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, 1996
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or
[ ] Transition Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to
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Commission File Number: 1-8029
THE RYLAND GROUP, INC.
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(Exact name of registrant as specified in its charter)
Maryland 52-0849948
--------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
of incorporation or organization) Identification No.)
11000 Broken Land Parkway, Columbia, Maryland 21044
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(Address of principal executive offices) (Zip Code)
(410) 715-7000
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
------ ------
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 5, 1996 was 15,836,297.
THE RYLAND GROUP, INC.
FORM 10-Q
INDEX
Page Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at
September 30, 1996 (unaudited) and
December 31, 1995 1-2
Consolidated Statements of Earnings
for the three and nine months ended
September 30, 1996 and 1995 (unaudited) 3
Consolidated Statements of Cash Flows
for the nine months ended September 30,
1996 and 1995 (unaudited) 4
Notes to Consolidated Financial
Statements (unaudited) 5-7
Item 2. Management's Discussion and Analysis
of Results of Operations and Financial
Condition 8-16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
INDEX OF EXHIBITS 20
The Ryland Group, Inc. and subsidiaries
CONSOLIDATED BALANCE SHEETS
(amounts in thousands)
September 30, December 31,
1996 1995
---------- ------------
(unaudited)
ASSETS
HOMEBUILDING:
Cash and cash equivalents $ 30,670 $ 54,518
Housing inventories:
Homes under construction 378,485 332,272
Land under development and improved lots 234,018 205,646
--------- ---------
Total inventories 612,503 537,918
Property, plant and equipment 33,921 34,662
Purchase price in excess of net assets acquired 20,801 21,575
Other assets 44,751 47,903
---------- ---------
742,646 696,576
---------- ---------
FINANCIAL SERVICES:
Cash and cash equivalents 1,090 1,474
Mortgage loans held for sale, net 163,761 285,001
Mortgage-backed securities and
notes receivable, net 139,770 112,544
Mortgage servicing rights, net 9,646 7,814
Other assets 43,059 42,586
---------- ---------
357,326 449,419
---------- ---------
OTHER ASSETS:
Collateral for bonds payable of
limited-purpose subsidiaries 266,311 375,146
Net deferred taxes 38,884 41,259
Other 10,552 18,389
---------- ---------
TOTAL ASSETS $ 1,415,719 $ 1,580,789
============ ===========
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,
1996 1995
------------ ------------
(unaudited)
LIABILITIES
HOMEBUILDING:
Accounts payable and other liabilities $ 76,992 $ 78,853
Long-term debt 439,436 396,607
------------ -----------
516,428 475,460
------------ -----------
FINANCIAL SERVICES:
Accounts payable and other liabilities 22,381 27,219
Short-term notes payable 275,026 367,469
------------ -----------
297,407 394,688
------------ -----------
OTHER LIABILITIES:
Bonds payable of limited-purpose subsidiaries 257,796 364,672
Other 35,575 44,845
------------ -----------
TOTAL LIABILITIES 1,107,206 1,279,665
STOCKHOLDERS' EQUITY
Convertible preferred stock, $1 par value
Authorized - 1,400,000 shares
Issued - 886,555 shares
(943,097 for 1995) 887 943
Common stock, $1 par value
Authorized - 78,600,000 shares
Issued - 15,818,907 shares
(15,681,891 for 1995) 15,819 15,682
Paid-in capital 117,456 115,611
Retained earnings 182,454 179,937
Net unrealized gain on
mortgage-backed securities 2,770 2,550
Due from RSOP Trust (10,873) (13,599)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 308,513 301,124
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,415,719 $ 1,580,789
=========== ===========
STOCKHOLDERS' EQUITY PER COMMON SHARE $ 18.89 $ 18.69
See notes to consolidated financial statements.
The Ryland Group, Inc. and subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS
(unaudited)
(amounts in thousands, except share data)
Three months
ended September 30,
1996 1995
-------- --------
REVENUES:
Homebuilding:
Residential revenues $ 374,834 $ 371,810
Other revenues 1,869 190
----------- -----------
Total homebuilding revenues 376,703 372,000
Financial services 18,997 21,530
Limited-purpose subsidiaries 6,758 9,057
----------- -----------
Total revenues 402,458 402,587
EXPENSES:
Homebuilding:
Cost of sales 326,178 324,916
Interest expense 8,236 7,891
Selling, general and administrative 36,958 38,896
---------- ----------
Total homebuilding expenses 371,372 371,703
Financial services:
Interest expense 4,305 6,590
General and administrative 9,831 11,108
---------- ----------
Total financial services expenses 14,136 17,698
Limited-purpose subsidiaries expense 6,758 9,014
Corporate expenses 2,730 3,042
--------- ----------
Total expenses 394,996 401,457
Earnings before taxes 7,462 1,130
Tax expense 2,985 452
---------- ----------
NET EARNINGS $ 4,477 $ 678
=========== ===========
Preferred dividends $ 490 $ 533
Net earnings available for
common shareholders $ 3,987 $ 145
NET EARNINGS PER COMMON SHARE:
Primary:
Net earnings $ 0.25 $ 0.01
=========== ===========
Fully diluted: (1)
Net earnings $ 0.25 $ 0.01
=========== ===========
AVERAGE COMMON SHARES OUTSTANDING:
PRIMARY 15,935,000 15,812,000
FULLY DILUTED (1) 15,935,000 15,812,000
=========== ===========
<FN>
(1) For the three months ended September 30, 1996 and 1995 conversion of
preferred shares is not assumed due to an antidilutive effect.
</FN>
See notes to consolidated financial statements.
The Ryland Group, Inc. and subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS
(unaudited)
(amounts in thousands, except share data)
Nine months
ended September 30,
1996 1995
-------- --------
REVENUES:
Homebuilding:
Residential revenues $1,050,474 $1,039,496
Other revenues 12,286 1,022
----------- -----------
Total homebuilding revenues 1,062,760 1,040,518
Financial services 59,101 67,889
Limited-purpose subsidiaries 22,284 28,605
----------- -----------
Total revenues 1,144,145 1,137,012
EXPENSES:
Homebuilding:
Cost of sales 918,338 916,755
Interest expense 20,291 22,185
Selling, general and administrative 107,832 110,224
---------- ----------
Total homebuilding expenses 1,046,461 1,049,164
Financial services:
Interest expense 14,938 17,757
General and administrative 33,594 34,514
---------- ----------
Total financial services expenses 48,532 52,271
Limited-purpose subsidiaries expense 22,284 28,553
Corporate expenses 8,796 9,893
--------- ----------
Total expenses 1,126,073 1,139,881
Earnings (loss) from continuing
operations before taxes 18,072 (2,869)
Tax expense (benefit) 7,229 (1,148)
---------- ----------
Net earnings (loss) from
continuing operations 10,843 (1,721)
Discontinued Operations:
Earnings from discontinued operations
(net of taxes of $2,212) 0 3,318
Gain on sale of discontinued operations
(net of taxes of $13,025) 0 19,538
---------- ----------
NET EARNINGS $ 10,843 $ 21,135
=========== ===========
Preferred dividends $ 1,499 $ 1,672
Net earnings available for
common shareholders $ 9,344 $ 19,463
NET EARNINGS PER COMMON SHARE:
Primary:
Net earnings (loss) from continuing
operations $ 0.59 $ (0.21)
Discontinued Operations 0.00 1.45
---------- -----------
Net earnings $ 0.59 $ 1.24
=========== ===========
Fully diluted: (1)
Net earnings (loss) from continuing
operations $ 0.59 $ (0.15)
Discontinued Operations 0.00 1.36
----------- -----------
Net earnings $ 0.59 $ 1.21
=========== ===========
AVERAGE COMMON SHARES OUTSTANDING:
PRIMARY 15,932,000 15,752,000
FULLY DILUTED (1) 15,932,000 16,787,000
=========== ===========
<FN>
(1) For the nine months ended September 30, 1996, conversion of preferred
shares is not assumed due to an antidilutive effect.
</FN>
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,
1996 1995
---------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 10,843 $ 21,135
Adjustments to reconcile net earnings to
net cash provided by (used for)
operating activities:
Depreciation and amortization 23,504 24,462
Gain on sale of mortgage-backed
securities - available-for-sale (657) (4,772)
Gain on sale of discontinued operations 0 (32,563)
(Increase) decrease in inventories (74,585) 6,253
Net change in other assets, payables
and other liabilities (10,683) 14,608
Equity in earnings of / distributions
from unconsolidated joint ventures 948 1,049
Increase in mortgage-backed securities-trading (798) 0
Decrease (increase) in mortgage
loans held for sale, net 121,240 (96,500)
---------- ---------
Net cash provided by (used for)
operating activities 69,812 (66,328)
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net additions to property, plant and equipment (15,878) (23,064)
Proceeds from sale of discontinued operations 0 47,000
Principal reduction of mortgage collateral 57,071 35,923
Principal reduction of mortgage-backed
securities - available-for-sale 19,127 4,907
Purchases of mortgage-backed securities-
available-for-sale (8,572) 0
Sales of mortgage-backed securities-
available-for-sale 10,876 68,003
Principal reduction of mortgage-backed
securities- held-to-maturity 15,306 23,562
(Increase) decrease in funds held by trustee (8,758) 3,375
Other investing activities, net (2,239) 8
---------- ---------
Net cash provided by investing activities 66,933 159,714
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in short-term notes payable (92,443) (2,403)
Cash proceeds of long-term debt 103,062 39,177
Reduction of long-term debt (60,233) (18,266)
Bond principal payments (108,542) (65,840)
Common and preferred stock dividends (8,595) (8,680)
Other financing activities, net 5,774 1,521
---------- ---------
Net cash used for financing activities (160,977) (54,491)
---------- ---------
Net(decrease)increase in cash and cash equivalents (24,232) 38,895
Cash and cash equivalents at beginning of year 55,992 26,826
---------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 31,760 $ 65,721
========== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest (net of
capitalized interest) $ 61,483 $ 67,819
Cash paid for income taxes (net of
refund received in 1996 and 1995) $ (2,492) $ 16,787
========== =========
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,
1996 1995
------ ------
Pretax earnings (loss):
Homebuilding $ 5,331 $ 297
Financial services 4,861 3,832
Corporate and other (1) (2,730) (2,999)
---------- ---------
Total $ 7,462 $ 1,130
========== =========
Nine months ended September 30,
1996 1995
------ ------
Pretax earnings (loss) from continuing operations:
Homebuilding $ 16,299 $ (8,646)
Financial services (2) 10,569 15,618
Corporate and other (1) (8,796) (9,841)
---------- ---------
Total $ 18,072 $ (2,869)
========== =========
<FN>
(1) The Company is no longer in the securities issuance business and,
therefore, the limited-purpose subsidiaries are no longer reported as a
separate business segment. Amounts related to the limited-purpose
subsidiaries are combined with corporate expenses and reflected in the above
table as "Corporate and other."
(2) Excludes pretax operating results of the institutional mortgage securities
administration business for the nine months ended September 30, 1995 of
$5,530.
</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.
The consolidated balance sheet as of September 30, 1996, the consolidated
statements of earnings for the three and nine months ended September 30, 1996
and 1995, and the consolidated statements of cash flows for the nine months
ended September 30, 1996 and 1995 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, 1996, and for all
periods presented, have been made. The consolidated balance sheet at December
31, 1995 is taken from the audited financial statements as of that date.
Certain amounts in the consolidated statements have been reclassified to
conform to the 1996 presentation.
Certain information and footnote disclosures normally included in the
financial statements have been condensed or omitted. These financial
statements should be read in conjunction with the financial statements and
related notes included in the Company's 1995 annual report to shareholders.
The results of operations for the three and nine months ended September 30,
1996 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. However, the effect of the RSOP
Trust was not dilutive for the three months ended September 30, 1996 and 1995
and the nine months ended September 30, 1996.
The Ryland Group, Inc. and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(unaudited)
Note 3. Discontinued Operations
On June 30, 1995, the Company completed the sale of its institutional mortgage
securities administration business for a purchase price of $47 million in
cash. The Company's institutional mortgage-securities administration business
included master servicing, securities administration, investor information
services, and tax calculation and reporting. The prior period results for
this business (formerly reported as institutional financial services) 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 from operations of the discontinued business were $11.4 million for
the nine months ended September 30, 1995. 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.
The Company reported a net gain from the sale of the institutional mortgage
securities administration business of $19.5 million (net of taxes of $13.0
million), or $1.24 per share, in the second quarter of 1995.
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
RESULTS OF OPERATIONS
CONSOLIDATED
For the third quarter of 1996, the Company reported consolidated net earnings
of $4.5 million, or $.25 per share, compared with $.7 million, or $.01 per
share, for the third quarter of 1995.
The Company's homebuilding segment reported pretax earnings of $5.3 million
for the third quarter of 1996, compared with pretax earnings of $.3 million
for the same period last year. The $5.0 million increase was attributable to
improved gross profit margins as well as lower selling, general and
administrative expenses.
The Company's financial services segment reported pretax earnings of $4.9
million for the third quarter of 1996, compared with $3.8 million for the same
period in 1995. The improvement occurred in the Company's retail mortgage
operations primarily due to a reduction in operating expenses. Investment
earnings for the third quarter of 1996 declined versus 1995 primarily due to
lower gains from the sale of mortgage-backed securities.
For the first nine months of 1996, the Company reported consolidated net
earnings of $10.8 million, or $.59 per share. This compares with a net loss
of $1.7 million, or $.21 per share, for the first nine months of 1995, from
continuing operations, and 1995 nine month consolidated net earnings of $21.1
million, or $1.24 per share, including the gain on the sale and operating
results of discontinued operations.
For the first nine months of 1996, the homebuilding segment reported pretax
earnings of $16.3 million, compared with a pretax loss of $8.6 million for the
same period in 1995. The $24.9 million improvement reflects an increase in
gross profit margins as well as pretax gains of $3.8 million from land sales,
the combination of which more than offset the impact of lower closings. The
financial services segment reported pretax earnings of $10.6 million for the
first nine months of 1996, compared with $15.6 million for the same period in
1995. The decline from last year's results is primarily due to lower gains
from the sale of mortgages and mortgage servicing rights, and a decrease in
investment earnings due to lower gains from the sale of mortgage-backed
securities.
In the second quarter of 1995, the Company sold its institutional mortgage-
securities administration business which was consistent with its long-term
strategy to focus on its core homebuilding and retail mortgage-finance
operations and to invest additional capital into its homebuilding operations.
The Company realized a net gain on the sale of $19.5 million in the second
quarter of 1995. Future results for the financial services segment will
continue to be negatively impacted by the elimination of this business.
The Company's limited-purpose subsidiaries are no longer issuing mortgage-
backed securities and mortgage-participation securities. They do continue to
hold collateral for previously issued mortgage-backed bonds in which the
Company maintains a residual interest. Revenues, expenses, and portfolio
balances for the limited-purpose subsidiaries continue to decline as the
mortgage collateral pledged to secure the bonds decreases due to scheduled
principal payments, prepayments and exercises of early redemption rights.
Corporate expenses were $2.7 million for the third quarter of 1996 and $8.8
million for the nine months ended September 30, 1996, down $.3 million and
$1.1 million, respectively, from the same period last year primarily due to
the Company's efforts to reduce operating expenses.
HOMEBUILDING
The Company's homebuilding segment reported pretax earnings of $5.3 million
for the third quarter of 1996, compared with pretax earnings of $.3 million
for the same period last year. For the nine months ended September 30, 1996,
homebuilding reported pretax earnings of $16.3 million compared with a pretax
loss of $8.6 million.
Results of operations of the Company's homebuilding segment are summarized as
follows ($ amounts in thousands, except average closing price):
Three months ended Nine months ended
September 30, September 30,
1996 1995 1996 1995
------ ------ ------ ------
Revenues $376,703 $372,000 $1,062,760 $1,040,518
Gross profit 50,525 47,084 144,422 123,763
Selling, general and
administrative expenses 36,958 38,896 107,832 110,224
Interest expense 8,236 7,891 20,291 22,185
--------- --------- --------- --------
Pretax earnings (loss) $ 5,331 $ 297 $ 16,299 $ (8,646)
========= ========= ========= ========
Operational Unit Data:
(includes joint ventures)
New orders (units) 1,832 2,201 6,295 7,379
Closings (units) 2,162 2,263 6,090 6,479
Outstanding contracts at
September 30,
Units 2,949 3,453
Dollar Value $535,128 $591,607
Average Closing Price
(excludes unconsolidated
joint ventures) $173,000 $165,000 $173,000 $161,000
The gross profit margins for the third quarter of 1996 averaged 13.4 percent.
This increase from the 12.7 percent reported for the third quarter of last
year is primarily due to increased closings from new communities. Gross
profit margins were 13.6 percent for the first nine months of 1996, an
increase of 1.7 percentage points from the 11.9 percent reported for the first
nine months of 1995. The third quarter of 1996 is the fourth consecutive
quarter in which gross profit margins have shown improvement over the prior
year quarter. Increased closings from new communities and gains from land
sales contributed to the year-to-date 1996 margin improvement while the sale
of older inventories in the California and Mid-Atlantic regions and the
Company's focus on reducing unsold homes under construction negatively
impacted gross margins during 1995.
Homebuilding revenues amounted to $377 million for the third quarter and $1.1
billion for the first nine months of 1996, increases of 1.3 percent and 2.1
percent over the respective 1995 periods. The increases were due to higher
average closing prices and revenues from land sales, which were partially
offset by declines in closings reflecting a reduction in new orders in the
first nine months of this year.
Total homebuilding new orders for the third quarter of 1996 decreased by 16.8
percent to 1,832 homes and for the first nine months of 1996 decreased by 14.7
percent to 6,295 homes, compared with the respective 1995 periods. Higher
interest rates, weakening consumer demand and delays in opening new
communities have negatively impacted sales. The decline was predominantly in
the Mid-Atlantic region, where the Company has reduced its investment in favor
of other markets showing stronger growth characteristics.
As a result of lower new order volume, outstanding contracts at September 30,
1996 were 2,949 compared with 3,453 at September 30, 1995 and 2,744 at
December 31, 1995. Outstanding contracts represent the Company's backlog of
sold, but not closed homes, which generally are built and closed, subject to
cancellations, over the next two quarters. The value of outstanding contracts
at September 30, 1996 was $535.1 million, a decrease of 9.5 percent from
September 30, 1995 and an increase of 12.1 percent from December 31, 1995.
Selling, general and administrative expenses as a percent of revenues were 9.8
percent for the third quarter of 1996 compared with 10.5 percent for the same
period of 1995. For the nine months ended September 30, 1996, selling,
general and administrative expenses were 10.1 percent compared with 10.6
percent for the same period of 1995. The declines in the third quarter and
first nine months are reflective of the Company's ongoing efforts to control
costs.
Interest expense for the third quarter of 1996 increased $.3 million from 1995
primarily due to an increase in the average homebuilding debt outstanding
related to the financing of inventories as well as an increase in the average
cost of funds. For the first nine months of 1996, interest expense decreased
$1.9 million compared with the same period of 1995. The year-to-date decrease
was primarily due to a lower average cost of funds.
FINANCIAL SERVICES
The financial services segment, excluding the results of the discontinued
institutional mortgage securities administration business, reported pretax
earnings of $4.9 million for the third quarter and $10.6 million for the first
nine months of 1996, compared with $3.8 million for the third quarter and
$15.6 million for the first nine months of 1995.
Pretax earnings by line of business were as follows (amounts in thousands):
Three months Nine months
ended September 30, ended September 30,
1996 1995 1996 1995
------- ------- -------- -------
Retail $ 3,519 $ 2,090 $ 5,811 $ 7,935
Investments 1,342 1,742 4,758 7,683
------- -------- ------- --------
Total $ 4,861 $ 3,832 $10,569 $15,618
======== ======== ======== ========
The increase in retail pretax earnings for the third quarter of 1996 was
primarily due to a reduction in general and administrative expenses. The
decline in retail pretax earnings for the first nine months of 1996 was
attributable to lower gains on the sales of mortgages and mortgage servicing
rights and lower loan servicing income.
Pretax investment earnings for the three months and nine months ended
September 30, 1996 were down primarily due to lower gains on sales of
mortgage-backed securities.
Revenues and expenses for the financial services segment were as follows:
Three months Nine months
ended September 30, ended September 30,
1996 1995 1996 1995
------ ------ ------ -----
Revenues:
Interest and
net origination fees $ 3,193 $ 5,731 $ 10,945 $ 12,434
Net gains on sales of mortgages
and servicing rights 3,111 2,970 10,340 12,274
Loan servicing 7,473 7,627 22,364 24,686
Title/escrow 1,485 1,334 4,245 3,661
--------- --------- ------- --------
Total retail revenues 15,262 17,662 47,894 53,055
Revenues from investment
operations 3,735 3,868 11,207 14,834
--------- --------- --------- -------
Total revenues 18,997 21,530 59,101 67,889
Expenses:
Interest 4,305 6,590 14,938 17,757
General and administrative 9,831 11,108 33,594 34,514
--------- --------- --------- -------
Total expenses 14,136 17,698 48,532 52,271
--------- --------- --------- -------
Pretax earnings $ 4,861 $ 3,832 $ 10,569 $ 15,618
========= ========= ======== =======
Revenues for the financial services segment decreased 12 percent for the three
months ended September 30, 1996 compared with the same period of 1995, due to
a decrease in retail revenues attributable to lower origination volume.
Revenues decreased 13 percent for the nine months ended September 30, 1996,
compared with the same period in 1995, primarily due to a lower level of loan
servicing revenues and lower gains from sales of mortgages and mortgage
servicing rights. The higher revenues reported in 1995 included a second
quarter 1995 $2.5 million gain from a bulk sale of mortgage servicing rights.
Also contributing to the decline was lower interest income from loan
originations. Investment revenues were down 24 percent in the first nine
months of 1996 compared with 1995, reflecting lower gains from sales of
mortgage-backed securities.
Interest expense declined 35 percent and 16 percent for the three and nine
month periods ended September 30, 1996, respectively, compared with the same
periods of 1995, as a result of lower borrowings combined with reduced
borrowing costs.
General and administrative expenses were down 11 percent and 3 percent for the
three and nine month periods ended September 30, 1996, respectively, compared
with the same periods of 1995, primarily due to the disposition of the
Company's wholesale mortgage origination business.
Retail Operations:
- ------------------
Retail operations include mortgage origination, loan servicing and
title/escrow services for retail customers.
A summary of origination activities is as follows:
Three months Nine months
ended September 30, ended September 30,
1996 1995 1996 1995
------ ------ ------ ------
Dollar volume of mortgages
originated (in millions) $ 302 $ 575 $1,179 $ 1,372
Number of mortgages originated:
Retail 2,307 2,630 7,248 6,801
Wholesale 0 1,835 1,776 4,024
------- ------ ------ ------
Total mortgages originated 2,307 4,465 9,024 10,825
Percentage of total closings:
Ryland Homes closings 58% 32% 43% 34%
Other closings 42% 68% 57% 66%
------- ------ ------ ------
100% 100% 100% 100%
Mortgage originations decreased by 48 percent and 17 percent for the three and
nine month periods ended September 30, 1996, respectively, compared with the
same periods last year. These decreases are primarily attributable to the
sale of the wholesale mortgage origination business which was completed in May
1996. Retail originations for the third quarter of 1996 decreased 12 percent
compared with the third quarter of 1995 reflecting a general decline in
origination volume experienced by the mortgage banking industry.
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,
1996 1995 1996 1995
------ ------ ------ ------
Net interest earned
(in thousands) $1,511 $1,671 $5,054 $4,107
Average balance of
mortgages held for sale
(in millions) $143 $272 $186 $203
Net interest spread 4.2% 2.4% 3.6% 2.7%
Net interest earned decreased for the third quarter of 1996 compared with 1995
primarily due to a lower average balance of mortgages held for sale. For the
first nine months of 1996, net interest earned increased primarily due to a
higher net interest spread resulting from lower average borrowing costs.
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):
1996 1995
------ ------
Originated $2.3 $2.5
Acquired 3.1 3.5
Subserviced 1.0 .1
------ ------
Total portfolio $6.4 $6.1
====== ======
The increase in the portfolio balance is attributable to additions to the
portfolio of loans which are subserviced for others. The decrease in the
originated and acquired portfolio balances is primarily attributable to normal
mortgage prepayment activity.
Investment Operations:
- ----------------------
The assets of the Company's investment operations primarily consist of
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. Revenues and expenses were as follows
(in thousands):
Three months Nine months
ended September 30, ended September 30,
1996 1995 1996 1995
------ ------ ------ ------
Sale of mortgage-backed securities $ 657 $ 908 $ 657 $ 4,839
Interest and other income 3,078 2,960 10,550 9,995
-------- ------- -------- -------
Total revenues 3,735 3,868 11,207 14,834
Interest and other expenses 2,393 2,126 6,449 7,151
------- ------ ------- ------
Pretax earnings $ 1,342 $ 1,742 $ 4,758 $ 7,683
======== ======= ======== =======
Interest and other income includes $1.3 million for the nine months ended
September 30, 1996 related to the redemption of certain securities.
Significant data concerning the Company's investment operations are as
follows:
Three months Nine months
ended September 30, ended September 30,
1996 1995 1996 1995
------- ------ ------ ------
Net interest earned
(in thousands) $ 1,208 $ 1,021 $ 3,426 $ 3,574
Average balance outstanding
(in millions) $ 131 $ 112 $ 119 $ 128
Net interest spread 3.7% 3.7% 3.9% 3.7%
The Company earns a net interest spread on the investment portfolio reflecting
the difference between the interest rates on the mortgage-backed securities
and the related borrowing rates. An increase in the average balance
outstanding for the three months ended September 30, 1996 is the primary
reason for the improved net interest earned for the third quarter of 1996.
FINANCIAL CONDITION AND LIQUIDITY
The Company generally provides for the cash requirements of the homebuilding
and financial services businesses from outside borrowings and internally
generated funds. The Company believes that its current sources of cash are
sufficient to finance its current requirements.
The homebuilding segment borrowings include an unsecured revolving credit
facility, senior notes, senior subordinated notes and nonrecourse secured
notes payable. The Company uses its unsecured revolving credit facility to
finance increases in its homebuilding inventory and changes in working
capital. As of September 30, 1996, the outstanding borrowings under this $400
million facility totaled $117 million, compared with $137 million as of
December 31, 1995. In addition, the Company had letters of credit outstanding
under this facility totaling $20.1 million at September 30, 1996 and $22.2
million at December 31, 1995. To finance land purchases, the Company may also
use seller-financed, non-recourse secured notes payable. At September 30,
1996, such notes payable outstanding amounted to $2.8 million, compared with
$4.5 million at December 31, 1995. Senior notes amounting to $15 million
matured and were paid off in both January and July of 1996. In addition, $5
million in principal of senior notes was prepaid in July 1996.
On July 8, 1996, the Company successfully completed the issuance of $100
million of 10.5% senior notes due 2006. The Company used the net proceeds of
the offering primarily to repay amounts outstanding under the revolving credit
facility.
Housing inventories increased to $612.5 million as of September 30, 1996, from
$537.9 million as of the end of 1995. This primarily represents normal
seasonal increases in sold homes under construction as well as an increased
investment in new markets.
The financial services segment uses cash generated from operations and
borrowing arrangements to finance its operations. In June 1996, the Company
extended the maturity of its bank facility to May 1998. The bank facility
provides up to $325 million for mortgage warehouse funding and $40 million for
working capital advances. Other borrowing arrangements as of September 30,
1996 included repurchase agreement facilities aggregating $625 million, a $100
million revolving credit facility used to finance investment portfolio
securities and a $35 million credit facility to be used for the short-term
financing of optional bond redemptions. At September 30, 1996 and December 31,
1995, the combined borrowings of the financial services segment outstanding
under all agreements were $275.0 million and $367.5 million, respectively.
Mortgage loans, notes receivable, and mortgage-backed securities held by the
limited-purpose subsidiaries are pledged as collateral for the issued bonds,
the terms of which provide for the retirement of all bonds from the proceeds
of the collateral. The source of cash for the bond payments is cash received
from the mortgage loans, notes receivable and mortgage-backed securities.
The Ryland Group, Inc. has not guaranteed the debt of the financial services
segment or limited-purpose subsidiaries.
Note: Certain statements in Management's Discussion and Analysis of Results
of Operation and Financial Condition may be "forward-looking statements"
within the meaning of the Private Securities Litigation Act of 1995. Such
statements involve known and unknown risks, uncertainties and other factors
that may cause actual results to differ materially. Such risks, uncertainties
and other factors include changes in general economic conditions that effect
the Company's businesses and operations, fluctuations in interest rates,
increases in the cost of land, raw materials and labor, and general and local
competitive factors.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In 1995, one current and two former officers of Ryland Mortgage Company
("RMC") were notified that they were 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 $3.4
million under three mortgage servicing contracts with the RTC. In July 1996,
the RTC (acting through its successor, the FDIC) requested reimbursement from
RMC of the $3.4 million, interest thereon and additional amounts relating to
these and other mortgage-servicing contracts. The Company is continuing to
investigate these matters and at this time cannot predict how they will be
resolved, or whether the Company or RMC will be targets of the investigation,
parties to any civil litigation or incur any liability.
The Company is party to various other legal proceedings generally incidental
to its businesses. Based on evaluation of these other matters and discussions
with counsel, management believes that liabilities to the Company arising from
these other matters will not have a material adverse effect on the financial
condition of the Company.
PART II. OTHER INFORMATION (con't)
Page Number
------------
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
11 Statement Re computation of earnings
per share (filed herewith) 21
27 Financial Data Schedule 22
B. Reports on Form 8-K
Form 8-K was filed with the Securities and Exchange Commission on July 2, 1996
regarding the Underwriting Agreement Basic Provisions relating to the debt
securities which were issued on July 8, 1996.
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 14, 1996 By: /s/ Michael D. Mangan
- ------------------ --------------------------
Date Michael D. Mangan,
Executive Vice President
and Chief Financial Officer
(Principal Financial Officer)
November 14, 1996 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
- ----------- ----------------
11 Statement Re computation of earnings
per share (filed herewith) 21
27 Financial Data Schedule 22
1
2