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, 1994
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 (I.R.S. Employer
of incorporation or organization) Identification No.)
11000 Broken Land Parkway, Columbia, Maryland 21044
(Address of principal executive offices) (Zip Code)
(410) 715-7000
(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 November 1, 1994 was 15,466,829.
THE RYLAND GROUP, INC.
FORM 10-Q
INDEX
Page Number
-----------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at
September 30, 1994 (unaudited) and
December 31, 1993 1-2
Consolidated Statements of Earnings
for the three and nine months ended
September 30, 1994 and 1993 (unaudited) 3
Consolidated Statements of Cash Flows
for the nine months ended September 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 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
INDEX OF EXHIBITS 19
The Ryland Group, Inc. and subsidiaries
CONSOLIDATED BALANCE SHEETS
(amounts in thousands)
September 30, December 31,
1994 1993
------------ ------------
(unaudited)
ASSETS
HOMEBUILDING:
Cash and cash equivalents $ 30,178 $ 44,251
Homebuilding inventories:
Homes under construction 431,571 318,266
Land under development and improved lots 140,025 163,459
Land held for future development or resale 4,694 7,821
------------ ------------
Total inventories 576,290 489,546
Investment in/advances to unconsolidated
joint ventures 17,403 23,066
Property, plant and equipment 19,356 13,999
Purchase price in excess of net assets acquired 22,865 23,639
Other assets 51,894 43,976
------------ ------------
717,986 638,477
------------ ------------
FINANCIAL SERVICES:
Cash and cash equivalents 2,303 2,239
Mortgage loans held for sale, net 246,472 535,679
Mortgage-backed securities, net 187,911 192,417
Purchased servicing and administration
rights, net 12,689 14,446
Other assets 66,750 76,150
------------ ------------
516,125 820,931
------------ ------------
LIMITED-PURPOSE SUBSIDIARIES:
Collateral for bonds payable, net 470,661 798,074
Other assets 5,816 9,882
------------ ------------
476,477 807,956
------------ ------------
Other assets 48,182 48,329
------------ ------------
TOTAL ASSETS $ 1,758,770 $ 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)
September 30, December 31,
1994 1993
------------ ------------
(unaudited)
LIABILITIES
HOMEBUILDING:
Accounts payable and other liabilities $ 81,452 $ 59,082
Long-term debt 419,321 381,040
------------ ------------
500,773 440,122
------------ ------------
FINANCIAL SERVICES:
Accounts payable and other liabilities 25,782 34,453
Short-term notes payable 407,229 716,933
------------ ------------
433,011 751,386
------------ ------------
LIMITED-PURPOSE SUBSIDIARIES:
Accounts payable and other liabilities 14,671 22,591
Bonds payable, net * 458,043 778,428
------------ ------------
472,714 801,019
------------ ------------
Other liabilities 40,437 29,919
------------ ------------
TOTAL LIABILITIES 1,446,935 2,022,446
------------ ------------
STOCKHOLDERS' EQUITY
Convertible preferred stock, $1 par value
Authorized - 1,400,000 shares
Issued - 1,090,990 shares
(1,153,652 for 1993) 1,091 1,154
Common stock, $1 par value
Authorized - 78,600,000 shares
Issued - 15,430,155 shares
(15,342,624 for 1993) 15,430 15,343
Paid-in capital 116,053 116,386
Retained earnings 194,162 180,351
Net unrealized gain on securities 2,585
Other (17,486) (19,987)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 311,835 293,247
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,758,770 $ 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
Page>
The Ryland Group, Inc. and subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS
(unaudited)
(amounts in thousands, except share data)
Three months ended Nine months ended
September 30, September 30,
1994 1993 1994 1993
----------- ----------- ----------- -----------
REVENUES:
Homebuilding:
Residential revenues $ 396,725 $ 314,486 $1,034,354 $ 833,009
Other revenues 1,740 535 3,296 3,895
----------- ----------- ----------- -----------
Total homebuilding revenues 398,465 315,021 1,037,650 836,904
Financial services 38,000 36,672 117,710 118,093
Limited-purpose subsidiaries 11,367 24,966 41,673 89,207
----------- ----------- ----------- -----------
Total revenues 447,832 376,659 1,197,033 1,044,204
EXPENSES:
Homebuilding:
Cost of sales 348,373 319,519 905,624 781,618
Interest expense 7,680 6,974 21,261 19,315
Selling, general and
administrative 37,866 29,930 102,243 81,868
----------- ----------- ----------- -----------
Total 393,919 356,423 1,029,128 882,801
Financial services:
Interest expense 5,852 7,480 20,309 21,898
General and administrative 18,014 19,378 59,059 53,235
----------- ---------- ----------- -----------
Total 23,866 26,858 79,368 75,133
Limited-purpose subsidiaries:
Interest expense 11,082 23,867 39,640 84,605
Other expenses 263 1,059 1,938 4,478
----------- ----------- ----------- -----------
Total 11,345 24,926 41,578 89,083
Corporate expenses 4,581 3,119 13,414 11,463
----------- ----------- ----------- -----------
Total expenses 433,711 411,326 1,163,488 1,058,480
Equity in losses of
unconsolidated joint ventures (139) (1,903) (2) (2,143)
----------- ----------- ----------- -----------
EARNINGS (LOSS) BEFORE TAXES AND
CUMULATIVE EFFECT OF A CHANGE
IN ACCOUNTING PRINCIPLE 13,982 (36,570) 33,543 (16,419)
Tax expense (benefit) 5,593 (14,014) 13,417 (6,156)
----------- ----------- ----------- -----------
NET EARNINGS (LOSS) BEFORE CUMULATIVE
EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE 8,389 (22,556) 20,126 (10,263)
Cumulative effect of a change in
accounting principle - (net of
taxes of $1,384) 2,076
----------- ----------- ----------- -----------
NET EARNINGS (LOSS) 8,389 (22,556) 22,202 (10,263)
=========== =========== =========== ===========
Preferred dividends $ 603 $ 642 $ 1,848 $ 1,952
Net earnings (loss) available
for common shareholders $ 7,786 $ (23,198) $ 20,354 $ (12,215)
NET EARNINGS (LOSS) PER COMMON SHARE:
Primary:
Net earnings (loss) before
cumulative effect of a change
in accounting principle $ 0.50 $ (1.52) $ 1.18 $ (0.80)
Cumulative effect of a change
in accounting principle 0.13
----------- ----------- ----------- -----------
Net earnings (loss) per
common share $ 0.50 $ (1.52) $ 1.31 $ (0.80)
=========== =========== =========== ===========
Fully diluted:
Net earnings (loss) before
cumulative effect of a change
in accounting principle $ 0.49 $ (1.52) $ 1.16 $ (0.80)
Cumulative effect of a change
in accounting principle 0.12
----------- ----------- ----------- -----------
Net earnings (loss) per
common share $ 0.49 $ (1.52) $ 1.28 $ (0.80)
=========== =========== =========== ===========
Dividends per common share $ 0.15 $ 0.15 $ 0.45 $ 0.45
Dividends per preferred share 0.55 0.55 1.65 1.65
=========== =========== =========== ===========
See notes to consolidated financial statements.
3
The Ryland Group, Inc. and subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
(amounts in thousands)
(unaudited)
Nine months ended September 30,
1994 1993
---------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ 22,202 $(10,263)
Adjustments to reconcile net earnings
(loss) to net cash provided by
(used for) operating activities:
Depreciation and amortization 14,332 14,942
Cumulative effect of a change
in accounting principle (3,460)
Gain on sale of investment (5,322)
Increase in inventories (86,744) (63,433)
Net change in other assets, payables
and other liabilities 13,572 (10,507)
Equity in losses of unconsolidated
joint ventures 2 2,143
Decrease in investment in/advances
to unconsolidated joint ventures 5,475 8,809
Increase in mortgage-backed securities -
trading (2,546)
Decrease (increase)in mortgage loans
held for sale, net 289,207 (10,229)
Decrease in mortgage-backed securities, net 23,542
---------- ---------
Net cash provided by (used for)
operating activities 252,040 (50,318)
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net additions to property, plant and equipment (14,054) (9,123)
Principal reduction of mortgage collateral 563,759
Principal reduction of mortgage-backed
securities-available for sale 33,262
Sales of mortgage-backed securities
available for sale 30,557
Principal reduction of mortgage-backed
securities-held to maturity 208,717
Decrease in funds held by trustee 73,779 85,590
Other investing activities, net (909) 6,726
---------- ---------
Net cash provided by investing activities 331,352 646,952
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in short-term notes payable (309,704) (26,960)
Cash proceeds of long-term debt 55,421 114,080
Reduction of long-term debt (17,140) (26,363)
Bond principal payments (323,603) (643,151)
Common and preferred stock dividends (8,832) (8,850)
Other financing activities, net 6,457 1,441
---------- ---------
Net cash used for financing activities (597,401) (589,803)
---------- ---------
Net (decrease) increase in cash (14,009) 6,831
Cash at beginning of year 46,490 10,413
---------- ---------
CASH AT END OF PERIOD $ 32,481 $ 17,244
========== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 89,606 $131,888
Cash paid for income taxes $ 20,411 $ 26,225
========== =========
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 September 30,
1994 1993
---------- ---------
Pretax earnings (loss):
Homebuilding $ 4,407 $(43,305)
Financial Services 14,134 9,814
Limited-purpose subsidiaries 22 40
Corporate expenses (4,581) (3,119)
---------- ---------
Total $ 13,982 $(36,570)
========== =========
Nine months ended September 30,
1994 1993
---------- ---------
Pretax earnings (loss):
Homebuilding $ 8,520 $(48,040)
Financial Services 38,342 42,960
Limited-purpose subsidiaries 95 124
Corporate expenses (13,414) (11,463)
---------- ---------
Total $ 33,543 $(16,419)
========== =========
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 September 30, 1994, the consolidated
statements of earnings for the three and nine months ended September 30, 1994
and 1993, and the consolidated statements of cash flows for the nine months
ended September 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 September 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 nine months ended September 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 (loss) 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 or
added to net loss. For the three and nine months ended September 30, 1994,
the average shares outstanding have been increased by the common stock
equivalents relating to the employee stock option and employee incentive
plans. For the three and nine months ended September 30,1993, these common
stock equivalents were not considered as the effect would be anti-dilutive.
6
The Ryland Group, Inc. and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(unaudited)
Note 2. Consolidated Financial Statements - continued
Net earnings used in calculating fully diluted earnings per common share for
the three and nine months ended September 30, 1994 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.
Net loss used in calculating fully diluted loss per common share for the three
and nine months ending September 30, 1993 was increased by the dividend
requirements of the preferred shares held by the RSOP Trust, as an adjustment
for incremental dividends on convertible preferred shares would be anti-
dilutive.
Fully diluted earnings per common share for the three and nine months ended
September 30, 1994, gives effect to the common stock equivalents and the
assumed conversion of the preferred stock into 1,103,318 shares and 1,125,650
shares, respectively, of common stock, in accordance with the RSOP Trust
Agreement. In computing fully diluted loss per share for the three and nine
months ended September 30, 1993, average shares outstanding have not been
increased by the common stock equivalents relating to the employee stock
option and employee incentive plans and the assumed conversion of the
preferred stock held by the RSOP Trust as the effect would be anti-dilutive.
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 three categories: held-to-maturity, available-for-sale,
and trading. 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.
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(unaudited)
Note 3. Accounting Changes - continued
Those securities meeting the held-to-maturity criteria are primarily those
currently held in a limited-purpose subsidiary whose bond indentures prohibit
liquidation of the collateral for bonds payable unless the corresponding bonds
payable are redeemed. The bonds payable in this category generally cannot be
redeemed until the principal balance of the bonds payable is less than 15
percent of the original balance. Prepayment risk is the only significant risk
associated with the mortgage-backed securities classified as held-to-maturity.
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. At September 30, 1994, these securities
are primarily mortgage-backed securities that had previously been held as
collateral for bonds payable in a limited-purpose subsidiary, but had call
rights that allowed for redemption prior to the principal balance being paid
down to 15 percent of the original balance. Lastly, securities classified as
trading are measured at fair value with gains and losses, both realized and
unrealized, recognized in the statement of earnings. At September 30, 1994
trading securities totaled $2.5 million.
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 related to unearned income or discount
points on investment securities, which can now be amortized into income during
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. At
September 30, 1994, the balance of the net unrealized gain on securities
classified as available for sale, which is reflected as a component of
stockholders' equity, was $2,585. The decline in this balance from January 1,
1994 is due to a reduction in fair value caused by the rising interest rate
environment and the sale by the Company of a portion of this portfolio.
8
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS AND RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
RESULTS OF OPERATIONS
CONSOLIDATED
In the third quarter of 1994, the Company reported consolidated net earnings
of $8.4 million, or $.50 per share. This compares with a consolidated net
loss of $22.6 million, or ($1.52) per share, for the same period in 1993. The
1994 results represent improvement from 1993 when the Company took a pretax
provision of $45 million against its homebuilding inventories. The
homebuilding segment reported pretax earnings of $4.4 million for the third
quarter of 1994, compared with a pretax loss of $43.3 million in the third
quarter of 1993, which included the aforementioned pretax provision for
homebuilding inventories. The financial services segment reported pretax
earnings for the third quarter of 1994 of $14.1 million, compared with $9.8
million for the same period of 1993.
The Company reported year-to-date consolidated net earnings of $22.2 million,
or $1.31 per share, which included the cumulative impact of an accounting
change of $.13 per share recognized in the first quarter. This compares with
a consolidated net loss of $10.3 million, or ($.80) per share, for the same
period in 1993, which included a non-recurring first quarter gain of $.21 per
share. The homebuilding segment's year-to-date pretax earnings of $8.5
million compared with a pretax loss of $48.0 million for the same period in
1993. The financial services segment reported year-to-date pretax earnings of
$38.3 million for 1994 compared with $43.0 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 results for the first nine months of 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 first quarter 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 $22 thousand for the third quarter of 1994, compared with pretax
earnings of $40 thousand for the same period in 1993. Year-to-date pretax
earnings were $95 thousand compared with $124 thousand for the same period in
1993.
9
HOMEBUILDING
Operations of the Company's homebuilding segment are summarized as follows
($ amounts in thousands):
Three months ended Nine months ended
September 30, September 30,
1994 1993 1994 1993
Revenues $398,465 $315,021 $1,037,650 $836,904
Gross profit 50,092 (4,498) 132,026 55,286
Selling, general and
administrative expenses 37,866 29,930 102,243 81,868
Interest expense 7,680 6,974 21,261 19,315
Equity in earnings
(losses) of
unconsolidated
joint ventures (139) (1,903) (2) (2,143)
________ _________ _________ ________
Pretax earnings (loss) $ 4,407 $(43,305) $ 8,520 $(48,040)
======== ========= ========= =========
Operational Unit Data:
(includes joint ventures)
New orders 2,200 2,103 7,364 6,508
Settlements 2,488 2,148 6,620 5,915
Outstanding contracts at
September 30,
Units 3,463 3,198
Dollar Value $570,000 $515,000
Average Settlement Price
(excludes unconsolidated
joint ventures) $161 $151 $159 $146
For the three and nine months ended September 30, 1994 revenues increased 26.5
percent and 24.0 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 nine months ended September 30, 1994, settlements
increased 15.8 percent and 11.9 percent, respectively, and the average
settlement price increased 6.6 percent and 8.9 percent from the same
respective periods a year ago.
10
The gross margin for the third quarter of 1994 was 12.6 percent, compared with
12.2 percent for the third quarter of 1993, excluding the 1993 provision for
inventory reserves. The year-to-date gross margin increased to 12.7 percent
from 11.7 percent, for the same period of 1993, which also excludes the
inventory reserve provision. The improvement in overall gross margins during
the third quarter and first nine months of 1994 was primarily attributable to
a better mix of sales from higher margin communities.
The Company's gross margins continue to be negatively impacted by the build
out of inventory in California that was impacted by the decline in economic
and market conditions. In the third quarter of 1993, the Company took a $45
million provision for homebuilding inventories, of which $40 million was for
inventory in the California region. At September 30, 1994 the remaining net
book value of the California inventory that was impacted by this provision was
approximately $88 million and consisted of approximately 1,600 homebuilding
lots and improvements, of which 218 were sold but not settled. Sales of homes
on these lots for the quarter and the first nine months of 1994 were 171 units
and 543 units, respectively. Settlements of homes on these lots for the third
quarter and first nine months of 1994 were 196 units and 453 units,
respectively.
Total homebuilding new orders increased 4.6 percent to 2,200 units during the
third quarter of 1994 and 13.2 percent to 7,364 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,
Southwest, and West regions which more than compensated for lower sales in the
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, to accelerate the sale of inventories. The increase in new
orders in the Southwest region is attributable to improved sales in the
Houston and Dallas divisions, and the addition of sales from Scott Felder
Homes. The increase in the West region is due to strong homebuilding markets
in Denver and Phoenix. The decline in the Southeast region was due to the
Company's withdrawals from the Jacksonville, Florida and Charleston, South
Carolina markets and the impact of higher interest rates on home sales, while
the decline in new orders in the Mid-Atlantic region was primarily 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
acquisition of Scott Felder Homes by purchasing the remaining minority
interest, strengthening its position in the Austin, San Antonio and Dallas
markets.
11
Outstanding homebuilding contracts as of September 30, 1994 were up 8.3
percent from September 30, 1993. The $570.0 million value of outstanding
contracts represented an increase of 10.7 percent over the same period of
1993.
Selling, general and administrative (S,G&A) expenses as a percentage of
revenues, were 9.5 percent for the third quarter and 9.9 percent for the first
nine months of 1994 compared with 9.5 percent and 9.8 percent for the same
respective periods of 1993. The Company has been incurring additional costs
associated with its expansion into new markets and the costs associated with
implementation of the Company's marketing and merchandising initiatives.
Interest expense for the third quarter and first nine months of 1994 increased
compared with the same periods of 1993, due to increased overall borrowing
costs of the Company and additions to inventory, partially offset by higher
interest capitalization in 1994.
FINANCIAL SERVICES
The financial services segment reported pretax earnings of $14.1 million for
the third quarter of 1994, compared with $9.8 million in the third quarter of
1993. Included in the third quarter 1994 results was a pretax gain of $2.3
million on a sale of mortgage-backed securities and a pretax gain of $7.2
million on a bulk sale of mortgage servicing rights.
Year-to-date pretax earnings were $38.3 million, compared with $43.0 million
for the same period of 1993. Year-to-date pretax earnings for 1993 included a
non-recurring first quarter gain of $5.3 million from the sale of the
Company's remaining interest in a real estate investment trust, as well as
$5.6 million in pretax gains from sales of mortgage-backed securities, as
compared to $2.3 million in pretax gains from sales of mortgage-backed
securities in 1994.
Retail Operations:
Pretax earnings for retail operations were as follows (amounts in thousands):
Three months Nine months
ended September 30, ended September 30,
1994 1993 1994 1993
______ _____ ____ _____
Revenues:
Interest and
net origination fees $ 3,955 $ 7,713 $15,138 $20,169
Gains on sales of mortgages
and servicing rights 10,750 5,230 33,130 17,979
Loan servicing 8,653 11,424 28,331 32,467
Title/escrow 1,304 940 3,281 2,421
______ ______ ______ ______
Total retail revenues 24,662 25,307 79,880 73,036
Expenses 17,347 21,372 59,343 59,027
______ ______ ______ ______
Pretax earnings $ 7,315 $ 3,935 $20,537 $14,009
======= ======= ======= =======
12
Interest and net origination fees have decreased as a result of the industry-
wide decline in mortgage origination activity which has resulted from the
current higher interest rate environment. It is expected that this trend will
continue. Loan servicing revenues have declined as the Company has reduced
its loan servicing portfolio. Ryland's loan origination activity experienced
a 47 percent decline during the third quarter of 1994 and is down 30 percent
year-to-date. The Company is continuing to reduce staffing levels in response
to the continued lower origination volumes. Higher gains on the sales of
mortgages and servicing rights in the current year were primarily the result
of selling a greater amount of mortgage servicing rights.
Mortgage origination activities were as follows:
Three months Nine months
ended September 30, ended September 30,
1994 1993 1994 1993
----- ----- ------ ------
Dollar volume of mortgages
originated (in millions) $ 467 $ 903 $1,667 $ 2,419
Number of mortgages originated 3,795 7,179 13,374 19,040
Percentage Ryland Homes settlements 33% 20% 26% 21%
Percentage other settlements 67% 80% 74% 79%
---- ----- ---- -----
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 Nine months
ended September 30, ended September 30,
1994 1993 1994 1993
----- ---- ----- -----
Interest spread (in thousands) $1,905 $2,829 $7,380 $8,957
Average balance of mortgages
held for sale (in millions) $ 221 $ 396 $ 315 $ 389
Interest spread rate 3.4% 2.8% 3.1% 3.1%
Interest spread for the three and nine months ended September 30, 1994
decreased as compared to the same periods in 1993 primarily due to the lower
average balance of mortgages held for sale.
13
The loan servicing portfolio balances were as follows at September 30, (in
billions):
1994 1993
---- ----
Originated $2.9 $4.1
Acquired 4.1 5.0
Subserviced for others .4 .6
---- ----
Total portfolio $7.4 $9.7
==== ====
The decrease in the portfolio balance is primarily attributable to the decline
in origination volume combined with higher sales of servicing rights in the
current year. At September 30, 1994 the subserviced-for-others category
includes servicing related to the bulk sale in the third quarter, which the
Company is subservicing for an interim period.
Institutional Operations:
The institutional operations encompass securities issuance and securities
administration services. Pretax earnings for the three months ended September
30, 1994 decreased 27.8 percent, as compared to the same period in 1993
primarily due to lower revenues as a result of fewer security issuances.
Year-to-date pretax earnings decreased 10.5 percent due to an increase in
expenses.
Three months Nine months
ended September 30, ended September 30,
1994 1993 1994 1993
------ ----- ----- -----
Revenues $ 5,857 $ 6,748 $17,617 $17,631
Expenses 3,253 3,139 10,094 9,230
------- ------- ------- ------
Pretax earnings $ 2,604 $ 3,609 $ 7,523 $ 8,401
======= ======= ======= =======
Significant data on the securities administration portfolio as of September
30, were as follows:
1994 1993
----- ----
Total securities administration
portfolio (in billions) $46.3 $57.7
Number of series in the
administration portfolio 549 518
Potential Sale of Institutional Financial Services:
On October 17, 1994, the Company announced that it is exploring the sale of
the institutional financial services business as part of the Company's
continued focus on its core homebuilding and related mortgage businesses.
14
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.
Pretax earnings for the three months ended September 30, 1994 increased
substantially as compared to the same period in 1993 as the result of a gain
on the sale of mortgage-backed securities. Year-to-date pretax earnings have
decreased substantially as compared to the same period in 1993. The decline
is primarily attributable to the $5.3 million gain in 1993 resulting from the
sale of the Company's remaining interest in a real estate investment trust
and is a non-recurring item. The Company also realized higher net revenues
from the sale of mortgage-backed securities in 1993.
Pretax earnings were comprised of the following:
Three months Nine months
ended September 30, ended September 30,
1994 1993 1994 1993
------ ----- ----- -----
Sale of interest in real estate $ 0 $ 0 $ 0 $ 5,322
investment trust
Sale of mortgage-backed securities 2,349 (761) 2,349 5,635
Interest spread and other 1,866 3,031 7,933 9,593
------ ------- ------- -------
Pretax earnings $4,215 $ 2,270 $10,282 $20,550
====== ======= ======= =======
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 decrease in the interest spread rate in the
third quarter of 1994 as compared to 1993, is due to an increase in borrowing
rates. The slight 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.
15
Significant data from the investment operations were as follows:
Three months Nine months
ended September 30, ended September 30,
1994 1993 1994 1993
----- ----- ----- ------
Interest spread earned
(in thousands) $2,740 $3,377 $10,919 $10,030
Average balance outstanding
at September 30 (in millions) $ 196 $ 196 $ 216 $ 210
Interest spread rate 5.5% 6.9% 6.8% 6.4%
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 $576.3 million as of September 30, 1994, from
$489.5 million as of December 31, 1993, due to normal seasonal increases in
homes under construction, increased sales of homes, 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,
permitted the Company to borrow up to $215 million for a three-year period.
In September 1994, the Company obtained additional credit commitments which
increased the total revolving credit facility commitments to $250 million. As
of September 30, 1994, the Company had borrowed $143.5 million under this
agreement, compared with $90 million as of December 31, 1993. The increase is
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 September 30, 1994 and December 31, 1993, the
combined borrowings under the mortgage warehouse funding agreement, the
repurchase agreements, and the revolving credit agreement were $407.2 million
and $716.9 million, respectively. As of September 30, 1994 and December 31,
1993, the balance of mortgage loans and mortgage-backed securities, net, were
$434.4 million and $728.1 million, respectively.
16
PART II. OTHER INFORMATION
Page Number
-----------
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
11 Statement Re computation of per share
earnings 20
27 Financial Data Schedule 21
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 September 30, 1994.
17
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 10, 1994 By: /s/ Alan P. Hoblitzell, Jr.
Date -------------------------------
Alan P. Hoblitzell, Jr.,
Director, Executive Vice President
and Chief Financial Officer
(Principal Financial Officer)
November 10, 1994 By: /s/ Stephen B. Cook
Date ------------------------------
Stephen B. Cook,
Vice President and Corporate Controller
(Principal Accounting Officer)
18
INDEX OF EXHIBITS
A. Exhibits Page of
Sequentially
Numbered Pages
-------------
11 Statement Re computation per
share earnings 20
27 Financial Data Schedule 21
19
EXHIBIT 11 STATEMENT RE COMPUTATION OF PER SHARE EARNINGS:
Three months ended Nine months ended
September 30, September 30,
1994 1993 1994 1993
----------- ----------- ----------- ----------
Primary:
Net earnings (loss) before
cumulative effect of a change
in accounting principle $ 8,389 $ (22,556) $ 20,126 $ (10,263)
Cumulative effect of a change in
accounting principle 2,076
----------- ----------- ----------- -----------
Net earnings (loss) $ 8,389 $ (22,556) $ 22,202 $ (10,263)
Adjustment for dividends on
convertible preferred shares (603) (642) (1,848) (1,952)
----------- ----------- ----------- -----------
Adjusted net earnings (loss) $ 7,786 $ (23,198) $ 20,354 $ (12,215)
=========== =========== =========== ===========
Weighted average common shares
outstanding 15,416,704 15,309,541 15,386,683 15,332,243
Common stock equivalents:(1)
Stock options 19,316 0 61,969 0
Employee incentive plans 117,931 0 123,308 0
Restricted stock 0 0 0 0
----------- ----------- ----------- -----------
Total 15,553,951 15,309,541 15,571,960 15,332,243
============ =========== =========== ===========
Primary earnings (loss) per common
share before cumulative effect of a
change in accounting principle $ 0.50 $ (1.52) $ 1.18 $ (0.80)
Cumulative effect of a change
in accounting principle $ $ 0.13 $
----------- ----------- ----------- -----------
Primary earnings (loss)
per common share $ 0.50 $ (1.52) $ 1.31 $ (0.80)
=========== =========== =========== ===========
Fully-Diluted:
Net earnings (loss) before
cumulative effect of a change
in accounting principle 8,389 (22,556) 20,126 (10,263)
Cumulative effect of a change in
accounting principle 2,076
----------- ----------- ----------- -----------
Net earnings (loss) $ 8,389 $ (22,556) $ 22,202 $ (10,263)
Adjustment for incremental
expense from conversion of
convertible preferred shares(1) (266) (815)
Adjustment for dividends on
convertible preferred shares (642) (1,952)
---------- ----------- ----------- -----------
Adjusted net earnings (loss) $ 8,123 $ (23,198) $ 21,387 $ (12,215)
=========== =========== =========== ===========
Weighted average common shares
outstanding 15,416,704 15,309,541 15,386,683 15,332,243
Common stock equivalents:(1)
Stock options 19,316 0 61,969 0
Employee incentive plans 117,931 0 123,308 0
Restricted stock 0 0 0 0
Convertible preferred stock 1,103,318 0 1,125,650 0
----------- ----------- ----------- -----------
Total 16,657,269 15,309,541 16,697,610 15,332,243
============ =========== =========== ===========
Fully diluted earnings (loss) per common
share before cumulative effect of a
change in accounting principle $ 0.49 $ (1.52) $ 1.16 $ (0.80)
Cumulative effect of a change
in accounting principle $ $ 0.12 $
----------- ----------- ----------- -----------
Fully diluted earnings (loss)
per common share $ 0.49 $ (1.52) $ 1.28 $ (0.80)
=========== =========== =========== ===========
(1) For the three and nine months ended September 30, 1993, no adjustment has
been made for incremental dividends on convertible preferred shares or common
stock equivalents as these adjustments would be anti-dilutive.
20