THE RYLAND GROUP, INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
(amounts in thousands, except share data, in all notes unless
otherwise noted)
NOTE L: EMPLOYEE INCENTIVE AND STOCK PLANS
Retirement Savings Opportunity Plan (RSOP)
In 1989, the Company established a retirement and employee stock ownership plan that
purchased shares of preferred stock from the Company. The purchase of preferred stock by
the plan was financed by a loan from the Company in the amount of $40,000. The interest
rate on the loan was 9.99% and through September, 1997, the loan was being repaid by the
plan through dividends received on the preferred stock and Company contributions. On
October 1, 1997, the Company purchased 248,881 shares of preferred stock at fair market
value from the plan representing preferred shares that secured the loan and had not been
released for allocation to participant's accounts. The plan used the proceeds to payoff
the related loan balance and the Company retired the preferred shares. The RSOP Trust
incurred interest on the loan in 1997 and 1996 of $930 and $1,794, respectively. As of
December 31, 1998, 416,744 shares of preferred stock are allocated to participant's
accounts. As of January 1, 1998, participants receive cash and no longer receive preferred
stock in connection with Company matching contributions to their accounts.
All full-time employees are eligible to participate in the RSOP the first pay period of
the quarter following 30 days of employment. 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. Compensation expense reflects the Company's matching
contributions of the employee 401(k) contributions. Total compensation expense related to
this Plan amounted to $3,549, $4,039 and $5,230 in 1998, 1997 and 1996, respectively.
Equity Incentive Plan and Other Related Plans
The Company's 1992 Equity Incentive Plan permits the Company to provide equity
incentives in the form of stock options, stock appreciation rights, performance shares,
restricted stock and other stock-based awards to employees. Under the Company's 1992
Equity Incentive Plan, options are granted to purchase shares at prices not less than the
fair-market value of the shares at the date of grant. The options are exercisable at
various dates over one- to 10-year periods. Stock options granted during 1998 generally
have a maximum term of 10 years and vest over three years. At the beginning of each year,
21/2 percent of the number of common shares outstanding at the beginning of the year are
authorized for grants of options and other equity instruments.
Under the Company's Non-Employee Director Equity Plan, stock options are granted to
directors to purchase shares at prices not less than the fair market value of the shares
at the date of grant. A maximum of 100,000 shares of common stock has been reserved for
issuance under this plan.
The following is a summary of the transactions relating to all stock option plans for
each year ended December 31:
The Company has adopted the disclosure-only provisions of FASB 123. Accordingly, no
compensation expense has been recognized for the stock option plans. Had compensation
expense for the Company's stock option plans been determined based on the fair value at
the grant date for awards in 1998, 1997 and 1996 consistent with the provisions of FASB
123, the Company's net earnings and net earnings per share would have been reduced to the
pro-forma amounts indicated in the following table:
For 1996, the pro-forma effect on net earnings and net earnings per share may not be
representative of the pro-forma effect on net earnings and net earnings per share in
future years because it does not take into consideration pro-forma compensation expense
related to grants made prior to 1995.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average assumptions used
for grants in 1998, 1997 and 1996, respectively: a risk-free interest rate of 5.4%, 6.3%
and 5.6%; an expected volatility factor for the market price of the Company's common stock
of 35%, 34% and 34%; a dividend yield of .7%, 1.2% and 4.0%; and an expected life of 5
years, 5 years and 6 years. The weighted-average fair value as of the grant date for
options granted in 1998, 1997 and 1996 was $9.11, $4.90 and $4.07, respectively.
