-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GUUUWjrdbQHOzCV+xtot1Vr+tpglmhlOeM6MP2W3tfDRoCZuXb5CFlZe8ZEjv29P 5XK1XVASD6qvsic0FkYDdw== 0000085974-98-000014.txt : 19981118 0000085974-98-000014.hdr.sgml : 19981118 ACCESSION NUMBER: 0000085974-98-000014 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RYLAND GROUP INC CENTRAL INDEX KEY: 0000085974 STANDARD INDUSTRIAL CLASSIFICATION: OPERATIVE BUILDERS [1531] IRS NUMBER: 520849948 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-08029 FILM NUMBER: 98750261 BUSINESS ADDRESS: STREET 1: 11000 BROKEN LAND PARKWAY CITY: COLUMBIA STATE: MD ZIP: 21044 BUSINESS PHONE: 4107157000 FORMER COMPANY: FORMER CONFORMED NAME: RYAN JAMES P CO DATE OF NAME CHANGE: 19720414 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q --------- [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 1998 ------------------ 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 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 November 10,1998 was 14,700,219. THE RYLAND GROUP, INC. FORM 10-Q INDEX Page Number PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets at September 30, 1998 (unaudited) and December 31, 1997 1-2 Consolidated Statements of Earnings for the three and nine months ended September 30, 1998 and 1997 (unaudited) 3 Consolidated Statements of Cash Flows for the nine months ended September 30, 1998 and 1997 (unaudited) 4 Notes to Consolidated Financial Statements (unaudited) 5-9 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 10-16 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, except share data) September 30, December 31, 1998 1997 ------------- ------------- (unaudited) ASSETS: Hombuilding: Cash and cash equivalents $ 39,567 $ 33,065 Housing inventories: Homes under construction 396,513 332,452 Land under development and improved lots 231,430 222,379 ---------- ---------- Total inventories 627,943 554,831 Property, plant and equipment 26,638 26,463 Purchase price in excess of net assets acquired 18,737 19,511 Other assets 39,800 37,359 ---------- ---------- 752,685 671,229 ---------- ---------- Financial Services: Cash and cash equivalents 8,629 3,066 Mortgage loans held for sale 125,724 199,857 Mortgage-backed securities and notes receivable 126,021 153,022 Mortgage servicing rights 3,819 8,242 Other assets 16,483 46,715 --------- ---------- 280,676 410,902 --------- ---------- Other Assets: Collateral for bonds payable of limited-purpose subsidiaries 97,314 142,303 Net deferred taxes 26,895 35,764 Other 21,931 23,211 ---------- ---------- Total assets $ 1,179,501 $ 1,283,409 ----------- ---------- ----------- ---------- The Ryland Group, Inc. and subsidiaries CONSOLIDATED BALANCE SHEETS (amounts in thousands, except share data) September 30, December 31, 1998 1997 ------------- ------------- (unaudited) LIABILITIES Hombuilding: Accounts payable and other liabilities $ 145,451 $ 117,326 Long-term debt 321,692 310,221 ---------- --------- 467,143 427,547 ---------- --------- Financial Services: Accounts payable and other liabilities 28,850 17,382 Short-term notes payable 212,379 340,632 ---------- --------- 241,229 358,014 ---------- --------- Other Liabilities: Bonds payable of limited-purpose subsidiaries 92,652 136,865 Other 50,716 55,860 ---------- --------- Total liabilities 851,740 978,286 ---------- --------- STOCKHOLDERS'EQUITY Convertible preferred stock, $1 par value: Authorized - 1,400,000 shares Issued - 440,750 shares (502,833 for 1997) 441 503 Common stock, $1 par value: Authorized - 78,600,000 shares Issued - 14,685,726 shares (14,521,859 for 1997) 14,686 14,522 Paid-in capital 91,346 88,502 Retained earnings 219,278 199,114 Accumulated other comprehensive income 2,010 2,482 ---------- --------- Total stockholders' equity 327,761 305,123 ---------- --------- Total liabilities and stockholders' equity $ 1,179,501 $ 1,283,409 ---------- --------- ---------- --------- Stockholders' equity per common shares $ 21.67 $ 20.31 ---------- --------- ---------- --------- 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 Nine months ended September 30, ended September 30, 1998 1997 1998 1997 ------ ------ ------ ------ Revenues: Hombuilding: Residential revenue $ 440,724 $ 396,907 $ 1,144,612 $ 1,055,300 Other revenue 6,856 1,190 24,075 26,478 --------- --------- --------- ---------- Total homebuilding revenue 447,580 398,097 1,168,687 1,081,778 Financial services 12,259 19,974 47,423 56,835 Limited-purpose subsidiaries 2,407 3,533 8,292 12,131 --------- --------- --------- --------- Total revenues 462,246 421,604 1,224,402 1,150,744 --------- --------- --------- --------- Expenses: Homebuilding: Cost of sales 375,213 344,851 992,021 936,178 Selling, general and administrative 42,697 36,913 116,366 108,343 Interest 4,537 5,809 14,526 18,208 --------- --------- --------- --------- Total homebuilding expenses 422,447 387,573 1,122,913 1,062,729 Financial services: General and administrative 7,041 10,645 24,825 32,271 Interest 3,661 4,816 12,460 12,961 --------- --------- --------- --------- Total financial services expenses 10,702 15,461 37,285 45,232 Limited-purpose subsidiaries expenses 2,407 3,533 8,292 12,131 Corporate expenses 4,395 3,802 11,089 10,073 --------- --------- --------- --------- Total expenses 439,951 410,369 1,179,579 1,130,165 Earnings before taxes and extraordinary item 22,295 11,235 44,823 20,579 Tax expense 9,772 4,494 18,783 8,232 --------- ------- ------- -------- Net earnings before extraordinary item $ 12,523 $ 6,741 $ 26,040 $ 12,347 --------- ------- ------- -------- Extraordinary item - loss on early extinguishment of debt (net of taxes of $2,217) (3,326) - (3,326) - --------- ------- ------- -------- Net earnings $ 9,197 $ 6,741 $ 22,714 $ 12,347 ========= ======= ======= ======== Net earnings per common share: Basic Earnings per share before extraordinary item $ 0.84 $ 0.42 $ 1.72 $ 0.71 Extraordinary item (0.23) - (0.23) - -------- ------ ------ ------ Earnings per share $ 0.61 $ 0.42 $ 1.49 $ 0.71 Diluted Earnings per share before extraordinary item $ 0.81 $ 0.41 $ 1.67 $ 0.70 Extraordinary item (0.22) - (0.21) - -------- ------ ------ ------ Earnings per share $ 0.59 $ 0.41 $ 1.46 $ 0.70 Average common shares outstanding: Basic 14,667,471 14,915,848 14,715,601 15,492,737 Diluted * 15,521,430 15,907,046 15,609,471 15,607,865 *For the nine months ended September 30,1997, conversion of preferred shares is not assumed due to an antidilutive effect. See notes to consolidated financial statements. The Ryland Group, Inc. and subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (amounts in thousands) Nine months ended September30, - ----------------------------------------------------------------------------- 1998 1997 - ----------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 22,714 $ 12,347 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 17,770 19,622 Loss on early extinguishment of debt 5,543 - Gain on sale of mortgage-backed securities-available-for-sale - (75) Increase in inventories (73,112) (7,348) Net change in other assets, payables and other liabilities 75,754 (9,338) Equity in losses of/distributions from unconsolidated joint ventures 98 130 Decrease in mortgage loans held for sale 74,133 22,313 ---------------------- Net cash provided by operating activities 122,900 37,651 ======================= CASH FLOWS FROM INVESTING ACTIVITIES: Net additions to property, plant and equipment (16,492) (13,125) Principal reduction of mortgage collateral 29,462 31,451 Principal reduction of mortgage-backed securities - available-for-sale 10,301 8,419 Sales of mortgage-backed securities- available-for-sale 8,703 2,222 Principal reduction of mortgage-backed securities - held-to-maturity 15,098 10,735 Other investing activities, net 9,457 2,600 --------------------- Net cash provided by investing activities 56,529 42,302 ===================== CASH FLOWS FROM FINANCING ACTIVITIES: Cash proceeds of long-term debt 114,262 7,647 Reduction of long-term debt (106,728) (11,982) Increase (decrease) in short-term notes payable (128,253) 1,641 Bond principal payments (45,153) (64,629) Common and preferred stock dividends (2,556) (6,717) Common stock repurchases (6,153) (22,120) Other financing activities, net 7,217 8,090 --------------------- Net cash used for financing activities (167,364) (88,070) ===================== Net increase in cash and cash equivalents 12,065 (8,117) Cash and cash equivalents at beginning of year 36,131 28,708 ===================== CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 48,196 $ 20,591 ===================== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for interest (net of capitalized interest) $ 37,254 $ 43,119 Cash paid for income taxes $ 9,346 $ 1,095 - -------------------------------------------------------------------------- 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. 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 Septmeber 30, 1998, the consolidated statements of earnings for the three and nine months ended Septmeber 30, 1998 and 1997, and the consolidated statements of cash flows for the nine months ended Septmeber 30, 1998 and 1997 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, 1998, and for all periods presented, have been made. The consolidated balance sheet at December 31, 1997 is taken from the audited financial statements as of that date. Certain amounts in the consolidated statements have been reclassified to conform to the 1998 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 1997 annual report to shareholders. The results of operations for the three and nine months ended September 30, 1998 are not necessarily indicative of the operating results for the full year. Assets presented in the financial statements are net of any valuation allowances. The following table is a summary of capitalized interest: 1998 1997 ------ ------ Capitalized interest as of January 1, $23,644 $27,589 Interest capitalized 12,972 13,303 Interest amortized to cost of sales (15,222) (15,509) ------- ------- Capitalized interest as of September 30, $21,394 $25,383 ======= ======= The Ryland Group, Inc. and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued (unaudited) Note 2. New Accounting Pronouncements FASB 128 In 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 128 (FASB 128), "Earnings per Share." FASB 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Earnings per share amounts for the three and nine months ended September 30, 1997 have been restated to conform to the FASB 128 requirements. FASB 130 As of January 1, 1998, the Company adopted Statement of Financial Accounting Standards No.130 (FASB 130), "Reporting Comprehensive Income." FASB 130 defines comprehensive income and establishes new rules for the reporting and display of comprehensive income and its components; however, the adoption of this Statement had no impact on the Company's net income or stockholders' equity. FASB 130 requires unrealized gains or losses on the Company's available-for-sale securities, which are included in stockholders' equity, to be reported as other comprehensive income. The net unrealized gains (losses) on available-for-sale securities (net of taxes) amounted to $(244) and $163 for the three months ended September 30, 1998 and 1997, respectively, and $(472) and $(74) for the nine months ended September 30, 1998 and 1997, respectively. Other comprehensive income is added to net income to arrive at total comprehensive income. Total comprehensive income was $8,953 for the third quarter of 1998 and $6,904 for the third quarter of 1997. Total comprehensive income was $22,242 for the first nine months of 1998 and $12,273 for the first nine months of 1997. FASB 133 In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 (FASB 133), "Accounting for Derivative Instruments and Hedging Activities," which is required to be adopted in years beginning after June 15, 1999. The Statement requires all derivatives to be recorded on the balance sheet at fair value and establishes new accounting procedures for hedges that will effect the timing of recognition and the manner in which hedging gains and losses are recognized in the Company's financial statements. The Company has not completed its evaluation of this new Statement; however, management does not anticipate that the adoption of the Statement will have a material impact on the Company's earnings or financial position. The Company currently expects to adopt this Statement beginning on January 1, 2000. Note 3. Segment Information Three months ended September 30, 1998 1997 ------ ------ Earnings before taxes and extraordinary item: Homebuilding $ 25,133 $ 10,524 Financial services 1,557 4,513 Corporate and other (4,395) (3,802) --------- --------- Total $ 22,295 $ 11,235 ======== ======== The Ryland Group, Inc. and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued (unaudited) Nine months ended September 30, 1998 1997 ------ ------ Earnings before taxes and extraordinary item: Homebuilding $ 45,774 $ 19,049 Financial services 10,138 11,603 Corporate and other (11,089) (10,073) -------- -------- Total $ 44,823 $ 20,579 ======== ======== Note 4. Earnings Per Share Reconciliation The following table sets forth the computation of basic and diluted earnings per share before extraordinary item. The assumed conversion of preferred stock was anti-dilutive for the nine months ended September 30, 1997. Three months ended September 30, 1998 1997 ------ ------ Numerator: Net earnings before extraordinary item $ 12,523 $ 6,741 Preferred stock dividends (243) (437) -------- -------- Numerator for basic earnings per share - income available to common stockholders 12,280 6,304 Effect of dilutive securities: Preferred stock dividends 243 190 Numerator for diluted earnings per share - income available to common stockholders after assumed conversions $ 12,523 $ 6,494 Denominator: Denominator for basic earnings per share - weighted-average shares 14,667,471 14,915,848 Effect of dilutive securities: Stock options 310,813 99,556 Conversion of Preferred Shares 451,868 804,334 Other equity incentives 91,278 87,308 --------- --------- Dilutive potential common shares 853,959 991,198 Denominator for diluted earnings per share - adjusted weighted average shares and assumed conversions 15,521,430 15,907,046 Basic earnings per share before extraordinary item $ 0.84 $ 0.42 Dilutive earnings per share before extraordinary item $ 0.81 $ 0.41 The Ryland Group, Inc. and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued (unaudited) Note 4. Earnings Per Share Reconciliation (continued) Nine months ended September 30, 1998 1997 ------ ------ Numerator: Net earnings before extraordinary item $ 26,040 $ 12,347 Preferred stock dividends (770) (1,352) -------- -------- Numerator for basic earnings per share - income available to common stockholders $ 25,270 $ 10,995 Effect of dilutive securities: Preferred stock dividends 770 0 Numerator for diluted earnings per share - income available to common stockholders after assumed conversions $ 26,040 $ 10,995 Denominator: Denominator for basic earnings per share - weighted-average shares 14,715,601 15,492,737 Effect of dilutive securities: Stock options 320,880 16,452 Conversion of Preferred Shares 474,916 0 Other equity incentives 98,074 98,676 ---------- ---------- Dilutive potential common shares 893,870 115,128 Denominator for diluted earnings per share - adjusted weighted average shares and assumed conversions 15,609,471 15,607,865 Basic earnings per share before extraordinary item $ 1.72 $ 0.71 Dilutive earnings per share before extraordinary item $ 1.67 $ 0.70 Note 5. Long-term Debt On April 13, 1998, the Company completed the issuance of $100 million of 8.25 percent senior subordinated notes which mature on April 1, 2008. On July 15, 1998, the Company retired the $100 million, 10.5 percent, senior subordinated notes due 2002, at the stated call price of 103.9375 percent of par. As a result, the Company has reported an extraordinary after-tax charge of $3.3 million in the third quarter of 1998 relating to the loss on the early extinguishment of debt. Note 6. Commitments and Contingencies Refer to Part II, Other Information, Item 1, Legal Proceedings of this document for updated information regarding the Company's Commitments and Contingencies. The Ryland Group, Inc. and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued (unaudited) Note 7. Income Taxes In the third quarter of 1998, the Company changed its estimated income tax rate for the year ending December 31, 1998 to 42 percent and adjusted its income tax provision for the third quarter to achieve a 42 percent effective income tax rate for the nine months ended September 30, 1998. The change in the tax rate was due to an increase in estimated non-deductible expenses primarily due to the fine paid in connection with the RTC matter discussed in Part II, Other Information, Item 1, Legal Proceedings. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS CONSOLIDATED For the third quarter of 1998, the Company reported consolidated net earnings before extraordinary item of $12.5 million, or $.84 per share ($.81 per share diluted). This compares with 1997 third quarter net earnings of $6.7 million, or $.42 per share ($.41 per share diluted). The Company's homebuilding segment reported pretax earnings of $25.1 million for the third quarter of 1998, compared with pretax earnings of $10.5 million for the same period last year. The 139 percent increase was driven by higher gross profit margins, combined with increased closings and lower interest costs. The Company's financial services segment reported pretax earnings of $1.6 million for the third quarter of 1998, compared with $4.5 million for the same period in 1997. The decline was due to lower earnings from retail operations, primarily the result of lower loan-servicing income attributable to the sale of a majority of the Company's loan-servicing portfolio in the first quarter of 1998, and lower gains on the sales of mortgages and servicing rights. Corporate expenses were $4.4 million for the third quarter of 1998, up $.6 million from the same period last year primarily due to higher incentive compensation expense in conjunction with the higher level of earnings. For the first nine months of 1998, the Company reported consolidated net earnings before extraordinary item of $26.0 million, or $1.72 per share ($1.67 per share diluted), compared with 1997 first nine months net earnings of $12.3 million, or $.71 per share ($.70 per share diluted). For the first nine months of 1998, the homebuilding segment reported pretax earnings of $45.8 million, compared with pretax earnings of $19.0 million for the same period in 1997. A significant increase in housing gross profit margins was the principal reason for the earnings improvement. The financial services segment reported pretax earnings of $10.1 million for the first nine months of 1998, compared with $11.6 million for the same period in 1997. The results for 1998 included a $6.1 million pretax gain from the first quarter sale of a majority of the Company's loan-servicing portfolio. Corporate expenses were $11.1 million for the first nine months of 1998, up $1 million from the same period last year primarily due to higher incentive compensation expense. The Company's limited-purpose subsidiaries no longer issue mortgage-backed securities and mortgage-participation securities, but they continue to hold collateral for previously issued mortgage-backed bonds in which the Company maintains a residual interest. Revenues, expenses, and portfolio balances continue to decline as the mortgage collateral pledged to secure the bonds decreases due to scheduled payments, prepayments and exercises of early redemption provisions. EXTRAORDINARY ITEM In the third quarter of 1998, the Company recognized an extraordinary loss of $3.3 million (net of taxes of $2.2 million), or $.23 per share. The loss was recorded in connection with the redemption on July 15, 1998 of $100 million of 10.5 percent senior subordinated notes due 2002. The redemption of the notes was at the stated call price of 103.9 percent of par and was funded by the April 1998 issuance of lower cost debt. Third-quarter net earnings after the extraordinary item were $9.2 million, or $.61 per share, versus $6.7 million, or $.42 per share, for the third quarter of 1997. For the first nine months of 1998, net earnings after the extraordinary item were $22.7 million, or $1.49 per share, versus $12.3 million, or $.71 per share, for the first nine months of 1997. HOMEBUILDING SEGMENT Results of operations of the Company's homebuilding segment are summarized as follows ($ amounts in thousands, except average closing price): Three months ended Nine months ended September 30, September 30, 1998 1997 1998 1997 ------ ------ ------ ------ Revenues: Residential $440,724 $396,907 $1,144,612 $1,055,300 Other 6,856 1,190 24,075 26,478 -------- -------- --------- --------- Total 447,580 398,097 1,168,687 1,081,778 Gross profit 72,367 53,246 176,666 145,600 Selling, general and administrative expenses 42,697 36,913 116,366 108,343 Interest expense 4,537 5,809 14,526 18,208 -------- -------- -------- -------- Pretax earnings $ 25,133 $ 10,524 $ 45,774 $ 19,049 = ====== ======== ======= ======= Operational Unit Data: New orders (units) 2,183 2,151 7,284 6,935 Closings (units) 2,361 2,173 6,265 5,820 Outstanding contracts at September 30: Units 3,831 3,310 Dollar Value $738,252 $605,148 Average Closing Price $187,000 $183,000 $183,000 $181,000 The Company's homebuilding segment reported pretax earnings of $25.1 million for the third quarter of 1998, compared with pretax earnings of $10.5 million for the same period last year. For the nine months ended September 30, 1998, homebuilding reported pretax earnings of $45.8 million compared with pretax earnings of $19.0 million for the first nine months of 1997. Homebuilding revenues amounted to $448 million for the third quarter of 1998, and $1.17 billion for the first nine months of 1998, up 12 percent and 8 percent, respectively, from the same periods last year. The growth in revenues primarily resulted from increased closings of 9 percent and 8 percent, respectively, from the same periods last year as well as an increase in the average closing price for the respective periods. The average closing price has increased primarily due to the mix of closings from more expensive housing markets, such as the San Francisco Bay Area and San Diego. Price increases in most markets were primarily to cover direct construction cost increases. The impact of price increases on average closing prices was somewhat offset by the Company's movement in certain markets to lower-priced product offerings. Gross profit margins from home sales averaged 16.3 percent for the third quarter of 1998, a 290 basis point increase from the 13.4 percent for the third quarter of 1997. This was the fourth consecutive quarter in which the Company reported a significant increase over the prior year's gross profit margins. Gross profit margins for the first nine months of 1998 averaged 15.3 percent versus 13.3 percent for the same period last year. A change in mix representing increased closings from newer communities, which have better land positions and more cost-effective product, continues to be the driving force behind the Company's improved performance. Market conditions have been favorable and have contributed to the margin improvement. Total homebuilding new orders increased 1.5 percent from the third quarter of last year to 2,183 homes, and increased 5.0 percent from last year's first nine months to 7,284 homes. Sales per community were up 12.5 percent for the third quarter reflecting fewer active communities. Total new orders for the third quarter were up in all regions except the West, where strong sales earlier in the year reduced the number of communities currently open for sales. The West region will be opening additional communities in the fourth quarter. For the first nine months of 1998, new orders increased in all regions, with the exception of the Mid-Atlantic. The largest increase in new orders for the first nine months was in the Southeast which had strong growth in its newest markets. Outstanding contracts at September 30, 1998 were 3,831 compared with 3,310 at September 30, 1997 and 2,812 at December 31, 1997. 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, 1998 was $738 million, an increase of 22 percent from September 30, 1997 and an increase of 45 percent from December 31, 1997. Selling, general and administrative expenses as a percent of revenues were 9.5 percent for the third quarter of 1998 compared with 9.3 percent for the same period of 1997. The increase was primarily related to higher incentive compensation expenses related to improved earnings. For the nine months ended September 30, 1998, selling, general and administrative expenses remained unchanged at 10.0 percent of revenues compared with the same period of 1997, despite higher incentive compensation costs. Interest expense for the third quarter and first nine months of 1998 decreased $1.3 million and $3.7 million, respectively, compared with the same periods of 1997. The decreases resulted from lower average borrowings as well as lower effective rates paid on borrowings. The lower borrowings reflect the Company's ability to meet more of its homebuilding operating cash flow requirements with internally generated funds resulting from improved financial performance and improved cash management. On October 30, 1998, the Company completed the acquisition of The Regency Organization ("Regency"), a privately held homebuilder with operations in Pasco, Hernando and Citrus Counties, Florida, immediately north of the Company's existing Tampa Bay operations. Regency's operational focus has been primarily on age-restricted and active-adult retirement communities. The acquisition affords the Company the opportunity to gain market share in a rapidly growing area of Florida and an immediate presence in the Florida retirement market. The Company purchased the stock of Regency for $6.2 million, entered into a noncompete agreement and retired Regency's indebtedness for a total cash investment of approximately $18 million. Results of Regency's operations will be reflected beginning in the fourth quarter of 1998. The Company anticipates that this acquisition could add approximately 350-400 closings to its results for 1999 at sales prices ranging from $90-$150 thousand. FINANCIAL SERVICES Results of operations of the Company's financial services segment are summarized as follows: Three months Nine months ended September 30, ended September 30, 1998 1997 1998 1997 ------ ------ ------ ------ Retail Revenues: Interest and net origination fees $ 1,554 $ 2,040 $ 5,776 $ 5,303 Net gains on sales of mortgages and servicing rights 4,438 6,357 17,343 15,545 Loan servicing 702 5,897 7,249 18,888 Title/escrow 2,100 1,641 6,242 4,453 -------- -------- -------- ------- Total retail revenues 8,794 15,935 36,610 44,189 Revenues from investment operations: Sale of mortgage-backed securities 46 0 46 75 Interest and other income 3,419 4,039 10,767 12,571 -------- -------- -------- ------- Total investment revenues 3,465 4,039 10,813 12,646 -------- -------- -------- ------- Total revenues 12,259 19,974 47,423 56,835 Expenses: General and administrative 7,041 10,645 24,825 32,271 Interest 3,661 4,816 12,460 12,961 -------- -------- ------- ------ Total expenses 10,702 15,461 37,285 45,232 -------- -------- ------- ------ Pretax earnings $ 1,557 $ 4,513 $ 10,138 $11,603 ======== ======== ======== ======= Pretax earnings by line of business were as follows (amounts in thousands): Three months Nine months ended September 30, ended September 30, 1998 1997 1998 1997 ------ ------ ------ ------ Retail $ 534 $3,396 $ 7,092 $7,127 Investments 1,023 1,117 3,046 4,476 ------ ------ ------ ------ Total $1,557 $4,513 $10,138 $11,603 ====== ====== ====== ====== OPERATIONAL DATA: Three months Nine months ended September 30, ended September 30, 1998 1997 1998 1997 ------ ------ ------ ------ Retail Operations: Originations 2,110 1,939 6,032 5,023 Percent of Total Originations from Ryland Homes 75% 65% 67% 64% Investment Operations: Portfolio Average Balance (in millions) $135 $163 $143 $154 The financial services segment reported pretax earnings of $1.6 million for the third quarter of 1998, compared with $4.5 million for the third quarter of 1997, and $10.1 million for the first nine months of 1998, compared with $11.6 million for the first nine months of 1997. Revenues and general and administrative expenses for the financial services segment decreased significantly for the three and nine month periods ended September 30, 1998, compared with the same periods of 1997. The decreases were primarily due to the decline in loan servicing operations related to the sale of a majority of the loan servicing portfolio in the first quarter of 1998. Interest expense decreased 24 percent for the three months ended September 30, 1998, compared with 1997, primarily due to a decrease in the warehouse holding period for mortgage loans before they are sold in the secondary market. Retail operations reported pretax earnings of $.5 million for the third quarter of 1998 compared with $3.4 million for the same period last year. For the first nine months of 1998, retail operations reported pretax earnings of $7.1 million, comparable with the first nine months of 1997. The Company sold the majority of its loan servicing portfolio in the first quarter of 1998 and realized a $6.1 million pretax gain, net of expenses and liabilities related to the sale of servicing. The decline in earnings for the third quarter was primarily due to lower loan servicing income, attributable to the reduction in the portfolio, partially offset by cost reductions. Future earnings from retail operations will be negatively impacted by the sale. Mortgage origination volume increased 9 percent and 20 percent for the three and nine month periods ended September 30, 1998, respectively, compared with the same periods last year. These increases were attributable to higher closing volume from homebuilder loan originations and higher refinancing activity. Investment operations reported pretax earnings of $1.0 million for the third quarter of 1998, compared with $1.1 million for the third quarter of 1997. The slight decrease was primarily due to a lower average portfolio balance which resulted in a decline in interest and other income. For the first nine months of 1998, investment earnings were $3.0 million versus $4.5 million for the same period of last year. The decline was primarily attributable to the fact that 1997 revenues and pretax results included $.8 million of other income related to the redemption of certain securities, as well as reduced interest income due to a lower average portfolio balance. YEAR 2000 The Company's Year 2000 remediation efforts have focused on its key business computer applications (i.e., those systems that the Company is dependent upon for the conduct of day-to-day business operations). Starting in 1997, the Company initiated a comprehensive review of its business applications to determine their Year 2000 readiness and the adequacy of these systems to meet future business requirements. Out of this effort, a number of systems were identified that were not Year 2000 compliant. In most cases these systems were already in the process of being replaced or upgraded. As of September 1998, the Company believes that its key homebuilding business systems are Year 2000 capable. No material costs have been incurred to date in achieving Year 2000 readiness for these systems. However, certain systems in the Company's financial services operations and certain data and voice communication systems are in the process of being replaced or upgraded with implementation and testing scheduled for the remainder of calendar year 1998 and early 1999. The additional costs of achieving Year 2000 compliance could aggregate between $1 to $2 million. The Company is currently assessing other potential Year 2000 issues, including non-information technology systems, and the Company's relationships with vendors, financial institutions and other third parties which are being reviewed to determine the status of their Year 2000 compliance and the potential impact on the Company if they are noncompliant. Although the Company will continue to monitor the situation, it is possible that the Company or the third parties with whom it has significant relationships will not successfully complete all of their Year 2000 remediation efforts. If this were to occur, the Company could encounter disruptions to its business, but, currently believes it unlikely that such disruptions will have a material adverse effect on its results of operations. The Company could also be impacted by financial market disruption or by Year 2000 computer system failures at government agencies on which the Company is dependent for zoning, building permits and related matters. The Company has not established a formal Year 2000 contingency plan, but expects to develop one as part of its Year 2000 activities. 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 senior notes, senior subordinated notes, an unsecured revolving credit facility, and nonrecourse secured notes payable. Senior and senior subordinated notes outstanding totaled $308.0 million as of September 30, 1998 and as of December 31, 1997. On April 13, 1998, the Company successfully completed the issuance of $100 million of 8.25 percent senior subordinated notes due April 1, 2008. The net proceeds from this issuance were initially used to repay outstanding amounts under the revolving credit facility and to repay short term notes payable. On July 15, 1998, the Company borrowed funds under its revolving credit facility to retire its $100 million, 10.5 percent, senior subordinated notes due 2002 at the stated call price of 103.9 percent of par. The Company uses its unsecured revolving credit facility to finance increases in its homebuilding inventory and changes in working capital. This facility, which matures in July 2000, provides for total borrowings of up to $300 million. There were $13.5 million in outstanding borrowings under this facility as of September 30, 1998 and no outstanding borrowings under this facility at December 31, 1997. In addition, the Company had letters of credit outstanding under this facility totaling $33.3 million at September 30, 1998 and $22.3 million at December 31, 1997. To finance land purchases, the Company may also use seller-financed, non-recourse secured notes payable. At September 30, 1998, such notes payable outstanding amounted to $.2 million, compared with $2.2 million at December 31, 1997. Housing inventories increased to $627.9 million as of September 30, 1998, from $554.8 million as of the end of 1997. This represents the normal seasonal increase in sold homes under construction. The financial services segment uses cash generated from operations and borrowing arrangements to finance its operations. A bank credit facility, which matures on September 1, 2000, provides up to $260 million for mortgage warehouse funding and $30 million for working capital advances. Other borrowing arrangements as of September 30, 1998 included repurchase agreement facilities aggregating $370 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, 1998 and December 31, 1997, the combined borrowings of the financial services segment outstanding under all agreements were $212.4 million and $340.6 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. During the third quarter of 1998, the Board of Directors approved the repurchase of up to one million of the Company's outstanding common shares, from time to time, in the open market or in privately negotiated transactions, subject to market conditions. During the second quarter of 1998, the Company completed a 2.0 million share repurchase program initiated in April 1997. 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. Forward- looking statements are based on various factors and assumptions that include risks and uncertainties, such as the costs of Year 2000 compliance, the completion and profitability of sales reported, the market for homes generally and in areas where the Company operates, the availability and cost of land, changes in economic conditions and interest rates, increases in raw material and labor costs, consumer confidence, government regulation, and general competitive factors, all or each of which may cause actual results to differ materially. PART II. OTHER INFORMATION Item 1. Pursuant to a Plea Agreement previously entered into by Ryland Mortgage Company ("RMC") with the United States Attorney's Office for the Middle District of Florida to resolve all charges in connection with an indictment previously brought against RMC (The "Indictment"), RMC paid $3.5 million in restitution plus interest, as well as a fine of $4.2 million and admitted responsibility for two charges of impeding the functions of the RTC. The agreement did not have a material adverse effect on the overall financial position of the Company. As a result of the Indictment, the U.S. Department of Housing and Urban Development ("HUD") previously had indicated that it was considering sanctions against RMC, including possible withdrawal of RMC's right to participate in The Federal House Administration ("FHA") loan program and originate FHA loans. RMC has entered into an agreement with HUD under which it expects to be able to continue to originate loans and participate in the FHA loan program while HUD considers what administrative action, if any, it will take as a result of the resolution of the Indictment. RMC is continuing its dialogue with representatives of HUD to reach agreement on its ability to continue to participate in the FHA loan program. The Company also is exploring alternative arrangements in the event that RMC is not successful in these efforts. Termination of RMC's right to participate in the FHA program could be followed by similar exclusions from the loan programs of other RMC investors. No assurance can be given regarding the results of these ongoing discussions with HUD and its possible impact on RMC and its business. 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 overall financial position of the Company. Page Number Item 6. Exhibits and Reports on Form 8-K A. Exhibits 11 Earnings Per Share (filed herewith) 20 27 Financial Data Schedule (filed herewith) 21 B. Reports on Form 8-K. No reports on Form 8-K were filed during the third quarter of 1998. 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 16, 1998 By: /s/ Michael D. Mangan Date Michael D. Mangan, Executive Vice President and Chief Financial Officer (Principal Financial Officer) November 16, 1998 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 Earnings Per Share (filed herewith) 20 27 Financial Data Schedule (filed herewith) 21 EX-27 2
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE RYLAND GROUP INC. FORM 10-Q FOR THE PERIOD ENDED 9/30/98 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS 1000 9-MOS DEC-31-1998 SEP-30-1998 48,196 126,021 125,724 0 627,943 0 26,638 0 1,179,501 0 305,031 0 441 14,686 312,634 1,179,501 1,168,687 1,224,402 992,021 1,133,246 11,089 0 35,244 44,823 18,783 26,040 0 (3,326) 0 22,714 1.49 1.46
EX-11 3 Exhibit 11 Statement RE Computation of Per Share Earnings Three months ended Nine months ended September 30, September 30, Basic 1998 1997 1998 1997 - ----- -------- -------- ------- ------ Net earnings from continuing operation $ 12,523 $ 6,741 $ 26,040 $ 12,347 Adjustment for dividends on convertible preferred shares (243) (437) (770) (1,352) --------- -------- --------- ------- Net earnings from continuing operations applicable to common stockholders 12,280 6,304 25,270 10,995 Extraordinary item (3,326) - (3,326) - --------- -------- --------- ------- Net income $ 8,954 $ 6,304 $ 21,944 $ 10,995 Weighted average common shares outstanding 14,667,471 14,915,848 14,715,601 15,492,737 Net earnings per share from continuing operations $ 0.84 $ 0.42 $ 1.72 $ 0.71 Extraordinary item (0.23) - (0.23) - ---------- --------- ---------- -------- Net earnings per share $ 0.61 $ 0.42 $ 1.49 $ 0.71 ========== ========= ========== ======== Diluted: Net earnings from continuing operations $ 12,523 $ 6,741 $ 26,040 $ 12,347 Adjustment for incremental expense from conversion of convertible preferred shares - (247) - - Adjustment for dividends on convertible preferred shares - - - (1,352) ---------- ---------- -------- -------- Net earnings from continuing operations applicable to common stockholders 12,523 6,494 26,040 10,995 Extraordinary item (3,326) - (3,326) - ---------- ---------- ----------- -------- Net income $ 9,197 $ 6,494 $ 22,714 $ 10,995 ========== ========== =========== ======== Weighted average common shares outstanding 14,667,471 14,915,848 14,715,601 15,492,737 Common stock equivalents:(1) Stock options 310,813 99,556 320,880 16,452 Compensation unit plan 91,278 87,308 98,074 98,676 Convertible preferred stock 451,868 804,334 474,916 - ---------- ---------- ---------- ---------- Total 15,521,430 15,907,046 15,609,471 15,607,865 ========== ========== ========== ========== Net earnings per share from continuing operations $ 0.81 $ 0.41 $ 1.67 $ 0.70 Extraordinary item (0.22) - (0.21) - ---------- ---------- ---------- --------- Net earnings per share $ 0.59 $ 0.41 $ 1.46 $ 0.70 ========== ========== ========== ========= (1) For the nine months ended September 30, 1997, conversion of preferred shares is not assumed due to an antidilutive effect. -----END PRIVACY-ENHANCED MESSAGE-----