<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
---------
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 1997
------------------
or
[ ] Transition Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to
--------------- ---------------
Commission File Number: 1-8029
THE RYLAND GROUP, INC.
----------------------
(Exact name of registrant as specified in its charter)
Maryland 52-0849948
-------- ----------
(State 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
November 10, 1997 was 14,462,988.
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THE RYLAND GROUP, INC.
FORM 10-Q
INDEX
Page Number
----------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at
September 30, 1997 (unaudited) and
December 31, 1996 1-2
Consolidated Statements of Earnings
for the three and nine months ended
September 30, 1997 and 1996 (unaudited) 3
Consolidated Statements of Cash Flows
for the nine months ended September 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 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, except share data)
September 30, December 31,
1997 1996
------------ ------------
(unaudited)
ASSETS
HOMEBUILDING:
Cash and cash equivalents $ 17,845 $ 27,852
Housing inventories:
Homes under construction 384,453 336,782
Land under development and improved lots 197,485 237,808
--------- ---------
Total inventories 581,938 574,590
Property, plant and equipment 29,155 31,560
Purchase price in excess of net assets acquired 19,769 20,543
Other assets 46,064 40,739
---------- ---------
694,771 695,284
---------- ---------
FINANCIAL SERVICES:
Cash and cash equivalents 2,746 856
Mortgage loans held for sale 157,836 180,149
Mortgage-backed securities and
notes receivable 155,322 143,508
Mortgage servicing rights 10,952 9,903
Other assets 43,111 48,015
---------- ---------
369,967 382,431
---------- ---------
OTHER ASSETS:
Collateral for bonds payable of
limited-purpose subsidiaries 148,679 214,443
Net deferred taxes 29,934 31,806
Other 15,878 14,560
---------- ---------
TOTAL ASSETS $ 1,259,229 $ 1,338,524
============ ===========
1
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The Ryland Group, Inc. and subsidiaries
CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share data)
September 30, December 31,
1997 1996
------------ ------------
(unaudited)
LIABILITIES
HOMEBUILDING:
Accounts payable and other liabilities $ 88,538 $ 84,651
Long-term debt 349,933 354,267
------------ -----------
438,471 438,918
------------ -----------
FINANCIAL SERVICES:
Accounts payable and other liabilities 14,240 18,754
Short-term notes payable 327,291 325,650
------------ -----------
341,531 344,404
------------ -----------
OTHER LIABILITIES:
Bonds payable of limited-purpose subsidiaries 142,954 206,891
Other 36,838 37,862
------------ -----------
TOTAL LIABILITIES 959,794 1,028,075
------------ -----------
STOCKHOLDERS' EQUITY
Convertible preferred stock, $1 par value:
Authorized - 1,400,000 shares
Issued - 790,441 shares
(861,741 for 1996) 790 862
Common stock, $1 par value:
Authorized - 78,600,000 shares
Issued - 14,506,211 shares
(15,852,729 for 1996) 14,506 15,853
Paid-in capital 94,477 116,652
Retained earnings 192,871 184,678
Net unrealized gain on
mortgage-backed securities 2,684 2,758
Due from RSOP Trust (5,893) (10,354)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 299,435 310,449
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,259,229 $ 1,338,524
========= ===========
STOCKHOLDERS' EQUITY PER COMMON SHARE $ 19.90 $ 19.00
2
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The Ryland Group, Inc. and subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS (unaudited)
(amounts in thousands, except share data)
Three months Nine months
ended September 30, ended September 30,
1997 1996 1997 1996
-------- ------- -------- --------
REVENUES:
Homebuilding:
Residential revenue $ 396,907 $ 374,834 $ 1,055,300 $ 1,050,474
Other revenue 1,190 1,869 26,478 12,286
-------- --------- ----------- ----------
Total homebuilding revenue 398,097 376,703 1,081,778 1,062,760
Financial services 19,974 18,997 56,835 59,101
Limited-purpose subsidiaries 3,533 6,758 12,131 22,284
-------- --------- ----------- ----------
Total revenues 421,604 402,458 1,150,744 1,144,145
-------- --------- ----------- ----------
EXPENSES:
Homebuilding:
Cost of sales 344,851 326,178 936,178 918,338
Selling, general and
administrative 36,913 36,958 108,343 107,832
Interest 5,809 8,236 18,208 20,291
------- ------- --------- ---------
Total homebuilding
expenses 387,573 371,372 1,062,729 1,046,461
Financial services:
General and
administrative 10,645 9,831 32,271 33,594
Interest 4,816 4,305 12,961 14,938
------- ------- --------- ---------
Total financial
services expenses 15,461 14,136 45,232 48,532
Limited-purpose subsidiaries
expenses 3,533 6,758 12,131 22,284
Corporate expenses 3,802 2,730 10,073 8,796
-------- ------- --------- ---------
Total expenses 410,369 394,996 1,130,165 1,126,073
Earnings before taxes 11,235 7,462 20,579 18,072
Tax expense 4,494 2,985 8,232 7,229
-------- ------- --------- ---------
Net earnings $ 6,741 $ 4,477 $ 12,347 $ 10,843
======== ======= ========= =========
Preferred Dividends $ 437 $ 490 $ 1,352 $ 1,499
Net earnings available for
common shareholders $ 6,304 $ 3,987 $ 10,995 $ 9,344
NET EARNINGS PER COMMON SHARE:
Primary $ 0.42 $ 0.25 $ 0.70 $ 0.59
Fully diluted (1) $ 0.41 $ 0.25 $ 0.70 $ 0.59
AVERAGE COMMON SHARES OUTSTANDING:
Primary 15,103,000 15,935,000 15,608,000 15,932,000
Fully diluted (1) 15,989,000 15,935,000 16,602,000 15,932,000
(1) For the three and nine months ended September 30, 1996, conversion of
preferred shares is not assumed due to an antidilutive effect.
See notes to consolidated financial statements.
3
<PAGE>
The Ryland Group, Inc. and subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
Nine months ended September 30,
1997 1996
---------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 12,347 $ 10,843
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 19,622 23,504
Gain on sale of mortgage-backed
securities - available-for-sale (75) (657)
Increase in inventories (7,348) (74,585)
Net change in other assets, payables
and other liabilities (7,103) (10,683)
Equity in earnings of/distributions
from unconsolidated joint ventures 130 948
Increase in mortgage-backed
securities - trading - (798)
Decrease in mortgage
loans held for sale 22,313 121,240
---------- ---------
Net cash provided by operating activities 39,886 69,812
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net additions to property, plant and equipment (13,125) (15,878)
Principal reduction of mortgage collateral 31,451 57,071
Principal reduction of mortgage-backed
securities - available-for-sale 8,419 19,127
Purchases of mortgage-backed securities
-available-for-sale - (8,572)
Sales of mortgage-backed securities -
available-for-sale 2,222 10,876
Principal reduction of mortgage-backed
securities-held-to-maturity 10,735 15,306
Decrease (increase) in funds held by trustee 2,438 (8,758)
Other investing activities, net (2,073) (2,239)
---------- ---------
Net cash provided by investing activities 40,067 66,933
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash proceeds of long-term debt 7,647 103,062
Reduction of long-term debt (11,982) (60,233)
Increase (decrease) in short-term
notes payable 1,641 (92,443)
Bond principal payments (64,629) (108,542)
Common and preferred stock dividends (6,717) (8,595)
Common stock repurchases (22,120) -
Other financing activities, net 8,090 5,774
---------- ---------
Net cash used for financing activities (88,070) (160,977)
---------- ---------
Net decrease in cash and cash equivalents (8,117) (24,232)
Cash and cash equivalents at beginning of year 28,708 55,992
---------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 20,591 $ 31,760
========== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest (net of
capitalized interest) $ 50,771 $ 61,483
Cash paid for income taxes (net of
refunds received) $ 1,095 $ (2,492)
========== =========
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 September 30,
1997 1996
---- ----
Pretax earnings:
Homebuilding $ 10,524 $ 5,331
Financial services 4,513 4,861
Corporate and other (3,802) (2,730)
------ ------
Total $ 11,235 $ 7,462
======= =======
Nine months ended September 30,
1997 1996
---- ----
Pretax earnings:
Homebuilding $ 19,049 $ 16,299
Financial services 11,603 10,569
Corporate and other (10,073) (8,796)
-------- -------
Total $ 20,579 $ 18,072
======== =======
5
<PAGE>
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 September 30, 1997, the consolidated
statements of earnings for the three and nine months ended September 30, 1997
and 1996, and the consolidated statements of cash flows for the nine months
ended September 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 September 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 nine months ended September 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 and nine months ended September 30, 1996.
6
<PAGE>
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 nine
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
(EPS)and to restate all prior periods. Primary EPS 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 EPS 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 EPS for the quarters ended September 30, 1997 and 1996,
there would have been no impact on the reported EPS amounts for those periods.
For the nine months ended September 30, 1997, the impact would have been an
increase of $.01 per share for both primary and fully diluted EPS. For the
nine months ended September 30, 1996, there would have been no impact on
primary EPS and a $.01 increase in fully diluted EPS. FASB 128 is not
expected to have a significant impact on EPS 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 third quarter of 1997, the Company reported consolidated net earnings
of $6.7 million, or $.42 per share. This compares with 1996 third quarter net
earnings of $4.5 million, or $.25 per share.
The Company's homebuilding segment reported pretax earnings of $10.5 million
for the third quarter of 1997, compared with pretax earnings of $5.3 million
for the same period last year. The improvement over last year was attributable
to a higher gross profit per unit combined with lower interest expense and
lower selling, general and administrative expenses as a percent of revenues.
The Company's financial services segment reported pretax earnings of $4.5
million for the third quarter of 1997, compared with $4.9 million for the same
period in 1996. The decline from last year's results was primarily
attributable to lower origination and loan servicing revenues which were
partially offset by higher gains from sales of mortgages and mortgage
servicing rights.
For the first nine months of 1997, the Company reported consolidated net
earnings of $12.3 million, or $.70 per share, compared with 1996 nine month
net earnings of $10.8 million, or $.59 per share. The first nine months
results included land sale after-tax 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 $19.0 million for the
first nine months of 1997 compared with pretax earnings of $16.3 million for
the same period in 1996. The improvement over 1996 was attributable to a
higher gross profit per unit, lower interest expense and higher gains from
land sales. The financial services segment reported pretax earnings of $11.6
million for the first nine months of 1997, compared with $10.6 million for the
same period in 1996. The increase over 1996 was due to higher gains from
sales of mortgages and mortgage servicing rights combined with lower general
and administrative expenses.
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.
Corporate expenses were $3.8 million for the third quarter of 1997 and $10.1
million for the nine months ended September 30, 1997, up $1.1 million and $1.3
million, respectively, from the same periods last year primarily due to higher
incentive compensation expenses in conjunction with the higher level of
earnings in 1997.
8
<PAGE>
HOMEBUILDING SEGMENT
The Company's homebuilding segment reported pretax earnings of $10.5 million
for the third quarter of 1997. This compares with pretax earnings of $5.3
million for the same period last year. For the nine months ended September
30, 1997, homebuilding reported pretax earnings of $19.0 million compared with
pretax earnings of $16.3 million for the first nine months of 1996. The first
nine months results included pretax land sale gains of $4.8 million in 1997
and $3.6 million in 1996.
Results of operations of the Company's homebuilding segment are summarized as
follows ($ amounts in thousands, except average closing price):
Three months ended Nine months ended
September 30, September 30,
1997 1996 1997 1996
---- ---- ---- ----
Revenues
Residential $396,907 $374,834 $1,055,300 $1,050,474
Other 1,190 1,869 26,478 12,286
------- ------- --------- ---------
Total $398,097 $376,703 $1,081,778 $1,062,760
Gross profit 53,246 50,525 145,600 144,422
Selling, general and
administrative expenses 36,913 36,958 108,343 107,832
Interest expense 5,809 8,236 18,208 20,291
------- ------ ------- -------
Pretax earnings $ 10,524 $ 5,331 $ 19,049 $ 16,299
======= ======= ======= =======
Operational Unit Data:
New orders (units) 2,151 1,832 6,935 6,295
Closings (units) 2,173 2,162 5,820 6,090
Outstanding contracts at
September 30,
Units 3,310 2,949
Dollar Value $605,148 $527,512
Average Closing Price $183,000 $173,000 $181,000 $173,000
Homebuilding revenues amounted to $398 million for the third quarter of 1997,
and $1.08 billion for the first nine months of 1997, up 5.7 percent and 1.8
percent, respectively, from the same periods last year. The improvement in
both periods was attributable to higher average closing prices. Also
contributing to the increase in revenues over last year's nine months were
higher revenues from land sales.
The gross profit margin for the third quarter of 1997 averaged 13.4 percent,
level with the third quarter of 1996 and up from 13.2 percent for the second
quarter of 1997. Gross margins have improved over the first half of 1997
despite the continuing challenge of strong competitive market conditions which
have negatively impacted gross margins in the Mid-Atlantic region. Increased
closings from newer communities contributed to this margin improvement. For
the first nine months of 1997, the gross profit margin averaged 13.5 percent
compared with 13.6 percent for the first nine months of 1996. Excluding land
sales, the gross margin was 13.3 percent for the first nine months of 1997,
compared with 13.4 percent for the first nine months of 1996. The slight
decline in gross profit margins for the first nine months was due to the
impact of competitive market conditions in the Mid-Atlantic region.
9
<PAGE>
Total homebuilding new orders for the third quarter increased to 2,151 homes,
up 17.4 percent over the third quarter last year, and increased to 6,935 homes
up 10.2 percent for the first nine months versus the same period last year.
For both the quarter and year-to-date, all regions reported increased new
orders.
As a result of higher new order volume, outstanding contracts at September 30,
1997 were 3,310 compared with 2,949 at September 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 September 30, 1997 was $605.1 million, an increase of 14.7 percent from
September 30, 1996 and an increase of 49.3 percent from December 31, 1996.
Selling, general and administrative expenses were $36.9 million, or 9.3
percent of revenues, for the third quarter of 1997, compared with $37.0
million, or 9.8 percent of revenues, for the same period of 1996. For the
nine months ended September 30, 1997, selling, general and administrative
expenses were 10.0 percent of revenues compared with 10.1 percent of revenues
for the same period of 1996. The decreases as a percentage of revenues were
due to the Company's continued focus on cost control.
Interest expense for the third quarter and first nine months of 1997 decreased
by $2.4 million and $2.1 million, respectively, compared with the same periods
of 1996. The reductions are primarily attributable to a decline in average
homebuilding borrowings compared with the periods ending September 30, 1996.
The lower borrowings were related to a decline in average inventories,
primarily due to a decrease in land under development and improved lots.
FINANCIAL SERVICES
The financial services segment reported pretax earnings of $4.5 million for
the third quarter of 1997 compared with $4.9 million for the third quarter of
1996. For the first nine months of 1997, the financial services segment
reported pretax earnings of $11.6 million compared with $10.6 million for the
first nine months of 1996.
Pretax earnings by line of business were as follows (amounts in thousands):
Three months Nine months
ended September 30, ended September 30,
1997 1996 1997 1996
---- ---- ---- ----
Retail $ 3,396 $ 3,519 $ 7,127 $ 5,811
Investments 1,117 1,342 4,476 4,758
------ ------ ------ ------
Total $ 4,513 $ 4,861 $11,603 $10,569
====== ====== ====== ======
The decrease in retail earnings for the third quarter of 1997 was primarily
attributable to lower origination and loan servicing revenues which were
partially offset by higher gains from sales of mortgages and mortgage
servicing rights. For the nine months ended September 30, 1997 retail
earnings increased 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 third quarter and first nine months of
1997 decreased compared with the same periods of 1996 due to gains from the
sale of mortgage-backed securities which were included in results for 1996.
10
<PAGE>
Revenues and expenses for the financial services segment were as follows:
Three months Nine months
ended September 30, ended September 30,
1997 1996 1997 1996
---- ---- ---- ----
Revenues:
Interest and
net origination fees $ 2,040 $ 3,193 $ 5,303 $ 10,945
Net gains on sales of mortgages
and servicing rights 6,357 3,111 15,545 10,340
Loan servicing 5,897 7,473 18,888 22,364
Title/escrow 1,641 1,485 4,453 4,245
------ ------ ------ ------
Total retail revenues 15,935 15,262 44,189 47,894
Revenues from investment
operations 4,039 3,735 12,646 11,207
------ ------ ------ ------
Total revenues 19,974 18,997 56,835 59,101
Expenses:
General and administrative 10,645 9,831 32,271 33,594
Interest 4,816 4,305 12,961 14,938
------ ------ ------ ------
Total expenses 15,461 14,136 45,232 48,532
------ ------ ------ ------
Pretax earnings $ 4,513 $ 4,861 $ 11,603 $10,569
======= ====== ====== ======
Revenues for the financial services segment increased 5 percent for the three
month period ended September 30, 1997 compared with the same period of 1996 as
increased gains on the sales of mortgages and servicing rights more than
offset decreased origination activity and a decline in servicing revenues. For
the nine month period ended September 30, 1997, revenues decreased 4 percent
compared with the same period of 1996 as decreased origination activity and a
decline in servicing revenues were only partially offset by higher gains on
sales of mortgages and servicing rights. Loan servicing revenues declined as
a result of a lower portfolio balance and changes in the portfolio product
mix. Investment revenues increased 8 percent and 13 percent for the three and
nine month periods ended September 30, 1997, respectively, compared with the
same periods of 1996, due to a higher average portfolio balance.
General and administrative expenses increased 8 percent for the three months
ended September 30, 1997, compared with the same period of 1996, due to the
timing of certain expenses, but were down 4 percent for the nine months ended
September 30, 1997. The year-to-date decrease was 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 increased 12 percent for the three months ended September 30,
1997, compared with the same period of 1996 due to higher borrowings
associated with the increase in the Company's investment portfolio. For the
nine months ended September 30, 1997 interest expense decreased 13 percent
when compared with 1996. The decline 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
a higher average portfolio balance.
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 Nine months
ended September 30, ended September 30,
1997 1996 1997 1996
---- ---- ---- ----
Dollar volume of mortgages
originated (in millions) $ 269 $ 302 $ 694 $1,179
Number of mortgages originated 1,939 2,307 5,023 9,024
Percentage of total closings:
Ryland Homes closings 65% 58% 64% 43%
Other closings 35% 42% 36% 57%
---- ---- ---- ----
100% 100% 100% 100%
Mortgage origination volume decreased by 16 percent and 44 percent for the
three and nine month periods ended September 30, 1997, respectively, compared
with the same periods last year. The decline in the third quarter is
primarily attributable to lower spot originations. The decrease for the nine
months ended September 30, 1997 is 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 spot
and homebuilder loan originations 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 September 30,
(in billions):
1997 1996
---- ----
Originated $1.5 $2.3
Acquired 2.4 3.1
Subserviced 1.1 1.0
---- ----
Total portfolio $5.0 $6.4
==== ====
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 a
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
nine month periods ended September 30, were as follows (in thousands):
12
<PAGE> Three months Nine months
ended September 30, ended September 30,
1997 1996 1997 1996
---- ---- ---- ----
Sale of mortgage-backed securities $ 0 $ 657 $ 75 $ 657
Interest and other income 4,039 3,078 12,571 10,550
----- ----- ------ ------
Total revenues 4,039 3,735 12,646 11,207
Interest and other expenses 2,922 2,393 8,170 6,449
----- ----- ----- -----
Pretax earnings $ 1,117 $ 1,342 $ 4,476 $ 4,758
======= ======= ======= =======
Interest income was higher for the three and nine month periods ended
September 30, 1997 as compared with the same periods of 1996 due to a higher
average investment portfolio balance. Interest and other income for the nine
months ended September 30, 1997 and 1996, included $.8 million and $1.3
million, respectively, in gains related to the redemption of certain
securities.
Significant data concerning the Company's investment operations are as
follows:
Three months Nine months
ended September 30, ended September 30,
1997 1996 1997 1996
---- ---- ---- ----
Net interest earned
(in thousands) $ 1,420 $ 1,208 $ 4,388 $ 3,426
Average balance outstanding
(in millions) $ 163 $ 131 $ 154 $ 119
Net interest spread 3.5% 3.7% 3.8% 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 nine month periods ended September 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 September 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
September 30, 1997 were $40 million, compared with $34 million as of December
31, 1996. In addition, the Company had letters of credit outstanding under
this facility totaling $19.6 million at September 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 September 30, 1997,
such notes payable outstanding amounted to $1.9 million, compared with $1.5
million at December 31, 1996.
Housing inventories increased to $581.9 million as of September 30, 1997, from
$574.6 million as of the end of 1996. This represents the normal seasonal
13
<PAGE>
increase in sold homes under construction combined with a decrease in land
under development and improved lots.
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 September 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 September 30, 1997 and December 31, 1996, the
combined borrowings of the financial services segment outstanding under all
agreements were $327.3 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 October 9, 1997, the Company's board of directors authorized the repurchase
of up to 400,000 shares of common stock which is in addition to the previously
announced share repurchase program of 1.6 million shares bringing the total
repurchase authorization to 2.0 million shares. As of October 30, 1997, the
Company had repurchased approximately 1.7 million shares of its outstanding
common stock in accordance with this program at a cost of approximately $25.5
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
On May 7, 1997, a federal grand jury in Jacksonville, Florida returned an
indictment against Ryland Mortgage Company and one current and two former
officers alleging misappropriation of funds from the Resolution Trust
Corporation ("RTC"). 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. HUD's Mortgage Review
Board has not yet scheduled a meeting 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)
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. There were no Reports on Form 8-K filed during the third quarter.
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
November 13, 1997 By: /s/ Michael D. Mangan
- ----------------- ---------------------
Date Michael D. Mangan,
Executive Vice President
and Chief Financial Officer
(Principal Financial Officer)
November 13, 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
<PAGE>
EXHIBIT 11 - STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
(amounts in thousands, except share data)
Three months Nine months
ended September 30, ended September 30,
1997 1996 1997 1996
------- -------- ------- -------
PRIMARY:
Net earnings $ 6,741 $ 4,477 $ 12,347 $ 10,843
Adjustment for dividends
on convertible
preferred shares (437) (490) (1,352) (1,499)
-------- --------- --------- --------
Adjusted net earnings $ 6,304 $ 3,987 $ 10,995 $ 9,344
======== ========= ========= ========
Weighted average common
shares outstanding 14,915,848 15,807,205 15,492,737 15,774,188
Common stock equivalents:
Stock Options 99,556 1,970 16,452 17,303
Employee incentive plans 87,308 125,514 98,676 140,482
---------- ---------- ---------- ----------
Total 15,102,712 15,934,689 15,607,865 15,931,973
========== ========== ========== ==========
Primary earnings
per common share $ 0.42 $ 0.25 $ 0.70 $ 0.59
========= ======== ======= =======
FULLY-DILUTED:
Net earnings $ 6,741 $ 4,477 $12,347 $10,843
Adjustment for incremental
expense from conversion of
convertible preferred shares(1) (247) - (709) -
Adjustment for dividends
on convertible
preferred shares - (490) - (1,499)
---------- --------- -------- --------
Adjusted net earnings $ 6,494 $ 3,987 $ 11,638 $ 9,344
========== ========= ========= ========
Weighted average common
shares outstanding 14,915,848 15,807,205 15,492,737 15,774,188
Common stock equivalents:
Stock Options 181,479 1,970 182,526 17,303
Employee incentive plans 87,308 125,514 98,676 140,482
Convertible preferred stock(1) 804,334 - 827,667 -
----------- ----------- ---------- ----------
Total 15,988,969 15,934,689 16,601,606 15,931,973
=========== =========== ========== ==========
Fully diluted earnings
per common share $ 0.41 $ 0.25 $ 0.70 $ 0.59
======= ======= ======= =======
(1) For the three and nine months ended September 30, 1996, no adjustments
have been made for incremental expense from conversion of preferred shares or
to common stock equivalents for convertible preferred stock as these
adjustments would be anti-dilutive.
19
<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 9/30/97 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 20,591
<SECURITIES> 155,322
<RECEIVABLES> 157,836
<ALLOWANCES> 0
<INVENTORY> 581,938
<CURRENT-ASSETS> 0
<PP&E> 29,155
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,259,229
<CURRENT-LIABILITIES> 0
<BONDS> 470,245
0
790
<COMMON> 14,506
<OTHER-SE> 284,139
<TOTAL-LIABILITY-AND-EQUITY> 1,259,229
<SALES> 1,081,778
<TOTAL-REVENUES> 1,150,744
<CGS> 936,178
<TOTAL-COSTS> 1,076,873
<OTHER-EXPENSES> 10,073
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 43,219
<INCOME-PRETAX> 20,579
<INCOME-TAX> 8,232
<INCOME-CONTINUING> 12,347
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,347
<EPS-PRIMARY> 0.70
<EPS-DILUTED> 0.70
</TABLE>
