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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED NOVEMBER 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ---------- TO ----------.
COMMISSION FILE NO. 1-9195
KB HOME
(FORMERLY KAUFMAN AND BROAD HOME CORPORATION)
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
INCORPORATED IN DELAWARE 95-3666267
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
10990 WILSHIRE BOULEVARD, LOS ANGELES, CALIFORNIA 90024
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (310) 231-4000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
COMMON STOCK (PAR VALUE $1.00 PER SHARE) NEW YORK STOCK EXCHANGE
RIGHTS TO PURCHASE SERIES A PARTICIPATING CUMULATIVE PREFERRED STOCK NEW YORK STOCK EXCHANGE
INCOME PRIDES NEW YORK STOCK EXCHANGE
GROWTH PRIDES NEW YORK STOCK EXCHANGE
9 3/8% SENIOR SUBORDINATED NOTES DUE 2003 NEW YORK STOCK EXCHANGE
7 3/4% SENIOR NOTES DUE 2004 NEW YORK STOCK EXCHANGE
9 5/8% SENIOR SUBORDINATED NOTES DUE 2006 NEW YORK STOCK EXCHANGE
9 1/2% SENIOR SUBORDINATED NOTES DUE 2011 NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO __
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. [X]
THE AGGREGATE MARKET VALUE OF VOTING STOCK HELD BY NON-AFFILIATES OF THE
COMPANY ON FEBRUARY 14, 2001 WAS $1,383,860,269, INCLUDING 8,774,612 SHARES HELD
BY THE REGISTRANT'S GRANTOR STOCK OWNERSHIP TRUST AND EXCLUDING 1,535,224 SHARES
HELD IN TREASURY.
THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S CLASSES OF
COMMON STOCK ON FEBRUARY 14, 2001 WAS AS FOLLOWS:
Common Stock (par value $1.00 per share) 43,973,952 shares, including
8,774,612 shares held by the Registrant's Grantor Stock Ownership
Trust and excluding 1,535,224 shares held in treasury.
DOCUMENTS INCORPORATED BY REFERENCE
2000 Annual Report to Stockholders (incorporated into Part II).
Notice of 2001 Annual Meeting of Stockholders and Proxy Statement
(incorporated into Part III).
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PART I
ITEM 1. BUSINESS
GENERAL
The Company is one of the largest homebuilder in the United States based on
the number of homes delivered. The Company builds single-family homes with
domestic operations in six western states, and has international operations in
France. On January 17, 2001, the Company announced it changed its name from
Kaufman and Broad Home Corporation to KB Home. Founded in 1957, the Company
builds innovatively designed homes which cater primarily to first-time and first
move-up homebuyers, generally in medium-sized developments close to major
metropolitan areas. Internationally, the Company's majority-owned subsidiary,
Kaufman & Broad S.A. ("KBSA"), builds single family homes, high density
residential properties such as condominium complexes and commercial projects in
France. KBSA is among the largest builders in France based on the number of
homes delivered. The Company provides mortgage banking services to domestic
homebuyers through its wholly owned subsidiary, Kaufman and Broad Mortgage
Company ("KBMC").
The Company is a Delaware corporation and maintains its principal executive
offices at 10990 Wilshire Boulevard, Los Angeles, California 90024. The
Company's telephone number is (310) 231-4000 and its Internet address is
www.kbhome.com. As used herein, the term "Company" refers to KB Home and its
subsidiaries, unless the context indicates otherwise.
MARKETS
The Company delivered 22,392 units in 2000 (excluding 455 deliveries from
certain unconsolidated joint ventures). The Company's unit deliveries for the
year ended November 30, 2000 were virtually flat compared with the previous
year's 22,422 units (excluding 38 deliveries from certain unconsolidated joint
ventures). During 2000, the average number of active communities operated by the
Company was 321, an increase of 2% over 1999. The average selling price of the
Company's homes was $168,300 in 2000, up 1% from 1999.
Since 1997, the Company has nearly doubled its annual unit deliveries and
more than doubled its unit backlog. The Company hopes to continue to increase
unit deliveries in future years, with its current primary growth strategies to
expand existing operations to optimal market volume levels, while entering new
markets at high volume levels through acquisitions. The Company's growth could
be materially affected by various risk factors such as changes in general
economic conditions either nationally or in regions in which the Company
operates or may commence operations, job growth and employment levels, home
mortgage interest rates or consumer confidence, among other things.
Nevertheless, the Company hopes to continue to grow its business in 2001. In
recent years, in addition to growing its existing businesses, the Company has
been active in completing acquisitions. During 2000, the Company's French
subsidiary purchased four homebuilders with operations in Paris, Lille, Toulouse
and Montpellier, France. In January 1999, the Company completed its purchase of
substantially all of the homebuilding assets of the Lewis Homes group of
companies ("Lewis Homes"). Prior to the acquisition, Lewis Homes was one of the
largest privately held single-family homebuilders in the United States based on
units delivered. Lewis Homes' principal markets were Las Vegas and Northern
Nevada, Southern California and the greater Sacramento area in Northern
California. The Company also acquired the remaining minority interest in
Houston-based General Homes Corporation ("General Homes") in January 1999. (The
Company had acquired a majority interest in General Homes in August 1998). In
August 1999, KBSA completed the acquisition of the outstanding shares of Park, a
French apartment builder.
During the late 1990's as a result of both organic growth and acquisitions,
the Company's homebuilding operations became more geographically diverse. This
diversity reduces the risk of financial impacts resulting from changes in demand
in individual markets. The Company's principal geographic markets as of November
30, 2000 were: "West Coast" -- California; "Southwest" -- Arizona, Nevada and
New Mexico; "Central" -- Colorado and Texas; and France. For several years prior
to this report, the Company grouped its domestic operating divisions in two
regions: California and "Other U.S." All year-over-year comparisons have been
accomplished by restating applicable prior years' results in a manner consistent
with the new regional groupings. The Company delivered its first homes in
California in 1963, France in 1970, Nevada in 1993, Colorado in 1994, New Mexico
in 1995 and Texas in 1996. In 1994, the Company also re-entered Arizona, a
market in which it had operated several years earlier.
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To enhance its operating capabilities in regional submarkets, the Company
conducted its domestic homebuilding business in 2000 through five divisional
offices in California, one divisional office in each of Colorado and New Mexico,
two divisional offices in both Nevada and Arizona, and four divisional offices
in Texas. In addition, the Company operated 15 KB Home Studios in 2000.
Internationally, the Company operates its construction business through two
divisional offices in France.
West Coast. The Company's West Coast region, comprised of operations in
Northern and Southern California, accounted for 28% of its domestic home
deliveries in 2000 compared to 32% in 1999 and 36% in 1998. During the first
half of the 1990's, weak conditions for new housing and general recessionary
trends in California prompted the Company to begin diversifying its business
through aggressive expansion into other western states in 1993. Since 1995, the
housing market has improved significantly in California. However, although the
number of new housing permits issued in California increased 3% in 2000 from
1999, and has increased in each year since 1995, the Company worked to
reposition its West Coast operations. In 2000, the Company's West Coast
deliveries decreased 13% from the previous year to 5,476 units. The decrease was
primarily due to two factors. First, the re-focusing of the Company's West Coast
operations following the Lewis Homes acquisition, in keeping with the KB2000
operational business model, resulted in fewer active communities in Northern
California in 2000 as compared to 1999. Second, the strength of the Company's
Southwest and Central region operations, which generally offer lower risk for
less investment in land, has resulted in more stringent criteria guiding the
Company's land investment decisions and has caused the Company to be more
selective in the West Coast region. Despite the decrease in the Company's West
Coast deliveries in 2000, the Company's market share in California was nearly
6%, which was the largest market share of any homebuilder in the state.
In Southern California, the Company conducts its homebuilding activity in
Los Angeles, Orange, Riverside, San Bernardino, San Diego and Ventura counties.
In Northern California, the Company's activities are conducted in the Central
Valley, Monterey Bay, Sacramento and San Francisco Bay-Oakland-San Jose regions.
The communities developed by the Company in the West Coast region consist
of single-family detached homes primarily designed for the entry-level housing
market. These homes ranged in size from approximately 1,200 to 5,000 square feet
in 2000 and sold at an average price of $257,000, well below the state of
California's new home average of $309,700, as a result of the Company's emphasis
on the entry-level market. In 2000, the Company's average selling price in the
West Coast region increased 5% from the previous year average of $246,000. The
West Coast average selling price increased only moderately due to a lower
proportion of Northern California deliveries in 2000, which are generally higher
priced than deliveries generated from Southern California operations.
Southwest. In the early 1990's, the greatly improved business conditions
in other western states coupled with a prolonged economic downturn in California
caused the Company to expand its domestic operations outside California. The
Company's Southwest region, which includes operations in Arizona, Nevada and New
Mexico, accounted for 30% of its domestic home deliveries in 2000 compared to
29% in 1999 and 20% in 1998. Deliveries from the Southwest region totaled 5,832
units in 2000, essentially flat with the prior year. The average number of
active communities in the Company's Southwest operations were slightly below the
prior year at 78 in 2000 compared to 82 in 1999.
The Company conducts its Southwest region homebuilding activities in
Phoenix and Tucson, Arizona; Las Vegas and Reno, Nevada; and Albuquerque, New
Mexico.
The communities developed by the Company's Southwest divisions primarily
consist of single-family detached entry-level homes. These homes ranged in size
from approximately 1,100 to 3,800 square feet in 2000 and sold at an average
price of $145,200. The average selling price of the Company's Southwest region
homes increased 2% in 2000 from $141,900 in 1999 as a result of selected
increases in sales prices in certain markets due to favorable market conditions.
Central. The Company's Central region, which includes operations in
Colorado and Texas, accounted for 42% of the Company's domestic deliveries in
2000 compared to 39% in 1999 and 44% in 1998. Since delivering its first homes
in the Central region in 1994, the Company has substantially grown its Central
operations, both organically and through acquisitions. The Company's operations
in the Central region delivered 8,112 units in 2000, up 4% from 7,809 units in
1999 as active communities in the region rose 4% to 100.
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The Company conducts its Central region homebuilding activities in Denver,
Colorado and Austin, Dallas, Houston and San Antonio, Texas. In 2000, the
Company was one of the largest homebuilders in each of its Texas markets, based
on the number of homes delivered.
The communities developed by the Company in the Central region consist
primarily of single-family detached homes targeted at the entry-level housing
market. These homes ranged in size from approximately 1,000 to 3,300 square feet
in 2000 and sold at an average price of $128,600. In 2000, the average selling
price of the Company's Central region homes rose 6% from $121,100 in 1999.
France. KBSA, the Company's majority owned subsidiary, is one of the
leading builders of homes (individual homes in communities and condominium
units) in France. KBSA's principal market in France is the Ile-de-France region,
where it currently builds 87% of its individual homes and 61% of its condominium
units. KBSA also has activities in the regions of Lyon, Marseille and Toulouse
as well as in Strasbourg and in Rouen. In 2000, housing deliveries from KBSA's
homebuilding operations increased 20% from the prior year, to 2,967 units,
partly due to improved market conditions. KBSA focused primarily on
single-family detached and attached homes in 2000, ranging in size from
approximately 800 to 1,600 square feet. The average selling price of KBSA's
homes in France decreased 3% to $158,500 in 2000 from $163,600 in 1999,
primarily due to a weakening in the French franc and an increase in the
proportion of deliveries generated from condominiums, which are typically priced
below single-family homes. In the late 1980's and early 1990's, KBSA carried out
a large commercial building business with revenues from these activities peaking
at $362.3 million in 1990. These commercial operations, which included
development of commercial office buildings in Paris for sale to institutional
investors, became a smaller segment of the French operations, however, as the
French economy declined in the first half of the 1990's. During this time, the
French economy experienced a significant recession reflecting low consumer
confidence, high unemployment and declines in both consumer and business
investments in real estate. Since 1996, the French economy has continued to
improve and KBSA expects a significant increase in its commercial activities in
2001, with revenues from these activities expected to range between $75.0
million and $90.0 million. Revenues from the development of commercial
buildings, all located in metropolitan Paris, totaled $.8 million in 2000, $.7
million in 1999 and $1.5 million in 1998.
Prior to February 7, 2000, KBSA was wholly owned by the Company. On
February 7, 2000, KBSA issued 5,314,327 common shares (including an over
allotment option) in an initial public offering. The offering was made in France
and elsewhere in Europe and was priced at 23 euros per share. KBSA is now listed
on the Premier Marche of the ParisBourse. The offering generated total net
proceeds of $113.1 million of which $82.9 million was used by the Company to
reduce its domestic debt and repurchase additional shares of its common stock.
The remainder of the proceeds was used to fund internal and external growth of
KBSA. The Company continues to own a majority interest in KBSA and will continue
to consolidate these operations in its financial statements.
Unconsolidated Joint Ventures. The Company participates in the development,
construction and sale of residential properties and commercial projects through
a number of unconsolidated joint ventures. These include joint ventures in
California, Nevada, New Mexico, Texas and France.
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Selected Market Data. The following table sets forth, for each of the
Company's regions, unit deliveries, average selling price of homes and total
construction revenues for the years ended November 30, 2000, 1999 and 1998
(excluding the effects of unconsolidated joint ventures).
YEARS ENDED NOVEMBER 30,
----------------------------
2000 1999 1998
-------- -------- --------
West Coast:
Unit deliveries........................................... 5,476 6,323 4,858
Average selling price..................................... $257,000 $246,000 $224,500
Total construction revenues (in millions)(1).............. $1,466.4 $1,579.2 $1,105.9
Southwest:
Unit deliveries........................................... 5,832 5,801 2,730
Average selling price..................................... $145,200 $141,900 $128,800
Total construction revenues (in millions)(1).............. $ 862.8 $ 830.4 $ 352.4
Central:
Unit deliveries........................................... 8,112 7,809 5,968
Average selling price..................................... $128,600 $121,100 $114,700
Total construction revenues (in millions)................. $1,065.8 $ 950.2 $ 690.0
Foreign:
Unit deliveries........................................... 2,972 2,489 1,657
Average selling price(2).................................. $158,700 $164,700 $152,400
Total construction revenues (in millions)(1)(2)........... $ 475.5 $ 412.3 $ 254.7
Total:
Unit deliveries........................................... 22,392 22,422 15,213
Average selling price(2).................................. $168,300 $166,500 $156,400
Total construction revenues (in millions)(1)(2)........... $3,870.5 $3,772.1 $2,403.0
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(1) Total construction revenues include revenues from residential development,
commercial activities and land sales.
(2) Average selling prices and total construction revenues for foreign
operations have been translated into U.S. dollars using weighted average
exchange rates for each period.
STRATEGY
The Company operates under the principles of its KB2000 operational
business model, and has continued to introduce complementary strategies to
enhance the benefits of this model. The KB2000 operational business model
emphasizes efficiencies generated from a more process-driven, systematic
approach to homebuilding and also focuses on gaining a deeper understanding of
customer interests and needs. Key elements of KB2000 include: improving the
Company's understanding of customer desires and preferences through frequent and
localized surveys; emphasizing pre-sales in contrast to speculative inventory;
maintaining lower average levels of in-process and standing inventory;
establishing even flow production; providing a wide spectrum of choice to
customers in terms of location, design and options; offering low base prices;
and reducing the use of sales incentives. Since first introducing the KB2000
operational business model in 1997, the Company has made significant progress in
implementing it by, among other things, focusing on the pre-sale and backlog
building strategy, developing and implementing a rigorous and detailed customer
survey program, and opening new KB2000 communities and KB Home Studios.
In order to leverage the benefits of the KB2000 operational business model,
the Company has concentrated on a strategy designed to achieve a leading
position in its major markets. By operating in fewer, larger markets at
sufficiently large volume levels, the Company believes it can better execute its
KB2000 operational business model and use economies of scale to increase
profits. The expected benefits of this strategy can include lower land
acquisition costs, improved terms with suppliers and subcontractors, the ability
to offer maximum choice and the best value to customers, and the retention of
the best management talent.
The Company hopes to continue to increase overall unit deliveries in future
years. The Company's growth strategies include expanding existing operations to
optimal market volume levels, as well as exploring entry into new markets at
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high volume levels, through acquisitions. Growth in existing markets will be
driven by the Company's ability to increase the average number of active
communities in its major markets through the continued successful implementation
of its KB2000 operational business model. Although the Company has not made a
major domestic acquisition since the January 1999 acquisition of Lewis Homes,
the Company continues to employ an acquisition strategy which has enabled it to
supplement growth in existing markets and facilitate expansion into new markets.
The Company believes that expanding its operations through the acquisition of
existing homebuilding companies affords several benefits such as established
land positions and existing relationships with land owners, subcontractors and
suppliers not found in start-up operations. During the last five fiscal years,
the Company has made the following acquisitions:
ENTITY ACQUIRED DATE ACQUIRED MARKETS
----------------- ------------------- ---------------------------------
Rayco March 1996 San Antonio, Texas
SMCI July 1997 Paris, France
Hallmark March 1998 Austin, Houston and San Antonio,
Texas
PrideMark March 1998 Denver, Colorado
Estes April 1998 Phoenix and Tucson, Arizona
General Homes August 1998* Houston, Texas
Lewis Homes January 1999 Las Vegas, Nevada and Northern
Nevada; Southern California and
the greater Sacramento area of
California
Park August 1999 Paris, France
Frank Arthur January 2000 Paris, France
Sefima July 2000 Paris, France
First July 2000 Lille, France
Sopra November 2000 Toulouse and Montpellier, France
* The Company also acquired the remaining minority interest in General Homes in
January 1999, bringing its total ownership interest to 100%.
In identifying acquisition targets, the Company seeks homebuilders that
possess the following characteristics: a business model similar to KB2000;
access to or control of land to support growth; a strong management team; and a
financial condition positioned to be accretive to earnings in the first full
year following acquisition. The Company believes that acquisitions fitting these
criteria will enable it to expand its operations in a focused and disciplined
manner. However, the Company's ability to acquire additional homebuilders could
be affected by several factors, including, among other things, conditions in the
U.S. securities markets, the Company's stock price, the general availability of
applicable acquisition candidates, pricing for such transactions, competition
among other national or regional builders for such target companies, changes in
general economic conditions nationally and in target markets, and capital or
credit market conditions.
The Company regularly reviews its land assets and businesses for the
purpose of monetizing non-strategic or marginal positions. In 2000, this
initiative was emphasized and was intended to increase cash flows to reduce debt
and repurchase stock. The Company continues to review its land assets and employ
stringent criteria for prospective land acquisitions.
LOCAL EXPERTISE
Management believes that its business requires in-depth knowledge of local
markets in order to acquire land in desirable locations and on favorable terms,
to engage subcontractors, to plan communities keyed to local demand, to
anticipate customer tastes in specific markets and to assess the regulatory
environment. Accordingly, the Company's divisional structure is designed to
utilize local market expertise. The Company has experienced management teams in
each of its regional submarkets. Although the Company has centralized certain
functions, such as marketing, legal, materials purchasing, product development,
architecture and accounting, to benefit from economies of scale, local
management continues to exercise considerable autonomy in identifying land
acquisition opportunities, developing sales strategies, conducting production
operations and controlling costs. The Company seeks to operate at optimal volume
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levels in each of its markets in order to maximize its competitive advantages
and the benefits of the KB2000 operational business model.
INNOVATIVE DESIGNS AND MARKETING STRATEGIES
The Company believes that it has been and continues to be an innovator in
the design of entry-level homes for the first-time buyer. The Company's in-house
architectural services group, whose plans are protected by copyright, has been
successful in creating distinctive design features that are not typically found
in comparably priced homes. In 2000, the Company continued to deepen the
implementation of the KB2000 operational business model, seeking to design homes
that kept construction costs and base prices as low as possible while achieving
high quality levels and promoting customer choice.
In January 2001, the Company announced that it was changing its name to "KB
Home." This new name, which resulted from homebuyer input, is intended to convey
the Company's strong customer focus and its commitment to helping homebuyers
realize their dream of home ownership.
Certain elements of the KB2000 operational business model include achieving
an in depth understanding of customer desires and preferences through detailed
market surveys and providing a wide spectrum of choice to customers in terms of
location, design and options. The Company's communities offer entry-level
homebuyers an abundance of choices and options which allows customers to
customize their home to an extent not typically available with other entry-
level builders. The Company provides flooring and other options and upgrades to
its homebuyers through its KB Home Studios. These KB Home Studios are typically
approximately 10,000 square feet, are located separately from divisional
business offices and offer customers over 5,000 options -- from floor plans to
fireplaces to garage doors -- in a retail environment convenient to multiple
communities. Company personnel are available at the studios to assist homebuyers
in selecting options and upgrades.
The Company markets its homes to prospective buyers through various types
of media, including newspaper advertisements, billboards and direct mail. In
addition, the Company extends its marketing programs beyond these more
traditional approaches through the use of television advertising, off-site
telemarketing and large-scale promotions. The Company maintains market and
specific community information on its Internet website which can be reached at
www.kbhome.com. The Company also utilizes a houseCall(TM) Center, a phone
service center designed to bring potential buyers to its communities while also
simplifying the home buying process for the consumer. The houseCall(TM) Center
can be reached at 1-800-34HOMES.
In 1999, the Company launched e.KB with the goal of increasing sales and
customer satisfaction, and improving the Company's financial performance through
e-commerce initiatives. Four key areas addressed by e.KB include: enhancing the
richness of up-to-date information available at www.kbhome.com and fully
integrating the website with the houseCall(TM) center, the KB Home Studios and
all sales offices; developing strategic alliances that will enable the Company
to provide new products and services to homebuyers; utilizing
business-to-business resources such as the KBbid program to create cost and time
savings for the Company; and increasing the Company's ability to cross-sell
communities through data collection and retrieval, while protecting the privacy
of its website visitors.
In France, the Company created a village concept through the elimination of
front-yard walls and the extensive use of landscaping. It also introduced to the
French market the American concept of a master bedroom suite, as well as walk-
in closets, built-in kitchen cabinetry and two-car garages. The Company believes
that in each of its residential markets, its value engineering enables it to
offer appealing and well-designed homes without increasing construction costs.
In 1998, the Company opened a 6,500 square foot new home showroom in Paris,
offering a broad choice of options to new home and condominium buyers. A French
website (ketb.com) featuring available homes was also launched in 1998.
In all of the Company's domestic and international residential markets, the
sale of homes is carried out by its in-house sales force. The Company maintains
on-site sales offices, which are usually open seven days a week, and markets its
homes principally through the use of fully furnished and landscaped model homes
which are decorated to emphasize the distinctive design features and the choices
available to customers. Company sales representatives are available to assist
prospective buyers by providing them with floor plans, price information and
tours of model homes. These sales representatives are experienced, trained
individuals who can provide buyers with specific information regarding other
products in the area, the variety of financing programs available, construction
schedules and marketing and advertising
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plans. In all of its domestic communities, the Company encourages participation
of outside real estate brokers in bringing prospective buyers to its
communities.
COMMUNITY DEVELOPMENT
The community development process generally consists of three phases: land
acquisition; land development; and home construction and sale. The normal
development cycle for a community has historically ranged from six to 24 months
in the West Coast region and is typically a somewhat shorter duration in the
Company's Southwest and Central markets. In France, the development cycle has
historically ranged from 12 to 30 months. Development cycles vary depending on
the extent of the government approvals required, the size of the development,
necessary site preparation, weather conditions and marketing results.
When feasible, the Company acquires control of lot positions through the
use of options. In addition, the Company frequently acquires finished lots
within its pricing parameters, enabling it to deliver completed homes shortly
after acquisition. The total number of lots in the Company's domestic new home
communities vary significantly but typically range from 50 to 250 lots. These
domestic developments usually include three different model home designs and
generally offer lot sizes ranging from approximately 3,000 to 10,000 square
feet, with premium lots often containing more square footage, views or
orientation benefits.
In prior years, the Company also regularly acquired undeveloped and/or
unentitled properties, often with total lots significantly in excess of 250
lots. In 1996, the Company decided to substantially eliminate its prior practice
of investing in such long-term development projects in order to reduce the
operating risk associated with such projects. In France, typical single-family
developments consist of approximately 30 to 40 lots, with average lot sizes of
3,500 square feet.
Land Acquisition and Development. In accordance with the KB2000
operational business model, all homebuyers of new and resale homes in each
market are carefully surveyed. Based upon these surveys, a marketing strategy is
developed which targets specific price points and geographic sectors which the
Company will pursue. The Company utilizes an in-house staff of land acquisition
specialists at each division who carry out extensive site selection research and
analysis in order to identify properties in desirable locations consistent with
the Company's market strategy. In acquiring land, the Company considers such
factors as: current market conditions, with an emphasis on the prices of
comparable new and resale homes in the particular market; expected sales rates;
proximity to metropolitan areas; population, industrial and commercial growth
patterns; estimated costs of completed lot development; customer preferences;
and environmental matters. Senior corporate management controls the commitment
of the Company's resources for all land acquisitions and utilizes a series of
specific financial and budgetary controls in approving acquisition opportunities
identified by division land acquisition personnel. The Company employs strict
standards for assessing all proposed land purchases based, in part, upon
specific discounted after tax cash flow internal rate of return requirements and
also evaluates each division's overall return on investment. The Company's
geographic expansion to areas which generally offer lower risk for less
investment in land has resulted in more stringent criteria guiding the Company's
land investment decisions and has caused it to be more selective in its land
investments in the West Coast region. Consistent with its standards, the Company
seeks to minimize, or defer the timing of, cash expenditures for new land
purchases and development by acquiring lots under option, phasing the land
purchase and lot development, relying upon non-recourse seller financing or
working with third-party land developers. In addition, the Company focuses on
acquiring finished or partially improved lots, which allow the Company to begin
delivery of finished homes within six months of the purchase of such lots and
reduces the risks of unforeseen improvement costs and volatile market
conditions. These techniques are intended to enhance returns associated with new
land investments by minimizing the incremental capital required.
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The following table shows the number of lots owned by the Company in
various stages of development and under option contracts in its principal
markets as of November 30, 2000 and 1999. The table does not include acreage
which has not yet been approved for subdivision into lots. This excluded acreage
consists of 627 acres and 767 acres owned in the United States in 2000 and 1999,
respectively.
TOTAL LOTS
HOMES/LOTS IN LAND UNDER LOTS UNDER OWNED OR
PRODUCTION DEVELOPMENT OPTION UNDER OPTION
--------------- --------------- --------------- ---------------
2000 1999 2000 1999 2000 1999 2000 1999
------ ------ ------ ------ ------ ------ ------ ------
West Coast........... 6,324 6,393 6,057 5,152 8,475 15,454 20,856 26,999
Southwest............ 5,637 6,712 2,719 3,190 6,395 9,159 14,751 19,061
Central.............. 10,406 8,702 7,245 7,724 12,854 13,840 30,505 30,266
Foreign and Other.... 2,198 1,718 6,119 164 4,367 3,726 12,684 5,608
------ ------ ------ ------ ------ ------ ------ ------
Total...... 24,565 23,525 22,140 16,230 32,091 42,179 78,796 81,934
====== ====== ====== ====== ====== ====== ====== ======
The Company has reduced the proportion of unentitled and unimproved land in
its portfolio. In addition, the Company has and expects to continue to focus on
the purchase of raw land under options which require little or no initial
payments, or pursuant to purchase agreements in which the Company's obligations
are contingent upon the Company being satisfied with the feasibility of
developing and selling homes. During the option period of its acquisition
agreements, the Company performs technical, environmental, engineering and
entitlement feasibility studies and seeks to obtain necessary government
approvals. The use of such option arrangements allows the Company to evaluate
and obtain regulatory approvals for a project, to reduce its financial
commitments, including interest and other carrying costs, and to minimize land
inventories. It also improves the Company's capacity to estimate costs
accurately, an important element in planning communities and pricing homes. The
Company typically purchases amounts sufficient for its expected production needs
and does not purchase land for speculative investment.
In France, despite the improvement in the French real estate market, the
Company also employs conservative strategies, including a greater emphasis on
the entry-level market segment and generally restrictive policies regarding land
acquisition.
Home Construction and Sale. Following the purchase of land and, if
necessary, the completion of the entitlement process, the Company typically
begins marketing homes and constructing model homes. The time required for
construction of the Company's homes depends on the weather, time of year, local
labor situations, availability of materials and supplies and other factors. The
construction of production homes is generally contingent upon customer orders to
minimize the costs and risks of standing inventory. The Company's KB2000
operational business model emphasizes pre-selling, maintaining stringent control
of production inventory and reducing unsold inventory. The pre-selling of homes
benefits homebuyers by allowing them to personalize their homes by selecting
from a wider range of customizing options. As a result of the Company's KB2000
pre-sale and backlog building strategies, the percentage of sold inventory in
production at year-end 2000 rose to 84% from 73% at year-end 1999.
The Company acts as the general contractor for virtually all of its
communities and hires subcontractors for all production activities. The use of
subcontractors enables the Company to reduce its investment in direct labor
costs, equipment and facilities. Where practical, the Company uses mass
production techniques, and prepackaged, standardized components and materials to
streamline the on-site production phase. During the early 1990's, the Company
developed systems for national and regional purchasing of certain building
materials, appliances and other items to take advantage of economies of scale
and to reduce costs. At all stages of production, the Company's own
administrative and on-site supervisory personnel coordinate the activities of
subcontractors and subject their work to quality and cost controls. As part of
its KB2000 strategies, the Company has also emphasized "even flow" production
methods to enhance the quality of its new homes, minimize production costs and
improve the predictability of revenues and earnings.
The Company generally prices its homes only after it has entered into
contracts for the construction of such homes with subcontractors, an approach
which improves its ability to estimate gross profits accurately. Wherever
possible, the Company seeks to acquire land and construct homes at costs which
allow selling prices to be set at levels below immediate competitors on a per
square foot basis, while maintaining appropriate gross margins.
8
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The Company's division personnel provide assistance to the homebuyer during
all phases of the homebuying process and after the home is sold. The coordinated
efforts of sales representatives, KB Home Studio consultants, on-site
construction superintendents and post-closing customer service personnel in the
customer's homebuying experience is intended to provide high levels of customer
satisfaction and lead to enhanced customer retention and referrals. In its
domestic homebuilding operations, the Company provides customers with a limited
home warranty program administered by the personnel in each of its divisions.
This arrangement is designed to give customers prompt and efficient
post-delivery service directly from the Company. The limited warranty program
covers certain repairs which may be necessary following new home construction
for one or two year periods and covers structural integrity for a period of ten
years. In the aggregate, the costs associated with the Company's warranty
program are not material to its operations.
EXTERNAL RISK FACTORS
The Company's operations and markets are affected by local and regional
factors such as local economies, demographic demand for housing, population
growth, employment growth, property taxes and energy costs, and by national
factors such as short and long-term interest rates, consumer confidence, federal
mortgage financing programs, federal income tax provisions and general economic
trends. In addition, homebuilders are subject to various risks including
availability and cost of land, conditions of supply and demand in local markets,
weather conditions, and delays in construction schedules and the entitlement
process. Net orders often vary on a seasonal basis, with the lowest order
activity typically occurring in the winter months.
The Company's 2000 financial results were affected by various factors,
including but not limited to, improved demand for new housing in certain markets
in the United States and in France, generally favorable economic conditions in
the Company's markets, and low domestic and foreign interest rates. Financial
results in 2000 were also adversely impacted by a weakening in the French franc
versus the U.S. dollar. The Company believes that the homebuilding industry has
been significantly less cyclical over the past several years, and should
continue to be less cyclical if these favorable conditions continue. In
addition, the Company's strategies, including the KB2000 operational business
model, are also intended to reduce the cyclical nature of its business.
The projections made by the Company for 2001 could be materially affected
by various risk factors such as changes in general economic conditions, either
nationally, in the U.S. or France, or in the localized regions in which the
Company operates; changes in job growth or employment levels; a downturn in the
economy's pace; changes in home mortgage interest rates or consumer confidence,
among other things. The Company is proceeding with caution into 2001 as recent
economic data indicates an overall slowing in the economy. The Company will
closely monitor overall economic trends in 2001 while remaining focused on the
effective management of its business units using KB2000 principles to minimize
the impact of any sustained economic slowdown.
BACKLOG
Sales of the Company's homes are made pursuant to standard sales contracts
which generally require a customer deposit at the time of execution and an
additional payment upon mortgage approval. Subject to particular contract
provisions, the Company generally permits customers to cancel their obligations
and obtain refunds of their deposits in the event mortgage financing is
unobtainable within a specified period of time.
Backlog consists of homes for which the Company has entered into a sales
contract but which it has not yet delivered. Ending backlog represents the
number of units in backlog from the previous period plus the number of net
orders (sales made less cancellations) taken during the current period minus
unit deliveries made during the current period. The backlog at any given time
will be affected by cancellations which most commonly result from the inability
of a prospective purchaser to obtain financing. Historically, the Company's
cancellation rates have increased during difficult economic periods. In
addition, deliveries of new homes typically increase from the first to the
fourth quarter in any year.
The Company's backlog at November 30, 2000 reached a new year-end record of
10,559 units, up 23% from the 8,558 backlog units at year end 1999.
Domestically, improvement occurred in all regions primarily due to generally
good market conditions throughout the United States, and the Company's emphasis
on pre-sales. The success of communities designed under the Company's KB2000
operational business model also contributed to the increase in domestic backlog
levels. KB2000 initiatives caused the Company's backlog ratio to increase to
174% at year-end 2000 from
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157% at year-end 1999. (Backlog ratio is defined as the ratio of beginning unit
backlog to actual deliveries in the succeeding quarter).
Internationally, unit backlog in France was 33% higher at November 30, 2000
as compared to November 30, 1999. This increase was mainly due to substantial
improvement in the French housing market and acquisitions completed during the
year.
The following table sets forth net orders, unit deliveries and ending
backlog relating to sales of homes and homes under contract for each quarter
during the three-year period ended November 30, 2000. The information in the
table excludes activity related to unconsolidated joint ventures. Activity
associated with unconsolidated joint ventures included net orders, unit
deliveries and ending backlog of 444, 455, and 208, respectively, for the year
ended November 30, 2000, and 38, 38 and 219, respectively, for the year ended
November 30, 1999.
NET UNIT ENDING
ORDERS DELIVERIES BACKLOG*
------ ---------- --------
Fiscal 2000:
First Quarter......................... 5,325 4,565 9,473
Second Quarter........................ 7,837 5,042 12,268
Third Quarter......................... 5,357 5,710 12,115
Fourth Quarter........................ 5,312 7,075 10,559
Fiscal 1999:
First Quarter......................... 5,621 4,279 9,216
Second Quarter........................ 7,219 5,139 11,296
Third Quarter......................... 5,347 6,103 10,809
Fourth Quarter........................ 4,869 6,901 8,558
Fiscal 1998:
First Quarter......................... 3,716 2,629 5,301
Second Quarter........................ 4,861 3,409 7,581
Third Quarter......................... 3,883 4,167 7,630
Fourth Quarter........................ 4,321 5,008 6,943
* Backlog amounts for 2000 have been adjusted to reflect four acquisitions in
France. Therefore, backlog amounts at November 30, 1999 combined with net
order and delivery activity for 2000 will not equal ending backlog at November
30, 2000. Similarly, backlog amounts for 1999 were adjusted to reflect the
acquisitions of Lewis Homes and Park and backlog amounts for 1998 were
adjusted to reflect the acquisitions of Hallmark, PrideMark and Estes, and the
acquisition of a majority interest in General Homes.
LAND AND RAW MATERIALS
Management believes that the Company's current supply of land is sufficient
for its reasonably anticipated needs over the next several years, and that it
will be able to acquire land on acceptable terms for future housing developments
absent great changes in current land acquisition market conditions. The
principal raw materials used in the construction of homes are concrete and
forest products. (In France, the principal materials used in the construction of
commercial buildings are steel, concrete and glass). In addition, the Company
uses a variety of other construction materials, including sheetrock, plumbing
and electrical items. The Company attempts to maintain efficient operations by
utilizing standardized materials which are commercially available on competitive
terms from a variety of sources. In addition, the Company's centralized
purchasing of certain building materials, appliances and fixtures, enable it to
benefit from large quantity purchase discounts for its domestic operations. When
possible, the Company makes bulk purchases of such products at favorable prices
from suppliers and instructs subcontractors to submit bids based on such prices.
LAND SALES
In the normal course of its business, the Company sells land which either
can be sold at an advantageous price due to market conditions or does not meet
its marketing needs. This property may consist of land zoned for commercial use
which is part of a larger parcel being developed for single-family homes or in
areas where the Company may consider its inventory to be excessive. Generally,
land sales fluctuate with decisions to maintain or decrease the Company's land
ownership position in certain markets based upon the volume of its holdings, the
strength and number of competing developers entering particular markets at given
points in time, the availability of land in markets served by the Company
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and prevailing market conditions. Land sales increased in 2000 in connection
with the Company's review of its assets and businesses for the purpose of
monetizing non-strategic or marginal positions. Land revenues totaled $100.5
million in 2000, $37.8 million in 1999 and $22.5 million in 1998.
CUSTOMER FINANCING -- KAUFMAN AND BROAD MORTGAGE COMPANY
On-site personnel at the Company's communities in the United States
facilitate sales by offering to arrange financing for prospective customers
through KBMC. Management believes that the ability to offer customers financing
on firm, competitive terms as a part of the sales process is an important factor
in completing sales.
KBMC's business consists of providing the Company's domestic customers with
competitive financing and coordinating and expediting the loan origination
transaction through the steps of loan application, loan approval and closing.
KBMC has its headquarters in Los Angeles and operates branch offices in
Fairfield, California; Las Vegas, Nevada; and San Antonio, Texas.
KBMC's principal sources of revenues are: (i) interest income earned on
mortgage loans during the period they are held by KBMC prior to their sale to
investors; (ii) net gains from the sale of loans; (iii) loan servicing fees; and
(iv) revenues from the sale of the rights to service loans.
KBMC is approved by the Government National Mortgage Association ("GNMA")
as a seller-servicer of Federal Housing Administration ("FHA") and Veterans
Administration ("VA") loans. A portion of the conventional loans originated by
KBMC (i.e., loans other than those insured by FHA or guaranteed by VA) qualify
for inclusion in loan guarantee programs sponsored by Fannie Mae or the Federal
Home Loan Mortgage Corporation ("FHLMC"). KBMC arranges for fixed and adjustable
rate, conventional, privately insured mortgages, FHA-insured or VA-guaranteed
mortgages, and mortgages funded by revenue bond programs of states and
municipalities. In 2000, 47% of the mortgages originated for the Company's
customers were conventional (most of which conformed to Fannie Mae and FHLMC
guidelines), 39% were FHA-insured or VA-guaranteed (a portion of which are
adjustable rate loans), 8% were funded by mortgage revenue bond programs and 6%
were adjustable rate mortgages ("ARMs") provided through commitments from
institutional investors. The percentages set forth above change from year to
year reflecting then-current fixed interest rates, introductory rates for ARMs,
housing prices and other economic conditions. In 2000, KBMC originated loans for
74% of the Company's domestic home deliveries to end users who obtained mortgage
financing.
KBMC is a delegated underwriter under the FHA Direct Endorsement and VA
Automatic programs in accordance with criteria established by such agencies.
Additionally, KBMC has delegated underwriting authority from Fannie Mae and
FHLMC. As a delegated underwriter, KBMC may underwrite and close mortgage loans
under programs sponsored by these agencies without their prior approval, which
expedites the loan origination process.
KBMC customarily sells nearly all of the loans that it originates. Loans
are sold either individually or in pools to GNMA, Fannie Mae or FHLMC or against
forward commitments to institutional investors, including banks and savings and
loan associations.
KBMC typically sells servicing rights on a regular basis for substantially
all of the loans it originates. However, for a small percentage of loans, and to
the extent required for loans being held for sale to investors, KBMC services
the mortgages that it originates. Servicing includes collecting and remitting
loan payments, accounting for principal and interest, making inspections of
mortgaged premises as required, monitoring delinquent mortgages and generally
administering the loans. KBMC receives fees for servicing mortgage loans,
generally ranging from .250% per annum to .375% per annum on the declining
principal balances of the loans.
The Company also assists its customers in France by arranging financing
through third-party lenders, primarily major French banks with which the Company
has established relationships. In some cases, French customers qualify for
certain government-assisted, home financing programs. A second mortgage is
usually handled through a government agency. A homebuyer in France may also have
a third mortgage provided through credit unions or other employee groups.
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EMPLOYEES
All of the Company's operating divisions operate independently with respect
to day-to-day operations within the context of the KB2000 operational business
model. All land purchases and other significant construction, mortgage banking
and similar operating decisions must be approved by the operating division
and/or senior corporate management.
The Company employs a trained staff of land acquisition specialists,
architects, planners, engineers, construction supervisors, marketing and sales
personnel and finance and accounting personnel, supplemented as necessary by
outside consultants, who guide the development of communities from their
conception through the marketing and sale of completed homes.
At January 31, 2001, the Company had approximately 3,500 full-time
employees in its operations, including approximately 400 in KBMC's operations.
No employees are represented by a collective bargaining agreement.
Construction and mortgage banking personnel are paid performance bonuses
based on individual performance and incentive compensation based on the
performance of the applicable operating division or subsidiary. The Company's
corporate personnel are typically paid performance bonuses based on individual
performance and incentive compensation based on the overall performance of the
Company. Each operating division or subsidiary is given autonomy regarding
employment of personnel within policy guidelines established by the Company's
senior management.
COMPETITION AND OTHER FACTORS
The Company expects the use of the KB2000 operational business model,
particularly the aspects which involve gaining a deeper understanding of
customer interests and needs and offering a wide range of choice to homebuyers,
to provide it with long-term competitive advantages. The housing industry is
highly competitive, and the Company competes with numerous housing producers
ranging from regional and national firms to small local builders primarily on
the basis of price, location, financing, design, reputation, quality and
amenities. In addition, the Company competes with other housing alternatives
including existing homes and rental housing. In certain markets and at times
when housing demand is high, the Company also competes with other builders to
hire subcontractors. The Company has historically been one of the market leaders
in each of the markets where it operates.
Increases in interest rates typically have a negative impact on the
Company's operations in that such increases adversely affect the availability of
home financing to, or qualification for such financing by, the Company's
customers. Conversely, significant reductions in interest rates typically have a
positive effect on the Company's operations. The relatively low interest rates
which have been in effect since the mid-1990s have been beneficial to the
Company's improved domestic results. The Company believes that, by virtue of its
KB2000 operational business model and the wide array of mortgage financing
products readily available to its homebuyers, the Company is less susceptible to
adverse impacts of interest rate increases on order rates than in the past.
The Company does not generally finance the development of its domestic
communities with proceeds of loans specifically obtained for, or secured by,
particular communities, i.e., project financing. Instead, financing of the
Company's domestic operations has been primarily generated from results of
operations, public debt and equity financing, and borrowings under its $725
million unsecured credit facility with various banks. On October 6, 2000, the
Company entered into the $725 million unsecured revolving credit facility,
consisting of a $564 million four-year committed revolving credit facility and a
$161 million five-year term loan, which together replaced its previously
existing revolving credit facility and term loan. Financing of the Company's
French operations has been primarily generated from results of operations and
borrowings from its unsecured committed credit lines with a series of foreign
banks. Furthermore, the initial public offering of the Company's French
operations, completed in February 2000, has strengthened the French business by
providing it with access to additional capital to support its growth. As a
result of diverse external sources of financing, the Company was not adversely
affected by the tight credit conditions that much of the homebuilding industry
experienced during the recession of the early to mid-1990s, both domestically
and in France.
On February 8, 2001, pursuant to the 1997 Shelf Registration, the Company
issued $250 million of 9 1/2% senior subordinated notes at 100% of the principal
amount of the notes. Proceeds from the issuance of the notes were used to pay
down bank borrowings.
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KBMC competes with other mortgage lenders, including national, regional and
local mortgage bankers, savings and loan associations and other financial
institutions, in the origination, sale and servicing of mortgage loans.
Principal competitive factors include interest rates and other features of
mortgage loan products available to the consumer. KBMC's operations are financed
primarily through a $300 million revolving Mortgage Warehouse Facility and a
$250 million Master Loan and Security Agreement with an investment bank.
REGULATION AND ENVIRONMENTAL MATTERS
The housing industry is subject to extensive and complex regulations. The
Company and its subcontractors must comply with various federal, state and local
laws, ordinances, rules and regulations concerning zoning, building design,
construction and similar matters. The operations of the Company are affected by
environmental laws and regulations, including regulations pertaining to
availability of water, municipal sewage treatment capacity, land use, protection
of endangered species, population density and preservation of the natural
terrain and coastlines. These and other requirements could become more
restrictive in the future, resulting in additional time and expense to obtain
approvals for the development of communities.
The Company is also subject to regulations and restrictions by the
government of France concerning investments in business operations in those
countries by U.S. companies, none of which has to date had a material adverse
effect on the Company's consolidated operations. The Company's foreign
operations are also subject to exchange rate fluctuations, which affect the
Company's financial statements and the reporting of profits and payment of
dividends from foreign subsidiaries, and to the terms of the Foreign Corrupt
Practices Act with which it is the strict policy of the Company to comply. In
addition, the Company periodically receives dividends and royalties from its
French operations without burdensome restrictions.
KBMC is subject to numerous federal, state and local laws, ordinances,
rules and regulations concerning loans to purchasers of homes as well as Company
eligibility for participation in programs of the VA, FHA, GNMA, Fannie Mae and
FHLMC.
The Company entered into a consent order with the Federal Trade Commission
in 1979, to which the Company is still subject and pursuant to which the Company
has agreed to provide explicit warranties on the quality and workmanship of its
new homes, follow certain guidelines in advertising and provide certain
disclosures to any prospective purchaser who visits Company sales offices or
model homes.
It is Company policy to use third-party environmental consultants to
investigate land considered for acquisition for environmental risks and
requiring disclosure from land sellers of known environmental risks. Despite
these activities, there can be no assurance that the Company will avoid material
liabilities relating to the removal of toxic wastes, site restoration,
monitoring or other environmental matters affecting properties currently or
previously owned by the Company. No estimate of such potential liabilities can
be made although the Company may, from time to time, purchase property which
requires modest environmental clean-up costs after appropriate due diligence. In
such instances, the Company takes steps prior to acquisition to assure itself as
to the precise scope of work required and costs associated with removal, site
restoration and/or monitoring, using detailed investigations by environmental
consultants. To the extent such contamination or other environmental issues have
occurred in the past, the Company believes it may be able to recover restoration
costs from third parties, including, but not limited to, the generators of
hazardous waste, land sellers or others in the prior chain of title and/or
insurers. Utilizing such policies, the Company anticipates that it is not likely
that environmental clean-up costs will have a material effect on future results
of operations or the Company's financial position. The Company has not been
notified by any governmental agency of any claim that any of the properties
owned or formerly owned by the Company are identified by the Environmental
Protection Agency as being a "Superfund" clean-up site requiring clean-up costs,
which could have a material effect on the Company's future financial position or
results of operations. Costs associated with the use of environmental
consultants are not material to the Company's results of operations.
ITEM 2. PROPERTIES
The Company's executive offices are in leased premises at 10990 Wilshire
Boulevard, Los Angeles, California. The Company's housing operations are
principally conducted from leased premises located in Phoenix and Tucson,
Arizona;
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Fremont, Irvine, Los Angeles, Pleasanton, Pomona, San Diego and Vacaville,
California; Denver, Colorado; Las Vegas and Reno, Nevada; Albuquerque, New
Mexico; Austin, Dallas and Houston, Texas; and Paris, France.
The Company's mortgage banking subsidiary leases executive offices in Los
Angeles, California and branch offices in Fairfield, California and Las Vegas,
Nevada.
The Company's homebuilding and mortgage banking operations in San Antonio,
Texas are principally conducted from premises which the Company owns.
The Company believes that such properties, including the equipment located
therein, are suitable and adequate to meet the requirements of its businesses.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in litigation incidental to its business. These
cases are in various procedural stages and, based on reports of counsel, it is
management's opinion that provisions or reserves made for potential losses are
adequate and any liabilities or costs arising out of currently pending
litigation will not have a materially adverse effect upon the Company's
financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of 2000 to a vote of
security holders, through the solicitation of proxies or otherwise.
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EXECUTIVE OFFICERS OF THE COMPANY
The following sets forth certain information regarding the executive
officers of the Company as of January 31, 2001:
YEAR
ASSUMED
PRESENT POSITION AT PRESENT OTHER POSITIONS AND OTHER BUSINESS EXPERIENCE WITHIN
NAME AGE JANUARY 31, 2001 POSITION THE LAST FIVE YEARS(1)
--------------------- --- ------------------------- -------- ----------------------------------------------------
Bruce Karatz 55 Chairman, President and 1993
Chief Executive Officer
Jeffrey T. Mezger 45 Chief Operating Officer 1999 Senior Vice President and Regional General Manager
and Executive Vice President, Kaufman and Broad of Arizona, Inc.
President
Glen Barnard 56 Executive Vice President, 1999 Senior Vice President and Regional General Manager
President, e.KB, Inc. President, Kaufman and Broad of Utah, Inc.
President, Kaufman and Broad of Colorado, Inc.
Guy Nafilyan 56 Chairman, President and 1999 President, European Operations
Chief Executive Officer, President and Chief Executive Officer, Kaufman &
Kaufman & Broad S.A. Broad
S.A. (formerly Kaufman and Broad France)
Barton P. Pachino 41 Senior Vice President and 1993
General Counsel
Albert Z. Praw 52 Senior Vice President, 1999 Senior Vice President, Business Development
Asset Management and President, Kaufman and Broad of Southern
Acquisitions California, Inc.
Senior Vice President and Regional General Manager
Senior Vice President, Real Estate
Gary A. Ray 42 Senior Vice President, 1996 Vice President, Training and Development, PepsiCo
Human Resources Restaurants International
William R. Hollinger 42 Vice President and 1992
Controller
NAME FROM - TO
--------------------- ---------
Bruce Karatz
Jeffrey T. Mezger 1998-1999
1995-1999
Glen Barnard 1996-1999
1997-1998
1995-1998
Guy Nafilyan 1992-1999
1983-1999
Barton P. Pachino
Albert Z. Praw 1998-1999
1997-1998
1996-1998
1994-1996
Gary A. Ray 1994-1996
William R. Hollinger
---------------
(1) All positions described were with the Company, unless otherwise indicated.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
As of January 31, 2001, there were 1,357 holders of record of the Company's
common stock.
Information as to the Company's quarterly stock prices is included on page
76 of the Company's 2000 Annual Report to Stockholders, which is included as
part of Exhibit 13 hereto.
Information as to the principal markets on which the Company's common stock
is being traded and quarterly cash dividends is included on page 76 of the
Company's 2000 Annual Report to Stockholders, which is included as part of
Exhibit 13 hereto.
ITEM 6. SELECTED FINANCIAL DATA
The Five Year Summary of KB Home for the five-year period ended November
30, 2000 is included on page 34 of the Company's 2000 Annual Report to
Stockholders, which is included as part of Exhibit 13 hereto. It should be read
in conjunction with the consolidated financial statements included in the
Company's 2000 Annual Report to Stockholders which are also included as part of
Exhibit 13 hereto.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations of KB Home is included on pages 35 through 49 of the Company's 2000
Annual Report to Stockholders, which are included as part of Exhibit 13 hereto.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The Company primarily enters into debt obligations to support general
corporate purposes, including acquisitions, and the operations of its divisions.
The primary market risk facing the Company is the interest rate risk on its
senior and senior subordinated notes. The Company has no cash flow exposure due
to interest rate changes for these notes. In connection with the Company's
mortgage banking operations, mortgage loans held for sale and the associated
Mortgage Warehouse Facility and Master Loan and Security Agreement are subject
to interest rate risk; however, such obligations reprice frequently and are
short-term in duration and accordingly the risk is not material. Under its
current policies, the Company does not use interest rate derivative instruments
to manage exposure to interest rate changes. The following table sets forth as
of November 30, 2000, the Company's long-term debt obligations, principal cash
flows by scheduled maturity, weighted average interest rates and estimated fair
market value (in thousands):
YEARS ENDED NOVEMBER 30, FAIR VALUE AT
----------------------------------------------------------------- NOVEMBER 30,
2001 2002 2003 2004 2005 THEREAFTER TOTAL 2000
-------- -------- -------- -------- -------- ---------- -------- -------------
Long-term debt(1) -- -- $174,534 $175,000 -- $124,581 $474,115 $460,243
Fixed Rate
Weighted Average Interest Rate -- -- 9.4% 7.8% -- 9.6%
---------------
(1) Includes senior and senior subordinated notes
A portion of the Company's construction operations are located in France.
As a result, the Company's financial results could be affected by factors such
as changes in the foreign currency exchange rate or weak economic conditions in
its markets. The Company's earnings are affected by fluctuations in the value of
the U.S. dollar as compared to foreign currency in France, as a result of its
sales in foreign markets. Therefore, for the year ending November 30, 2000, the
result of a 10% uniform strengthening in the value of the dollar relative to the
currency in which the Company's sales were denominated in France would have
resulted in a decrease in revenues of $47.5 million and a decrease in pretax
income of $3.4 million. Comparatively, the 1999 results of a 10% uniform
strengthening in the value of the dollar relative to the currencies in which the
Company's sales were denominated would have been a decrease in revenues of
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$40.5 million and a decrease in pretax income of $2.8 million. These
calculations assume that each exchange rate would change in the same direction
relative to the U.S. dollar. The Company's sensitivity analysis of the effects
of changes in foreign currency exchange rates does not factor in a potential
change in sales levels or local currency prices.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of KB Home are included on pages 50
through 72 of the Company's 2000 Annual Report to Stockholders, which are
included as part of Exhibit 13 hereto. Reference is made to the Index to
Financial Statements on page F-1 herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
The Notice of 2001 Annual Meeting of Stockholders and Proxy Statement,
filed pursuant to Regulation 14A under the Securities Exchange Act of 1934, is
incorporated by reference in this Annual Report on Form 10-K pursuant to General
Instruction G(3) of Form 10-K and provides the information required under Part
III (Items 10, 11, 12 and 13) except for the information regarding the executive
officers of the Company, which is included in Part I on page 15 herein.
PART IV
ITEM 14. FINANCIAL STATEMENTS, EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
FINANCIAL STATEMENTS
Reference is made to the index set forth on page F-1 of this Annual
Report on Form 10-K.
EXHIBITS
EXHIBIT
NO. DESCRIPTION
------- -----------
2.1 Purchase Agreement (Amended and Restated), executed January
7, 1999, between the Company and the Lewis Homes sellers,
filed as an exhibit to the Company's Current Report on Form
8-K dated January 7, 1999, is incorporated by reference
herein.
2.2 Representation, Warranty and Indemnity Agreement, dated
January 7, 1999, between the Company and certain entities
affiliated with the Lewis Homes sellers, filed as an exhibit
to the Company's Current Report on Form 8-K dated January 7,
1999, is incorporated by reference herein.
3.1 Amended Certificate of Incorporation, filed as an exhibit to
the Company's Registration Statement No. 33-6471 on Form
S-1, is incorporated by reference herein.
3.2 Amendment to Certificate of Incorporation, filed as an
exhibit to the Company's Registration Statement No. 33-30140
on Form S-1, is incorporated by reference herein.
3.3 Certificate of Designation of Series A Participating
Cumulative Preferred Stock, filed as an exhibit to the
Company's Registration Statement No. 33-30140 on Form S-1,
is incorporated by reference herein.
3.4 Certificate of Designation of Series B Mandatory Conversion
Premium Dividend Preferred Stock, filed as an exhibit to the
Company's Registration Statement No. 33-59516 on Form S-3,
is incorporated by reference herein.
17
19
EXHIBIT
NO. DESCRIPTION
------- -----------
3.5 Amended Certificate of Designation of Series B Mandatory
Conversion Premium Dividend Preferred Stock, filed as an
exhibit to the Company's Registration Statement No. 33-59516
on Form S-3, is incorporated by reference herein.
3.6 Amended Certificate of Designation of Series A Participating
Cumulative Preferred Stock, filed as an exhibit to the
Company's Registration Statement No. 001-09195 on Form
8-A12B, is incorporated by reference herein.
3.7 Certificate of Ownership and Merger effective January 17,
2001 merging KB Home, Inc. into Kaufman and Broad Home
Corporation, through which the name of the Company was
changed to KB HOME.
3.8 By-Laws, as amended and restated on January 17, 2001, to
reflect the change in the Company's name.
4.1 Amended Certificate of Incorporation, filed as an exhibit to
the Company's Registration Statement No. 33-6471 on Form
S-1, is incorporated by reference herein.
4.2 Amendment to Certificate of Incorporation, filed as an
exhibit to the Company's Registration Statement No. 33-30140
on Form S-1, is incorporated by reference herein.
4.3 Indenture relating to 9 3/8% Senior Subordinated Notes due
2003 between the Company and First National Bank of Boston,
dated May 1, 1993, filed as an exhibit to the Company's
Registration Statement No. 33-59516 on Form S-3, is
incorporated by reference herein.
4.4 Specimen of 9 3/8% Senior Subordinated Notes due 2003, filed
as an exhibit to the Company's Registration Statement No.
33-59516 on Form S-3, is incorporated by reference herein.
4.5 Indenture relating to 9 5/8% Senior Subordinated Notes due
2006 between the Company and SunTrust Bank, Atlanta, dated
November 19, 1996, filed as an exhibit to the Company's
Current Report on Form 8-K dated November 19, 1996, is
incorporated by reference herein.
4.6 Specimen of 9 5/8% Senior Subordinated Notes due 2006, filed
as an exhibit to the Company's Current Report on Form 8-K
dated November 19, 1996, is incorporated by reference
herein.
4.7 Indenture relating to 7 3/4% Senior Notes due 2004 between
the Company and SunTrust Bank, Atlanta, dated October 14,
1997, filed as an exhibit to the Company's Current Report on
Form 8-K dated October 14, 1997, is incorporated by
reference herein.
4.8 Specimen of 7 3/4% Senior Notes due 2004, filed as an
exhibit to the Company's Current Report on Form 8-K dated
October 14, 1997, is incorporated by reference herein.
4.9 Certificate of Trust of KBHC Financing I, filed as an
exhibit to the Company's registration Statement Nos.
333-51825 and 333-51825-01 (Amendment No. 4) on Form S-3, is
incorporated by reference herein.
4.10 Declaration of Trust of KBHC Financing I, filed as an
exhibit to the Company's Registration Statement Nos.
333-51825 and 333-51825-01 (Amendment No. 4) on Form S-3, is
incorporated by reference herein.
4.11 Amended and Restated Declaration of Trust of KBHC Financing
I, dated July 7, 1998, (including Capital Security
Certificate for KBHC Financing I, with respect to the
Capital Securities) filed as an exhibit to the Company's
Current Report on Form 8-K dated August 14, 1998, is
incorporated by reference herein.
4.12 Guarantee Agreement, dated July 7, 1998, in respect of KBHC
Financing I, in respect of the Capital Securities, filed as
an exhibit to the Company's Current Report on Form 8-K dated
August 14, 1998, is incorporated by reference herein.
4.13 Indenture, dated July 7, 1998 between the Company and The
First National Bank of Chicago, as Trustee, filed as an
exhibit to the Company's Current Report on Form 8-K dated
August 14, 1998, is incorporated by reference herein.
4.14 First Supplemental Indenture, dated July 7, 1998, between
the Company and The First National Bank of Chicago, as
Trustee, (including Debentures) filed as an exhibit to the
Company's Current Report on Form 8-K dated August 14, 1998,
is incorporated by reference herein.
18
20
EXHIBIT
NO. DESCRIPTION
------- -----------
4.15 Purchase Contract Agreement, dated July 7, 1998, between the
Company and The First National Bank of Chicago, as Purchase
Contract Agent, filed as an exhibit to the Company's Current
Report on Form 8-K dated August 14, 1998, is incorporated by
reference herein.
4.16 Pledge Agreement, dated July 7, 1998, between the Company,
The Chase Manhattan Bank, as Collateral Agent, Custodial
Agent and Securities Intermediary and The First National
Bank of Chicago, as Purchase Contract Agent, filed as an
exhibit to the Company's Current Report on Form 8-K dated
August 14, 1998, is incorporated by reference herein.
4.17 Remarketing Agreement, dated July 7, 1998, among the
Company, The First National Bank of Chicago and Merrill
Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated, filed as an exhibit to the Company's Current
Report on Form 8-K dated August 14, 1998, is incorporated by
reference herein.
4.18 Rights Agreement between the Company and ChaseMellon
Shareholder Services, L.L.C., as Rights Agent, dated
February 4, 1999, filed as an exhibit to the Company's
Current Report on Form 8-K dated February 4, 1999, is
incorporated by reference herein.
4.19 By-Laws, as amended and restated on January 17, 2001, to
reflect the change in the Company's name, included as
Exhibit No. 3.8 herein.
10.1 1986 Stock Option Plan, filed as an exhibit to the Company's
Registration Statement No. 33-6471 on Form S-1, is
incorporated by reference herein.
10.2 1988 Employee Stock Plan, filed as an exhibit to the
definitive Joint Proxy Statement for the Company's 1989
Special Meeting of Shareholders, is incorporated by
reference herein.
10.3 Consent Order, Federal Trade Commission Docket No. C-2954,
dated February 12, 1979, filed as an exhibit to the
Company's Registration Statement No. 33-6471 on Form S-1, is
incorporated by reference herein.
10.4 SunAmerica Inc. Executive Deferred Compensation Plan,
approved September 25, 1985, filed as an exhibit to
SunAmerica Inc.'s 1985 Annual Report on Form 10-K, is
incorporated by reference herein.
10.5 Directors' Deferred Compensation Plan established effective
July 27, 1989, filed as an exhibit to the Company's 1989
Annual Report on Form 10-K, is incorporated by reference
herein.
10.6 Settlement with Federal Trade Commission of June 27, 1991,
filed as an exhibit to the Company's Current Report on Form
8-K, dated June 28, 1991, is incorporated by reference
herein.
10.7 Amendments to the Kaufman and Broad Home Corporation 1988
Employee Stock Plan dated January 27, 1994, filed as an
exhibit to the Company's 1994 Annual Report on Form 10-K,
are incorporated by reference herein.
10.8 Kaufman and Broad Home Corporation Performance-Based
Incentive Plan for Senior Management, filed as an exhibit to
the Company's 1995 Annual Report on Form 10-K, is
incorporated by reference herein.
10.9 Form of Stock Option Agreement under Kaufman and Broad Home
Corporation Performance-Based Incentive Plan for Senior
Management, filed as an exhibit to the Company's 1995 Annual
Report on Form 10-K, is incorporated by reference herein.
10.10 Employment Contract of Bruce Karatz, dated December 1, 1995,
filed as an exhibit to the Company's 1995 Annual Report on
Form 10-K, is incorporated by reference herein.
10.11 Kaufman and Broad Home Corporation Unit Performance Program,
filed as an exhibit to the Company's 1996 Annual Report on
Form 10-K, is incorporated by reference herein.
10.12 Kaufman and Broad France Incentive Plan, filed as an exhibit
to the Company's 1997 Annual Report on Form 10-K, is
incorporated by reference herein.
10.13 Registration Rights Agreement, dated January 7, 1999, filed
as an exhibit to the Company's Current Report on Form 8-K,
dated January 7, 1999, is incorporated by reference herein.
10.14 Kaufman and Broad Home Corporation 1998 Stock Incentive
Plan, filed as an exhibit to the Company's 1998 Annual
Report on Form 10-K, is incorporated by reference herein.
19
21
EXHIBIT
NO. DESCRIPTION
------- -----------
10.15 Kaufman and Broad Home Corporation Directors' Legacy
Program, as amended January 1, 1999, filed as an exhibit to
the Company's 1998 Annual Report on Form 10-K, is
incorporated by reference herein.
10.16 Kaufman and Broad Home Corporation 1999 Incentive Plan,
filed as an exhibit to the Company's 1999 Annual Report on
Form 10-K, is incorporated by reference herein.
10.17 Trust Agreement between Kaufman and Broad Home Corporation
and Wachovia Bank, N.A. as Trustee, dated as of August 27,
1999, filed as an exhibit to the Company's 1999 Annual
Report on Form 10-K, is incorporated by reference herein.
10.18 Non-Employee Directors Stock Plan, as amended and restated
as of December 6, 1999, filed as an exhibit to the Company's
1999 Annual Report on Form 10-K, is incorporated by
reference herein.
10.19 Stock Purchase Agreement, dated as of September 21, 2000, by
and between the Company and certain of the Lewis Homes
sellers.
10.20 2000 Revolving Credit Facility, dated as of October 3, 2000,
by and among the Company, the banks party thereto, Bank of
America, N.A., as Administrative Agent, and Banc of America
Securities LLC, as Lead Arranger and Sole Book Manager.
10.21 2000 Term Credit Facility, dated as of October 3, 2000, by
and among the Company, the banks party thereto, Bank of
America, N.A., as Administrative Agent, and Banc of America
Securities LLC, as Lead Arranger and Sole Book Manager.
10.22 Form of limited liability company Operating Agreement under
the e.KB Equity Incentive Program.
13 Pages 34 through 72 and page 76 of the Company's 2000 Annual
Report to Stockholders.
22 Subsidiaries of the Company.
24 Consent of Independent Auditors.
FINANCIAL STATEMENT SCHEDULES
Financial statement schedules have been omitted because they are not
applicable or the required information is shown in the consolidated
financial statements and notes thereto.
REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the fourth quarter of 2000.
20
22
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
KB HOME
By: /s/ WILLIAM R. HOLLINGER
------------------------------------
William R. Hollinger
Vice President and Controller
Dated: February 28, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant in
the capacities and on the dates indicated:
SIGNATURE TITLE DATE
--------- ----- ----
/s/ BRUCE KARATZ Chairman, President and February 28, 2001
----------------------------------------------------- Chief Executive Officer
Bruce Karatz (Principal Executive Officer)
/s/ WILLIAM R. HOLLINGER Vice President and Controller February 28, 2001
----------------------------------------------------- (Principal Financial Officer
William R. Hollinger and
Principal Accounting Officer)
/s/ RONALD W. BURKLE Director February 28, 2001
-----------------------------------------------------
Ronald W. Burkle
/s/ HENRY G. CISNEROS Director February 28, 2001
-----------------------------------------------------
Henry G. Cisneros
/s/ JANE EVANS Director February 28, 2001
-----------------------------------------------------
Jane Evans
/s/ DR. RAY R. IRANI Director February 28, 2001
-----------------------------------------------------
Dr. Ray R. Irani
/s/ JAMES A. JOHNSON Director February 28, 2001
-----------------------------------------------------
James A. Johnson
/s/ RANDALL W. LEWIS Director February 28, 2001
-----------------------------------------------------
Randall W. Lewis
/s/ DR. BARRY MUNITZ Director February 28, 2001
-----------------------------------------------------
Dr. Barry Munitz
/s/ GUY NAFILYAN Director February 28, 2001
-----------------------------------------------------
Guy Nafilyan
/s/ LUIS G. NOGALES Director February 28, 2001
-----------------------------------------------------
Luis G. Nogales
/s/ SANFORD C. SIGOLOFF Director February 28, 2001
-----------------------------------------------------
Sanford C. Sigoloff
21
23
KB HOME AND CONSOLIDATED SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
The consolidated financial statements, together with the report thereon of
Ernst & Young LLP, dated December 21, 2000, all appearing on pages 50 through 72
of the 2000 Annual Report to Stockholders, are incorporated in this Annual
Report on Form 10-K between page F-1 and the List of Exhibits Filed. With the
exception of the aforementioned information and the information incorporated in
Items 5, 6 and 7, the 2000 Annual Report to Stockholders is not to be deemed
filed as part of this Annual Report on Form 10-K.
Separate combined financial statements of the Company's unconsolidated
joint venture activities have been omitted because, if considered in the
aggregate, they would not constitute a significant subsidiary as defined by Rule
3-09 of Regulation S-X.
------------------------
PAGE NO. IN
ANNUAL REPORT
TO STOCKHOLDERS
---------------
KB HOME
Consolidated Statements of Income for the years ended
November 30, 2000, 1999 and 1998............................ 50
Consolidated Balance Sheets as of November 30, 2000 and 1999... 51
Consolidated Statements of Stockholders' Equity for the years
ended November 30, 2000, 1999 and 1998...................... 52
Consolidated Statements of Cash Flows for the years ended
November 30, 2000, 1999 and 1998............................ 53
Notes to Consolidated Financial Statements..................... 54 through 70
Report of Independent Auditors................................. 71
Report on Financial Statements................................. 72
The following pages represent pages 34 through 72 and page 76 of the 2000
Annual Report to Stockholders of KB Home, and include the Five Year Summary,
Management's Discussion and Analysis of Financial Condition and Results of
Operations, the Consolidated Financial Statements and related notes thereto, the
Report of Independent Auditors, Report on Financial Statements, Stockholder
Information and Common Stock Prices. These pages were filed with the Securities
and Exchange Commission as Exhibit 13 hereto.
F-1
24
SELECTED FINANCIAL INFORMATION
YEARS ENDED NOVEMBER 30,
-------------------------------------------------------------------------------
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS 2000 1999 1998 1997 1996
-------------------------------------------------------------------------------
Construction:
Revenues $ 3,870,488 $ 3,772,121 $ 2,402,966 $ 1,843,614 $ 1,754,147
Operating income (loss)(1) 288,609 259,107 148,672 101,751 (72,078)
Total assets 2,361,768 2,214,076 1,542,544 1,133,861 1,000,159
Mortgages and notes payable 987,980 813,424 529,846 496,869 442,629
-------------------------------------------------------------------------------
Mortgage banking:
Revenues $ 60,370 $ 64,174 $ 46,396 $ 35,109 $ 33,378
Operating income(2) 23,832 17,464 21,413 14,508 12,740
Total assets 467,153 450,159 317,660 285,130 243,335
Notes payable 385,294 377,666 239,413 200,828 134,956
Collateralized mortgage obligations 29,928 36,219 49,264 60,058 68,381
-------------------------------------------------------------------------------
Consolidated:
Revenues $ 3,930,858 $ 3,836,295 $ 2,449,362 $ 1,878,723 $ 1,787,525
Operating income (loss)(1),(2) 312,441 276,571 170,085 116,259 (59,338)
Net income (loss)(1),(2),(3) 209,960 147,469 95,267 58,230 (61,244)
Total assets 2,828,921 2,664,235 1,860,204 1,418,991 1,243,494
Mortgages and notes payable 1,373,274 1,191,090 769,259 697,697 577,585
Collateralized mortgage obligations 29,928 36,219 49,264 60,058 68,381
Mandatorily redeemable preferred
securities (Feline Prides) 189,750 189,750 189,750
Stockholders' equity(1),(2),(3) 654,759 676,583 474,511 383,056 340,350
-------------------------------------------------------------------------------
Basic earnings (loss) per share(1),(2),(3) $ 5.39 $ 3.16 $ 2.41 $ 1.50 $ (1.80)
Diluted earnings (loss) per share(1),(2),(3) 5.24 3.08 2.32 1.45 (1.80)
Cash dividends per common share .30 .30 .30 .30 .30
===============================================================================
(1) Reflects a $170.8 million construction pretax noncash charge for impairment
of long-lived assets recorded in the second quarter of 1996.
(2) Reflects an $18.2 million mortgage banking pretax secondary marketing
trading loss recorded in the third quarter of 1999.
(3) Reflects a $39.6 million construction gain on issuance of French subsidiary
stock recorded in the first quarter of 2000.
34
25
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
OVERVIEW Revenues are primarily generated from the Company's (i) housing
operations in the western United States and France and (ii) its domestic
mortgage banking operations.
The Company's construction revenues are generated from operating divisions in
the following regional groups: "West Coast"- California; "Southwest"- Arizona,
Nevada and New Mexico; and "Central"- Colorado and Texas. For several years
prior to this report, the Company grouped its domestic operating divisions in
two regions: California and "Other U.S." All year-over-year comparisons have
been accomplished by restating applicable prior years' results in a manner
consistent with the new regional groupings.
The Company reported record earnings for the third consecutive year in 2000. Net
income for the year ended November 30, 2000 totaled $210.0 million and diluted
earnings per share reached $5.24, including a one-time gain on the issuance of
stock by the Company's French subsidiary in an initial public offering in
February 2000. Excluding this gain, diluted earnings per share were $4.25,
compared to diluted earnings per share of $3.33 (excluding a secondary marketing
trading loss) recorded in 1999. During the 2000 fiscal year, the Company
delivered 22,392 homes.
Total Company revenues rose to an all-time high of $3.93 billion in 2000, up
2.5% from $3.84 billion in 1999, which had increased 56.6% from revenues of
$2.45 billion in 1998. The increase in 2000 mainly resulted from increases in
housing and land sale revenues. The increase in revenues in 1999 compared to
1998 was primarily attributable to higher housing and land sale revenues, as
well as increased revenues from mortgage banking operations. Operating results
for 1999 included the results of Lewis Homes from its January 1999 acquisition
date, as well as the first full year of results from the acquisitions of
Houston-based Hallmark Residential Group ("Hallmark") and Phoenix/Tucson-based
Estes Homebuilding Co. ("Estes") and the assets of Denver-based PrideMark
Homebuilding Group ("PrideMark"), all of which the Company completed in the
second quarter of 1998. Operating results for 1999 also reflected the
acquisition of the remaining minority interest of General Homes, which occurred
on January 4, 1999. The Company had acquired a majority interest in General
Homes in August 1998. Included in total Company revenues were mortgage banking
revenues of $60.4 million in 2000, $64.2 million in 1999 and $46.4 million in
1998, respectively.
Net income increased $62.5 million or 42.4% to $210.0 million, or $5.24 per
diluted share in 2000, both Company records, up from $147.5 million, or $3.08
per diluted share in 1999. These results include a one-time gain of $39.6
million, or $.99 per diluted share, on the issuance of stock by the Company's
French subsidiary in an initial public offering in February 2000 (the "French
IPO gain"). Excluding the French IPO gain, diluted earnings per share for 2000
were $4.25, up 27.6% compared with 1999, excluding the secondary marketing
trading loss. The increase in diluted earnings per share in 2000 was principally
driven by the combined effect of a higher housing gross margin, lower selling,
general and administrative expenses, a lower effective income tax rate and a
16.2% reduction in the average number of diluted shares outstanding due to the
Company's share repurchase program. Net income of $147.5 million, or $3.08 per
diluted share for 1999 was 54.8% higher than the $95.3 million, or $2.32 per
diluted share recorded in 1998. Net income and diluted earnings per share for
1999 included the impact of a third quarter secondary marketing trading loss,
resulting from unauthorized trading by an employee at the Company's mortgage
banking subsidiary. The loss totaled $11.8 million, or $.25 per diluted share,
on an after tax basis. Excluding the impact of the trading loss, net income for
1999 was $159.2 million and diluted earnings per share were $3.33. The growth in
diluted earnings per share occurred despite the trading loss and despite an
increase of 16.6% in the diluted average number of common shares outstanding in
1999, resulting from the Lewis Homes acquisition which closed on January 7,
1999. The increase in diluted earnings per share in 1999 was principally driven
by significantly higher unit deliveries, an improved construction gross margin
and a reduction in the selling, general and administrative expense ratio.
35
26
CONSTRUCTION
REVENUES Construction revenues rose to $3.87 billion in 2000 from $3.77 billion
in 1999, which had increased from $2.40 billion in 1998. The increase in 2000
was primarily due to higher housing and land sale revenues. The improvement in
1999 was mainly the result of increased housing revenues, due, among other
things, to the acquisition of Lewis Homes in 1999, the inclusion of a full
year's operating results from the operations in Houston, Denver and
Phoenix/Tucson acquired during 1998, and higher land sale revenues.
UNCONSOLIDATED
WEST COAST SOUTHWEST CENTRAL FOREIGN TOTAL JOINT VENTURES
------------------------------------------------------------------------
Unit Deliveries
2000
First 1,128 1,264 1,653 520 4,565 123
Second 1,207 1,349 1,884 602 5,042 137
Third 1,444 1,596 1,944 726 5,710 102
Fourth 1,697 1,623 2,631 1,124 7,075 93
------------------------------------------------------------------------
Total 5,476 5,832 8,112 2,972 22,392 455
========================================================================
1999
First 1,199 1,130 1,627 323 4,279
Second 1,430 1,376 1,845 488 5,139
Third 1,629 1,590 1,936 948 6,103
Fourth 2,065 1,705 2,401 730 6,901 38
------------------------------------------------------------------------
Total 6,323 5,801 7,809 2,489 22,422 38
========================================================================
Net Orders
2000
First 1,341 1,523 1,903 558 5,325 115
Second 2,178 1,875 2,888 896 7,837 121
Third 1,301 1,301 2,191 564 5,357 102
Fourth 1,198 1,337 1,941 836 5,312 106
------------------------------------------------------------------------
Total 6,018 6,036 8,923 2,854 23,831 444
========================================================================
1999
First 1,572 1,284 2,230 535 5,621
Second 2,104 1,901 2,297 917 7,219
Third 1,660 1,457 1,720 510 5,347
Fourth 1,314 1,431 1,477 647 4,869 38
------------------------------------------------------------------------
Total 6,650 6,073 7,724 2,609 23,056 38
========================================================================
36
27
UNCONSOLIDATED
WEST COAST SOUTHWEST CENTRAL FOREIGN TOTAL JOINT VENTURES
----------------------------------------------------------------------------------------
Ending Backlog-Units
2000
First 2,092 2,366 3,449 1,566 9,473 211
Second 3,063 2,892 4,453 1,860 12,268 195
Third 2,920 2,597 4,700 1,898 12,115 195
Fourth 2,421 2,311 4,010 1,817 10,559 208
========================================================================================
1999
First 1,925 2,208 3,887 1,196 9,216
Second 2,599 2,733 4,339 1,625 11,296
Third 2,630 2,600 4,123 1,456 10,809
Fourth 1,879 2,107 3,199 1,373 8,558 219
========================================================================================
Ending Backlog-Value
In thousands
2000
First $ 495,782 $ 349,122 $ 438,739 $ 249,581 $1,533,224 $ 38,824
Second 755,243 413,692 570,012 315,151 2,054,098 36,660
Third 737,912 377,324 607,767 310,240 2,033,243 35,880
Fourth 643,620 345,609 541,258 272,901 1,803,388 42,224
========================================================================================
1999
First $ 449,993 $ 305,339 $ 454,944 $ 196,028 $1,406,304
Second 613,466 389,458 524,065 270,229 1,797,218
Third 631,823 371,160 511,378 235,544 1,749,905
Fourth 457,439 299,520 396,962 228,213 1,382,134 $ 33,945
========================================================================================
Housing revenues totaled a record $3.77 billion in 2000, $3.73 billion in 1999
and $2.38 billion in 1998. In 2000, housing revenues increased 1.0% from 1999 as
a result of a 1.1% increase in the average selling price as unit volume remained
nearly flat with the prior year. In 1999, housing revenues were up 56.9% from
1998 as a result of a 47.4% increase in unit volume and a 6.5% rise in the
average selling price.
Housing revenues from West Coast operations were $1.41 billion in 2000, down
9.5% from $1.56 billion in 1999 as a result of a 13.4% decrease in unit
deliveries, partially offset by a 4.5% increase in the average selling price.
West Coast housing operations generated 42.7% of domestic housing revenues in
2000, down from 46.8% in 1999 and 51.3% in 1998, mainly as a result of the
Company's selective land investments in the region and the continued expansion
of its Southwest and Central region operations. This marks a consistent trend of
diversification of the Company's domestic operations outside of California since
1993. Housing revenues generated from the Company's Southwest region totaled
$846.9 million in 2000, up 2.9% from $823.2 million in 1999, while the Central
region posted housing revenues of $1.04 billion, up 10.4% from $945.4 million a
year earlier. Both the Southwest and Central regions gained deliveries in 2000
with the Southwest up by 31 units and the Central region up by 303 units when
compared to 1999. Housing revenues in the Southwest were up in 1999 from $351.5
million in 1998, as a result of both increased deliveries and a higher average
selling price, partly due to acquisitions. In the Central region, housing
revenues in 1999 rose from $684.3 million in 1998 as a result of expansion in
both Colorado and Texas, including the full year impact of acquisitions
completed during 1998. Operations in France generated housing revenues of $470.3
million in 2000, up 16.6% from $403.4 million in
37
28
1999, as a result of higher unit volume, partially offset by a lower average
selling price. In 1998, housing revenues from operations in France totaled
$240.0 million.
Company-wide, housing deliveries of 22,392 units in 2000 were virtually flat
compared with 22,422 units in 1999 as a 2.6% decrease in U.S. deliveries was
partially offset by a 20.4% increase in French deliveries. The decline in
domestic deliveries reflected a 13.4% decrease in the West Coast region, partly
offset by increases of .5% and 3.9% in the Southwest and Central regions,
respectively. West Coast deliveries decreased to 5,476 units in 2000 from 6,323
units in 1999, primarily due to two factors. First, the re-focusing of the
Company's West Coast operations, following the Lewis Homes acquisition, in
keeping with the KB2000 operational business model resulted in fewer active
communities in Northern California in 2000 as compared to 1999. Second, the
strength of the Company's Southwest and Central region operations, which
generally offer lower risk for less investment in land, has resulted in more
stringent criteria guiding the Company's land investment decisions and has
caused the Company to be more selective in its land investments in the West
Coast region. Southwest operations delivered 5,832 units in 2000, up slightly
from 5,801 units in 1999, despite a 4.9% decrease in the average number of
active communities operated in this region. In the Central region, deliveries
totaled 8,112 units in 2000, up from 7,809 units in 1999 as active communities
in the region rose 4.2%. French deliveries increased to 2,967 units in 2000 from
2,465 units in 1999 as a result of expansion of these operations during 2000,
partly through acquisitions.
Housing deliveries increased 47.4% to 22,422 units in 1999 from 15,213 units in
1998. This improvement reflected increases in U.S. and French deliveries of
47.0% and 53.2%, respectively. The increase in the number of domestic
deliveries, partly due to acquisitions and partly due to organic growth, was
comprised of a 30.2% year-over-year increase in units delivered in the West
Coast region and increases of 112.5% and 30.8% in the Southwest and Central
regions, respectively. West Coast deliveries rose to 6,323 units in 1999 from
4,858 units in 1998, reflecting a 34.4% increase in the average number of active
communities in the state. Southwest operations delivered 5,801 units in 1999, up
from 2,730 units in 1998 as the average number of active communities rose
105.0%. Deliveries from Central region operations rose to 7,809 units in 1999,
up from 5,968 units in 1998 due to a 26.3% rise in the average number of active
communities. Excluding the impact of acquisitions within the trailing twelve
months, domestic deliveries rose 12.2% in 1999 from 1998. French deliveries
increased 53.2% to 2,465 units in 1999 from 1,609 units in 1998, largely due to
improved market conditions.
The Company-wide average new home price increased 1.1% in 2000, to $168,300 from
$166,500 in 1999. The 1999 average had increased 6.5% from $156,400 in 1998. The
increase in the average selling price in 2000 resulted from a higher domestic
average selling price, partially offset by a lower average selling price in
France.
In the West Coast region, the average selling price rose 4.5% in 2000 to
$257,000 from $246,000 in 1999, which had increased 9.6% from $224,500 in 1998.
The average selling price in the Southwest region increased 2.3% to $145,200 in
2000, compared with $141,900 in 1999 and $128,800 in 1998. The Central region
average selling price rose 6.2% to $128,600 in 2000 compared with $121,100 in
1999 and $114,700 in 1998. The West Coast average selling price increased only
moderately due to a lower proportion of Northern California deliveries in 2000,
which are generally higher priced than deliveries generated from Southern
California operations. Domestic price increases in 1999 resulted from the
inclusion of higher-priced deliveries from the Lewis Homes operations in
California and Nevada, acquired early in 1999, and from selected increases in
sales prices in certain markets due to favorable market conditions.
The Company's average selling price in France decreased to $158,500 in 2000 from
$163,600 in 1999, which had increased from $149,200 in 1998. The average selling
price in France decreased in 2000 primarily due to an increase in the proportion
of deliveries generated from condominiums, which are typically priced below
single-family detached homes, and the adverse foreign currency impact resulting
from a weakening in the French franc versus the U.S. dollar. The French average
selling price rose in 1999 primarily due to a change in the mix of deliveries
and price appreciation in the French housing market.
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Revenues from the development of commercial buildings, all located in
metropolitan Paris, totaled $.8 million in 2000, $.7 million in 1999 and $1.5
million in 1998. After several years of de-emphasizing its commercial
development operations in France due to French commercial market conditions, the
Company currently anticipates a significant increase in this business in 2001,
with revenues from these activities expected to range between $75.0 million and
$90.0 million for the year, dependent upon continued favorable market
conditions.
Land sale revenues totaled $100.5 million in 2000, $37.8 million in 1999 and
$22.5 million in 1998. Generally, land sale revenues fluctuate with decisions to
maintain or decrease the Company's land ownership position in certain markets
based upon the volume of its holdings, the strength and number of competing
developers entering particular markets at given points in time, the availability
of land in markets served by the Company and prevailing market conditions. The
significant increase in land sales in 2000 resulted from the Company's asset
repositioning strategy, adopted in late 1999, which included the identification
and sale of non-core assets.
OPERATING INCOME Operating income increased 11.4% to a new Company record of
$288.6 million in 2000 from $259.1 million in 1999. The increase was primarily
due to higher housing gross profits and lower selling, general and
administrative expenses. Housing gross profits in 2000 increased 3.0% or $22.1
million to $743.7 million from $721.6 million in 1999. As a percentage of
related revenues, housing gross profit margin was 19.7% in 2000, up from 19.3%
in the prior year. The increase in the Company's housing gross margin resulted
from several factors, including an improved pricing environment, generally
favorable market conditions throughout the year, deeper execution of the KB2000
operational business model and the reduced impact related to purchase accounting
associated with the 1999 acquisition of Lewis Homes. During 2000, the Company's
housing gross profit margin showed sequential improvement each quarter and, in
the fourth quarter reached 20.6%. Company-wide land sales generated a profit of
$2.8 million in 2000, compared to a loss of $1.2 million in 1999.
Selling, general and administrative expenses decreased .7%, or $3.3 million in
2000, to $458.0 million. As a percentage of housing revenues, to which these
expenses are most closely correlated, selling, general and administrative
expenses were 12.2% in 2000 compared to 12.4% in 1999. The improved ratio
resulted from savings generated by the Company's cost-containment initiatives.
Operating income increased 74.3% to $259.1 million in 1999 from $148.7 million
in 1998. This increase was primarily due to higher housing gross profits,
resulting from higher unit volume, partially offset by increased selling,
general and administrative expenses. Housing gross profits in 1999 increased
58.1% or $265.2 million to $721.6 million from $456.4 million in 1998. As a
percentage of related revenues, housing gross profit margin was 19.3% in 1999,
up from 19.2% in the prior year. This increase was primarily due to more
efficient home designs and construction costs in KB2000 communities and overall
improved market conditions, as well as market-driven price increases in selected
communities, particularly in the West Coast region. Company-wide land sales
produced losses of $1.2 million and $3.2 million in 1999 and 1998, respectively.
Selling, general and administrative expenses increased 51.5%, or $156.7 million
to $461.3 million in 1999. As a percentage of housing revenues, however,
selling, general and administrative expenses decreased .4 percentage points to
12.4% in 1999 from 12.8% in 1998. The improvement in the selling, general and
administrative expense ratio was due to a strong increase in unit volume and
reduced reliance on sales initiatives, partially offset by increased
expenditures for information systems in support of the KB2000 operational
business model and the Company's year 2000 compliance plan, and by goodwill
amortization and other expenses related to the Lewis Homes transaction.
INTEREST INCOME AND EXPENSE Interest income, which is generated from short-term
investments and mortgages receivable, amounted to $5.8 million in 2000, $7.8
million in 1999 and $5.7 million in 1998. The decrease in interest income in
2000 reflected lower interest bearing average balances of short-term investments
and mortgages receivable compared to the same period a year ago. The increase in
interest income in 1999 compared to 1998 primarily reflected an increase in the
interest bearing average balance of mortgages receivable and a higher average
balance of short-term investments.
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Interest expense results principally from borrowings to finance land purchases,
housing inventory and other operating and capital needs. In 2000, interest
expense, net of amounts capitalized, increased by $3.2 million to $31.5 million
from $28.3 million in 1999. Gross interest incurred in 2000 was $16.2 million
higher than that incurred in 1999, reflecting an increase in average
indebtedness.
The percentages of interest capitalized in 2000 and 1999 were 66.6% and 63.7%,
respectively. The amounts of interest capitalized as a percentage of gross
interest incurred and distributions associated with the Company's outstanding
Feline Prides were 57.3% in 2000 and 53.3% in 1999.
In 1999, interest expense, net of amounts capitalized, increased to $28.3
million from $23.3 million in 1998. Gross interest incurred in 1999 was $23.7
million higher than that incurred in 1998, reflecting an increase in average
indebtedness, primarily as a result of the Lewis Homes acquisition and growth in
the number of new communities in 1999.
The percentage of interest capitalized in 1999 increased from the 57.0%
capitalized in 1998. The higher capitalization rate in 1999 resulted from the
effect of the issuance of Feline Prides in the third quarter of 1998 and a
higher proportion of land under development in 1999 compared to the previous
year. The amount of interest capitalized as a percentage of gross interest
incurred and distributions associated with the Feline Prides was 51.3% in 1998.
MINORITY INTERESTS Minority interests are comprised of two major components:
pretax income of consolidated subsidiaries and joint ventures related to
residential and commercial activities; and distributions associated with the
Feline Prides issued in July 1998. Operating income was reduced by minority
interests of $31.6 million in 2000, $29.4 million in 1999 and $7.0 million in
1998. Minority interests in 2000 included the impact of the Company's French IPO
and $15.2 million in distributions related to the Feline Prides. In 1999 and
1998, minority interests included $15.2 million and $6.1 million, respectively,
in distributions related to the Feline Prides. Increased joint venture activity
contributed to the rise in minority interests from 1998 to 1999. In the
aggregate, minority interests in 2001 are expected to remain at high levels due
to ongoing joint venture activity and distributions associated with the Feline
Prides.
EQUITY IN PRETAX INCOME OF UNCONSOLIDATED JOINT VENTURES The Company's
unconsolidated joint venture activities were located in California, Nevada, New
Mexico and France in 2000; California, Nevada, New Mexico, Texas and France in
1999; and New Mexico, Texas and France in 1998. These unconsolidated joint
ventures posted combined revenues of $116.8 million in 2000, $13.9 million in
1999 and $17.7 million in 1998. Revenues from unconsolidated joint ventures
increased in 2000 primarily due to the inclusion of a new domestic joint venture
related to a Nevada community. All unconsolidated joint venture revenues in 2000
and 1999 were generated from residential properties. French commercial
activities accounted for $6.5 million of the combined revenues in 1998.
Unconsolidated joint ventures generated combined pretax income of $4.9 million
in 2000, compared with pretax income of $3.6 million and $5.0 million in 1999
and 1998, respectively. The Company's share of pretax income from unconsolidated
joint ventures totaled $2.9 million in 2000, $.2 million in 1999 and $1.2
million in 1998.
GAIN ON ISSUANCE OF FRENCH SUBSIDIARY STOCK The Company recognized a one-time
gain of $39.6 million from the issuance of 5,314,327 common shares (including
the over allotment option) by Kaufman & Broad S.A. ("KBSA"), the Company's
wholly owned French subsidiary, in an initial public offering in the first
quarter of 2000. The offering was made in France and elsewhere in Europe and was
priced at 23 euros per share. KBSA is now listed on the Premier Marche of the
ParisBourse. The offering generated total net proceeds of $113.1 million, of
which $82.9 million was used by the Company to reduce its domestic debt and
repurchase additional shares of its common stock. The remainder of the proceeds
was used to fund internal and external growth of KBSA. The Company continues to
own a majority interest in KBSA and will continue to consolidate these
operations in its financial statements.
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MORTGAGE BANKING
INTEREST INCOME AND EXPENSE The Company's mortgage banking operations provide
financing principally to purchasers of homes sold by the Company's domestic
housing operations through the origination of residential mortgages. Interest
income is earned primarily from first mortgages and mortgage-backed securities
held for long-term investment as collateral, while interest expense results from
notes payable and the collateralized mortgage obligations. Interest income
increased to a record $21.1 million in 2000 from $19.2 million in 1999 and $15.6
million in 1998. Interest expense rose to $19.4 million in 2000 from $16.9
million in 1999 and $15.0 million in 1998. In both 2000 and 1999, interest
income increased primarily due to a higher balance of first mortgages held under
commitments of sale and other receivables outstanding compared to the previous
year.
Interest expense rose in both 2000 and 1999 due to a higher amount of notes
payable outstanding compared to the prior year. Combined interest income and
expense resulted in net interest income of $1.7 million in 2000, $2.3 million in
1999 and $.6 million in 1998. These differences reflect variations in mortgage
production mix; movements in short-term versus long-term interest rates; and the
amount, timing and rates of return on interim reinvestments of monthly principal
amortization and prepayments.
OTHER MORTGAGE BANKING REVENUES Other mortgage banking revenues, which
principally consist of gains on sales of mortgages and servicing rights and, to
a lesser extent, mortgage servicing fees and insurance commissions, totaled
$39.2 million in 2000, $45.0 million in 1999 and $30.8 million in 1998. The
decrease in 2000 was primarily the result of lower gains on the sales of
mortgages and servicing rights due to lower unit delivery volume. Interest rate
increases during 2000, including a shift in product mix toward more variable
rate loans, lower retention and the intensely competitive mortgage banking
environment also contributed to the decrease. The increase in 1999 reflected
higher gains on the sales of mortgages and servicing rights due to a higher
volume of mortgage originations associated with increases in housing unit volume
and improved retention in the United States.
GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses
associated with mortgage banking operations increased to $17.2 million in 2000
from $11.6 million in 1999 and $9.9 million in 1998. The increase in general and
administrative expenses in 2000 was primarily due to expansion of the
operations. In 1999, general and administrative expenses increased primarily due
to higher mortgage production volume.
SECONDARY MARKETING TRADING LOSS On August 31, 1999, the Company disclosed that
it had discovered unauthorized mortgage loan trading activity by an employee of
its mortgage banking subsidiary resulting in a pretax trading loss of $18.2
million ($11.8 million, or $.25 per diluted share, on an after-tax basis). It is
normal practice for the Company's mortgage banking subsidiary to sell loans into
the market that approximately match loan commitments to the Company's
homebuyers. This practice is intended to hedge exposure to changes in interest
rates that may occur until loans are sold to secondary market investors in the
ordinary course of its business. The loss was the result of a single employee
engaging in unauthorized mortgage loan trading largely unrelated to mortgage
originations. The employee who conducted the unauthorized trading was
terminated.
INCOME TAXES
The Company recorded income tax expense of $87.7 million in 2000, $79.4 million
in 1999 and $51.3 million in 1998. These amounts represented effective income
tax rates of approximately 34.0% in 2000 (excluding the one-time gain on the
issuance of French subsidiary stock) and 35.0% in both 1999 and 1998. The
effective tax rate declined by 1.0 percentage point in 2000 as a result of
greater utilization of tax credits. Pretax income for financial reporting
purposes and taxable income for income tax purposes historically have differed
primarily due to the impact of state income taxes, foreign tax rate differences,
intercompany dividends and the use of tax credits.
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LIQUIDITY AND CAPITAL RESOURCES
The Company assesses its liquidity in terms of its ability to generate cash to
fund its operating and investing activities. Historically, the Company has
funded its construction and mortgage banking activities with internally
generated cash flows and external sources of debt and equity financing. In 2000,
operating, investing and financing activities provided net cash of $4.7 million;
in 1999, these activities used net cash of $35.0 million.
Operating activities provided $64.5 million in 2000 while operating activities
in 1999 provided $106.8 million. The Company's sources of operating cash in 2000
included earnings of $210.0 million, various noncash items deducted from net
income and other operating items of $2.5 million. Partially offsetting these
sources were investments in inventories of $96.1 million (excluding acquisitions
and $25.1 million of inventories acquired through seller financing), a decrease
in accounts payable, accrued expenses and other liabilities of $55.0 million, a
decrease in receivables of $53.9 million and a gain on the issuance of French
subsidiary stock of $39.6 million.
In 1999, the sources of operating cash included earnings of $147.5 million, an
increase of $130.3 million in accounts payable, accrued expenses and other
liabilities and various noncash items deducted from net income. The cash
provided was partially offset by an increase of $184.1 million in receivables
and an investment of $38.8 million in inventories (excluding the effect of
acquisitions and $43.5 million of inventories acquired through seller
financing).
Cash used by investing activities totaled $24.9 million in 2000 compared to
$34.0 million in 1999. In 2000, $24.3 million, net of cash acquired, was used
for acquisitions, $18.5 million was used for net purchases of property and
equipment and $2.6 million was used for originations of mortgages held for
long-term investment. Partially offsetting these uses were distributions related
to investments in unconsolidated joint ventures of $13.9 million and proceeds of
$6.6 million received from mortgage-backed securities, which were principally
used to pay down collateralized mortgage obligations for which the
mortgage-backed securities had served as collateral.
In 1999, cash used by investing activities included $19.2 million used for net
purchases of property and equipment, $15.0 million used for investments in
unconsolidated joint ventures, $11.6 million, net of cash acquired, used for
acquisitions, and $2.8 million used for originations of mortgages held for
long-term investment. Partially offsetting these uses were $14.6 million of
proceeds received from mortgage-backed securities.
Financing activities in 2000 used $34.9 million of cash compared to $107.8
million used in 1999. In 2000, the Company's uses of cash included payments for
repurchases of common stock of $169.2 million (excluding $78.0 million of common
stock repurchased through the issuance of promissory notes), payments to
minority interests of $20.1 million, cash dividend payments of $11.5 million and
payments on collateralized mortgage obligations of $6.3 million. Partially
offsetting these uses were proceeds from the issuance of French subsidiary stock
of $113.1 million and net proceeds from borrowings of $59.1 million. The
Company's financial leverage, as measured by the ratio of debt to total capital,
net of invested cash, was 53.9% at the end of 2000 compared to 48.4% at the end
of 1999. The ratio for 1999 was adjusted to reflect $.7 million of invested cash
at November 30, 1999. The Company seeks to maintain its ratio of debt to total
capital within a targeted range of 45% to 55%, and achieved this goal in 2000
despite executing stock repurchases of approximately $247.0 million during the
year. The Company believes its debt to total capital ratio for 2000 reflects
the impact of a strategic review of its assets and businesses initiated late in
1999.
Financing activities in 1999 used $81.9 million for the repurchase of common
stock, $43.7 million for payments to minority interests, $14.2 million for cash
dividend payments and $14.1 million for payments on collateralized mortgage
obligations. Partially offsetting these uses was cash of $46.1 million provided
from net proceeds from borrowings.
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On January 4, 1999, the Company invested approximately $14.5 million to acquire
the remaining 49.7% of the outstanding stock of General Homes, bringing its
ownership interest to 100%. General Homes was a builder of single-family homes
primarily in Houston, Texas. The investment was accounted for under the purchase
method and the results of operations of General Homes were included in the
Company's consolidated financial statements as of January 4, 1999. The
investment was financed by borrowings under the Company's domestic unsecured
revolving credit facility.
Effective January 7, 1999, the Company acquired substantially all of the
homebuilding assets of Lewis Homes. Lewis Homes was engaged in the acquisition,
development and sale of residential real estate in California and Nevada. The
purchase price for Lewis Homes was approximately $449.2 million, comprised of
the assumption of approximately $303.2 million in debt and the issuance of 7.9
million shares of the Company's common stock valued at approximately $146.0
million. The purchase price was based on the December 31, 1998 net book values
of the entities purchased. The excess of the purchase price over the estimated
fair value of net assets acquired was $177.6 million and was allocated to
goodwill. The Company is amortizing the goodwill on a straight-line basis over a
period of ten years.
The 7.9 million shares of Company common stock issued in the acquisition were
"restricted" shares and could not be resold without a registration statement or
compliance with Rule 144 under the Securities Act of 1933 ("Rule 144"), which,
among other things, limits the number of shares that may be resold in a given
period. The Company originally agreed to file a registration statement for 6.0
million of those shares in three increments at the Lewis family's request from
July 1, 2000 to July 1, 2002. On September 21, 2000, the Company instead
repurchased 4.0 million of the shares issued in the acquisition from the Lewis
holders at a price of $26.00 per share. In connection with the repurchase, the
Lewis holders' registration rights for the first two increments were
extinguished. In the period subsequent to the Company's repurchase, the Lewis
holders sold most of the balance of their shares within the requirements of Rule
144.
The acquisition consideration for Lewis Homes was determined by arms-length
negotiations between the parties. The acquisition was accounted for as a
purchase, with the results of Lewis Homes included in the Company's consolidated
financial statements as of January 7, 1999.
During the second half of 1999, the Company completed the acquisition of the
outstanding shares of Park, a French apartment builder, for a total price of
approximately $16.6 million. The acquisition was financed by a three-year bank
loan that provides for interest at the Euro Interbank Offered Rate Plus 1.45%.
The acquisition was accounted for under the purchase method, and the results of
operations of the builder are included in the Company's consolidated financial
statements as of the date of purchase. The excess of the purchase price over the
estimated fair value of net assets acquired was $10.0 million and was allocated
to goodwill. The Company is amortizing goodwill related to the acquisition on a
straight-line basis over a period of ten years.
During the year ended November 30, 2000, the Company's French subsidiary, KBSA,
completed the acquisitions of four homebuilders in France. These companies were
acquired for an aggregate purchase price of $33.5 million and were accounted for
under the purchase method of accounting. The excess of the purchase price over
the estimated fair value of the net assets acquired was $24.7 million and was
allocated to goodwill. The Company is amortizing the goodwill on a straight-line
basis over a period of ten years.
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In 2000 and 1999, common stock repurchases made under the Company's share
repurchase program, established in August 1999, totaled $247.0 million and
$81.9, respectively. The Company repurchased approximately 10.7 million shares
in 2000 and 3.8 million shares in 1999, thereby completing the purchase of all
the 14.5 million shares of common stock previously authorized for repurchase by
the Company's Board of Directors. Included in the 10.7 million shares
repurchased during 2000 were 4.0 million shares, repurchased on September 21,
2000, which had been issued in the January 1999 acquisition of Lewis Homes.
In connection with its share repurchase program, on August 27, 1999, the Company
established a grantor stock ownership trust (the "Trust") into which certain of
the repurchased shares have been transferred. The Trust, administered by an
independent trustee, acquires, holds and distributes the shares of common stock
for the purpose of funding certain employee compensation and employee benefit
obligations of the Company under its existing stock option, 401(k) and other
employee benefit plans. The existence of the Trust has no impact on the amount
of benefits or compensation that is paid under these plans.
For financial reporting purposes, the Trust is consolidated with the Company.
Any dividend transactions between the Company and the Trust are eliminated.
Acquired shares held by the Trust remain valued at the market price at the date
of purchase and are shown as a reduction to stockholders' equity in the
consolidated balance sheet. The difference between the Trust share value and the
fair market value on the date shares are released from the Trust, for the
benefit of employees, will be included in additional paid-in capital. Common
stock held in the Trust is not considered outstanding in the computation of
earnings per share. The Trust held 8.8 million and 3.8 million shares of common
stock at November 30, 2000 and 1999, respectively. The trustee votes shares held
by the Trust in accordance with voting directions from eligible employees, as
specified in a trust agreement with the trustee.
External sources of financing for the Company's construction activities include
its domestic unsecured credit facility, other domestic and foreign bank lines,
third-party secured financings, and the public debt and equity markets.
Substantial unused lines of credit remain available for the Company's future
use, if required, principally through its domestic unsecured revolving credit
facility. On October 6, 2000, the Company entered into a $725.0 million
unsecured credit agreement (the "$725.0 million Unsecured Credit Facility"),
consisting of a $564.0 million four-year committed revolving credit facility and
a $161.0 million five-year term loan, which together replaced its previously
existing revolving credit facility and Term Loan Agreement. This $725.0 million
Unsecured Credit Facility could be expanded up to an aggregate total of $900.0
million if additional bank lending commitments are obtained. Interest on the
$725.0 million Unsecured Credit Facility is payable monthly at the London
Interbank Offered Rate plus an applicable spread on amounts borrowed. Under the
$725.0 million Unsecured Credit Facility, $725.0 million remained committed and
$414.4 million was available for the Company's future use at November 30, 2000.
In addition, the Company's French subsidiaries have lines of credit with various
banks which totaled $207.8 million at November 30, 2000 and have various
committed expiration dates through November 2003. Under these unsecured
financing agreements, $82.7 million was available in the aggregate at November
30, 2000.
Depending upon available terms and its negotiating leverage related to specific
market conditions, the Company also finances certain land acquisitions with
purchase-money financing from land sellers and other third parties. At November
30, 2000, the Company had outstanding seller-financed notes payable of $29.8
million secured primarily by the underlying property which had a carrying value
of $75.2 million.
On September 21, 2000, in connection with the repurchase of 4.0 million shares
from the Lewis holders, the Company issued promissory notes (the "Shareholder
Notes"), with an aggregate principal amount of $78.0 million, to the Lewis
holders. Interest on the Shareholder Notes is accrued monthly at a rate of 6.6%.
Under the terms of the notes, principal payments of $26.0 million plus accrued
interest are due on January 4, 2001, June 7, 2001 and December 6, 2001.
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On December 5, 1997, the Company filed a universal shelf registration statement
(the "1997 Shelf Registration") with the Securities and Exchange Commission for
up to $500.0 million of the Company's debt and equity securities. This universal
shelf registration provides that securities may be offered from time to time in
one or more series and in the form of senior, senior subordinated or
subordinated debt, preferred stock, common stock, and/or warrants to purchase
such securities. The registration was declared effective on December 16, 1997,
and as of November 30, 2000 no securities had been issued thereunder.
On July 7, 1998, the Company, together with a KBHC Trust that is wholly owned by
the Company, issued an aggregate of (i) 19.0 million Feline Prides, and (ii) 1.0
million KBHC Trust capital securities, with a $10 stated liquidation amount. The
Feline Prides consisted of (i) 18.0 million Income Prides with the stated amount
per Income Prides of $10, which are units comprised of a capital security and a
stock purchase contract under which the holders will purchase common stock from
the Company not later than August 16, 2001 and the Company will pay to the
holders certain unsecured contract adjustment payments, and (ii) 1.0 million
Growth Prides with a face amount per Growth Prides equal to the $10 stated
amount, which are units consisting of a 1/100th beneficial interest in a
zero-coupon U.S. Treasury security and a stock purchase contract under which the
holders will purchase common stock from the Company not later than August 16,
2001 and the Company will pay to the holders certain unsecured contract
adjustment payments.
The distribution rate on the Income Prides is 8.25% per annum and the
distribution rate on the Growth Prides is .75% per annum. Under the stock
purchase contracts, investors will be required to purchase shares of common
stock of the Company for an effective price ranging between a minimum of $31.75
per share and a maximum of $38.10 per share, and the Company will issue
approximately 5 to 6 million common shares by August 16, 2001, depending upon
the price of the common stock upon settlement of the purchase contracts (subject
to adjustment under certain circumstances). The capital securities associated
with the Income Prides and the U.S. Treasury securities associated with the
Growth Prides have been pledged as collateral to secure the holders' obligations
in respect of the common stock purchase contracts. The capital securities issued
by the KBHC Trust are entitled to a distribution rate of 8% per annum of their
$10 stated liquidation amount.
The Company uses its capital resources primarily for land purchases, land
development and housing construction. The Company typically manages its
investments in land by purchasing property under options and other types of
conditional contracts whenever possible, and similarly controls its investment
in housing inventories by emphasizing the pre-sale of homes over speculative
construction and carefully managing the timing of the production process. The
Company's backlog ratio (beginning backlog as a percentage of unit deliveries in
the succeeding quarter) for the fourth quarter of 2000 was 174.0% versus 156.6%
in the fourth quarter of 1999. During the 1990's, inventories became
geographically more diverse, primarily as a result of the Company's extensive
domestic expansion outside of the West Coast region. The Company continues to
concentrate its housing operations in desirable areas within targeted growth
markets, principally oriented toward entry-level and first-time move up
purchasers.
The principal sources of liquidity for the Company's mortgage banking operations
are internally generated funds from the sales of mortgages and related servicing
rights. Mortgages originated by the mortgage banking operations are generally
sold in the secondary market within 60 days of origination. External sources of
financing for these operations include a $300.0 million revolving mortgage
warehouse agreement (the "Mortgage Warehouse Facility") and a $250.0 million
Master Loan and Security Agreement. On February 18, 2000, the Company's mortgage
banking subsidiary renewed its Mortgage Warehouse Facility and increased the
facility from $250.0 million. The Mortgage Warehouse Facility, which expires on
February 18, 2003, provides for an annual fee based on the committed balance of
the facility and provides for interest at either the London Interbank Offered
Rate or the Federal Funds Rate plus an applicable spread on amounts borrowed.
The Master Loan and Security Agreement was renewed on May 19, 2000 with an
investment bank and was increased from $150.0 million. The agreement, which
expires on May 18, 2001, provides for a facility fee based on the $250.0 million
maximum amount available and provides for interest to be paid monthly at the
Eurodollar Rate plus an applicable spread on amounts borrowed. The amounts
outstanding under the Mortgage Warehouse Facility and the Master Loan and
Security Agreement are secured by a borrowing base, which includes certain
mortgage loans
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held under commitments of sale, and are repayable from sales proceeds. There are
no compensating balance requirements under either facility. Both facilities
include financial covenants and restrictions which, among other things, require
the maintenance of certain financial statement ratios, a minimum tangible net
worth and a minimum net income.
Debt service on the Company's collateralized mortgage obligations is funded by
receipts from mortgage-backed securities. Such funds are expected to be adequate
to meet future debt-payment schedules for the collateralized mortgage
obligations and therefore these securities have virtually no impact on the
capital resources and liquidity of the mortgage banking operations.
The Company continues to benefit in all of its operations from the strength of
its capital position, which has allowed it to maintain overall profitability
during troubled economic times, finance domestic and international expansion,
re-engineer product lines and diversify into new markets. Secure access to
capital at competitive rates, among other reasons, should enable the Company to
continue to grow and expand. As a result of its geographic diversification, the
disciplines of the KB2000 operational business model and its strong capital
position, the Company believes it has adequate resources and sufficient credit
line facilities to satisfy its current and reasonably anticipated future
requirements for the funds needed to acquire capital assets and land, to
construct homes, to fund its mortgage banking operations, and to meet other
needs of its business, both on a short and long-term basis.
CONVERSION TO THE EURO CURRENCY
On January 1, 1999, certain member countries of the European Union (the "EU")
established fixed conversion rates between their existing currencies and the
European Union's common currency (the "euro"). The Company conducts substantial
business in France, an EU member country. During the established transition
period for the introduction of the euro, which extends to June 30, 2002, the
Company will address the issues involved with the adoption of the new currency.
The most important issues facing the Company include: converting information
technology systems; reassessing currency risk; negotiating and amending
contracts; and processing tax and accounting records.
Based upon progress to date, the Company believes that use of the euro will not
have a significant impact on the manner in which it conducts its business
affairs and processes its business and accounting records. Accordingly,
conversion to the euro is not expected to have a material effect on the
Company's financial condition or results of operations.
SUBSEQUENT EVENT
On February 8, 2001, pursuant to the 1997 Shelf Registration, the Company issued
$250.0 million of 9 1/2% senior subordinated notes at 100% of the principal
amount of the notes. The notes, which are due February 15, 2011 with interest
payable semi-annually, represent unsecured obligations of the Company and are
subordinated to all existing and future senior indebtedness of the Company. The
notes are redeemable at the option of the Company, in whole or in part, at
104.750% of their principal amount beginning February 15, 2006, and thereafter
at prices declining annually to 100% on and after February 15, 2009. Proceeds
from the issuance of the notes were used to pay down bank borrowings.
OUTLOOK
The Company's residential backlog at November 30, 2000 consisted of 10,559
units, representing aggregate future revenues of $1.80 billion. Both amounts
established new year-end records, and reflected increases of 22.7% and 30.3%,
respectively, when compared to the 8,558 units in residential backlog,
representing aggregate future revenues of $1.38 billion, at year-end 1999.
Company-wide net orders for the fourth quarter of 2000 totaled 5,312, up 9.1%
from the comparable quarter of 1999.
The Company's domestic residential backlog at November 30, 2000 increased to
$1.53 billion, up 32.6% from $1.15 billion at year-end 1999. On a unit basis,
domestic backlog stood at 8,742 units at year-end 2000, up 21.7% from 7,185
units at year-end 1999. Improvement occurred in all domestic regions, reflecting
generally good market conditions throughout the United States. The
46
37
success of communities designed under the Company's KB2000 operational business
model also contributed to the increase in total U.S. backlog levels. West Coast
operations produced substantial year-over-year growth, with backlog at November
30, 2000 rising to $643.6 million on 2,421 units from $457.4 million on 1,879
units at November 30, 1999. Full-year results were tempered by an 8.8% decline
in net orders from West Coast operations in the fourth quarter of 2000 to 1,198
units from 1,314 units in the fourth quarter of 1999. In Southwest operations,
backlog value increased to $345.6 million on 2,311 units at November 30, 2000
from $299.5 million on 2,107 units at November 30, 1999. This improvement
occurred despite the region's average number of active communities decreasing
4.9% compared to the prior year. Fourth quarter 2000 net orders in Southwest
operations decreased 6.6% to 1,337 units from 1,431 units in the year-earlier
period. In the Central region, backlog rose to $541.3 million on 4,010 units at
November 30, 2000 from $397.0 million on 3,199 units at November 30, 2000.
Fourth quarter 2000 net orders in Central operations increased 31.4% to 1,941
units from 1,477 units in the year-earlier period.
In France, residential backlog at November 30, 2000 totaled $272.9 million on
1,817 units, up 20.1% and 32.7%, respectively, from $227.2 million on 1,369
units at year-end 1999. French net orders increased 29.2% to 836 units in the
fourth quarter of 2000 from 647 units in the year-earlier period. The value of
the backlog associated with French commercial development activities totaled
approximately $88.6 million at November 30, 2000, up from $1.7 million at
year-end 1999, reflecting the Company's increasing level of activity.
Substantially all homes included in the year-end 2000 backlog are expected to be
delivered during 2001. However, cancellations could occur, particularly if
market conditions deteriorate or mortgage interest rates increase, thereby
decreasing backlog and related future revenues.
Company-wide net orders during the first two months of fiscal 2001 increased
18.2% from the comparable period of 2000. Domestic net orders during the
two-month period increased 20.1%, reflecting increases of 34.2% and 33.8% in
Southwest and Central operations, respectively, partially offset by a decrease
of 12.5% in the West Coast region. In France, net orders for the first two
months of fiscal 2001 increased 3.6% compared to the same period in 2000,
reflecting the expansion of the French operations through acquisitions and new
community openings. Full year Company-wide net order results could be further
affected by current global or regional market uncertainties, mortgage interest
rate volatility in France or the U.S., declines in consumer confidence in either
country and/or other factors.
As a result of the Company's more selective land investment within the West
Coast region and its continued domestic expansion outside of the region, the
percentage of domestic unit deliveries generated from West Coast operations
decreased to 28.2% in 2000 from 31.7% in 1999. On a housing revenue basis, these
percentages were 42.7% in 2000 and 46.8% in 1999. In response to persistently
weak conditions for new housing and general recessionary trends in the West
Coast region during the first half of the 1990's and in order to spur growth,
the Company diversified its business through aggressive expansion into other
western states. Although the West Coast housing market has improved
significantly since then, the Company has maintained a more selective approach
to its land investments in keeping with its KB2000 operational business model.
The Company's Southwest and Central operations continued to experience growth in
2000. The Company has also achieved the most significant penetration of its
KB2000 operational business model in these markets. The Company is seeking to
continue to expand its Southwest and Central operations and continues to explore
opportunities to enter new domestic markets as well as grow its businesses
within existing markets.
The French housing market has continued to improve in recent years. In 2000, the
Company's unit deliveries in France rose by 20.4% from the previous year as the
Company expanded these operations, partly through acquisitions. French
commercial activities are also likely to rebound in 2001 as the division
reinvigorates its commercial business. The initial public offering of KBSA,
completed in February 2000, has strengthened the French business by providing it
with access to additional capital to support its growth.
47
38
While adhering to the disciplines of the KB2000 operational business model, the
Company has leveraged the model with additional complementary initiatives,
including strategies to establish and deepen its leading market positions and to
identify new acquisition opportunities. The Company hopes to increase overall
unit delivery growth in future years through these strategies. The Company's
growth strategies include the expansion of existing operations to achieve
optimal market volume levels, and the possible entry into new geographic markets
through acquisitions. Growth in the Company's existing markets will be driven by
the Company's ability to increase the average number of active communities
through the continued successful implementation of its KB2000 operational
business model.
As part of its strategy, the Company has made a commitment to pursue e-commerce
opportunities through its recently formed subsidiary, e.KB, Inc. These efforts
include continually improving its website, kbhome.com, to provide more
information for consumers, utilizing its houseCALL center to support website
efforts and selectively investing in related e-commerce businesses. The Company
intends to continue to focus on e-commerce initiatives with the hope of reducing
supply chain costs, building longer-term relationships with its customers and
bringing new technology to its customers.
In August 2000, the Company announced that it had formed American CityVista, a
joint venture with Henry Cisneros, former president of Univision Communications
and former Secretary of the U.S. Department of Housing and Urban Development,
now also a director of the Company. American CityVista will develop distinctive
communities in urban in-fill areas where new residential development has not
occurred in recent years. Working with the Company, American CityVista is
expected to identify appropriate sites, plan neighborhoods, acquire and develop
land, build homes and market them as competitively priced "villages within
cities" that are designed to honor local tastes and traditions.
During 2000, the Company focused on the asset repositioning strategy that it
announced in late 1999. As part of this strategy, the Company reviewed its
assets and businesses for the purpose of monetizing non-strategic or marginal
positions, and instituted more stringent criteria for land acquisitions. The
Company's asset repositioning activities during 2000 included the partial IPO of
its French subsidiary and various land sales. A majority of the land assets
originally identified through the asset repositioning strategy as non-core were
sold as of November 30, 2000. The asset repositioning initiatives were intended
to increase cash flows available to reduce debt and/or repurchase additional
stock, or possibly to fund future acquisitions.
In January 2001, the Company announced that it was changing its name to "KB
Home." This new name, which resulted from homebuyer input, is intended to convey
the Company's strong customer focus and its commitment to helping homebuyers
realize their dream of home ownership.
Based on its current projections, the Company expects to establish its fourth
consecutive year of record earnings per share in fiscal 2001. However, this goal
could be materially affected by various risk factors, such as changes in general
economic conditions, either nationally, in the U.S. or France, or in the
localized regions in which the Company operates; changes in job growth or
employment levels; a downturn in the economy's pace; changes in home mortgage
interest rates or consumer confidence, among other things. The Company is
proceeding with caution into 2001 as recent economic data indicates an overall
slowing in the economy. The Conference Board recently reported that U.S.
consumer confidence in December 2000 sank to its lowest level in two years. The
Federal Reserve, in its recent decision to cut the federal funds rate, also
cited a variety of cautionary factors, including weakening sales and production,
falling consumer confidence, skittish financial markets and high energy prices.
The Company will closely monitor overall economic trends in 2001 while remaining
focused on the effective management of its business units, using the KB2000
principles, to minimize the impact of any sustained economic slowdown.
48
39
IMPACT OF INFLATION
The Company's business is significantly affected by general economic conditions,
particularly by inflation and its generally associated adverse effect on
interest rates. Although inflation rates have been low in recent years, rising
inflation would likely affect the Company's revenues and earning power by
reducing demand for homes as a result of correspondingly higher interest rates.
In periods of high inflation, the rising costs of land, construction, labor,
interest and administrative expenses have often been recoverable through
increased selling prices, although this has not always been possible because of
high mortgage interest rates and competitive factors in the marketplace. In
recent years, inflation has had no significant adverse impact on the Company, as
average annual cost increases have not exceeded the average rate of inflation.
* * *
Investors are cautioned that certain statements contained in this document, as
well as some statements by the Company in periodic press releases and some oral
statements by Company officials to securities analysts and stockholders during
presentations about the Company are "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995 (the "Act").
Statements which are predictive in nature, which depend upon or refer to future
events or conditions, or which include words such as "expects", "anticipates",
"intends", "plans", "believes", "estimates", "hopes", and similar expressions
constitute forward-looking statements. In addition, any statements concerning
future financial performance (including future revenues, earnings or growth
rates), ongoing business strategies or prospects, and possible future Company
actions, which may be provided by management are also forward-looking statements
as defined by the Act. Forward-looking statements are based on current
expectations and projections about future events and are subject to risks,
uncertainties, and assumptions about the Company, economic and market factors
and the homebuilding industry, among other things. These statements are not
guaranties of future performance, and the Company has no specific intention to
update these statements.
Actual events and results may differ materially from those expressed or
forecasted in the forward-looking statements made by the Company or Company
officials due to a number of factors. The principal important risk factors that
could cause the Company's actual performance and future events and actions to
differ materially from such forward-looking statements include, but are not
limited to, national or regional changes in general economic conditions,
employment levels, costs of homebuilding material and labor, home mortgage and
other interest rates, the secondary market for mortgage loans, competition,
currency exchange rates as they affect the Company's operations in France,
consumer confidence, government regulation or restrictions on real estate
development, capital or credit market conditions affecting the Company's cost of
capital; the availability and cost of land in desirable areas, environmental
factors, governmental regulations, unanticipated violations of Company policy,
property taxes, and unanticipated delays in the Company's operations.
49
40
consolidated statements of income
YEARS ENDED NOVEMBER 30,
-----------------------------------------------
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS 2000 1999 1998
-----------------------------------------------
TOTAL REVENUES $ 3,930,858 $ 3,836,295 $ 2,449,362
===============================================
Construction:
Revenues $ 3,870,488 $ 3,772,121 $ 2,402,966
Construction and land costs (3,123,869) (3,051,698) (1,949,729)
Selling, general and administrative expenses (458,010) (461,316) (304,565)
-----------------------------------------------
Operating income 288,609 259,107 148,672
Interest income 5,782 7,806 5,674
Interest expense, net of amounts capitalized (31,479) (28,340) (23,341)
Minority interests (31,640) (29,392) (7,002)
Equity in pretax income of unconsolidated joint ventures 2,926 224 1,151
Gain on issuance of French subsidiary stock 39,630
-----------------------------------------------
Construction pretax income 273,828 209,405 125,154
Mortgage banking:
Revenues:
Interest income 21,130 19,186 15,569
Other 39,240 44,988 30,827
-----------------------------------------------
60,370 64,174 46,396
Expenses:
Interest (19,374) (16,941) (15,046)
General and administrative (17,164) (11,614) (9,937)
Secondary marketing trading loss (18,155)
-----------------------------------------------
Mortgage banking pretax income 23,832 17,464 21,413
-----------------------------------------------
Total pretax income 297,660 226,869 146,567
Income taxes (87,700) (79,400) (51,300)
-----------------------------------------------
NET INCOME $ 209,960 $ 147,469 $ 95,267
===============================================
BASIC EARNINGS PER SHARE $ 5.39 $ 3.16 $ 2.41
===============================================
DILUTED EARNINGS PER SHARE $ 5.24 $ 3.08 $ 2.32
===============================================
See accompanying notes.
50
41
consolidated balance sheets
NOVEMBER 30,
-----------------------------
IN THOUSANDS, EXCEPT SHARES 2000 1999
-----------------------------
ASSETS
Construction:
Cash and cash equivalents $ 21,385 $ 15,576
Trade and other receivables 294,760 205,847
Mortgages and notes receivable 11,821 58,702
Inventories 1,657,401 1,521,265
Investments in unconsolidated joint ventures 10,407 21,290
Deferred income taxes 73,842 99,519
Goodwill 202,177 205,618
Other assets 89,975 86,259
-----------------------------
2,361,768 2,214,076
-----------------------------
Mortgage banking:
Cash and cash equivalents 11,696 12,791
Receivables:
First mortgages and mortgage-backed securities 43,137 47,080
First mortgages held under commitments of sale and other receivables 403,165 386,076
Other assets 9,155 4,212
-----------------------------
467,153 450,159
-----------------------------
TOTAL ASSETS $ 2,828,921 $ 2,664,235
=============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Construction:
Accounts payable $ 311,537 $ 328,528
Accrued expenses and other liabilities 201,672 222,855
Mortgages and notes payable 987,980 813,424
-----------------------------
1,501,189 1,364,807
-----------------------------
Mortgage banking:
Accounts payable and accrued expenses 11,135 9,711
Notes payable 385,294 377,666
Collateralized mortgage obligations secured by mortgage-backed securities 29,928 36,219
-----------------------------
426,357 423,596
-----------------------------
Minority interests:
Consolidated subsidiaries and joint ventures 56,866 9,499
Company obligated mandatorily redeemable preferred securities of subsidiary
trust holding solely debentures of the Company 189,750 189,750
-----------------------------
246,616 199,249
-----------------------------
Stockholders' equity:
Preferred stock - $1.00 par value; authorized, 10,000,000 shares: none
outstanding Common stock - $1.00 par value; authorized, 100,000,000 shares;
44,397,243 and 48,090,615 shares outstanding at November 30, 2000 and 1999,
respectively 44,397 48,091
Paid-in capital 240,761 335,324
Retained earnings 598,374 376,626
Accumulated other comprehensive income (9,564) (1,584)
Grantor stock ownership trust, at cost: 8,782,252 shares and 3,750,100 shares at
November 30, 2000 and 1999, respectively (190,872) (81,874)
Treasury stock, at cost: 1,448,100 shares at November 30, 2000 (28,337)
-----------------------------
TOTAL STOCKHOLDERS' EQUITY 654,759 676,583
-----------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,828,921 $ 2,664,235
=============================
See accompanying notes.
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42
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
NUMBER OF SHARES
---------------------------------
GRANTOR
IN THOUSANDS STOCK
YEARS ENDED NOVEMBER 30, COMMON OWNERSHIP TREASURY COMMON PAID-IN
2000, 1999 AND 1998 STOCK TRUST STOCK STOCK CAPITAL
----------------------------------------------------------------------
Balance at November 30, 1997 38,997 $ 38,997 $ 186,086
----------------------------------------------------------------------
Comprehensive income:
Net income
Foreign currency translation
adjustments
Total comprehensive income
Dividends on common stock
Exercise of employee stock
options 995 995 15,699
Company obligated mandatorily
redeemable preferred securities
of subsidiary trust holding
solely debentures of the
Company - contract
adjustment payments and
issuance costs (8,265)
----------------------------------------------------------------------
Balance at November 30, 1998 39,992 39,992 193,520
----------------------------------------------------------------------
Comprehensive income:
Net income
Foreign currency translation
adjustments
Total comprehensive income
Dividends on common stock
Exercise of employee stock
options 212 212 3,686
Issuance of common stock
related to an acquisition 7,887 7,887 138,118
Grantor stock ownership trust (3,750)
----------------------------------------------------------------------
Balance at November 30, 1999 48,091 (3,750) 48,091 335,324
----------------------------------------------------------------------
Comprehensive income:
Net income
Foreign currency translation
adjustments
Total comprehensive income
Dividends on common stock
Exercise of employee stock
options 306 306 5,445
Common stock purchased and
retired (4,000) (4,000) (100,000)
Grantor stock ownership trust (5,032) (8)
Treasury stock (1,448)
Issuance of French
subsidiary stock
----------------------------------------------------------------------
Balance at November 30, 2000 44,397 (8,782) (1,448) $ 44,397 $ 240,761
======================================================================
ACCUMULATED GRANTOR
IN THOUSANDS OTHER STOCK TOTAL
YEARS ENDED NOVEMBER 30, RETAINED COMPREHENSIVE OWNERSHIP TREASURY STOCKHOLDERS'
2000, 1999 AND 1998 EARNINGS INCOME TRUST STOCK EQUITY
------------------------------------------------------------------------
Balance at November 30, 1997 $ 159,960 $(1,987) $ 383,056
------------------------------------------------------------------------
Comprehensive income:
Net income 95,267 95,267
Foreign currency translation
adjustments (370) (370)
--------
Total comprehensive income 94,897
Dividends on common stock (11,871) (11,871)
Exercise of employee stock
options 16,694
Company obligated mandatorily
redeemable preferred securities
of subsidiary trust holding
solely debentures of the
Company - contract
adjustment payments and
issuance costs (8,265)
------------------------------------------------------------------------
Balance at November 30, 1998 243,356 (2,357) 474,511
------------------------------------------------------------------------
Comprehensive income:
Net income 147,469 147,469
Foreign currency translation
adjustments 773 773
--------
Total comprehensive income 148,242
Dividends on common stock (14,199) (14,199)
Exercise of employee stock
options 3,898
Issuance of common stock
related to an acquisition 146,005
Grantor stock ownership trust $ (81,874) (81,874)
------------------------------------------------------------------------
Balance at November 30, 1999 376,626 (1,584) (81,874) 676,583
------------------------------------------------------------------------
Comprehensive income:
Net income 209,960 209,960
Foreign currency translation
adjustments (7,980) (7,980)
--------
Total comprehensive income 201,980
Dividends on common stock (11,465) (11,465)
Exercise of employee stock
options 5,751
Common stock purchased and
retired (104,000)
Grantor stock ownership trust (108,998) (109,006)
Treasury stock $(28,337) (28,337)
Issuance of French
subsidiary stock 23,253 23,253
------------------------------------------------------------------------
Balance at November 30, 2000 $ 598,374 $(9,564) $(190,872) $(28,337) $ 654,759
========================================================================
See accompanying notes.
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43
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED NOVEMBER 30,
------------------------------------------
IN THOUSANDS 2000 1999 1998
------------------------------------------
Cash flows from operating activities:
Net income $ 209,960 $ 147,469 $ 95,267
Adjustments to reconcile net income to net cash provided (used) by
operating activities:
Equity in pretax income of unconsolidated joint ventures (2,926) (224) (1,151)
Minority interests 31,640 29,392 7,002
Gain on issuance of French subsidiary stock (39,630)
Amortization of discounts and issuance costs 1,012 1,501 1,882
Depreciation and amortization 41,298 38,251 16,178
Provision for deferred income taxes 25,677 (25,913) 474
Change in assets and liabilities, net of effects from acquisitions:
Receivables (53,935) (184,116) (50,040)
Inventories (96,078) (38,761) (125,719)
Accounts payable, accrued expenses and other liabilities (54,970) 130,257 51,283
Other, net 2,496 8,911 (8,025)
------------------------------------------
Net cash provided (used) by operating activities 64,544 106,767 (12,849)
------------------------------------------
Cash flows from investing activities:
Acquisitions, net of cash acquired (24,292) (11,646) (162,818)
Investments in unconsolidated joint ventures 13,885 (15,022) 2,214
Net sales (originations) of mortgages held for long-term investment (2,645) (2,756) 1,686
Payments received on first mortgages and mortgage-backed securities 6,615 14,629 12,933
Purchases of property and equipment, net (18,500) (19,160) (15,859)
------------------------------------------
Net cash used by investing activities (24,937) (33,955) (161,844)
------------------------------------------
Cash flows from financing activities:
Net proceeds from credit agreements and other short-term borrowings 84,984 119,425 63,187
Issuance of French subsidiary stock 113,118
Proceeds from Company obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely debentures of the Company 183,057
Payments on collateralized mortgage obligations (6,312) (14,098) (12,324)
Payments on mortgages, land contracts and other loans (25,857) (73,329) (45,239)
Payments to minority interests (20,133) (43,723) (7,006)
Payments of cash dividends (11,465) (14,199) (11,871)
Repurchases of common stock (169,228) (81,874)
------------------------------------------
Net cash provided (used) for financing activities (34,893) (107,798) 169,804
------------------------------------------
Net increase (decrease) in cash and cash equivalents 4,714 (34,986) (4,889)
Cash and cash equivalents at beginning of year 28,367 63,353 68,242
------------------------------------------
Cash and cash equivalents at end of year $ 33,081 $ 28,367 $ 63,353
==========================================
Supplemental disclosures of cash flow information:
Interest paid, net of amounts capitalized $ 50,042 $ 43,014 $ 37,915
Income taxes paid 40,818 64,554 40,521
==========================================
Supplemental disclosures of noncash activities:
Cost of inventories acquired through seller financing $ 25,054 $ 43,529 $ 29,911
Issuance of promissory notes to repurchase common stock 78,000
Issuance of common stock related to an acquisition 146,005
Debt assumed related to an acquisition 303,239
==========================================
See accompanying notes.
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44
notes to consolidated financial statements
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
OPERATIONS KB Home (the "Company") is a regional builder of single-family homes
with domestic operations throughout the western United States, and international
operations in France. The Company also develops commercial and high-density
residential projects in France. Through its mortgage banking subsidiary, Kaufman
and Broad Mortgage Company, the Company provides mortgage banking services to
its domestic homebuyers.
BASIS OF PRESENTATION The consolidated financial statements include the
accounts of the Company and all significant subsidiaries and joint ventures in
which a controlling interest is held. All significant intercompany transactions
have been eliminated. Investments in unconsolidated joint ventures in which the
Company has less than a controlling interest are accounted for using the equity
method.
USE OF ESTIMATES The financial statements have been prepared in conformity with
generally accepted accounting principles and, as such, include amounts based on
informed estimates and judgments of management. Actual results could differ from
these estimates.
CASH AND CASH EQUIVALENTS The Company considers all highly liquid debt
instruments and other short-term investments purchased with a maturity of three
months or less to be cash equivalents. As of November 30, 2000 and 1999, the
Company's cash equivalents totaled $1,830,000 and $704,000, respectively.
FOREIGN CURRENCY TRANSLATION Results of operations for foreign entities are
translated to U.S. dollars using the average exchange rates during the period.
Assets and liabilities are translated using the exchange rates in effect at the
balance sheet date. Resulting translation adjustments are recorded in
stockholders' equity as foreign currency translation adjustments.
CONSTRUCTION OPERATIONS Housing and other real estate sales are recognized when
title passes to the buyer and all of the following conditions are met: a sale is
consummated, a significant down payment is received, the earnings process is
complete and the collection of any remaining receivables is reasonably assured.
In France, revenues from development and construction of single-family detached
homes, condominiums and commercial buildings, under long-term contracts with
individual investors who own the land, are recognized using the percentage of
completion method, which is generally based on costs incurred as a percentage of
estimated total costs of individual projects. Revenues recognized in excess of
amounts collected are classified as receivables. Amounts received from buyers in
excess of revenues recognized, if any, are classified as other liabilities.
Construction and land costs are comprised of direct and allocated costs,
including estimated future costs for warranties and amenities. Land, land
improvements and other common costs are allocated on a relative fair value basis
to units within a parcel or subdivision. Land and land development costs
generally include related interest and property taxes incurred until development
is substantially completed or deliveries have begun within a subdivision.
Land to be developed and projects under development are stated at cost unless
the carrying amount of the parcel or subdivision is determined not to be
recoverable, in which case the impaired inventories are written down to fair
value. Write-downs of impaired inventories are recorded as adjustments to the
cost basis of the inventory. The Company's inventories typically do not
consist of completed projects.
Goodwill represents the excess of the purchase price over the fair value of net
assets acquired and is amortized by the Company over periods ranging from five
to ten years using the straight-line method. Accumulated amortization was
$79,756,000 and $52,765,000 at November 30, 2000 and 1999, respectively. In the
event that facts and circumstances indicate that the carrying value of goodwill
may be impaired, an evaluation of recoverability would be performed. If an
evaluation were required, the estimated future undiscounted cash flows
associated with the goodwill would be compared to its carrying amount to
determine if a write-down to fair value or discounted cash flow is required.
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45
MORTGAGE BANKING OPERATIONS First mortgages and mortgage-backed securities
consist of securities held for long-term investment and are valued at amortized
cost. First mortgages held under commitments of sale are valued at the lower of
aggregate cost or market. Market is principally based on public market
quotations or outstanding commitments obtained from investors to purchase first
mortgages receivable.
Principal and interest payments received on mortgage-backed securities are
invested in short-term securities maturing on the next debt service date of the
collateralized mortgage obligations for which the securities are held as
collateral. Such payments are restricted to the payment of the debt service on
the collateralized mortgage obligations.
SECONDARY MARKETING TRADING LOSS On August 31, 1999, the Company disclosed that
it had discovered unauthorized mortgage loan trading activity by an employee of
its mortgage banking subsidiary resulting in a pretax trading loss of
$18,155,000 ($11,755,000, or $.25 per diluted share, on an after-tax basis). It
is normal practice for the Company's mortgage banking subsidiary to sell loans
into the market that approximately match loan commitments to the Company's
homebuyers. This practice is intended to hedge exposure to changes in interest
rates that may occur until loans are sold to secondary market investors in the
ordinary course of business. The loss was the result of a single employee
engaging in unauthorized mortgage loan trading largely unrelated to mortgage
originations. The employee who conducted the unauthorized trading was
terminated.
STOCK OPTIONS The Company's employee stock option plans are accounted for under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB Opinion No. 25").
INCOME TAXES Income taxes are provided for at rates applicable in the countries
in which the income is earned. Provision is made currently for United States
federal income taxes on earnings of foreign subsidiaries that are not expected
to be reinvested indefinitely.
EARNINGS PER SHARE Basic earnings per share is calculated by dividing net
income by the average number of common shares outstanding for the period.
Diluted earnings per share is calculated by dividing net income by the average
number of shares outstanding including all dilutive potentially issuable shares
under various stock option plans and stock purchase contracts. The following
table presents a reconciliation of average shares outstanding:
YEARS ENDED NOVEMBER 30,
-------------------------------
IN THOUSANDS 2000 1999 1998
-------------------------------
Basic average shares outstanding 38,931 46,730 39,553
Net effect of stock options assumed to be exercised 1,138 1,101 1,480
-------------------------------
Diluted average shares outstanding 40,069 47,831 41,033
===============================
SEGMENT INFORMATION In accordance with Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information," the Company identified two reportable segments: construction and
mortgage banking. The Company's construction segment consists primarily of
domestic and foreign homebuilding operations. The Company's construction
operations are engaged in the acquisition and development of land primarily for
residential purposes and offer a wide variety of homes that are designed to
appeal to the first-time homebuyer. Domestically, the Company currently sells
homes in six western states. Internationally, the Company operates in France.
The Company also builds commercial projects and high-density residential
properties, such as condominium complexes, in France. The Company's mortgage
banking operations provide mortgage banking services to the Company's domestic
homebuyers. The mortgage banking segment originates, processes and sells
mortgages to third-party investors. The Company does not retain or service the
mortgages that it originates but, rather, sells the mortgages and related
servicing rights to investors.
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Information for the Company's reportable segments are presented in its
consolidated statements of income and consolidated balance sheets included
herein. The Company's reporting segments follow the same accounting policies
used for the Company's consolidated financial statements as described in the
summary of significant accounting policies. Management evaluates a segment's
performance based upon a number of factors including pretax results.
RECENT ACCOUNTING PRONOUNCEMENTS Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
No. 133"), was issued in June 1998. This statement addresses the accounting for
and disclosure of derivative instruments, including derivative instruments
imbedded in other contracts, and hedging activities. The Statement requires the
Company to recognize all derivatives on the balance sheet at fair value.
Derivatives that are not hedges must be adjusted to fair value through income.
If the derivative is a hedge, depending on the nature of the hedge, changes in
the fair value of derivatives are either offset against the change in fair value
of assets, liabilities, or firm commitments through earnings or recognized in
other comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change is recognized in earnings.
Management has analyzed the implementation requirements and does not anticipate
that the adoption of the new statement as of December 1, 2000 will have a
significant effect on the earnings or financial position of the Company.
The Company manages its interest rate market risk on mortgage loans held for
sale and its estimated future commitments to originate and close mortgage loans
at fixed prices through the use of mandatory forward commitments to sell
mortgage-backed securities and best-efforts whole loan delivery commitments. The
Company estimates the portion of the locked mortgage loan pipeline that is
expected to close in order to determine the amount of hedging instruments. These
hedging instruments are effective as hedges for interest rate market risk on
mortgage loans held for sale and estimated future commitments. Accordingly,
gains and losses are deferred until the ultimate disposition of the contract. As
of November 30, 2000 and 1999, the Company had approximately $512,000,000 and
$378,000,000, respectively, of mandatory forward commitments outstanding.
RECLASSIFICATIONS Certain amounts in the consolidated financial statements of
prior years have been reclassified to conform to the 2000 presentation.
NOTE 2. ISSUANCE OF FRENCH SUBSIDIARY STOCK
On February 7, 2000, Kaufman & Broad S.A. ("KBSA"), the Company's wholly owned
French subsidiary, issued 5,314,327 common shares (including the over-allotment
option) in an initial public offering. The offering was made in France and
elsewhere in Europe and was priced at 23 euros per share. KBSA is now listed on
the Premier Marche of the ParisBourse. The offering generated total net proceeds
of $113,100,000, of which $82,900,000 was used by the Company to reduce its
domestic debt and repurchase additional shares of its common stock. The
remainder of the proceeds was used to fund internal and external growth of KBSA.
The Company recognized a gain of $39,630,000, or $.99 per diluted share as a
result of the offering. The Company continues to own a majority interest in KBSA
and will continue to consolidate these operations in its financial statements.
NOTE 3. ACQUISITIONS
Effective January 7, 1999, the Company acquired substantially all of the
homebuilding assets of the Lewis Homes group of companies ("Lewis Homes"). Lewis
Homes was engaged in the acquisition, development and sale of residential real
estate in California and Nevada. The purchase price for Lewis Homes was
approximately $449,244,000, comprised of the assumption of approximately
$303,239,000 in debt and the issuance of 7,886,686 shares of the Company's
common stock valued at approximately $146,005,000. The purchase price was based
on the December 31, 1998 net book values of the entities purchased. The excess
of the purchase price over the estimated fair value of net assets acquired was
$177,600,000 and was allocated to goodwill. The Company is amortizing the
goodwill on a straight-line basis over a period of ten years. Under the terms of
the purchase agreement, a Lewis family member was also appointed to the
Company's Board of Directors.
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The 7,886,686 shares of Company common stock issued in the acquisition were
"restricted" shares and could not be resold without a registration statement or
compliance with Rule 144 under the Securities Act of 1933 ("Rule 144"), which,
among other things, limits the number of shares that may be resold in a given
period. The Company originally agreed to file a registration statement for
6,000,000 of those shares in three increments at the Lewis family's request from
July 1, 2000 to July 1, 2002. On September 21, 2000, the Company instead
repurchased 4,000,000 of the shares issued in the acquisition from the Lewis
holders at a price of $26.00 per share. In connection with the repurchase, the
Lewis holders' registration rights for the first two increments were
extinguished. In the period subsequent to the Company's repurchase, the Lewis
holders sold most of the balance of their shares within the requirements of Rule
144. In connection with the acquisition of Lewis Homes, the Company obtained a
$200,000,000 unsecured term loan agreement with various banks (the "Term Loan
Agreement") to refinance certain debt assumed. The Company used borrowings under
its existing domestic unsecured revolving credit facility to refinance certain
other debt assumed in the Lewis Homes acquisition.
The acquisition consideration for Lewis Homes was determined by arm's-length
negotiations between the parties. The acquisition was accounted for as a
purchase, with the results of Lewis Homes included in the Company's consolidated
financial statements as of January 7, 1999.
The following unaudited pro forma information presents a summary of the
consolidated results of operations of the Company as if the acquisition of Lewis
Homes had occurred as of December 1, 1998 with pro forma adjustments to give
effect to amortization of goodwill, interest expense on acquisition debt and
certain other adjustments, together with related income tax effects:
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
YEAR ENDED NOVEMBER 30, 1999
-----------
Total revenues $3,919,247
Total pretax income 231,384
Net income 150,384
Basic earnings per share 3.16
Diluted earnings per share 3.09
===========
This pro forma financial information is presented for informational purposes
only and is not necessarily indicative of the operating results that would have
occurred had the acquisition been consummated as of December 1, 1998, nor are
they necessarily indicative of future operating results.
During the year ended November 30, 2000, the Company's French subsidiary, KBSA,
completed the acquisitions of four homebuilders in France. These companies were
acquired for an aggregate purchase price of $33,516,000 and were accounted for
under the purchase method of accounting. The excess of the purchase price over
the estimated fair value of the net assets acquired was $24,745,000 and was
allocated to goodwill. The Company is amortizing the goodwill on a straight-line
basis over a period of ten years. The pro forma results for 2000 and 1999,
assuming these acquisitions had been made at the beginning of the year, would
not be materially different from reported results.
NOTE 4. RECEIVABLES
CONSTRUCTION Trade receivables amounted to $213,197,000 and $138,250,000 at
November 30, 2000 and 1999, respectively. Included in these amounts are unbilled
receivables due from buyers on French single-family detached home, condominium
and commercial building sales accounted for using the percentage of completion
method totaling $161,658,000 at November 30, 2000 and $97,264,000 at November
30, 1999. The buyers are contractually obligated to remit payments against their
unbilled balances. Other receivables of $81,563,000 at November 30, 2000 and
$67,597,000 at November 30, 1999 included escrow deposits and amounts due from
municipalities and utility companies.
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At November 30, 2000 and 1999, receivables were net of allowances for doubtful
accounts of $10,152,000 and $16,578,000, respectively.
MORTGAGE BANKING First mortgages and mortgage-backed securities consisted of
loans of $11,734,000 at November 30, 2000 and $9,089,000 at November 30, 1999
and mortgage-backed securities of $31,403,000 and $37,991,000 at November 30,
2000 and 1999, respectively. The mortgage-backed securities serve as collateral
for related collateralized mortgage obligations. The properties covered by the
mortgages underlying the mortgage-backed securities are single-family
residences. Issuers of the mortgage-backed securities are the Government
National Mortgage Association and Fannie Mae. The first mortgages and
mortgage-backed securities bore interest at an average rate of 8 3/8% at both
November 30, 2000 and 1999 (with rates ranging from 7% to 12% in both 2000 and
1999).
The Company's mortgage-backed securities held for long-term investment have been
classified as held-to-maturity and are stated at amortized cost, adjusted for
amortization of discounts and premiums to maturity. Such amortization is
included in interest income. The total gross unrealized gains and gross
unrealized losses on the mortgage-backed securities were $600,000 and $0,
respectively at November 30, 2000 and $685,000 and $0, respectively at November
30, 1999.
First mortgages held under commitments of sale and other receivables consisted
of first mortgages held under commitments of sale of $389,494,000 at November
30, 2000 and $376,377,000 at November 30, 1999 and other receivables of
$13,671,000 and $9,699,000 at November 30, 2000 and 1999, respectively. The
first mortgages held under commitments of sale bore interest at an average rate
of 7 1/2% at both November 30, 2000 and 1999. The balance in first mortgages
held under commitments of sale and other receivables fluctuates significantly
during the year and typically reaches its highest level at quarter-ends,
corresponding to the Company's home and mortgage delivery activity.
NOTE 5. INVENTORIES
Inventories consisted of the following:
NOVEMBER 30,
---------------------------
IN THOUSANDS 2000 1999
---------------------------
Homes, lots and improvements in production $1,115,824 $1,063,505
Land under development 541,577 457,760
---------------------------
Total inventories $1,657,401 $1,521,265
===========================
Land under development primarily consists of parcels on which 50% or less of
estimated development costs have been incurred.
The impact of capitalizing interest costs on consolidated pretax income is as
follows:
YEARS ENDED NOVEMBER 30,
---------------------------------------
IN THOUSANDS 2000 1999 1998
---------------------------------------
Interest incurred $ 94,201 $ 78,041 $ 54,299
Interest expensed (31,479) (28,340) (23,341)
---------------------------------------
Interest capitalized 62,722 49,701 30,958
Interest amortized (40,679) (44,257) (30,752)
---------------------------------------
Net impact on consolidated pretax income $ 22,043 $ 5,444 $ 206
=======================================
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NOTE 6. 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 are based in California, Nevada,
New Mexico, Texas and France and are engaged in the development, construction
and sale of residential properties and commercial projects. Combined condensed
financial information concerning the Company's unconsolidated joint venture
activities follows:
NOVEMBER 30,
---------------------
IN THOUSANDS 2000 1999
---------------------
Cash $ 9,151 $ 3,386
Receivables 11,440 4,914
Inventories 36,100 82,021
Other assets 166 377
---------------------
Total assets $56,857 $90,698
=====================
Mortgages and notes payable $17,522 $30,988
Other liabilities 14,936 11,111
Equity of:
The Company 10,407 21,290
Others 13,992 27,309
---------------------
Total liabilities and equity $56,857 $90,698
=====================
The joint ventures finance land and inventory investments primarily through a
variety of borrowing arrangements. The Company typically does not guarantee
these financing arrangements.
YEARS ENDED NOVEMBER 30,
-----------------------------------------
IN THOUSANDS 2000 1999 1998
-----------------------------------------
Revenues $ 116,837 $ 13,889 $ 17,657
Cost of sales (85,383) (9,842) (12,245)
Other expenses, net (26,533) (426) (384)
-----------------------------------------
Total pretax income $ 4,921 $ 3,621 $ 5,028
-----------------------------------------
The Company's share of pretax income $ 2,926 $ 224 $ 1,151
=========================================
The Company's share of pretax income includes management fees earned from the
unconsolidated joint ventures.
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NOTE 7. MORTGAGES AND NOTES PAYABLE
CONSTRUCTION Mortgages and notes payable consisted of the following (interest
rates are as of November 30):
NOVEMBER 30,
-----------------------
IN THOUSANDS 2000 1999
-----------------------
Unsecured domestic borrowings with banks under a revolving credit agreement
(7 7/8% in 2000 and 6 3/8% in 1999) $120,000 $ 50,000
Other unsecured domestic borrowings with banks due within one year
(6 3/8% to 6 1/2% in 1999) 9,000
Unsecured French borrowings (5 4/5% to 6 1/2% in 2000 and 3 3/4% to 7% in 1999) 125,135 49,940
Term loan borrowings (8 3/8% in 2000 and 6 7/8% in 1999) 160,950 200,000
Shareholder notes (6 3/5% in 2000) 78,000
Mortgages and land contracts due to land sellers and other loans
(4 1/4% to 10 1/2% in 2000 and 7% to 10 1/4% in 1999) 29,780 30,583
Senior notes due 2004 at 7 3/4% 175,000 175,000
Senior subordinated notes due 2003 at 9 3/8% 174,534 174,370
Senior subordinated notes due 2006 at 9 5/8% 124,581 124,531
-----------------------
Total mortgages and notes payable $987,980 $813,424
=======================
On January 7, 1999, in connection with the acquisition of Lewis Homes, the
Company obtained a $200,000,000 Term Loan Agreement to refinance certain debt
assumed. The Term Loan Agreement provided for three payments of $25,000,000, due
on January 31, 2000, April 30, 2000 and July 31, 2000, with the remaining
principal balance due on April 30, 2001. Interest was payable monthly at the
London Interbank Offered Rate plus an applicable spread. Under the terms of the
Term Loan Agreement, the Company was required, among other things, to maintain
certain financial statement ratios and a minimum net worth and was subject to
limitations on acquisitions, inventories and indebtedness. The financing
obtained under the Term Loan Agreement did not affect the amounts available
under the Company's pre-existing borrowing arrangements.
On October 6, 2000, the Company entered into a $725,000,000 unsecured credit
agreement (the "$725,000,000 Unsecured Credit Facility"), consisting of a
$564,050,000 four-year committed revolving credit facility and a $160,950,000
five-year term loan, which together replaced its previously existing revolving
credit facility and Term Loan Agreement. The $725,000,000 Unsecured Credit
Facility could be expanded up to an aggregate total of $900,000,000 if
additional bank lending commitments are obtained. Interest on the $725,000,000
Unsecured Credit Facility is payable monthly at the London Interbank Offered
Rate plus an applicable spread on amounts borrowed.
The Company's French subsidiaries have lines of credit with various banks which
totaled $207,824,000 at November 30, 2000 and have various committed expiration
dates through November 2003. These lines of credit provide for interest on
borrowings at either the French Federal Funds Rate or the Paris Interbank
Offered Rate plus an applicable spread.
On September 21, 2000, in connection with the repurchase of 4,000,000 shares
from the Lewis holders, the Company issued promissory notes (the "Shareholder
Notes"), with an aggregate principal amount of $78,000,000, to the Lewis
holders. Interest on the Shareholder Notes is accrued monthly at an annual rate
of 6 3/5%. Under the terms of the notes, principal payments of $26,000,000 plus
accrued interest are due on January 4, 2001, June 7, 2001 and December 6, 2001.
The weighted average annual interest rate on aggregate unsecured borrowings,
excluding the senior and senior subordinated notes, was 7 3/8% and 6 3/5% at
November 30, 2000 and 1999, respectively.
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On April 26, 1993, the Company issued $175,000,000 principal amount of 9 3/8%
senior subordinated notes at 99.202%. The notes are due May 1, 2003 with
interest payable semi-annually. The notes represent unsecured obligations of the
Company and are subordinated to all existing and future senior indebtedness of
the Company. The Company may redeem the notes, in whole or in part, at any time
at 100% of their principal amount.
On October 29, 1996, the Company filed a universal shelf registration statement
(the "1996 Shelf Registration") with the Securities and Exchange Commission for
up to $300,000,000 of the Company's debt and equity securities. The Company's
previously outstanding shelf registration for debt securities in the amount of
$100,000,000 was subsumed within the 1996 Shelf Registration. On November 14,
1996, the Company utilized the 1996 Shelf Registration to issue $125,000,000 of
9 5/8% senior subordinated notes at 99.525%. The notes, which are due November
15, 2006 with interest payable semi-annually, represent unsecured obligations of
the Company and are subordinated to all existing and future senior indebtedness
of the Company. The notes are redeemable at the option of the Company, in whole
or in part, at 104.8125% of their principal amount beginning November 15, 2001,
and thereafter, at prices declining annually to 100% on and after November 15,
2004.
On October 14, 1997, pursuant to the 1996 Shelf Registration, the Company issued
$175,000,000 of 7 3/4% senior notes at 100% of the principal amount of the
notes. The notes, which are due October 15, 2004 with interest payable
semi-annually, represent unsecured obligations of the Company and rank pari
passu in right of payment with all other senior unsecured indebtedness of the
Company. The notes are not redeemable by the Company prior to stated maturity.
This offering resulted in the issuance of all available securities under the
1996 Shelf Registration.
The 7 3/4% senior notes and 9 3/8% and 9 5/8% senior subordinated notes contain
certain restrictive covenants that, among other things, limit the ability of the
Company to incur additional indebtedness, pay dividends, make certain
investments, create certain liens, engage in mergers, consolidations, or sales
of assets, or engage in certain transactions with officers, directors and
employees. Under the terms of the $725,000,000 Unsecured Credit Facility, the
Company is required, among other things, to maintain certain financial statement
ratios and a minimum net worth and is subject to limitations on acquisitions,
inventories and indebtedness. Based on the terms of the Company's $725,000,000
Unsecured Credit Facility, senior notes and senior subordinated notes, retained
earnings of $108,599,000 were available for payment of cash dividends or stock
repurchases at November 30, 2000.
Principal payments on senior and senior subordinated notes, term loan
borrowings, shareholder notes, mortgages, land contracts and other loans are due
as follows: 2001, $65,072,000; 2002, $37,355,000; 2003, $179,112,000; 2004,
$175,668,000; 2005, $160,989,000; and thereafter, $124,649,000.
Assets (primarily inventories) having a carrying value of approximately
$75,243,000 are pledged to collateralize mortgages, land contracts and other
secured loans.
On December 5, 1997, the Company filed a universal shelf registration statement
(the "1997 Shelf Registration") with the Securities and Exchange Commission for
up to $500,000,000 of the Company's debt and equity securities. This universal
shelf registration provides that securities may be offered from time to time in
one or more series and in the form of senior, senior subordinated or
subordinated debt, preferred stock, common stock, and/or warrants to purchase
such securities. The registration was declared effective on December 16, 1997,
and as of November 30, 2000 no securities had been issued thereunder.
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MORTGAGE BANKING Notes payable included the following (interest rates are as of
November 30):
November 30,
-----------------------
in thousands 2000 1999
-----------------------
Mortgage Warehouse Facility (6 5/8% in 2000 and 6 1/8% in 1999) $228,922 $240,102
Master Loan and Security Agreement (6 4/5% in 2000 and 6 1/2% in 1999) 156,372 137,564
-----------------------
Total notes payable $385,294 $377,666
=======================
First mortgages receivable are financed through a $300,000,000 revolving
mortgage warehouse agreement (the "Mortgage Warehouse Facility"). On February
18, 2000, the Company's mortgage banking subsidiary renewed its Mortgage
Warehouse Facility and increased the facility from $250,000,000. The Mortgage
Warehouse Facility, which expires on February 18, 2003, provides for an annual
fee based on the committed balance of the facility and provides for interest at
either the London Interbank Offered Rate or the Federal Funds Rate plus an
applicable spread on amounts borrowed.
On May 19, 2000, the Company's mortgage banking subsidiary renewed its Master
Loan and Security Agreement with an investment bank and increased the maximum
amount available under the agreement from $150,000,000 to $250,000,000. The
agreement, which expires on May 18, 2001, provides for a facility fee based on
the $250,000,000 maximum amount available and provides for interest to be paid
monthly at the Eurodollar Rate plus an applicable spread on amounts borrowed.
The amounts outstanding under the Mortgage Warehouse Facility and the Master
Loan and Security Agreement are secured by a borrowing base, which includes
certain mortgage loans held under commitments of sale and are repayable from
sales proceeds. There are no compensating balance requirements under either
facility. Both facilities include financial covenants and restrictions which,
among other things, require the maintenance of certain financial statement
ratios, a minimum tangible net worth and a minimum net income.
Collateralized mortgage obligations represent bonds issued to third parties
which are collateralized by mortgage-backed securities with substantially the
same terms. At both November 30, 2000 and 1999, the collateralized mortgage
obligations bore interest at rates ranging from 8% to 12 1/4% with stated
original principal maturities ranging from 3 to 30 years. Actual maturities are
dependent on the rate at which the underlying mortgage-backed securities are
repaid. No collateralized mortgage obligations have been issued since 1988.
Note 8. COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF
SUBSIDIARY TRUST HOLDING SOLELY DEBENTURES OF THE COMPANY (FELINE PRIDES)
On July 7, 1998, the Company, together with KBHC Financing I, a Delaware
statutory business trust (the "KBHC Trust") that is wholly owned by the Company,
issued an aggregate of (i) 18,975,000 Feline Prides, and (ii) 1,000,000 KBHC
Trust capital securities, with a $10 stated liquidation amount. The Feline
Prides consisted of (i) 17,975,000 Income Prides with a stated amount per Income
Prides of $10 (the "Stated Amount"), which are units comprised of a capital
security and a stock purchase contract under which the holders will purchase
common stock from the Company not later than August 16, 2001 and the Company
will pay to the holders certain unsecured contract adjustment payments, and (ii)
1,000,000 Growth Prides with a face amount per Growth Prides equal to the Stated
Amount, which are units consisting of a 1/100th beneficial interest in a
zero-coupon U.S. Treasury security and a stock purchase contract under which the
holders will purchase common stock from the Company not later than August 16,
2001 and the Company will pay to the holders certain unsecured contract
adjustment payments.
The distribution rate on the Income Prides is 8.25% per annum and the
distribution rate on the Growth Prides is .75% per annum. Under the stock
purchase contracts, investors will be required to purchase shares of common
stock of the Company for an effective price ranging between a minimum of $31.75
per share and a maximum of $38.10 per share, and the Company will issue
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approximately 5,000,000 to 6,000,000 common shares by August 16, 2001, depending
upon the price of the common stock upon settlement of the purchase contracts
(subject to adjustment under certain circumstances). The capital securities
associated with the Income Prides and the U.S. Treasury securities associated
with the Growth Prides have been pledged as collateral to secure the holders'
obligations in respect of the common stock purchase contracts. The capital
securities issued by the KBHC Trust are entitled to a distribution rate of 8%
per annum of their $10 stated liquidation amount.
The KBHC Trust utilized the proceeds from the issuance of the Feline Prides and
capital securities to purchase an equivalent principal amount of the Company's
8% Debentures due August 16, 2003 (the "8% Debentures"). The 8% Debentures are
the sole asset of the KBHC Trust. The Company's obligations under the Debentures
and related agreements, taken together, constitute a firm and unconditional
guarantee by the Company of the KBHC Trust's obligations under the capital
securities. The interest rate on the 8% Debentures and the distribution rate on
the capital securities of the KBHC Trust are to be reset, subject to certain
limitations, effective August 16, 2001. The Company has recorded the present
value of the contract adjustment payments on the Feline Prides, totaling
$1,600,000, as a liability and a reduction of stockholders' equity. The
liability will be reduced as the contract adjustment payments are made. The
Company has the right to defer the contract adjustment payments and the payment
of interest on the 8% Debentures, but any such election will subject the Company
to restrictions on the payment of dividends on, and redemption of, its
outstanding shares of common stock, and on the payment of interest on, or
redemption of, debt securities of the Company junior in rank to the 8%
Debentures, none of which are currently outstanding. Distributions of
$15,180,000, $15,180,000 and $6,072,000 are included as minority interests in
the Company's results of operations for each of the years ended November 30,
2000, 1999 and 1998, respectively.
NOTE 9. FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair values of financial instruments have been determined based on
available market information and appropriate valuation methodologies. However,
judgment is necessarily required in interpreting market data to develop the
estimates of fair value. In that regard, the estimates presented herein are not
necessarily indicative of the amounts that the Company could realize in a
current market exchange.
The carrying values and estimated fair values of the Company's financial
instruments, except for those for which the carrying values approximate fair
values, are summarized as follows:
NOVEMBER 30,
---------------------------------------------------
2000 1999
---------------------------------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
IN THOUSANDS VALUE FAIR VALUE VALUE FAIR VALUE
---------------------------------------------------
Construction:
Financial liabilities
7 3/4% Senior notes $175,000 $164,745 $175,000 $163,520
9 3/8% Senior subordinated notes 174,534 173,110 174,370 174,738
9 5/8% Senior subordinated notes 124,581 122,388 124,531 125,700
Mortgage banking:
Financial assets
Mortgage-backed securities 31,403 32,003 37,991 38,676
Financial liabilities
Collateralized mortgage obligations secured by
mortgage-backed securities 29,928 30,982 36,219 36,897
Company obligated mandatorily redeemable
preferred securities of subsidiary trust holding
solely debentures of the Company 189,750 175,000 189,750 141,800
===================================================
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The Company used the following methods and assumptions in estimating fair
values:
Cash and cash equivalents; first mortgages held under commitments of sale and
other receivables; borrowings under the unsecured credit facilities, Shareholder
Notes, French lines of credit, Mortgage Warehouse Facility and Master Loan and
Security Agreement: The carrying amounts reported approximate fair values.
Senior notes and senior subordinated notes: The fair values of the Company's
senior notes and senior subordinated notes are estimated based on quoted market
prices.
Mortgage-backed securities and collateralized mortgage obligations secured by
mortgage-backed securities: The fair values of these financial instruments are
estimated based on quoted market prices for the same or similar issues.
Company obligated mandatorily redeemable preferred securities of subsidiary
trust holding solely debentures of the Company: The fair values of these
financial instruments are based on quoted market prices on the New York Stock
Exchange.
NOTE 10. COMMITMENTS AND CONTINGENCIES
Commitments and contingencies include the usual obligations of homebuilders for
the completion of contracts and those incurred in the ordinary course of
business. The Company is also involved in litigation incidental to its business,
the disposition of which should have no material effect on the Company's
financial position or results of operations.
NOTE 11. STOCKHOLDERS' EQUITY
PREFERRED STOCK On February 4, 1999, the Company adopted a new Stockholder
Rights Plan to replace its preexisting shareholder rights plan adopted in 1989
(the "1989 Rights Plan"), and declared a dividend distribution of one preferred
share purchase right for each outstanding share of common stock; such rights
were issued on March 7, 1999, simultaneously with the expiration of the rights
issued under the 1989 Rights Plan. Under certain circumstances, each right
entitles the holder to purchase 1/100th of a share of the Company's Series A
Participating Cumulative Preferred Stock at a price of $135.00, subject to
certain antidilution provisions. The rights are not exercisable until the
earlier to occur of (i) 10 days following a public announcement that a person or
group has acquired Company stock representing 15% or more of the aggregate votes
entitled to be cast by all shares of common stock or (ii) 10 days following the
commencement of a tender offer for Company stock representing 15% or more of the
aggregate votes entitled to be cast by all shares of common stock. If, without
approval of the Board of Directors, the Company is acquired in a merger or other
business combination transaction, or 50% or more of the Company's assets or
earning power is sold, each right will entitle its holder to receive, upon
exercise, common stock of the acquiring company having a market value of twice
the exercise price of the right; and if, without approval of the Board of
Directors, any person or group acquires Company stock representing 15% or more
of the aggregate votes entitled to be cast by all shares of common stock, each
right will entitle its holder to receive, upon exercise, common stock of the
Company having a market value of twice the exercise price of the right. At the
option of the Company, the rights are redeemable prior to becoming exercisable
at $.005 per right. Unless previously redeemed, the rights will expire on March
7, 2009. Until a right is exercised, the holder will have no rights as a
stockholder of the Company, including the right to vote or receive dividends.
NOTE 12. EMPLOYEE BENEFIT AND STOCK PLANS
Benefits are provided to most employees under the Company's 401(k) Savings Plan
under which contributions by employees are partially matched by the Company. The
aggregate cost of this plan to the Company was $4,513,000 in 2000, $3,937,000 in
1999 and $3,025,000 in 1998.
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55
The Company's 1999 Incentive Plan (the "1999 Plan") provides that stock options,
associated limited stock appreciation rights, restricted shares of common stock,
stock units and other securities may be awarded to eligible individuals for
periods of up to 15 years. The Company also has a Performance-Based Incentive
Plan for Senior Management (the "Incentive Plan") and a 1998 Stock Incentive
Plan (the "1998 Plan") which provide for the same awards as may be made under
the 1999 Plan, but require that such awards be subject to certain conditions
which are designed to assure that annual compensation paid in excess of
$1,000,000 to participating executives is tax deductible for the Company. The
1998 Plan and the 1999 Plan are the Company's primary existing employee stock
plans.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"), issued in October 1995, established financial
accounting and reporting standards for stock-based employee compensation plans.
As permitted by SFAS No. 123, the Company elected to continue to use APB Opinion
No. 25 and related interpretations in accounting for its stock options. Had
compensation expense for the Company's stock option plans been determined based
on the fair value at the grant date for awards in 2000, 1999 and 1998 consistent
with the provisions of SFAS No. 123, the Company's net income and diluted
earnings per share would have been reduced to the pro forma amounts indicated
below:
YEARS ENDED NOVEMBER 30,
----------------------------------------------
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS 2000 1999 1998
----------------------------------------------
Net income - as reported $ 209,960 $ 147,469 $ 95,267
Net income - pro forma 205,652 142,816 91,398
Diluted earnings per share - as reported 5.24 3.08 2.32
Diluted earnings per share - pro forma 5.10 2.99 2.24
==============================================
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions used for
grants in 2000, 1999 and 1998, respectively: a risk free interest rate of 5.44%.
6.14% and 4.38%; an expected volatility factor for the market price of the
Company's common stock of 44.82%, 43.14% and 41.31%; a dividend yield of 1.00%,
1.36% and 1.19%; and an expected life of 4 years, 4 years and 4 years. The
weighted average fair value of options granted in 2000, 1999 and 1998 was $7.70,
$6.92 and $6.09, respectively.
Stock option transactions are summarized as follows:
2000 1999 1998
----------------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
----------------------------------------------------------------------------------
Options outstanding at
beginning of year 4,849,822 $17.26 2,965,067 $15.22 2,747,318 $ 9.98
Granted 1,615,176 24.74 2,241,736 20.12 1,318,017 22.83
Exercised (306,628) 16.46 (211,925) 16.43 (995,235) 10.70
Cancelled (419,638) 21.08 (145,056) 21.00 (105,033) 16.56
----------------------------------------------------------------------------------
Options outstanding at end of year 5,738,732 $19.13 4,849,822 $17.26 2,965,067 $15.22
----------------------------------------------------------------------------------
Options exercisable at end of year 2,773,254 $15.60 2,041,106 $13.83 1,586,455 $12.16
----------------------------------------------------------------------------------
Options available for grant
at end of year 1,671,996 2,867,334 2,464,014
==================================================================================
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56
Stock options outstanding at November 30, 2000 are as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
CONTRACTUAL EXERCISE EXERCISE
RANGE OF EXERCISE PRICE OPTIONS LIFE PRICE OPTIONS PRICE
-------------------------------------------------------------
$4.38 to $14.56 1,255,489 5.10 $ 7.78 1,214,989 $ 7.55
$16.13 to $19.88 1,103,166 13.60 17.79 385,381 17.86
$20.25 to $24.85 1,833,714 12.74 22.42 1,085,929 22.54
$25.00 to $33.94 1,546,363 14.78 25.39 86,955 31.29
-------------------------------------------------------------
$4.38 to $33.94 5,738,732 11.78 $19.13 2,773,254 $15.60
=============================================================
The Company records proceeds from the exercise of stock options as additions to
common stock and paid-in capital. The tax benefit, if any, is recorded as
additional paid-in capital.
In 1991, the Board of Directors approved the issuance of restricted stock awards
under the 1988 Plan of up to an aggregate 600,000 shares of common stock to
certain officers and key employees. Restrictions lapse each year through May 10,
2005 on specified portions of the shares awarded to each participant so long as
the participant has remained in the continuous employ of the Company. Restricted
shares under this grant outstanding at the end of the year totaled 108,331 in
2000, 129,998 in 1999 and 151,665 in 1998.
On August 4, 1999, the Company's Board of Directors authorized a share
repurchase program which allowed the Company to purchase shares of its common
stock at prices not to exceed $28 per share. As of November 30, 2000, the Board
of Directors had authorized the repurchase of a total of 14,500,000 shares. The
Company had repurchased 14,500,000 shares and 3,750,100 shares, respectively,
under the repurchase program as of November 30, 2000 and 1999.
In connection with its share repurchase program, on August 27, 1999, the Company
established a grantor stock ownership trust (the "Trust") into which certain of
the repurchased shares have been transferred. The Trust, administered by an
independent trustee, acquires, holds and distributes the shares of common stock
for the purpose of funding certain employee compensation and employee benefit
obligations of the Company under its existing stock option, 401(k) and other
employee benefit plans. The existence of the Trust has no impact on the amount
of benefits or compensation that is paid under these plans.
For financial reporting purposes, the Trust is consolidated with the Company.
Any dividend transactions between the Company and the Trust are eliminated.
Acquired shares held by the Trust remain valued at the market price at the date
of purchase and are shown as a reduction to stockholders' equity in the
consolidated balance sheet. The difference between the Trust share value and the
fair market value on the date shares are released from the Trust, for the
benefit of employees, will be included in additional paid-in capital. Common
stock held in the Trust is not considered outstanding in the computation of
earnings per share. The Trust held 8,782,252 and 3,750,100 shares of common
stock at November 30, 2000 and 1999, respectively. The trustee votes shares held
by the Trust in accordance with voting directions from eligible employees, as
specified in a trust agreement with the trustee.
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NOTE 13. INCOME TAXES
The components of pretax income are as follows:
YEARS ENDED NOVEMBER 30,
-------------------------------------------
IN THOUSANDS 2000 1999 1998
-------------------------------------------
Domestic $263,266 $200,272 $136,042
Foreign 34,394 26,597 10,525
-------------------------------------------
Total pretax income $297,660 $226,869 $146,567
===========================================
The components of income taxes are as follows:
IN THOUSANDS TOTAL FEDERAL STATE FOREIGN
--------------------------------------------------
2000
Currently payable $ 70,818 $ 43,776 $17,000 $10,042
Deferred 16,882 11,586 5,296
--------------------------------------------------
Total $ 87,700 $ 55,362 $17,000 $15,338
==================================================
1999
Currently payable $ 87,428 $ 65,557 $11,755 $10,116
Deferred (8,028) (12,411) 4,383
--------------------------------------------------
Total $ 79,400 $ 53,146 $11,755 $14,499
==================================================
1998
Currently payable $ 52,628 $ 39,989 $ 8,498 $ 4,141
Deferred (1,328) (3,145) 1,817
--------------------------------------------------
Total $ 51,300 $ 36,844 $ 8,498 $ 5,958
==================================================
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Deferred income taxes result from temporary differences in the financial and tax
bases of assets and liabilities. Significant components of the Company's
deferred tax liabilities and assets are as follows:
NOVEMBER 30,
----------------------
IN THOUSANDS 2000 1999
----------------------
Deferred tax liabilities:
Installment sales $ 15,763 $ 15,471
Bad debt and other reserves 468 449
Capitalized expenses 21,970 15,704
Partnerships and joint ventures 1,237 2,439
Repatriation of foreign subsidiaries 12,381
Other 3,917 12,179
----------------------
Total deferred tax liabilities 43,355 58,623
----------------------
Deferred tax assets:
Warranty, legal and other accruals 27,372 29,210
Depreciation and amortization 19,328 27,957
Capitalized expenses 14,928 16,370
Partnerships and joint ventures 14,139 13,183
Noncash charge for impairment of long-lived assets 6,400 7,686
Foreign tax credits 12,346
Net operating losses 20,347 40,121
Other 14,683 11,269
----------------------
Total deferred tax assets 117,197 158,142
----------------------
Net deferred tax assets $ 73,842 $ 99,519
======================
Net operating loss carryforwards expire in various years from 2005 through 2018.
The Company expects that the entire deferred tax benefit of the tax loss
carryforwards will be recognized in future periods.
Income taxes computed at the statutory United States federal income tax rate and
income tax expense provided in the financial statements differ as follows:
YEARS ENDED NOVEMBER 30,
---------------------------------------
IN THOUSANDS 2000 1999 1998
---------------------------------------
Amount computed at statutory rate $ 104,181 $ 79,404 $ 51,298
Increase (decrease) resulting from:
State taxes, net of federal income tax benefit 11,050 7,641 5,524
Differences in foreign tax rates 853 4,379 1,594
Intercompany dividends (2,537) 1,153 977
Tax credits (24,211) (11,329) (3,351)
Other, net (1,636) (1,848) (4,742)
---------------------------------------
Total $ 87,700 $ 79,400 $ 51,300
=======================================
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59
The Company has commitments to invest $6,197,000 over five years in affordable
housing partnerships which are scheduled to provide tax credits.
The Company had foreign tax credit carryforwards at November 30, 2000 of
$1,000,000 for United States federal income tax purposes which expire in 2004.
NOTE 14. GEOGRAPHICAL INFORMATION
The following table presents information about the Company by geographic area.
The Company's domestic construction operations are comprised of three regions as
follows: West Coast - California; Southwest - Arizona, Nevada and New Mexico;
and Central - Colorado and Texas.
OPERATING IDENTIFIABLE
IN THOUSANDS REVENUES INCOME ASSETS
----------------------------------------
2000
Construction:
West Coast $1,466,418 $ 95,243 $ 907,956
Southwest 862,822 67,899 427,347
Central 1,065,803 90,018 531,074
Foreign 475,445 35,449 495,391
----------------------------------------
Total construction 3,870,488 288,609 2,361,768
Mortgage banking 60,370 23,832 467,153
----------------------------------------
Total $3,930,858 $312,441 $2,828,921
========================================
1999
Construction:
West Coast $1,579,226 $115,515 $ 905,890
Southwest 830,418 58,434 481,997
Central 950,177 59,488 505,144
Foreign 412,300 25,670 321,045
----------------------------------------
Total construction 3,772,121 259,107 2,214,076
Mortgage banking 64,174 17,464 450,159
----------------------------------------
Total $3,836,295 $276,571 $2,664,235
========================================
1998
Construction:
West Coast $1,105,849 $ 82,939 $ 655,920
Southwest 352,389 25,742 258,081
Central 690,019 32,493 398,308
Foreign 254,709 7,498 230,235
----------------------------------------
Total construction 2,402,966 148,672 1,542,544
Mortgage banking 46,396 21,413 317,660
----------------------------------------
Total $2,449,362 $170,085 $1,860,204
========================================
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NOTE 15. QUARTERLY RESULTS (UNAUDITED)
Quarterly results for the years ended November 30, 2000 and 1999 follow:
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS FIRST SECOND THIRD FOURTH
------------------------------------------------------
2000
Revenues $799,585 $906,182 $ 981,024 $1,244,067
Operating income 47,275 53,678 81,964 129,524
Pretax income 77,414 42,700 66,439 111,107
Net income 64,214 27,700 44,639 73,407
Basic earnings per share 1.51 .70 1.17 2.10
Diluted earnings per share 1.47 .68 1.14 2.00
======================================================
1999
Revenues $694,143 $862,270 $1,057,113 $1,222,769
Operating income 34,134 56,494 72,058 113,885
Pretax income 24,886 43,975 58,781 99,227
Net income 16,186 28,575 38,181 64,527
Basic earnings per share .36 .60 .80 1.39
Diluted earnings per share .35 .58 .78 1.36
======================================================
Quarterly and year-to-date computations of per share amounts are made
independently. Therefore, the sum of per share amounts for the quarters may not
agree with per share amounts for the year.
NOTE 16. SUBSEQUENT EVENT (UNAUDITED)
On February 8, 2001, pursuant to the 1997 Shelf Registration, the Company issued
$250,000,000 of 9 1/2% senior subordinated notes at 100% of the principal amount
of the notes. The notes, which are due February 15, 2011 with interest payable
semi-annually, represent unsecured obligations of the Company and are
subordinated to all existing and future senior indebtedness of the Company. The
notes are redeemable at the option of the Company, in whole or in part, at
104.750% of their principal amount beginning February 15, 2006, and thereafter
at prices declining annually to 100% on and after February 15, 2009. Proceeds
from the issuance of the notes were used to pay down bank borrowings.
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REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of KB Home:
We have audited the accompanying consolidated balance sheets of KB Home as of
November 30, 2000 and 1999, and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the three years in the period
ended November 30, 2000. 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 auditing standards generally accepted
in the United States. Those 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 KB Home at
November 30, 2000 and 1999, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended November 30,
2000, in conformity with accounting principles generally accepted in the United
States.
/s/ ERNST & YOUNG LLP
Los Angeles, California
December 21, 2000
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62
REPORT ON FINANCIAL STATEMENTS
The accompanying consolidated financial statements are the responsibility of
management. The statements have been prepared in conformity with generally
accepted accounting principles. Estimates and judgments of management based on
its current knowledge of anticipated transactions and events are made to prepare
the financial statements as required by generally accepted accounting
principles. Management relies on internal accounting controls, among other
things, to produce records suitable for the preparation of financial statements.
The responsibility of our external auditors for the financial statements is
limited to their expressed opinion on the fairness of the consolidated financial
statements taken as a whole. Their examination is performed in accordance with
generally accepted auditing standards which include tests of our accounting
records and internal accounting controls and evaluation of estimates and
judgments used to prepare the financial statements. The Company employs a staff
of internal auditors whose work includes evaluating and testing internal
accounting controls.
An audit committee of outside members of the Board of Directors periodically
meets with management, the external auditors and the internal auditors to
evaluate the scope of auditing activities and review results. Both the external
and internal auditors have the unrestricted opportunity to communicate privately
with the audit committee.
/s/ WILLIAM R. HOLLINGER
William R. Hollinger
Vice President and Controller
December 21, 2000
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63
STOCKHOLDER INFORMATION
Common Stock Prices
2000 1999
-----------------------------------------------------
High Low High Low
-----------------------------------------------------
First Quarter $24 13/16 $18 3/4 $ 31 $21 3/8
Second Quarter 22 3/8 16 13/16 28 3/4 21
Third Quarter 25 3/8 16 15/16 25 7/16 19 1/4
Fourth Quarter 32 13/16 23 15/16 25 9/16 16 3/4
=====================================================
DIVIDEND DATA
KB Home paid a quarterly cash dividend of $.075 per common share in 2000 and
1999.
ANNUAL STOCKHOLDERS' MEETING
The 2001 Annual Stockholders' meeting will be held at The W Hotel, 930 Hilgard
Avenue, in Los Angeles, California, at 9:00 a.m. on Thursday, April 5, 2001.
STOCK EXCHANGE LISTINGS
KB Home's common stock is listed on the New York Stock Exchange and is also
traded on the Boston, Cincinnati, Midwest, Pacific and Philadelphia Exchanges.
The ticker symbol is KBH.
Kaufman & Broad S.A. is listed on the ParisBourse. The ticker symbol is KOF.
KBSA's Web site address is ketb.com.
TRANSFER AGENT
Mellon Investor Services LLC
P.O. Box 3315
South Hackensack, New Jersey 07606-1915
(800) 356-2017
www.mellon-investor.com
INDEPENDENT AUDITORS
Ernst & Young LLP
Los Angeles, California
SHAREHOLDER INFORMATION
The Company's common stock is traded on the New York Stock Exchange under the
symbol KBH. There were 45,508,345 shares of common stock outstanding as of
February 1, 2001.
FORM 10-K
The Company's 2000 Report on Form 10-K filed with the Securities and Exchange
Commission may be obtained without charge by writing to the Company's Investor
Relations department, or by visiting the Company's Web site at kbhome.com.
HEADQUARTERS
KB Home
10990 Wilshire Boulevard, Seventh Floor
Los Angeles, California 90024
(310) 231-4000
(310) 231-4222 Fax
Location and Community Information:
kbhome.com
(800) 34-HOMES
INVESTOR CONTACT
Mary McCarthy
Senior Vice President, Corporate Communications
KB Home
10990 Wilshire Boulevard, Seventh Floor
Los Angeles, California 90024
(310) 231-4000
mmccarthy@kbhome.com
BONDHOLDER SERVICES ADDRESSES
& PHONE NUMBERS
8 1/4% $189,750,000 FELINE PRIDES - Due 8/16/01
Trustee:
Bank One, N.A.
Corporate Trust Investor Relations
One Bank One Plaza
Mail Code IL1-0126
Chicago, Illinois 60670
bondholder@em.fcnbd.com
(800) 524-9472
9 3/8% $175,000,000 Note - Due 5/1/03
Trustee:
State Street Bank and Trust Company of California, N.A.
Corporate Trust Department
633 West 5th Street, 12th Floor
Los Angeles, California 90071
corporatetrust.statestreet.com
(800) 531-0368
7 3/4% $175,000,000 Note - Due 10/15/04
9 5/8% $125,000,000 Note - Due 11/15/06
9 1/2% $250,000,000 Note - Due 2/15/11
Trustee:
Sun Trust Bank
Corporate Trust Division
Mail Code 008
25 Park Place, 24th Floor
Building 10, Suite 810
Atlanta, Georgia 30303-2900
olga.warren@suntrust.com
(800) 711-1614
76
64
LIST OF EXHIBITS FILED
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
------- ----------- ----------
3.7 Certificate of Ownership and Merger effective January 17,
2001 merging KB Home, Inc. into Kaufman and Broad Home
Corporation, through which the name of the Company was
changed to KB HOME..........................................
3.8 By-Laws, as amended and restated on January 17, 2001, to
reflect the change in the Company's name....................
4.19 By-Laws, as amended and restated on January 17, 2001, to
reflect the change in the Company's name, included as
Exhibit No. 3.8 herein.
10.19 Stock Purchase Agreement, dated as of September 21, 2000, by
and between the Company and certain of the Lewis Homes
sellers.....................................................
10.20 2000 Revolving Credit Facility, dated as of October 3, 2000,
by and among the Company, the banks party thereto, Bank of
America, N.A., as Administrative Agent, and Banc of America
Securities LLC, as Lead Arranger and Sole Book Manager......
10.21 2000 Term Credit Facility, dated as of October 3, 2000, by
and among the Company, the banks party thereto, Bank of
America, N.A., as Administrative Agent, and Banc of America
Securities LLC, as Lead Arranger and Sole Book Manager......
10.22 Form of limited liability company Operating Agreement under
the e.KB Equity Incentive Program...........................
13 Pages 34 through 72 and page 76 of the Company's 2000 Annual
Report to Stockholders......................................
22 Subsidiaries of the Company.................................
24 Consent of Independent Auditors.............................