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 September 30, 1995
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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
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(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
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
The number of shares of common stock of The Ryland Group, Inc., outstanding on
November 7, 1995 was 15,666,458
THE RYLAND GROUP, INC.
FORM 10-Q
INDEX
Page Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at
September 30, 1995 (unaudited) and
December 31, 1994 1-2
Consolidated Statements of Earnings
for the three and nine months ended
September 30, 1995 and 1994 (unaudited) 3
Consolidated Statements of Cash Flows
for the nine months ended September 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 9-16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
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,
1995 1994
---------- ------------
(unaudited)
ASSETS
HOMEBUILDING:
Cash and cash equivalents $ 64,535 $ 25,963
Housing inventories:
Homes under construction 373,981 399,046
Land under development and improved lots 212,259 193,096
Land held for future development or resale 2,320 2,671
--------- ---------
Total inventories 588,560 594,813
Investment in/advances to unconsolidated
joint ventures 10,290 11,500
Property, plant and equipment 33,258 24,001
Purchase price in excess of net assets acquired 21,833 22,607
Other assets 53,075 61,362
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771,551 740,246
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FINANCIAL SERVICES:
Cash and cash equivalents 1,186 863
Mortgage loans held for sale, net 311,272 214,772
Mortgage-backed securities, net 104,303 171,120
Mortgage servicing and administration
rights, net 8,124 12,014
Other assets 39,908 56,251
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464,793 455,020
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LIMITED-PURPOSE SUBSIDIARIES:
Collateral for bonds payable, net 392,598 459,044
Other assets 4,552 5,289
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397,150 464,333
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Net deferred taxes 30,243 27,822
Other assets 8,847 17,067
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TOTAL ASSETS $ 1,672,584 $ 1,704,488
============ ===========
See notes to consolidated financial statements.
The Ryland Group, Inc. and subsidiaries
CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share data)
September 30, December 31,
1995 1994
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(unaudited)
LIABILITIES
HOMEBUILDING:
Accounts payable and other liabilities $ 87,026 $ 95,551
Long-term debt 429,653 408,744
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516,679 504,295
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FINANCIAL SERVICES:
Accounts payable and other liabilities 34,769 21,040
Short-term notes payable 375,226 377,629
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409,995 398,669
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LIMITED-PURPOSE SUBSIDIARIES:
Accounts payable and other liabilities 12,453 14,369
Bonds payable, net (1) 381,682 446,752
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394,135 461,121
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Other liabilities 26,690 28,281
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TOTAL LIABILITIES 1,347,499 1,392,366
============ ===========
STOCKHOLDERS' EQUITY
Convertible preferred stock, $1 par value
Authorized - 1,400,000 shares
Issued - 964,920 shares
(1,072,903 for 1994) 965 1,073
Common stock, $1 par value
Authorized - 78,600,000 shares
Issued - 15,620,974 shares
(15,475,242 for 1994) 15,621 15,475
Paid-in capital 115,776 115,863
Retained earnings 206,449 193,635
Net unrealized gain on
mortgage-backed securities 381 1,763
Other (14,107) (15,687)
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TOTAL STOCKHOLDERS' EQUITY 325,085 312,122
============ ===========
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,672,584 $ 1,704,488
============ ===========
See notes to consolidated financial statements.
<FN>
(F1) 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 Nine months
ended September 30, ended September 30,
1995 1994 1995 1994
-------- -------- -------- -------
REVENUES:
Homebuilding:
Residential revenues $ 371,810 $ 396,725 $1,039,496 $ 1,034,354
Other revenues 190 1,740 1,022 3,296
----------- ---------- ---------- ---------
Total homebuilding revenues 372,000 398,465 1,040,518 1,037,650
Financial services 21,530 32,143 67,889 100,093
Limited-purpose subsidiaries 9,057 11,367 28,605 41,673
----------- ----------- ---------- ---------
Total revenues 402,587 441,975 1,317,012 1,179,416
EXPENSES:
Homebuilding:
Cost of sales 325,243 348,373 917,279 905,624
Interest expense 7,891 7,680 22,185 21,261
Selling, general and
administrative 38,896 37,866 110,224 102,243
---------- ---------- ---------- ---------
Total 372,030 393,919 1,049,688 1,029,128
Financial services:
Interest expense 6,590 5,852 17,757 20,309
General and administrative 11,108 14,761 34,514 48,965
---------- ---------- ---------- ---------
Total 17,698 20,613 52,271 69,274
Limited-purpose subsidiaries:
Interest expense 9,019 11,082 28,508 39,640
Other expenses (5) 263 45 1,938
---------- ---------- ---------- ---------
Total 9,014 11,345 28,553 41,578
Corporate expenses 3,042 4,581 9,893 13,414
--------- ---------- ---------- ---------
Total expenses 401,784 430,458 1,140,405 1,153,394
Equity in earnings (losses) of
unconsolidated joint ventures 327 (139) 524 (2)
---------- ---------- ---------- ---------
Earnings (loss) from continuing
operations before taxes
and cumulative effect
of a change in
accounting principle 1,130 11,378 (2,869) 26,020
Tax expense (benefit) 452 4,551 (1,148) 10,408
---------- ---------- ---------- ------
Net earnings (loss) from
continuing operations
before cumulative effect
of a change in
accounting principle 678 6,827 (1,721) 15,612
Discontinued Operations:
Earnings from discontinued
operations (net of taxes
of $2,212 for 1995 and
$1,042 & $3,009 in 1994) 0 1,562 3,318 4,514
Gain on sale of
discontinued operations
(net of taxes of $13,025) 0 0 19,538 0
---------- ---------- ---------- ---------
Net earnings before cumulative
effect of a change in
accounting principle 678 8,389 21,135 20,126
Cumulative effect of a change
in accounting principle
(net of taxes of $1,384) 0 0 0 2,076
----------- ----------- ---------- ---------
NET EARNINGS $ 678 $ 8,389 $ 21,135 $ 22,202
=========== =========== ========== =========
Preferred dividends $ 533 $ 603 $ 1,672 $ 1,848
Net earnings available for
common shareholders $ 145 $ 7,786 $ 19,463 $ 20,354
NET EARNINGS PER COMMON SHARE:
Primary:
Net earnings(loss) from
continuing operations
before cumulative effect
of a change in
accounting principle $ 0.01 $ 0.40 $ (0.21) $ 0.88
Discontinued operations 0.00 0.10 1.45 0.30
---------- ----------- ---------- -------
Net earnings before
cumulative effect
of a change in
accounting principle 0.01 0.50 1.24 1.18
Cumulative effect
of a change in
accounting principle 0.00 0.00 0.00 0.13
----------- ----------- ---------- -------
Net earnings
per common share $ 0.01 $ 0.50 $ 1.24 $ 1.31
=========== =========== ========== =======
Fully diluted:
Net earnings (loss)
from continuing
operations before
cumulative effect
of a change in
accounting principle $ 0.01 $ 0.40 $ (0.15) $ 0.89
Discontinued operations 0.00 0.09 1.36 0.27
----------- ---------- ---------- -------
Net earnings before
cumulative effect
of a change in
accounting principle 0.01 0.49 1.21 1.16
Cumulative effect
of a change in
accounting principle 0.00 0.00 0.00 0.12
----------- ---------- ---------- -------
Net earnings
per common share $ 0.01 $ 0.49 $ 1.21 $ 1.28
=========== =========== ========== ========
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.
The Ryland Group, Inc. and subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, amounts in thousands)
Nine months ended September 30,
1995 1994
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 21,135 $ 22,202
Adjustments to reconcile net earnings to
net cash provided by (used for)
operating activities:
Depreciation and amortization 24,462 14,332
Net cumulative effect of a change
in accounting principle 0 (3,460)
Gain on sale of mortgage-backed
securities - available-for-sale (4,772) (2,349)
Gain on sale of discontinued operations (32,563) 0
Decrease (increase) in inventories 6,253 (86,744)
Net change in other assets, payables
and other liabilities 14,608 13,572
Equity in earnings / distributions
from unconsolidated joint ventures 1,049 5,477
Increase in mortgage-backed securities-trading (2,546)
(Increase) decrease in mortgage
loans held for sale, net (96,500) 289,207
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Net cash (used for) provided by
operating activities (66,328) 249,691
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CASH FLOWS FROM INVESTING ACTIVITIES:
Net additions to property, plant and equipment (23,064) (14,054)
Proceeds from sale of discontinued operations 47,000 0
Principal reduction of mortgage collateral 10,411 36,180
Principal reduction of mortgage-backed
securities - available-for-sale 4,907 33,262
Sales of mortgage-backed securities-
available-for-sale 68,003 33,066
Principal reduction of mortgage-backed
securities- held-to-maturity 49,074 172,377
Decrease in funds held by trustee 3,375 73,779
Other investing activities, net 8 (909)
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Net cash provided by investing activities 159,714 333,701
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CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in short-term notes payable (2,403) (309,704)
Cash proceeds of long-term debt 39,177 55,421
Reduction of long-term debt (18,266) (17,140)
Bond principal payments (65,840) (323,603)
Common and preferred stock dividends (8,680) (8,832)
Other financing activities, net 1,521 6,457
---------- ---------
Net cash (used for) financing activities (54,491) (597,401)
---------- ---------
Net increase (decrease) in cash 38,895 (14,009)
Cash at beginning of year 26,826 46,490
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CASH AT END OF PERIOD $ 65,721 $ 32,481
========== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest (net of
capitalized interest) $ 81,750 $ 89,606
Cash paid for income taxes (net of
refund received in 1995) $ 16,787 $ 20,411
========== =========
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 September 30,
1995 1994
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Pretax earnings from continuing operations:
Homebuilding $ 297 $ 4,407
Financial services (1) 3,832 11,530
Limited-purpose subsidiaries 43 22
Corporate expenses (3,042) (4,581)
---------- ---------
Total $ 1,130 $ 11,378
========== =========
<FN>
(F1) Excludes pretax operating earnings of $2,604 for the institutional
mortgage securities administration business for the three months ended
September 30, 1994. This amount is included in earnings from discontinued
operations.
</FN>
Nine months ended September 30,
1995 1994
------ ------
Pretax (loss) earnings from continuing operations:
Homebuilding $ (8,646) $ 8,520
Financial services (2) 15,618 30,819
Limited-purpose subsidiaries 52 95
Corporate expenses (9,893) (13,414)
--------- ---------
Total $ (2,869) $ 26,020
========== =========
<FN>
(F2) Excludes pretax operating earnings of $5,530 and $7,523 for the
institutional mortgage securities administration business for the nine months
ended September 30, 1995 and 1994, 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 September 30, 1995, the consolidated
statements of earnings for the three and nine months ended September 30, 1995
and 1994, and the consolidated statements of cash flows for the nine months
ended September 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 September 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 nine months ended September 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 (the "RSOP Trust") into common
stock, as well as the amount of the additional RSOP Trust contribution
required to fund the difference between the RSOP Trust's earnings from
preferred share dividends and the RSOP Trust's potential earnings from common
share dividends after an assumed conversion. The assumed conversion of the
preferred shares and the additional RSOP Trust contrubution were not dilutive
for the third quarter of 1995.
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 $2.1 million (net of $1.4 million 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 $7.6 million
(net of $5.1 million 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,
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 $381. 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 in
the second quarter, which resulted in a favorable impact, net of the valuation
allowance, of $.5 million in the second quarter ended June 30, 1995 and $.7
million in the nine months ended September 30, 1995. In accordance with SFAS
122, prior period financial statements have not been restated.
The book value of the capitalized mortgage servicing rights at September 30,
1995 was $8.1 million and the aggregate fair value totaled $10.4 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. Additions to the valuation
allowance were $17 thousand and $231 thousand for the three and nine months
ended September 30, 1995, respectively and resulted in an ending balance of
$231 thousand at September 30, 1995.
The Ryland Group, Inc. and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(unaudited)
Note 4. New Accounting Pronouncements
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 121 (SFAS 121), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of".
SFAS 121 amends the impairment provisions of the existing accounting
literature which required the Company's homebuilding inventories to be carried
at the lower of cost or net realizable value. Under the new provisions, if
the Company's homebuilding inventories are determined to be impaired, the
impairment loss is measured based upon the difference between the fair value
of the asset and its carrying amount. Fair value is a more conservative
measurement than net realizable value since it requires that impaired
homebuilding inventories be written down to provide for a risk-based profit
margin.
SFAS 121 is required to be adopted no later than the first quarter of 1996.
The Company has not completed its analysis of the impact of this new
pronouncement, therefore the timing and impact of adopting SFAS 121 have not
yet been determined. However, if the Company's homebuilding inventories are
determined to be impaired, it is posssible that SFAS 121 could have a material
adverse impact on the Company.
Note 5. 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. 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.
There were no revenues from the operations of the discontinued business for
the third quarter of 1995 as the sale occurred in the second quarter. Revenues
for the three months ended September 30,1994 were $5.9 million. Revenues
from operations of the discontinued business were $11.4 million and $17.6
million, for the nine months ended September 30, 1995 and 1994, respectively.
Earnings from operations of the discontinued business were $3.3 million, or
$.21 per share (net of taxes of $2.2 million) for the nine months ended
September 30, 1995. Earnings for the three and nine months ended September
30, 1994 were $1.6 million, or $.10 per share (net of taxes of $1.0 million),
and $4.5 million, or $.30 per share (net of taxes of $3.0 million),
respectively.
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 third quarter of 1995, the Company reported consolidated net earnings
of $.7 million, or $.01 per share, compared with consolidated net earnings of
$8.4 million, or $.50 per share, for the same period in 1994. Consolidated
net earnings for the first nine months of 1995 were $21.1 million, or $1.24
per share, compared with $22.2 million, or $1.31 per share, for the same
period in 1994. Results for the first nine months of 1995 include a net gain
of $19.5 million related to the second quarter sale of the Company's mortgage
securities administration business to Norwest Bank Minnesota. The sale of
this business is consistent with the Company's long-term strategy to focus on
its core homebuilding and mortgage-finance operations and to invest additional
capital into its homebuilding operations. Earnings for the financial services
segment for the third quarter were, and future results will continue to be,
negaively impacted by the elimination of the mortgage securities
administration business. Results for the first nine months of 1994 included
$2.1 million, or $.13 per share, cumulative effect of an accounting change
related to the adoption of FAS 115.
The Company's continuing operations reported consolidated net earnings of $.7
million, or $.01 per share, for the third quarter of 1995 compared with $6.8
million, or $.40 per share, for the same period in 1994. For the first nine
months of 1995, the Company reported a consolidated net loss from continuing
operations of $1.7 million, or $.21 per share, compared with net earnings from
continuing operations of $15.6 million, or $.88 per share, for the same period
in 1994. For financial reporting purposes, net operating earnings of the
mortgage securities administration business, amounting to $3.3 million for the
six months ended June 30, 1995 (when the sale closed) and $4.5 million for the
nine months ended September 30, 1994, as well as the $19.5 million gain on the
sale, have been reported as discontinued operations.
The Company's homebuilding segment recorded pretax earnings of $.3 million for
the third quarter of 1995, compared with pretax earnings of $4.4 million for
the same period last year. The lower earnings reflect a nine percent decline
in closings. Gross profit margins were 12.6 percent for both periods. For the
first nine months of 1995, the homebuilding segment reported a pretax loss of
$8.6 million, compared with pretax earnings of $8.5 million for the same
period in 1994. The year-to-year decline is primarily due to lower gross
profit margins.
The Company's financial services segment, which excludes the results of the
discontinued institutional mortgage securities administration business,
reported pretax earnings of $3.8 million for the third quarter of 1995,
compared with $11.5 million for the same period in 1994. The financial
services segment reported pretax earnings of $15.6 million for the first nine
months of 1995, compared with $30.8 million for the same period in 1994. The
decline in both periods from last year's results is primarily attributable to
lower gains from sales of mortgages and mortgage servicing rights, and a lower
level of investment earnings.
The limited-purpose subsidiaries reported pretax earnings of $43 thousand for
the third quarter of 1995, compared with pretax earnings of $22 thousand for
the same period in 1994. For the first nine months of 1995, the limited-
purpose subsidiaries reported pretax earnings of $52 thousand compared with
$95 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 pretax earnings of $.3 million for
the third quarter of 1995 compared with pretax earnings of $4.4 million for
the same period last year. For the nine months ended September 30, 1995,
homebuilding reported a pretax loss of $8.6 million compared with pretax
earnings of $8.5 million for the same period last year.
Results of operations of the Company's homebuilding segment are summarized as
follows ($ amounts in thousands, except average closing price):
Three months ended Nine months ended
September 30, September 30,
1995 1994 1995 1994
------ ------ ------ ------
Revenues $372,000 $398,465 $1,040,518 $1,037,650
Gross profit 46,757 50,092 123,239 132,026
Selling, general and
administrative expenses 38,896 37,866 110,224 102,243
Interest expense 7,891 7,680 22,185 21,261
Equity in earnings (losses)
of unconsolidated
joint ventures 327 (139) 524 (2)
--------- --------- ---------- ---------
Pretax earnings (loss) $ 297 $ 4,407 $ (8,646) $ 8,520
========= ========= ========== =========
Operational Unit Data:
(includes joint ventures)
Sales (units) 2,201 2,200 7,379 7,364
Closings (units) 2,263 2,488 6,479 6,620
Outstanding contracts at
September 30,
Units 3,453 3,463
Dollar Value $591,607 $570,024
Average Closing Price
(excludes unconsolidated
joint ventures) $165,000 $161,000 $161,000 $159,000
Homebuilding revenues amounted to $372 million for the third quarter of 1995,
down 6.6 percent from the third quarter of 1994 due to a decline in closings
reflecting slower sales earlier this year. For the first nine months of 1995,
revenues amounted to $1.04 billion, approximately level with the same period
last year. An increase in average closing price more than offset a 2 percent
decline in the volume of closings.
The gross profit margin for the third quarter of 1995 was 12.6 percent,
comparable with the third quarter last year, and a significant improvement
from the 11.3 percent reported for the second quarter of 1995. The year-to-
date gross margin decreased to 11.8 percent from 12.7 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 negatively impacted gross margins
during the first nine months of 1995.
During the third quarter and first nine 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 121 homes and 377 homes, respectively, as compared with 196 homes,
and 453 homes, respectively, in the same periods of 1994. At September 30,
1995, the remaining net book value of the affected California inventory was
approximately $57 million and consisted of approximately 1,030 homebuilding
lots and related improvements, of which 69 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
nine months of 1995.
Total homebuilding sales for the third quarter and first nine months of 1995
were comparable with the same periods last year as increases in sales in many
markets were offset by a significant decline in sales in the Mid-Atlantic
region. In response to the current economic uncertainties and competitive
pressures in the Mid-Atlantic region, the Company is redistributing its
capital investment within the region and is reallocating some of this
investment to other markets outside the region where the Company believes it
can achieve higher returns. Except for the Mid-Atlantic region, all regions
reported increases in sales for the third quarter, reflecting the Company's
entry into several new markets as well as growth in many existing markets.
The increase in sales activity in existing markets during the third quarter is
attributable to a relatively favorable interest rate environment and the
opening of new communities.
Outstanding contracts at September 30, 1995 were 3,453 compared with 3,463 at
September 30, 1994. Outstanding contracts represent the Company's backlog of
sold but not closed homes, which generally are built and closed, subject to
cancellations, over the next two quarters. The $591.6 million value of
outstanding contracts as of September 30, 1995 has increased 39.4 percent from
December 31, 1994 and 3.8 percent from September 30, 1994.
Selling, general and administrative expenses as a percent of revenues were
10.5 and 10.6 percent for the third quarter and the first nine months of 1995
compared with 9.5 percent and 9.9 percent, respectively, for the same periods
of 1994. Included in selling, general and administrative expenses for the
first nine months of 1995 were $2.2 million of reorganization costs associated
with the Company's initiatives to lower operating costs. General and
administrative expenses, excluding selling expenses and the reorganization
costs, as a percent of revenue, declined for the first nine months of 1995 due
to the Company's efforts to reduce fixed expenses. Selling expenses as a
percentage of revenues increased in the first nine 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 third quarter of 1995 increased $0.2 million compared
with the same period of 1994. For the nine months ended September 30, 1995
interest expense increased $0.9 million primarily due to an increase in the
average homebuilding debt outstanding related to the financing of inventories.
Increases in interest expense were mitigated by an increase in the amount of
interest capitalized due to an increase in land under development.
FINANCIAL SERVICES
The financial services segment, which excludes the results of the discontinued
mortgage securities administration business, reported pretax earnings of $3.8
million for the third quarter of 1995, compared with $11.5 million for the
third quarter of 1994. Pretax earnings for the first nine months of 1995 were
$15.6 million compared with $30.8 million for the same period of 1994.
Pretax earnings by line of business were as follows (amounts in thousands):
Three months Nine months
ended September 30, ended September 30,
1995 1994 1995 1994
------ ------ ------ ------
Retail $ 2,090 $ 7,315 $ 7,935 $ 20,537
Investments 1,742 4,215 7,683 10,282
-------- -------- -------- --------
Total $ 3,832 $11,530 $15,618 $ 30,819
The declines in pretax earnings for the three and nine months ended September
30, 1995, compared with the same periods in 1994, were primarily due to lower
gains from sales of mortgages and mortgage servicing rights and a lower level
of investment earnings. The decline in investment earnings will likely
continue as the Company's investment portfolio declines.
Revenues for the financial services segment decreased 33 percent and 32
percent for the three and nine months ended September 30, 1995, respectively,
as compared to the same periods of 1994, primarily due to lower gains from
sales of mortgage servicing rights and lower gains on sales of mortgages.
Interest expense increased 13 percent for the three months and decreased 13
percent for the nine months ended September 30, 1995, respectively, as
compared to the same periods of 1994. Interest expense increased in the third
quarter due to a higher interest rate on slightly higher borrowings. Interest
expense has decreased for the nine months ended September 30, 1995 as a result
of a lower level of borrowings required to fund mortgage loan originations.
General and administrative expenses declined 25 percent and 30 percent for the
three and nine months ended September 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 Nine months
ended September 30, ended September 30,
1995 1994 1995 1994
------ ------ ------ ------
Revenues:
Interest and
net origination fees $ 5,731 $ 3,955 $12,434 $ 15,138
Net gains on sales of mortgages
and servicing rights 2,970 10,750 12,274 33,130
Loan servicing 7,627 8,653 24,686 28,331
Title/escrow 1,334 1,304 3,661 3,281
------- ------- ------- --------
Total retail revenues 17,662 24,662 53,055 79,880
Expenses 15,572 17,347 45,120 59,343
------- ------- ------- --------
Pretax earnings $ 2,090 $ 7,315 $ 7,935 $ 20,537
======= ======= ======= ========
A summary of origination activities is as follows:
Three months Nine months
ended September 30 ended September 30,
1995 1994 1995 1994
------ ------ ------ -----
Dollar volume of mortgages
originated (in millions) $ 575 $ 467 $ 1,372 $ 1,667
Number of mortgages originated 4,465 3,795 10,825 13,374
Percentage of total closings:
Ryland Homes closings 32% 33% 34% 26%
Other closings 68% 67% 66% 74%
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 Nine months
ended September 30, ended September 30,
1995 1994 1995 1994
------ ------ ------ ------
Net interest earned
(in thousands) $ 1,671 $1,905 $ 4,107 $7,380
Average balance of
mortgages held for sale
(in millions) $ 272 $221 $ 203 $315
Net interest spread 2.4% 3.4% 2.7% 3.1%
Net interest earned decreased in the third quarter of 1995 as a lower net
interest spread was only partially offset by an increase in the average
balance of mortgages held for sale. For the nine month comparison, net
interest earned decreased in 1995 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 September 30, (in
billions):
1995 1994
------ ------
Originated $2.5 $2.9
Acquired 3.5 4.1
Subserviced .1 .4
------ ------
Total portfolio $6.1 $7.4
====== ======
The decrease in the portfolio balance as compared with September 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. Pretax earnings for the three and
nine months ended September 30, were as follows (in thousands):
Three months Nine months
ended September 30, ended September 30,
1995 1994 1995 1994
------ ------ ------ ------
Sale of mortgage-backed securities $ 908 $ 2,349 $ 4,839 $ 2,349
Net interest earned and other 834 1,866 2,844 7,933
-------- --------- -------- -------
Pretax earnings $ 1,742 $ 4,215 $ 7,683 $10,282
======== ========= ======== =======
Pretax earnings for the third quarter and first nine months of 1995 decreased
from the same periods of 1994 due to decreases in the net interest earned on
mortgage-backed securities. These decreases are attributable to lower average
investment balances along with lower net interest spread. Lower gains from
sales of mortgage-backed securities also caused the decline for the third
quarter of 1995.
Significant data from the investment operations are as follows:
Three months Nine months
ended September 30, ended September 30,
1995 1994 1995 1994
------ ------ ------ ------
Net interest earned
(in thousands) $ 1,021 $2,740 $ 3,574 $10,919
Average balance outstanding
(in millions) $ 112 $ 196 $ 128 $ 216
Net interest spread 3.7% 5.5% 3.7% 6.8%
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 a lower net interest spread resulting from
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 nonrecourse secured
notes payable.
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 three-year period and total borrowing capacity was increased from
$250 million to $400 million. As of September 30, 1995, the outstanding
borrowings under this facility were $161.5 million, compared with $127.5
million as of December 31, 1994. In addition, the Company had letters of
credit outstanding under this facility totaling $23.5 million at September 30,
1995. To finance land purchases, the Company may also use seller-financed,
non-recourse secured notes payable. At September 30, 1995, such notes payable
outstanding amounted to $12.9 million compared with $25.6 million at December
31, 1994.
Housing inventories decreased to $588.6 million as of September 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 up to $325 million for mortgage
warehouse funding and $40 million for working capital advances, and extended
the maturity of the facility to May 1997. Other borrowing arrangements as of
September 30, 1995 included repurchase agreement facilities aggregating $925
million, a new $100 million committed credit facility used to finance
investment portfolio securities and a $35 million credit facility to be used
for the short-term financing of optional bond redemptions. At September 30,
1995 and December 31, 1994, the combined borrowings of the financial services
segment outstanding under all agreements were $375.2 million and $377.6
million, respectively.
Mortgage loans and mortgage-backed securities held by the limited-purpose
subsidiaries are pledged as collateral for the bonds, the terms of which
provide for the retirement of all bonds from the proceeds of the collateral.
The source of cash for the bond payments is cash received from the mortgage
loans 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") have
been 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.
Page Number
------------
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
10.1 Employment Agreement dated as of
September 18, 1995 between Michael D. Mangan
and The Ryland Group, Inc. (filed herewith) 20-35
10.2 Employment Agreement dated as of
September 18, 1995 between David Lesser
and The Ryland Group, Inc. (filed herewith) 36-52
11 Statement Re computation of earnings
per share (filed herewith) 53
27 Financial Data Schedule 54
B. Reports on Form 8-K
Form 8-K was filed with the Securities and Exchange Commission
on July 17, 1995 regarding the Company's sale of its mortgage
securities administration business to Norwest Bank Minnesota.
SIGNATURES
------------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE RYLAND GROUP, INC.
-----------------------
Registrant
November 13, 1995 By: /s/ Michael D. Mangan
- ----------------- --------------------------
Date Michael D. Mangan,
Executive Vice President
and Chief Financial Officer
(Principal Financial Officer)
November 13, 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
Exhibit No. Numbered Pages
- ----------- ----------------
10.1 Employment Agreement dated as of
September 18, 1995 between Michael D. Mangan
and The Ryland Group, Inc. (filed herewith) 20-35
10.2 Employment Agreement dated as of
September 18, 1995 between David Lesser
and The Ryland Group, Inc. (filed herewith) 36-52
11 Statement Re computation of earnings
per share (filed herewith) 53
27 Financial Data Schedule (filed herewith) 54