-----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, Gz5FEaqQSvNFNc0GZnayDIs6VYBQZtqM4TkDHgiybepf4/BqJpd63dtoXLJp0Xm/ 6oU5a22xWevwTFW0S4NVsw== 0000085974-98-000013.txt : 19980817 0000085974-98-000013.hdr.sgml : 19980817 ACCESSION NUMBER: 0000085974-98-000013 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 SROS: NYSE 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: 98689804 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 June 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 August 10, 1998 was 14,670,647. THE RYLAND GROUP, INC. FORM 10-Q INDEX Page Number ------ PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets at June 30, 1998 (unaudited) and December 31, 1997 1-2 Consolidated Statements of Earnings for the three and six months ended June 30, 1998 and 1997 (unaudited) 3 Consolidated Statements of Cash Flows for the six months ended June 30, 1998 and 1997 (unaudited) 4 Notes to Consolidated Financial Statements (unaudited) 5-8 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 9-14 PART II. OTHER INFORMATION Item 1. Legal Proceedings 15 Item 4. Submission of Matters to a Vote of 15-16 Security Holders Item 6. Exhibits and Reports on Form 8-K 16 SIGNATURES 17 INDEX OF EXHIBITS 18 The Ryland Group, Inc. and subsidiaries CONSOLIDATED BALANCE SHEETS (amounts in thousands, except share data) June 30, December 31, 1998 1997 ------------- ------------- (unaudited) ASSETS: Homebuilding: Cash and cash equivalents $ 56,039 $ 33,065 Housing inventories: Homes under construction 381,155 332,452 Land under development and improved lots 242,211 222,379 ---------- ---------- Total inventories 623,366 554,831 Property, plant and equipment 26,373 26,463 Purchase price in excess of net assets acquired 18,995 19,511 Other assets 44,447 37,359 ---------- ---------- 769,220 671,229 ---------- ---------- Financial Services: Cash and cash equivalents 8,591 3,066 Mortgage loans held for sale 134,476 199,857 Mortgage-backed securities and notes receivable 130,230 153,022 Mortgage servicing rights 1,680 8,242 Other assets 25,444 46,715 --------- ---------- 300,421 410,902 --------- ---------- Other Assets: Collateral for bonds payable of limited-purpose subsidiaries 114,263 142,303 Net deferred taxes 33,544 35,764 Other 21,890 23,211 ---------- ---------- Total assets $ 1,239,338 $ 1,283,409 ---------- ---------- ---------- ---------- 1 The Ryland Group, Inc. and subsidiaries CONSOLIDATED BALANCE SHEETS (amounts in thousands, except share data) June 30, December 31, 1998 1997 ------------- ------------- (unaudited) LIABILITIES Homebuilding: Accounts payable and other liabilities $ 141,771 $ 117,326 Long-term debt 408,683 310,221 ---------- --------- 550,454 427,547 ---------- --------- Financial Services: Accounts payable and other liabilities 27,262 17,382 Short-term notes payable 183,543 340,632 ---------- --------- 210,805 358,014 ---------- --------- Other Liabilities: Bonds payable of limited-purpose subsidiaries 109,201 136,865 Other 49,197 55,860 ---------- --------- Total liabilities 919,657 978,286 ---------- --------- STOCKHOLDERS'EQUITY Convertible preferred stock, $1 par value: Authorized - 1,400,000 shares Issued - 462,985 shares (502,833 for 1997) 463 503 Common stock, $1 par value: Authorized - 78,600,000 shares Issued - 14,640,396 shares (14,521,859 for 1997) 14,640 14,522 Paid-in capital 91,422 88,502 Retained earnings 210,902 199,114 Accumulated other comprehensive income 2,254 2,482 ---------- --------- Total stockholders'equity 319,681 305,123 ---------- --------- Total liabilities and stockholders'equity $ 1,239,338 $ 1,283,409 ---------- --------- ---------- --------- Stockholders'equity per common shares $ 21.17 $ 20.31 ---------- --------- ---------- --------- See notes to consolidated financial statements. 2 The Ryland Group, Inc. and subsidiaries CONSOLIDATED STATEMENT OF EARNINGS (unaudited) (amounts in thousands, except share data) Three months Six months ended June 30, ended June 30, 1998 1997 1998 1997 ------ ------ ------ ------ Revenues: Homebuilding: Residential revenue $ 395,888 $ 376,615 $ 703,888 $ 658,393 Other revenue 13,680 1,397 17,219 25,288 --------- --------- -------- --------- Total homebuilding revenue 409,568 378,012 721,107 683,681 Financial services 13,482 17,548 35,164 36,861 Limited-purpose subsidiaries 2,801 4,060 5,885 8,598 --------- --------- -------- -------- Total revenues 425,851 399,620 762,156 729,140 --------- --------- -------- -------- Expenses: Homebuilding: Cost of sales 347,626 328,261 616,808 591,327 Selling, general and administrative 39,725 37,162 73,669 71,430 Interest 5,429 6,463 9,989 12,399 --------- --------- -------- -------- Total homebuilding expenses 392,780 371,886 700,466 675,156 Financial services: General and administrative 8,017 9,780 17,784 21,626 Interest 4,198 4,248 8,799 8,145 --------- --------- -------- -------- Total financial services expenses 12,215 14,028 26,583 29,771 Limited-purpose subsidiaries expenses 2,801 4,060 5,885 8,598 Corporate expenses 3,344 3,195 6,694 6,271 --------- --------- -------- -------- Total expenses 411,140 393,169 739,628 719,796 Earnings before taxes 14,711 6,451 22,528 9,344 Tax expense 5,884 2,581 9,011 3,738 --------- ------- ------- ------- Net earnings $ 8,827 $ 3,870 $ 13,517 $ 5,606 --------- ------- ------- ------- Net earnings per common share: Basic $ 0.58 $ 0.22 $ 0.88 $ 0.30 Diluted (a) $ 0.57 $ 0.22 $ 0.86 $ 0.30 Average common shares outstanding: Basic 14,757,845 15,683,985 14,735,500 15,781,181 Diluted (a) 15,599,143 15,771,567 15,171,345 15,886,309 (a) For the three months ended June 30,1997, and the six months ended June 30, 1998 and 1997, conversion of preferred shares is not assumed due to an antidilutive affect. See notes to consolidated financial statements. 3 The Ryland Group, Inc. and subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (amounts in thousands) Six months ended June 30, - ----------------------------------------------------------------------------- 1998 1997 - ----------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 13,517 $ 5,606 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 11,528 12,754 Gain on sale of mortgage-backed securities-available-for-sale - (75) Increase in inventories (68,535) (3,345) Net change in other assets, payables and other liabilities 53,696 (9,083) Equity in (earnings) losses of/distributions from unconsolidated joint ventures (457) 7 Decrease in mortgage loans held for sale 65,381 38,945 ----------------------- Net cash provided by operating activities 75,130 44,809 ----------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Net additions to property, plant and equipment (10,127) (8,282) Principal reduction of mortgage collateral 20,981 22,257 Principal reduction of mortgage-backed securities - available-for-sale 9,555 4,938 Sales of mortgage-backed securities- available-for-sale 4,098 2,222 Principal reduction of mortgage-backed securities - held-to-maturity 10,118 6,840 Other investing activities, net 6,567 (12,374) ----------------------- Net cash provided by investing activities 41,192 15,601 ----------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Cash proceeds of long-term debt 100,762 32,647 Reduction of long-term debt (2,299) (11,200) Decrease in short-term notes payable (157,089) (19,903) Bond principal payments (28,375) (44,358) Common and preferred stock dividends (1,725) (3,942) Common stock repurchases (6,153) (11,331) Other financing activities, net 7,056 5,136 ----------------------- Net cash used for financing activities (87,823) (52,951) ----------------------- Net increase in cash and cash equivalents 28,499 7,459 Cash and cash equivalents at beginning of year 36,131 28,708 ----------------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 64,630 $ 36,167 ====================== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for interest (net of capitalized interest) $ 24,119 $ 27,610 Cash paid for income taxes $ 7,265 $ 940 - ---------------------------------------------------------------------------- See notes to consolidated financial statements. 4 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 June 30, 1998, the consolidated statements of earnings for the three and six months ended June 30, 1998 and 1997, and the consolidated statements of cash flows for the six months ended June 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 June 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 six months ended June 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 8,461 9,075 Interest amortized to cost of sales (9,199) (10,355) ------- ------- Capitalized interest as of June 30, $22,906 $26,309 ======= ======= 5 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 six months ended June 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 $(455) and $207 for the three months ended June 30, 1998 and 1997, respectively, and $(228) and $(237) for the six months ended June 30, 1998 and 1997, respectively. Other comprehensive income is added to net income to arrive at total comprehensive income. Total comprehensive income was $8,372 for the second quarter of 1998 and $4,077 for the second quarter of 1997. Total comprehensive income was $13,289 for the first six months of 1998 and $5,369 for the first six months of 1997. Note 3. Segment Information Three months ended June 30, 1998 1997 ------ ------ Pretax earnings: Homebuilding $ 16,788 $ 6,126 Financial services 1,267 3,520 Corporate and other (3,344) (3,195) --------- --------- Total $ 14,711 $ 6,451 ======== ======== Six months ended June 30, 1998 1997 ------ ------ Pretax earnings: Homebuilding $ 20,641 $ 8,525 Financial services 8,581 7,090 Corporate and other (6,694) (6,271) -------- -------- Total $ 22,528 $ 9,344 ======== ======== 6 The Ryland Group, Inc. and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued (unaudited) Note 4. Earnings Per Share Reconciliation The following table sets forth the computation of basic and diluted earnings per share. The assumed conversion of preferred stock was anti-dilutive for the three months ended June 30, 1997 and the six months ended June 30, 1998 and 1997, respectively. Three months ended June 30, 1998 1997 ------ ------ Numerator: Net earnings $ 8,827 $ 3,870 Preferred stock dividends (256) (452) -------- -------- Numerator for basic earnings per share - income available to common stockholders 8,571 3,418 Effect of dilutive securities: Preferred stock dividends 256 0 Numerator for diluted earnings per share - income available to common stockholders after assumed conversions $ 8,827 $ 3,418 Denominator: Denominator for basic earnings per share - weighted-average shares 14,757,845 15,683,985 Effect of dilutive securities: Stock options 272,520 274 Conversion of Preferred Shares 476,479 0 Other equity incentives 92,299 87,308 --------- --------- Dilutive potential common shares 841,298 87,582 Denominator for diluted earnings per share - adjusted weighted average shares and assumed conversions 15,599,143 15,771,567 Basic earnings per share $ 0.58 $ 0.22 Dilutive earnings per share $ 0.57 $ 0.22 Six months ended June 30, 1998 1997 ------ ------ Numerator: Net earnings $ 13,517 $ 5,606 Preferred stock dividends (526) (915) -------- -------- Numerator for basic and diluted earnings per share - income available to common stockholders $ 12,991 $ 4,691 Denominator: Denominator for basic earnings per share - weighted-average shares 14,735,500 15,781,181 Effect of dilutive securities: Stock options 334,374 768 Other equity incentives 101,471 104,360 ---------- ---------- Dilutive potential common shares 435,845 105,128 7 The Ryland Group, Inc. and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued (unaudited) Denominator for diluted earnings per share - adjusted weighted average shares and assumed conversions 15,171,345 15,886,309 Basic earnings per share $ 0.88 $ 0.30 Dilutive earnings per share $ 0.86 $ 0.30 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. 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 reborrowed funds under the revolving credit facility to retire 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 will report an extraordinary after-tax charge of approximately $3.4 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. 8 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS CONSOLIDATED For the second quarter of 1998, the Company reported consolidated net earnings of $8.8 million, or $.58 per share ($.57 per share diluted). This compares with 1997 second quarter net earnings of $3.9 million, or $.22 per share. The Company's homebuilding segment reported pretax earnings of $16.8 million for the second quarter of 1998, compared with pretax earnings of $6.1 million for the same period last year. The increase was driven by higher gross profit margins combined with a 7 percent increase in closings and pretax gains of $1.2 million from land sales. The Company's financial services segment reported pretax earnings of $1.3 million for the second quarter of 1998, compared with $3.5 million for the same period in 1997. Retail mortgage operations and investment operations reported declines for the quarter. The decline in retail earnings was primarily due to lower loan-servicing income attributable to the sale, in the first quarter of 1998, of a majority of the Company's loan-servicing portfolio. Corporate expenses were $3.3 million for the second quarter of 1998, up $.1 million from the same period last year primarily due to higher incentive compensation expense in conjunction with the higher level of earnings in the second quarter of 1998. For the first six months of 1998, the Company reported consolidated net earnings of $13.5 million, or $.88 per share ($.86 per share diluted), compared with 1997 first half net earnings of $5.6 million, or $.30 per share. For the first six months of 1998, the homebuilding segment reported pretax earnings of $20.6 million, compared with pretax earnings of $8.5 million for the same period in 1997. A significant improvement in housing gross profit margins was the principal reason for the earnings improvement. The financial services segment reported pretax earnings of $8.6 million for the first six months of 1998, compared with $7.1 million for the same period in 1997. First-half 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 $6.7 million for the first six months of 1998, up $.4 million from the same period last year primarily due to higher incentive compensation expense. The Company's limited-purpose subsidiaries no longer issue mortgage-backed securities and mortgage-participation securities, but they continue to hold collateral for previously issued mortgage-backed bonds in which the Company maintains a residual interest. Revenues, expenses, and portfolio balances continue to decline as the mortgage collateral pledged to secure the bonds decreases due to scheduled payments, prepayments and exercises of early redemption provisions. HOMEBUILDING SEGMENT Results of operations of the Company's homebuilding segment are summarized as follows ($ amounts in thousands, except average closing price): 9 Three months ended Six months ended June 30, June 30, 1998 1997 1998 1997 ------ ------ ------ ------ Revenues: Residential $395,888 $376,615 $703,888 $658,393 Other 13,680 1,397 17,219 25,288 -------- -------- -------- -------- Total 409,568 378,012 721,107 683,681 Gross profit 61,942 49,751 104,299 92,354 Selling, general and administrative expenses 39,725 37,162 73,669 71,430 Interest expense 5,429 6,463 9,989 12,399 -------- -------- -------- -------- Pretax earnings $ 16,788 $ 6,126 $ 20,641 $ 8,525 ======== ======== ======== ======== Operational Unit Data: New orders (units) 2,470 2,310 5,101 4,784 Closings (units) 2,210 2,072 3,904 3,647 Outstanding contracts at June 30: Units 4,009 3,332 Dollar Value $756,044 $620,625 Average Closing Price $179,000 $182,000 $180,000 $181,000 The Company's homebuilding segment reported pretax earnings of $16.8 million for the second quarter of 1998, compared with pretax earnings of $6.1 million for the same period last year. For the six months ended June 30, 1998, homebuilding reported pretax earnings of $20.6 million compared with pretax earnings of $8.5 million for the first half of 1997. Homebuilding revenues amounted to $410 million for the second quarter of 1998, and $721 million for the first half of 1998, up 8 percent and 5 percent, respectively, from the same periods last year. An increase in closings for both periods was partially offset by a decrease in average closing price. The decrease in average closing price reflects the Company's strategy to move to lower-priced product offerings. Gross profit margins from home sales averaged 15.3 percent for the second quarter of 1998, a 210 basis point improvement over the 13.2 percent for the second quarter of 1997. This was the third consecutive quarter in which the Company reported a significant increase over prior year gross profit margins. Gross profit margins for the first half of 1998 averaged 14.7 percent versus 13.2 percent for the same period last year. Increased closings from newer communities, with better land positions and cost effective product, continue to be the driving force behind the Company's improved performance, while better cost controls and favorable market conditions have also contributed. Total homebuilding new orders increased 7 percent over the second quarter of last year to 2,470 homes, and also increased 7 percent over last year's first half to 5,101 homes. For the quarter, new order growth was strong in the Midwest, Southeast, and West reflecting increases in both new and existing markets. For the first six months of 1998, new orders increased in all regions, with the exception of the Mid-Atlantic. The largest increase in first half new orders was in the Southeast region which had growth in all divisions, especially in its newest markets. 10 Outstanding contracts at June 30, 1998 were 4,009 compared with 3,332 at June 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 June 30, 1998 was $756 million, an increase of 22 percent from June 30, 1997 and an increase of 48 percent from December 31, 1997. Selling, general and administrative expenses as a percent of revenues were 9.7 percent for the second quarter of 1998 compared with 9.8 percent for the same period of 1997. For the six months ended June 30, 1998, selling, general and administrative expenses were 10.2 percent of revenues compared with 10.4 percent for the same period of 1997. The decreases were attributable to continued cost controls combined with a higher revenue base. The Company continues to focus on effectively controlling costs and improving the efficiency of its homebuilding operations. Interest expense for the second quarter and first half of 1998 decreased $1.0 million and $2.4 million, respectively, compared with the same periods of 1997. The decreases 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. 11 FINANCIAL SERVICES Results of operations of the Company's financial services segment are summarized as follows: Three months Six months ended June 30, ended June 30, 1998 1997 1998 1997 ------ ------ ------ ------ Retail Revenues: Interest and net origination fees $ 2,116 $ 1,628 $ 4,222 $ 3,263 Net gains on sales of mortgages and servicing rights 3,857 4,045 12,905 9,188 Loan servicing 1,831 6,323 6,547 12,991 Title/escrow 2,151 1,559 4,142 2,812 -------- -------- -------- -------- Total retail revenues 9,955 13,555 27,816 28,254 Revenues from investment operations: Sale of mortgage-backed securities 0 75 0 75 Interest and other income 3,527 3,918 7,348 8,532 -------- -------- -------- ------- Total investment revenues 3,527 3,993 7,348 8,607 -------- -------- -------- ------- Total revenues 13,482 17,548 35,164 36,861 Expenses: General and administrative 8,017 9,780 17,784 21,626 Interest 4,198 4,248 8,799 8,145 -------- -------- ------- ------ Total expenses 12,215 14,028 26,583 29,771 -------- -------- ------- ------ Pretax earnings $ 1,267 $ 3,520 $ 8,581 $ 7,090 ======== ======== ======== ======= Pretax earnings by line of business were as follows (amounts in thousands): Three months Six months ended June 30, ended June 30, 1998 1997 1998 1997 ------ ------ ------ ------ Retail $ 289 $2,265 $6,558 $3,731 Investments 978 1,255 2,023 3,359 ------ ------ ------ ------ Total $1,267 $3,520 $8,581 $7,090 ====== ====== ====== ====== OPERATIONAL DATA: Three months Six months ended June 30, ended June 30, 1998 1997 1998 1997 ------ ------ ------ ----- Retail Operations: Originations 2,201 1,741 4,034 3,084 Percent of Total Originations from Ryland Homes 66% 64% 63% 63% Investment Operations: Portfolio Average Balance (in millions) $140.9 $153.9 $147.4 $148.7 12 The financial services segment reported pretax earnings of $1.3 million for the second quarter of 1998 compared with $3.5 million for the second quarter of 1997, and $8.6 million for the first six months of 1998, compared with $7.1 million for the first half of 1997. Revenues for the financial services segment decreased 23 percent and 5 percent for the three and six months ended June 30, 1998, respectively, compared with the same periods of 1997. General and administrative expenses decreased 18 percent for both the three and six month periods ended June 30, 1998, compared with the same periods of 1997. The decreases in revenues and general and administrative expenses 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 declined slightly for the three months ended June 30, 1998, but increased 8 percent for the first six months of 1998 compared with 1997. The year-to-date increase resulted from increased borrowings in the first quarter required to fund higher origination volume. Retail operations reported pretax earnings of $.3 million for the second quarter of 1998 compared with $2.3 million for the same period last year. For the first six months of 1998, retail operations reported pretax earnings of $6.6 million versus $3.7 million for the first half 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 second quarter was primarily due to lower loan servicing income, attributable to the reduction in the portfolio, partially offset by cost reductions. The increase in retail earnings for the first half was attributable to the aforementioned $6.1 million pretax gain from the sale of the portfolio. Future earnings from retail operations will be negatively impacted by the sale. Mortgage origination volume increased 26 percent and 31 percent for the three and six month periods ended June 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 second quarter of 1998, compared with $1.3 million for the second quarter of 1997. The decrease was primarily due to a lower average portfolio balance which resulted in a 10 percent decline in interest and other income. For the first six months of 1998, investment earnings were $2.0 million versus $3.4 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. 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 $408.0 million as of June 30, 1998 and $308.0 million 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 reborrowed funds under its revolving credit 13 facility to retire its $100 million, 10.5 percent, senior subordinated notes due 2002 at the stated call price of 103.9375 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 no outstanding borrowings under this facility as of June 30, 1998 and December 31, 1997. In addition, the Company had letters of credit outstanding under this facility totaling $39.6 million at June 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 June 30, 1998, such notes payable outstanding amounted to $.7 million, compared with $2.2 million at December 31, 1997. Housing inventories increased to $623.4 million as of June 30, 1998, from $554.8 million as of the end of 1997. This represents the normal seasonal increase in sold homes under construction combined with growth due to increased volume. The financial services segment uses cash generated from operations and borrowing arrangements to finance its operations. A bank credit facility, which matures on June 1, 2000, provides up to $260 million for mortgage warehouse funding and $30 million for working capital advances. Other borrowing arrangements as of June 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 June 30, 1998 and December 31, 1997, the combined borrowings of the financial services segment outstanding under all agreements were $183.5 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 second quarter of 1998, the Company repurchased 310,800 shares of its common stock and has completed the share repurchase program announced on April 30, 1997. The Company has repurchased a total of 2.0 million shares under the stock repurchase program. 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 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. 14 PART II. OTHER INFORMATION Item 1. Legal Proceedings Ryland Mortgage Company ("RMC") announced on July 31, 1998 that it entered into a Plea Agreement 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"). The Indictment concerns actions in 1993 related to two of RMC's loan servicing contracts with the Resolution Trust Corporation ("RTC"). Under the terms of the Plea Agreement, which has been filed with the United States District Court for the Middle District of Florida and requires court approval, RMC will pay $3.5 million in restitution plus interest, as well as a fine of $4.2 million. While the agreement represents a significant expense for RMC, it is not expected to have a material adverse effect on the overall financial position of the Company. Under the Plea Agreement, RMC admits responsibility for two charges of impeding the functions of the RTC. All other charges against RMC are to be dismissed under the Plea Agreement. The agreement does not address the charges against three former employees, which remain pending. 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 during the 60 day period following the date of court approval of the Plea Agreement. During this period, HUD shall consider 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. Item 4. Submission of Matters to a Vote of Security Holders The Annual Meeting of Stockholders of the Company was held on April 29, 1998. Proxies were solicited by the Company pursuant to Regulation 14 under the Securities Exchange Act of 1934 to elect directors of the Company for the ensuing year. Proxies representing 11,937,739 shares of stock eligible to vote at the meeting, or 78 percent of the outstanding shares, were voted in connection with the election of directors. The nine incumbent directors nominated by the Company were elected with a minimum of 11,716,631 votes. The following is a separate tabulation with respect to the vote for each nominee: 15 Name Total Votes For Total Votes Withheld R. Chad Dreier 11,780,306 157,433 James A. Flick, Jr. 11,785,611 152,128 Robert J. Gaw 11,785,409 152,330 Leonard M. Harlan 11,784,911 152,828 L.C. Heist 11,785,311 152,428 William L. Jews 11,785,098 152,641 William G. Kagler 11,716,631 221,108 Charlotte St. Martin 11,780,911 156,828 John O. Wilson 11,785,011 152,728 Page Number Item 6. Exhibits and Reports on Form 8-K A. Exhibits 27 Financial Data Schedule (filed herewith) 19 B. Reports on Form 8-K. Form 8-K was filed with the Securities and Exchange Commission on April 7, 1998 regarding the sale of a majority of the Company's loan servicing portfolio. 16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. THE RYLAND GROUP, INC. Registrant August 14, 1998 By: /s/ Michael D. Mangan Date Michael D. Mangan, Executive Vice President and Chief Financial Officer (Principal Financial Officer) August 14, 1998 By: /s/ Stephen B. Cook Date Stephen B. Cook, Vice President and Corporate Controller (Principal Accounting Officer) 17 INDEX OF EXHIBITS A. Exhibits Page of Sequentially Exhibit No. Numbered Pages 27 Financial Data Schedule (filed herewith) 19 18 EX-27 2
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE RYLAND GROUP INC. FORM 10-Q FOR THE PERIOD ENDED 6/30/98 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS 1000 6-MOS DEC-31-1998 JUN-30-1998 64630 130230 134476 0 623366 0 26373 0 1239338 0 292744 0 463 14640 304578 1239338 721107 762156 616808 708287 6694 0 24647 22528 9011 13517 0 0 0 13517 .88 .86
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