1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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, 1999
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
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
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. [ ]
THE AGGREGATE MARKET VALUE OF VOTING STOCK HELD BY NON-AFFILIATES OF THE
COMPANY ON FEBRUARY 15, 2000 WAS $799,499,850. EXCLUDED FROM THE CALCULATION OF
MARKET VALUE ON FEBRUARY 15, 2000 ARE 6,491,400 SHARES HELD BY THE REGISTRANT'S
GRANTOR STOCK OWNERSHIP TRUST.
THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S CLASSES OF
COMMON STOCK ON FEBRUARY 15, 2000 WAS AS FOLLOWS:
Common Stock (par value $1.00 per share) 41,620,554 shares. Excluded
from the calculation of shares outstanding on February 15, 2000 are
6,491,400 shares held by the Registrant's Grantor Stock Ownership
Trust.
DOCUMENTS INCORPORATED BY REFERENCE
1999 Annual Report to Stockholders (incorporated into Part II).
Notice of 2000 Annual Meeting of Stockholders and Proxy Statement
(incorporated into Part III).
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2
PART I
ITEM 1. BUSINESS
GENERAL
The Company is a builder of single-family homes with domestic operations in
six western states, and international operations in France. Domestically, in
1999, the Company became the largest homebuilder in the United States based on
the number of homes delivered. Founded in 1957, the Company builds innovatively
designed homes which cater primarily to first-time homebuyers, generally in
medium-sized developments close to major metropolitan areas. Internationally,
the Company also builds commercial projects and high density residential
properties such as condominium complexes. The Company 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.kbhomes.com. As used herein, the term "Company" refers to Kaufman and Broad
Home Corporation and its subsidiaries, unless the context indicates otherwise.
MARKETS
The Company achieved an all-time record 22,422 unit deliveries in 1999
(excluding 38 deliveries from certain unconsolidated joint ventures) and became
the largest homebuilder in the United States, as measured by unit deliveries.
The Company's unit deliveries for the year ended November 30, 1999 were
approximately 47% higher than the previous Company record of 15,213 units
established in 1998. The increase in deliveries in 1999 reflected increases in
all of the Company's key markets. Growth in domestic deliveries reflected an
increase in the average number of active communities resulting from the
Company's continued expansion of its operations and the acquisitions completed
in 1999 and 1998. 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).
During the second quarter of 1998, the Company completed its acquisitions of
Houston-based Hallmark Residential Group ("Hallmark"), Phoenix/Tucson-based
Estes Homebuilding Co. ("Estes") and the assets of Denver-based PrideMark
Homebuilding Group ("PrideMark"). Growth in French deliveries in 1999 resulted
partly from improved market conditions and the acquisition of Park, a French
condominium builder, in the second half of 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 2000.
During 1999, the average number of active communities operated by the
Company was 315, an increase of approximately 50% over 1998. The average selling
price of the Company's homes was $166,500 in 1999, up approximately 6% from 1998
due to the inclusion of somewhat higher-priced deliveries in California and
Nevada related to the Lewis Homes acquisition, as well as higher-priced
deliveries in France. In addition, the Company increased prices in certain fast
selling, hard to replace communities due to improved market conditions in
several of its major markets.
The Company's principal geographic markets as of November 30, 1999 were:
California; "Other U.S." (comprised of the Company's operations in Arizona,
Colorado, Nevada, New Mexico and Texas); and France (principally
1
3
metropolitan Paris). The Company delivered its first homes in California in
1963, France in 1970, Nevada in 1993, Arizona and Colorado in 1994, New Mexico
in 1995 and Texas in 1996.
To enhance its operating capabilities in regional submarkets, the Company
conducted its domestic homebuilding business in 1999 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 new home showrooms in 1999.
Internationally, the Company operates its construction business through two
divisional offices in France.
California. During the first half of the 1990s, weak conditions for new
housing and general recessionary trends in California prompted the Company in
1993 to begin diversifying its business through aggressive expansion into other
western states. Since 1995, the housing market has improved significantly in
California with the number of permits issued increasing in each succeeding year.
In 1999, new housing permits issued in the state increased approximately 8% from
the prior year. In 1999, the Company's California deliveries rose approximately
30% from the previous year to 6,323 units, reflecting an increase of
approximately 34% in the average number of active communities in the state.
Growth in the Company's California operations in 1999 was primarily driven by
the acquisition of Lewis Homes as well as improved market conditions. The
Company's market share in California was nearly 7% in 1999, which was the
largest market share of any homebuilder in the state.
In Southern California, the Company conducts its homebuilding activity in
Los Angeles, San Bernardino, Riverside, Ventura, Orange and San Diego counties.
In Northern California, the Company's activities are conducted in the San
Francisco Bay-Oakland-San Jose, Monterey Bay, Sacramento, Central Valley and
Fresno regions.
Most of the communities developed by the Company in California consist of
single-family detached homes primarily designed for the entry-level housing
market. These homes typically ranged in size from approximately 1,000 to 5,000
square feet in 1999 and sold at an average price of $246,000, well below the
statewide new home average of $282,400, as a result of the Company's emphasis on
the entry-level market. In 1999, the Company's average selling price in
California increased approximately 10% from the previous year, reflecting the
inclusion of higher-priced deliveries from the Lewis Homes operations and
selected increases in sales prices in certain markets based on improved market
conditions.
Other U.S. In the early 1990s, the greatly improved business conditions in
other western states coupled with the prolonged economic downturn in California
caused the Company to expand its domestic operations outside California. Since
1996, the Company has more than tripled the annual number of unit deliveries
generated from its Other U.S. operations. Deliveries from these operations
totaled 13,610 units in 1999, up approximately 56% from the prior year. This
increase was due to a higher average number of active communities, reflecting
the Company's growth strategy and the inclusion of operating results from
acquisitions. The Company's Other U.S. operations accounted for approximately
68% of its domestic home deliveries in 1999 compared to approximately 64% in
1998.
The Company conducts its Other U.S. homebuilding activities in Phoenix and
Tucson, Arizona; Denver, Colorado; Las Vegas and Reno, Nevada; Albuquerque, New
Mexico; and Austin, Dallas, Houston and San Antonio, Texas.
The communities developed by the Company's Other U.S. divisions primarily
consist of single-family detached entry-level homes. These homes typically
ranged in size from approximately 1,000 to 3,800 square feet in 1999 and sold at
an average price of $129,900. The average selling price of the Company's Other
U.S. homes increased approximately 9% in 1999 from $119,100 in 1998 due to the
inclusion of higher-priced deliveries from the Lewis Homes operations in Nevada
and selected increases in sales prices in certain markets due to favorable
market conditions.
France. The Company is one of the leading builders of homes (individual
homes in communities and condominium units) in France. Its principal market in
France is the Ile-de-France region, where it currently builds approximately 90%
of its individual homes and approximately 66% of its condominium units. The
Company also has activities in the regions of Marseille and Lyon (including
Besancon), as well as in Strasbourg and Rouen. At one time, the Company carried
out a large commercial building business; however, the Company's French
commercial operations, which developed commercial office buildings in Paris for
sale to institutional investors, became a smaller segment of the French
operations as the French economy declined in the first half of the 1990s. 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. In 1999,
2
4
housing deliveries from the Company's French homebuilding operations increased
approximately 53% from the prior year to 2,465 units, partly due to improved
market conditions. The Company's French operations focused primarily on
single-family detached and attached homes in 1999, ranging in size from
approximately 800 to 2,700 square feet. The average selling price of the
Company's homes in France rose nearly 10% to $163,600 in 1999, primarily due to
a change in the mix of deliveries and price appreciation in the French housing
market. Revenues from the development of commercial buildings, all located in
metropolitan Paris, totaled $.7 million in 1999, $1.5 million in 1998 and $2.7
million in 1997.
On January 24, 2000, Kaufman & Broad S.A. ("KBSA"), the Company's wholly
owned French subsidiary filed a preliminary public offering memorandum for the
initial public offering of ordinary shares of KBSA. On February 7, 2000, KBSA
successfully completed its public offering and is now listed on the Premier
Marche of the ParisBourse. The offering of 5,148,937 shares (before exercise of
the over allotment option) was made in France and in Europe and was priced at 23
euros per share, representing a total offering of approximately $120.0 million.
Proceeds from the offering will be used to fund internal and external growth of
the French homebuilding operations, obtain better financing conditions, and
finance the payment of a dividend of approximately $85.0 million to the Company,
which the Company will use to reduce its domestic debt and repurchase additional
shares of its common stock. The Company continues to hold 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.
Selected Market Data. The following table sets forth, for each of the
Company's principal markets, unit deliveries, average selling price of homes and
total construction revenues for the years ended November 30, 1999, 1998 and 1997
(excluding the effects of unconsolidated joint ventures).
YEARS ENDED NOVEMBER 30,
----------------------------
1999 1998 1997
-------- -------- --------
California:
Unit deliveries........................................... 6,323 4,858 4,731
Average selling price..................................... $246,000 $224,500 $208,500
Total construction revenues (in millions)(1).............. $1,579.2 $1,105.9 $ 993.9
Other U.S.:
Unit deliveries........................................... 13,610 8,698 5,642
Average selling price..................................... $129,900 $119,100 $118,700
Total construction revenues (in millions)(1).............. $1,780.6 $1,042.4 $ 670.6
Foreign:
Unit deliveries........................................... 2,489 1,657 1,070
Average selling price(2).................................. $164,700 $152,400 $160,100
Total construction revenues (in millions)(1)(2)........... $ 412.3 $ 254.7 $ 179.1
Total:
Unit deliveries........................................... 22,422 15,213 11,443
Average selling price(2).................................. $166,500 $156,400 $159,700
Total construction revenues (in millions)(1)(2)........... $3,772.1 $2,403.0 $1,843.6
- ------------
(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.
3
5
STRATEGY
The Company remained focused throughout 1999 on two primary initiatives it
originally established in 1997: deepening the implementation of its KB2000
operational business model and continuing growth. To advance these initiatives,
the Company also concentrated on two complementary strategies consisting of
establishing optimally large local market positions and maintaining its focus on
integrating strategic acquisitions.
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 new
home showrooms.
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
high volume levels, through acquisitions from time to time. 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
four 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
* 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.
4
6
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 is in the process of reviewing its assets and businesses for
the purpose of monetizing non-strategic or marginal positions, and has
instituted even more stringent criteria for prospective land acquisitions.
Included among these initiatives is the Company's exploration of the sale of
certain operating divisions, which do not individually or in the aggregate
comprise a material portion of the Company's business. These initiatives are
intended to increase cash flows available to reduce debt and/or repurchase
additional stock.
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 and product
development, 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 levels in each of its
markets in order to maximize its competitive advantages and the benefits of the
KB2000 operational business model.
In France, the Company has assembled a French management team which is
highly experienced in its single-family housing and commercial real estate
businesses as well as the financing, development and construction of
high-density residential projects. This expertise includes knowledge of local
markets and the regulatory environment.
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 1999, the Company continued its implementation of
KB2000, seeking to keep construction costs and base prices as low as possible
while achieving high quality levels and promoting customer choice.
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 KB2000 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 builders.
The Company provides flooring and other options and upgrades to its homebuyers
through its new home showrooms. These showrooms, which are typically
approximately 10,000 square feet, are located separately from divisional
business offices and offer customers thousands of option combinations -- from
floor plans to fireplaces to garage doors -- in a retail environment convenient
to multiple communities. Company personnel are available at the showrooms to
assist homebuyers in selecting options and upgrades. During 1999, the Company
opened 2 new home showrooms, bringing its total to 15.
The Company markets its homes to prospective buyers through various types
of media, including newspaper advertisements, highway signs 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.kbhomes.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.
5
7
The Company recently 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 to be addressed by e.kb include:
enhancing the richness of up-to-date information available at www.kbhomes.com
and fully integrating the website with the houseCALL(TM) center, the new home
showrooms 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 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 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 California and is typically a somewhat shorter duration in the Company's
Other U.S. 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 are comprised of 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.
In prior years, the Company also 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. However, as part of its recent acquisitions and
due to favorable market conditions for buildable land in California, the Company
has increased its long-term development holdings. In these holdings, however,
the Company typically offers multiple product lines through large model
complexes resulting in faster overall sales rates, shortening the total
investment cycle. 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
6
8
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. Consistent with these 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.
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, 1999 and 1998. The table does not include acreage
which has not yet been approved for subdivision into lots. This excluded acreage
consists of 767 acres and 863 acres owned in the United States in 1999 and 1998,
respectively.
TOTAL LOTS
HOMES/LOTS IN LAND UNDER LOTS UNDER OWNED OR
PRODUCTION DEVELOPMENT OPTION UNDER OPTION
--------------- --------------- --------------- ---------------
1999 1998 1999 1998 1999 1998 1999 1998
------ ------ ------ ------ ------ ------ ------ ------
California........... 6,393 4,139 5,152 9,921 15,454 10,490 26,999 24,550
Other U.S............ 15,414 12,213 10,914 6,384 22,999 21,707 49,327 40,304
Foreign and Other.... 1,718 1,284 164 482 3,726 926 5,608 2,692
------ ------ ------ ------ ------ ------ ------ ------
Total...... 23,525 17,636 16,230 16,787 42,179 33,123 81,934 67,546
====== ====== ====== ====== ====== ====== ====== ======
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 1999 rose to approximately 73% from approximately 71% at
year end 1998.
The Company acts as the general contractor for 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
7
9
materials to streamline the on-site production phase. During the early 1990s,
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.
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, 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 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 1999 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, the Company's acquisitions of Lewis Homes,
Park and the remaining minority interest in General Homes in 1999 and its
acquisitions in Arizona, Colorado and Texas completed during 1998, generally
favorable economic conditions in the Company's markets, and low domestic and
foreign interest rates. 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.
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.
8
10
The Company's backlog at November 30, 1999 reached a new year end record of
8,558 units, up approximately 23% from the 6,943 backlog units at year end 1998.
Domestically, improvement occurred in both California and Other U.S. operations
primarily due to the Lewis Homes acquisition completed during the first quarter
of 1999, improved order rates reflecting generally good market conditions
throughout the United States, particularly in California, and the Company's
emphasis on pre-sales. The success of communities designed under its KB2000
operational business model also contributed to the increase in domestic backlog
levels. KB2000 initiatives caused the Company's backlog ratio to increase to
approximately 157% at year end 1999 from approximately 152% at year end 1998
(Backlog ratio is defined as the ratio of beginning unit backlog to actual
deliveries in the succeeding quarter).
Internationally, unit backlog in France was approximately 43% higher at
November 30, 1999 as compared to November 30, 1998. This increase was partly due
to substantial improvement in the French housing market and the acquisition of
Park in 1999.
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, 1999. The information in the
table excludes activity related to unconsolidated joint ventures. For the year
ended November 30, 1999, activity associated with unconsolidated joint ventures
included net orders, unit deliveries and ending backlog of 38, 38 and 219,
respectively.
NET UNIT ENDING
ORDERS DELIVERIES BACKLOG*
------ ---------- --------
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
Fiscal 1997:
First Quarter......................... 2,755 2,108 3,486
Second Quarter........................ 3,396 2,465 4,417
Third Quarter......................... 3,310 3,016 5,040
Fourth Quarter........................ 3,028 3,854 4,214
* Backlog amounts for 1999 have been adjusted to reflect the acquisitions of
Lewis Homes and Park. Therefore, backlog amounts at November 30, 1998 combined
with net order and delivery activity for 1999 will not equal ending backlog at
November 30, 1999. Similarly, 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, while backlog amounts for 1997 were
adjusted to reflect the acquired SMCI developments in France.
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.
9
11
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 and
prevailing market conditions. Land sales are expected to increase 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
$37.8 million in 1999, $22.5 million in 1998 and $13.6 million in 1997.
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 Phoenix
and Tucson, Arizona; Fremont, Modesto, Newport Beach, Pomona, San Diego and
Vacaville, California; Denver, Colorado; Las Vegas and Reno, Nevada;
Albuquerque, New Mexico; and Austin, Dallas, Houston 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 1999, approximately 47% of the mortgages originated for the
Company's customers were conventional (most of which conformed to Fannie Mae and
FHLMC guidelines), approximately 40% were FHA-insured or VA-guaranteed (a
portion of which are adjustable rate loans), approximately 7% were funded by
mortgage revenue bond programs and approximately 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 1999, KBMC originated loans for approximately 80% 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
10
12
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.
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, 2000, 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. However, mortgage interest rates have risen
since the beginning of the Company's 1999 fiscal year. The Company anticipates
that recent increases in short-term interest rates instituted by the Federal
Reserve Board may give rise to further increases in mortgage interest rates. 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 unsecured
revolving credit facility with various banks. 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,
11
13
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 these
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.
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 $250 million revolving mortgage warehouse facility and a
$150 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.
12
14
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; Fremont, Los Angeles, Modesto, Newport Beach, Palmdale, Pleasanton,
Pomona, Sacramento, San Diego and Vacaville, California; Denver, Colorado; Las
Vegas and Reno, Nevada; Albuquerque, New Mexico; Dallas and Houston, Texas; and
Paris, France.
The Company's mortgage banking subsidiaries lease executive offices in Los
Angeles, California and branch offices in Phoenix and Tucson, Arizona; Fremont,
Modesto, Newport Beach, Pomona, San Diego and Vacaville, California; Denver,
Colorado; Las Vegas and Reno, Nevada; Albuquerque, New Mexico; and Austin,
Dallas and Houston, Texas.
The Company's homebuilding operations in Austin, Texas and its 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 1999 to a vote of
security holders, through the solicitation of proxies or otherwise.
13
15
EXECUTIVE OFFICERS OF THE COMPANY
The following sets forth certain information regarding the executive
officers of the Company as of January 31, 2000:
YEAR
ASSUMED
PRESENT POSITION AT PRESENT OTHER POSITIONS AND OTHER BUSINESS EXPERIENCE WITHIN
NAME AGE JANUARY 31, 2000 POSITION THE LAST FIVE YEARS(1)
- --------------------- --- ------------------------- -------- ----------------------------------------------------
Bruce Karatz 54 Chairman, President and 1993
Chief Executive Officer
Jeffrey T. Mezger 44 Chief Operating Officer 1999 Senior Vice President and Regional General Manager
and Executive Vice President of Kaufman and Broad of Arizona, Inc.
President
Glen Barnard 55 Executive Vice President, 1999 Senior Vice President and Regional General Manager
President e.kb President of Kaufman and Broad of Utah, Inc.
President of Kaufman and Broad of Colorado, Inc.
Chairman, American Lives, Inc.
Guy Nafilyan 55 Executive Vice President, 1999 President of European Operations
Kaufman and Broad Home President and Chief Executive Officer of Kaufman and
Corporation; Chairman Broad France
and Chief Executive
Officer, Kaufman & Broad
S.A.
William R. Cardon 56 Senior Vice President and 1998 President of Kaufman and Broad Coastal, Inc.
Regional General Manager President of Kaufman and Broad of San Diego, Inc.
John "Buddy" E. 52 Senior Vice President and 1999 President, Texas Region
Goodwin Regional General Executive Vice President of Operations
Manager; President, of Kaufman and Broad of San Antonio
Kaufman and Broad of San Vice President of Sales and Marketing, Rayco Ltd.
Antonio
Michael F. Henn 51 Senior Vice President and 1994
Chief Financial Officer
Barton P. Pachino 40 Senior Vice President and 1993
General Counsel
Albert Z. Praw 51 Senior Vice President, 1999 Senior Vice President, Business Development
Asset Management and President of Kaufman and Broad of Southern
Acquisitions California, Inc.
Senior Vice President and Regional General Manager
Senior Vice President, Real Estate
Gary A. Ray 41 Senior Vice President, 1996 Vice President, Training and Development
Human Resources PepsiCo Restaurants International
William R. Hollinger 41 Vice President and 1992
Controller
Mary M. McAboy 47 Vice President, Investor 1999 Vice President, Investor Relations
and Public Relations Principal, McAboy & Associates
Vice President, Corporate Communications, The Vons
Companies, Inc.
NAME FROM - TO
- --------------------- ---------
Bruce Karatz
Jeffrey T. Mezger 1998-1999
1995-1999
Glen Barnard 1996-1999
1997-1998
1995-1998
1991-1995
Guy Nafilyan 1992-1999
1983-1999
William R. Cardon 1997-Present
1987-Present
John "Buddy" E. 1997-1999
Goodwin 1996-1997
1988-1996
Michael F. Henn
Barton P. Pachino
Albert Z. Praw 1998-1999
1997-1998
1996-1998
1994-1996
Gary A. Ray 1994-1996
William R. Hollinger
Mary M. McAboy 1998-1999
1997-1998
1987-1997
- ---------------
(1) All positions described were with the Company, unless otherwise indicated.
14
16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
As of January 31, 2000, there were 1,522 holders of record of the Company's
common stock.
Information as to the Company's quarterly stock prices is included on page
83 of the Company's 1999 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 83 of the
Company's 1999 Annual Report to Stockholders, which is included as part of
Exhibit 13 hereto.
ITEM 6. SELECTED FINANCIAL DATA
The Five Year Summary of Kaufman and Broad Home Corporation for the
five-year period ended November 30, 1999 is included on page 42 of the Company's
1999 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 1999 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 Kaufman and Broad Home Corporation is included on pages 43 through
57 of the Company's 1999 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, 1999, 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
2000 2001 2002 2003 2004 THEREAFTER TOTAL 30, 1999
-------- -------- -------- -------- -------- ---------- -------- -----------
Long-term debt(1) -- -- -- $174,370 $175,000 $124,531 $473,901 $463,958
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, 1999, 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 $40.5 million and a decrease in pretax
income of $2.8 million. Comparatively, the 1998 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
15
17
$25.5 million and a decrease in pretax income of $1.7 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 Kaufman and Broad Home Corporation
are included on pages 58 through 79 of the Company's 1999 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 2000 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 14 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.
16
18
EXHIBIT
NO. DESCRIPTION
------- -----------
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.
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 By-Laws, filed as an exhibit to the Company's Registration
Statement No. 33-30140 on Form S-1, is incorporated by
reference herein.
3.7 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.
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 By-Laws, filed as an exhibit to the Company's Registration
Statement No. 33-30140 on Form S-1, is incorporated by
reference herein.
4.4 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.
4.5 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.
4.6 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.
4.7 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.
4.8 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.
4.9 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.
4.10 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.
4.11 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.
4.12 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.
4.13 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.
4.14 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.
17
19
EXHIBIT
NO. DESCRIPTION
------- -----------
4.15 First Supplement 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.
4.16 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.
4.17 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.
4.18 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.
4.19 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.
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 Non-Employee Director
Stock Unit Plan, 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 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.
18
20
EXHIBIT
NO. DESCRIPTION
------- -----------
10.13 $500,000,000 1997 Revolving Loan Agreement dated April 21,
1997 by and among the Company, Bank of America National
Trust and Savings Association, as administrative agent,
co-syndication agent and managing agent, NationsBank of
Texas, N.A., as syndication agent and managing agent, Credit
Lyonnais Los Angeles Branch, as documentation agent and
managing agent, Guaranty Federal Bank F.S.B., Societe
Generale and Union Bank of California, N.A., as co-agents,
and the other banks listed therein ("Revolving Loan Agree-
ment") filed as an exhibit to the Company's 1997 Annual
Report on Form 10-K, is incorporated by reference herein.
10.14 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.
10.15 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.
10.16 Term Loan Agreement among the Company, Bank of America
National Trust and Savings Association, as Administrative
Agent and Lead Arranger, Credit Lyonnais Los Angeles Branch,
as Syndication Agent, The First National Bank of Chicago, as
Documentation Agent and Union Bank of California as Co-Agent
and the banks listed therein, dated January 7, 1999 ("Term
Loan Agreement"), filed as an exhibit to the Company's
Current Report on Form 8-K, dated January 7, 1999, is
incorporated by reference herein.
10.17 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.
10.18 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.
10.19 Amendment No. 1 to Term Loan Agreement, dated April 19,
1999.
10.20 Amendment No. 3 to 1997 Revolving Loan Agreement, dated
April 19, 1999.
10.21 Kaufman and Broad Home Corporation 1999 Incentive Plan.
10.22 Trust Agreement between Kaufman and Broad Home Corporation
and Wachovia Bank, N.A. as Trustee, dated as of August 27,
1999.
10.23 Non-Employee Directors Stock Plan, as amended and Restated
as of December 6, 1999.
13 Pages 42 through 79 and page 83 of the Company's 1999 Annual
Report to Stockholders.
22 Subsidiaries of the Company.
24 Consent of Independent Auditors.
27 Financial Data Schedule.
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 1999.
19
21
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.
KAUFMAN AND BROAD HOME CORPORATION
By: MICHAEL F. HENN
------------------------------------
Michael F. Henn
Senior Vice President
and Chief Financial Officer
Dated: February 28, 2000
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
--------- ----- ----
BRUCE KARATZ Chairman, President and February 28, 2000
- ----------------------------------------------------- Chief Executive Officer
Bruce Karatz (Principal Executive Officer)
MICHAEL F. HENN Senior Vice President February 28, 2000
- ----------------------------------------------------- and Chief Financial Officer
Michael F. Henn (Principal Financial Officer)
WILLIAM R. HOLLINGER Vice President and Controller February 28, 2000
- ----------------------------------------------------- (Principal Accounting Officer)
William R. Hollinger
Director February , 2000
- -----------------------------------------------------
Steve Bartlett
RONALD W. BURKLE Director February 28, 2000
- -----------------------------------------------------
Ronald W. Burkle
Director February , 2000
- -----------------------------------------------------
Jane Evans
DR. RAY R. IRANI Director February 28, 2000
- -----------------------------------------------------
Dr. Ray R. Irani
JAMES A. JOHNSON Director February 28, 2000
- -----------------------------------------------------
James A. Johnson
RANDALL W. LEWIS Director February 28, 2000
- -----------------------------------------------------
Randall W. Lewis
DR. BARRY MUNITZ Director February 28, 2000
- -----------------------------------------------------
Dr. Barry Munitz
GUY NAFILYAN Director February 28, 2000
- -----------------------------------------------------
Guy Nafilyan
LUIS G. NOGALES Director February 28, 2000
- -----------------------------------------------------
Luis G. Nogales
CHARLES R. RINEHART Director February 28, 2000
- -----------------------------------------------------
Charles R. Rinehart
SANFORD C. SIGOLOFF Director February 28, 2000
- -----------------------------------------------------
Sanford C. Sigoloff
20
22
KAUFMAN AND BROAD HOME CORPORATION AND CONSOLIDATED SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
The consolidated financial statements, together with the report thereon of
Ernst & Young LLP, dated December 23, 1999, all appearing on pages 58 through 79
of the 1999 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 1999 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
---------------
KAUFMAN AND BROAD HOME CORPORATION
Consolidated Statements of Income for the years ended
November 30, 1999, 1998 and 1997............................ 58
Consolidated Balance Sheets as of November 30, 1999 and 1998... 59
Consolidated Statements of Stockholders' Equity for the years
ended November 30, 1999, 1998 and 1997...................... 60
Consolidated Statements of Cash Flows for the years ended
November 30, 1999, 1998 and 1997............................ 61
Notes to Consolidated Financial Statements..................... 62 through 77
Report of Independent Auditors................................. 78
Report on Financial Statements................................. 79
The following pages represent pages 42 through 79 and page 83 of the 1999
Annual Report to Stockholders of Kaufman and Broad Home Corporation, 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
23
SELECTED FINANCIAL INFORMATION
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
Years Ended November 30, 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
CONSTRUCTION:
Revenues $ 3,772,121 $ 2,402,966 $ 1,843,614 $ 1,754,147 $ 1,366,866
Operating income (loss)* 259,107 148,672 101,751 (72,078) 65,531
Total assets 2,214,076 1,542,544 1,133,861 1,000,159 1,269,208
Mortgages and notes payable 813,424 529,846 496,869 442,629 639,575
MORTGAGE BANKING:
Revenues $ 64,174 $ 46,396 $ 35,109 $ 33,378 $ 30,979
Operating income* 17,464 21,413 14,508 12,740 9,348
Total assets 450,159 317,660 285,130 243,335 304,971
Notes payable 377,666 239,413 200,828 134,956 151,000
Collateralized mortgage obligations 36,219 49,264 60,058 68,381 84,764
CONSOLIDATED:
Revenues $ 3,836,295 $ 2,449,362 $ 1,878,723 $ 1,787,525 $ 1,397,845
Operating income (loss)* 276,571 170,085 116,259 (59,338) 74,879
Net income (loss)* 147,469 95,267 58,230 (61,244) 29,059
Total assets 2,664,235 1,860,204 1,418,991 1,243,494 1,574,179
Mortgages and notes payable 1,191,090 769,259 697,697 577,585 790,575
Collateralized mortgage obligations 36,219 49,264 60,058 68,381 84,764
Mandatorily redeemable preferred securities
(Feline Prides) 189,750 189,750
Stockholders' equity* 676,583 474,511 383,056 340,350 415,478
BASIC EARNINGS (LOSS) PER SHARE* $ 3.16 $ 2.41 $ 1.50 $ (1.80) $ .59
DILUTED EARNINGS (LOSS) PER SHARE* 3.08 2.32 1.45 (1.80) .58
CASH DIVIDENDS PER COMMON SHARE .30 .30 .30 .30 .30
- ---------------------------------------------------------------------------------------------------------------------------
*Reflects an $18.2 million mortgage banking pretax secondary marketing trading
loss recorded in the third quarter of 1999 and a $170.8 million construction
pretax noncash charge for impairment of long-lived assets recorded in the second
quarter of 1996.
42
24
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 achieved record performance levels for the second consecutive year
in 1999, with net income of $147.5 million and unit deliveries totaling 22,422.
During the year, the Company remained focused on two primary initiatives it
originally established in 1997: deepening the implementation of its KB2000
operational business model and continuing growth. To advance these initiatives,
the Company also concentrated on two complementary strategies consisting of
establishing optimally large local market positions and maintaining its focus on
integrating strategic acquisitions.
The Company made two strategic acquisitions during early 1999 which fueled its
growth and contributed to the achievement of record results. In January 1999,
the Company completed its acquisition of Lewis Homes, which greatly supplemented
growth in the Company's existing California and Nevada markets. Also in January
1999, the Company purchased the remaining minority interest in Houston-based
General Homes.
Total Company revenues increased to a record $3.84 billion in 1999, up 56.6%
from $2.45 billion in 1998, which had increased 30.4% from revenues of $1.88
billion in 1997. The 1999 increase primarily resulted from higher housing and
land sale revenues, as well as increased revenues from mortgage banking
operations. Operating results for 1999 include the results of Lewis Homes from
the 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
reflect the acquisition of the remaining minority interest of General Homes,
which occurred on January 4, 1999. The increase in revenues in 1998 compared to
1997 was primarily due to higher housing and land sale revenues, as well as
increased revenues from mortgage banking operations. In addition, 1998 operating
results included revenues from the acquisitions of Hallmark, PrideMark and
Estes, as of their respective second quarter 1998 acquisition dates. Results for
1998 also reflected the Company's acquisition of a majority interest in General
Homes in August 1998. Included in total Company revenues were mortgage banking
revenues of $64.2 million in 1999, $46.4 million in 1998 and $35.1 million in
1997.
Net income increased $52.2 million or 54.8% to $147.5 million or $3.08 per
diluted share in 1999, both Company records, up from $95.3 million or $2.32 per
diluted share in 1998. Net income and diluted earnings per share for 1999
include 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, diluted
earnings per share for 1999 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, as a result of 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. Net income of $95.3 million
or $2.32 per diluted share in 1998 was 63.6% higher than the $58.2 million or
$1.45 per diluted share recorded in 1997. Net income increased in 1998 mainly
due to increases in unit deliveries and construction gross margin and increased
mortgage banking pretax income. The Company's 1998 operating results also
benefited from the earnings contributions of the three acquisitions completed
during the second quarter of 1998, as well as the acquisition of a majority
interest in General Homes.
CONSTRUCTION
REVENUES Construction revenues increased in 1999 to $3.77 billion from $2.40
billion in 1998, which had increased from $1.84 billion in 1997. 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. In 1998, the
increase in revenues primarily reflected increased housing revenues, partly due
to the operations in Houston, Denver and Phoenix/Tucson acquired during the
year, and increased revenues from land sales.
43
25
California Other U.S. Foreign Total
- -------------------------------------------------------------------------------------------------------------
UNIT DELIVERIES
1999
First 1,199 2,757 323 4,279
Second 1,430 3,221 488 5,139
Third 1,629 3,526 948 6,103
Fourth 2,065 4,106 730 6,901
Total 6,323 13,610 2,489 22,422
Unconsolidated joint ventures 38 38
=============================================================================================================
1998
First 1,022 1,341 266 2,629
Second 1,124 1,938 347 3,409
Third 1,225 2,567 375 4,167
Fourth 1,487 2,852 669 5,008
Total 4,858 8,698 1,657 15,213
=============================================================================================================
NET ORDERS
1999
First 1,572 3,514 535 5,621
Second 2,104 4,198 917 7,219
Third 1,660 3,177 510 5,347
Fourth 1,314 2,908 647 4,869
Total 6,650 13,797 2,609 23,056
Unconsolidated joint ventures 38 38
=============================================================================================================
1998
First 1,269 2,062 385 3,716
Second 1,391 2,907 563 4,861
Third 1,117 2,387 379 3,883
Fourth 985 2,630 706 4,321
Total 4,762 9,986 2,033 16,781
=============================================================================================================
44
26
California Other U.S. Foreign Total
- -------------------------------------------------------------------------------------------------------------
ENDING BACKLOG-UNITS
1999
First 1,925 6,095 1,196 9,216
Second 2,599 7,072 1,625 11,296
Third 2,630 6,723 1,456 10,809
Fourth 1,879 5,306 1,373 8,558
Unconsolidated joint ventures 219 219
=============================================================================================================
1998
First 1,563 3,011 727 5,301
Second 1,830 4,808 943 7,581
Third 1,722 4,961 947 7,630
Fourth 1,220 4,739 984 6,943
=============================================================================================================
ENDING BACKLOG-VALUE IN THOUSANDS
1999
First $ 449,993 $ 760,283 $ 196,028 $1,406,304
Second 613,466 913,523 270,229 1,797,218
Third 631,823 882,538 235,544 1,749,905
Fourth 457,439 696,482 228,213 1,382,134
Unconsolidated joint ventures 33,945 33,945
=============================================================================================================
1998
First $ 337,424 $ 363,340 $ 98,378 $ 799,142
Second 394,144 588,820 136,929 1,119,893
Third 388,998 594,575 148,464 1,132,037
Fourth 288,317 560,307 151,668 1,000,292
=============================================================================================================
Housing revenues totaled a record $3.73 billion in 1999, $2.38 billion in 1998
and $1.83 billion in 1997. The increase in 1999 reflected a 47.4% increase in
unit volume and a 6.5% rise in the average selling price. Excluding the impact
of acquisitions within the trailing twelve-month period, housing revenues and
unit deliveries rose 21.3% and 15.2%, respectively. In 1998, housing revenues
totaled $2.38 billion, up 30.2% from 1997 as a result of a 33.0% increase in
unit volume, partially offset by a 2.1% decline in average selling price.
California housing operations generated 41.7% of Company-wide housing revenues
in 1999, down from 45.8% in 1998 and 54.0% in 1997, mainly as a result of the
Company's strategic acquisition activities and continued expansion of its Other
U.S. operations. (The Company's housing operations in Arizona, Colorado, Nevada,
New Mexico, Texas and Utah are collectively referred to as "Other U.S.").
Housing revenues from California operations were $1.56 billion in 1999, up 42.6%
from $1.09 billion in 1998. Other U.S. housing revenues totaled $1.77 billion in
1999, up 70.8% from $1.04 billion in 1998. Increased housing revenues in
California and Other U.S. operations in 1999 were due to acquisition activities
and improved market conditions. Operations in France generated housing revenues
of $403.4 million in 1999, an increase of 68.1% compared to $240.0 million in
1998, reflecting increases in housing deliveries and substantial improvement in
the French housing market. In 1997, housing revenues from operations in France
totaled $160.5 million.
45
27
Housing deliveries rose 47.4% to 22,422 units in 1999, surpassing the previous
Company-wide record of 15,213 units established in 1998. This improvement
reflected increases in U.S. and French deliveries of 47.0% and 53.2%,
respectively. Growth in domestic deliveries was comprised of a 30.2% increase in
California and a 56.5% increase in Other U.S. operations. In California,
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. Other
U.S. operations delivered 13,610 units in 1999, up from 8,698 units in 1998 as
the average number of active communities rose 53.9% to 177. Excluding the impact
of acquisitions within the trailing twelve-month period, domestic unit
deliveries rose 12.2% in 1999 from the previous year. French deliveries
increased 53.2% to 2,465 units in 1999 from 1,609 units in 1998, partly due to
improved market conditions.
Housing deliveries increased 33.0% to 15,213 units in 1998 from 11,443 units in
1997. This improvement reflected increases in U.S. and French operations of
30.7% and 55.9%, respectively. Growth in domestic deliveries was primarily
driven by a 54.2% increase in results from Other U.S. operations, to 8,698 units
in 1998 from 5,642 units in 1997, and a 2.7% rise in California deliveries to
4,858 units in 1998 from 4,731 units in 1997. The increase in California
deliveries occurred despite a 17.9% year over year decline in the Company's
average number of active communities in the state to 64. Unit deliveries in
Other U.S. operations in 1998 included 1,702 deliveries from companies acquired
that year. Excluding results from these acquisitions, deliveries from Other U.S
operations increased 24.0% to 6,996 units, from 5,642 units delivered in 1997,
due to a higher average number of active communities in existing Other U.S
businesses. In 1998, French deliveries increased from the previous year
primarily as a result of the inclusion of a full year of results from SMCI. The
Company acquired SMCI, a builder of condominiums in Paris and other cities in
France, in mid-1997.
The Company-wide average new home price increased 6.5% in 1999, to $166,500 from
$156,400 in 1998. The 1998 average had decreased 2.1% from $159,700 in 1997. The
increase in the average selling price in 1999 reflected the inclusion of
somewhat higher-priced deliveries in California and Nevada related to the Lewis
Homes acquisition, as well as higher prices in France. In addition, the Company
increased prices in certain fast selling, hard to replace communities due to
improved market conditions in several of its major markets. These price
increases were partially offset by a higher proportion of lower-priced
deliveries from Other U.S. markets. Other U.S. operations accounted for 68.3% of
domestic deliveries in 1999 compared to 64.2% in 1998. The decrease in 1998 was
primarily due to the Company's decision to generate a greater proportion of
lower-priced domestic unit deliveries (primarily from Other U.S. operations) as
well as to the lower average selling price in France resulting from the
inclusion of SMCI deliveries.
In California, the average selling price rose 9.6% in 1999 to $246,000 from
$224,500 in 1998, which had increased 7.7% from $208,500 in 1997. The average
selling price in Other U.S. markets increased 9.1% to $129,900 in 1999, compared
with $119,100 in 1998 and $118,700 in 1997. Domestic price increases in 1999
resulted from the inclusion of higher-priced deliveries from the Lewis Homes
operations in California and Nevada and selected increases in sales prices in
certain markets due to favorable market conditions. In 1998, the increase in the
Company's California average selling price resulted from strategic increases in
sales prices in certain markets based on improved market conditions, as well as
a change in product mix favoring a greater number of higher-priced urban in-fill
locations and first-time move-up sales.
The Company's average selling price in France rose to $163,600 in 1999 from
$149,200 in 1998, which had decreased from $155,500 in 1997. The average selling
price in France rose in 1999 primarily due to a change in the mix of deliveries
and price appreciation in the French housing market. The French average selling
price had declined in 1998 primarily due to the inclusion of a full year of
lower-priced deliveries generated from SMCI developments acquired in 1997.
Revenues from the development of commercial buildings, all located in
metropolitan Paris, totaled $.7 million in 1999, $1.5 million in 1998 and $2.7
million in 1997.
Land sale revenues totaled $37.8 million in 1999, $22.5 million in 1998 and
$13.6 million in 1997. 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. Land
sales are expected to increase in 2000 in connection with the Company's review
of its assets and businesses for the purpose of monetizing non-strategic or
marginal positions.
46
28
OPERATING INCOME Operating income increased 74.3% to a new Company record of
$259.1 million in 1999 from $148.7 million in 1998. The 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 in
housing gross margin was primarily due to 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 California. 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
in 1999 to $461.3 million. As a percentage of housing revenues, to which these
expenses are most closely correlated, 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
the 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.
Operating income increased to $148.7 million in 1998 from $101.8 million in
1997. 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 1998 increased 37.5% or $124.5
million from $331.9 million in 1997. As a percentage of related revenues,
housing gross profit margin was 19.2% in 1998, up from 18.2% in 1997. Housing
gross margin increased primarily due to the rising proportion of higher margin
deliveries produced by KB2000 communities, as well as price increases in certain
fast-selling, hard to replace communities, particularly in certain California
markets. Company-wide land sales produced losses of $3.2 million and $1.4
million in 1998 and 1997, respectively.
Selling, general and administrative expenses increased by 32.9% or $75.5 million
to $304.6 million in 1998. However, as a percentage of housing revenues,
selling, general and administrative expenses increased .3 percentage points to
12.8% in 1998 from 12.5% in 1997. This increase was mainly due to the inclusion
of selling, general and administrative expenses of acquired entities, including
goodwill amortization, expenditures incurred in connection with extensive
information systems revisions required to support the KB2000 operational
business model, system conversions related to acquisitions and initial efforts
toward year 2000 compliance, new market entries in Texas and higher third-party
sales commissions. Sales commissions rose because a higher percentage of
domestic sales were generated from third-party brokers as part of the KB2000
operational business model.
INTEREST INCOME AND EXPENSE Interest income, which is generated from short-term
investments and mortgages receivable, amounted to $7.8 million in 1999, $5.7
million in 1998 and $5.1 million in 1997. Increases in interest income in 1999
and 1998 primarily reflected increases in the interest bearing average balances
of mortgages receivable each year. In 1999, a higher average balance of
short-term investments also contributed to the increase in interest income.
Interest expense results principally from borrowings to finance land purchases,
housing inventory and other operating and capital needs. 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 percentages of interest capitalized in 1999 and 1998 were 63.7% and 57.0%,
respectively. 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
amounts of interest capitalized as a percentage of gross interest incurred and
distributions associated with the Feline Prides were 53.3% in 1999 and 51.3% in
1998.
In 1998, interest expense, net of amounts capitalized, decreased to $23.3
million from $29.8 million in 1997 primarily due to the issuance of Feline
Prides in the third quarter of 1998, as distributions associated with the Feline
Prides are included in minority interests rather than interest expense.
47
29
Gross interest incurred in 1998 was higher than that incurred in 1997 by $1.8
million, reflecting an increase in average indebtedness in 1998, partially
offset by a lower average interest rate as a result of more favorable financing
terms obtained by the Company due to the redemption of its $100.0 million
10 3/8% senior notes and the issuance of $175.0 million of 7 3/4% senior notes
in the fourth quarter of 1997. The percentage of interest capitalized in 1998
increased from the 43.1% capitalized in 1997, due to the issuance of Feline
Prides in 1998 and a higher proportion of land under development in 1998
compared to 1997.
In 1998, the Company issued $189.8 million of Feline Prides and used the
proceeds to immediately pay down outstanding debt under its domestic unsecured
revolving credit facility. The distributions associated with the Feline Prides
are included in minority interests; therefore, interest expense in future
periods will generally be lower than it would be without this financing.
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 Feline
Prides issued in July 1998. Operating income was reduced by minority interests
of $29.4 million in 1999, $7.0 million in 1998 and $.4 million in 1997. Minority
interests increased in 1999 and 1998 due to the inclusion of $15.2 million and
$6.1 million, respectively, in distributions related to the Feline Prides. In
1999, increased joint venture activity also contributed to the rise in minority
interests. In the aggregate, minority interests are expected to remain at higher
levels due to increased joint venture activity and distributions associated with
the Feline Prides.
EQUITY IN PRETAX INCOME (LOSS) OF UNCONSOLIDATED JOINT VENTURES The Company's
unconsolidated joint venture activities, located in California, Nevada, New
Mexico, Texas and France, posted combined revenues of $13.9 million in 1999,
$17.7 million in 1998 and $98.2 million in 1997. All unconsolidated joint
venture revenues in 1999 were generated from residential properties. French
commercial activities accounted for $6.5 and $87.7 million of the combined
revenues in 1998 and 1997, respectively. Combined revenues recorded by the
Company's joint ventures fluctuated during the three-year period mainly due to
the sale of a French commercial project in 1997. Unconsolidated joint ventures
generated combined pretax income of $3.6 million in 1999, compared with pretax
income of $5.0 million and a pretax loss of $2.9 million in 1998 and 1997,
respectively. The Company's share of pretax income from unconsolidated joint
ventures totaled $.2 million in 1999 and $1.2 million in 1998. In 1997, the
Company's share of pretax losses totaled $.1 million.
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 $19.2 million in 1999 from $15.6 million in 1998 and $13.3
million in 1997. Interest expense also reached record levels, increasing to
$16.9 million in 1999 from $15.0 million in 1998 and $12.7 million in 1997. In
both 1999 and 1998, 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 1999 and 1998 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 $2.3 million in 1999 and $.6 million
in both 1998 and 1997. 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, servicing rights and, to a
lesser extent, mortgage servicing fees and insurance commissions, totaled $45.0
million in 1999, $30.8 million in 1998 and $21.8 million in 1997. The increases
in 1999 and 1998 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. In addition,
in 1998 a more favorable mix of fixed to variable interest rate loans
contributed to the increased revenues.
48
30
GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses
associated with mortgage banking operations increased to $11.6 million in 1999
from $9.9 million in 1998 and $7.9 million in 1997. The increases in general and
administrative expenses in both 1999 and 1998 were 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 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 $79.4 million in 1999, $51.3 million
in 1998 and $32.8 million in 1997. These amounts represented effective income
tax rates of approximately 35.0% in both 1999 and 1998 and 36.0% in 1997. The
effective tax rate declined in 1998 as a result of greater utilization of
affordable housing 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.
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 1999,
operating, investing and financing activities used net cash of $35.0 million; in
1998, these activities used net cash of $4.9 million.
Operating activities in 1999 provided $106.8 million, while 1998 operating
activities used $12.8 million. In 1999, cash was provided by 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 in receivables of $184.1 million
and an investment of $38.8 million in inventories (excluding the effect of
acquisitions and $43.5 million of inventories acquired through seller
financing). Excluding the effect of the Company's acquisitions, inventories
increased in 1999, primarily in domestic operations, reflecting continued growth
throughout U.S. markets.
In 1998, uses of operating cash included an investment of $125.7 million in
inventories (excluding the effect of acquisitions and $29.9 million of
inventories acquired through seller financing) and an increase in receivables of
$50.0 million. The use of cash was partially offset by earnings of $95.3
million, an increase of $51.3 million in accounts payable, accrued expenses and
other liabilities, and various noncash items deducted from net income.
Cash used by investing activities totaled $34.0 million in 1999 compared to
$161.8 million in 1998. In 1999, $19.2 million was used for net purchases of
property and equipment, $15.0 million was used for investments in unconsolidated
joint ventures, $11.6 million, net of cash acquired, was used for acquisitions,
and $2.8 million was 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, which were principally used to pay
down collateralized mortgage obligations for which the mortgage-backed
securities had served as collateral.
In 1998, cash used by investing activities included $162.8 million, net of cash
acquired, used for acquisitions and $15.9 million used for net purchases of
property and equipment. Among amounts partially offsetting these uses were $12.9
million of proceeds received from mortgage-backed securities, $2.2 million in
distributions related to investments in unconsolidated joint ventures and $1.7
million from the net sales of mortgages held for long-term investment.
49
31
Financing activities in 1999 used $107.8 million of cash compared to $169.8
million provided in 1998. In 1999, the Company's uses of cash included
repurchases of common stock of $81.9 million, payments to minority interests of
$43.7 million, cash dividend payments of $14.2 million and payments on
collateralized mortgage obligations of $14.1 million. Partially offsetting these
uses was cash provided from net proceeds from borrowings of $46.1 million. The
Company's financial leverage, as measured by the ratio of debt to total capital,
net of invested cash, was 48.4% at the end of 1999 compared to 43.4% at the end
of 1998. The ratios were adjusted to reflect $.7 million and $20.2 million of
invested cash at November 30, 1999 and 1998, respectively. 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 1999 despite its share repurchase program and the
impact of the secondary marketing trading loss. The Company believes its debt to
total capital ratio for 1999 reflects the initial impact of a strategic review
of its assets and businesses initiated late in the year. The debt to capital
ratio at the end of 1998 was impacted by an increase in capital from the
offering of $189.8 million of Feline Prides in the third quarter of 1998.
Financing activities in 1998 provided $183.1 million from the issuance of Feline
Prides and $17.9 million in net proceeds from borrowings. Partially offsetting
cash provided in 1998 were payments to minority interests of $7.0 million,
payments on collateralized mortgage obligations of $12.3 million and cash
dividend payments of $11.9 million.
During the second quarter of 1998, the Company acquired three privately held
homebuilders with regional operations in certain key markets. On March 19, 1998,
the Company acquired all of the issued and outstanding capital stock of
Houston-based Hallmark for approximately $54.0 million, including the assumption
of debt. Hallmark built single-family homes primarily in Houston (with
additional operations in San Antonio and Austin, Texas) under the trade names of
Dover Homes and Ideal Builders. The acquisition of Hallmark marked the Company's
entry into the Houston market and formed the core of those operations, while
strengthening its existing market positions in San Antonio and Austin.
The Company acquired substantially all of the assets of Denver-based PrideMark
on March 23, 1998 for approximately $65.0 million, including the assumption of
trade liabilities and debt. PrideMark built single-family homes in Denver,
Colorado, and its acquisition significantly increased the Company's already
substantial market presence in Denver.
On April 9, 1998, the Company acquired all of the issued and outstanding capital
stock of Estes for approximately $48.0 million, including the assumption of
debt. Estes built single-family homes in Phoenix and Tucson, Arizona. Estes
provided the Company's entry into the Tucson market and significantly increased
its already substantial market presence in Phoenix.
On August 18, 1998, the Company acquired a majority ownership investment in
General Homes, a builder of single-family homes primarily in Houston, Texas. The
Company invested approximately $31.8 million, including the assumption of debt,
to acquire 50.3% of the outstanding stock of General Homes, pursuant to a
completed plan of reorganization. Effective 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%.
Each acquisition and investment was accounted for under the purchase method and
the results of operations of the acquired entities were included in the
Company's consolidated financial statements as of their respective dates of
acquisition. Each of these 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. Prior
to the acquisition, Lewis Homes was one of the largest privately held
single-family homebuilders in the United States based on units delivered, with
revenues for the year ended December 31, 1998 of $715 million on 3,631 unit
deliveries. Lewis Homes also owned or controlled approximately 24,000 lots and
had a backlog of approximately 900 homes at December 31,1998. Lewis Homes'
principal markets were Las Vegas and Northern Nevada, Southern California and
the greater Sacramento area in Northern California.
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
50
32
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 shares of Company common
stock issued in the acquisition are "restricted" shares and may not be resold
without a registration statement or compliance with Securities and Exchange
Commission regulations that limit the number of shares that may be resold in a
given period. The Company has agreed to file a registration statement for those
shares in three increments at the Lewis family's request from July 1, 2000 to
July 1, 2002. Under the terms of the purchase agreement, a Lewis family member
has also been appointed to the Company's Board of Directors.
In connection with the acquisition of Lewis Homes, the Company obtained a $200
million unsecured Term Loan Agreement with various banks to refinance certain
debt assumed. The Term Loan Agreement dated January 7, 1999 provides for three
payments of $25 million, due on January 31, 2000, April 30, 2000 and July 31,
2000, with the remaining principal balance due on April 30, 2001. Interest is
payable monthly at the London Interbank Offered Rate plus an applicable spread.
Under the terms of the Term Loan Agreement, 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. The
financing obtained under the Term Loan Agreement did not affect the amounts
available under the pre-existing borrowing arrangements, although the Company
used borrowings under its $500 million 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 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.
On August 4, 1999, the Company's Board of Directors authorized a share
repurchase program which allowed the Company to purchase up to 2.5 million
shares of the Company's common stock at prices not to exceed $28 per share. The
Company repurchased all of the 2.5 million shares originally authorized and on
November 1, 1999, the Board of Directors authorized the repurchase of up to 4.0
million additional shares of Company common stock. As of November 30, 1999, the
Company had repurchased 3.8 million shares under the repurchase program.
As of February 3, 2000, the Company had repurchased a total of 6.5 million
shares of the Company's common stock under authorizations made by the Board of
Directors on August 4, 1999 and November 1, 1999. On February 3, 2000, the
Company's Board of Directors authorized the repurchase of up to an additional
4.0 million shares of the Company's common stock.
In connection with the repurchase program, on August 27, 1999, the Company
established a grantor stock ownership trust (the "Trust") into which the
repurchased shares are 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 will have no impact on the
amount of benefits or compensation that will be 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 3.8 million shares of common stock at
November 30, 1999. 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.
51
33
External sources of financing for the Company's construction activities include
its domestic unsecured revolving 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. Under this facility, $500.0 million remained committed and
$416.9 million was available for the Company's future use at November 30, 1999.
The domestic unsecured revolving credit facility is comprised of a $400 million
revolving credit facility scheduled to expire on April 30, 2001 and a 364-day
revolving credit facility which has provisions for annual renewal. In addition,
the Company's French subsidiaries have lines of credit with various banks which
totaled $198.7 million at November 30, 1999 and have various committed
expiration dates through November 2001. Under these unsecured financing
agreements, $148.8 million was available in the aggregate at November 30, 1999.
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, 1999, the Company had outstanding seller-financed notes payable of $30.6
million secured primarily by the underlying property which had a carrying value
of $106.3 million.
On December 5, 1997, the Company filed a universal shelf registration statement
with the Securities and Exchange Commission for up to $500 million of the
Company's debt and equity securities. The 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 no securities have 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) 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 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) 1,000,000 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. During
the 1990's, the Company's inventories became geographically more diverse,
primarily as a result of its extensive domestic expansion outside of California.
The Company continues to concentrate its housing operations in desirable areas
within targeted growth markets, principally oriented toward entry-level
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 $250.0 million revolving mortgage
warehouse facility, which expires on February 23, 2000. At November 30, 1999,
the mortgage banking operations had borrowed the maximum amount available under
the facility. The Company's mortgage banking subsidiary is currently in the
process of renewing its revolving mortgage warehouse facility.
52
34
On May 25, 1999, the Company's mortgage banking subsidiary entered into a $150.0
million Master Loan and Security Agreement with an investment bank. The
agreement, which expires on May 25, 2000, provides for a facility fee based on
the $150.0 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 revolving 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.
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 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.
YEAR 2000 ISSUE
The term "year 2000 issue" is a general term that was used to describe the
complications that were feared would arise from the use of existing computer
hardware and software designed by applicable manufacturers without consideration
for the change in the century as of January 1, 2000. If not corrected, software
programs with this embedded problem were considered to possibly cause computer
systems to fail or to miscalculate data.
During the late 1990's, the Company invested in information systems required to
support its KB2000 operational business model and effectively manage and control
growth. In conjunction with this investment in technology, and with respect to
the year 2000 issue in particular, the Company undertook to modify or replace
portions of its existing computer operating systems to ensure that they would
function properly with respect to dates in the year 2000 and thereafter.
In 1998, the Company formed a "Year 2000 Project Office" to direct the
Company-wide efforts encompassed by this project. During calendar year 1999, the
Company successfully completed a year 2000 effort that was comprised of 13
distinct projects. Each of the projects was timely completed and certified as
year 2000 compliant by key management participants. With the passing of the new
year and the month of January 2000 completed, neither the Company nor any of its
key vendors or other third party providers have been materially adversely
impacted by technological issues associated with the turning of the century. At
this time, the Company considers the risk of any year 2000 related failures or
the consequences of any year 2000 failures to be extremely low. Management
believes that the year 2000 issue has not and will not have any material adverse
effect on the Company's liquidity, financial condition or results of operations.
Several of the projects included in the Company's year 2000 plan were projects
which were necessary to support the Company's KB2000 operational business model,
and would have been undertaken regardless of year 2000 exposure. The total cost
of all of the Company's projects associated with its year 2000 plan was
approximately $4.0 million; however, because such projects involved conversions
and upgrades that were not necessitated to meet year 2000 concerns, it is not
possible to determine the portion of the total cost which is specifically
attributable to year 2000 compliance efforts.
53
35
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 Events
On January 24, 2000, Kaufman & Broad S.A. ("KBSA"), the Company's wholly owned
French subsidiary filed a preliminary public offering memorandum for the initial
public offering of ordinary shares of KBSA. On February 7, 2000, KBSA
successfully completed its public offering and is now listed on the Premier
Marche of the ParisBourse. The offering of approximately 5.1 million shares
(before exercise of the over allotment option) was made in France and in Europe
and was priced at 23 euros per share, representing a total offering of
approximately $120.0 million.
Proceeds from the offering will be used to fund internal and external growth of
the French homebuilding operations, obtain better financing conditions, and
finance the payment of a dividend of approximately $85.0 million to the Company,
which the Company will use to reduce its domestic debt and repurchase additional
shares of its common stock. The Company continues to own a majority interest in
KBSA and will continue to consolidate these operations in its financial
statements.
In connection with the ongoing review of its assets and operations, and to
reposition its core homebuilding operations, the Company is actively exploring
the sale of certain of its operating divisions. Such divisions, which do not
individually or in the aggregate comprise a material portion of the Company's
financial position or results of operations, operate businesses that are
inconsistent with the Company's strategic focus on fewer, larger homebuilding
markets to maximize execution of its KB2000 operational business model. To the
extent the sale of any division occurs during fiscal year 2000 as planned, the
Company does not anticipate such transactions to have a material effect on its
financial position or results of operations in fiscal year 2000 or in future
years.
Outlook
The Company's residential backlog at November 30, 1999 consisted of 8,558 units,
representing aggregate future revenues of $1.38 billion. Both amounts
established new year-end records, and reflected increases of 23.3% and 38.2%,
respectively, when compared to the 6,943 units in residential backlog,
representing aggregate future revenues of $1.00 billion, at year-end 1998.
Company-wide net orders for the fourth quarter of 1999 totaled 4,869, up 12.7%
from the comparable quarter of 1998. The 1999 fourth quarter net order total
included orders generated by the acquired Lewis Homes operations and operations
acquired in France. Excluding the impact of acquisitions within the trailing
twelve-month period, Company-wide net orders decreased 12.2% in the fourth
quarter of 1999 compared to the year-earlier quarter.
The Company's domestic residential backlog at November 30, 1999 increased to
$1.15 billion, up 36.0% from $848.6 million at year-end 1998. On a unit basis,
the domestic backlog stood at 7,185 units at year-end 1999, up 20.6% from 5,959
units at year-end 1998. Improvement occurred in both California and Other U.S.
operations, and resulted primarily from the Lewis Homes acquisition, completed
during the first quarter of 1999, higher order rates reflecting generally good
market conditions throughout the United States, particularly in California, and
the Company's empha-
54
36
sis on pre-sales. The success of communities designed under its KB2000
operational business model also contributed to the increase in total United
States backlog levels. California operations produced substantial year-over-year
growth, with backlog at November 30, 1999 rising to $457.4 million on 1,879
units from $288.3 million on 1,220 units at November 30, 1998. Net orders from
California operations increased 33.4% in the fourth quarter of 1999 to 1,314
units, up from 985 units in the fourth quarter of 1998; however, excluding 504
net orders associated with the Company's Lewis Homes acquisition, fourth quarter
net orders in California operations decreased 17.8%. In Other U.S. operations,
backlog increased to $696.5 million on 5,306 units at November 30, 1999, up from
$560.3 million on 4,739 units at November 30, 1998, as the average number of
active communities rose 53.9% from the prior year. Fourth quarter 1999 net
orders in Other U.S. operations increased 10.6% to 2,908 units from 2,630 units
in the year-earlier period.
In France, residential backlog at November 30, 1999 totaled $227.2 million on
1,369 units, up 55.7% and 42.5%, respectively, from $145.9 million on 961 units
at year-end 1998. French net orders decreased 7.3% to 647 units in the fourth
quarter of 1999 from 698 units in the year-earlier period primarily due to
existing communities selling out more quickly than expected. The value of the
backlog associated with French commercial development activities totaled
approximately $1.7 million at November 30, 1999 from $1.8 million at year end
1998, reflecting a reduced level of activity.
Substantially all homes included in the year-end 1999 backlog are expected to be
delivered during 2000. 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 2000 decreased
2.1% from the comparable period of 1999. Domestic net orders during the
two-month period decreased 3.7% due to a 5.9% decrease in net orders from Other
U.S. operations, partially offset by a 1.9% increase in net orders from
California operations. Excluding net orders from operations acquired in the
trailing twelve-month period, domestic net orders decreased 14.8% in the first
two months of fiscal 2000 compared to the same period a year ago. The decrease
is primarily due to higher mortgage interest rates compared to the year-earlier
period. In France, net orders for the first two months of fiscal 2000 increased
12.9% compared to the same period in 1999, reflecting the inclusion of Park and
new community openings. Excluding net orders from operations acquired in the
trailing twelve-month period, French net orders rose 3.2% in the first two
months of fiscal 2000. Full year Company-wide net order results could be further
affected by current global market uncertainties, mortgage interest rate
volatility, declines in consumer confidence and/or other factors.
As a result of continued domestic expansion outside of California, the
percentage of domestic unit deliveries generated from California operations
decreased to 31.7% in 1999 from 35.8% in 1998. On a revenue basis, these
percentages were 46.8% in 1999 and 51.3% in 1998. In response to persistently
weak conditions for new housing and general recessionary trends in California
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.
Since then, the housing market has improved significantly in California, and the
Company remains cautiously optimistic that the improved economic climate will
continue for the foreseeable future, thereby generally enabling the housing
market, and the Company's business in the state to retain its strength.
Other U.S. operations continued to experience substantial growth in 1999. The
acquisition of Lewis Homes' market-leading operations in Nevada, coupled with
the continued expansion of preexisting Other U.S. operations, resulted in a
56.5% increase in deliveries in 1999 compared to the prior year. The Company has
also achieved the most significant penetration of its KB2000 operational
business model in these Other U.S. markets. The Company is seeking to continue
to expand its Other U.S. operations and continues to explore opportunities to
enter new markets as well as grow its existing markets.
The French housing market has continued to improve in recent years. In 1999,
unit deliveries in France rose by 53.2% from the previous year, including the
impact of the acquisition of Park. The Company anticipates that increases in
deliveries from French housing operations in 2000 will be in line with that
nation's improving economy. French commercial activities are not likely to
increase materially, consistent with the strategy to focus primarily on the
expansion of its residential development 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.
55
37
As the Company enters fiscal year 2000, it plans to continue to operate under
the principles of the KB2000 operational business model -- now renamed KBnxt --
and to strive for continued growth. The Company believes its KB2000 operational
business model has been instrumental in its achievement of record deliveries and
earnings in 1998 and 1999. Since implementing KB2000 in 1997, the Company has
leveraged the business model with additional and complementary initiatives
including strategies to establish leading market positions and maintain focus on
acquisitions.
In order to leverage the benefits of the KB2000/KBnxt 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
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 delivery growth in future
years, with its current primary growth strategies to expand existing operations
to optimal market volume levels, while still exploring entry into new markets,
at high volume levels, through acquisitions.
The Company expects to continue to consider acquisitions from time to time to
supplement growth in existing markets and facilitate expansion into new markets.
However, the Company's ability to acquire other homebuilders could be affected
by several factors, including, among other things, conditions in 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 and
economic conditions nationally and in target markets, and capital or credit
market conditions. Merger and acquisition activity within the U.S homebuilding
industry has slowed in recent months as a result of the generally depressed
stock prices of leading builders.
The Company is also in the process of reviewing its assets and businesses for
the purpose of monetizing non-strategic or marginal positions, and has
instituted even more stringent criteria for prospective land acquisitions.
Included among these initiatives is the Company's exploration of the sale of
certain operating divisions, which do not individually or in the aggregate
comprise a material portion of the Company's business. These initiatives are
intended to increase cash flows available to reduce debt and/or repurchase
additional stock. The Company believes that the improvement in its debt ratio
from the end of the third quarter to the end of the fourth quarter of fiscal
1999, which occurred despite the stock buyback program, reflects the early
benefits of this review.
The Company's agreement to joint venture its interest in "City Ranch", a master
planned community in north Los Angeles County, California, is an example of its
ongoing asset review process.
Notwithstanding the asset review, the Company hopes to continue to increase
overall unit deliveries in future years. Subject to various risk factors, the
Company's growth strategies include expanding existing operations to sizable
market volume levels, as well as entering new markets at high volume levels,
principally 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 successful implementation of its operational
business model.
Based on its current projections, the Company expects to establish record
earnings in fiscal 2000, although this goal could be materially affected by
various risk factors such as changes in general economic conditions, either
nationally or in the regions in which the Company operates or may commence
operations, job growth and employment levels, home mortgage interest rates or
consumer confidence, and the extent of its internal asset review, among other
things. In particular, interest rates have risen since the beginning of the
Company's 1999 fiscal year. Recent increases in short-term interest rates
instituted by the Federal Reserve Board may give rise to further increases in
mortgage interest rates. With its acquisition of companies in 1998 and 1999,
including Lewis Homes, its asset repositioning program, and its high current
backlog levels, the Company believes it is well-positioned to achieve record
earnings in 2000.
56
38
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.
57
39
CONSOLIDATED STATEMENTS OF INCOME
in thousands, except per share amounts
Years Ended November 30, 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------
TOTAL REVENUES $ 3,836,295 $ 2,449,362 $ 1,878,723
==============================================================================================================
CONSTRUCTION:
Revenues $ 3,772,121 $ 2,402,966 $ 1,843,614
Construction and land costs (3,051,698) (1,949,729) (1,512,766)
Selling, general and administrative expenses (461,316) (304,565) (229,097)
- --------------------------------------------------------------------------------------------------------------
Operating income 259,107 148,672 101,751
Interest income 7,806 5,674 5,078
Interest expense, net of amounts capitalized (28,340) (23,341) (29,829)
Minority interests (29,392) (7,002) (425)
Equity in pretax income (loss) of unconsolidated joint ventures 224 1,151 (53)
- --------------------------------------------------------------------------------------------------------------
Construction pretax income 209,405 125,154 76,522
- --------------------------------------------------------------------------------------------------------------
MORTGAGE BANKING:
Revenues:
Interest income 19,186 15,569 13,303
Other 44,988 30,827 21,806
- --------------------------------------------------------------------------------------------------------------
64,174 46,396 35,109
Expenses:
Interest (16,941) (15,046) (12,699)
General and administrative (11,614) (9,937) (7,902)
Secondary marketing trading loss (18,155)
- --------------------------------------------------------------------------------------------------------------
Mortgage banking pretax income 17,464 21,413 14,508
- --------------------------------------------------------------------------------------------------------------
Total pretax income 226,869 146,567 91,030
Income taxes (79,400) (51,300) (32,800)
- --------------------------------------------------------------------------------------------------------------
NET INCOME $ 147,469 $ 95,267 $ 58,230
==============================================================================================================
BASIC EARNINGS PER SHARE $ 3.16 $ 2.41 $ 1.50
==============================================================================================================
DILUTED EARNINGS PER SHARE $ 3.08 $ 2.32 $ 1.45
==============================================================================================================
See accompanying notes.
58
40
CONSOLIDATED BALANCE SHEETS
IN THOUSANDS, EXCEPT SHARES
November 30, 1999 1998
- -----------------------------------------------------------------------------------------------------------------
ASSETS
CONSTRUCTION:
Cash and cash equivalents $ 15,576 $ 56,602
Trade and other receivables 205,847 140,771
Mortgages and notes receivable 58,702 54,070
Inventories 1,521,265 1,134,402
Investments in unconsolidated joint ventures 21,290 5,608
Deferred income taxes 99,519 24,094
Goodwill 205,618 45,533
Other assets 86,259 81,464
- -----------------------------------------------------------------------------------------------------------------
2,214,076 1,542,544
- -----------------------------------------------------------------------------------------------------------------
MORTGAGE BANKING:
Cash and cash equivalents 12,791 6,751
Receivables:
First mortgages and mortgage-backed securities 47,080 58,262
First mortgages held under commitments of sale and other receivables 386,076 249,702
Other assets 4,212 2,945
- -----------------------------------------------------------------------------------------------------------------
450,159 317,660
- -----------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 2,664,235 $ 1,860,204
=================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CONSTRUCTION:
Accounts payable $ 328,528 $ 211,380
Accrued expenses and other liabilities 222,855 148,508
Mortgages and notes payable 813,424 529,846
- -----------------------------------------------------------------------------------------------------------------
1,364,807 889,734
- -----------------------------------------------------------------------------------------------------------------
MORTGAGE BANKING:
Accounts payable and accrued expenses 9,711 8,924
Notes payable 377,666 239,413
Collateralized mortgage obligations secured by mortgage-backed securities 36,219 49,264
- -----------------------------------------------------------------------------------------------------------------
423,596 297,601
- -----------------------------------------------------------------------------------------------------------------
MINORITY INTERESTS:
Consolidated subsidiaries and joint ventures 9,499 8,608
Company obligated mandatorily redeemable preferred securities of subsidiary
trust holding solely debentures of the Company 189,750 189,750
- -----------------------------------------------------------------------------------------------------------------
199,249 198,358
- -----------------------------------------------------------------------------------------------------------------
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; 48,090,615 and
39,992,004 shares outstanding at November 30, 1999 and 1998, respectively 48,091 39,992
Paid-in capital 335,324 193,520
Retained earnings 376,626 243,356
Accumulated other comprehensive income (1,584) (2,357)
Grantor stock ownership trust, at cost: 3,750,100 shares at November 30, 1999 (81,874)
- -----------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 676,583 474,511
- -----------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,664,235 $ 1,860,204
=================================================================================================================
See accompanying notes.
59
41
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Number of Shares
----------------- Accumulated
Grantor Other Grantor
in thousands Stock Compre- Stock Total
Years Ended November 30, 1999, Common Ownership Common Paid-in Retained hensive Ownership Stockholders'
1998 and 1997 Stock Trust Stock Capital Earnings Income Trust Equity
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at November 30, 1996 38,828 $ 38,828 $183,801 $ 113,398 $ 4,323 $ 340,350
- -----------------------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income 58,230 58,230
Foreign currency translation
adjustments (6,310) (6,310)
---------
Total comprehensive income 51,920
Dividends on common stock (11,668) (11,668)
Exercise of employee stock
options 169 169 2,285 2,454
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at November 30, 1997 38,997 38,997 186,086 159,960 (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 995 995 15,699 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) (8,265)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at November 30, 1998 39,992 39,992 193,520 243,356 (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 212 212 3,686 3,898
Issuance of common stock related
to an acquisition 7,887 7,887 138,118 146,005
Grantor stock ownership trust (3,750) $(81,874) (81,874)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at November 30, 1999 48,091 (3,750) $ 48,091 $335,324 $ 376,626 $ (1,584) $(81,874) $ 676,583
===================================================================================================================================
See accompanying notes.
60
42
CONSOLIDATED STATEMENTS OF CASH FLOWS
in thousands
Years Ended November 30, 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 147,469 $ 95,267 $ 58,230
Adjustments to reconcile net income to net cash provided (used) by
operating activities:
Equity in pretax (income) loss of unconsolidated joint ventures (224) (1,151) 53
Minority interests 29,392 7,002 425
Amortization of discounts and issuance costs 1,501 1,882 2,341
Depreciation and amortization 38,251 16,178 11,860
Provision for deferred income taxes (25,913) 474 (5,028)
Change in assets and liabilities, net of effects from acquisitions:
Receivables (184,116) (50,040) (118,123)
Inventories (38,761) (125,719) 5,157
Accounts payable, accrued expenses and other liabilities 130,257 51,283 20,064
Other, net 8,911 (8,025) (4,023)
- -------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities 106,767 (12,849) (29,044)
- -------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash acquired (11,646) (162,818)
Investments in unconsolidated joint ventures (15,022) 2,214 1,921
Net sales (originations) of mortgages held for long-term investment (2,756) 1,686 164
Payments received on first mortgages and mortgage-backed securities 14,629 12,933 9,988
Purchases of property and equipment, net (19,160) (15,859) (5,917)
- -------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities (33,955) (161,844) 6,156
- -------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from credit agreements and other short-term borrowings 119,425 63,187 37,900
Proceeds from Company obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely debentures of the Company 183,057
Proceeds from issuance of senior notes 172,182
Payments on collateralized mortgage obligations (14,098) (12,324) (9,531)
Payments on mortgages, land contracts and other loans (73,329) (45,239) (8,047)
Redemption of senior notes (100,000)
Payments from (to) minority interests (43,723) (7,006) 513
Payments of cash dividends (14,199) (11,871) (11,668)
Repurchases of common stock (81,874)
- -------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) for financing activities (107,798) 169,804 81,349
- -------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (34,986) (4,889) 58,461
Cash and cash equivalents at beginning of year 63,353 68,242 9,781
- -------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 28,367 $ 63,353 $ 68,242
=========================================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid, net of amounts capitalized $ 43,014 $ 37,915 $ 43,559
Income taxes paid 74,560 40,521 29,982
=========================================================================================================================
SUPPLEMENTAL DISCLOSURES OF NONCASH ACTIVITIES:
Cost of inventories acquired through seller financing $ 43,529 $ 29,911 $ 15,098
Issuance of common stock related to an acquisition 146,005
Debt assumed related to an acquisition 303,239
=========================================================================================================================
See accompanying notes.
61
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
OPERATIONS Kaufman and Broad Home Corporation (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 is also a
developer of 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, 1999 and 1998, the
Company's cash equivalents totaled $704,000 and $20,246,000, respectively.
FOREIGN CURRENCY TRANSLATION Results of operations for foreign entities are
translated using the average exchange rates during the period. For foreign
entities, assets and liabilities are translated to U.S. dollars 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 apartments,
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
billed 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
$52,765,000 and $25,804,000 at November 30, 1999 and 1998, 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 is 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.
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.
62
44
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 which 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. Earnings per share
amounts for all periods have been presented and, where necessary, restated to
conform to the Statement of Financial Accounting Standards No. 128, "Earnings
Per Share" requirements. The following table presents a reconciliation of
average shares outstanding:
in thousands
Years Ended November 30, 1999 1998 1997
- ------------------------------------------------------------------------------------------
Basic average shares outstanding 46,730 39,553 38,889
Net effect of stock options assumed to be exercised 1,101 1,480 1,169
- ------------------------------------------------------------------------------------------
Diluted average shares outstanding 47,831 41,033 40,058
==========================================================================================
COMPREHENSIVE INCOME During the quarter ended February 28, 1999, the Company
adopted Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income", which establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purpose financial statements.
SEGMENT INFORMATION Effective November 30, 1999, the Company adopted Statement
of Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 131 establishes
new standards for segment reporting which are based on the way management
organizes segments within a company for making operating decisions and assessing
performance.
In accordance with SFAS No. 131, 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 and apartment 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.
63
45
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 In June 1998, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133").
SFAS No. 133 requires all derivatives to be recorded on the balance sheet at
fair value. The Company will adopt SFAS No. 133 in its fiscal year 2000. The
Company does not anticipate that the adoption of SFAS No. 133 will have a
significant effect on its results of operations or financial position.
RECLASSIFICATIONS Certain amounts in the consolidated financial statements of
prior years have been reclassified to conform to the 1999 presentation.
Note 2. Acquisitions
During the second quarter of 1998, the Company acquired three privately held
home builders with regional operations in certain key markets. On March 19,
1998, the Company acquired all of the issued and outstanding capital stock of
Houston-based Hallmark Residential Group ("Hallmark") for approximately
$54,000,000, including the assumption of debt. Hallmark built single-family
homes primarily in Houston (with additional operations in San Antonio and
Austin, Texas) under the trade names of Dover Homes and Ideal Builders. The
Company acquired substantially all of the assets of Denver-based PrideMark
Homebuilding Group ("PrideMark") on March 23, 1998 for approximately
$65,000,000, including the assumption of trade liabilities and debt. PrideMark
built single-family homes in Denver, Colorado. On April 9, 1998, the Company
acquired all of the issued and outstanding capital stock of Estes Homebuilding
Co. ("Estes") for approximately $48,000,000, including the assumption of debt.
Estes built single-family homes in Phoenix and Tucson, Arizona.
On August 18, 1998, the Company acquired a majority ownership investment in
General Homes Corporation ("General Homes"), a builder of single-family homes
primarily in Houston, Texas. The Company invested approximately $31,837,000,
including the assumption of debt, to acquire 50.3% of the outstanding stock of
General Homes, pursuant to a completed plan of reorganization. Effective January
4, 1999, the Company invested approximately $14,500,000 to acquire the remaining
49.7% of the outstanding stock of General Homes, bringing its ownership interest
to 100%.
The acquisitions of Hallmark, PrideMark, Estes and General Homes were financed
by borrowings under the Company's domestic unsecured revolving credit facility.
Each acquisition was accounted for under the purchase method and the results of
operations of the acquired entities were included in the Company's consolidated
financial statements as of their respective dates of acquisition. The purchase
prices were allocated to the assets acquired and liabilities assumed based upon
their estimated fair market values at the date of acquisition. The excess of the
purchase prices over the fair value of net assets acquired was $23,450,000 on an
aggregate basis and was allocated to goodwill. The Company is amortizing
goodwill related to the acquisitions on a straight-line basis over a period of
ten years.
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. Prior to the acquisition, Lewis Homes was one
of the largest privately held single-family homebuilders in the United States
based on units delivered, with revenues for the year ended December 31, 1998 of
$715,000,000 on 3,631 unit deliveries. Lewis Homes also owned or controlled
approximately 24,000 lots and had a backlog of approximately 900 homes at
December 31, 1998. Lewis Homes' principal markets were Las Vegas and Northern
Nevada, Southern California and the greater Sacramento area in Northern
California.
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
64
46
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. The shares of
Company common stock issued in the acquisition are "restricted" shares and may
not be resold without a registration statement or compliance with Securities and
Exchange Commission regulations that limit the number of shares that may be
resold in a given period. The Company has agreed to file a registration
statement for those shares in three increments at the Lewis family's request
from July 1, 2000 to July 1, 2002. Under the terms of the purchase agreement, a
Lewis family member has also been appointed to the Company's Board of Directors.
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 $500,000,000 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 acquisitions of
Hallmark, PrideMark, Estes, General Homes and Lewis Homes had occurred as of
December 1, 1997 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
Years Ended November 30, 1999 1998
- -------------------------------------------------------------------------------------------------------
Total revenues $3,919,247 $3,279,287
Total pretax income 231,384 184,993
Net income 150,384 120,293
Basic earnings per share 3.16 2.54
Diluted earnings per share 3.09 2.46
=======================================================================================================
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 acquisitions been consummated as of December 1, 1997, nor are
they necessarily indicative of future operating results.
Note 3. Receivables
CONSTRUCTION Trade receivables amounted to $138,250,000 and $67,771,000 at
November 30, 1999 and 1998, respectively. Included in these amounts are unbilled
receivables due from buyers on French apartment, condominium and commercial
building sales accounted for using the percentage of completion method, totaling
$97,264,000 at November 30, 1999 and $37,804,000 at November 30, 1998. The
buyers are contractually obligated to remit payments against their unbilled
balances. Other receivables of $67,597,000 at November 30, 1999 and $73,000,000
at November 30, 1998 included escrow deposits and amounts due from
municipalities and utility companies.
At November 30, 1999 and 1998, receivables were net of allowances for doubtful
accounts of $16,578,000 and $9,146,000, respectively.
MORTGAGE BANKING First mortgages and mortgage-backed securities consisted of
loans of $9,089,000 at November 30, 1999 and $6,334,000 at November 30, 1998 and
mortgage-backed securities of $37,991,000 and $51,928,000 at November 30, 1999
and 1998, 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% and 8 2/5%
at November 30, 1999 and 1998, respectively (with rates ranging from 7% to 12%
in both 1999 and 1998).
65
47
First mortgages and mortgage-backed securities were net of discounts and
premiums of $18,000 at November 30, 1999 and $546,000 at November 30, 1998.
These discounts and premiums, which primarily represent loan origination
discount points and acquisition price discounts or premiums, are deferred as an
adjustment to the carrying value of the related first mortgages and
mortgage-backed securities and amortized into interest income using the interest
method.
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 $685,000 and $0,
respectively at November 30, 1999 and $3,457,000 and $0, respectively at
November 30, 1998.
First mortgages held under commitments of sale and other receivables consisted
of first mortgages held under commitments of sale of $376,377,000 at November
30, 1999 and $242,537,000 at November 30, 1998 and other receivables of
$9,699,000 and $7,165,000 at November 30, 1999 and 1998, respectively. The first
mortgages held under commitments of sale bore interest at an average rate of
7 1/2% at both November 30, 1999 and 1998. 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 4. Inventories
Inventories consisted of the following:
in thousands
November 30, 1999 1998
- -----------------------------------------------------------------------------------------
Homes, lots and improvements in production $1,063,505 $ 835,300
Land under development 457,760 299,102
- -----------------------------------------------------------------------------------------
Total inventories $1,521,265 $1,134,402
=========================================================================================
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:
in thousands
Years Ended November 30, 1999 1998 1997
- ------------------------------------------------------------------------------------------------
Interest incurred $ 78,041 $ 54,299 $ 52,468
Interest expensed (28,340) (23,341) (29,829)
- ------------------------------------------------------------------------------------------------
Interest capitalized 49,701 30,958 22,639
Interest amortized (44,257) (30,752) (25,480)
- ------------------------------------------------------------------------------------------------
Net impact on consolidated pretax income $ 5,444 $ 206 $ (2,841)
================================================================================================
Note 5. 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:
66
48
in thousands
November 30, 1999 1998
- -------------------------------------------------------
Cash $ 3,386 $ 6,286
Receivables 4,914 5,727
Inventories 82,021 15,042
Other assets 377 637
- -------------------------------------------------------
Total assets $90,698 $27,692
=======================================================
Mortgages and notes payable $30,988 $ 4,593
Other liabilities 11,111 5,696
Equity of:
The Company 21,290 5,608
Others 27,309 11,795
- -------------------------------------------------------
Total liabilities and equity $90,698 $27,692
=======================================================
The joint ventures finance land and inventory investments primarily through a
variety of borrowing arrangements. The Company typically does not guarantee
these financing arrangements.
in thousands
Years Ended November 30, 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
Revenues $ 13,889 $ 17,657 $ 98,183
Cost of sales (9,842) (12,245) (94,901)
Other expenses, net (426) (384) (6,147)
- --------------------------------------------------------------------------------------------------------------------
Total pretax income (loss) $ 3,621 $ 5,028 $ (2,865)
====================================================================================================================
The Company's share of pretax income (loss) $ 224 $ 1,151 $ (53)
====================================================================================================================
The Company's share of pretax income (loss) includes management fees earned from
the unconsolidated joint ventures.
Note 6. Mortgages and Notes Payable
CONSTRUCTION Mortgages and notes payable consisted of the following (interest
rates are as of November 30):
in thousands
November 30, 1999 1998
- ----------------------------------------------------------------------------------------------------------------
Unsecured domestic borrowings with banks under a revolving
credit agreement (6 3/8% in 1999) $ 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 (3 3/4% to 7% in 1999 and 4 1/5% to 5 3/8% in 1998) 49,940 $ 33,647
Term loan borrowings due 2001 (6 7/8% in 1999) 200,000
Mortgages and land contracts due to land sellers and other loans (7% to 10 1/4% in 1999
and 8% to 10 1/4% in 1998) 30,583 22,492
Senior notes due 2004 at 7 3/4% 175,000 175,000
Senior subordinated notes due 2003 at 9 3/8% 174,370 174,221
Senior subordinated notes due 2006 at 9 5/8% 124,531 124,486
- ----------------------------------------------------------------------------------------------------------------
Total mortgages and notes payable $813,424 $529,846
================================================================================================================
67
49
On April 21, 1997, the Company entered into a $500,000,000 domestic unsecured
revolving credit agreement (the "Revolving Credit Facility") with various banks.
The Revolving Credit Facility is comprised of a $400,000,000 revolving credit
facility scheduled to expire on April 30, 2001 and a $100,000,000 364-day
revolving credit facility. Upon expiration, the $100,000,000 revolving credit
facility is renewable at the lenders' option or may be converted, at the
Company's option, to a term loan expiring on April 30, 2001. Under the Revolving
Credit Facility, $500,000,000 remained committed and $416,904,000 was available
for the Company's future use at November 30, 1999. The Revolving Credit Facility
provides for interest on borrowings at either the applicable bank reference rate
or the London Interbank Offered Rate plus an applicable spread and an annual
commitment fee based on the unused portion of the commitment.
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 provides 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 is payable monthly at the
London Interbank Offered Rate plus an applicable spread. Under the terms of the
Term Loan Agreement, 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. The financing
obtained under the Term Loan Agreement did not affect the amounts available
under the Company's pre-existing borrowing arrangements.
The Company's French subsidiaries have lines of credit with various banks which
totaled $198,658,000 at November 30, 1999 and have various committed expiration
dates through November 2000. 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.
The weighted average interest rate on aggregate unsecured borrowings, excluding
the senior and senior subordinated notes, was 6 3/5% and 4 3/5% at November 30,
1999 and 1998, respectively.
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
on or after May 1, 2000 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 September 4, 1997, the Company completed the optional redemption of its
$100,000,000 principal amount of 10 3/8% senior notes due in 1999. The Company
used borrowings under its Revolving Credit Facility to retire the entire
$100,000,000 of senior notes at 100% of the principal amount of the notes,
together with accrued and unpaid interest.
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, con-
68
50
solidations, or sales of assets, or engage in certain transactions with
officers, directors and employees. Under the terms of the Revolving 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 Revolving Credit Facility, Term Loan Agreement, senior notes and
senior subordinated notes, retained earnings of $150,180,000 were available for
payment of cash dividends or stock repurchases at November 30, 1999.
Principal payments on senior and senior subordinated notes, term loan
borrowings, mortgages, land contracts and other loans are due as follows: 2000,
$91,767,000; 2001, $135,644,000; 2002, $1,389,000; 2003, $175,205,000; 2004,
$175,948,000; and thereafter, $124,531,000.
Assets (primarily inventories) having a carrying value of approximately
$106,266,000 are pledged to collateralize mortgages, land contracts and other
secured loans.
On December 5, 1997, the Company filed a new universal shelf registration
statement 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 no securities have
been issued thereunder.
MORTGAGE BANKING Notes payable included the following (interest rates are as of
November 30):
IN THOUSANDS
November 30, 1999 1998
- --------------------------------------------------------------------------------
Notes payable secured by trust deed notes
(6 1/8% to 7 1/8% in 1999 and 5 3/5% in 1998) $377,666 $239,413
- --------------------------------------------------------------------------------
Total notes payable $377,666 $239,413
================================================================================
First mortgages receivable are financed through a $250,000,000 revolving
mortgage warehouse agreement (the "Mortgage Warehouse Facility"). The Mortgage
Warehouse Facility, which expires on February 23, 2000, provides for an annual
fee based on the committed balance of the facility and provides for interest at
either the Federal Funds Rate or the London Interbank Offered Rate plus an
applicable spread on amounts borrowed. The Company is in the process of renewing
this facility.
On May 25, 1999, the Company's mortgage banking subsidiary entered into a
$150,000,000 Master Loan and Security Agreement with an investment bank. The
agreement, which expires on May 25, 2000, provides for a facility fee based on
the $150,000,000 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, 1999 and 1998, 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.
69
51
Note 7. 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
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 totaling
$15,180,000 and $6,072,000 are included as minority interests in the Company's
results of operations for the years ended November 30, 1999 and 1998,
respectively.
Note 8. 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.
70
52
The carrying values and estimated fair values of the Company's financial
instruments, except for those financial instruments for which the carrying
values approximate fair values, are summarized as follows:
in thousands
November 30, 1999 1998
- ------------------------------------------------------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
- ------------------------------------------------------------------------------------------------------------------------
Construction:
Financial liabilities
7 3/4% Senior notes $175,000 $163,520 $175,000 $169,698
9 3/8% Senior subordinated notes 174,370 174,738 174,221 178,833
9 5/8% Senior subordinated notes 124,531 125,700 124,486 134,288
Mortgage banking:
Financial assets
Mortgage-backed securities 37,991 38,676 51,928 55,386
Financial liabilities
Collateralized mortgage obligations secured by
mortgage-backed securities 36,219 36,897 49,264 53,693
Company obligated mandatorily redeemable
preferred securities of subsidiary trust holding
solely debentures of the Company 189,750 141,800 189,750 162,200
========================================================================================================================
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 Revolving Credit Facility, Term Loan
Agreement, 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 9. 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 10. Stockholders' Equity
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 circum-
71
53
stances, 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. The holdings of or acquisitions by any of the members of
the Lewis family, a former officer of Lewis Homes and any entity controlled by
any of them (the "Lewis Holders"), who held in the aggregate approximately 16%
of the Company's common stock as of January 7, 1999, will not cause the rights
to become exercisable by virtue of their ownership so long as their aggregate
ownership remains below 17% of the issued and outstanding common stock. In the
event the aggregate ownership of the Lewis Holders falls below 15.5% of the
issued and outstanding shares of the Company's common stock, the rights will
become exercisable as described above if their holdings should at anytime
thereafter exceed 16% of the issued and outstanding shares of the Company's
common stock. In the event the aggregate ownership of the Lewis Holders falls
below 14.5% of the issued and outstanding shares of the Company's common stock,
the Lewis Holders' exemption will terminate, and the rights will become
exercisable as described above. 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 11. 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 $3,937,000 in 1999, $3,025,000 in
1998 and $2,081,000 in 1997.
The Company's 1988 Employee Stock Plan (the "1988 Plan") and the 1999 Incentive
Plan (the "1999 Plan") provide 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 the Company's 1998 Stock Incentive Plan which provide
for the same awards as may be made under the 1988 Plan and 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 1988 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 1999, 1998 and 1997 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:
in thousands, except per share amounts
Years Ended November 30, 1999 1998 1997
- -----------------------------------------------------------------------------------------
Net income -- as reported $ 147,469 $ 95,267 $ 58,230
Net income -- pro forma 142,816 91,398 57,463
Diluted earnings per share -- as reported 3.08 2.32 1.45
Diluted earnings per share -- pro forma 2.99 2.24 1.44
=========================================================================================
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 1999, 1998 and 1997, respectively: a risk free interest rate of 6.14%,
4.38% and 5.84%; an expected volatility factor for the mar-
72
54
ket price of the Company's common stock of 43.14%, 41.31% and 34.62%; a dividend
yield of 1.36%, 1.19% and 1.38%; and an expected life of 4 years, 4 years and 4
years. The weighted average fair value of options granted in 1999, 1998 and 1997
was $6.92, $6.09 and $3.68, respectively.
Stock option transactions are summarized as follows:
1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
- -----------------------------------------------------------------------------------------------------------------------------------
Options outstanding at beginning of year 2,965,067 $ 15.22 2,747,318 $ 9.98 2,830,268 $ 10.00
Granted 2,241,736 20.12 1,318,017 22.83 387,000 14.07
Exercised (211,925) 16.43 (995,235) 10.70 (169,183) 12.10
Cancelled (145,056) 21.00 (105,033) 16.56 (300,767) 14.25
- -----------------------------------------------------------------------------------------------------------------------------------
Options outstanding at end of year 4,849,822 $ 17.26 2,965,067 $ 15.22 2,747,318 $ 9.98
Options exercisable at end of year 2,041,106 $ 13.83 1,586,455 $ 12.16 1,816,346 $ 7.92
Options available for grant at end of year 2,867,334 2,464,014 1,776,998
===================================================================================================================================
Stock options outstanding at November 30, 1999 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 $14.13 1,232,191 5.97 $ 7.40 1,086,761 $ 6.58
$14.38 to $17.75 1,339,250 14.10 17.22 127,185 14.78
$19.06 to $22.44 1,749,193 13.57 21.94 372,965 21.43
$23.06 to $33.94 529,188 13.64 24.82 454,195 24.70
- -----------------------------------------------------------------------------------------------------------------------------------
$ 4.38 to $33.94 4,849,822 11.79 $ 17.26 2,041,106 $ 13.83
===================================================================================================================================
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 129,998 in
1999, 151,665 in 1998 and 226,668 in 1997.
On August 4, 1999, the Company's Board of Directors authorized a share
repurchase program which allows the Company to purchase up to 2,500,000 shares
of the Company's common stock at prices not to exceed $28 per share. The Company
repurchased all of the 2,500,000 shares originally authorized and on November 1,
1999, the Board of Directors authorized the repurchase of up to 4,000,000
additional shares of Company common stock. As of November 30, 1999, the Company
had repurchased 3,750,100 shares under the repurchase program.
73
55
In connection with its share repurchase program, on August 27, 1999, the Company
established a grantor stock ownership trust (the "Trust") into which the
repurchased shares are 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 will have no impact on the
amount of benefits or compensation that will be 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 3,750,100 shares of common stock at November
30, 1999. 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.
NOTE 12. INCOME TAXES
The components of pretax income are as follows:
IN THOUSANDS
Years Ended November 30, 1999 1998 1997
- ----------------------------------------------------------------------------------
Domestic $200,272 $136,042 $ 87,545
Foreign 26,597 10,525 3,485
- ----------------------------------------------------------------------------------
Total pretax income $226,869 $146,567 $ 91,030
==================================================================================
The components of income taxes are as follows:
IN THOUSANDS Total Federal State Foreign
- ---------------------------------------------------------------------------------------------------
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
===================================================================================================
1997
Currently payable $ 35,159 $ 28,254 $ 4,847 $ 2,058
Deferred (2,359) (1,892) (467)
- ---------------------------------------------------------------------------------------------------
Total $ 32,800 $ 26,362 $ 4,847 $ 1,591
===================================================================================================
74
56
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:
IN THOUSANDS
November 30, 1999 1998
- ---------------------------------------------------------------------------------------------
Deferred tax liabilities:
Installment sales $ 15,471 $ 6,520
Bad debt and other reserves 449 166
Capitalized expenses 15,704 20,800
Partnerships and joint ventures 2,439 2,457
Repatriation of foreign subsidiaries 12,381 12,018
Other 12,179 3,491
- ---------------------------------------------------------------------------------------------
Total deferred tax liabilities 58,623 45,452
- ---------------------------------------------------------------------------------------------
Deferred tax assets:
Warranty, legal and other accruals 29,210 15,315
Depreciation and amortization 27,957 7,476
Capitalized expenses 16,370 9,827
Partnerships and joint ventures 13,183 4,186
Noncash charge for impairment of long-lived assets 7,686 8,902
Foreign tax credits 12,346 11,857
Net operating losses 40,121 931
Other 11,269 11,052
- ---------------------------------------------------------------------------------------------
Total deferred tax assets 158,142 69,546
- ---------------------------------------------------------------------------------------------
Net deferred tax assets $ 99,519 $ 24,094
=============================================================================================
Net operating loss carryforwards expire in various years from 2000 through 2019.
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:
IN THOUSANDS
Years Ended November 30, 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------
Amount computed at statutory rate $ 79,404 $ 51,298 $ 31,861
Increase (decrease) resulting from:
State taxes, net of federal income tax benefit 7,641 5,524 3,150
Differences in foreign tax rates 4,379 1,594 (885)
Intercompany dividends 1,153 977 352
Tax credits (11,329) (3,351) (2,046)
Other, net (1,848) (4,742) 368
- ---------------------------------------------------------------------------------------------------------------
Total $ 79,400 $ 51,300 $ 32,800
===============================================================================================================
The Company has commitments to invest $12,900,000 over six years in affordable
housing partnerships which are scheduled to provide tax credits.
75
57
The Company had foreign tax credit carryforwards at November 30, 1999 of
$3,433,000 for United States federal income tax purposes which expire in 2000,
2002 and 2004.
The undistributed earnings of foreign subsidiaries, which the Company plans to
invest indefinitely and for which no United States federal income taxes have
been provided, totaled $28,421,000 at November 30, 1999. If these earnings were
currently distributed, the resulting withholding taxes payable would be
$1,420,000.
NOTE 13. GEOGRAPHICAL INFORMATION
Geographical information follows:
Operating Identifiable
IN THOUSANDS Revenues Income Assets
- ------------------------------------------------------------------------------------
1999
Construction:
California $1,579,226 $ 110,942 $ 905,890
Other U.S. 1,780,595 112,765 987,141
Foreign 412,300 35,400 321,045
- ------------------------------------------------------------------------------------
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:
California $1,105,849 $ 79,871 $ 655,920
Other U.S. 1,042,408 55,343 656,389
Foreign 254,709 13,458 230,235
- ------------------------------------------------------------------------------------
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
====================================================================================
1997
Construction:
California $ 993,921 $ 65,554 $ 717,949
Other U.S. 670,590 34,166 283,794
Foreign 179,103 2,031 132,118
- ------------------------------------------------------------------------------------
Total construction 1,843,614 101,751 1,133,861
Mortgage banking 35,109 14,508 285,130
- ------------------------------------------------------------------------------------
Total $1,878,723 $ 116,259 $1,418,991
====================================================================================
76
58
NOTE 14. QUARTERLY RESULTS (UNAUDITED)
Quarterly results for the years ended November 30, 1999 and 1998 follow:
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS First Second Third Fourth
- ----------------------------------------------------------------------------------------------------------------------------
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
============================================================================================================================
1998
Revenues $ 426,245 $ 537,459 $ 659,014 $ 826,644
Operating income 18,323 32,637 48,888 70,237
Pretax income 12,698 26,222 43,298 64,349
Net income 8,098 17,222 28,098 41,849
Basic earnings per share .21 .44 .70 1.05
Diluted earnings per share .20 .42 .68 1.02
============================================================================================================================
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 15. SUBSEQUENT EVENTS (UNAUDITED)
On January 24, 2000, Kaufman & Broad S.A. ("KBSA"), the Company's wholly owned
French subsidiary filed a preliminary public offering memorandum for the initial
public offering of ordinary shares of KBSA. On February 7, 2000, KBSA
successfully completed its public offering and is now listed on the Premier
Marche of the ParisBourse. The offering of 5,148,937 shares (before exercise of
the over allotment option) was made in France and in Europe and was priced at 23
euros per share, representing a total offering of approximately $120,000,000.
Proceeds from the offering will be used to fund internal and external growth of
the French homebuilding operations, obtain better financing conditions, and
finance the payment of a dividend of approximately $85,000,000 to the Company,
which the Company will use to reduce its domestic debt and repurchase additional
shares of its common stock. The Company continues to own a majority interest in
KBSA and will continue to consolidate these operations in its financial
statements.
As of February 3, 2000, the Company had repurchased a total of 6,500,000 shares
of the Company's common stock under authorizations made by the Board of
Directors on August 4, 1999 and November 1, 1999. On February 3, 2000, the
Company's Board of Directors authorized the repurchase of up to an additional
4,000,000 shares of the Company's common stock.
77
59
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of Kaufman and Broad Home
Corporation:
We have audited the accompanying consolidated balance sheets of Kaufman and
Broad Home Corporation as of November 30, 1999 and 1998, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended November 30, 1999. 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 Kaufman and Broad
Home Corporation at November 30, 1999 and 1998, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended November 30, 1999, in conformity with accounting principles generally
accepted in the United States.
/s/ Ernst & Young LLP
- --------------------------------
Los Angeles, California
December 23, 1999
78
60
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/ MICHAEL F. HENN
- ---------------------------------
Michael F. Henn
Senior Vice President and Chief Financial Officer
December 23, 1999
79
61
STOCKHOLDER INFORMATION
COMMON STOCK PRICES
1999 1998
- ----------------------------------------------------------------------------------------------
High Low High Low
- ----------------------------------------------------------------------------------------------
First Quarter $ 31 $ 21 3/8 $ 26 7/8 $20 5/16
Second Quarter 28 3/4 21 34 1/2 22 5/16
Third Quarter 25 7/16 19 1/4 35 21 3/8
Fourth Quarter 25 9/16 16 3/4 31 1/4 17 1/8
==============================================================================================
DIVIDEND DATA
Kaufman and Broad Home Corporation paid a quarterly cash dividend of $.075 per
common share in 1999 and 1998.
ANNUAL STOCKHOLDERS' MEETING
The 2000 Annual Stockholders' meeting will be held at the Company's offices at
10990 Wilshire Boulevard, Seventh Floor, in Los Angeles, California, at 9:00
a.m. on Thursday, April 6, 2000.
STOCK EXCHANGE LISTINGS
Kaufman and Broad Home Corporation'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.
TRANSFER AGENT
ChaseMellon Shareholder Services
85 Challenger Road
Ridgefield Park, New Jersey 07660
(800) 356-2017
www.chasemellon.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 48,090,615 shares of common stock outstanding as of
February 1, 2000.
FORM 10-K
The Company's 1999 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 kbhomes.com.
HEADQUARTERS
Kaufman and Broad Home Corporation
10990 Wilshire Boulevard, Seventh Floor
Los Angeles, California 90024
(310) 231-4000
(310) 231-4222 Fax
Location and Community Information:
kbhomes.com
(800) 34-HOMES
INVESTOR CONTACT
Mary M. McAboy
Vice President, Investor and Public Relations
Kaufman and Broad Home Corporation
10990 Wilshire Boulevard, Seventh Floor
Los Angeles, California 90024
(310) 231-4033
mmcaboy@kbhomes.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
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
83
62
LIST OF EXHIBITS FILED
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
- ------- ----------- ----------
10.19 Amendment No. 1 to Term Loan Agreement, dated April 19,
1999........................................................
10.20 Amendment No. 3 to 1997 Revolving Loan Agreement, dated
April 19, 1999..............................................
10.21 Kaufman and Broad Home Corporation 1999 Incentive Plan......
10.22 Trust Agreement between Kaufman and Broad Home Corporation
and Wachovia Bank, N.A. as Trustee, dated as of August 27,
1999........................................................
10.23 Non-Employee Directors Stock Plan, as amended and Restated
as of December 6, 1999......................................
13 Pages 42 through 79 and page 83 of the Company's 1999 Annual
Report to
Stockholders................................................
22 Subsidiaries of the Company.................................
24 Consent of Independent Auditors.............................
27 Financial Data Schedule.....................................