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, 1994
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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.
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(Exact name of registrant as specified in its charter)
Maryland 52-0849948
- -------------------------------- -----------------
(State or other jurisdiction of (I.R.S. Employer
of 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
------ ------
The number of shares of common stock of The Ryland Group, Inc.,
outstanding on August 2, 1994 was 15,415,758.
THE RYLAND GROUP, INC.
FORM 10-Q
INDEX
Page Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at
June 30, 1994 (unaudited) and
December 31, 1993 1-2
Consolidated Statements of Earnings
for the three and six months ended
June 30, 1994 and 1993 (unaudited) 3
Consolidated Statements of Cash Flows
for the six months ended June 30,
1994 and 1993 (unaudited) 4
Notes to Consolidated Financial
Statements (unaudited) 5-8
Item 2. Management's Discussion and Analysis
of Results of Operations and Financial
Condition 9-16
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of
Security Holders 17
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
INDEX OF EXHIBITS 20
The Ryland Group, Inc. and subsidiaries
CONSOLIDATED BALANCE SHEETS
(amounts in thousands)
June 30, December 31,
1994 1993
------------ ------------
(unaudited)
ASSETS
HOMEBUILDING:
Cash and cash equivalents $ 42,463 $ 44,251
Homebuilding inventories:
Homes under construction 409,797 318,266
Land under development and improved lots 143,594 163,459
Land held for development or resale 4,974 7,821
------------ ------------
Total inventories 558,365 489,546
Investment in/advances to unconsolidated
joint ventures 18,220 23,066
Property, plant and equipment 16,949 13,999
Purchase price in excess of net assets acquired 23,123 23,639
Other assets 37,495 43,976
------------ ------------
696,615 638,477
------------ ------------
FINANCIAL SERVICES:
Cash and cash equivalents 2,269 2,239
Mortgage loans held for sale, net 260,948 535,679
Mortgage-backed securities, net 239,202 192,417
Purchased servicing and administration
rights, net 13,557 14,446
Other assets 62,479 76,150
------------ ------------
578,455 820,931
------------ ------------
LIMITED-PURPOSE SUBSIDIARIES:
Collateral for bonds payable, net 521,196 798,074
Other assets 6,721 9,882
------------ ------------
527,917 807,956
------------ ------------
Other assets 50,276 48,329
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TOTAL ASSETS $ 1,853,263 $ 2,315,693
============ ============
See notes to consolidated financial statements.
1
The Ryland Group, Inc. and subsidiaries
CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share data)
June 30, December 31,
1994 1993
------------ ------------
(unaudited)
LIABILITIES
HOMEBUILDING:
Accounts payable and other liabilities $ 92,066 $ 59,082
Long-term debt 397,832 381,040
------------ ------------
489,898 440,122
------------ ------------
FINANCIAL SERVICES:
Accounts payable and other liabilities 51,873 34,453
Short-term notes payable 450,014 716,933
------------ ------------
501,887 751,386
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LIMITED-PURPOSE SUBSIDIARIES:
Accounts payable and other liabilities 16,828 22,591
Bonds payable, net * 506,256 778,428
------------ ------------
523,084 801,019
------------ ------------
Other liabilities 31,130 29,919
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TOTAL LIABILITIES 1,545,999 2,022,446
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STOCKHOLDERS' EQUITY
Convertible preferred stock, $1 par value
Authorized - 1,400,000 shares
Issued - 1,115,128 shares
(1,153,652 for 1993) 1,115 1,154
Common stock, $1 par value
Authorized - 78,600,000 shares
Issued - 15,396,772 shares
(15,342,624 for 1993) 15,397 15,343
Paid-in capital 115,624 116,386
Retained earnings 188,537 180,351
Net unrealized gain on securities 4,230
Other (17,639) (19,987)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 307,264 293,247
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,853,263 $ 2,315,693
============ ============
See notes to consolidated financial statements.
* The 'bonds payable, net' shown in the financial statements represent
obligations solely of the limited-purpose subsidiaries, which are
secured by the assets of the limited-purpose subsidiaries.
The bonds are not guaranteed or insured by The Ryland Group, Inc.
or any of its subsidiaries.
2
The Ryland Group, Inc. and subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS
(unaudited)
(amounts in thousands, except share data)
Three months ended Six months ended
June 30, June 30,
1994 1993 1994 1993
----------- ----------- ----------- -----------
REVENUES:
Homebuilding:
Residential revenues $ 363,385 $ 301,832 $ 637,629 $ 518,554
Other revenues 786 1,857 1,556 3,329
----------- ----------- ----------- -----------
Total homebuilding revenues 364,171 303,689 639,185 521,883
Financial services 38,937 38,528 79,710 81,421
Limited-purpose subsidiaries 13,601 29,776 30,306 64,241
----------- ----------- ----------- -----------
Total revenues 416,709 371,993 749,201 667,545
EXPENSES:
Homebuilding:
Cost of sales 317,269 268,992 557,251 462,099
Interest expense 6,925 6,697 13,581 12,341
Selling, general and
administrative 35,328 27,945 64,377 51,938
----------- ----------- ----------- -----------
Total 359,522 303,634 635,209 526,378
Financial services:
Interest expense 6,594 7,397 14,457 14,418
General and administrative 20,002 17,157 41,045 33,857
----------- ---------- ----------- -----------
Total 26,596 24,554 55,502 48,275
Limited-purpose subsidiaries:
Interest expense 12,975 28,377 28,558 60,738
Other expenses 564 1,347 1,675 3,419
----------- ----------- ----------- -----------
Total 13,539 29,724 30,233 64,157
Corporate expenses 4,503 4,706 8,833 8,344
----------- ----------- ----------- -----------
Total expenses 404,160 362,618 729,777 647,154
Equity in earnings (losses) of
unconsolidated joint ventures 87 33 137 (240)
----------- ----------- ----------- -----------
EARNINGS BEFORE TAXES AND
CUMULATIVE EFFECT OF A CHANGE
IN ACCOUNTING PRINCIPLE 12,636 9,408 19,561 20,151
Tax expense 5,054 3,668 7,824 7,858
----------- ----------- ----------- -----------
NET EARNINGS BEFORE CUMULATIVE
EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE 7,582 5,740 11,737 12,293
Cumulative effect of a change in
accounting principle - (net of
taxes of $1,384) 0 0 2,076 0
----------- ----------- ----------- -----------
NET EARNINGS $ 7,582 $ 5,740 $ 13,813 $ 12,293
=========== =========== =========== ===========
Preferred dividends $ 616 $ 651 $ 1,245 $ 1,310
Net earnings available for
common shareholders $ 6,966 $ 5,089 $ 12,568 $ 10,983
NET EARNINGS PER COMMON SHARE:
Primary:
Net earnings before cumulative
effect of a change in
accounting principle $ 0.45 $ 0.33 $ 0.68 $ 0.71
Cumulative effect of a change
in accounting principle 0.13
----------- ----------- ----------- -----------
Net earnings per common
share $ 0.45 $ 0.33 $ 0.81 $ 0.71
=========== =========== =========== ===========
Fully diluted:
Net earnings before cumulative
effect of a change in
accounting principle $ 0.44 $ 0.33 $ 0.66 $ 0.70
Cumulative effect of a change
in accounting principle 0.13
----------- ----------- ----------- -----------
Net earnings per common
share $ 0.44 $ 0.33 $ 0.79 $ 0.70
=========== =========== =========== ===========
Dividends per common share $ 0.15 $ 0.15 $ 0.30 $ 0.30
Dividends per preferred share 0.55 0.55 1.10 1.10
See notes to consolidated financial statements.
3
The Ryland Group, Inc. and subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
(amounts in thousands)
(unaudited)
Six months ended June 30,
1994 1993
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 13,813 $ 12,293
Adjustments to reconcile net earnings
to net cash provided by (used for)
operating activities:
Depreciation and amortization 9,084 9,831
Cumulative effect of a change
in accounting principle (3,460)
Gain on sale of investment (5,322)
Increase in inventories (68,819) (92,497)
Net change in other assets, payables
and other liabilities 60,305 (49,966)
Equity in (earnings) losses of
unconsolidated joint ventures (137) 240
Decrease in investment in/advances
to unconsolidated joint ventures 4,837 4,447
Decrease (increase)in mortgage loans
held for sale, net 274,731 (6,852)
Decrease in mortgage-backed securities, net 31,750
---------- ---------
Net cash provided by (used for)
operating activities 290,354 (96,076)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Net additions to property, plant and equipment (10,363) (4,509)
Principal reduction of mortgage collateral 392,618
Principal reduction of mortgage-backed
securities-available for sale 21,742
Principal reduction of mortgage-backed
securities-held to maturity 168,138
Decrease in funds held by trustee 54,327 58,118
Other investing activities, net (909) 7,154
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Net cash provided by investing activities 232,935 453,381
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CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in short-term notes payable (266,919) (18,287)
Cash proceeds of long-term debt 29,717 138,417
Reduction of long-term debt (12,925) (13,645)
Bond principal payments (274,884) (448,413)
Common and preferred stock dividends (5,915) (5,916)
Other financing activities, net 5,879 1,410
---------- ---------
Net cash used for financing activities (525,047) (346,434)
---------- ---------
Net (decrease) increase in cash (1,758) 10,871
Cash at beginning of year 46,490 10,413
---------- ---------
CASH AT END OF PERIOD $ 44,732 $ 21,284
========== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 62,232 $100,237
Cash paid for income taxes $ 18,906 $ 18,513
See notes to consolidated financial statements.
4
The Ryland Group, Inc. and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(amounts in thousands, except share data, in all notes)
Note 1. Segment Information
Three months ended June 30,
1994 1993
---------- ---------
Pretax earnings (loss):
Homebuilding $ 4,736 $ 88
Financial Services 12,341 13,974
Limited-purpose subsidiaries 62 52
Corporate expenses (4,503) (4,706)
---------- ---------
Total $ 12,636 $ 9,408
========== =========
Six months ended June 30,
1994 1993
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Pretax earnings (loss):
Homebuilding $ 4,113 $ (4,735)
Financial Services 24,208 33,146
Limited-purpose subsidiaries 73 84
Corporate expenses (8,833) (8,344)
---------- ---------
Total $ 19,561 $ 20,151
========== =========
5
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. Certain investments in
joint ventures are accounted for by the equity method.
The consolidated balance sheet as of June 30, 1994, the consolidated
statements of earnings for the three and six months ended June 30, 1994 and
1993, and the consolidated statements of cash flows for the six months ended
June 30, 1994 and 1993 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, 1994, and for all periods presented,
have been made. The consolidated balance sheet at December 31, 1993 is taken
from the audited financial statements as of that date. Certain amounts in the
consolidated statements have been reclassified to conform to the 1994
presentation.
Certain information and footnote disclosures normally included in the
financial statements have been condensed or omitted. It is suggested that
these financial statements be read in conjunction with the financial
statements and related notes included in the Company's December 31, 1993
annual report to shareholders.
The results of operations for the three and six months ended June 30, 1994 are
not necessarily indicative of the operating results for the full year.
Assets presented in the financial statements are net of any valuation
allowances.
In calculating primary earnings per common share, the dividend requirements of
the preferred shares held by the Ryland Retirement and Stock Ownership Plan
Trust (the RSOP Trust) have been deducted from net earnings. For the three
and six months ended June 30, 1994 and 1993, the average shares outstanding
have been increased by the common stock equivalents relating to the employee
stock option and employee incentive plans.
Net earnings used in calculating fully diluted earnings per common share, for
the three and six months ended June 30, 1994 and 1993, were decreased by the
amount of the additional RSOP contribution required to fund the difference
between the RSOP's earnings from preferred stock dividends and the RSOP's
potential earnings from common stock dividends after an assumed conversion.
6
The Ryland Group, Inc. and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(unaudited)
Note 2. Consolidated Financial Statements - continued
Fully diluted earnings per common share for the three and six months ended
June 30, 1994, gives effect to the common stock equivalents and the assumed
conversion of the preferred stock into 1,127,250 shares and 1,136,816 shares,
respectively, of common stock, in accordance with the RSOP Trust Agreement.
Fully diluted earnings per share for the three and six months ended June 30,
1993, gives effect to the common stock equivalents and assumed conversion of
the preferred stock into 1,182,097 shares and 1,188,181 shares respectively,
of common stock, in accordance with the RSOP Trust Agreement.
Note 3. Accounting Changes
In May 1993 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 115 ("FAS 115"), "Accounting for Certain
Investments in Debt and Equity Securities." The Company adopted the
provisions of the new standard for investments held as of or acquired after
January 1, 1994. In accordance with FAS 115, prior period financial
statements have not been restated to reflect the change in accounting
principle. In compliance with the new standard, the Company has classified
its investments into one of three categories: Held-to-maturity, available-
for-sale, or trading, based on management's intent and ability to hold such
securities. Management determines the appropriate classification of
investment securities at the time of purchase and reevaluates such
designations as of each balance sheet date. Investment securities are
classified as held-to-maturity when the Company has the positive intent and
ability to hold the securities to maturity. Securities which are classified
as held-to-maturity will continue to be stated at amortized cost. Securities
which are classified as available-for-sale are measured at fair value with the
unrealized gains and losses, net of tax, reflected as a component of
stockholders' equity. Lastly, securities classified as trading are measured
at fair value with gains and losses, both realized and unrealized, flowing
through the income statement. At June 30, 1994, there were no securities
designated as trading account assets.
The cumulative effect of adopting FAS 115 as of January 1, 1994 increased net
income by $2,076 (net of $1,384 in deferred income taxes), or $.13 per share.
This cumulative effect adjustment relates to unearned income or discount
points on investment securities, which can now be amortized into income during
7
The Ryland Group, Inc. and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(unaudited)
Note 3. Accounting Changes - continued
the period that the investment securities are held. Prior to adopting FAS 115,
discount points were recognized into income only when the related investment
security was sold. The January 1, 1994 balance of stockholders' equity was
increased by $7,594 (net of $5,063 in deferred income taxes) to reflect the
net unrealized holding gains on securities classified as available-for-sale,
which were previously carried at the lower of amortized cost or market.
Subsequent to January 1, 1994, the fair value of the mortgage-backed
securities in the available-for-sale portfolio declined, resulting in a net
unrealized gain adjustment to stockholders' equity as of June 30, 1994 of
$4,230.
8
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
RESULTS OF OPERATIONS
CONSOLIDATED
In the second quarter of 1994, the Company reported consolidated net earnings
of $7.6 million, or $.45 per share. This compares with consolidated net
earnings of $5.7 million, or $.33 per share, for the same period in 1993. The
improvement in the Company's second quarter results was attributable to
improved performance in the homebuilding segment which reported pretax
earnings of $4.7 million for the second quarter of 1994, compared with pretax
earnings of $88 thousand in the second quarter of 1993. The financial services
segment reported pretax earnings for the second quarter of 1994 of $12.3
million, compared with $14.0 million for the same period of 1993.
The Company reported year-to-date consolidated net earnings of $13.8 million,
or $.81 per share, which included the cumulative impact of a first quarter
accounting change of $.13 per share. This compares with consolidated net
earnings of $12.3 million, or $.71 per share, for the same period in 1993,
which included a non-recurring first quarter gain of $.21 per share.
Excluding these non-recurring items, year-to-date consolidated net earnings
for 1994 amounted to $11.7 million, or $.68 per share, compared with $9.1
million, or $.50 per share, for the same period of 1993. The homebuilding
segment's year-to-date pretax earnings of $4.1 million compared with a pretax
loss of $4.7 million for the same period in 1993. The financial services
segment reported year-to-date pretax earnings of $24.2 million for 1994
compared with $33.1 million for the same period in 1993, when a non-recurring
pretax gain of $5.3 million was realized from the sale of the Company's
remaining interest in a real estate investment trust.
The Company's first half results for 1994 include the cumulative impact of an
accounting change to adopt Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Debt and Equity Securities," as
of January 1, 1994. The impact of this accounting rule change, which
increased year-to-date net earnings by $2.1 million, or $.13 per share,
relates to the financial services segment's investment portfolio.
The limited-purpose subsidiaries, whose operations continue to decline as the
related mortgage collateral and bonds payable decrease, reported pretax
earnings of $62 thousand for the second quarter of 1994, compared with pretax
earnings of $52 thousand for the same period in 1993. Year-to-date pretax
earnings were $73 thousand compared with $84 thousand for the same period in
1993.
9
HOMEBUILDING
Operations of the Company's homebuilding segment are summarized as follows
($ amounts in thousands):
Three months ended Six months ended
June 30, June 30,
1994 1993 1994 1993
---- ---- ---- ----
Revenues $364,171 $303,689 $639,185 $521,883
Gross profit 46,902 34,697 81,934 59,784
Selling, general and
administrative expenses 35,328 27,945 64,377 51,938
Interest expense 6,925 6,697 13,581 12,341
Equity in earnings
(losses) of
unconsolidated
joint ventures 87 33 137 (240)
-------- --------- ------- ---------
Pretax earnings (loss) $ 4,736 $ 88 $ 4,113 $ (4,735)
======== ========= ======= =========
Operational Unit Data:
(includes joint ventures)
New orders 2,316 2,158 5,164 4,405
Settlements 2,303 2,159 4,132 3,767
Outstanding contracts at
June 30,
Units 3,751 3,243
Dollar Value $621,239 $508,508
Average Settlement Price
(excludes unconsolidated
joint ventures) $161 $145 $158 $143
For the three and six months ended June 30, 1994 revenues increased 19.9
percent and 22.5 percent, respectively, compared with the same periods in
1993, due to an overall increase in settlements and higher average settlement
prices. For the three and six months ended June 30, 1994, settlements
increased 6.7 percent and 9.7 percent, respectively, and the average
settlement price increased 11.0 percent and 10.5 percent from the same
respective periods a year ago.
10
The gross margin for the second quarter of 1994 was 12.9 percent, compared
with 11.4 percent for the second quarter of 1993. The year-to-date gross
margin increased to 12.8 percent from 11.5 percent for the same period of
1993. The improvement in overall gross margins during the second quarter
and first six months of 1994 was primarily attributable to increased sales
prices, higher volume and a better mix of sales from higher margin
communities. Despite the improvement, the Company's gross margins continue to
be negatively impacted by the build out of low margin inventory in California.
Total homebuilding new orders increased 7.3 percent to 2,316 units during the
second quarter of 1994 and 17.2 percent to 5,164 units for the year-to-date
compared with the same respective periods in 1993. The year-to-date growth in
new orders is primarily attributable to significant gains in the California
and Southwest regions more than compensating for lower sales in the
Mid-Atlantic and Southeast regions. The California region showed substantial
improvement in sales compared to last year, due in large part to the changes
in strategy implemented in the latter part of 1993. The increase in new orders
in the Southwest region is attributable to improved sales in the Houston and
Dallas divisions, as well as the sales increase resulting from the acquisition
of Scott Felder Homes. The decline in the Southeast region was primarily due
to the Company's withdrawals from the Jacksonville, Florida and Charleston,
South Carolina markets, while the decline in new orders in the Mid-Atlantic
region was partially weather-related and partially due to economic conditions
in the region.
The Company acquired a majority interest in Scott Felder Homes in March 1993
through a limited partnership. On July 1, 1994 the Company completed the full
acquisition of this enterprise strengthening its position in the Austin, San
Antonio and Dallas markets.
For the homebuilding segment, outstanding contracts as of June 30, 1994 were
up 15.7 percent from June 30, 1993. The $621.2 million value of outstanding
contracts, which increased 22.2 percent over the same period of 1993, is the
highest June 30th backlog in the Company's history.
Selling, general and administrative expenses as a percentage of revenues, were
9.7 percent for the first quarter and 10.1 percent for the first six months of
1994 compared with 9.2 percent and 10.0 percent for the same respective
periods of 1993. These increases were primarily attributable to the costs
associated with the Company's expansion into new markets.
Interest expense for the second quarter and first six months of 1994 increased
somewhat compared with the same periods of 1993, due to an increase in the
overall borrowing costs of the Company, partially offset by a higher amount of
interest capitalization in 1994.
11
FINANCIAL SERVICES
The financial services segment reported pretax earnings of $12.3 million for
the second quarter of 1994, compared with $14.0 million in the second quarter
of 1993. Year-to-date pretax earnings were $24.2 million compared with $33.1
million for the same period of 1993. The decrease in year-to-date earnings
was primarily due to a non-recurring first quarter pretax gain of $5.3 million
from the sale of the Company's remaining interest in a real estate investment
trust, as well as $6.4 million in pretax gains from sales of called
collateral, $2.4 million of which occurred in the second quarter. Expenses
increased from the prior year due to expansion of operations during 1993.
Retail Operations:
- -----------------
Pretax earnings for retail operations were as follows (amounts in thousands):
Three months Six months
ended June 30, ended June 30,
1994 1993 1994 1993
---- ---- ---- ----
Revenues:
Interest and
net origination fees $ 4,229 $6,557 $11,183 $12,456
Gains on sales of mortgages
and servicing rights 12,923 6,591 22,380 12,749
------- ------- ------- ------
Mortgage production revenue 17,152 13,148 33,563 25,205
Loan servicing 8,425 10,526 19,678 21,043
Title/escrow 1,087 886 1,977 1,481
------- ------- ------- ------
Total retail revenues 26,664 24,560 55,218 47,729
Expenses 19,740 19,571 41,996 37,655
------- ------- ------- ------
Pretax earnings $ 6,924 $ 4,989 $13,222 $10,074
======= ======= ======= =======
Interest and net origination fees have decreased as a result of the industry-
wide decline in mortgage origination activity resulting from the current
higher interest rate environment, while loan servicing revenues have declined
due to reductions in the loan servicing portfolio. These trends are likely to
continue. The increases in total revenues for the three months ended June 30,
1994 and the six months ended June 30, 1994 compared with the same periods in
1993, were the result of higher gains on the sales of mortgages and servicing
rights. Expenses increased between periods due to the overall expansion of
the Company's operations in 1993. The Company has recently reduced staffing
levels in anticipation of continued lower origination volumes.
12
Mortgage origination activities were as follows:
Three months Six months
ended June 30, ended June 30,
1994 1993 1994 1993
---- ---- ---- ----
Dollar volume of mortgages
originated (in millions) $ 525 $ 975 $1,200 $ 1,516
Number of mortgages originated 4,224 7,595 9,579 11,861
Percentage Ryland Homes settlements 28% 19% 23% 22%
Percentage other settlements 72% 81% 77% 78%
---- ---- ---- ----
Total settlements 100% 100% 100% 100%
The Company earns interest on mortgages held for sale and pays interest on
borrowings secured by the mortgages. Significant data from these operations
were as follows:
Three months Six months
ended June 30, ended June 30,
1994 1993 1994 1993
---- ---- ---- ----
Interest spread (in thousands) $2,126 $3,079 $5,475 $6,128
Average balance of mortgages
held for sale (in millions) $ 273 $ 413 $ 362 $ 386
Interest spread rate 3.1% 3.0% 3.1% 3.2%
The interest spread decreased in the current six months as compared to 1993
due to a lower average balance of mortgages held for sale.
The loan servicing portfolio balances were as follows at June 30, (in
billions):
1994 1993
---- ----
Originated $3.1 $3.7
Acquired 4.3 5.2
Subserviced for others 0.1 .8
---- ----
Total portfolio $7.5 $9.7
==== ====
The decrease in the portfolio balance is primarily attributable to the decline
in origination volume combined with higher sales of servicing in the current
year.
13
Institutional Operations:
The institutional operations encompass securities issuance and securities
administration services. Pretax earnings for the three months ended June 30,
1994 decreased 11.6 percent as compared to the same period in 1993 due to an
increase in expenses. Year-to-date pretax earnings increased 2.7 percent as
compared to the same period in 1993, despite a decline in the overall
portfolio balance, due to improved margins per series.
Three months Six months
ended June 30, ended June 30,
1994 1993 1994 1993
---- ---- ---- ----
Revenues $6,060 $5,960 $11,760 $10,883
Expenses 3,450 3,008 6,841 6,091
------ ------ ------- -------
Pretax earnings $2,610 $2,952 $ 4,919 $ 4,792
====== ====== ======= =======
Significant data on the securities administration portfolio as of June 30,
were as follows:
1994 1993
---- ----
Total securities administration
portfolio (in billions) $48.2 $64.3
Number of series in the
administration portfolio 542 505
Investment Operations:
The Company's investment operations hold certain assets, primarily mortgage-
backed securities, which were obtained as a result of the redemption of
mortgage-backed bonds issued by the Company's limited-purpose subsidiaries.
As shown in the table below, pretax earnings for the three and six months
ended June 30, 1994 decreased substantially as compared to the same period of
1993. The $5.3 million gain in the first quarter of 1993 was the result of
the sale of the Company's remaining interest in a real estate investment trust
(REIT) and is a non-recurring item. The Company also realized net revenues of
$2.4 million and $6.4 million from the sale of mortgage-backed securities in
the three and six months ended June 30, 1993, respectively.
14
Pretax earnings were comprised of the following:
Three months Six months
ended June 30, ended June 30,
1994 1993 1994 1993
---- ---- ---- ----
Sale of REIT stock $ 0 $ 0 $ 0 $ 5,322
Sale of mortgage-backed securities 0 2,356 0 6,396
Interest spread and other 2,807 3,677 6,067 6,562
------ ------- ------ -------
Pretax earnings $2,807 $ 6,033 $6,067 $18,280
====== ======= ====== =======
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 slight decrease in the interest spread rate
in the second quarter of 1994 as compared to 1993, is primarily due to an
increase in borrowing rates. The increase in the interest spread rate between
the year-to-date periods is due to a higher yield earned on the mortgage-
backed securities, partially as a result of the adoption of FAS 115 as of
January 1, 1994. Prior to FAS 115, unearned income (discount points) was
deferred and recognized upon the sale of the related investment security.
Under FAS 115, this unearned income is amortized into income as an adjustment
to the interest yield over the remaining term of the investment security.
Significant data from the investment operations was as follows:
Three months Six months
ended June 30, ended June 30,
1994 1993 1994 1993
---- ---- ---- ----
Interest spread earned
(in thousands) $3,781 $3,646 $8,179 $6,653
Average balance outstanding
at June 30 (in millions) $ 228 $ 215 $ 226 $ 217
Interest spread rate 6.6% 6.8% 7.3% 6.1%
15
FINANCIAL CONDITION AND LIQUIDITY
The Company generally provides for the cash requirements of the homebuilding
segment and financial services segment from internally generated funds and
outside borrowings. The Company believes that its sources of cash are
sufficient to finance its expected requirements.
Housing inventories increased to $558.4 million as of June 30, 1994, from
$489.5 million as of December 31, 1993, primarily due to normal seasonal
increases in homes under construction and expansion into new and existing
markets.
The Company primarily uses its unsecured revolving credit agreement to finance
its homes under construction. This agreement, which was renewed in July 1993,
allows the Company to borrow up to $215 million for a three-year period. As
of June 30, 1994, the Company had borrowed $118 million under this agreement,
compared with $90 million as of December 31, 1993. The increase is primarily
attributable to the aforementioned increases in homebuilding inventories.
The financial services segment uses cash generated from operations and
borrowing arrangements to finance operations. Borrowing arrangements include
a $400 million combined mortgage warehouse and working capital funding
agreement, repurchase agreement facilities aggregating $800 million and a
secured $35 million credit agreement to be used for the short-term financing
of optional bond redemptions. At June 30, 1994 and December 31, 1993, the
combined borrowings under the mortgage warehouse funding agreement, the
repurchase agreements, and the revolving credit agreement were $450.0 million
and $716.9 million, respectively. As of June 30, 1994 and December 31, 1993,
the balance of mortgage loans and mortgage-backed securities, net were $500.2
million and $728.1 million, respectively.
16
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders of the Company was held on April 20, 1994.
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, to approve the amendment of the 1992 non-employee director
equity plan and to approve the appointment of Ernst & Young as independent
public accountants of the Company for 1994.
The ten incumbent directors proposed by the Company were elected. Proxies
representing 14,222,809 shares of stock eligible to vote at this meeting, or
92.6 percent of the outstanding shares, were voted for the election of
directors. The following is a separate tabulation with respect to the vote
for each director:
Name Total Vote For Total Vote Withheld
- ---- -------------- -------------------
Andre P. Brewster 14,151,235 71,574
Robert J. Gaw 14,137,531 85,278
Alan P. Hoblitzell, Jr. 14,136,700 86,109
John H. Mullin III 14,151,335 71,474
Leonard M. Harlan 14,149,990 72,819
William G. Kagler 14,151,435 71,374
John O. Wilson 14,151,435 71,374
L.C. Heist 14,151,535 71,274
James A. Flick, Jr. 14,151,435 71,374
R. Chad Dreier 14,151,535 71,274
The amendment to the 1992 non-employee director equity plan was approved by
91 percent of the shares voting. The following is a breakdown of the vote on
such matter:
For Against Abstain
--- ------- -------
12,939,569 1,025,065 258,175
Ernst & Young was approved as the independent public accountants for the
Company for 1994 by 99.3 percent of the shares voting. The following is a
breakdown of the vote on such matter:
For Against Abstain
--- ------- -------
14,129,410 39,185 54,213
17
PART II. OTHER INFORMATION (continued)
Page Number
-----------
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
10 1992 Non-Employee Director Equity Plan (as amended) 21-27
11 Statement Re computation of earnings
per share 28
B. Reports on Form 8-K
No reports on Form 8-K were filed with the
Securities and Exchange Commission during
the three months ended June 30, 1994.
18
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 12, 1994 By: /s/ Alan P. Hoblitzell, Jr.
- --------------- ------------------------------------------
Date Alan P. Hoblitzell, Jr.,
Director, Executive Vice President
and Chief Financial Officer
(Principal Financial Officer)
August 12, 1994 By: /s/ Stephen B. Cook
- --------------- ------------------------------------------
Date Stephen B. Cook,
Vice President and Corporate Controller
(Principal Accounting Officer)
19
INDEX OF EXHIBITS
A. Exhibits Page of
Sequentially
Numbered Pages
--------------
10 1992 Non-Employee Director Equity Plan (as amended) 21-27
11 Statement Re computation of earnings
per share 28
20