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 June 30, 1998
--------------
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
------------------------------------------------------
(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 10, 1998 was 14,670,647.
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, 1998 (unaudited) and
December 31, 1997 1-2
Consolidated Statements of Earnings
for the three and six months ended June 30,
1998 and 1997 (unaudited) 3
Consolidated Statements of Cash Flows
for the six months ended June 30,
1998 and 1997 (unaudited) 4
Notes to Consolidated Financial
Statements (unaudited) 5-8
Item 2. Management's Discussion and Analysis
of Results of Operations and Financial
Condition 9-14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 4. Submission of Matters to a Vote of 15-16
Security Holders
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
INDEX OF EXHIBITS 18
The Ryland Group, Inc. and subsidiaries
CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share data)
June 30, December 31,
1998 1997
------------- -------------
(unaudited)
ASSETS:
Homebuilding:
Cash and cash equivalents $ 56,039 $ 33,065
Housing inventories:
Homes under construction 381,155 332,452
Land under development and
improved lots 242,211 222,379
---------- ----------
Total inventories 623,366 554,831
Property, plant and equipment 26,373 26,463
Purchase price in excess of net
assets acquired 18,995 19,511
Other assets 44,447 37,359
---------- ----------
769,220 671,229
---------- ----------
Financial Services:
Cash and cash equivalents 8,591 3,066
Mortgage loans held for sale 134,476 199,857
Mortgage-backed securities and
notes receivable 130,230 153,022
Mortgage servicing rights 1,680 8,242
Other assets 25,444 46,715
--------- ----------
300,421 410,902
--------- ----------
Other Assets:
Collateral for bonds payable of
limited-purpose subsidiaries 114,263 142,303
Net deferred taxes 33,544 35,764
Other 21,890 23,211
---------- ----------
Total assets $ 1,239,338 $ 1,283,409
---------- ----------
---------- ----------
1
The Ryland Group, Inc. and subsidiaries
CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share data)
June 30, December 31,
1998 1997
------------- -------------
(unaudited)
LIABILITIES
Homebuilding:
Accounts payable and other liabilities $ 141,771 $ 117,326
Long-term debt 408,683 310,221
---------- ---------
550,454 427,547
---------- ---------
Financial Services:
Accounts payable and other liabilities 27,262 17,382
Short-term notes payable 183,543 340,632
---------- ---------
210,805 358,014
---------- ---------
Other Liabilities:
Bonds payable of limited-purpose
subsidiaries 109,201 136,865
Other 49,197 55,860
---------- ---------
Total liabilities 919,657 978,286
---------- ---------
STOCKHOLDERS'EQUITY
Convertible preferred stock, $1 par value:
Authorized - 1,400,000 shares
Issued - 462,985 shares (502,833 for 1997) 463 503
Common stock, $1 par value:
Authorized - 78,600,000 shares
Issued - 14,640,396 shares
(14,521,859 for 1997) 14,640 14,522
Paid-in capital 91,422 88,502
Retained earnings 210,902 199,114
Accumulated other comprehensive income 2,254 2,482
---------- ---------
Total stockholders'equity 319,681 305,123
---------- ---------
Total liabilities and stockholders'equity $ 1,239,338 $ 1,283,409
---------- ---------
---------- ---------
Stockholders'equity per common shares $ 21.17 $ 20.31
---------- ---------
---------- ---------
See notes to consolidated financial statements.
2
The Ryland Group, Inc. and subsidiaries
CONSOLIDATED STATEMENT OF EARNINGS (unaudited)
(amounts in thousands, except share data)
Three months Six months
ended June 30, ended June 30,
1998 1997 1998 1997
------ ------ ------ ------
Revenues:
Homebuilding:
Residential revenue $ 395,888 $ 376,615 $ 703,888 $ 658,393
Other revenue 13,680 1,397 17,219 25,288
--------- --------- -------- ---------
Total homebuilding revenue 409,568 378,012 721,107 683,681
Financial services 13,482 17,548 35,164 36,861
Limited-purpose subsidiaries 2,801 4,060 5,885 8,598
--------- --------- -------- --------
Total revenues 425,851 399,620 762,156 729,140
--------- --------- -------- --------
Expenses:
Homebuilding:
Cost of sales 347,626 328,261 616,808 591,327
Selling, general and
administrative 39,725 37,162 73,669 71,430
Interest 5,429 6,463 9,989 12,399
--------- --------- -------- --------
Total homebuilding
expenses 392,780 371,886 700,466 675,156
Financial services:
General and administrative 8,017 9,780 17,784 21,626
Interest 4,198 4,248 8,799 8,145
--------- --------- -------- --------
Total financial services
expenses 12,215 14,028 26,583 29,771
Limited-purpose subsidiaries
expenses 2,801 4,060 5,885 8,598
Corporate expenses 3,344 3,195 6,694 6,271
--------- --------- -------- --------
Total expenses 411,140 393,169 739,628 719,796
Earnings before taxes 14,711 6,451 22,528 9,344
Tax expense 5,884 2,581 9,011 3,738
--------- ------- ------- -------
Net earnings $ 8,827 $ 3,870 $ 13,517 $ 5,606
--------- ------- ------- -------
Net earnings per common share:
Basic $ 0.58 $ 0.22 $ 0.88 $ 0.30
Diluted (a) $ 0.57 $ 0.22 $ 0.86 $ 0.30
Average common shares
outstanding:
Basic 14,757,845 15,683,985 14,735,500 15,781,181
Diluted (a) 15,599,143 15,771,567 15,171,345 15,886,309
(a) For the three months ended June 30,1997, and the six months ended June 30,
1998 and 1997, conversion of preferred shares is not assumed due to an
antidilutive affect.
See notes to consolidated financial statements.
3
The Ryland Group, Inc. and subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands) Six months ended June 30,
- -----------------------------------------------------------------------------
1998 1997
- -----------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 13,517 $ 5,606
Adjustments to reconcile net earnings
to net cash provided by
operating activities:
Depreciation and amortization 11,528 12,754
Gain on sale of mortgage-backed
securities-available-for-sale - (75)
Increase in inventories (68,535) (3,345)
Net change in other assets, payables
and other liabilities 53,696 (9,083)
Equity in (earnings) losses
of/distributions from
unconsolidated joint ventures (457) 7
Decrease in mortgage loans held
for sale 65,381 38,945
-----------------------
Net cash provided by
operating activities 75,130 44,809
-----------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net additions to property, plant
and equipment (10,127) (8,282)
Principal reduction of mortgage
collateral 20,981 22,257
Principal reduction of mortgage-backed
securities - available-for-sale 9,555 4,938
Sales of mortgage-backed securities-
available-for-sale 4,098 2,222
Principal reduction of mortgage-backed
securities - held-to-maturity 10,118 6,840
Other investing activities, net 6,567 (12,374)
-----------------------
Net cash provided by investing activities 41,192 15,601
-----------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash proceeds of long-term debt 100,762 32,647
Reduction of long-term debt (2,299) (11,200)
Decrease in short-term notes payable (157,089) (19,903)
Bond principal payments (28,375) (44,358)
Common and preferred stock dividends (1,725) (3,942)
Common stock repurchases (6,153) (11,331)
Other financing activities, net 7,056 5,136
-----------------------
Net cash used for financing activities (87,823) (52,951)
-----------------------
Net increase in cash and cash equivalents 28,499 7,459
Cash and cash equivalents at beginning of year 36,131 28,708
-----------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 64,630 $ 36,167
======================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest
(net of capitalized interest) $ 24,119 $ 27,610
Cash paid for income taxes $ 7,265 $ 940
- ----------------------------------------------------------------------------
See notes to consolidated financial statements.
4
The Ryland Group, Inc. and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(amounts in thousands, except for share data, in all notes)
Note 1. 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, 1998, the consolidated
statements of earnings for the three and six months ended June 30, 1998 and
1997, and the consolidated statements of cash flows for the six months ended
June 30, 1998 and 1997 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, 1998, and for all periods presented,
have been made. The consolidated balance sheet at December 31, 1997 is taken
from the audited financial statements as of that date. Certain amounts in the
consolidated statements have been reclassified to conform to the 1998
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 1997 annual report to shareholders.
The results of operations for the three and six months ended June 30, 1998 are
not necessarily indicative of the operating results for the full year.
Assets presented in the financial statements are net of any valuation
allowances.
The following table is a summary of capitalized interest:
1998 1997
------ ------
Capitalized interest as of January 1, $23,644 $27,589
Interest capitalized 8,461 9,075
Interest amortized to cost of sales (9,199) (10,355)
------- -------
Capitalized interest as of June 30, $22,906 $26,309
======= =======
5
The Ryland Group, Inc. and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(unaudited)
Note 2. New Accounting Pronouncements
FASB 128
In 1997, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 128 (FASB 128), "Earnings per Share." FASB
128 replaced the calculation of primary and fully diluted earnings per share
with basic and diluted earnings per share. Earnings per share amounts for the
three and six months ended June 30, 1997 have been restated to conform to the
FASB 128 requirements.
FASB 130
As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No.130 (FASB 130), "Reporting Comprehensive Income." FASB 130
defines comprehensive income and establishes new rules for the reporting and
display of comprehensive income and its components; however, the adoption of
this Statement had no impact on the Company's net income or stockholders'
equity. FASB 130 requires unrealized gains or losses on the Company's
available-for-sale securities, which are included in stockholders' equity, to
be reported as other comprehensive income. The net unrealized gains (losses)
on available-for-sale securities (net of taxes) amounted to $(455) and $207
for the three months ended June 30, 1998 and 1997, respectively, and $(228)
and $(237) for the six months ended June 30, 1998 and 1997, respectively.
Other comprehensive income is added to net income to arrive at total
comprehensive income. Total comprehensive income was $8,372 for the second
quarter of 1998 and $4,077 for the second quarter of 1997. Total comprehensive
income was $13,289 for the first six months of 1998 and $5,369 for the first
six months of 1997.
Note 3. Segment Information
Three months ended June 30,
1998 1997
------ ------
Pretax earnings:
Homebuilding $ 16,788 $ 6,126
Financial services 1,267 3,520
Corporate and other (3,344) (3,195)
--------- ---------
Total $ 14,711 $ 6,451
======== ========
Six months ended June 30,
1998 1997
------ ------
Pretax earnings:
Homebuilding $ 20,641 $ 8,525
Financial services 8,581 7,090
Corporate and other (6,694) (6,271)
-------- --------
Total $ 22,528 $ 9,344
======== ========
6
The Ryland Group, Inc. and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(unaudited)
Note 4. Earnings Per Share Reconciliation
The following table sets forth the computation of basic and diluted earnings
per share. The assumed conversion of preferred stock was anti-dilutive for
the three months ended June 30, 1997 and the six months ended June 30, 1998
and 1997, respectively.
Three months ended June 30,
1998 1997
------ ------
Numerator:
Net earnings $ 8,827 $ 3,870
Preferred stock dividends (256) (452)
-------- --------
Numerator for basic earnings per share -
income available to common stockholders 8,571 3,418
Effect of dilutive securities:
Preferred stock dividends 256 0
Numerator for diluted earnings per share -
income available to common stockholders
after assumed conversions $ 8,827 $ 3,418
Denominator:
Denominator for basic earnings per share -
weighted-average shares 14,757,845 15,683,985
Effect of dilutive securities:
Stock options 272,520 274
Conversion of Preferred Shares 476,479 0
Other equity incentives 92,299 87,308
--------- ---------
Dilutive potential common shares 841,298 87,582
Denominator for diluted earnings per share -
adjusted weighted average shares and
assumed conversions 15,599,143 15,771,567
Basic earnings per share $ 0.58 $ 0.22
Dilutive earnings per share $ 0.57 $ 0.22
Six months ended June 30,
1998 1997
------ ------
Numerator:
Net earnings $ 13,517 $ 5,606
Preferred stock dividends (526) (915)
-------- --------
Numerator for basic and diluted
earnings per share - income available
to common stockholders $ 12,991 $ 4,691
Denominator:
Denominator for basic earnings per share -
weighted-average shares 14,735,500 15,781,181
Effect of dilutive securities:
Stock options 334,374 768
Other equity incentives 101,471 104,360
---------- ----------
Dilutive potential common shares 435,845 105,128
7
The Ryland Group, Inc. and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(unaudited)
Denominator for diluted earnings per share -
adjusted weighted average shares and
assumed conversions 15,171,345 15,886,309
Basic earnings per share $ 0.88 $ 0.30
Dilutive earnings per share $ 0.86 $ 0.30
Note 5. Long-term Debt
On April 13, 1998, the Company completed the issuance of $100 million of 8.25
percent senior subordinated notes which mature on April 1, 2008. The net
proceeds from this issuance were initially used to repay outstanding amounts
under the revolving credit facility and to repay short-term notes payable. On
July 15, 1998, the Company reborrowed funds under the revolving credit
facility to retire the $100 million, 10.5 percent, senior subordinated notes
due 2002, at the stated call price of 103.9375 percent of par. As a result,
the Company will report an extraordinary after-tax charge of approximately
$3.4 million in the third quarter of 1998 relating to the loss on the early
extinguishment of debt.
Note 6. Commitments and Contingencies
Refer to Part II, Other Information, Item 1, Legal Proceedings of this
document for updated information regarding the Company's Commitments and
Contingencies.
8
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
RESULTS OF OPERATIONS
CONSOLIDATED
For the second quarter of 1998, the Company reported consolidated net earnings
of $8.8 million, or $.58 per share ($.57 per share diluted). This compares
with 1997 second quarter net earnings of $3.9 million, or $.22 per share.
The Company's homebuilding segment reported pretax earnings of $16.8 million
for the second quarter of 1998, compared with pretax earnings of $6.1 million
for the same period last year. The increase was driven by higher gross profit
margins combined with a 7 percent increase in closings and pretax gains of
$1.2 million from land sales.
The Company's financial services segment reported pretax earnings of $1.3
million for the second quarter of 1998, compared with $3.5 million for the
same period in 1997. Retail mortgage operations and investment operations
reported declines for the quarter. The decline in retail earnings was
primarily due to lower loan-servicing income attributable to the sale, in the
first quarter of 1998, of a majority of the Company's loan-servicing
portfolio.
Corporate expenses were $3.3 million for the second quarter of 1998, up $.1
million from the same period last year primarily due to higher incentive
compensation expense in conjunction with the higher level of earnings in the
second quarter of 1998.
For the first six months of 1998, the Company reported consolidated net
earnings of $13.5 million, or $.88 per share ($.86 per share diluted),
compared with 1997 first half net earnings of $5.6 million, or $.30 per share.
For the first six months of 1998, the homebuilding segment reported pretax
earnings of $20.6 million, compared with pretax earnings of $8.5 million for
the same period in 1997. A significant improvement in housing gross profit
margins was the principal reason for the earnings improvement. The financial
services segment reported pretax earnings of $8.6 million for the first six
months of 1998, compared with $7.1 million for the same period in 1997.
First-half results for 1998 included a $6.1 million pretax gain from the first
quarter sale of a majority of the Company's loan-servicing portfolio.
Corporate expenses were $6.7 million for the first six months of 1998, up $.4
million from the same period last year primarily due to higher incentive
compensation expense.
The Company's limited-purpose subsidiaries no longer issue mortgage-backed
securities and mortgage-participation securities, but they continue to hold
collateral for previously issued mortgage-backed bonds in which the Company
maintains a residual interest. Revenues, expenses, and portfolio balances
continue to decline as the mortgage collateral pledged to secure the bonds
decreases due to scheduled payments, prepayments and exercises of early
redemption provisions.
HOMEBUILDING SEGMENT
Results of operations of the Company's homebuilding segment are summarized as
follows ($ amounts in thousands, except average closing price):
9
Three months ended Six months ended
June 30, June 30,
1998 1997 1998 1997
------ ------ ------ ------
Revenues:
Residential $395,888 $376,615 $703,888 $658,393
Other 13,680 1,397 17,219 25,288
-------- -------- -------- --------
Total 409,568 378,012 721,107 683,681
Gross profit 61,942 49,751 104,299 92,354
Selling, general and
administrative expenses 39,725 37,162 73,669 71,430
Interest expense 5,429 6,463 9,989 12,399
-------- -------- -------- --------
Pretax earnings $ 16,788 $ 6,126 $ 20,641 $ 8,525
======== ======== ======== ========
Operational Unit Data:
New orders (units) 2,470 2,310 5,101 4,784
Closings (units) 2,210 2,072 3,904 3,647
Outstanding contracts at
June 30:
Units 4,009 3,332
Dollar Value $756,044 $620,625
Average Closing Price $179,000 $182,000 $180,000 $181,000
The Company's homebuilding segment reported pretax earnings of $16.8 million
for the second quarter of 1998, compared with pretax earnings of $6.1 million
for the same period last year. For the six months ended June 30, 1998,
homebuilding reported pretax earnings of $20.6 million compared with pretax
earnings of $8.5 million for the first half of 1997.
Homebuilding revenues amounted to $410 million for the second quarter of 1998,
and $721 million for the first half of 1998, up 8 percent and 5 percent,
respectively, from the same periods last year. An increase in closings for
both periods was partially offset by a decrease in average closing price. The
decrease in average closing price reflects the Company's strategy to move to
lower-priced product offerings.
Gross profit margins from home sales averaged 15.3 percent for the second
quarter of 1998, a 210 basis point improvement over the 13.2 percent for the
second quarter of 1997. This was the third consecutive quarter in which the
Company reported a significant increase over prior year gross profit margins.
Gross profit margins for the first half of 1998 averaged 14.7 percent versus
13.2 percent for the same period last year. Increased closings from newer
communities, with better land positions and cost effective product, continue
to be the driving force behind the Company's improved performance, while
better cost controls and favorable market conditions have also contributed.
Total homebuilding new orders increased 7 percent over the second quarter of
last year to 2,470 homes, and also increased 7 percent over last year's first
half to 5,101 homes. For the quarter, new order growth was strong in the
Midwest, Southeast, and West reflecting increases in both new and existing
markets. For the first six months of 1998, new orders increased in all
regions, with the exception of the Mid-Atlantic. The largest increase in
first half new orders was in the Southeast region which had growth in all
divisions, especially in its newest markets.
10
Outstanding contracts at June 30, 1998 were 4,009 compared with 3,332 at June
30, 1997 and 2,812 at December 31, 1997. 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, 1998 was $756 million, an increase of 22
percent from June 30, 1997 and an increase of 48 percent from December 31,
1997.
Selling, general and administrative expenses as a percent of revenues were 9.7
percent for the second quarter of 1998 compared with 9.8 percent for the same
period of 1997. For the six months ended June 30, 1998, selling, general and
administrative expenses were 10.2 percent of revenues compared with 10.4
percent for the same period of 1997. The decreases were attributable to
continued cost controls combined with a higher revenue base. The Company
continues to focus on effectively controlling costs and improving the
efficiency of its homebuilding operations.
Interest expense for the second quarter and first half of 1998 decreased $1.0
million and $2.4 million, respectively, compared with the same periods of
1997. The decreases reflect the Company's ability to meet more of its
homebuilding operating cash flow requirements with internally generated funds
resulting from improved financial performance and improved cash management.
11
FINANCIAL SERVICES
Results of operations of the Company's financial services segment are
summarized as follows:
Three months Six months
ended June 30, ended June 30,
1998 1997 1998 1997
------ ------ ------ ------
Retail Revenues:
Interest and
net origination fees $ 2,116 $ 1,628 $ 4,222 $ 3,263
Net gains on sales of mortgages
and servicing rights 3,857 4,045 12,905 9,188
Loan servicing 1,831 6,323 6,547 12,991
Title/escrow 2,151 1,559 4,142 2,812
-------- -------- -------- --------
Total retail revenues 9,955 13,555 27,816 28,254
Revenues from investment
operations:
Sale of mortgage-backed
securities 0 75 0 75
Interest and other income 3,527 3,918 7,348 8,532
-------- -------- -------- -------
Total investment revenues 3,527 3,993 7,348 8,607
-------- -------- -------- -------
Total revenues 13,482 17,548 35,164 36,861
Expenses:
General and administrative 8,017 9,780 17,784 21,626
Interest 4,198 4,248 8,799 8,145
-------- -------- ------- ------
Total expenses 12,215 14,028 26,583 29,771
-------- -------- ------- ------
Pretax earnings $ 1,267 $ 3,520 $ 8,581 $ 7,090
======== ======== ======== =======
Pretax earnings by line of business were as follows (amounts in thousands):
Three months Six months
ended June 30, ended June 30,
1998 1997 1998 1997
------ ------ ------ ------
Retail $ 289 $2,265 $6,558 $3,731
Investments 978 1,255 2,023 3,359
------ ------ ------ ------
Total $1,267 $3,520 $8,581 $7,090
====== ====== ====== ======
OPERATIONAL DATA: Three months Six months
ended June 30, ended June 30,
1998 1997 1998 1997
------ ------ ------ -----
Retail Operations:
Originations 2,201 1,741 4,034 3,084
Percent of Total Originations
from Ryland Homes 66% 64% 63% 63%
Investment Operations:
Portfolio Average
Balance (in millions) $140.9 $153.9 $147.4 $148.7
12
The financial services segment reported pretax earnings of $1.3 million for
the second quarter of 1998 compared with $3.5 million for the second quarter
of 1997, and $8.6 million for the first six months of 1998, compared with $7.1
million for the first half of 1997.
Revenues for the financial services segment decreased 23 percent and 5 percent
for the three and six months ended June 30, 1998, respectively, compared with
the same periods of 1997. General and administrative expenses decreased 18
percent for both the three and six month periods ended June 30, 1998, compared
with the same periods of 1997. The decreases in revenues and general and
administrative expenses were primarily due to the decline in loan servicing
operations related to the sale of a majority of the loan servicing portfolio
in the first quarter of 1998. Interest expense declined slightly for the three
months ended June 30, 1998, but increased 8 percent for the first six months
of 1998 compared with 1997. The year-to-date increase resulted from increased
borrowings in the first quarter required to fund higher origination volume.
Retail operations reported pretax earnings of $.3 million for the second
quarter of 1998 compared with $2.3 million for the same period last year. For
the first six months of 1998, retail operations reported pretax earnings of
$6.6 million versus $3.7 million for the first half of 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. The decline in earnings for the second quarter was
primarily due to lower loan servicing income, attributable to the reduction in
the portfolio, partially offset by cost reductions. The increase in retail
earnings for the first half was attributable to the aforementioned $6.1
million pretax gain from the sale of the portfolio. Future earnings from
retail operations will be negatively impacted by the sale.
Mortgage origination volume increased 26 percent and 31 percent for the three
and six month periods ended June 30, 1998, respectively, compared with the
same periods last year. These increases were attributable to higher closing
volume from homebuilder loan originations and higher refinancing activity.
Investment operations reported pretax earnings of $1.0 million for the second
quarter of 1998, compared with $1.3 million for the second quarter of 1997.
The decrease was primarily due to a lower average portfolio balance which
resulted in a 10 percent decline in interest and other income. For the first
six months of 1998, investment earnings were $2.0 million versus $3.4 million
for the same period of last year. The decline was primarily attributable to
the fact that 1997 revenues and pretax results included $.8 million of other
income related to the redemption of certain securities.
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 $408.0
million as of June 30, 1998 and $308.0 million as of December 31, 1997. On
April 13, 1998, the Company successfully completed the issuance of $100
million of 8.25 percent senior subordinated notes due April 1, 2008. The net
proceeds from this issuance were initially used to repay outstanding amounts
under the revolving credit facility and to repay short term notes payable. On
July 15, 1998, the Company reborrowed funds under its revolving credit
13
facility to retire its $100 million, 10.5 percent, senior subordinated notes
due 2002 at the stated call price of 103.9375 percent of par.
The Company uses its unsecured revolving credit facility to finance increases
in its homebuilding inventory and changes in working capital. This facility,
which matures in July 2000, provides for total borrowings of up to $300
million. There were no outstanding borrowings under this facility as of June
30, 1998 and December 31, 1997. In addition, the Company had letters of credit
outstanding under this facility totaling $39.6 million at June 30, 1998 and
$22.3 million at December 31, 1997. To finance land purchases, the Company
may also use seller-financed, non-recourse secured notes payable. At June 30,
1998, such notes payable outstanding amounted to $.7 million, compared with
$2.2 million at December 31, 1997.
Housing inventories increased to $623.4 million as of June 30, 1998, from
$554.8 million as of the end of 1997. This represents the normal seasonal
increase in sold homes under construction combined with growth due to
increased volume.
The financial services segment uses cash generated from operations and
borrowing arrangements to finance its operations. A bank credit facility,
which matures on June 1, 2000, provides up to $260 million for mortgage
warehouse funding and $30 million for working capital advances. Other
borrowing arrangements as of June 30, 1998 included repurchase agreement
facilities aggregating $370 million, a $100 million revolving credit facility
used to finance investment portfolio securities and a $35 million credit
facility to be used for the short-term financing of optional bond redemptions.
At June 30, 1998 and December 31, 1997, the combined borrowings of the
financial services segment outstanding under all agreements were $183.5
million and $340.6 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.
During the second quarter of 1998, the Company repurchased 310,800 shares of
its common stock and has completed the share repurchase program announced on
April 30, 1997. The Company has repurchased a total of 2.0 million shares
under the stock repurchase program.
The Ryland Group, Inc. has not guaranteed the debt of the financial services
segment or limited-purpose subsidiaries.
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
risks and uncertainties, such as the completion and profitability of sales
reported, the market for homes generally and in areas where the Company
operates, the availability and cost of land, changes in economic conditions
and interest rates, increases in raw material and labor costs, consumer
confidence, government regulation, and general competitive factors, all or
each of which may cause actual results to differ materially.
14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Ryland Mortgage Company ("RMC") announced on July 31, 1998 that it entered
into a Plea Agreement with the United States Attorney's Office for the Middle
District of Florida to resolve all charges in connection with an indictment
previously brought against RMC (The "Indictment"). The Indictment concerns
actions in 1993 related to two of RMC's loan servicing contracts with the
Resolution Trust Corporation ("RTC"). Under the terms of the Plea Agreement,
which has been filed with the United States District Court for the Middle
District of Florida and requires court approval, RMC will pay $3.5 million in
restitution plus interest, as well as a fine of $4.2 million. While the
agreement represents a significant expense for RMC, it is not expected to have
a material adverse effect on the overall financial position of the Company.
Under the Plea Agreement, RMC admits responsibility for two charges of
impeding the functions of the RTC. All other charges against RMC are to be
dismissed under the Plea Agreement. The agreement does not address the
charges against three former employees, which remain pending.
As a result of the Indictment, the U.S. Department of Housing and Urban
Development ("HUD") previously had indicated that it was considering sanctions
against RMC, including possible withdrawal of RMC's right to participate in
The Federal House Administration ("FHA") loan program and originate FHA loans.
RMC has entered into an agreement with HUD under which it expects to be able
to continue to originate loans and participate in the FHA loan program during
the 60 day period following the date of court approval of the Plea Agreement.
During this period, HUD shall consider what administrative action, if any, it
will take as a result of the resolution of the Indictment. RMC is continuing
its dialogue with representatives of HUD to reach agreement on its ability to
continue to participate in the FHA loan program. The Company also is
exploring alternative arrangements in the event that RMC is not successful in
these efforts. Termination of RMC's right to participate in the FHA program
could be followed by similar exclusions from the loan programs of other RMC
investors. No assurance can be given regarding the results of these ongoing
discussions with HUD and its possible impact on RMC and its business.
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 overall
financial position of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders of the Company was held on April 29, 1998.
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.
Proxies representing 11,937,739 shares of stock eligible to vote at the
meeting, or 78 percent of the outstanding shares, were voted in connection
with the election of directors. The nine incumbent directors nominated by the
Company were elected with a minimum of 11,716,631 votes. The following is a
separate tabulation with respect to the vote for each nominee:
15
Name Total Votes For Total Votes Withheld
R. Chad Dreier 11,780,306 157,433
James A. Flick, Jr. 11,785,611 152,128
Robert J. Gaw 11,785,409 152,330
Leonard M. Harlan 11,784,911 152,828
L.C. Heist 11,785,311 152,428
William L. Jews 11,785,098 152,641
William G. Kagler 11,716,631 221,108
Charlotte St. Martin 11,780,911 156,828
John O. Wilson 11,785,011 152,728
Page Number
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
27 Financial Data Schedule (filed herewith) 19
B. Reports on Form 8-K.
Form 8-K was filed with the Securities and Exchange Commission on April 7,
1998 regarding the sale of a majority of the Company's loan servicing
portfolio.
16
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, 1998 By: /s/ Michael D. Mangan
Date Michael D. Mangan,
Executive Vice President
and Chief Financial Officer
(Principal Financial Officer)
August 14, 1998 By: /s/ Stephen B. Cook
Date Stephen B. Cook, Vice President
and Corporate Controller
(Principal Accounting Officer)
17
INDEX OF EXHIBITS
A. Exhibits Page of
Sequentially
Exhibit No. Numbered Pages
27 Financial Data Schedule
(filed herewith) 19
18
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