1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended May 31, 1997.
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)
Delaware 95-3666267
(State of incorporation) (IRS employer identification number)
10990 Wilshire Boulevard
Los Angeles, California 90024
(310) 231-4000
(Address and telephone number of principal and executive offices)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
Yes [X] No [ ]
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S CLASSES OF
COMMON STOCK AS OF THE CLOSE OF THE PERIOD COVERED BY THIS REPORT.
Common stock, par value $1.00 per share, 38,850,486 shares outstanding
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KAUFMAN AND BROAD HOME CORPORATION
FORM 10-Q
INDEX
PAGE
NUMBER(S)
---------
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Statements of Income -
Six Months and Three Months ended May 31, 1997 and 1996 3
Consolidated Balance Sheets -
May 31, 1997 and November 30, 1996 4
Consolidated Statements of Cash Flows -
Six Months ended May 31, 1997 and 1996 5
Notes to Consolidated Financial Statements 6-8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 9-15
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 16
ITEM 5. OTHER INFORMATION 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 17
SIGNATURES 18
INDEX OF EXHIBITS 19
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
KAUFMAN AND BROAD HOME CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands Except Per Share Amounts - Unaudited)
Six Months Ended May 31, Three Months Ended May 31,
------------------------- -------------------------
1997 1996 1997 1996
--------- --------- --------- ---------
TOTAL REVENUES $ 760,586 $ 784,402 $ 414,202 $ 481,927
========= ========= ========= =========
CONSTRUCTION:
Revenues $ 746,676 $ 769,580 $ 407,041 $ 473,765
Construction and land costs (614,526) (632,332) (334,938) (388,376)
Selling, general and (99,814) (100,136) (51,513) (60,425)
administrative expenses
Non-cash charge for
impairment of long-lived assets - (170,757) - (170,757)
--------- --------- --------- ---------
Operating income (loss) 32,336 (133,645) 20,590 (145,793)
Interest income 2,251 1,443 1,164 725
Interest expense, net of
amounts capitalized (16,444) (18,726) (8,048) (10,624)
Minority interests in pretax
income of consolidated
joint ventures (114) (161) (61) (96)
Equity in pretax income
(loss) of unconsolidated
joint ventures 61 (1,739) 21 (1,507)
--------- --------- --------- ---------
Construction pretax income (loss) 18,090 (152,828) 13,666 (157,295)
--------- --------- --------- ---------
MORTGAGE BANKING:
Revenues:
Interest income 6,637 7,448 3,028 3,781
Other 7,273 7,374 4,133 4,381
--------- --------- --------- ---------
13,910 14,822 7,161 8,162
Expenses:
Interest (6,222) (6,895) (2,976) (3,426)
General and administrative (2,129) (2,595) (1,146) (1,323)
--------- --------- --------- ---------
Mortgage banking pretax income 5,559 5,332 3,039 3,413
--------- --------- --------- ---------
TOTAL PRETAX INCOME (LOSS) 23,649 (147,496) 16,705 (153,882)
Income taxes (8,500) 53,100 (6,000) 55,400
--------- --------- --------- ---------
NET INCOME (LOSS) $ 15,149 $ (94,396) $ 10,705 $ (98,482)
========= ========= ========= =========
EARNINGS (LOSS) PER SHARE $ .38 $ (2.37) $ .27 $ (2.47)
========= ========= ========= =========
AVERAGE SHARES OUTSTANDING 39,709 39,828 39,729 39,839
========= ========= ========= =========
CASH DIVIDENDS PER COMMON SHARE $ .150 $ .150 $ .075 $ .075
========= ========= ========= =========
See accompanying notes.
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KAUFMAN AND BROAD HOME CORPORATION
CONSOLIDATED BALANCE SHEETS
(In Thousands - Unaudited)
May 31, November
1997 30, 1996
----------- ----------
ASSETS
CONSTRUCTION:
Cash and cash equivalents $ 11,666 $ 4,723
Trade and other receivables 121,593 107,037
Inventories 789,296 780,302
Investments in unconsolidated joint ventures 7,736 8,312
Goodwill 35,192 39,356
Other assets 64,989 60,429
----------- ----------
1,030,472 1,000,159
----------- ----------
MORTGAGE BANKING:
Cash and cash equivalents 6,121 5,058
Receivables:
First mortgages and mortgage-backed securities 78,494 81,536
First mortgages held under
commitment of sale and other receivables 105,406 153,459
Other assets 3,000 3,282
----------- ----------
193,021 243,335
----------- ----------
TOTAL ASSETS $ 1,223,493 $1,243,494
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CONSTRUCTION:
Accounts payable $ 127,882 $ 151,791
Accrued expenses and other liabilities 76,673 96,986
Mortgages and notes payable 498,496 442,629
----------- ----------
703,051 691,406
----------- ----------
MORTGAGE BANKING:
Accounts payable and accrued expenses 6,323 7,481
Notes payable 103,418 134,956
Collateralized mortgage obligations
secured by mortgage-backed securities 64,726 68,381
----------- ----------
174,467 210,818
----------- ----------
Minority interests in consolidated joint ventures 657 920
----------- ----------
Common stock 38,850 38,828
Paid-in capital 184,071 183,801
Retained earnings 122,723 113,398
Cumulative foreign currency translation adjustments (326) 4,323
----------- ----------
TOTAL STOCKHOLDERS' EQUITY 345,318 340,350
----------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,223,493 $1,243,494
=========== ==========
See accompanying notes.
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KAUFMAN AND BROAD HOME CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands - Unaudited)
Six Months Ended May 31,
------------------------
1997 1996
-------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 15,149 $ (94,396)
Adjustments to reconcile net income
(loss) to net cash provided (used)
by operating activities:
Equity in pretax (income) loss of
unconsolidated joint ventures (61) 1,739
Minority interests in pretax
income of consolidated joint ventures 114 161
Amortization of discounts and issuance costs 938 702
Depreciation and amortization 5,883 4,790
Provision for deferred income taxes (3,174) (35,063)
Non-cash charge for impairment of long-lived assets - 170,757
Change in assets and liabilities net of
effects from purchase of Rayco:
Receivables 33,301 78,612
Inventories (7,070) 78,337
Accounts payable, accrued expenses
and other liabilities (45,380) (60,246)
Other, net (6,064) (802)
-------- ---------
Net cash provided (used) by operating activities (6,364) 144,591
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Rayco, net of cash acquired - (80,556)
Investments in unconsolidated joint ventures 637 (4,940)
Net originations of mortgages held for
long-term investment (1,105) (317)
Payments received on first mortgages
and mortgage-backed securities 4,484 11,453
Other, net (1,491) (5,163)
-------- ---------
Net cash provided (used) by investing activities 2,525 (79,523)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from (payments on)
credit agreements and other short-term borrowings 25,792 (16,308)
Payments on collateralized mortgage obligations (4,280) (10,906)
Payments on mortgages, land contracts and other loans (3,466) (37,802)
Payments to minority interests in
consolidated joint ventures (377) (142)
Payments of cash dividends (5,824) (10,281)
-------- ---------
Net cash provided (used) by financing activities 11,845 (75,439)
-------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 8,006 (10,371)
Cash and cash equivalents at beginning of period 9,781 43,382
-------- ---------
Cash and cash equivalents at end of period $ 17,787 $ 33,011
======== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Interest paid, net of amounts capitalized $ 23,397 $ 26,693
======== =========
Income taxes paid $ 5,240 $ 3,241
======== =========
SUPPLEMENTAL DISCLOSURES OF NONCASH
ACTIVITIES:
Cost of inventories acquired through
seller financing $ 1,924 $ 15,397
======== =========
See accompanying notes.
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KAUFMAN AND BROAD HOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in the annual financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted.
These unaudited consolidated financial statements should be read in
conjunction with the consolidated financial statements for the year ended
November 30, 1996 contained in the Company's 1996 Annual Report to
Stockholders.
In the opinion of the Company, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of only normal
recurring accruals) necessary to present fairly the Company's financial
position as of May 31, 1997, the results of its consolidated operations for
the six months and three months ended May 31, 1997 and 1996, and its
consolidated cash flows for the six months ended May 31, 1997 and 1996. The
results of operations for the six months and three months ended May 31, 1997
are not necessarily indicative of the results to be expected for the full
year. The consolidated balance sheet at November 30, 1996 has been taken from
the audited financial statements as of that date.
2. Inventories
Inventories consist of the following (in thousands):
May 31, November 30,
1997 1996
-------- -----------
Homes, lots and improvements in production $625,024 $646,069
Land under development 164,272 134,233
-------- --------
Total inventories $789,296 $780,302
======== ========
The impact of capitalizing interest costs on consolidated pretax income is as
follows (in thousands):
Six Months Ended Three Months Ended
------------------------ -------------------------
May 31, May 31, May 31, May 31,
1997 1996 1997 1996
-------- -------- -------- ---------
Interest incurred $ 26,523 $ 33,935 $ 13,350 $ 17,882
Interest expensed (16,444) (18,726) (8,048) (10,624)
-------- -------- -------- --------
Interest capitalized 10,079 15,209 5,302 7,258
Interest amortized (10,500) (9,461) (4,758) (5,759)
-------- -------- -------- --------
Net impact on pretax $ (421) $ 5,748 $ 544 $ 1,499
======== ======== ======== ========
3. Earnings Per Share
The computation of earnings per share is based on the weighted average number
of common shares, equivalent Series B convertible preferred shares and common
share equivalents outstanding during the applicable period. All of the
Company's Series B convertible preferred shares were converted into shares of
the Company's common stock on April 1, 1996, the mandatory conversion date.
Prior to their conversion, the Series B convertible preferred shares were
considered common stock due to their being subject to mandatory
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KAUFMAN AND BROAD HOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
conversion into common stock, and the related dividends were not deducted
from net income for purposes of calculating earnings per share. Common share
equivalents include dilutive stock options using the treasury stock method.
If, for purposes of calculating earnings per share, the Series B convertible
preferred shares were excluded from the weighted average shares outstanding
and the related dividends deducted from net income, the computation would
have resulted in a loss per share of $2.80 and $2.68 for the six months and
three months ended May 31, 1996, respectively. This computation is not
applicable for the six months and three months ended May 31, 1997 due to the
conversion of the Series B convertible preferred shares into common stock in
April 1996.
4. Acquisition
On March 1, 1996, the Company acquired San Antonio, Texas-based Rayco, Ltd.
and affiliates for a total purchase price of approximately $104.5 million,
including cash to pay off certain debt assumed. The total purchase price for
the San Antonio operations was based on the net book values of the entities
purchased and the assumption of certain debt. The acquisition was accounted
for as a purchase with the results of operations of the acquired entities
included in the Company's consolidated financial statements as of the date of
acquisition. The purchase price was allocated based on estimated fair values
at the date of acquisition. The excess of the purchase price over the fair
value of net assets acquired was $32.3 million and is being amortized on a
straight-line basis over a period of seven years.
The following unaudited pro forma information presents a summary of
consolidated results of operations of the Company and the San Antonio
operations as if the acquisition had occurred as of December 1, 1995, 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. The pro forma results for the six months ended
May 31, 1996 below are presented both before and after the $170.8 million
non-cash charge for impairment of long-lived assets (in thousands except per
share amounts).
Six Months Ended May 31,1996
----------------------------
After Before
non-cash non-cash
charge charge
--------- --------
Total revenues $ 843,113 $843,113
Total pretax income (loss) (144,492) 26,265
Net income (loss) (92,492) 16,765
Earnings (loss) per share (2.32) .42
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 Rayco acquisition been consummated as of December 1,
1995, nor are they necessarily indicative of future operating results.
5. Mortgages and Notes Payable
During the second quarter of 1997, the Company completed the renegotiation of
its $500 million domestic unsecured revolving credit agreement with various
banks. The Company's new $500 million unsecured revolving credit agreement,
dated April 21, 1997, is comprised of a $400 million revolving credit
facility scheduled to expire on April 30, 2001 and a $100 million 364-day
revolving credit facility. Upon expiration,
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KAUFMAN AND BROAD HOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
the $100 million revolving credit facility may be converted, at the Company's
option, to a term loan expiring on April 30, 2001. The new 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. Under
the terms of the new credit 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.
On February 24, 1997, the Company's mortgage banking subsidiary replaced its
$120 million commercial paper facility and $100 million mortgage loan
purchase facility with a $250 million 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
London Interbank Offered Rate or the Federal Funds Rate plus an applicable
spread on amounts borrowed. The amount outstanding under the facility is
secured by a borrowing base, which includes certain mortgage loans held under
commitment of sale and is repayable from proceeds on the sales of first
mortgages. There are no compensating balance requirements under the facility.
The terms of the mortgage warehouse facility include financial covenants and
restrictions which, among other things, require the maintenance of certain
financial statement ratios and a minimum tangible net worth.
6. Reclassifications
Certain amounts in the consolidated financial statements of 1996 have been
reclassified to conform to the 1997 presentation.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
OVERVIEW
Total revenues for the three months ended May 31, 1997 decreased 14.1% to
$414.2 million from $481.9 million for the three months ended May 31, 1996.
For the six months ended May 31, 1997, total revenues decreased 3.0% to
$760.6 million from $784.4 million in the year-earlier period. Reduced
housing revenues primarily accounted for the decreases in total revenues for
the three and six month periods, although commercial and land sale revenues
were also lower. Net income for the second quarter of 1997 totaled $10.7
million or $.27 per share compared to a net loss of $98.5 million or $2.47
per share for the same period a year ago. Results in the year ago quarter
included an after tax non-cash charge of $109.3 million for impairment of
long-lived assets. Excluding this non-cash charge, the Company's operations
earned $10.8 million or $.27 per share in the 1996 second quarter. For the
six months ended May 31, 1997, the Company recorded net income of $15.1
million or $.38 per share compared to a net loss of $94.4 million or $2.37
per share for the six months ended May 31, 1996. Excluding the non-cash
charge for impairment of long-lived assets, earnings for the first half of
1996 totaled $14.9 million or $.37 per share. The earnings for the three
months ended May 31, 1997 were flat when compared to the year-earlier period
(excluding the non-cash charge), as reductions in overhead and interest
expense offset the impact of a 14.5% decrease in unit deliveries. Earnings
for the first half of 1997 included six months of operating results from the
Company's San Antonio division, while results for the first half of 1996
included only three months as the Company's acquisition of its San Antonio
operations occurred on March 1, 1996.
CONSTRUCTION
Revenues decreased by $66.8 million, or 14.1%, to $407.0 million in the
second quarter of 1997 from $473.8 million in the second quarter of 1996 due
mainly to a decrease in housing revenues. Residential revenues for the period
decreased by $53.3 million to $400.4 million from $453.7 million in the
year-earlier period primarily as a result of the 14.5% decrease in unit
deliveries, partly offset by a 3.2% increase in the average selling price.
Housing revenues in the United States decreased to $369.8 million on 2,306
unit deliveries in the second quarter of 1997, compared to $418.8 million on
2,718 units in the corresponding quarter of 1996, primarily reflecting a
decline in housing revenues from the Company's California operations.
California housing revenues for the second quarter of 1997 declined 17.0% to
$227.2 million on 1,095 unit deliveries from $273.7 million on 1,453 unit
deliveries in the year-earlier period. Revenues from other U.S. housing
operations totaled $142.6 million in the current quarter compared to $145.1
million in the same quarter a year ago. California deliveries in the second
quarter of 1997 decreased 24.6% from the second quarter of 1996, reflecting a
decline of 20.0% in the average number of active communities, coupled with
overall company strategies to de-emphasize the use of sales incentives and
maintain lower levels of standing unsold inventory through an increased
emphasis on contracting for sales prior to construction ("pre-sales"). Other
U.S. deliveries decreased slightly to 1,211 units in the second quarter of
1997 from 1,265 units in the second quarter of 1996. Revenues from French
housing operations during the three months ended May 31, 1997 decreased to
$28.4 million on 151 units from $34.3 million on 160 units in the
year-earlier period.
During the second quarter of 1997, the Company's overall average selling
price increased 3.2% to $162,400 from $157,300 in the same quarter a year
ago, reflecting an increase in the domestic average selling price partially
offset by a decrease in the French average selling price. The Company's
domestic average selling price rose 4.1% to $160,400 in the second quarter of
1997, as the California average selling price increased 10.2% to $207,500
from $188,300 and the average selling price in other U.S. operations
increased 2.7% to $117,800 from $114,700. These increases occurred as a
result of a change in product mix favoring a greater number of higher priced
urban in-fill locations and first time move up sales. In France, the average
selling price in the second quarter of 1997 decreased 12.1% to $188,300 from
$214,100 in the year-earlier quarter due to a change in the mix of
deliveries.
Revenues generated from commercial development activities in France totaled
$2.2 million for the three months ended May 31, 1997 compared to $7.7 million
generated in the same period a year ago, reflecting the reduced opportunities
in the French commercial market which remains mired in a long-term recession.
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Revenues from land sales totaled $4.5 million in the second quarter of 1997
compared to $12.4 million in the second quarter of 1996. Generally, land sale
revenues fluctuate based on the Company's decision to maintain or decrease
its land ownership position in certain markets, the strength and number of
competing developers entering markets at given points in time, the
availability of land in markets served by the Company's housing divisions,
and/or prevailing market conditions. The higher level of land sale revenues
in the second quarter of 1996 was impacted by the Company's aggressive asset
sale program implemented as part of its debt reduction strategy in 1996.
For the first six months of 1997, construction revenues totaled $746.7
million, decreasing $22.9 million from $769.6 million for the same period a
year ago, primarily as a result of lower housing and commercial revenues.
Housing revenues totaled $734.2 million on 4,573 units in the first half of
1997 compared to $743.4 million on 4,566 units for the same period a year
ago. Results for the first half of 1997 included a full six months of
operating results for the Company's San Antonio division, while results for
the first half of 1996 included only three months as the Company's
acquisition of its San Antonio operations occurred on March 1, 1996. In the
first quarter of 1997, the San Antonio division recorded construction
revenues of $57.6 million on 611 deliveries. Housing operations in the United
States produced revenues of $683.7 million on 4,322 units in the first six
months of 1997 and $688.3 million on 4,300 units in the comparable period of
1996. During the first half of 1997, California housing revenues decreased to
$411.0 million from $475.3 million in the first half of 1996, reflecting a
21.2% decline in unit deliveries during the period. Housing revenues from
other U.S. operations increased to $272.7 million in the first six months of
1997 from $213.0 million in the prior years period primarily as a result of
the additional three months of San Antonio operations included in the 1997
period. Deliveries in California decreased to 2,009 units for the first six
months of 1997 from 2,548 for the first six months of 1996, while deliveries
from other United States operations increased to 2,313 from 1,752 units
during the same period. French housing revenues totaled $45.9 million on 234
units in the first half of 1997 and $53.7 million on 256 units in the
corresponding period of 1996.
The Company-wide average new home price decreased slightly to $160,600 in the
first six months of 1997 from $162,700 in the year-earlier period. The
domestic average selling price for the first half of 1997 decreased by 1.2%
from the comparable prior year period, reflecting a decline of 3.0% in the
average selling price in other U.S. operations to $117,900, partially offset
by an increase of 9.7% in the California average selling price to $204,600.
In France, the average selling price for the six month period decreased to
$196,000 in 1997 from $209,900 in 1996. The decrease in the average selling
price in other U.S. operations resulted from a change in the mix of
deliveries and the inclusion of six months of San Antonio operations in the
first half of 1997 versus only three months in the first half of 1996. The
San Antonio operations had an average selling price of $92,800 for the first
half of 1997. In California, the average selling price increased as a result
of a change in product mix favoring a greater number of higher priced urban
in-fill locations and first time move up sales.
Revenues from the development of commercial buildings in France decreased to
$2.2 million for the first six months of 1997 from $11.4 million in the
comparable period of 1996. Company-wide revenues from land sales totaled
$10.3 million for the first half of 1997 compared to $14.8 million for the
same period a year ago.
Operating income decreased by $4.4 million to $20.6 million in the second
quarter of 1997 from $25.0 million (excluding the $170.8 million non-cash
charge for impairment of long-lived assets) in the second quarter of 1996.
This decrease resulted as lower gross profits on revenues from housing,
commercial and land were only partially offset by reduced selling, general
and administrative expenses. Total gross profits decreased by $13.3 million,
or 15.6% to $72.1 million in the second quarter of 1997 from $85.4 million in
the prior year's period. During this same period, housing gross profits
decreased by $9.6 million to $72.2 million from $81.8 million. The decrease
in housing gross profits reflected lower unit volume in the second quarter of
1997. As a percentage of revenues, gross profits decreased to 17.7% in the
current quarter from 18.0% in the year-earlier quarter. This decrease was due
to a lower gross margin on commercial activities and land sales in the second
quarter of 1997 compared to the second quarter of 1996, as the housing gross
margin remained flat at 18.0% during these periods. Gross profits generated
from commercial activities in the current quarter decreased to $.4 million
from $2.5 million produced from such activities in the prior year's quarter.
During the second quarter of 1997, land sales resulted in a loss of $.5
million compared to profits of $1.1 million generated in the second quarter
of 1996.
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Selling, general and administrative expenses decreased by $8.9 million to
$51.5 million in the three months ended May 31, 1997 from $60.4 million in
the corresponding 1996 period. The improvement in selling, general and
administrative expenses was primarily due to lower unit volume as well as the
Company's cost containment efforts which resulted in reduced sales incentives
and advertising expenses, partially offset by increased sales commissions. As
a percentage of housing revenues, selling, general and administrative
expenses improved .4 percentage points to 12.9% in the current quarter
compared to 13.3% for the year-earlier period.
For the first six months of 1997, operating income decreased by $4.8 million
to $32.3 million from $37.1 million in the corresponding period of 1996
(excluding 1996's non-cash charge for impairment of long-lived assets). This
decrease was primarily due to lower gross profits on housing and commercial
activities during the first half of 1997. For the six month period, total
gross profits decreased by $5.0 million or 3.7% to $132.2 million in 1997
from $137.2 million in 1996 with housing gross profits decreasing by $1.3
million to $130.5 million from $131.8 million during this same period. Total
gross profits as a percentage of revenues decreased to 17.7% in the first
half of 1997 from 17.8% in the year-earlier period despite the housing gross
margin increasing .1 percentage point to 17.8% in the first half of 1997.
This decrease was primarily due to a lower gross margin on commercial
activities during the period. Gross profits generated from commercial
activities decreased to $.4 million during the first half of 1997 from $4.1
million in the prior year's period. During the first six months of both 1997
and 1996, land sales resulted in profits of $1.3 million.
Selling, general and administrative expenses decreased by $.3 million to
$99.8 million for the first six months of 1997 from $100.1 million for the
same period of 1996. This slight decrease was partly due to the inclusion of
six months of San Antonio operating results in the 1997 period compared to
only three months included in 1996. Additionally, selling, general and
administrative expenses for the 1997 period contained a higher proportion of
sales commissions, advertising and compensation expenses, as well as start up
costs related to operations in Austin and Dallas, Texas, partly offset by
lower sales incentives. As a percentage of housing revenues, selling, general
and administrative expenses increased by .1 percentage point to 13.6% for the
first six months of 1997 from 13.5% in the corresponding period of 1996.
Interest income totaled $1.2 million in the second quarter of 1997 compared
to $.7 million in the second quarter of 1996. For the first six months,
interest income totaled $2.3 million in 1997 and $1.4 million in 1996.
Interest income for the second quarter and first half of 1997 reflected an
increase in the interest bearing average balances of mortgages receivable
compared to the same periods a year ago.
Interest expense (net of amounts capitalized) decreased to $8.0 million in
the second quarter of 1997 from $10.6 million in the second quarter of 1996.
For the six months ended May 31, 1997, interest expense totaled $16.4 million
compared to $18.7 million for the same period of 1996. Gross interest
incurred in the three months and six months ended May 31, 1997 was lower than
that incurred in the corresponding year ago periods by $4.5 million and $7.4
million, respectively, reflecting a decrease in average indebtedness in 1997.
The Company's average debt level for the three months and six months ended
May 31, 1997 decreased from the same periods a year ago primarily as a result
of the Company's 1996 debt reduction strategy. The impact of the lower
interest incurred in both periods of 1997 was partly offset by a decline in
the percentage of interest capitalized. The percentage of interest
capitalized during the three months ended May 31, 1997 and 1996 was 39.7% and
40.6%, respectively. For the six month period ended May 31, this percentage
was 38.0% in 1997 and 44.8% in 1996. The lower 1997 capitalization rates
reflected a higher proportion of land in production in 1997 compared to 1996.
Minority interests in pretax income of consolidated joint ventures totaled
$.1 million in the second quarter of 1997 and 1996. For the first half of
1997, minority interests in pretax income of consolidated joint ventures
totaled $.1 million compared to $.2 million for the same period a year ago.
Minority interests, which primarily relate to commercial activities in
France, are expected to remain at relatively low levels, reflecting the
limited opportunities currently available in the French commercial market.
Equity in pretax income (loss) of unconsolidated joint ventures reflected
slightly positive results in the second quarter of 1997 compared to the $1.5
million loss recorded in the second quarter of 1996. The Company's joint
ventures recorded combined revenues of $6.2 million in the current quarter
compared to $1.3 million in the corresponding period of 1996. All of the
joint venture revenues in the second quarter of 1997 and 1996
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were generated from residential properties. For the first half of 1997, the
Company's equity in pretax income of unconsolidated joint ventures totaled
$.1 million compared to a $1.7 million loss in the same period of 1996.
Combined revenues from these joint ventures totaled $8.7 million in the first
half of 1997 and $2.1 million in the first half of 1996. Of these amounts,
revenues from residential properties accounted for $8.7 million in 1997 and
$2.0 million in 1996. The losses recorded in the three month and six month
periods of 1996 primarily related to a single French multi-family residential
project. As a result of the non-cash charge recorded in the second quarter of
1996 to reflect the impairment in unconsolidated joint ventures, the Company
does not anticipate incurring significant additional losses from these joint
ventures in the future.
MORTGAGE BANKING
Interest income and interest expense decreased by $.8 million and $.4
million, respectively, in the second quarter of 1997 compared to the same
quarter a year ago. For the first six months of 1997, interest income from
mortgage banking activities declined by $.8 million and related interest
expense dropped by $.7 million from the same period of 1996. The amounts for
the three and six month periods decreased due to the declining balances of
outstanding mortgage-backed securities and related collateralized mortgage
obligations, stemming from both regularly scheduled monthly principal
amortization and prepayment activity of mortgage collateral. In addition, the
decrease in interest expense resulted partly from the lower amount of notes
payable outstanding during the second quarter and first half of 1997 compared
to the same periods of 1996. Interest income and expense are expected to
continue to decline as the mortgage-backed securities and related
collateralized mortgage obligations pay off at approximately the same rate.
Other mortgage banking revenues decreased by $.3 million to $4.1 million in
the second quarter of 1997 from $4.4 million in the prior year's second
quarter. For the first half of 1997, other mortgage banking revenues totaled
$7.3 million, a decrease of $.1 million from $7.4 million in the first half
of 1996. These decreases were the result of lower gains on the sale of
mortgages and servicing rights due to a reduced level of mortgage
originations.
General and administrative expenses associated with mortgage banking
activities decreased by $.2 million to $1.1 million in the second quarter of
1997 from $1.3 million for the same period a year ago. For the six month
period, these expenses were $2.1 million in 1997 and $2.6 million in 1996.
The decrease in general and administrative expenses in 1997 resulted
primarily from lower mortgage production levels and the Company's emphasis on
cost containment.
INCOME TAXES
Income tax expense totaled $6.0 million in the second quarter of 1997
compared to an income tax benefit of $55.4 million in the prior year's second
quarter. For the first six months of 1997, income tax expense totaled $8.5
million compared to an income tax benefit of $53.1 million in the same period
of 1996. The income tax amounts represented effective income tax rates of
approximately 36% in both 1997 and 1996. The tax benefits established in the
three and six month periods of 1996 reflected the pretax losses reported by
the Company as a result of the non-cash charge for impairment of long-lived
assets recorded in the second quarter of 1996.
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 concerns with internally
generated operating results and external sources of debt and equity
financing. For the six months ended May 31, 1997, net cash provided by
operating, investing and financing activities totaled $8.0 million compared
to $10.4 million used in the first six months of 1996.
The Company's operating activities for the first six months of 1997 used cash
of $6.4 million compared to $144.6 million provided during the same period of
1996. For the six months ended May 31, 1997, the Company primarily used cash
to pay down $45.4 million in accounts payable, accrued expenses and other
liabilities, and to fund an investment of $7.1 million in inventories
(excluding $1.9 million of inventories acquired through seller financing).
The use of cash was partially offset by six months' earnings of $15.1
million, a reduction in receivables of $33.3 million and various noncash
items deducted from net income. The
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reduction in receivables mainly related to a lower balance of mortgages held
under commitment of sale due to lower mortgage origination volume in the
second quarter of 1997 compared to the fourth quarter of 1996.
Operating activities for the first six months of 1996 provided cash from a
reduction in inventories totaling $78.3 million (excluding $15.4 million of
inventories acquired through seller financing), a reduction in receivables of
$78.7 million and various non-cash items, including a $170.8 million non-cash
charge for impairment of long-lived assets, offsetting the net loss of $94.4
million (which included the non-cash charge for impairment of long-lived
assets) recorded for the first half of 1996. The cash provided was partially
offset by uses of cash, including a $35.1 million change in deferred taxes
and a $60.2 million decrease in accounts payable, accrued expenses and other
liabilities. During the second quarter of 1996, excluding the acquisition of
the San Antonio operations and the non-cash charge for impairment of
long-lived assets, inventories decreased, primarily in the United States, as
the Company began to execute its debt reduction strategy in 1996, including
its aggressive asset sale program. The reduction in receivables related
primarily to a decrease in mortgage origination volume in the second quarter
of 1996 compared to the fourth quarter of 1995.
Cash provided by investing activities totaled $2.5 million in the first half
of 1997 compared to $79.5 million used in the year-earlier period. In the
first six months of 1997, cash was provided from $4.5 million in proceeds
received from mortgage-backed securities, which were principally used to pay
down the collateralized mortgage obligations for which the mortgage-backed
securities have served as collateral, and $.6 million in distributions
related to investments in unconsolidated joint ventures. Among amounts
partially offsetting these proceeds was $1.5 million of cash used for other
investing activities. In the first six months of 1996, $80.6 million of cash
was used for the purchase of Rayco, acquired on March 1, 1996, $4.9 million
was used for investments in unconsolidated joint ventures and $5.2 million
was used for other investing activities. Partially offsetting these 1996 six
month uses was $11.5 million of proceeds received from mortgage-backed
securities.
Financing activities in the first half of 1997 provided $11.8 million of
cash, while financing activities used $75.4 million in the first half of
1996. In the first six months of 1997, cash was provided from net proceeds
from borrowings of $22.3 million. Partially offsetting the cash provided were
cash dividend payments of $5.8 million and payments on collateralized
mortgage obligations of $4.3 million. Financing activities in the first six
months of 1996 resulted in net cash outflows due mainly to net payments on
borrowings of $54.1 million, payments on collateralized mortgage obligations
of $10.9 million and cash dividend payments of $10.3 million.
During the second quarter of 1997, as a result of improved operating results
and a lower debt to total capital ratio, the Company completed the
renegotiation of its $500 million domestic unsecured revolving credit
facility. Under the new $500 million credit facility, a total of $438.0
million was available for future use as of May 31, 1997. The Company's French
unsecured financing agreements had in the aggregate $18.6 million available
at May 31, 1997. In addition, the Company's mortgage banking operations had
$146.6 million available under its $250 million secured revolving mortgage
warehouse facility at quarter-end. As a result of the Company's execution of
an aggressive debt reduction plan throughout 1996, its financial leverage, as
measured by the ratio of debt to total capital, was 59.1% at the end of the
1997 second quarter compared to 68.4% at the end of the 1996 second quarter.
Despite $104.5 million in borrowings made during the second quarter of 1996
to acquire the San Antonio operations, the Company achieved the goal it set a
year ago of targeting its financial leverage within the range of 50% to 60%.
The Company believes it has adequate resources and sufficient credit line
facilities to satisfy its current and reasonably anticipated future
requirements for funds to acquire capital assets and land, to construct
homes, to fund its mortgage banking operations and to meet any other needs of
its business, both on a short and long-term basis.
OUTLOOK
The Company's residential backlog as of May 31, 1997 consisted of 4,417
units, representing aggregate future revenues of approximately $667.5
million, up 26.3% and 34.3%, respectively, from 3,497 units, representing
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aggregate future revenues of approximately $497.2 million, a year ago.
Company-wide net orders for the second quarter of 1997 totaled 3,396, up 4.9%
compared to the second quarter of 1996.
The Company's operations in the United States accounted for approximately
$596.7 million of backlog value on 4,050 units at May 31, 1997, up from
$419.7 million on 3,133 units at May 31, 1996, reflecting higher backlogs
from both California and other U.S. operations. Backlog in California
increased to approximately $288.7 million on 1,398 units at May 31, 1997 from
$182.7 million on 947 units at May 31, 1996 due primarily to the Company's
strategy of emphasizing pre-sales. However, in California net orders declined
6.4% in the second quarter of 1997 due to reduced emphasis on sales
incentives, a temporary absence of new home communities in certain strong
markets in Northern California, and fewer active communities in the state
compared to a year ago. Other U.S. operations also demonstrated
year-over-year growth in backlog levels with the backlog value at May 31,
1997 increasing to approximately $308.0 million on 2,652 units from $237.0
million on 2,186 units at May 31, 1996, reflecting a 20.2% increase in other
U.S. net orders.
In France, the value of residential backlog at May 31, 1997 was approximately
$66.6 million on 351 units, compared to $72.2 million on 337 units a year
earlier. The Company's net orders in France decreased by 4.6% during the
second quarter of 1997 to 230 units from 241 units for the same period a year
ago. Backlog associated with consolidated commercial development activities
was valued at approximately $6.1 million at May 31, 1997 compared to $.6
million at May 31, 1996. The relatively low levels of commercial backlog in
1997 and 1996 reflected continued reduced opportunities in the French
commercial market.
In Mexico, the value of residential backlog at May 31, 1997 was approximately
$4.2 million on 16 units compared to $5.3 million on 27 units at May 31,
1996. Operations in Mexico generated 9 net orders in the second quarter of
1997, compared to 8 net orders generated in the same period a year ago. The
new home market in Mexico remains seriously hampered by the depressed value
of the peso and economic instability created by its devaluation. Despite
troubled conditions and an unsettled economic environment, demand for housing
in Mexico remains substantial. The Company continues to closely monitor its
level of activity in Mexico and the desirability of expanding its market
presence there.
Substantially all of the homes included in residential backlog are expected
to be delivered in 1997; however, cancellations could occur, particularly if
market conditions deteriorate or mortgage interest rates increase, thereby
decreasing backlog and related future revenues.
For the remainder of the year, the Company intends to continue to focus on
its two 1997 strategic initiatives: acceleration of the Company's growth and
the implementation of a substantially different operational business model
integrating many of the basic operating characteristics of the business model
used in the San Antonio operations, including an emphasis on pre-sales, a
de-emphasis of sales incentives and maintaining lower levels of standing
inventory. The Company made excellent progress with regard to these
initiatives during the first half of 1997 and anticipates these strategies
will favorably impact revenues and earnings in the second half of 1997, as
net orders have recently improved. As expected, the Company's focus also
resulted in higher backlog levels at the end of the second quarter compared
to year ago levels, as well as an increase in the percentage of sold
inventory in production at May 31, 1997 to 71.0% compared to 59.0% at May 31,
1996.
Company-wide net orders for the seven weeks ending June 22, 1997 increased
37.8% from the net orders for the comparable period of 1996. During this same
seven week period, domestic net orders were up 38.7% in 1997 from the prior
year's period, reflecting a 39.9% increase in California net orders and a
37.3% increase in net orders from other U.S. operations. The Company expects
California net order comparisons to continue to be favorable in the second
half of 1997, as a greater number of communities are expected to be open.
However, mortgage rate increases beyond those effectuated by the Federal
Reserve Board in March 1997, continuing rate volatility, an appreciable
decline in consumer confidence and/or other factors could mitigate the
effects of the Company's anticipated community openings.
Although an essential element of the Company's new business model, the
increased emphasis on pre-sales could result in a modest reduction in
expected unit deliveries in the third quarter as the Company's backlog
lengthens out. Despite the Company's generally cautious outlook for the third
quarter of 1997, the Company continues to anticipate higher overall delivery
volumes for full-year 1997 compared to 1996. Assuming stable or improving
business conditions, employment, interest rates and consumer confidence in
its major markets,
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the Company continues to believe that the anticipated increase in delivery
volumes and continued progress on the two 1997 strategic initiatives will
result in improved operating income and earnings per share in 1997 compared
to 1996. The Company continues to believe that its accelerated growth
strategy combined with the integration of its new operational business model
will also provide long-term benefits to its operations beyond 1997.
SAFE HARBOR STATEMENT
Investors are cautioned that certain statements contained herein (except for
historical information) are "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995, which involves
certain risks and uncertainties. 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 estimates of future revenues, earnings or
prospects 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 the Company, economic and market
factors, the homebuilding industry and assumptions made by management. These
statements are not guaranties of future performance.
Actual events and results may differ materially from those expressed or
forecasted in the forward-looking statements due to factors which include,
but are not limited to, changes in general economic conditions, material
prices, labor costs, interest rates, consumer confidence, seasonality, the
availability and cost of land in desirable areas, competition, currency
exchange rates, conditions in the overall homebuilding market in the
Company's geographic markets (including the historic cyclicality of the
industry), population growth, property taxes, delays in construction
schedules and the entitlement process, environmental factors and governmental
regulations affecting the Company's operations. See the Company's Annual
Report on Form 10-K for the year ended November 30, 1996 and other Company
filings with the Securities and Exchange Commission for a further discussion
of risks and uncertainties applicable to the Company's business.
The Company undertakes no obligation to update any forward-looking statements
in this Report on Form 10-Q or elsewhere.
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PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 3, 1997, at the Company's 1997 Annual Meeting of Stockholders, the
following matter was submitted for stockholder vote:
Election of Directors. Messrs. Antoine Jeancourt-Galignani, Bruce Karatz
and Charles R. Rinehart were re-elected as directors. Mr.
Jeancourt-Galignani received 31,712,981 affirmative votes with 3,294,356
votes withheld; Mr. Karatz received 34,703,091 affirmative votes with
304,246 votes withheld; and Mr. Rinehart received 34,713,485 affirmative
votes with 293,852 votes withheld.
Messrs. Ronald W. Burkle, Ray R. Irani, Guy Nafilyan and Luis G. Nogales
continue as directors and, if nominated, will next stand for re-election
at the 1998 Annual Meeting of Stockholders; Messrs. James A. Johnson,
Sanford C. Sigoloff and Ms. Jane Evans also continue as directors and, if
nominated, will next stand for re-election at the 1999 Annual Meeting of
Stockholders.
ITEM 5. OTHER INFORMATION
The following table presents residential information in terms of unit
deliveries to home buyers and net orders taken by geographical market for the
three months and six months ended May 31, 1997 and 1996, together with
backlog data in terms of units and value by geographical market as of May 31,
1997 and 1996.
Three Months Ended May 31,
----------------------------------------
Deliveries Net Orders
---------------- ---------------
Market 1997 1996 1997 1996
------ ----- ----- ----- ----
California 1,095 1,453 1,476 1,577
Other United States 1,211 1,265 1,681 1,399
France 151 160 230 241
Other 8 5 9 21
----- ----- ----- -----
Total 2,465 2,883 3,396 3,238
===== ===== ===== =====
Six Months Ended May 31,
-----------------------------------
Backlog - Value
Deliveries Net Orders Backlog - Units In Thousands
--------------- --------------- --------------- ---------------------
Market 1997 1996 1997 1996 1997 1996 1997 1996
------ ----- ----- ----- ----- ----- ----- ------ --------
California 2,009 2,548 2,553 2,869 1,398 947 $288,719 $182,718
Other United States 2,313 1,752 3,209 1,939 2,652 2,186* 307,977 236,970*
France 234 256 370 364 351 337 66,582 72,215
Other 17 10 19 42 16 27* 4,224 5,265*
----- ----- ----- ----- ----- ----- -------- --------
Total 4,573 4,566 6,151 5,214 4,417 3,497* $667,502 $497,168*
===== ===== ===== ===== ===== ===== ======== ========
*Backlog amounts for the second quarter of 1996 were adjusted to reflect the
acquisition of Rayco and disposition of Canadian operations. Therefore,
first quarter 1996 backlog amounts combined with second quarter sales and
delivery activity will not equal ending backlog for the second quarter of
1996.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
- --------
11 Statement of Computation of Per Share Earnings (Loss).
24 The consent of Ernst & Young LLP, independent auditors, filed as an
exhibit to the Company's 1996 Annual Report on Form 10-K, is
incorporated by reference herein.
27 Financial Data Schedule.
Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended May 31, 1997.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KAUFMAN AND BROAD HOME CORPORATION
--------------------------------------
Registrant
Dated July 14, 1997 /s/ BRUCE KARATZ
--------------------------- --------------------------------------
Bruce Karatz
Chairman, President and
Chief Executive Officer
Dated July 14, 1997 /s/ MICHAEL F. HENN
--------------------------- --------------------------------------
Michael F. Henn
Senior Vice President and
Chief Financial Officer
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Page of
Sequentially
INDEX OF EXHIBITS Numbered Pages
---------------
11 Statement of Computation of Per Share Earnings (Loss) 20
27 Financial Data Schedule 21
19