EX-99.1 3 a03795exv99w1.htm EX-99.1 exv99w1
 

Exhibit 99.1

THE RYLAND GROUP

Consolidated Statements of Earnings

                               
          YEAR ENDED DECEMBER 31,
         
(in thousands, except share data)   2003   2002   2001

 
 
 
REVENUES
                       
 
HOMEBUILDING
  $ 3,355,450     $ 2,805,055     $ 2,684,116  
 
FINANCIAL SERVICES
    88,679       72,158       63,075  
 
 
   
     
     
 
   
TOTAL REVENUES
    3,444,129       2,877,213       2,747,191  
 
 
   
     
     
 
EXPENSES
                       
 
HOMEBUILDING
                       
   
Cost of sales
    2,615,975       2,216,059       2,181,619  
   
Selling, general and administrative
    333,726       281,049       261,078  
   
Interest
    6,032       6,826       18,229  
   
Expenses related to early retirement of debt
    5,086             7,244  
 
 
   
     
     
 
     
Total homebuilding expenses
    2,960,819       2,503,934       2,468,170  
 
FINANCIAL SERVICES
                       
   
General and administrative
    24,339       21,299       22,532  
   
Interest
    1,491       2,565       5,423  
 
 
   
     
     
 
     
Total financial services expenses
    25,830       23,864       27,955  
 
CORPORATE EXPENSES
    61,263       40,075       32,730  
 
 
   
     
     
 
   
TOTAL EXPENSES
    3,047,912       2,567,873       2,528,855  
 
 
   
     
     
 
Earnings before taxes
    396,217       309,340       218,336  
Tax expense
    154,525       123,736       86,243  
 
 
   
     
     
 
NET EARNINGS
  $ 241,692     $ 185,604     $ 132,093  
 
 
   
     
     
 
Preferred dividends
  $     $     $ 308  
Net earnings available to common stockholders
  $ 241,692     $ 185,604     $ 131,785  
NET EARNINGS PER COMMON SHARE
                       
 
Basic
  $ 4.86     $ 3.51     $ 2.47  
 
Diluted
  $ 4.56     $ 3.32     $ 2.32  
AVERAGE COMMON SHARES OUTSTANDING
                       
 
Basic
    49,718,032       52,842,620       53,330,900  
 
Diluted
    53,044,404       55,918,286       57,022,716  
DIVIDENDS DECLARED PER COMMON SHARE
  $ 0.08     $ 0.04     $ 0.04  
                               
See Notes to Consolidated Financial Statements.
                       

1


 

THE RYLAND GROUP

Consolidated Balance Sheets

                         
            DECEMBER 31,
           
(in thousands, except share data)   2003   2002

 
 
ASSETS
               
 
HOMEBUILDING
               
   
Cash and cash equivalents
  $ 314,518     $ 266,577  
   
Housing inventories
               
     
Homes under construction
    734,280       575,794  
     
Land under development and improved lots
    602,504       524,218  
     
Consolidated inventory not owned
    59,868        
   
 
   
     
 
       
Total inventories
    1,396,652       1,100,012  
   
Property, plant and equipment
    40,853       40,479  
   
Purchase price in excess of net assets acquired
    18,185       18,185  
   
Other assets
    59,432       58,252  
   
 
   
     
 
 
    1,829,640       1,483,505  
   
 
   
     
 
 
FINANCIAL SERVICES
               
   
Cash and cash equivalents
    2,186       2,868  
   
Mortgage-backed securities and notes receivable
    26,260       42,583  
   
Other assets
    39,824       38,163  
   
 
   
     
 
 
    68,270       83,614  
   
 
   
     
 
 
OTHER ASSETS
               
   
Net deferred taxes
    37,443       36,830  
   
Other
    72,237       53,802  
   
 
   
     
 
     
TOTAL ASSETS
    2,007,590       1,657,751  
LIABILITIES
               
 
HOMEBUILDING
               
   
Accounts payable and other liabilities
    366,131       300,168  
   
Long-term debt
    540,500       490,500  
   
 
   
     
 
 
    906,631       790,668  
   
 
   
     
 
 
FINANCIAL SERVICES
               
   
Accounts payable and other liabilities
    23,376       23,718  
   
Short-term notes payable
    26,254       43,145  
   
 
   
     
 
 
 
    49,630       66,863  
   
 
   
     
 
 
OTHER LIABILITIES
    170,136       120,141  
   
 
   
     
 
     
TOTAL LIABILITIES
    1,126,397       977,672  
   
 
   
     
 
MINORITY INTEREST
    56,651        
   
 
   
     
 
STOCKHOLDERS’ EQUITY
               
 
Common stock, $1.00 par value:
               
   
Authorized — 80,000,000 shares
               
   
Issued — 48,552,494 shares (50,520,686 for 2002)
    48,552       50,521  
 
Retained earnings
    774,859       628,200  
 
Accumulated other comprehensive income
    1,131       1,358  
   
 
   
     
 
     
TOTAL STOCKHOLDERS’ EQUITY
    824,542       680,079  
   
 
   
     
 
     
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
  $ 2,007,590     $ 1,657,751  

See Notes to Consolidated Financial Statements.

2


 

THE RYLAND GROUP

Consolidated Statements of Stockholders’ Equity

                                                     
                                        ACCUMULATED        
                                        OTHER   TOTAL
        PREFERRED   COMMON   PAID-IN   RETAINED   COMPREHENSIVE   STOCKHOLDERS’
(in thousands, except share data)   STOCK   STOCK   CAPITAL   EARNINGS   INCOME   EQUITY

 
 
 
 
 
 
BALANCE AT JANUARY 1, 2001
  $ 1,180     $ 52,996     $ 19,903     $ 379,006     $ 544     $ 453,629  
Comprehensive income:
                                               
 
Net earnings
                            132,093               132,093  
 
Other comprehensive income, net of tax:
                                               
   
Unrealized gains on mortgage-backed securities, net of taxes of $601
                                    920       920  
 
                                           
 
 
Total comprehensive income
                                            133,013  
Preferred stock dividends (per share $0.28)
                            (308 )             (308 )
Common stock dividends (per share $0.04)
                            (2,124 )             (2,124 )
Repurchase of common stock
            (4,008 )     (41,348 )     (137             (45,493 )
Conversions and retirements of preferred stock
    (1,180 )     1,180       149                       149  
Reclassification of preferred paid-in capital
                    1,309                       1,309  
Employee stock plans and related income tax benefit
            2,700       19,987                       22,687  
 
   
     
     
     
     
     
 
BALANCE AT DECEMBER 31, 2001
          52,868             508,530       1,464       562,862  
 
   
     
     
     
     
     
 
Comprehensive income:
                                               
 
Net earnings
                            185,604               185,604  
 
Other comprehensive income, net of tax:
                                               
   
Unrealized losses on mortgage-backed securities, net of taxes of $(67)
                                    (106 )     (106 )
 
                                           
 
 
Total comprehensive income
                                            185,498  
Common stock dividends (per share $0.04)
                            (2,134 )             (2,134 )
Repurchase of common stock
            (4,612 )     (27,504 )     (63,800 )             (95,916 )
Employee stock plans and related income tax benefit
            2,265       27,504                       29,769  
 
   
     
     
     
     
     
 
BALANCE AT DECEMBER 31, 2002
          50,521             628,200       1,358       680,079  
 
   
     
     
     
     
     
 
Comprehensive income:
                                               
 
Net earnings
                            241,692               241,692  
 
Other comprehensive income, net of tax:
                                               
   
Unrealized losses on mortgage-backed securities, net of taxes of $(139)
                                    (227 )     (227 )
 
                                           
 
 
Total comprehensive income
                                            241,465  
Common stock dividends (per share $0.08)
                            (3,966 )             (3,966 )
Repurchase of common stock
            (3,996 )     (35,876 )     (91,067 )             (130,939 )
Employee stock plans and related income tax benefit
            2,027       35,876                       37,903  
 
   
     
     
     
     
     
 
BALANCE AT DECEMBER 31, 2003
  $     $ 48,552     $     $ 774,859     $ 1,131     $ 824,542  
 
   
     
     
     
     
     
 

See Notes to Consolidated Financial Statements.

3


 

THE RYLAND GROUP

Consolidated Statements of Cash Flows

                             
        YEAR ENDED DECEMBER 31,
       
(in thousands)   2003   2002   2001

 
 
 
CASH FLOWS FROM OPERATING ACTIVITIES
                       
 
Net earnings
  $ 241,692     $ 185,604     $ 132,093  
 
Adjustments to reconcile net earnings to net cash provided by operating activities:
                       
   
Depreciation and amortization
    36,436       32,670       37,068  
 
Changes in assets and liabilities:
                       
   
Increase in inventories
    (239,989 )     (200,623 )     (10,984 )
   
Net change in other assets, payables and other liabilities
    86,629       52,331       16,443  
 
Tax benefit from exercise of stock options
    17,120       12,103       8,337  
 
Other operating activities, net
    913       5,095       (6,182 )
 
 
   
     
     
 
 
Net cash provided by operating activities
    142,801       87,180       176,775  
 
 
   
     
     
 
CASH FLOWS FROM INVESTING ACTIVITIES
                       
 
Net additions to property, plant and equipment
    (32,541 )     (36,547 )     (30,883 )
 
Principal reduction of mortgage-backed securities, notes receivable and mortgage collateral
    18,672       25,314       33,215  
 
 
   
     
     
 
 
Net cash (used for) provided by investing activities
    (13,869 )     (11,233 )     2,332  
 
 
   
     
     
 
CASH FLOWS FROM FINANCING ACTIVITIES
                       
 
Cash proceeds of long-term debt
    150,000             250,000  
 
Repayment of long-term debt
    (100,000 )           (209,500 )
 
Decrease in short-term notes payable
    (16,891 )     (18,974 )     (20,444 )
 
Common and preferred stock dividends
    (2,020 )     (2,148 )     (2,605 )
 
Common stock repurchases
    (130,939 )     (95,916 )     (45,493 )
 
Proceeds from stock option exercises
    15,190       11,382       12,888  
 
Other financing activities, net
    2,987       844       (7,844 )
 
 
   
     
     
 
 
Net cash used for financing activities
    (81,673 )     (104,812 )     (22,998 )
 
 
   
     
     
 
 
Net increase (decrease) in cash and cash equivalents
    47,259       (28,865 )     156,109  
 
Cash and cash equivalents at beginning of year
    269,445       298,310       142,201  
 
 
   
     
     
 
CASH AND CASH EQUIVALENTS AT END OF YEAR
  $ 316,704     $ 269,445     $ 298,310  
 
 
   
     
     
 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
                       
 
Cash paid for interest (net of capitalized interest)
  $ 12,738     $ 14,275     $ 33,177  
 
Cash paid for income taxes
    132,731       101,939       72,662  
 
 
   
     
     
 
SUPPLEMENTAL DISCLOSURES OF NONCASH ACTIVITIES
                       
 
Consolidated inventory not owned
  $ 56,651     $     $  

     See Notes to Consolidated Financial Statements.

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THE RYLAND GROUP

Notes to Consolidated Financial Statements

NOTE A: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The consolidated financial statements include the accounts of The Ryland Group, Inc. and its wholly owned subsidiaries (“the Company”). Intercompany transactions have been eliminated in consolidation. Certain prior year amounts have been reclassified to conform to the 2003 presentation.

Use of Estimates

The preparation of financial statements, in conformity with accounting principles generally accepted in the United States, requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates.

Cash and Cash Equivalents

The Company considers all highly liquid short-term investments and cash held in escrow to be cash equivalents. Cash equivalents totaled $309.5 million and $257.0 million at December 31, 2003 and 2002, respectively.

Per Share Data

Basic 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. Additionally, diluted net earnings per common share gives effect to dilutive common stock equivalent shares.

Stock Split

All references in the consolidated financial statements to common shares, share prices, per share amounts and stock plans have been retroactively restated for the 2004 and 2002 two-for-one stock splits. (See Note J.)

Homebuilding Revenues

Homebuilding revenues are recognized when home sales are closed and title and possession are transferred to the buyer.

Housing Inventories

Housing inventories consist principally of homes under construction, land under development and improved lots. Inventories to be held and used are stated at cost, unless a community is determined to be impaired, in which case the impaired inventories are written down to fair value. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets is measured by comparing the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset and sales of comparable assets. Inventories to be disposed of are stated at either the lower of cost or fair value less cost to sell and are reported net of valuation reserves. Write-downs of impaired inventories to fair value are recorded as adjustments to the cost basis of the respective inventory. Valuation reserves related to inventories to be disposed of amounted to $1.5 million at December 31, 2003, and $5.3 million at December 31, 2002. The net carrying values of the related inventories amounted to $795,000 and $5.6 million at December 31, 2003 and 2002, respectively.

     Costs of inventory include direct costs of land and land development; material acquisition; home construction; and related direct overhead expenses. The costs of acquiring and developing land and constructing certain related amenities are allocated to the parcels to which these costs relate. Interest and taxes are capitalized during the land development stage.

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THE RYLAND GROUP

The following table is a summary of capitalized interest:

                 
(in thousands)   2003   2002

 
 
Capitalized interest at January 1
  $ 40,824     $ 33,291  
Interest capitalized
    42,602       39,695  
Interest amortized to cost of sales
    (38,263 )     (32,162 )
 
   
     
 
Capitalized interest at December 31
  $ 45,163     $ 40,824  
 
   
     
 

Variable Interest Entities

In January 2003, the FASB issued Interpretation No. 46 (FIN 46), “Consolidation of Variable Interest Entities.” FIN 46 requires a variable interest entity (VIE) to be consolidated by a company if that company is subject to a majority of the risk of loss from the VIE’s activities and/or entitled to receive a majority of the VIE’s residual returns. FIN 46 also requires disclosures about VIEs that the Company is not required to consolidate but in which it has a significant, though not primary, variable interest.

     The consolidation requirements of FIN 46 applied immediately to VIEs created after January 31, 2003. For VIEs created before January 31, 2003, the consolidation requirements apply in the first interim period ending after March 15, 2004 (the Company’s fiscal quarter ending March 31, 2004). Certain disclosure requirements apply in all financial statements issued after January 31, 2003, regardless of when the VIE was established. The Company adopted the consolidation requirements of FIN 46 for VIEs created after January 31, 2003, during 2003. The Company will adopt the consolidation requirements for VIEs created before January 31, 2003, during the quarter ending March 31, 2004. The Company is currently in the process of evaluating these contracts and does not believe that such adoption will have a material impact on its financial condition or results of operations.

     The Company routinely enters into joint ventures for the purpose of developing land. The Company’s investment in these joint ventures may create a variable interest in a VIE, depending on the contractual terms of the arrangement. Additionally, in the ordinary course of business, the Company enters into lot option purchase contracts in order to procure land for the construction of homes. Under such lot option purchase contracts, the Company funds stated deposits in consideration for the right to purchase lots at a future point in time, usually at predetermined prices. In accordance with the requirements of FIN 46, certain of the Company’s lot option purchase contracts may result in the creation of a variable interest with a VIE holding the land parcel under option.

     Using the framework outlined in FIN 46, the Company evaluated its option contracts and the joint venture agreement it entered into after January 31, 2003. Based on its evaluation, the Company determined that, in some cases, it had the primary variable interest in certain VIEs subject to lot option contracts. While the Company may not have had legal title to the optioned land or guaranteed the seller’s debt associated with that property, under FIN 46 it had the primary variable interest and was required to consolidate the particular VIE’s assets under option at fair value. As a result, the Company consolidated $59.9 million of inventory not owned as of December 31, 2003. This represents the fair value of the optioned property. Additionally, to reflect the fair value of the inventory consolidated under FIN 46, the Company eliminated $3.2 million of its related cash deposits for lot option contracts, which are included in consolidated inventory not owned. Minority interest totaling $56.7 million was recorded with respect to the consolidation of these contracts, representing the selling entities’ ownership interests in these VIEs. At December 31, 2003, the Company had cash deposits and letters of credit totaling $6.4 million, representing the Company’s current maximum exposure to loss, relating to lot option contracts that were consolidated. Creditors of these VIEs, if any, have no recourse against the Company.

     At December 31, 2003, the Company had cash deposits and/or letters of credit totaling $27.2 million which were associated with lot option purchase contracts entered into subsequent to January 31, 2003, having an aggregate purchase price of $440.5 million and related to VIEs in which it did not have a primary variable interest.

Service Liabilities

Service, warranty and completion costs are estimated and accrued at the time a home closes.

Investments in Unconsolidated Joint Ventures

The Company participates in a number of joint ventures in which it has less than a controlling interest. These joint ventures, based in Atlanta, Dallas, Denver, Orlando, Phoenix and Washington, D.C., are engaged in the development of land. At December 31, 2003 and 2002, the Company’s investment in unconsolidated joint ventures amounted to $14.0 million and $14.9 million, respectively. The Company’s equity in losses of these unconsolidated joint ventures was $94,000 for the year ended December 31, 2003, compared to equity in earnings of $2.7 million for the same period in 2002 and $26,000 for the same period in 2001. The aggregate assets of the unconsolidated joint ventures in which the Company participated were $47.3 million and $61.0 million at December 31, 2003 and 2002, respectively. At December 31, 2003 and 2002, the aggregate

6


 

THE RYLAND GROUP

debt of the unconsolidated joint ventures in which the Company participated was $21.1 million and $31.9 million, respectively. The Company does not guarantee the debt of its unconsolidated joint ventures.

Property, Plant and Equipment

Property, plant and equipment, which includes model home furnishings, are carried at cost less accumulated depreciation and amortization. Depreciation is provided for, principally, by the straight-line method over the estimated useful lives of the assets. Model home furnishings, which are amortized over the life of the community as homes are closed, are included in cost of sales.

Purchase Price in Excess of Net Assets Acquired

In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142 (SFAS 142), “Goodwill and Other Intangible Assets.” SFAS 142 requires that goodwill and other intangible assets no longer be amortized but be reviewed for impairment at least annually. Intangible assets with finite lives will continue to be amortized over their estimated useful lives. Additionally, SFAS 142 requires that goodwill included in the carrying value of equity-method investments no longer be amortized.

     The Company adopted the provisions of SFAS 142 on January 1, 2002, and performs impairment tests of its goodwill annually. The Company tests goodwill for impairment by using the two-step process prescribed in SFAS 142. The first step is used to identify potential impairment, while the second step measures the amount of impairment. The Company had no impairment in the years ended December 31, 2003 and 2002.

     The Company’s application of the nonamortization provisions of SFAS 142 resulted in the elimination of its goodwill amortization expense in 2003 and 2002. Results reported for the year ended December 31, 2001, included an after-tax goodwill amortization expense of $1.1 million, or $0.02 per diluted share.

Income Taxes

The Company files a consolidated federal income tax return. Certain items of income and expense are included in one period for financial reporting purposes and in another for income tax purposes. Deferred income taxes are provided in recognition of these differences. Deferred tax assets and liabilities are determined based on enacted tax rates and are subsequently adjusted for changes in these rates. A change in deferred tax assets or liabilities results in a charge or credit to deferred tax expense.

Stock-Based Compensation

The Company has elected to follow the intrinsic value method to account for compensation expense, which is related to the award of stock options, and to furnish the pro forma disclosures required under Statement of Financial Accounting Standards No. 123 (SFAS 123), “Accounting for Stock-based Compensation,” as amended. Since stock option awards are granted at prices no less than the fair market value of the shares at the date of grant, no compensation expense is recognized.

     Had compensation expense been determined based on fair value at the grant date for stock option awards, consistent with the provisions of SFAS 123, the Company’s net earnings and earnings per share in 2003, 2002 and 2001 would have been reduced to the pro forma amounts indicated in the following table:

                         
    YEAR ENDED DECEMBER 31,
   
(in thousands, except share data)   2003   2002   2001

 
 
 
Net earnings, as reported
  $ 241,692     $ 185,604     $ 132,093  
Add: Stock-based employee compensation expense included in reported net earnings, net of related tax effects
                 
Deduct: Total stock-based employee compensation expense determined under fair value method for all awards, net of related tax effects
    (3,991 )     (3,455 )     (2,599 )
 
   
     
     
 
Pro forma net earnings
  $ 237,701     $ 182,149     $ 129,494  
 
   
     
     
 
Earnings per share:
                       
Basic — as reported
  $ 4.86     $ 3.51     $ 2.47  
Basic — pro forma
    4.78       3.45       2.43  
Diluted — as reported
    4.56       3.32       2.32  
Diluted — pro forma
    4.48       3.26       2.27  
 
   
     
     
 

     The fair value of each option grant is estimated on the grant date by using the Black-Scholes option-pricing model. The following weighted-average assumptions were used for grants in 2003, 2002 and 2001, respectively: a risk-free interest rate of 2.1 percent, 4.0 percent and 4.7 percent; an expected volatility factor for the market price of the Company’s com-

7


 

THE RYLAND GROUP

mon stock of 37.6 percent, 36.8 percent and 37.5 percent; a dividend yield of 0.3 percent, 0.2 percent and 0.3 percent; and an expected life of three years. The weighted-average fair values at the grant date for options granted in 2003, 2002 and 2001 were $7.28, $6.57 and $5.07, respectively.

Mortgage-Backed Securities and Notes Receivable

Mortgage-backed securities and notes receivable consist of GNMA certificates, FNMA mortgage pass-through certificates, FHLMC participation certificates, notes receivable secured by mortgage-backed securities, whole loans and funds held by a trustee. Mortgage-backed securities were classified as available-for-sale and carried in the consolidated balance sheets at fair value, with unrealized gains and losses net of applicable taxes recorded as a component of accumulated other comprehensive income in stockholders’ equity. The estimated fair value of these securities was determined based on current market quotations.

Loan Origination Fees, Costs, Mortgage Discounts and Loan Sales

Loan origination fees, net of related direct origination costs and loan discount points, are recognized in current earnings upon the sale of the related mortgage loans. Gains or losses on the sales of mortgage loans and related servicing rights are recognized when the Company transfers title to the purchaser.

Derivative Instruments

In the normal course of business and pursuant to its risk-management policy, the Company enters, as an end user, into derivative instruments, including forward-delivery contracts for loans and mortgage-backed securities; options on forward-delivery contracts; futures contracts; and options on futures contracts, to minimize the impact of movements in market interest rates on interest rate lock commitments (IRLCs) and mortgage loans held-for-sale. The Company elected not to use hedge accounting treatment with respect to its economic hedging activities. Accordingly, all derivative instruments used as economic hedges are carried in the consolidated balance sheets at fair value, with changes in value recorded in current earnings. The Company’s mortgage pipeline includes IRLCs, which represent commitments that have been extended by the Company to those borrowers who have applied for loan funding and have met certain defined credit and underwriting criteria. The Company determined that its IRLCs meet the definition of derivatives under Statement of Financial Accounting Standards No. 133 (SFAS 133), “Accounting for Derivatives and Hedging Activities,” as amended.

Comprehensive Income

Comprehensive income consists of net income and the increase or decrease of unrealized gains or losses on the Company’s available-for-sale securities. Comprehensive income totaled $241.5 million, $185.5 million and $133.0 million for the years ended December 31, 2003, 2002 and 2001, respectively.

New Accounting Pronouncements

SFAS 149

In April 2003, the FASB issued Statement of Financial Accounting Standards No. 149 (SFAS 149), “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” This statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as “derivatives”) and for hedging activities under SFAS 133. This statement is effective for contracts entered into or modified after June 30, 2003. Management does not believe that the implementation of SFAS 149 will have a material impact on the Company’s financial condition or results of operations.

SFAS 150

In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150 (SFAS 150), “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” This statement establishes standards for the classification and measurement of certain financial instruments having characteristics of both liabilities and equity. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and is otherwise effective at the start of the first interim period beginning after June 15, 2003. Application of SFAS 150 to noncontrolling interests in limited-life subsidiaries has been deferred indefinitely. Management does not believe that the implementation of SFAS 150 will have a material impact on the Company’s financial condition or results of operations.

8


 

THE RYLAND GROUP

NOTE B: SEGMENT INFORMATION

The Company is a leading national homebuilder and mortgage-related financial services firm. As one of the largest single-family on-site homebuilders in the United States, it builds homes in 27 markets. The Company’s homebuilding segment specializes in the sale and construction of single-family attached and detached housing. The Company’s financial services segment provides loan origination, title, escrow and insurance brokerage services, and maintains a portfolio of mortgage-backed securities and notes receivable.

     The Company evaluates performance and allocates resources based on a number of factors, including segment pretax earnings. The accounting policies of the segments are the same as those described in Note A, Summary of Significant Accounting Policies. Certain corporate expenses are allocated to the homebuilding and financial services segments.

                             
        YEAR ENDED DECEMBER 31,
       
(in thousands)   2003   2002   2001

 
 
 
REVENUES
                       
 
Homebuilding
  $ 3,355,450     $ 2,805,055     $ 2,684,116  
 
Financial services
    88,679       72,158       63,075  
 
 
   
     
     
 
   
Total
  $ 3,444,129     $ 2,877,213     $ 2,747,191  
 
 
   
     
     
 
PRETAX EARNINGS
                       
 
Homebuilding
  $ 394,631     $ 301,121     $ 215,946  
 
Financial services
    62,849       48,294       35,120  
 
Corporate
    (61,263 )     (40,075 )     (32,730 )
 
 
   
     
     
 
   
Total
  $ 396,217     $ 309,340     $ 218,336  
 
 
   
     
     
 
DEPRECIATION AND AMORTIZATION
                       
 
Homebuilding
  $ 30,448     $ 27,901     $ 32,011  
 
Financial services
    922       819       709  
 
Corporate
    5,066       3,950       4,348  
 
 
   
     
     
 
   
Total
  $ 36,436     $ 32,670     $ 37,068  
 
 
   
     
     
 
IDENTIFIABLE ASSETS
                       
 
Homebuilding
  $ 1,829,640     $ 1,483,505     $ 1,325,598  
 
Financial services
    68,270       83,614       92,847  
 
Corporate and other
    109,680       90,632       92,424  
 
 
   
     
     
 
   
Total
  $ 2,007,590     $ 1,657,751     $ 1,510,869  
 
 
   
     
     
 

9


 

THE RYLAND GROUP

NOTE C: EARNINGS PER SHARE RECONCILIATION

The following table sets forth the computation of basic and diluted earnings per share:

                             
        YEAR ENDED DECEMBER 31,
       
(in thousands, except share data)   2003   2002   2001

 
 
 
NUMERATOR
                       
 
Net earnings
  $ 241,692     $ 185,604     $ 132,093  
 
Preferred stock dividends
                (308 )
 
 
   
     
     
 
 
Numerator for basic earnings per share — earnings available to common stockholders
    241,692       185,604       131,785  
 
Effect of dilutive securities — preferred stock dividends
                308  
 
 
   
     
     
 
 
Numerator for diluted earnings per share — earnings available to common stockholders
  $ 241,692     $ 185,604     $ 132,093  
DENOMINATOR
                       
 
Denominator for basic earnings per share — weighted-average shares
    49,718,032       52,842,620       53,330,900  
 
Effect of dilutive securities:
                       
   
Stock options
    2,622,548       2,405,840       2,574,220  
   
Conversion of preferred shares
                797,980  
   
Equity incentive plan
    703,824       669,826       319,616  
 
 
   
     
     
 
 
Dilutive potential of common shares
    3,326,372       3,075,666       3,691,816  
 
Denominator for diluted earnings per share — adjusted weighted-average shares and assumed conversions
    53,044,404       55,918,286       57,022,716  
NET EARNINGS PER COMMON SHARE
                       
 
Basic
  $ 4.86     $ 3.51     $ 2.47  
 
Diluted
    4.56       3.32       2.32  
 
 
   
     
     
 

     The assumed conversion of preferred shares was dilutive for the year ended December 31, 2001.

NOTE D: FINANCIAL SERVICES’ SHORT-TERM NOTES PAYABLE

The financial services segment had outstanding borrowings at December 31 as follows:

                   
(in thousands)   2003   2002

 
 
Repurchase agreement
  $ 12,007     $ 20,303  
Revolving credit agreement
    14,247       22,842  
 
   
     
 
 
Total
  $ 26,254     $ 43,145  
 
   
     
 

     The repurchase agreement provided for short-term borrowings of $12.0 million and $20.3 million at December 31, 2003 and 2002, respectively, that were collateralized by mortgage loans and mortgage-backed securities. Outstanding collateral balances were $11.2 million and $18.9 million, with fair values of $12.0 million and $20.3 million, at December 31, 2003 and 2002, respectively.

     In 2003, the Company’s financial services segment renewed and extended a revolving credit facility used to finance mortgage investment portfolio securities. The facility, previously $35.0 million, was renewed for $25.0 million. The agreement matures in March 2004 and bears interest at market rates. The Company is currently in the process of extending the facility. Borrowings outstanding under this facility totaling $14.2 million and $22.8 million, respectively, were collateralized by collateralized mortgage obligations previously issued by one of the Company’s limited-purpose subsidiaries and had principal balances of $14.1 million and $22.6 million, with fair values of $14.9 million and $23.8 million, at December 31, 2003 and 2002, respectively.

     Weighted-average short-term borrowings during the period were $34.0 million, $51.5 million and $72.0 million for 2003, 2002 and 2001, respectively.

     Weighted-average interest rates at the end of the period on all short-term borrowings were 2.0 percent and 1.9 percent for 2003 and 2002, respectively. Weighted-average interest rates during the period on all short-term borrowings were 1.8 percent, 2.3 percent and 4.8 percent for 2003, 2002 and 2001, respectively.

     The repurchase agreement and revolving credit agreement contain certain financial covenants. The Company was in compliance with these covenants at December 31, 2003.

10


 

THE RYLAND GROUP

NOTE E: DERIVATIVE INSTRUMENTS

The Company, which uses financial instruments in its normal course of operations, has no derivative financial instruments that are held for trading purposes.

     The contract or notional amounts of these financial instruments at December 31 were as follows:

                   
(in thousands)   2003   2002

 
 
Interest rate lock commitments
  $ 73,590     $ 63,487  
Hedging contracts:
               
 
Forward-delivery contracts
  $ 84,491     $ 96,000  
 
Other
    20,000       15,000  

     IRLCs represent loan commitments with customers at market rates up to 120 days before settlement. IRLCs expose the Company to market risk as a result of increases in mortgage interest rates. IRLCs had interest rates ranging from 4.9 percent to 10.2 percent at December 31, 2003, and 5.0 percent to 10.3 percent at December 31, 2002.

     Hedging contracts are regularly entered into by the Company for the purpose of mitigating its exposure to movements in interest rates on IRLCs and mortgage loans held-for-sale. The selection of these hedging contracts is based upon the Company’s secondary marketing strategy, which establishes a risk-tolerance level. Major factors influencing the use of various hedging contracts include general market conditions, interest rates, types of mortgages originated and the percentage of IRLCs expected to fund. The market risk assumed while holding the hedging contracts generally mitigates the market risk associated with IRLCs and mortgage loans held-for-sale.

     The Company is exposed to credit-related losses in the event of nonperformance by counterparties to certain hedging contracts. Credit risk is limited to those instances where the Company is in a net unrealized gain position. The Company manages this credit risk by entering into agreements with counterparties meeting its credit standards and by monitoring position limits.

NOTE F: FAIR VALUES OF FINANCIAL INSTRUMENTS

The Company’s financial instruments are held for purposes other than trading. The fair values of these financial instruments are based on quoted market prices, where available, or are estimated by using either present value or other valuation techniques. Estimated fair values are significantly affected by the assumptions used, including discount rates and estimates of cash flows. In that regard, derived fair value estimates cannot always be substantiated by comparison to independent markets and, in some cases, cannot be realized in immediate settlement of the instruments.

     The table below sets forth the carrying values and fair values of the Company’s financial instruments at December 31. It excludes nonfinancial instruments, and, accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.

                                     
        2003   2002
       
 
        CARRYING   FAIR   CARRYING   FAIR
(in thousands)   VALUE   VALUE   VALUE   VALUE

 
 
 
 
HOMEBUILDING
                               
 
Liabilities
                               
   
Senior notes
  $ 397,000     $ 427,141     $ 247,000     $ 262,392  
   
Senior subordinated notes
    143,500       160,519       243,500       255,924  
FINANCIAL SERVICES
                               
 
Assets
                               
   
Mortgage loans held-for-sale1
  $ 21,920     $ 22,234     $ 19,411     $ 19,795  
   
Mortgage-backed securities and notes receivable
    26,260       27,304       42,583       44,208  
 
Other Financial Instruments
                               
   
Interest rate lock commitments
    1,625       1,625       1,472       1,472  
   
Forward-delivery contracts
    (124 )     (124 )     (1,208 )     (1,208 )
   
Other
    (19 )     (19 )     30       30  
OTHER ASSETS
                               
 
Collateral for bonds payable of the limited-purpose subsidiaries
  $ 9,188     $ 9,241     $ 12,011     $ 12,045  
OTHER LIABILITIES
                               
 
Bonds payable of the limited-purpose subsidiaries
  $ 8,011     $ 8,721     $ 10,378     $ 10,893  

1Mortgage loans held-for-sale are reported in the balance sheet in Financial Services “Other assets.”

11


 

THE RYLAND GROUP

    The Company used the following methods and assumptions in estimating fair values:
 
  Cash and cash equivalents; secured notes payable; and short-term notes payable. The carrying amounts reported in the balance sheet approximate fair values.
 
  Senior notes; senior subordinated notes; mortgage loans held-for-sale; mortgage-backed securities and notes receivable; hedging contracts; and interest rate lock commitments. The fair values of these financial instruments are based on either quoted market prices or market prices for similar financial instruments.

NOTE G: LIMITED-PURPOSE SUBSIDIARIES

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. Payments made on the bonds are on a scheduled basis in amounts relating to corresponding payments received on the underlying mortgage collateral. Bonds payable are reported in the balance sheet in “Other liabilities.”

     Collateral for bonds payable, which consists of mortgage-backed securities; notes receivable secured by mortgage-backed securities and mortgage loans; fixed-rate mortgage loans; and funds held by trustee, is reported in the balance sheet under “Other assets” in “Other.” Mortgage-backed securities consist of GNMA certificates, FNMA mortgage pass-through certificates and FHLMC participation certificates. All principal and interest on collateral is remitted directly to a trustee and is available for payment on the bonds.

     Neither the Company nor its homebuilding and financial services subsidiaries have guaranteed these nonrecourse bond issues.

     The following table sets forth information with respect to the limited-purpose subsidiaries’ bonds payable outstanding at December 31:

                   
(in thousands)   2003   2002

 
 
Bonds payable, net of discounts:
               
 
2003 — $242; 2002 — $408
  $ 8,011     $ 10,378  
Range of interest rates
    7.25% - 11.65 %     7.25% - 11.65 %
Stated maturities
    2009 - 2018       2009 - 2018  
 
 
   
     
 

NOTE H: LONG-TERM DEBT

Long-term debt consists of the following at December 31:

                   
(in thousands)   2003   2002

 
 
Senior subordinated notes
  $ 143,500     $ 243,500  
Senior notes
    397,000       247,000  
 
   
     
 
 
Total
  $ 540,500     $ 490,500  
 
   
     
 

     The Company has a $400.0 million senior unsecured revolving credit facility with a three-year term. The agreement matures in August 2005 with an option for a one-year extension. The Company did not borrow against the revolving credit facility during 2003. In prior years, the Company used its unsecured revolving credit facility to finance increases in its homebuilding inventory and working capital. Borrowings under this agreement bear interest at variable short-term rates. The effective interest rate was 4.8 percent for 2002 and 7.4 percent for 2001. There were no outstanding borrowings under this agreement at December 31, 2003 and 2002.

     In June 2003, the Company issued $150.0 million of 5.4 percent senior notes, which pay interest semiannually and will mature on June 1, 2008. In July 2003, the net proceeds from this offering were used to fully redeem the $100.0 million aggregate principal from the Company’s 8.3 percent senior subordinated notes due April 1, 2008, at a stated call price of 104.1 percent of the principal amount. The remaining proceeds were used for general corporate purposes. As a result of this redemption, the Company recorded a $5.1 million pretax loss associated with the early extinguishment of debt.

12


 

THE RYLAND GROUP

     At December 31, 2003, the Company had $143.5 million of 9.1 percent senior subordinated notes due June 2011, with interest payable semiannually, which may be redeemed at a stated redemption price at the option of the Company, in whole or in part, at any time on or after June 15, 2006. Senior subordinated notes are subordinated to all existing and future senior debt of the Company.

     At December 31, 2003, the Company had $150.0 million of 5.4 percent senior notes due June 2008, with interest payable semiannually, which may be redeemed at a stated redemption price at the option of the Company, in whole or in part, at any time. Additionally, the Company had $100.0 million of 8.0 percent senior notes due August 2006, with interest payable semiannually, which may not be redeemed prior to maturity. Also outstanding at December 31, 2003, was $147.0 million of 9.8 percent senior notes due September 2010, with interest payable semiannually, which may be redeemed at a stated redemption price at the option of the Company, in whole or in part, at any time on or after September 1, 2005.

     Maturities of long-term debt are scheduled as follows:

         
(in thousands)        

   
 
2006
  $ 100,000  
2007
     
2008
    150,000  
After 2008
    290,500  
     
 
Total long-term debt
  $ 540,500  

     The bank credit agreement, senior subordinated indenture agreements and senior note agreements contain certain financial covenants. At December 31, 2003, the Company had $141.2 million of retained earnings available for dividends and was in compliance with these covenants.

NOTE I: INCOME TAXES

The Company’s expense for income taxes is summarized as follows:

                             
        YEAR ENDED DECEMBER 31,
       
(in thousands)   2003   2002   2001

 
 
 
CURRENT
                       
 
Federal
  $ 137,108     $ 106,722     $ 75,822  
 
State
    17,884       17,014       12,918  
 
 
   
     
     
 
   
Total current
    154,992       123,736       88,740  
 
 
   
     
     
 
DEFERRED
                       
 
Federal
    (413 )           (2,134 )
 
State
    (54 )           (363 )
 
 
   
     
     
 
   
Total deferred
    (467 )           (2,497 )
 
 
   
     
     
 
Total expense
  $ 154,525     $ 123,736     $ 86,243  
 
 
   
     
     
 

     The following table reconciles the statutory federal income tax rate to the Company’s effective income tax rate:

                         
    YEAR ENDED DECEMBER 31,
   
    2003   2002   2001
   
 
 
Income taxes at federal statutory rate
    35.0 %     35.0 %     35.0 %
State income taxes, net of federal tax
    3.0       3.6       3.7  
Other, net
    1.0       1.4       0.8  
 
   
     
     
 
Effective rate
    39.0 %     40.0 %     39.5 %
 
   
     
     
 

13


 

THE RYLAND GROUP

     Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

     Significant components of the Company’s deferred tax assets and liabilities at December 31 were as follows:

                     
(in thousands)   2003   2002

 
 
DEFERRED TAX ASSETS
               
 
Warranty, legal and other accruals
  $ 30,534     $ 25,706  
 
Employee benefits
    23,045       18,030  
 
Non-cash charge for impairment of long-lived assets
    950       2,553  
 
Other
    665       4,068  
 
 
   
     
 
   
Total deferred tax assets
    55,194       50,357  
 
 
   
     
 
DEFERRED TAX LIABILITIES
               
 
Installment sales method and deferred gains
    (7,439 )     (5,553 )
 
Capitalized expenses
    (8,036 )     (5,656 )
 
Other
    (2,276 )     (2,318 )
 
 
   
     
 
   
Total deferred tax liabilities
    (17,751 )     (13,527 )
 
 
   
     
 
Net deferred tax asset
  $ 37,443     $ 36,830  
 
 
   
     
 

     The Company determined that no valuation allowance for the deferred tax asset was required. The Company had a total current tax liability of $34.9 million and $29.7 million at December 31, 2003 and 2002, respectively. These amounts are reported in the balance sheet in “Other liabilities.”

NOTE J: STOCKHOLDERS’ EQUITY

Preferred Stock

During 2001, Ryland called and redeemed all of its outstanding preferred stock, which was held within the Retirement Savings Opportunity Plan (RSOP) Trust. At the election of each individual preferred stockholder, and in accordance with the terms of the preferred stock, each share of preferred stock was either purchased at a per share price of $7.89 or converted into one share of Ryland common stock. A total of 1,011,148 shares of preferred stock was converted into an equivalent number of shares of common stock.

     Each share of preferred stock received a quarterly dividend of $0.14. During 2001, the Company paid $308,000 in dividends on its preferred stock. Each share of preferred stock entitled the holder to a number of votes equal to the shares into which the stock was convertible, and preferred stockholders voted together with common stockholders on all matters.

Common Share Purchase Rights

In 1996, the Company adopted a revised stockholder rights plan under which it distributed one common share purchase right for each share of common stock outstanding on January 13, 1997. Each right entitles the holder to purchase one share of common stock at an exercise price of $17.50. The rights become exercisable ten business days after any party acquires, or announces an offer to acquire, 20.0 percent or more of the Company’s common stock. The rights expire January 13, 2007, and are redeemable at $0.0025 per right at any time before ten business days following the time that any party acquires 20.0 percent or more of the Company’s common stock.

     In the event that the Company enters into a merger or other business combination, or if a substantial amount of its assets are sold after the time that the rights become exercisable, the holder will receive, upon exercise, shares of the common stock of the surviving or acquiring company having a market value of twice the exercise price. Until the earlier of the time that the rights become exercisable, are redeemed or expire, the Company will issue one right with each new share of common stock.

Stock Spilt

On October 10, 2004, the Company’s Board of Directors approved a two-for-one stock split of its common stock, which was effected in the form of a stock dividend. Record holders of the Company’s common stock at the close of business on November 15, 2004, were entitled to one additional share for each share held at that time. The new shares were distributed on November 30, 2004.

On April 24, 2002, the Company’s Board of Directors approved a two-for-one stock split of its common stock, which was effected in the form of a stock dividend. Record holders of the Company’s common stock at the close of business on May 15, 2002, were entitled to one additional share for each share held at that time. The new shares were distributed on May 30, 2002.

14


 

THE RYLAND GROUP

NOTE K: EMPLOYEE INCENTIVE AND STOCK PLANS

Retirement Savings Opportunity Plan (RSOP)

All full-time employees are eligible to participate in the RSOP following 30 days of employment. Part-time employees are eligible to participate in the RSOP following the completion of one thousand hours of service within the first 12 months of employment or within any plan year after the date of hire. Pursuant to Section 401(k) of the Internal Revenue Code, the plan permits deferral of a portion of a participant’s income into a variety of investment options. Total compensation expense related to the Company’s matching contributions for this plan amounted to $8.1 million, $7.2 million and $6.5 million in 2003, 2002 and 2001, respectively.

     Previously, the Company issued its preferred stock in connection with its matching contributions to those accounts. As a result of the redemption of the preferred stock, 506,864 and 572,734 shares of common stock were allocated to participants’ accounts at December 31, 2003 and 2002, respectively.

Employee Stock Purchase Plan (ESPP)

All full-time employees of the Company, with the exception of its executive officers, are eligible to participate in the ESPP. Eligible employees authorize payroll deductions to be made for the purchase of shares. The Company matches a portion of the employee’s contribution by donating an additional 20.0 percent of the employee’s payroll deduction. Stock is purchased by a plan administrator on a regular monthly basis. All brokerage and transaction fees for purchasing the stock are paid for by the Company. The Company’s expense related to its matching contribution for this plan was $321,000, $258,000 and $192,000 in 2003, 2002 and 2001, respectively.

Supplemental Executive Retirement Plan

The Company has supplemental, nonqualified retirement plans which vest over five-year periods beginning January 1, 2003, and July 1, 2003, pursuant to which the Company will pay supplemental pension benefits to key employees upon retirement. In connection with these plans, the Company has purchased cost-recovery life insurance on the lives of certain employees. Insurance contracts associated with the plans are held by trusts, established as part of the plans to implement and carry out their provisions and finance their related benefits. The trusts are owners and beneficiaries of such contracts. The amount of coverage is designed to provide sufficient revenue to cover all costs of the plans if assumptions made as to employment term, mortality experience, policy earnings and other factors are realized. At December 31, 2003, the cash surrender value of these contracts was $6.1 million. The net periodic benefit cost for these plans for the year ended December 31, 2003, was $3.7 million, which included service costs of $3.7 million, interest costs of $290,000 and investment income of $324,000. The $4.0 million projected benefit obligation at December 31, 2003, was equal to the net liability recognized in the balance sheet at that date. For the year ended December 31, 2003, the weighted-average discount rate used for the plans was 7.8 percent.

Equity Incentive Plan and Other Related Plans

On April 24, 2002, the Company’s stockholders approved The Ryland Group, Inc. 2002 Equity Incentive Plan (“the Plan”), which permits the granting of stock options, stock appreciation rights, restricted or unrestricted stock awards, stock units or any combination of the foregoing to employees. This plan replaces the Company’s 1992 Equity Incentive Plan, which expired on April 15, 2002. The aggregate number of shares available for issuance under the Plan includes 30,864 shares carried over from the 1992 Equity Incentive Plan and 2.6 million new shares available under the terms of the Plan. Any shares of the Company’s common stock covered by an award (or portion of an award) granted under the Plan or the 1992 Equity Incentive Plan that are forfeited, expired or canceled without delivery of shares of common stock, or which are tendered to the Company as full or partial payment of the exercise price or related tax withholding obligations, will again be available for award under the Plan. The Plan will remain in effect until April 24, 2012, unless it is terminated by the Board of Directors at an earlier date. The options are exercisable at various dates over one- to ten-year periods. Stock options granted during 2003 generally have a maximum term of ten years and vest over three years. At December 31, 2003 and 2002, 1,540,584 and 2,220,672 stock options were available for grant, respectively.

     Under the Company’s 2000 Non-Employee Director Equity Plan, stock options are granted to directors for the purchase of shares at prices not less than the fair market value of the shares at the date of grant. At December 31, 2003 and 2002, 353,200 and 573,200 stock options were available for grant, respectively.

15


 

THE RYLAND GROUP

     The following is a summary of transactions relating to all stock option plans for each year ended December 31:

                                                   
      2003   2002   2001
     
 
 
              WEIGHTED-           WEIGHTED-           WEIGHTED-
              AVERAGE           AVERAGE           AVERAGE
              EXERCISE           EXERCISE           EXERCISE
      SHARES   PRICE   SHARES   PRICE   SHARES   PRICE
     
 
 
 
 
 
Options outstanding at beginning of year
    6,874,796     $ 10.11       7,346,568     $ 6.58       8,799,744     $ 5.13  
 
Granted
    1,032,300       26.08       1,574,400       21.48       1,531,000       12.33  
 
Exercised
    (1,762,008 )     8.62       (1,939,230 )     5.87       (2,592,532 )     5.03  
 
Forfeited
    (132,212 )     18.19       (106,942 )     11.94       (391,644 )     6.86  
 
   
     
     
     
     
     
 
Options outstanding at end of year
    6,012,876     $ 13.11       6,874,796     $ 10.11       7,346,568     $ 6.58  
Available for future grant
    1,893,784               2,793,872               1,069,644          
 
   
     
     
     
     
     
 
Total shares reserved
    7,906,660               9,668,668               8,416,212          
 
   
     
     
     
     
     
 
Options exercisable at December 31
    3,788,128     $ 7.76       3,997,936     $ 6.26       4,096,732     $ 5.22  
Prices related to options exercised during the year
  $ 3.41 – $22.70             $ 3.38 – $11.35             $ 3.38 – $7.23          

     A summary of stock options outstanding and exercisable at December 31, 2003, follows:

                                           
      OPTIONS OUTSTANDING   OPTIONS EXERCISABLE
     
 
              WEIGHTED-                        
RANGE OF           AVERAGE   WEIGHTED-           WEIGHTED-
EXERCISE   NUMBER   REMAINING   AVERAGE   NUMBER   AVERAGE
PRICES   OUTSTANDING   LIFE (YEARS)   EXERCISE PRICE   EXERCISABLE   EXERCISE PRICE

 
 
 
 
 
$3.19 to $5.97
      1,673,602       4.02     $ 4.01       1,673,602     $ 4.01  
$6.04 to $11.38
      1,915,142       6.19     $ 8.25       1,549,302     $ 7.53  
$16.68 to $24.44
      2,197,132       8.62     $ 21.07       565,224     $ 19.49  
$34.70 to $44.32
      227,000       9.99     $ 44.03              

     The Company has made several restricted stock awards to senior executives under both the 1992 and 2002 Equity Incentive Plans. All restricted stock was awarded in the name of each participant, who had all the rights of other common stockholders subject to restrictions and forfeiture provisions. Accordingly, such restricted stock awards were considered common stock equivalents. Compensation expense recognized for such awards totaled $16.1 million, $9.8 million and $5.7 million for the years ended December 31, 2003, 2002 and 2001, respectively.

     The following is a summary of activity relating to restricted stock awards for each year ended December 31:

                         
    2003   2002   2001
   
 
 
Restricted shares at January 1
    904,200       500,000       360,000  
Shares awarded
          730,000       260,000  
Shares vested
    (265,600 )     (325,800 )     (120,000 )
 
   
     
     
 
Restricted shares at December 31
    638,600       904,200       500,000  
 
   
     
     
 

     At December 31, 2003, the outstanding restricted shares vest as follows: 2004 – 268,200; 2005 – 182,400; 2006 – 94,000; and 2007 – 94,000.

     All outstanding stock options and restricted stock awards have been granted in accordance with the terms of the 2002 Equity Incentive Plan, the 2000 Non-Employee Director Equity Plan and their respective predecessor plans, which were approved by the Company’s stockholders.

NOTE L: COMMITMENTS AND CONTINGENCIES

Commitments

In the normal course of business, the Company acquires rights under option agreements to purchase land for use in future homebuilding operations. At December 31, 2003, the Company had cash deposits and letters of credit outstanding of $87.6 million for land options and land purchase contracts having a total purchase price of $1,334.0 million. At December 31, 2003, the Company had commitments with respect to option contracts having specific performance provisions of approximately $51.5 million, compared to $68.0 million at December 31, 2002.

16


 

THE RYLAND GROUP

     Rent expense primarily relates to office facilities, model homes, and furniture and equipment.

                         
    YEAR ENDED DECEMBER 31,
   
(in thousands)   2003   2002   2001

 
 
 
Total rent expense
  $ 17,937     $ 20,058     $ 21,591  
Less income from subleases
    (215 )     (1,233 )     (2,376 )
 
   
     
     
 
Net rental expense
  $ 17,722     $ 18,825     $ 19,215  
 
   
     
     
 

     Future minimum rental commitments under noncancelable leases with remaining terms in excess of one year are as follows:

         
(in thousands)        

2004
  $ 7,375  
2005
    5,866  
2006
    4,890  
2007
    3,303  
2008 and thereafter
    3,180  
 
   
 
Subtotal
  $ 24,614  
Less sublease income
    (618 )
 
   
 
Total lease commitments
  $ 23,996  
 
   
 

Contingencies

Contingent liabilities may arise from obligations incurred in the ordinary course of business or from the usual obligations of on-site housing producers for the completion of contracts. Some municipalities require the Company to issue development bonds or maintain letters of credit to assure completion of public facilities within a project. At December 31, 2003, total development bonds were $278.4 million and total deposits and letters of credit were $44.0 million.

     The Company provides product warranties to its customers covering workmanship and materials for one year, certain mechanical systems for two years and structural systems for ten years. The Company estimates and records warranty liabilities based upon historical experience and known risks at the time a home closes, and in the case of unexpected claims, upon identification and quantification of the obligations. Actual future warranty costs could differ from currently estimated amounts.

     Changes in the Company’s product liability during the period are as follows:

                 
(in thousands)   2003   2002

 
 
Balance at January 1
  $ 29,860     $ 26,664  
Warranties issued
    16,668       13,235  
Settlements made
    (16,201 )     (13,936 )
Changes in liability for pre-existing warranties
    3,931       3,897  
 
   
     
 
Balance at December 31
  $ 34,258     $ 29,860  
 
   
     
 

     The Company is party to various legal proceedings generally incidental to its businesses. Litigation reserves have been established based on discussions with counsel and the Company’s analysis of historical claims. The Company has, and requires the majority of its subcontractors to have, general liability insurance that protects the Company against a portion of its risk of loss and to cover construction-related claims. The Company establishes reserves to cover its self-insured retentions and deductible amounts under those policies. Due to the high degree of judgment required in determining these estimated reserve amounts, actual future litigation costs could differ from the Company’s currently estimated amounts.

17


 

NOTE M: SUBSEQUENT EVENT — SUPPLEMENTAL GUARANTOR INFORMATION

In December 2004, substantially all of the Company’s wholly-owned homebuilding subsidiaries (the “Guarantor Subsidiaries”), will be issuing guarantees, on a joint and several basis, related to the obligation to pay principal, premium, if any, and interest on the existing publicly traded senior notes issued by The Ryland Group, Inc. The Ryland Group, Inc.’s 8 percent senior notes due August 2006, 5.4 percent senior notes due June 2008 and the 9.8 percent senior notes due September 2010, will be guaranteed by the Guarantor Subsidiaries. Such guarantees will be full and unconditional.

In lieu of providing separate audited financial statements for the Guarantor Subsidiaries we have included the accompanying condensed consolidating financial statements. Management does not believe that separate financial statements of the Guarantor Subsidiaries are material to investors and are therefore not presented.

The following condensed consolidating information presents the consolidating statements of earnings, cash flows and financial position for (i) the parent company and issuer, The Ryland Group, Inc. (“TRG, Inc.”), (ii) the Guarantor Subsidiaries, (iii) the Non-guarantor Subsidiaries, and (iv) the consolidation eliminations to arrive at the information for The Ryland Group, Inc. and subsidiaries on a consolidated basis.

18


 

Consolidating Statement Of Earnings

                                         
    YEAR ENDED DECEMBER 31, 2003
            GUARANTOR   NON-GUARANTOR   CONSOLIDATING   CONSOLIDATED
(amounts in thousands)
  TRG, INC.
  SUBSIDIARIES
  SUBSIDIARIES
  ELIMINATIONS
  TOTAL
REVENUES
                                       
HOMEBUILDING
  $ 2,153,561     $ 1,317,300     $     $ (115,411 )   $ 3,355,450  
FINANCIAL SERVICES
                88,679             88,679  
 
   
 
     
 
     
 
     
 
     
 
 
TOTAL REVENUES
    2,153,561       1,317,300       88,679       (115,411 )     3,444,129  
 
EXPENSES
                                       
HOMEBUILDING
                                       
Cost of sales
    1,671,666       1,059,627       93       (115,411 )     2,615,975  
Selling, general and administrative
    203,246       130,401       79             333,726  
Interest
    134       5,898                   6,032  
Expenses related to early retirement of debt
    5,086                         5,086  
 
   
 
     
 
     
 
     
 
     
 
 
Total homebuilding expenses
    1,880,132       1,195,926       172       (115,411 )     2,960,819  
FINANCIAL SERVICES
                                       
General and administrative
                24,339             24,339  
Interest
                1,491             1,491  
 
   
 
     
 
     
 
     
 
     
 
 
Total financial services expenses
                25,830             25,830  
CORPORATE EXPENSES
    15,378       45,885                   61,263  
 
   
 
     
 
     
 
     
 
     
 
 
TOTAL EXPENSES
    1,895,510       1,241,811       26,002       (115,411 )     3,047,912  
 
   
 
     
 
     
 
     
 
     
 
 
Earnings before taxes
    258,051       75,489       62,677             396,217  
Tax expense
    100,640       29,441       24,444             154,525  
Equity in net earnings of subsidiaries
    84,281                   (84,281 )      
 
   
 
     
 
     
 
     
 
     
 
 
NET EARNINGS
  $ 241,692     $ 46,048     $ 38,233     $ (84,281 )   $ 241,692  
 
   
 
     
 
     
 
     
 
     
 
 

19


 

Consolidating Statement Of Earnings

                                         
    YEAR ENDED DECEMBER 31, 2002
            GUARANTOR   NON-GUARANTOR   CONSOLIDATING   CONSOLIDATED
(amounts in thousands)
  TRG, INC.
  SUBSIDIARIES
  SUBSIDIARIES
  ELIMINATIONS
  TOTAL
REVENUES
                                       
HOMEBUILDING
  $ 1,745,222     $ 1,122,661     $     $ (62,828 )   $ 2,805,055  
FINANCIAL SERVICES
                72,158             72,158  
 
   
 
     
 
     
 
     
 
     
 
 
TOTAL REVENUES
    1,745,222       1,122,661       72,158       (62,828 )     2,877,213  
 
EXPENSES
                                       
HOMEBUILDING
                                       
Cost of sales
    1,350,717       928,077       93       (62,828 )     2,216,059  
Selling, general and administrative
    167,428       113,543       78             281,049  
Interest
    (132 )     6,958                   6,826  
 
   
 
     
 
     
 
     
 
     
 
 
Total homebuilding expenses
    1,518,013       1,048,578       171       (62,828 )     2,503,934  
FINANCIAL SERVICES
                                       
General and administrative
                21,299             21,299  
Interest
                2,565             2,565  
 
   
 
     
 
     
 
     
 
     
 
 
Total financial services expenses
                23,864             23,864  
CORPORATE EXPENSES
    11,383       28,692                   40,075  
 
   
 
     
 
     
 
     
 
     
 
 
TOTAL EXPENSES
    1,529,396       1,077,270       24,035       (62,828 )     2,567,873  
 
   
 
     
 
     
 
     
 
     
 
 
Earnings before taxes
    215,826       45,391       48,123             309,340  
Tax expense
    86,330       18,157       19,249             123,736  
Equity in net earnings of subsidiaries
    56,108                   (56,108 )      
 
   
 
     
 
     
 
     
 
     
 
 
NET EARNINGS
  $ 185,604     $ 27,234     $ 28,874     $ (56,108 )   $ 185,604  
 
   
 
     
 
     
 
     
 
     
 
 

20


 

Consolidating Statement Of Earnings

                                         
    YEAR ENDED DECEMBER 31, 2001
            GUARANTOR   NON-GUARANTOR   CONSOLIDATING   CONSOLIDATED
(amounts in thousands)
  TRG, INC.
  SUBSIDIARIES
  SUBSIDIARIES
  ELIMINATIONS
  TOTAL
REVENUES
                                       
HOMEBUILDING
  $ 1,609,457     $ 1,148,226     $     $ (73,567 )   $ 2,684,116  
FINANCIAL SERVICES
                63,075             63,075  
 
   
 
     
 
     
 
     
 
     
 
 
TOTAL REVENUES
    1,609,457       1,148,226       63,075       (73,567 )     2,747,191  
 
EXPENSES
                                       
HOMEBUILDING
                                       
Cost of sales
    1,274,539       980,554       93       (73,567 )     2,181,619  
Selling, general and administrative
    150,022       110,991       65             261,078  
Interest
    774       17,455                   18,229  
Expenses related to early retirement of debt
    7,244                         7,244  
 
   
 
     
 
     
 
     
 
     
 
 
Total homebuilding expenses
    1,432,579       1,109,000       158       (73,567 )     2,468,170  
FINANCIAL SERVICES
                                       
General and administrative
                22,532             22,532  
Interest
                5,423             5,423  
 
   
 
     
 
     
 
     
 
     
 
 
Total financial services expenses
                27,955             27,955  
CORPORATE EXPENSES
    7,838       24,892                   32,730  
 
   
 
     
 
     
 
     
 
     
 
 
TOTAL EXPENSES
    1,440,417       1,133,892       28,113       (73,567 )     2,528,855  
 
   
 
     
 
     
 
     
 
     
 
 
Earnings before taxes
    169,040       14,334       34,962             218,336  
Tax expense
    66,771       5,662       13,810             86,243  
Equity in net earnings of subsidiaries
    29,824                   (29,824 )      
 
   
 
     
 
     
 
     
 
     
 
 
NET EARNINGS
  $ 132,093     $ 8,672     $ 21,152     $ (29,824 )   $ 132,093  
 
   
 
     
 
     
 
     
 
     
 
 

21


 

Consolidating Balance Sheet

                                         
    DECEMBER 31, 2003
            GUARANTOR   NON-GUARANTOR   CONSOLIDATING   CONSOLIDATED
(amounts in thousands)
  TRG, INC.
  SUBSIDIARIES
  SUBSIDIARIES
  ELIMINATIONS
  TOTAL
ASSETS
                                       
HOMEBUILDING
                                       
Cash and cash equivalents
  $ 34,434     $ 278,767     $ 1,317     $     $ 314,518  
Total housing inventories
    821,971       518,030       56,651             1,396,652  
Property, plant and equipment
    25,478       15,375                   40,853  
Purchase price in excess of net assets acquired
    15,383       2,802                   18,185  
Other assets
    23,306       22,052       14,074             59,432  
 
   
 
     
 
     
 
     
 
     
 
 
 
    920,572       837,026       72,042             1,829,640  
FINANCIAL SERVICES
                                       
Cash and cash equivalents
                2,186             2,186  
Mortgage-backed securities and notes receivable
                26,260             26,260  
Other assets
                39,824             39,824  
 
   
 
     
 
     
 
     
 
     
 
 
 
                68,270             68,270  
OTHER ASSETS
                                       
Net deferred taxes
    41,857             (4,414 )           37,443  
Other
    59,798             12,439             72,237  
Investment in subsidiaries
    66,700                   (66,700 )      
 
   
 
     
 
     
 
     
 
     
 
 
 
    168,355             8,025       (66,700 )     109,680  
 
   
 
     
 
     
 
     
 
     
 
 
TOTAL ASSETS
    1,088,927       837,026       148,337       (66,700 )     2,007,590  
 
   
 
     
 
     
 
     
 
     
 
 
LIABILITIES
                                       
HOMEBUILDING
                                       
Accounts payable and other liabilities
    257,199       108,895       37             366,131  
Debt
    540,500                         540,500  
 
   
 
     
 
     
 
     
 
     
 
 
 
    797,699       108,895       37             906,631  
FINANCIAL SERVICES
                                       
Accounts payable and other liabilities
                23,376             23,376  
Short-term notes payable
                26,254             26,254  
 
   
 
     
 
     
 
     
 
     
 
 
 
                49,630             49,630  
OTHER LIABILITIES
                                       
Intercompany payable
    (458,196 )     389,236       (74,800 )     143,760        
Other liabilities
    161,441             8,695             170,136  
 
   
 
     
 
     
 
     
 
     
 
 
 
    (296,755 )     389,236       (66,105 )     143,760       170,136  
 
   
 
     
 
     
 
     
 
     
 
 
TOTAL LIABILITIES
    500,944       498,131       (16,438 )     143,760       1,126,397  
 
   
 
     
 
     
 
     
 
     
 
 
MINORITY INTEREST
                56,651             56,651  
 
   
 
     
 
     
 
     
 
     
 
 
STOCKHOLDERS’ EQUITY
    587,983       338,895       108,124       (210,460 )     824,542  
 
   
 
     
 
     
 
     
 
     
 
 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
  $ 1,088,927     $ 837,026     $ 148,337     $ (66,700 )   $ 2,007,590  
 
   
 
     
 
     
 
     
 
     
 
 

22


 

Consolidating Balance Sheet

                                         
    DECEMBER 31, 2002
            GUARANTOR   NON-GUARANTOR   CONSOLIDATING   CONSOLIDATED
(amounts in thousands)
  TRG, INC.
  SUBSIDIARIES
  SUBSIDIARIES
  ELIMINATIONS
  TOTAL
ASSETS
                                       
HOMEBUILDING
                                       
Cash and cash equivalents
  $ 24,395     $ 241,033     $ 1,149     $     $ 266,577  
Total housing inventories
    673,559       426,453                   1,100,012  
Property, plant and equipment
    25,526       14,953                   40,479  
Purchase price in excess of net assets acquired
    15,383       2,802                   18,185  
Other assets
    21,835       22,349       14,068             58,252  
 
   
 
     
 
     
 
     
 
     
 
 
 
    760,698       707,590       15,217             1,483,505  
FINANCIAL SERVICES
                                       
Cash and cash equivalents
                2,868             2,868  
Mortgage-backed securities and notes receivable
                42,583             42,583  
Other assets
                38,163             38,163  
 
   
 
     
 
     
 
     
 
     
 
 
 
                83,614             83,614  
OTHER ASSETS
                                       
Net deferred taxes
    37,796             (966 )           36,830  
Other
    39,368             14,434             53,802  
Investment in subsidiaries
    48,232                   (48,232 )      
 
   
 
     
 
     
 
     
 
     
 
 
 
    125,396             13,468       (48,232 )     90,632  
 
   
 
     
 
     
 
     
 
     
 
 
TOTAL ASSETS
    886,094       707,590       112,299       (48,232 )     1,657,751  
 
   
 
     
 
     
 
     
 
     
 
 
LIABILITIES
                                       
HOMEBUILDING
                                       
Accounts payable and other liabilities
    206,253       93,881       34             300,168  
Debt
    490,500                         490,500  
 
   
 
     
 
     
 
     
 
     
 
 
 
    696,753       93,881       34             790,668  
FINANCIAL SERVICES
                                       
Accounts payable and other liabilities
                23,718             23,718  
Short-term notes payable
                43,145             43,145  
 
   
 
     
 
     
 
     
 
     
 
 
 
                66,863             66,863  
OTHER LIABILITIES
                                       
Intercompany payable
    (362,891 )     320,862       (35,918 )     77,947        
Other liabilities
    108,712             11,429             120,141  
 
   
 
     
 
     
 
     
 
     
 
 
 
    (254,179 )     320,862       (24,489 )     77,947       120,141  
 
   
 
     
 
     
 
     
 
     
 
 
TOTAL LIABILITIES
    442,574       414,743       42,408       77,947       977,672  
 
   
 
     
 
     
 
     
 
     
 
 
STOCKHOLDERS’ EQUITY
    443,520       292,847       69,891       (126,179 )     680,079  
 
   
 
     
 
     
 
     
 
     
 
 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
  $ 886,094     $ 707,590     $ 112,299     $ (48,232 )   $ 1,657,751  
 
   
 
     
 
     
 
     
 
     
 
 

23


 

Consolidating Statement of Cash Flows

                                         
    YEAR ENDED DECEMBER 31, 2003
            GUARANTOR   NON-GUARANTOR   CONSOLIDATING   CONSOLIDATED
(amounts in thousands)
  TRG, INC.
  SUBSIDIARIES
  SUBSIDIARIES
  ELIMINATIONS
  TOTAL
CASH FLOWS FROM OPERATING ACTIVITIES
                                       
Net earnings
  $ 241,692     $ 46,048     $ 38,233     $ (84,281 )   $ 241,692  
Adjustments to reconcile net earnings to net cash provided by operating activities:
                                       
Depreciation and amortization
    24,261       11,253       922             36,436  
Changes in assets and liabilities:
                                       
Increase in inventories
    (148,412 )     (91,577 )                 (239,989 )
Net change in other assets, payables and other liabilities
    (43,093 )     83,352       (37,911 )     84,281       86,629  
Tax benefit from exercise of stock options
    17,120                         17,120  
Other operating activities, net
    913                         913  
 
   
 
     
 
     
 
     
 
     
 
 
Net cash provided by operating activities
    92,481       49,076       1,244             142,801  
 
   
 
     
 
     
 
     
 
     
 
 
CASH FLOWS FROM INVESTING ACTIVITIES
                                       
Net additions to property, plant and equipment
    (20,266 )     (11,342 )     (933 )           (32,541 )
Principal reduction of mortgage-backed securities, notes receivable and mortgage collateral
                18,672             18,672  
 
   
 
     
 
     
 
     
 
     
 
 
Net cash (used for) provided by investing activities
    (20,266 )     (11,342 )     17,739             (13,869 )
 
   
 
     
 
     
 
     
 
     
 
 
CASH FLOWS FROM FINANCING ACTIVITIES
                                       
Cash proceeds of long-term debt
    150,000                         150,000  
Repayment of long-term debt
    (100,000 )                       (100,000 )
Decrease in short-term notes payable
                (16,891 )           (16,891 )
Common and preferred stock dividends
    (2,020 )                       (2,020 )
Common stock repurchases
    (130,939 )                       (130,939 )
Proceeds from stock option exercises
    15,190                         15,190  
Other financing activities, net
    5,593             (2,606 )           2,987  
 
   
 
     
 
     
 
     
 
     
 
 
Net cash used for financing activities
    (62,176 )           (19,497 )           (81,673 )
 
   
 
     
 
     
 
     
 
     
 
 
Net increase (decrease) in cash and cash equivalents
    10,039       37,734       (514 )           47,259  
Cash and cash equivalents at beginning of period
    24,395       241,033       4,017             269,445  
 
   
 
     
 
     
 
     
 
     
 
 
CASH AND CASH EQUIVALENTS AT END OF PERIOD
  $ 34,434     $ 278,767     $ 3,503     $     $ 316,704  
 
   
 
     
 
     
 
     
 
     
 
 

24


 

Consolidating Statement Of Cash Flows

                                         
    FOR THE YEAR ENDED DECEMBER 31, 2002
            GUARANTOR   NON-GUARANTOR   CONSOLIDATING   CONSOLIDATED
(amounts in thousands)
  TRG, INC.
  SUBSIDIARIES
  SUBSIDIARIES
  ELIMINATIONS
  TOTAL
CASH FLOWS FROM OPERATING ACTIVITIES
                                       
Net earnings
  $ 185,604     $ 27,234     $ 28,874     $ (56,108 )   $ 185,604  
Adjustments to reconcile net earnings to net cash provided by operating activities:
                                       
Depreciation and amortization
    20,020       11,831       819             32,670  
Changes in assets and liabilities:
                                       
Increase in inventories
    (139,594 )     (61,029 )                 (200,623 )
Net change in other assets, payables and other liabilities
    11,280       14,511       (29,568 )     56,108       52,331  
Tax benefit from exercise of stock options
    12,103                         12,103  
Other operating activities, net
    5,095                         5,095  
 
   
 
     
 
     
 
     
 
     
 
 
Net cash provided by (used for) operating activities
    94,508       (7,453 )     125             87,180  
 
   
 
     
 
     
 
     
 
     
 
 
CASH FLOWS FROM INVESTING ACTIVITIES
                                       
Net additions to property, plant and equipment
    (22,185 )     (13,191 )     (1,171 )           (36,547 )
Principal reduction of mortgage-backed securities, notes receivable and mortgage collateral
                25,314             25,314  
 
   
 
     
 
     
 
     
 
     
 
 
Net cash (used for) provided by investing activities
    (22,185 )     (13,191 )     24,143             (11,233 )
 
   
 
     
 
     
 
     
 
     
 
 
CASH FLOWS FROM FINANCING ACTIVITIES
                                       
Decrease in short-term notes payable
                (18,974 )           (18,974 )
Common and preferred stock dividends
    (2,148 )                       (2,148 )
Common stock repurchases
    (95,916 )                       (95,916 )
Proceeds from stock option exercises
    11,382                         11,382  
Other financing activities, net
    6,284             (5,440 )           844  
 
   
 
     
 
     
 
     
 
     
 
 
Net cash used for financing activities
    (80,398 )           (24,414 )           (104,812 )
 
   
 
     
 
     
 
     
 
     
 
 
Net decrease in cash and cash equivalents
    (8,075 )     (20,644 )     (146 )           (28,865 )
Cash and cash equivalents at beginning of period
    32,470       261,677       4,163             298,310  
 
   
 
     
 
     
 
     
 
     
 
 
CASH AND CASH EQUIVALENTS AT END OF PERIOD
  $ 24,395     $ 241,033     $ 4,017     $     $ 269,445  
 
   
 
     
 
     
 
     
 
     
 
 

25


 

Consolidating Statement Of Cash Flows

                                         
    YEAR ENDED DECEMBER 31, 2001
            GUARANTOR   NON-GUARANTOR   CONSOLIDATING   CONSOLIDATED
(amounts in thousands)
  TRG, INC.
  SUBSIDIARIES
  SUBSIDIARIES
  ELIMINATIONS
  TOTAL
CASH FLOWS FROM OPERATING ACTIVITIES
                                       
Net earnings
  $ 132,093     $ 8,672     $ 21,152     $ (29,824 )   $ 132,093  
Adjustments to reconcile net earnings to net cash provided by operating activities:
                                       
Depreciation and amortization
    22,088       14,271       709             37,068  
Changes in assets and liabilities:
                                       
Increase in inventories
    (64,288 )     53,304                   (10,984 )
Net change in other assets, payables and other liabilities
    (83,472 )     97,554       (27,463 )     29,824       16,443  
Tax benefit from exercise of stock options
    8,337                         8,337  
Other operating activities, net
    (6,182 )                       (6,182 )
 
   
 
     
 
     
 
     
 
     
 
 
Net cash provided by (used for) operating activities
    8,576       173,801       (5,602 )           176,775  
 
   
 
     
 
     
 
     
 
     
 
 
CASH FLOWS FROM INVESTING ACTIVITIES
                                       
Net additions to property, plant and equipment
    (19,447 )     (10,499 )     (937 )           (30,883 )
Principal reduction of mortgage-backed securities, notes receivable and mortgage collateral
                33,215             33,215  
 
   
 
     
 
     
 
     
 
     
 
 
Net cash (used for) provided by investing activities
    (19,447 )     (10,499 )     32,278             2,332  
 
   
 
     
 
     
 
     
 
     
 
 
CASH FLOWS FROM FINANCING ACTIVITIES
                                       
Cash proceeds of long-term debt
    250,000                         250,000  
Repayment of long-term debt
    (209,500 )                       (209,500 )
Decrease in short-term notes payable
                (20,444 )           (20,444 )
Common and preferred stock dividends
    (2,605 )                       (2,605 )
Common stock repurchases
    (45,493 )                       (45,493 )
Proceeds from stock option exercises
    12,888                         12,888  
Other financing activities, net
    1,617             (9,461 )           (7,844 )
 
   
 
     
 
     
 
     
 
     
 
 
Net cash provided by (used for) financing activities
    6,907             (29,905 )           (22,998 )
 
   
 
     
 
     
 
     
 
     
 
 
Net (decrease) increase in cash and cash equivalents
    (3,964 )     163,302       (3,229 )           156,109  
Cash and cash equivalents at beginning of period
    36,434       98,375       7,392             142,201  
 
   
 
     
 
     
 
     
 
     
 
 
CASH AND CASH EQUIVALENTS AT END OF PERIOD
  $ 32,470     $ 261,677     $ 4,163     $     $ 298,310  
 
   
 
     
 
     
 
     
 
     
 
 

26


 

THE RYLAND GROUP

Report of Independent Registered Public Accounting Firm

BOARD OF DIRECTORS AND STOCKHOLDERS

THE RYLAND GROUP, INC.

We have audited the accompanying consolidated balance sheets of The Ryland Group, Inc. and subsidiaries as of December 31, 2003 and 2002, and the related consolidated statements of earnings, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2003. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

     We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). These standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

     In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of The Ryland Group, Inc. and subsidiaries at December 31, 2003 and 2002, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2003, in conformity with U.S. generally accepted accounting principles.

-s- Ernst & Young LLP
ERNST & YOUNG LLP
Los Angeles, California
January 20, 2004
except for Note M, as to which the date is December 16, 2004

Report of Management

Management of the Company is responsible for the integrity and accuracy of the financial statements and all other annual report information. The financial statements are prepared in conformity with generally accepted accounting principles and include amounts based on management’s judgments and estimates.

     The accounting systems, which record, summarize and report financial information, are supported by internal control systems designed to provide reasonable assurance, at an appropriate cost, that the assets are safeguarded and that transactions are recorded in accordance with Company policies and procedures. Proper selection, training and development of personnel also contribute to the effectiveness of the internal control systems. These systems are the responsibility of management and are regularly tested by the Company’s internal auditors. External auditors also review and test the effectiveness of these systems to the extent they deem necessary to express an opinion on the consolidated financial statements.

     The Audit Committee of the Board of Directors periodically meets with management, the internal auditors and the external auditors to review accounting, auditing and financial matters. Both internal auditors and external auditors have unrestricted access to the Audit Committee.

-s- Gordon A. Milne
Gordon A. Milne
Executive Vice President and Chief
Financial Officer

-s- David L. Fristoe
David L. Fristoe
Senior Vice President, Controller,
Chief Information Officer and Chief Accounting Officer

27