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, 1995
-------------
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
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
------ ------
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 1, 1995 was 15,599,724
THE RYLAND GROUP, INC.
FORM 10-Q
INDEX
Page Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at
June 30, 1995 (unaudited) and
December 31, 1994 1-2
Consolidated Statements of Earnings
for the three and six months ended
June 30, 1995 and 1994 (unaudited) 3
Consolidated Statements of Cash Flows
for the six months ended June 30,
1995 and 1994 (unaudited) 4
Notes to Consolidated Financial
Statements (unaudited) 5-8
Item 2. Management's Discussion and Analysis
of Results of Operations and Financial
Condition 9-15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of
Security Holders 16
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)
June 30, December 31,
1995 1994
---------- ------------
(unaudited)
ASSETS
HOMEBUILDING:
Cash and cash equivalents $ 30,195 $ 25,963
Homebuilding inventories:
Homes under construction 370,932 399,046
Land under development and improved lots 201,578 193,096
Land held for development or resale 2,320 2,671
--------- ---------
Total inventories 574,830 594,813
Investment in/advances to unconsolidated
joint ventures 10,214 11,500
Property, plant and equipment 30,867 24,001
Purchase price in excess of net assets acquired 22,091 22,607
Other assets 65,130 61,362
---------- ---------
733,327 740,246
---------- ---------
FINANCIAL SERVICES:
Cash and cash equivalents 1,148 863
Mortgage loans held for sale, net 269,236 214,772
Mortgage-backed securities, net 113,049 171,120
Purchased servicing and administration
rights, net 7,543 12,014
Other assets 44,383 56,251
---------- ---------
435,359 455,020
---------- ---------
LIMITED-PURPOSE SUBSIDIARIES:
Collateral for bonds payable, net 416,104 459,044
Other assets 4,839 5,289
---------- ---------
420,943 464,333
---------- ---------
Net deferred taxes 30,373 27,822
Other assets 5,338 17,067
---------- ---------
TOTAL ASSETS $ 1,625,340 $ 1,704,488
============ ===========
See notes to consolidated financial statements.
The Ryland Group, Inc. and subsidiaries
CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share data)
June 30, December 31,
1995 1994
------------ ------------
(unaudited)
LIABILITIES
HOMEBUILDING:
Accounts payable and other liabilities $ 77,931 $ 95,551
Long-term debt 371,376 408,744
------------ -----------
449,307 504,295
------------ -----------
FINANCIAL SERVICES:
Accounts payable and other liabilities 37,999 21,040
Short-term notes payable 355,891 377,629
------------ -----------
393,890 398,669
------------ -----------
LIMITED-PURPOSE SUBSIDIARIES:
Accounts payable and other liabilities 12,945 14,369
Bonds payable, net (1) 404,807 446,752
------------ -----------
417,752 461,121
------------ -----------
Other liabilities 36,913 28,281
------------ -----------
TOTAL LIABILITIES 1,297,862 1,392,366
============ ===========
STOCKHOLDERS' EQUITY
Convertible preferred stock, $1 par value
Authorized - 1,400,000 shares
Issued - 1,013,576 shares
(1,072,903 for 1994) 1,014 1,073
Common stock, $1 par value
Authorized - 78,600,000 shares
Issued - 15,571,318 shares
(15,475,242 for 1994) 15,571 15,475
Paid-in capital 116,374 115,863
Retained earnings 208,529 193,635
Net unrealized gain on
mortgage-backed securities 937 1,763
Other (14,947) (15,687)
------------ -----------
TOTAL STOCKHOLDERS' EQUITY 327,478 312,122
============ ===========
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,625,340 $ 1,704,488
============ ===========
See notes to consolidated financial statements.
<FN>
(1) 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 other subsidiaries.
</FN>
The Ryland Group, Inc. and subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS
(unaudited)
(amounts in thousands, except share data)
Three months Six months
ended June 30, ended June 30,
1995 1994 1995 1994
-------- -------- -------- -------
REVENUES:
Homebuilding:
Residential revenues $ 355,894 $ 363,385 $ 667,686 $ 637,629
Other revenues 315 786 832 1,556
----------- ---------- ---------- ---------
Total homebuilding revenues 356,209 364,171 668,518 639,185
Financial services 23,472 32,877 46,359 67,950
Limited-purpose subsidiaries 9,547 13,601 19,548 30,306
----------- ----------- ---------- ---------
Total revenues 389,228 410,649 734,425 737,441
EXPENSES:
Homebuilding:
Cost of sales 316,111 317,269 592,036 557,251
Interest expense 6,785 6,925 14,294 13,581
Selling, general and
administrative 37,959 35,328 71,328 64,377
---------- ---------- ---------- ---------
Total 360,855 359,522 677,658 635,209
Financial services:
Interest expense 5,627 6,594 11,167 14,457
General and administrative 11,556 16,552 23,406 34,204
---------- ---------- ---------- ---------
Total 17,183 23,146 34,573 48,661
Limited-purpose subsidiaries:
Interest expense 9,524 12,975 19,489 28,558
Other expenses 21 564 50 1,675
---------- ---------- ---------- ---------
Total 9,545 13,539 19,539 30,233
Corporate expenses 3,171 4,503 6,851 8,833
--------- ---------- ---------- ---------
Total expenses 390,754 400,710 738,621 722,936
Equity in (losses) earnings of
unconsolidated joint ventures (10) 87 197 137
---------- ---------- ---------- ---------
(Loss) earnings from continuing
operations before taxes
and cumulative effect
of a change in
accounting principle (1,536) 10,026 (3,999) 14,642
Tax (benefit) expense (614) 4,010 (1,600) 5,856
---------- ---------- ---------- ------
Net (loss) earnings from
continuing operations
before cumulative effect
of a change in
accounting principle (922) 6,016 (2,399) 8,786
Discontinued Operations:
Earnings from discontinued
operations (net of taxes
of $778 & $2,212 for 1995
and $1,044 & $1,968 in 1994) 1,168 1,566 3,318 2,951
Gain on sale of
discontinued operations
(net of taxes of $13,025) 19,538 0 19,538 0
---------- ---------- ---------- ---------
Net earnings before cumulative
effect of a change in
accounting principle 19,784 7,582 20,457 11,737
Cumulative effect of a change
in accounting principle
(net of taxes of $1,384) 0 0 0 2,076
----------- ----------- ---------- ---------
NET EARNINGS $ 19,784 $ 7,582 $ 20,457 $ 13,813
=========== =========== ========== =========
Preferred dividends $ 560 $ 616 $ 1,139 $ 1,245
Net earnings available for
common shareholders $ 19,224 $ 6,966 $ 19,318 $ 12,568
NET EARNINGS PER COMMON SHARE:
Primary:
Net (loss) earnings from
continuing operations
before cumulative effect
of a change in
accounting principle $ (0.09) $ 0.35 $ (0.22) $ 0.49
Discontinued Operations 1.31 0.10 1.45 0.19
---------- ----------- ---------- -------
Net earnings before
cumulative effect
of a change in
accounting principle 1.22 0.45 1.23 0.68
Cumulative effect
of a change in
accounting principle 0.00 0.00 0.00 0.13
----------- ----------- ---------- -------
Net earnings
per common share $ 1.22 $ 0.45 $ 1.23 $ 0.81
=========== =========== ========== =======
Fully diluted:
Net (loss) earnings
from continuing
operations before
cumulative effect
of a change in
accounting principle $ (0.07) $ 0.35 $ (0.17) $ 0.48
Discontinued Operations 1.23 0.09 1.36 0.18
----------- ----------- ---------- -------
Net earnings before
cumulative effect
of a change in
accounting principle 1.16 0.44 1.19 0.66
Cumulative effect
of a change in
accounting principle 0.00 0.00 0.00 0.13
----------- ----------- ---------- -------
Net earnings
per common share $ 1.16 $ 0.44 $ 1.19 $ 0.79
=========== =========== ========== ========
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.
The Ryland Group, Inc. and subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited,amounts in thousands)
Six months ended June 30,
1995 1994
---------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 20,457 $ 13,813
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 13,563 9,084
Net cumulative effect of a change
in accounting principle 0 (3,460)
Gain on sale of mortgage-backed
securities - available-for-sale (3,878) 0
Gain on sale of discontinued operations (32,563) 0
Decrease (increase) in inventories 19,983 (68,819)
Net change in other assets, payables
and other liabilities 9,981 60,305
Equity in earnings / distributions
from unconsolidated joint ventures 1,125 4,700
(Increase) decrease in mortgage
loans held for sale, net (54,678) 274,731
---------- ---------
Net cash (used for) provided by
operating activities (26,010) 290,354
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net additions to property, plant and equipment (14,661) (10,363)
Proceeds from sale of discontinued operations 47,000 0
Principal reduction of mortgage collateral 6,844 30,440
Principal reduction of mortgage-backed
securities - available-for-sale 3,912 21,742
Sales of mortgage-backed securities-
available-for-sale 56,982 0
Principal reduction of mortgage-backed
securities- held-to-maturity 30,554 137,698
Decrease in funds held by trustee 5,274 54,327
Other investing activities, net 678 (909)
---------- ---------
Net cash provided by investing activities 136,583 232,935
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in short-term notes payable (21,738) (266,919)
Cash proceeds of long-term debt 5,108 29,717
Reduction of long-term debt (42,474) (12,925)
Bond principal payments (42,425) (274,884)
Common and preferred stock dividends (5,808) (5,915)
Other financing activities, net 1,281 5,879
---------- ---------
Net cash (used for) financing activities (106,056) (525,047)
---------- ---------
Net increase (decrease) in cash 4,517 (1,758)
Cash at beginning of year 26,826 46,490
---------- ---------
CASH AT END OF PERIOD $ 31,343 $ 44,732
========== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest (net of
capitalized interest) $ 54,955 $ 62,232
Cash paid for income taxes (net of
refund received in 1995) $ 2,887 $ 18,906
========== =========
See notes to consolidated financial statements.
The Ryland Group, Inc. and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(amounts in thousands, except for share data, in all notes)
Note 1. Segment Information
Three months ended June 30,
1995 1994
------ ------
Pretax (loss) earnings from continuing operations:
Homebuilding $ (4,656) $ 4,736
Financial services (1) 6,289 9,731
Limited-purpose subsidiaries 2 62
Corporate expenses (3,171) (4,503)
---------- ---------
Total $ (1,536) $ 10,026
========== =========
<FN>
(1) Excludes pretax operating results of the institutional mortgage securities
administration business for the three months ended June 30, 1995 and 1994 of
$1,946 and $2,610, respectively These amounts are included in earnings from
discontinued operations.
</FN>
Six months ended June 30,
1995 1994
------ ------
Pretax (loss) earnings from continuing operations:
Homebuilding $ (8,943) $ 4,113
Financial services (2) 11,786 19,289
Limited-purpose subsidiaries 9 73
Corporate expenses (6,851) (8,833)
--------- ---------
Total $ (3,999) $ 14,642
========== =========
<FN>
(2) Excludes pretax operating results of the institutional mortgage securities
administration business for the six months ended June 30, 1995 and 1994 of
$5,530 and $4,919, respectively. These amounts are included in earnings from
discontinued operations.
</FN>
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, 1995, the consolidated
statements of earnings for the three and six months ended June 30, 1995 and
1994, and the consolidated statements of cash flows for the six months ended
June 30, 1995 and 1994 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, 1995, and for all periods presented,
have been made. The consolidated balance sheet at December 31, 1994 is taken
from the audited financial statements as of that date. Certain amounts in the
consolidated statements have been reclassified to conform to the 1995
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 1994 annual report to
shareholders.
The results of operations for the three and six months ended June 30, 1995 are
not necessarily indicative of the operating results for the full year.
Assets presented in the financial statements are net of any valuation
allowances.
Primary net earnings per common share is computed by dividing net earnings,
after considering preferred stock dividend requirements, by the weighted
average number of common shares outstanding considering dilutive common
equivalent shares. Common equivalent shares relating to stock options are
computed using the treasury stock method.
Fully diluted net earnings per common share additionally gives effect to the
assumed conversion of the preferred shares held by The Ryland Group, Inc.
Retirement and Stock Ownership Plan Trust (RSOP Trust) into common stock, as
well as the amount of the additional RSOP Trust contribution required to fund
the difference between the RSOP Trust's earnings from preferred share
dividends and the RSOP Trust's potential earnings from common share dividends
after an assumed conversion.
The Ryland Group, Inc. and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(unaudited)
Note 3. Accounting Changes
In May 1993 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 115 (SFAS 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.
The cumulative effect of adopting SFAS 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 of discount
points on mortgage-backed securities, which can now be amortized into income
during the period that the mortgage-backed securities are held. 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 June 30, 1995, the balance of the
net unrealized gain on securities classified as available for sale, which is
reflected as a component of stockholders' equity, was $937. The decline in
this balance since January 1, 1994, is primarily due to a reduction in the
portfolio balance resulting from sales of securities.
In May 1995 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 122 (SFAS 122.), "Accounting for Mortgage
Servicing Rights an amendment of FASB Statement No. 65." This Statement
requires a mortgage banking enterprise to capitalize retained mortgage
servicing rights on originated or purchased loans by allocating the total cost
of the mortgage loans between the mortgage servicing rights and the loans
(without the servicing rights) based on their relative fair values.
Previously, only the cost of mortgage servicing rights acquired through a
purchase transaction could be capitalized. The new statement also specifies
new procedures for assessing impairment of capitalized mortgage servicing
rights, whenever capitalized, and requires that impairment shall be recognized
through a valuation allowance for individual portfolio stratifications based
on the fair value of those rights. The Company adopted SFAS 122 effective
April 1, 1995, which resulted in a favorable impact, net of the valuation
allowance, of $.5 million in the second quarter. In accordance
with SFAS 122, prior period financial statements have not been restated.
The book value of the capitalized mortgage servicing rights at June 30, 1995
was $8.5 million and the aggregate fair value totaled $11.0 million.
Comparable market values and a valuation model that calculates the present
value of future cash flows were used to estimate fair value. In using this
valuation method, the Company incorporated assumptions that market
participants would use in estimating future net servicing income, which
included estimates of the cost of servicing per loan, the discount rate, float
value, an inflation rate, ancillary income per loan, prepayment speeds and
default rates.
For purposes of measuring impairment, the following risk characteristics were
used to stratify the post-implementation originated mortgage servicing rights:
product type, investor type, and interest rates. Aggregate additions to the
valuation allowance for the three months ended June 30, 1995 and the aggregate
balance of the allowance at June 30, 1995 totaled $214.
Note 4. Discontinued Operations
On June 30, 1995, pursuant to an Asset Purchase Agreement dated April 10, 1995
, the Company completed the sale of its mortgage securities
administration business to Norwest Bank Minnesota, National Association
(Norwest)for a purchase price of $47 million in cash, subject to certain
post-closing adjustments, which the Company does not
anticipate will have a material impact on the transaction as recorded. The
Company's mortgage securities administration business included master
servicing, securities administration, investor information services, and tax
calculation and reporting. The current and prior period results for this
business (formerly reported as institutional financial services) as well as
the gain on the sale of the business have been reported as discontinued
operations in the accompanying consolidated statements of earnings.
Revenues from operations of the discontinued business were $6.6 million and
$13.7 million for the three and six months ended June 30, 1995, respectively,
as compared with $8.7 million and $16.8 million for the same periods of 1994.
Earnings from operations of the discontinued business were $1.2 million, or
$.07 per share, and $3.3 million, or $.21 per share, (net of taxes of $778
thousand and $2.2 million, respectively) for the three and six months ended
June 1995, respectively, as compared with $1.6 million, or $.10 per share, and
$3.0 million, or $.19 per share, (net of taxes of $1.0 million and $2.0
million, respectively) for the same periods of 1994.
The Company reported a net gain from the sale of the mortgage securities
administration business of $19.5 million, or $1.24 per share, in the second
quarter of 1995. Proceeds from the sale were used to repay long-term debt of
the homebuilding segment and short-term notes payable of the financial
services segment. The gain reported reflects the proceeds from the sale less
the book value of the net assets of the mortgage securities administration
business, transaction costs, accrued expenses, other costs directly related
to the transaction, and income taxes.
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
RESULTS OF OPERATIONS
CONSOLIDATED
For the second quarter of 1995, the Company reported consolidated net earnings
of $19.8 million, or $1.22 per share, compared with consolidated net earnings
of $7.6 million, or $.45 per share, for the same period in 1994. The Company
closed the sale of its institutional mortgage securities administration
business to Norwest Bank Minnesota during the second quarter of 1995 and the
reported results include a net gain on the sale of $19.5 million. For
financial reporting purposes, current and prior period net operating earnings
of the institutional mortgage securities administration business, as well as
the gain on the sale, have been reported as discontinued operations. The
Company's continuing operations reported a consolidated net loss of $922
thousand, or $.09 per share, for the second quarter of 1995, compared with net
earnings of $6.0 million, or $.35 per share, for the second quarter of 1994.
The Company's homebuilding segment recorded a pretax loss of $4.7 million for
the second quarter of 1995, compared with pretax earnings of $4.7 million for
the same period last year. The decline reflects lower gross profit margins
and higher selling expenses resulting from the Company's ongoing efforts to
sell older inventories in the California and Mid-Atlantic regions and its
focus on reducing unsold homes under construction combined with increased
competitive pressures. In addition, reorganization costs associated with the
Company's initiatives to lower operating costs increased second quarter
expenses by $2.2 million.
The Company's financial services segment, which excludes the results of the
discontinued institutional mortgage securities administration business,
reported pretax earnings of $6.3 million for the second quarter of 1995,
compared with $9.7 million for the same period of 1994. The decline from last
year's results is primarily due to reduced origination volume, lower gains
from sales of mortgage servicing rights, and a lower level of income from
investment operations.
The limited-purpose subsidiaries reported pretax earnings of $2 thousand for
the second quarter of 1995, compared with pretax earnings of $62 thousand for
the same period of 1994.
Consolidated net earnings for the first six months of 1995 were $20.5 million,
or $1.23 per share, compared with $13.8 million, or $.81 per share, for the
first half of 1994. Excluding discontinued operations and the $2.1 million,
or $.13 per share, cumulative effect of an accounting change in 1994 related
to the adoption of FAS 115, the Company reported a net loss from continuing
operations of $2.4 million, or $.22 per share, for the first six months of
1995, compared with net earnings from continuing operations of $8.8 million or
$.49 per share, for the first six months of 1994.
For the first six months of 1995, the homebuilding segment reported a pretax
loss of $8.9 million, compared with pretax earnings of $4.1 million for the
same period in 1994. The financial services segment reported pretax earnings
of $11.8 million for the first six months of 1995, compared with $19.3 million
for the same period in 1994. For the first six months of 1995, the limited-
purpose subsidiaries reported pretax earnings of $9 thousand compared with $73
thousand for the same period in 1994, as the portfolio in which the Company
has a residual interest continued to decline.
HOMEBUILDING
The Company's homebuilding segment reported a pretax loss of $4.7 million for
the second quarter of 1995 compared with pretax earnings of $4.7 million for
the same period last year. For the six months ended June 30, 1995,
homebuilding reported a pretax loss of $8.9 million compared with pretax
earnings of $4.1 million for the same period last year.
Results of operations of the Company's homebuilding segment are summarized as
follows ($ amounts in thousands, except average closing price):
Three months ended Six months ended
June 30, June 30,
1995 1994 1995 1994
------ ------ ------ ------
Revenues $356,209 $364,171 $668,518 $639,185
Gross profit 40,098 46,902 76,482 81,934
Selling, general and
administrative expenses 37,959 35,328 71,328 64,377
Interest expense 6,785 6,925 14,294 13,581
Equity in (losses) earnings
of unconsolidated
joint ventures (10) 87 197 137
--------- --------- --------- --------
Pretax (loss) earnings $ (4,656) $ 4,736 $ (8,943) $ 4,113
========= ========= ========= ========
Operational Unit Data:
(includes joint ventures)
New orders (units) 2,618 2,316 5,178 5,164
Closings (units) 2,218 2,303 4,216 4,132
Outstanding contracts at
June 30,
Units 3,515 3,751
Dollar Value $602,882 $621,239
Average Closing Price
(excludes unconsolidated
joint ventures) $162,000 $161,000 $160,000 $158,000
Homebuilding revenues amounted to $356 million for the second quarter of 1995,
down 2.2 percent from the second quarter of 1994 due to a 3.7 percent decline
in closings reflecting slower first quarter sales. For the first six months
of 1995, revenues amounted to $669 million, an increase of 4.6 percent over
the same period last year attributable to a 2.0 percent increase in closings
and a $2 thousand increase in average closing price. The increased volume
year-to-date was attributable to growth in new markets as well as the
Company's efforts in recent quarters to reduce its inventory of unsold homes
under construction.
The gross margin for the second quarter of 1995 declined to 11.3 percent,
compared with 12.9 percent for the second quarter of 1994. This decrease in
margins was the principle reason for the earnings decline. The year-to-date
gross margin decreased to 11.4 percent from 12.8 percent for the same period
of 1994. The Company's ongoing efforts to sell older inventories in the
California and Mid-Atlantic regions, and its focus on reducing its inventory
of unsold homes under construction combined with increased competitive
pressures, negatively impacted gross margins.
During the second quarter and first six months of 1995,
inventories in California that were negatively impacted by the decline in
economic and market conditions experienced in that region prior to 1994, were
reduced by the closing of 162 homes and 256 homes, respectively, as compared
with 154 homes, and 257 homes, respectively, in the same periods of 1994. At
June 30, 1995, the remaining net book value of the affected California
inventory was approximately $60 million and consisted of approximately 1,150
homebuilding lots and related improvements, of which 105 were sold but not
closed. Gross profit margins for the remainder of 1995 and beyond will
continue to be negatively impacted by the build-out and sale of homes on these
lots.
Since the latter part of 1994, the Company has taken actions to close-out
older communities in the Mid-Atlantic region. Closings on houses from these
Mid-Atlantic communities negatively affected gross profit margins in the first
and second quarters of 1995. By the end of the third quarter of 1995, the
Company expects that substantially all of these houses will have been closed.
Total homebuilding sales increased 13.0 percent to 2,618 units during the
second quarter of 1995 and 0.3 percent to 5,178 units for the first six months
of 1995 compared with the respective periods in 1994. Sales for the first six
months were relatively flat due to the higher interest rates and economic
uncertainty in many markets during the first quarter. However, new orders for
all regions, with the exception of the Mid-Atlantic region, increased during
the second quarter of 1995 as compared with the same period of 1994. The
increase in sales activity during the second quarter is attributable to lower
interest rates, efforts to reduce unsold inventory, and opening of new
communities. Sales in the Mid-Atlantic region continue to reflect the
competitive pressures and economic uncertainties of that market.
The combination of level sales for the first half of 1995 and the 2.0 percent
increase in closings versus the same period of 1994, reduced outstanding
contracts at June 30, 1995 by 6.3 percent from June 30, 1994. Outstanding
contracts represent the Company's backlog of new homes, which generally are
built and closed, subject to cancellations, over the next two quarters. The
$602.9 million value of outstanding contracts as of June 30, 1995 has
increased 42.0 percent from December 31, 1994 but has decreased 3.0 percent
from June 30, 1994.
Selling, general and administrative expenses as a percent of revenues were
10.7 percent for both the second quarter and for the first six months of 1995
compared with 9.7 percent and 10.1 percent for the same respective periods of
1994. Included in selling, general and administrative expenses for the second
quarter were $2.2 million of reorganization costs associated with the
Company's initiatives to lower operating costs. Excluding the reorganization
costs and selling expenses, general and administrative expenses, as a percent
of revenue, declined for the first half of 1995 due to the higher revenue base
combined with the Company's efforts to reduce fixed expenses. Selling
expenses as a percentage of revenues increased in the first six months of 1995
due to costs associated with expansion into new markets, implementation of the
Company's new marketing and merchandising initiatives and the Company's
efforts to reduce unsold inventories.
Interest expense for the second quarter of 1995 decreased $0.1 million
compared with the same period of 1994. For the six months ended June 30, 1995
interest expense increased $0.7 million primarily due to an increase in the
average homebuilding debt outstanding related to the financing of higher
levels of inventories and higher interest rates charged on the Company's
borrowings. The above increases were mitigated by an increase in the amount of
interest capitalized. The majority of the proceeds from the June 30, 1995
sale of the mortgage securities administration business were used to reduce
homebuilding debt.
FINANCIAL SERVICES
The financial services segment, which excludes the results of the discontinued
institutional mortgage securities administration business, reported pretax
earnings of $6.3 million for the second quarter of 1995, compared with $9.7
million for the second quarter of 1994. Pretax earnings for the first six
months of 1995 were $11.8 million compared with $19.3 million for the same
period of 1994.
Pretax earnings by line of business were as follows (amounts in thousands):
Three months Six months
ended June 30, ended June 30,
1995 1994 1995 1994
------ ------ ------ ------
Retail $ 4,702 $ 6,924 $ 5,845 $ 13,222
Investments 1,587 2,807 5,941 6,067
-------- -------- -------- --------
Total $ 6,289 $ 9,731 $11,786 $ 19,289
The declines in pretax earnings for the three and six months ended June 30,
1995, compared with the same periods in 1994, were primarily due to reduced
volume of loan originations, lower gains from sales of mortgage servicing
rights, and a lower level of income from investments.
Revenues for the financial services segment decreased 29 percent and 32
percent for the three and six months ended June 30, 1995, respectively, as
compared to the same periods of 1994, primarily due to lower gains on sales of
servicing rights and reduced mortgage origination activity. Interest expense
declined 15 percent and 23 percent for the three and six months ended June 30,
1995, respectively, as compared to the same periods of 1994, as a result of
the lower level of borrowings required to fund mortgage loan originations.
General and administrative expenses declined 30 percent and 32 percent for the
three and six months ended June 30, 1995, respectively, as compared to the
same periods of 1994, as a result of cost reduction measures implemented in
retail operations.
Retail Operations:
------------------
Retail operations include mortgage origination, loan servicing and
title/escrow services for retail and wholesale customers.
Results for retail operations were as follows (amounts in thousands):
Three months Six months
ended June 30, ended June 30,
1995 1994 1995 1994
------ ------ ------ ------
Revenues:
Interest and
net origination fees $ 3,669 $ 4,229 $ 6,703 $ 11,183
Net gains on sales of mortgages
and servicing rights 6,278 12,923 9,304 22,380
Loan servicing 8,366 8,425 17,059 19,678
Title/escrow 1,308 1,087 2,327 1,977
------- ------- ------- --------
Total retail revenues 19,621 26,664 35,393 55,218
Expenses 14,919 19,740 29,548 41,996
------- ------- ------- --------
Pretax earnings $ 4,702 $ 6,924 $ 5,845 $ 13,222
======= ======= ======= ========
Retail operations reported a pretax earnings decrease of $2.2 million for the
second quarter of 1995 as compared with the same period last year. The
earnings decline is primarily attributable to a $6.6 million decrease in net
gains from sales of mortgages and servicing rights. Gains from the bulk sale
of servicing rights were $2.3 million in the second quarter of 1995 as
compared with $10.0 million reported in the same period of 1994. Included in
net gains on sales of mortgages and servicing rights is a gain of $.8 million
that was recognized in the second quarter of 1995 in conjunction with the
implementation of SFAS 122 (see Note 3). Expenses have decreased between
periods primarily due to the actions the Company has taken to reduce operating
expenses and due to a decline in interest expense resulting from the lower
level of borrowings required to fund mortgage loan originations.
A summary of origination activities is as follows:
Three months Six months
ended June 30, ended June 30,
1995 1994 1995 1994
------ ------ ------ -----
Dollar volume of mortgages
originated (in millions) $ 469 $ 525 $ 797 $ 1,200
Number of mortgages originated 3,698 4,224 6,360 9,579
Percentage of total closings:
Ryland Homes closings 34% 28% 36% 23%
Other closings 66% 72% 64% 77%
Total closings 100% 100% 100% 100%
The Company earns interest on mortgages held for sale and pays interest on
borrowings secured by the mortgages. Significant data related to these
activities are as follows:
Three months Six months
ended June 30, ended June 30,
1995 1994 1995 1994
------ ------ ------ ------
Net interest earned
(in thousands) $1,276 $2,126 $2,436 $5,475
Average balance of
mortgages held for sale
(in millions) $182 $273 $169 $362
Net interest spread 2.8% 3.1% 2.9% 3.1%
Net interest earned decreased in the second quarter and year-to-date 1995
compared to 1994 due to a lower average balance of mortgages held for sale
combined with a lower net interest spread.
The Company services loans that it originates as well as loans originated by
others. Loan servicing portfolio balances were as follows at June 30, (in
billions):
1995 1994
------ ------
Originated $2.5 $3.1
Acquired 3.7 4.3
Subserviced .3 .1
------ ------
Total portfolio $6.5 $7.5
====== ======
The decrease in the portfolio balance as compared with June 30, 1994 was
attributable to a decline in origination volume combined with sales of
servicing rights and normal mortgage prepayment activity.
Investment Operations:
----------------------
The Company's investment operations hold certain assets, primarily mortgage-
backed securities, which were obtained as a result of the exercise of
redemption rights on various mortgage-backed bonds previously owned by the
Company's limited-purpose subsidiaries. As shown in the table below, pretax
earnings for the three and six months ended June 30, were as follows
(in thousands):
Three months Six months
ended June 30, ended June 30,
1995 1994 1995 1994
------ ------ ------ ------
Sale of mortgage-backed securities $ 807 $ 0 $ 3,931 $ 0
Net interest earned and other 780 2,807 2,010 6,067
-------- --------- -------- -------
Pretax earnings $ 1,587 $ 2,807 $ 5,941 $ 6,067
======== ========= ======== =======
Pretax earnings for the second quarter and first six months of 1995 decreased
compared with the same period of 1994 due to a decrease in the net interest
earned on mortgage-backed securities which more than offset the gains from the
sale of mortgage-backed securities.
Significant data from the investment operations are as follows:
Three months Six months
ended June 30, ended June 30,
1995 1994 1995 1994
------ ------ ------ ------
Net interest earned
(in thousands) $1,060 $3,781 $ 2,553 $8,179
Average balance outstanding
(in millions) $ 118 $ 228 $ 136 $ 226
Net interest spread 3.7% 6.6% 3.8% 7.3%
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 net interest earned between
periods is primarily due to a decline in the average investment portfolio
balance outstanding combined with an increase in borrowing rates.
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. Proceeds from the sale of the Company's institutional
mortgage securities administration business on June 30, 1995 were used to
repay long-term debt of the homebuilding segment and short-term notes payable
of the financial services segment. The Company believes that its current
sources of cash are sufficient to finance its current requirements.
The homebuilding segment borrowings include an unsecured revolving credit
facility, senior notes, senior subordinated notes and land purchase notes.
The Company primarily uses its unsecured revolving credit facility to finance
increases in its homebuilding inventory. This facility was renewed in July
1995 for a new three-year period and total borrowing capacity was increased
from $250 million to $400 million. As of June 30, 1995, the Company had
borrowed $96.0 million under this facility, compared with $127.5 million as of
December 31, 1994. In addition, the Company had letters of credit outstanding
under this facility totaling $4.2 million at June 30, 1995, compared with $7.4
million at December 31, 1994. To finance land purchases, the Company may also
use seller-financed, non-recourse secured notes payable. At June 30, 1995,
such notes payable outstanding amounted to $20.0 million compared with $25.6
million at December 31, 1994.
Housing inventories decreased to $574.8 million as of June 30, 1995, from
$594.8 million as of the end of 1994. A lower investment in unsold homes
under construction was partially offset by an increase in sold homes.
The financial services segment uses cash generated from operations and
borrowing arrangements to finance its operations. In June 1995, the Company
renewed its bank facility which provides financing of up to $325 million for
mortgage warehouse funding and $40 million for working capital advances, and
extended the maturity of the facility to June 1997. Other borrowing
arrangements as of June 30, 1995 included repurchase agreement facilities
aggregating $900 million and a $35 million credit facility to be used for the
short-term financing of optional bond redemptions. At June 30, 1995 and
December 31, 1994, the combined borrowings of the financial services segment
outstanding under all agreements were $355.9 million and $377.6 million,
respectively.
Mortgage loans 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 segment's bond payments is cash
received from the segment's mortgage loans receivable and mortgage-backed
securities.
The Ryland Group, Inc. has not guaranteed the debt of the financial services
segment or limited-purpose subsidiaries.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
One current and two former officers of Ryland Mortgage Company ("RMC") were
recently notified that they are targets of a federal grand jury investigation
concerning alleged misappropriation of funds from the Resolution Trust
Corporation ("RTC"). The Company has been advised that the investigation
relates to alleged overpayments to RMC of approximately $3 million under two
mortgage servicing contracts with the RTC. The Company is investigating this
matter, and at this time cannot predict how it will be resolved or whether the
Company or RMC will incur any liability.
The Company is party to various other legal proceedings generally incidental
to its businesses. Based on evaluation of such legal proceedings and
discussions with counsel, management believes that liabilities to the Company
arising from these matters will not have a material adverse effect on the
Company's financial condition.
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders of the Company was held on April 19, 1995.
Proxies were solicited by the Company pursuant to Regulation 14 under the
Securities Exchange Act of 1934 to elect directors of the Company for the
ensuing year and to approve the appointment of Ernst & Young LLP as
independent public accountants of the Company for 1995.
The ten incumbent directors nominated by the Company were elected. Proxies
representing 14,350,648 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 nominee:
Name Total Vote For Total Vote Withheld
R. Chad Dreier 14,176,188 174,459
Andre P. Brewster 14,075,978 274,668
James A. Flick, Jr. 14,244,225 126,421
Robert J. Gaw 14,226,006 124,640
Leonard M. Harlan 14,223,199 127,447
L.C. Heist 14,225,799 124,847
William L. Jews 14,219,320 131,326
William G. Kagler 14,224,163 126,483
John H. Mullin III 14,079,062 271,584
John O. Wilson 14,225,882 124,764
Ernst & Young LLP was approved as the independent public accountants for the
Company for 1995 by 99.6 percent of the shares voting. The following is a
breakdown of the vote on such matter:
For Against Abstain
14,199,316 30,769 26,563
PART II. OTHER INFORMATION - continued
Page Number
------------
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
11 Statement Re computation of earnings
per share (filed herewith) 20
27 Financial Data Schedule 21
B. Reports on Form 8-K
Form 8-K was filed with the
Securities and Exchange Commission on
April 25, 1995.
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, 1995 By: /s/ Michael D. Mangan
--------------- -----------------------------------
Date Michael D. Mangan,
Executive Vice President
and Chief Financial Officer
(Principal Financial Officer)
August 14, 1995 By: /s/ Stephen B. Cook
--------------- -----------------------------------
Date Stephen B. Cook, Vice President
and Corporate Controller
(Principal Accounting Officer)
INDEX OF EXHIBITS
A. Exhibits Page of
Sequentially
Numbered Pages
----------------
11 Statement Re computation of earnings
per share (filed herewith) 20
27 Financial Data Schedule 21