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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED NOVEMBER 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM
--------------- TO
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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 NEW YORK STOCK EXCHANGE
STOCK
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. [X]
THE AGGREGATE MARKET VALUE OF VOTING STOCK HELD BY NON-AFFILIATES OF THE
COMPANY ON JANUARY 31, 1998 WAS $994,997,716.
THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S CLASSES OF
COMMON STOCK ON JANUARY 31, 1998 WAS AS FOLLOWS:
Common Stock (par value $1.00 per share) 38,997,784 shares
DOCUMENTS INCORPORATED BY REFERENCE
1997 Annual Report to Stockholders (incorporated into Part II).
Notice of 1998 Annual Meeting of Stockholders and Proxy Statement (incorporated
into Part III).
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PART I
ITEM 1. BUSINESS
GENERAL
The Company is a builder of single-family homes with domestic operations in
seven western states, and international operations in France and Mexico.
Domestically, the Company is the largest homebuilder west of the Mississippi
River, delivering more single-family homes than any other builder in the region.
Founded in 1957, the Company builds innovatively designed homes which cater
primarily to first-time home buyers, generally in medium-sized developments
close to major metropolitan areas. Internationally, the Company is among the
largest builders in greater metropolitan Paris, France, based on the number of
homes delivered. In France, the Company also builds commercial projects and
high-density residential properties, such as condominium and apartment
complexes. The Company provides mortgage banking services to domestic home
buyers 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. Its
telephone number is (310) 231-4000. As used herein, the term "Company" refers to
Kaufman and Broad Home Corporation and its subsidiaries, unless the context
indicates otherwise.
MARKETS
In 1997, the Company achieved an all time record 11,443 unit deliveries,
surpassing the previous Company record of 10,249 units established in 1996. The
increase in deliveries in 1997 was primarily due to the Company's expansion of
its domestic operations outside California. During 1997, the average number of
active communities operated by the Company was 165, an increase of approximately
8% over 1996. The average selling price of the Company's homes was $159,700 in
1997, down 2.2% from 1996.
The Company's principal geographic markets as of November 30, 1997 were:
California; other United States (Arizona, Colorado, Nevada, New Mexico, Texas
and Utah); France (principally metropolitan Paris); and Mexico City, Mexico. The
Company delivered its first homes in California in 1963, France in 1970, Nevada
in 1993, Arizona and Colorado in 1994, New Mexico and Utah in 1995, and Texas
and Mexico in 1996. The Company broadened its market position in Texas in 1997,
delivering its first homes in Austin during the year.
To enhance its operating capabilities in regional submarkets, the Company
conducted its domestic homebuilding business in 1997 through six divisional and
four satellite offices in California, one divisional office in each of Nevada,
Arizona, Colorado, New Mexico and Utah, and three divisional offices in Texas.
Internationally, the Company operates its construction business through two
divisional offices in France and one divisional office in Mexico.
California. The Company benefited during the 1980s from the relative
strength and growth of the California housing market. During the first half of
the 1990s, however, weak conditions for new housing and general recessionary
trends in California persisted, prompting the Company to diversify its business
through aggressive expansion into other western states. Market conditions in
many markets within California (particularly in Northern California) improved in
1997, with increases in new housing permits issued in the state of approximately
13% from the prior year. Nevertheless, the Company continues to be selective in
its land investments in California while focusing on improving gross margins,
reducing overhead expenses and maximizing rates of return. In 1997, the
Company's average number of active communities in California declined
approximately 11%, and as a result, its deliveries in the state totaled 4,731,
decreasing nearly 9% from the previous year. The Company's market share in
California fell to 6.2% in 1997 from 7.3% in 1996, primarily due to the
Company's strategic shift away from a market share focus. Despite this decrease,
however, the Company continues to have the largest market share in California,
with its closest competitor having a market share totaling less than half that
of the Company.
In Southern California, the Company concentrates its home building activity
in Los Angeles, Kern, San Bernardino, Riverside, Ventura, Orange and San Diego
counties. In Northern California, the Company's activities are concentrated in
the San Francisco Bay-Oakland-San Jose, Monterey Bay, Sacramento, Central Valley
and Fresno regions.
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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 ranged in size from approximately 900 to 3,000 square feet
in 1997 and sold at an average price of $208,500, well below the statewide new
home average of $242,800, as a result of the Company's emphasis on the
entry-level market. The Company's 1997 average selling price in California
increased approximately 8% from the prior year reflecting a shift in mix to
relatively higher-priced homes and general improvement in the state's new home
market.
Other United States. 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 look for opportunities to expand its
domestic operations outside California. Deliveries from the Company's other U.S.
operations in 1997 totaled 5,642 units, up 31% from the prior year. This
increase was due to a higher number of average active communities, reflecting
the Company's growth strategy; the inclusion of twelve months of operating
results from the Company's San Antonio division in 1997 (versus nine months in
1996 resulting from the March 1, 1996 acquisition of these operations); and
start-up operations in Austin. The Company's domestic operations outside of
California accounted for approximately 54% of its domestic home deliveries in
1997, compared to approximately 45% in 1996.
The communities developed by the Company's other U.S. divisions primarily
consist of single-family detached entry-level homes. These homes ranged in size
from approximately 900 to 3,700 square feet in 1997 and sold at an average price
of $118,700. The average selling price of the Company's other U.S. homes
decreased in 1997 from $119,700 in 1996, reflecting the inclusion of a full year
of San Antonio operations which had an average selling price of $94,700 in 1997.
France. The French residential and commercial real estate markets,
particularly within the greater metropolitan Paris region, where the Company's
operations are concentrated, experienced substantial growth through the second
half of the 1980s as a strong economy and approaching European market
unification fueled business expansion and individual home purchases. In the
first half of the 1990s, however, the French economy experienced a significant
recession reflecting low consumer confidence, high unemployment and declines in
both consumer and business investments in real estate. The French economy
improved modestly in 1996 and continued to improve in 1997. The Company
continues to believe that the greater Paris metropolitan area (which is the
principal population, economic and government center of France) as well as other
French metropolitan areas continue to offer long term growth potential for
residential builders.
Housing deliveries from the Company's French operations increased
approximately 38% from the prior year to 1,032 units, primarily as a result of
the Company's acquisition of certain active developments of French homebuilder
SMCI. These developments, which consist of condominiums in Paris and other
cities in France, were acquired in mid-1997.
The Company's French homebuilding operations focused primarily on
single-family detached and attached homes in 1997, ranging in size from
approximately 800 to 1,900 square feet. The average selling price of the
Company's homes in France declined 25% to $155,500 in 1997 due to the inclusion
of lower-priced deliveries generated from SMCI developments. The Company's
French commercial operations, which have developed commercial office buildings
in Paris for sale to institutional investors, has become a smaller segment of
the French operations in recent years. With the completion of certain large
projects in the early 1990s, the Company's level of commercial operations has
declined as the market absorbs existing commercial properties. The Company's
French commercial activities are likely to remain at or below 1997 levels,
reflecting persistently poor conditions in the French commercial market and the
Company's strategy to focus on its residential development business.
Canada. In 1996, the Company received proceeds of $9.5 million from the
sale of all of the issued and outstanding shares of its Canadian subsidiary.
These proceeds were used to reduce the Company's debt. As the Company had been
slowly winding down its operations in Canada, the impact of the sale on the
Company's financial position and results of operations was not significant.
Mexico. The Company established its housing operation in Mexico in 1993
upon determining that the then-projected growth in the Mexican economy and
housing shortages in that country's major metropolitan areas would represent a
unique opportunity for the Company. The decline in the value of the peso in
early 1995 and the resulting economic recession created thereby seriously
hampered the new home market in Mexico. Despite difficult market
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conditions, in 1996 the Company delivered its first homes from a community near
Mexico City. In 1997, the Company's operations in Mexico achieved profitability
with housing deliveries increasing to 38 units, up 52% from the prior year.
Mexico's economy has shown signs of recovering from the country's deep recession
brought about by the devaluation of the peso. Nevertheless, economic and
political conditions remain unsettled and the Company continues to closely
monitor its level of activity in Mexico and the desirability of expanding its
market presence there.
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, New Mexico 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, 1997, 1996 and 1995
(excluding the effect of unconsolidated joint ventures).
YEARS ENDED NOVEMBER 30,
---------------------------------
1997 1996 1995
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California:
Unit deliveries............................................. 4,731 5,171 5,430
Average selling price....................................... $ 208,500 $ 192,900 $ 176,800
Total construction revenues (in millions)(1)................ $ 993.9 $ 1,058.0 $ 971.1
Other United States:
Unit deliveries............................................. 5,642 4,294 1,800
Average selling price....................................... $ 118,700 $ 119,700 $ 136,300
Total construction revenues (in millions)(1)................ $ 670.6 $ 516.9 $ 247.0
France:
Unit deliveries............................................. 1,032 749 574
Average selling price(2).................................... $ 155,500 $ 206,600 $ 203,700
Total construction revenues (in millions)(1)(2)............. $ 168.2 $ 171.4 $ 138.6
Other:
Unit deliveries............................................. 38 35 53
Average selling price(2).................................... $ 284,600 $ 212,500 $ 99,400
Total construction revenues (in millions)(1)(2)............. $ 10.9 $ 7.9 $ 10.2
Total:
Unit deliveries............................................. 11,443 10,249 7,857
Average selling price(2).................................... $ 159,700 $ 163,300 $ 168,900
Total construction revenues (in millions)(1)(2)............. $ 1,843.6 $ 1,754.2 $ 1,366.9
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(1) Total construction revenues include revenues from residential development,
commercial activities and land sales.
(2) Average selling prices and total construction revenues for France and Other
(Canada and Mexico) have been translated into U.S. dollars using weighted
average exchange rates for each period.
STRATEGY
The Company established two strategic initiatives for 1997 -- acceleration
of the Company's growth and the implementation of a new operational business
model, "KB2000", which integrates many of the basic operating principles that
were historically used in the Company's recently acquired San Antonio
operations. The Company plans to continue to deepen its focus on these
initiatives in 1998 to enhance its ability to achieve profit performance that is
more predictable, consistent and achievable.
The Company expects accelerated growth to occur in certain of its existing
markets as well as through new market entry. The Company has identified certain
existing homebuilding divisions as candidates for accelerated growth based upon
the applicable divisions' strength, size and ability to generate returns which
meet or exceed Company objectives and due to the general economic conditions of
their specific markets. In the markets specifically identified for accelerated
growth, the Company has set a goal that aggregate 1999 deliveries will
approximately double from comparable 1996
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delivery levels. In addition, the Company plans to enter new markets
(particularly additional metropolitan areas in Texas and other western states)
and achieve modest growth in existing markets such that, in aggregate, the
Company has established a goal of delivering in excess of 16,000 units
Company-wide in 1999. To supplement planned growth in both new and existing
markets, the Company intends to actively pursue the acquisition of strategically
desirable existing homebuilders. As of February 26, 1998, the Company was
actively engaged in consideration and due diligence review of several potential
acquisitions. There can be no assurance, however, that any of these potential
acquisitions will be consummated.
The KB2000 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: knowing the buyer, buying land consistent with targeted customers,
designing homes to meet customer needs through providing a wide array of
choices, emphasizing even flow production, establishing large backlogs through
pre-sale of homes, focusing on quality, partnering with third-party brokers and
offering integrated mortgage loan financing. The Company made significant
progress in implementing the KB2000 business model in 1997 by, among other
things, focusing on a 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.
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, 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 sizeable businesses in each of its markets in order to
maximize its competitive advantages and the benefits of the KB2000 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, construction and
rehabilitation 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 1997, the Company began implementation of KB2000,
which seeks to keep construction costs and base prices as low as possible while
promoting customer choice. Certain elements of this model include achieving a
deep 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
home buyers an abundance of choices and options which allow the customer to
customize their home to an extent not typically available with other builders.
As part of its implementation of KB2000, the Company opened its first four new
home showrooms in 1997 and plans to open six more in the first half of 1998.
These showrooms offer customers thousands of option combinations -- from floor
plans to fireplaces to garage doors in a retail space convenient to multiple
communities.
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 all of its residential markets, the sale of homes is carried out by the
Company's in-house sales force. The Company 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. The Company also markets
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its homes 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, large-scale promotions and the internet. In
all of its communities, the Company encourages participation of outside real
estate brokers in bringing prospective buyers to its communities.
In 1997, the Company partnered with Fox Broadcasting and The Pepsi-Cola
Company in sponsoring a national contest to win a full-size replica of "The
Simpsons" cartoon house built in a Company community in Henderson, Nevada. The
contest, which some in the media dubbed as "the most successful promotion in
homebuilding history," generated more than 1,700 articles or broadcast news
stories reaching more than a billion people worldwide. The contest resulted in
an increase in traffic to the Company's communities during the period of the
promotion, with net orders during the period rising compared to the same period
a year earlier.
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 20 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 and marketing results.
When feasible, the Company 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 in 1997
generally offered lot sizes ranging from approximately 3,200 to 8,400 square
feet. In many of its KB2000 communities, the Company offers several floor plans,
although only three or four model homes are typically constructed. In prior
years, the Company also acquired undeveloped and/or unentitled properties, often
with total lots significantly in excess of 250 lots; however, the acquisition of
such long term development properties is not consistent with the Company's
current land investment strategy. During 1996, the Company decided to
substantially eliminate its prior practice of investing in such long term
development projects in order to reduce the risks associated with such projects
and to facilitate the Company's four principal 1996 strategies: geographic
diversification, increased emphasis on return on investment, planned debt
reduction and improved operating margins. In France, typical single-family
developments consist of approximately 40 lots, with average lot sizes of 3,800
square feet.
Land Acquisition and Development. In accordance with the KB2000 business
model all home buyers 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; proximity to metropolitan areas; population, industrial
and commercial growth patterns; estimated costs of completed lot development;
customer preferences; and environmental matters. Senior corporate management
controls the commitment of the Company's resources for land acquisition and
utilizes a series of specific financial and budgetary controls, including after
tax internal rate of return requirements, in approving acquisition opportunities
identified by division land acquisition personnel. In 1995, the Company
implemented stricter standards for assessing all proposed land purchases based,
in part, upon specific discounted after tax cash flow internal rate of return
requirements and the Company began evaluating its operating divisions based upon
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.
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In the second quarter of 1996, management determined that it was in the
Company's best interest to accelerate the disposition of certain real estate
assets in order to help effectuate the Company's strategies to improve overall
return on investment, restore financial leverage to targeted levels, and
position the Company for continued geographic expansion. In addition, in 1996
the Company substantially eliminated its prior practice of investing in long
term development projects in order to reduce the operating risk associated with
such projects. The accelerated disposition of long term development assets
caused certain assets, primarily inventories and investments in unconsolidated
joint ventures in California and France, to be identified as being impaired and
to be written down. Certain of the Company's California properties were impacted
by the charge, while none of its non-California domestic properties were
affected. The Company's non-California domestic properties were not affected
since they were not held for long term development and were expected to be
economically successful such that they were determined not to be impaired.
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, 1997 and 1996. The table does not include acreage
which has not yet been approved for subdivision into lots. This excluded acreage
consists of 853 acres and 1,118 acres owned in the United States in 1997 and
1996, respectively.
TOTAL LOTS
HOMES/LOTS IN LAND UNDER LOTS UNDER OWNED OR
PRODUCTION DEVELOPMENT OPTION UNDER OPTION
--------------- --------------- -------------- ---------------
1997 1996 1997 1996 1997 1996 1997 1996
------ ------ ------ ------ ------ ----- ------ ------
California........... 4,454 6,545 8,948 7,960 7,965 7,689 21,367 22,194
Other United
States............. 8,103 5,897 4,266 3,877 6,380 1,554 18,749 11,328
France............... 767 477 210 217 715 275 1,692 969
Other................ 64 75 65 90 -- -- 129 165
------ ------ ------ ------ ------ ----- ------ ------
Total...... 13,388 12,994 13,489 12,144 15,060 9,518 41,937 34,656
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While the Company has significantly reduced the proportion of unentitled
and unimproved land purchases in its portfolio, when all acquired property is
considered, the Company has and expects to continue to purchase 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 only 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 continues to employ 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 the model homes. The construction of
production homes is generally contingent upon customer orders to minimize the
costs and risks of standing inventory. The Company began to focus on contracting
for sales prior to construction in 1996 as part of its debt reduction program
undertaken that year. The Company continued this focus with its KB2000 business
model which emphasizes pre-selling, maintaining stringent control of production
inventory and reducing unsold inventory in production. The pre-selling of homes
also benefits home buyers by allowing them to personalize their homes by
selecting from a wider range of customizing options. As a result of the
Company's pre-sale and backlog building strategies, unsold inventory units at
year end 1997 declined 16% from the prior year. In addition, the percentage of
sold inventory in production at year end 1997 rose to 67% from 44% at year end
1996.
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 materials to streamline the on-site
production phase. During the early 1990s, the Company developed systems for
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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 costs accurately. Wherever possible, the
Company seeks to acquire land and construct homes at prices below immediate
competitors on a per square foot basis.
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 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.
CYCLICALITY
The Company's business, and the housing industry in general, are cyclical.
The Company's operations and markets are affected by local and regional factors
such as local economies, demographic demand for housing, population growth,
property taxes and energy costs, and by national factors such as short and long
term interest rates, 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 sales activity typically occurring in the winter months.
The Company's 1997 financial results were affected by various factors,
including but not limited to, improved demand for new housing in certain markets
in California and in France, generally favorable economic conditions in the
Company's other U.S. markets, and low domestic and foreign interest rates.
BACKLOG
Sales of the Company's homes are made pursuant to standard sales contracts
which generally require a customer deposit at the time of execution and an
additional payment upon mortgage approval. Subject to particular contract
provisions, the Company generally permits customers to cancel their obligations
and obtain refunds of their deposits in the event mortgage financing is
unobtainable within a specified period of time.
Backlog consists of homes for which the Company has entered into a sales
contract but which it has not yet delivered. Ending backlog represents the
number of units in backlog from the previous period plus the number of net
orders (sales made less cancellations) taken during the current period minus
unit deliveries made during the current period. The backlog at any given time
will be affected by cancellations which most commonly result from the inability
of a prospective purchaser to obtain financing. Historically, the Company's
cancellation rates have increased during difficult economic periods. In
addition, deliveries of new homes typically increase from the first to the
fourth quarter in any year. The Company's backlog at November 30, 1997 stood at
4,214 units, approximately 48% higher than the 2,839 backlog units at year end
1996, primarily reflecting the implementation of the KB2000 business model which
focuses on a pre-sale and backlog building strategy. KB2000 initiatives also
caused the Company's backlog ratio to increase to 130.8% at year end 1997 from
115.8% at year end 1996 (Backlog ratio is defined as the ratio of beginning
backlog to actual deliveries in the succeeding quarter).
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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, 1997.
NET UNIT ENDING
ORDERS DELIVERIES BACKLOG*
------ ---------- --------
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
Fiscal 1996:
First Quarter......................... 1,976 1,683 1,705
Second Quarter........................ 3,238 2,883 3,497
Third Quarter......................... 2,650 2,749 3,398
Fourth Quarter........................ 2,375 2,934 2,839
Fiscal 1995:
First Quarter......................... 1,636 1,367 1,285
Second Quarter........................ 2,241 1,875 1,651
Third Quarter......................... 2,311 2,111 1,851
Fourth Quarter........................ 2,065 2,504 1,412
* Backlog amounts for 1997 have been adjusted to reflect the recently acquired
SMCI developments in France. Therefore, backlog amounts at November 30, 1996
combined with net order and delivery activity for 1997 will not equal ending
backlog at November 30, 1997. Backlog amounts for 1996 have been adjusted to
reflect the San Antonio acquisition and the disposition of the Canadian
operations. Therefore, backlog amounts at November 30, 1995 combined with net
order and delivery activity for 1996 will not equal ending backlog at November
30, 1996.
LAND AND RAW MATERIALS
Management believes that the Company's current supply of land is sufficient
for its reasonably anticipated needs over the next couple of years, and that it
will be able to acquire land on acceptable terms for future housing
developments. The principal raw materials used in the construction of homes are
concrete and forest products. 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. The Company makes bulk
purchases of such products at favorable prices from suppliers and instructs
subcontractors to submit bids based on such prices.
The principal materials used in the construction of French commercial
buildings are steel, concrete and glass.
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 sale revenues fluctuate based on the Company's decisions to maintain or
decrease its land ownership position in certain markets, 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's housing divisions, or
prevailing market conditions. Land sale revenues totaled $13.6 million in 1997,
$68.2 million in 1996 and $18.2 million in 1995. The 1996 results were
abnormally high due to an aggressive asset sale program undertaken by the
Company as part of its debt reduction strategy that year. Land sold in 1996 was
primarily property previously held for long term development which the Company
disposed of in order to redeploy the invested capital at potentially higher
returns.
8
10
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. The Company typically assists customers in arranging for
guaranteed maximum interest rates at the time of sale even though delivery may
take place in the future.
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 Anaheim,
Fremont, Los Angeles, Modesto, Newport Beach, Palmdale, Salinas, San Diego and
San Ramon, California; Las Vegas, Nevada; Phoenix, Arizona; Denver, Colorado;
Albuquerque, New Mexico; Salt Lake City, Utah; and Austin, Dallas 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 1997, approximately 46% of the mortgages originated for the
Company's customers were conventional (most of which conformed to Fannie Mae and
FHLMC guidelines), 35% were FHA-insured or VA-guaranteed (a portion of which are
adjustable rate loans), 11% were funded by mortgage revenue bond programs and 8%
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 1997, KBMC originated loans for
70% of the Company's domestic home deliveries. Generally, KBMC receives an
origination fee of approximately 1% of the principal amount of the loan.
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, like other mortgage bankers, 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.
For a small percentage of loans, and to the extent required for loans being
held for sale to investors, KBMC services the mortgages that it originates.
Servicing includes collecting and remitting loan payments, accounting for
principal and interest, making inspections of mortgaged premises as required,
monitoring delinquent mortgages and generally administering the loans.
KBMC receives fees for servicing mortgage loans, generally ranging from
.25% per annum to .50% per annum on the declining principal balances of the
loans. KBMC typically sells servicing rights on a regular basis for
substantially all of the loans it originates.
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 home buyer in France may also
have a third mortgage provided through credit unions or other employee groups.
9
11
EMPLOYEES
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, 1998, the Company had approximately 2,040 full-time
employees in its operations, including approximately 180 in KBMC's operations.
The Company considers its employee relationships to be good. No employees are
represented by a collective bargaining agreement.
COMPETITION AND OTHER FACTORS
The Company expects the use of the KB2000 business model, particularly the
aspects which involve gaining a deeper understanding of customer interests and
needs, to provide it with a long term competitive advantage. 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.
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. Indeed, the relatively low interest
rates which have been in effect throughout the mid-1990s have been instrumental
to the Company's improved domestic results.
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 $500
million 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 from a
series of foreign banks. 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 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 warehouse agreement.
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
governments of France and Mexico 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 from its French operations
without burdensome restrictions, although tax considerations have limited the
amount of such dividends.
10
12
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
("FTC") 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. Costs associated with the use of environmental
consultants are not material to the Company's results of operations. 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.
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 Anaheim, Fremont, Fresno,
Los Angeles, Modesto, Newport Beach, Palmdale, Pleasanton, Sacramento, Salinas,
San Diego and San Ramon, California; Las Vegas, Nevada; Phoenix, Arizona;
Denver, Colorado; Albuquerque, New Mexico; Salt Lake City, Utah; Dallas, Texas;
Paris, France; and Mexico City, Mexico.
The Company's mortgage banking subsidiaries lease executive offices in Los
Angeles, California and branch offices in Anaheim, Fremont, Los Angeles,
Modesto, Newport Beach, Palmdale, Salinas, San Diego and San Ramon, California;
Las Vegas, Nevada; Phoenix, Arizona; Denver, Colorado; Albuquerque, New Mexico;
Salt Lake City, Utah; and Dallas, Texas.
The Company's operations in San Antonio and Austin, Texas (including
mortgage banking operations) 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 1997 to a vote of
security holders, through the solicitation of proxies or otherwise.
11
13
EXECUTIVE OFFICERS OF THE COMPANY
The following sets forth certain information regarding the executive
officers of the Company as of January 31, 1998:
YEAR
ASSUMED OTHER POSITIONS AND OTHER
PRESENT POSITION AT PRESENT BUSINESS EXPERIENCE WITHIN
NAME AGE JANUARY 31, 1998 POSITION THE LAST FIVE YEARS(1) FROM - TO
- ---------------------- --- ------------------------------ -------- ------------------------------------- ---------------
Bruce Karatz 52 Chairman, President and 1993 President and Chief Executive Officer 1986-1993
Chief Executive Officer
Guy Nafilyan 53 Executive Vice President 1992 President and Chief Executive Officer 1983 - Present
and President of European of Kaufman and Broad France
Operations
Glen Barnard 53 Senior Vice President and 1996 President of Kaufman and Broad of 1995 - Present
Regional General Manager; Colorado,
President of Kaufman and Inc. 1991-1995
Broad of Colorado, Inc.; Chairman, American Lives, Inc.
President of Kaufman and 1997
Broad of Utah, Inc.
Michael F. Henn 49 Senior Vice President and 1994 Executive Vice President, Chief 1986-1994
Chief Financial Officer Financial
and Administrative Officer, The Vons
Companies, Inc.
Lisa G. Kalmbach 40 Senior Vice President and 1996 President of Kaufman and 1992-1997
Regional General Manager; Broad - South Bay,
President of Kaufman and 1997 Inc.
Broad of Northern California,
Inc.
Barton P. Pachino 38 Senior Vice President 1993 Vice President and Corporate Counsel 1991-1993
and General Counsel
Albert Z. Praw 49 Senior Vice President and 1996 Senior Vice President, Real Estate 1994-1996
Regional General Manager; Partner in law firm of Sidley & 1992-1994
President of Kaufman and 1997 Austin
Broad of Southern California,
Inc.
Gary A. Ray 39 Senior Vice President, 1996 Vice President, Training and 1994-1996
Human Resources Development
PepsiCo Restaurants International
Regional Vice President of Human 1992-1994
Resoures -
South Pacific Region, PepsiCo
Restaurants
International
William R. Hollinger 39 Vice President 1992
and Controller
Dennis Welsch 40 Vice President 1995 Vice President and Controller 1995
and Treasurer of Kaufman and Broad - South Bay,
Inc.
Controller of Kaufman and Broad - 1993-1994
South Bay, Inc.
Vice President, Treasurer A-M Homes 1986-1993
- ---------------
(1) All positions described were with the Company, unless otherwise indicated.
12
14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
As of January 31, 1998, there were 1,854 holders of record of the Company's
common stock.
Information as to the Company's quarterly stock prices is included on page
82 of the Company's 1997 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 82 of the
Company's 1997 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 and its
consolidated subsidiaries for the five-year period ended November 30, 1997 is
included on page 44 of the Company's 1997 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 1997 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 45 through
57 of the Company's 1997 Annual Report to Stockholders, which are included as
part of Exhibit 13 hereto.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of Kaufman and Broad Home Corporation
are included on pages 58 through 78 of the Company's 1997 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 1998 Annual Meeting of Stockholders and Proxy Statement,
filed pursuant to Regulation 14A under the Securities Exchange Act of 1934,
incorporated by reference in this Annual Report on Form 10-K pursuant to General
Instruction G(3) of Form 10-K, 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 12 herein.
13
15
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
------- ------------------------------------------------------------------------
3.1 Amended Certificate of Incorporation, filed as an exhibit to the
Company's Registration Statement No. 33-6471 on Form S-1, is
incorporated by reference herein.
3.2 Amendment to Certificate of Incorporation, filed as an exhibit to the
Company's Registration Statement No. 33-30140 on Form S-1, is
incorporated by reference herein.
3.3 Certificate of Designation of Series A Participating Cumulative
Preferred Stock, filed as an exhibit to the Company's Registration
Statement No. 33-30140 on Form S-1, is incorporated by reference herein.
3.4 Certificate of Designation of Series B Mandatory Conversion Premium
Dividend Preferred Stock, filed as an exhibit to the Company's
Registration Statement No. 33-59516 on Form S-3, is incorporated by
reference herein.
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.
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 Rights Agreement between the Company and Bank of America National Trust
and Savings Association, successor-by-merger to Security Pacific
National Bank, as Rights Agent, dated February 21, 1989, filed as an
exhibit to the Company's 1989 Annual Report on Form 10-K, is
incorporated by reference herein.
4.5 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.
4.6 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.
4.7 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.
4.8 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.
14
16
EXHIBIT
NO. DESCRIPTION
------- ------------------------------------------------------------------------
4.9 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.
4.10 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.
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 Directors' Legacy Program, filed as
an exhibit to the Company's 1995 Annual Report on Form 10-K, is
incorporated by reference herein.
10.12 Kaufman and Broad Home Corporation Non-Employee Directors Stock Unit
Plan, filed as an exhibit to the Company's 1996 Annual Report on Form
10-K, is incorporated by reference herein.
10.13 Kaufman and Broad Home Corporation Unit Performance Program, filed as an
exhibit to the Company's 1996 Annual Report on Form 10-K, is
incorporated by reference herein.
10.14 $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.
10.15 Kaufman and Broad France Incentive Plan.
11 Statement of Computation of Per Share Earnings (Loss).
15
17
EXHIBIT
NO. DESCRIPTION
------- ------------------------------------------------------------------------
13 Pages 44 through 78 and page 82 of the Company's 1997 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
On October 9, 1997, the Company filed a Current Report on Form 8-K
(Item 5) and on October 14, 1997 the Company filed a Current Report on Form
8-K/A (Item 5), which included its consolidated statements of income for
the three months and nine months ended August 31, 1997 and 1996 and
consolidated balance sheets as of August 31, 1997 and 1996 and November 30,
1996. The Form 8-K and Form 8-K/A also included supplemental information
for the three and nine months ended August 31, 1997 and 1996.
On October 14, 1997, the Company filed a Current Report on Form 8-K
(Item 7) which included certain exhibits in connection with the issuance of
its 7 3/4% Senior Notes due 2004 pursuant to Registration Statement Nos.
333-14977 and 33-50732.
16
18
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 26, 1998
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 February 26, 1998
- --------------------------------------------- and Chief Executive
Bruce Karatz Officer
MICHAEL F. HENN Senior Vice President February 26, 1998
- --------------------------------------------- and Chief Financial Officer
Michael F. Henn
Director February , 1998
- ---------------------------------------------
Steve Bartlett
RONALD W. BURKLE Director February 26, 1998
- ---------------------------------------------
Ronald W. Burkle
JANE EVANS Director February 26, 1998
- ---------------------------------------------
Jane Evans
DR. RAY R. IRANI Director February 26, 1998
- ---------------------------------------------
Dr. Ray R. Irani
JAMES A. JOHNSON Director February 26, 1998
- ---------------------------------------------
James A. Johnson
Director; Executive Vice February , 1998
- --------------------------------------------- President, European
Guy Nafilyan Operations
LUIS G. NOGALES Director February 26, 1998
- ---------------------------------------------
Luis G. Nogales
CHARLES R. RINEHART Director February 26, 1998
- ---------------------------------------------
Charles R. Rinehart
SANFORD C. SIGOLOFF Director February 26, 1998
- ---------------------------------------------
Sanford C. Sigoloff
17
19
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 January 2, 1998, all appearing on pages 58 through 78
of the 1997 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 1997 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
Report of Independent Auditors............................................ 78
Consolidated Statements of Income for the years ended
November 30, 1997, 1996 and 1995....................................... 58
Consolidated Balance Sheets as of November 30, 1997 and 1996.............. 59
Consolidated Statements of Stockholders' Equity for the years ended
November 30, 1997, 1996 and 1995....................................... 60
Consolidated Statements of Cash Flows for the years ended November 30,
1997, 1996 and 1995.................................................... 61
Notes to Consolidated Financial Statements................................ 62 through 77
The following pages represent pages 44 through 78 and page 82 of the 1997
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, Stockholder
Information and Quarterly Stock Prices. These pages were filed with the
Securities and Exchange Commission as Exhibit 13 hereto.
F-1
20
SELECTED FINANCIAL INFORMATION
Years Ended November 30,
---------------------------------------------------------------
In thousands, except per share amounts 1997 1996 1995 1994 1993
---------------------------------------------------------------
CONSTRUCTION:
Revenues $1,843,614 $1,754,147 $1,366,866 $1,307,570 $1,199,776
Operating income before non-cash charge
for impairment of long-lived assets 101,751 98,679 65,531 88,323 86,609
Operating income (loss)* 101,751 (72,078) 65,531 88,323 86,609
Total assets 1,133,861 1,000,159 1,269,208 1,167,136 983,442
Mortgages and notes payable 496,869 442,629 639,575 565,020 313,357
---------------------------------------------------------------
MORTGAGE BANKING:
Revenues $32,657 $31,758 $29,660 $28,701 $38,078
Operating income 14,508 12,740 9,348 6,003 7,534
Total assets 285,130 243,335 304,971 287,324 355,936
Notes payable 200,828 134,956 151,000 125,000 138,500
Collateralized mortgage obligations 60,058 68,381 84,764 96,731 144,143
---------------------------------------------------------------
CONSOLIDATED:
Revenues $1,876,271 $1,785,905 $1,396,526 $1,336,271 $1,237,854
Operating income before non-cash charge
for impairment of long-lived assets 116,259 111,419 74,879 94,326 94,143
Operating income (loss)* 116,259 (59,338) 74,879 94,326 94,143
Net income (loss)* 58,230 (61,244) 29,059 46,550 39,921
Total assets 1,418,991 1,243,494 1,574,179 1,454,460 1,339,378
Mortgages and notes payable 697,697 577,585 790,575 690,020 451,857
Collateralized mortgage obligations 60,058 68,381 84,764 96,731 144,143
Stockholders' equity* 383,056 340,350 415,478 404,747 444,340
---------------------------------------------------------------
EARNINGS (LOSS) PER SHARE* $1.45 $(1.54) $.73 $1.16 $.96
CASH DIVIDENDS PER COMMON SHARE .30 .30 .30 .30 .30
---------------------------------------------------------------
*Reflects a $170.8 million pretax non-cash charge for impairment of long-lived
assets recorded in the second quarter of 1996.
44
21
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.
During 1997, the Company focused on two primary strategic initiatives --
acceleration of the Company's growth and the implementation of a new operational
business model, "KB2000", which integrates many of the basic operating
principles that were historically used in the Company's recently acquired San
Antonio operations. These include: achieving a deep understanding of customer
desires and preferences through detailed market surveys; emphasizing pre-sales
as opposed to building speculative inventory; maintaining lower levels of
inventory 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.
The excellent progress made by the Company on these initiatives in 1997 was a
key factor in the improvement in Company-wide revenues and earnings compared to
1996.
Total Company revenues increased to $1.88 billion in 1997, up 5.1% from $1.79
billion in 1996, which had increased 28.0% from revenues of $1.40 billion in
1995. The 1997 increase primarily resulted from higher housing revenues,
partially offset by lower land sale revenues. In addition, 1997 results included
a full year's contribution from the Company's San Antonio homebuilding
operations (formerly Rayco, Ltd.); in contrast, 1996 results included only a
nine-month contribution as the Company's acquisition of these operations
occurred on March 1, 1996. The increase in revenues in 1996 compared to 1995
results was largely due to the acquisition of the San Antonio operations, as
well as the continued maturation of the Company's other U.S. businesses and
higher land sale revenues. Included in total Company revenues were mortgage
banking revenues of $32.7 million in 1997, $31.8 million in 1996 and $29.7
million in 1995.
Net income increased approximately $10.2 million or 21.3% to $58.2 million or
$1.45 per share in 1997, up from $48.0 million or $1.20 per share in 1996,
excluding the after-tax non-cash charge of $109.3 million for impairment of
long-lived assets recorded in 1996. Including the non-cash charge, the Company
recorded a net loss of $61.2 million or $1.54 per share in 1996. Excluding the
charge, 1996 net income of $48.0 million was 65.2% higher than the $29.1 million
or $.73 per share recorded in 1995. Net income increased in 1997 due to higher
unit deliveries, lower net interest expense and higher earnings from the
mortgage banking operations. In addition, earnings for 1997 included a full year
of operating results from the San Antonio operations while 1996 included only
three quarters of results. In 1996, net income, excluding the non-cash charge,
rose due to improved unit deliveries (including three quarters of San Antonio
operations), continued progress in implementing the Company's key 1996
initiatives to improve gross margins and contain costs, and an increase in
pretax income from mortgage banking operations. Mortgage banking pretax income
rose in 1996 primarily due to increased loan volume and higher income from sales
of mortgages and servicing rights stemming from an improved mix of fixed-rate
and variable loans.
Construction
REVENUES Construction revenues increased in 1997 to $1.84 billion from $1.75
billion in 1996, which had increased from $1.37 billion in 1995. The improvement
in 1997 was primarily the result of increased housing revenues, which included a
full year's operating results from the Company's San Antonio division, partially
offset by a decline in revenues from land sales. In 1996, the increase in
revenues primarily reflected the inclusion of $189.2 million in revenues from
nine months of San Antonio operations, continued growth within the Company's
other U.S. operations and increased land sale revenues.
Housing revenues totaled $1.83 billion in 1997, $1.67 billion in 1996 and $1.33
billion in 1995. The increase in 1997 reflected an 11.7% increase in unit
volume, partially offset by a 2.2% decline in average selling price. Housing
revenues in 1997 included four quarters of results from the Company's San
Antonio operations versus three quarters in 1996. These operations recorded
revenues of $57.6 million on 611 deliveries in the first quarter of 1997. In
1996, excluding revenues from the San Antonio operations, housing revenues
totaled $1.48 billion, up 11.8% from 1995 as a result of a 4.6% increase in unit
volume and a 6.9% higher average selling price. California housing operations
generated 54.0% of Company-wide housing rev-
45
22
enues in 1997, down from 59.6% in 1996 and 72.3% in 1995, reflecting the March
31, 1996 acquisition of the Company's San Antonio operations and continued
diversification beyond California. Housing revenues from California operations
were $986.6 million in 1997, down 1.1% from $997.3 million in 1996. The
Company's other U.S. housing revenues totaled $669.4 million in 1997, up 30.3%
from $513.9 million in 1996. The 1996 results, which included three quarters of
revenues from San Antonio operations, had more than doubled from $245.4 million
in 1995; excluding the San Antonio results, other U.S. housing revenues in 1996
totaled $324.7 million, up 32.3% from 1995. The Company's operations in France
and Mexico generated housing revenues of $160.5 million and $10.8 million,
respectively, in 1997 and $154.7 million and $6.4 million, respectively, in
1996, reflecting an increase in international housing deliveries. Housing
revenues from French operations totaled $116.9 million in 1995.
Residential Quarterly Unit and Backlog Data
Other
United
California States France Other Total
----------------------------------------------------------------------------
UNIT DELIVERIES
- ------------------------------------------------------------------------------------------------
1997
First 914 1,102 83 9 2,108
Second 1,095 1,211 151 8 2,465
Third 1,204 1,513 295 4 3,016
Fourth 1,518 1,816 503 17 3,854
----------------------------------------------------------------------------
Total 4,731 5,642 1,032 38 11,443
----------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
1996
First 1,095 487 96 5 1,683
Second 1,453 1,265 160 5 2,883
Third 1,259 1,307 180 3 2,749
Fourth 1,364 1,235 313 22 2,934
----------------------------------------------------------------------------
Total 5,171 4,294 749 35 10,249
----------------------------------------------------------------------------
NET ORDERS
- ------------------------------------------------------------------------------------------------
1997
First 1,077 1,528 140 10 2,755
Second 1,476 1,681 230 9 3,396
Third 1,506 1,599 191 14 3,310
Fourth 1,134 1,368 513 13 3,028
----------------------------------------------------------------------------
Total 5,193 6,176 1,074 46 12,489
----------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
1996
First 1,292 540 123 21 1,976
Second 1,577 1,399 241 21 3,238
Third 1,395 1,144 104 7 2,650
Fourth 1,135 968 267 5 2,375
----------------------------------------------------------------------------
Total 5,399 4,051 735 54 10,239
----------------------------------------------------------------------------
46
23
Other
United
California States France Other Total
----------------------------------------------------------------
Ending Backlog-Units
- -------------------------------------------------------------------------------------------------------
1997
First 1,017 2,182 272 15 3,486
Second 1,398 2,652 351 16 4,417
Third 1,700 2,738 576 26 5,040
Fourth 1,316 2,290 586 22 4,214
----------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
1996
First 823 599 256 27 1,705
Second 947 2,186 337 27 3,497
Third 1,083 2,023 261 31 3,398
Fourth 854 1,756 215 14 2,839
----------------------------------------------------------------
Ending Backlog-Value In thousands
- -------------------------------------------------------------------------------------------------------
1997
First $219,908 $248,835 $ 56,783 $ 4,290 $529,816
Second 288,719 307,977 66,582 4,224 667,502
Third 377,332 321,007 71,041 8,320 777,700
Fourth 303,050 274,591 82,750 6,270 666,661
----------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
1996
First $153,074 $ 86,880 $ 51,820 $ 4,948 $296,722
Second 182,718 236,970 72,215 5,265 497,168
Third 225,486 229,348 55,236 7,595 517,665
Fourth 180,513 196,195 47,603 3,584 427,895
----------------------------------------------------------------
Housing deliveries rose 11.7% to 11,443 units in 1997, exceeding the previous
Company-wide record of 10,249 units in 1996. This improvement reflected
increases in U.S. and French operations of 9.6% and 37.8%, respectively. Growth
in domestic deliveries was driven by a 31.4% increase in other U.S. deliveries
to 5,642 units in 1997 from 4,294 units in 1996, partially offset by a decline
in California deliveries. Unit deliveries in other U.S. operations increased in
1997 for several reasons: a higher number of average active communities,
reflecting the Company's growth strategy; the inclusion of twelve months of
operating results from the San Antonio division; and start-up operations in
Austin. In California, deliveries decreased 8.5% in 1997, to 4,731 units from
5,171 units in 1996, reflecting a decline in the average number of active
communities in the state. In France, deliveries in 1997 increased primarily as a
result of the acquisition of certain active developments of French homebuilder
SMCI. These developments, which consist of condominiums in Paris and other
cities in France, were acquired in mid-1997 for $2.2 million in cash and the
assumption of approximately $8.1 million of debt.
Housing deliveries increased to 10,249 units in 1996 from 7,857 units in 1995.
Excluding 2,027 San Antonio deliveries, Company-wide deliveries in 1996
increased 4.6% from the prior year, reflecting increases in U.S. and French
operations of 2.9% and 30.5%, respectively. The modest increase in domestic
deliveries was driven by a 25.9% rise in other U.S. deliveries, reflecting the
Company's accelerated expansion into domestic markets beyond California. Other
U.S. deliveries in 1996 increased to 2,267 units from 1,800 units in 1995, while
California deliveries decreased 4.8% to 5,171 units in 1996 from 5,430 units in
1995.
47
24
The Company-wide average new home price decreased 2.2% in 1997, to $159,700 from
$163,300 in 1996. The 1996 average had decreased 3.3% from $168,900 in 1995. The
decrease in 1997 was primarily due to a lower average selling price in France
resulting from SMCI deliveries, as well as a greater proportion of lower-priced
homes sold in the Company's other U.S. business. The decrease in 1996 reflected
a lower average selling price in the United States, resulting primarily from the
inclusion of the San Antonio operations acquired that year.
In California, the Company's average selling price rose 8.1% in 1997 to $208,500
from $192,900 in 1996, which had increased 9.1% from $176,800 in 1995. The
increases in both years reflected a shift in mix toward higher-priced homes in
the state. The Company's average selling price in other U.S. markets was
$118,700 in 1997, down from $119,700 in 1996 and $136,300 in 1995. Both
decreases reflected the impact of the San Antonio operations. These operations
had average selling prices of $94,700 and $93,400 in 1997 and 1996,
respectively, substantially below the Company's average. The Company's average
selling price in France decreased to $155,500 in 1997 from $206,600 in 1996,
which was up modestly from $203,700 in 1995. The average selling price in France
declined in 1997 because of lower-priced deliveries generated from the newly
acquired SMCI developments. In 1996, the French average price rose slightly due
to a change in product mix.
Revenues from the development of commercial buildings, all located in
metropolitan Paris, totaled $2.7 million in 1997, $12.2 million in 1996 and
$20.5 million in 1995. These significant revenue declines reflected reduced
opportunities in French commercial markets due to the lingering effects of the
country's recession, as well as the Company's strategy to focus primarily on its
residential development business.
Land sale revenues totaled $13.6 million in 1997, $68.2 million in 1996 and
$18.2 million in 1995. The results for 1997 and 1995 are more representative of
typical Company land sales activity levels when viewed historically. The 1996
results were abnormally high due to an aggressive asset sale program undertaken
as part of the Company's debt reduction strategy. Land sold in 1996 was
primarily property previously held for long-term development, which the Company
disposed of in order to redeploy the invested capital at potentially higher
returns. 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 particular markets at given
points in time, the availability of land in markets served by the Company's
housing divisions, and prevailing market conditions.
OPERATING INCOME Operating income increased to $101.8 million in 1997 from $98.7
million (excluding the $170.8 million non-cash charge for impairment of
long-lived assets) in 1996. The increase was primarily due to higher housing
gross profits, resulting from higher unit volume, partially offset by lower
gross profits from commercial activities and losses from land sales. Gross
profits in 1997 (excluding losses from land sales) increased by $15.7 million to
$332.2 million from $316.5 million in 1996. As a percentage of related revenues,
the Company's gross profit margin (excluding losses from land sales) was 18.2%
in 1997, down from 18.8% in the prior year. The Company's housing gross margin
dropped to 18.2% in 1997 from 18.7% in 1996, primarily due to the accelerated
sell-through of older, lower margin non-KB2000 communities, particularly in
California, and lower margins associated with the Company's entry into new
markets in Austin and Dallas, Texas, partially offset by an improved gross
margin from new KB2000 communities.
Company-wide land sales produced a loss of $1.4 million in 1997, compared to
profits of $2.6 million in 1996.
Selling, general and administrative expenses increased by $8.7 million in 1997
to $229.1 million. This increase was primarily due to the inclusion of a full
year of results from the San Antonio operations in 1997 (including amortization
of goodwill) compared to nine months of results in 1996, and higher sales
commissions, partially offset by cost-containment efforts that reduced sales
incentives and advertising expenses. As a percentage of housing revenues, to
which these expenses are most closely correlated, selling, general and
administrative expenses decreased .7 percentage points to 12.5% in 1997 from
13.2% in 1996. This improvement reflected higher unit volume as well as
more favorable ratios for sales incentives, advertising
48
25
expenses and general and administrative expenses. These improvements were
partially offset by increased sales commissions associated with a higher
proportion of the Company's domestic sales being generated from third party
brokers; increased use of third party brokers is a component of the KB2000
business model. The Company remains focused on improving efficiency and will
seek to reduce selling, general and administrative expenses to the extent
possible in 1998.
Excluding the $170.8 million non-cash charge for impairment of long-lived assets
recorded in the second quarter of 1996, operating income in 1996 increased by
$33.2 million or 50.6% to $98.7 million from $65.5 million in 1995. This
increase was primarily due to higher gross profits on housing sales, resulting
from both higher unit volume and improved margins, mainly due to the inclusion
of three quarters of San Antonio operations. Including the non-cash charge, the
Company reported an operating loss of $72.1 million in 1996. Gross profits in
1996 (excluding profits from land sales) increased by $74.3 million to $316.5
million from $242.2 million in 1995. As a percentage of related revenues, the
Company's gross profit margin (excluding profits from land sales) was 18.8% in
1996, up from 18.0% in the prior year. The Company's housing gross margin
increased to 18.7% in 1996 from 17.9% in 1995, primarily reflecting the addition
of the San Antonio operations and continued growth in the Company's higher
margin operations in its other U.S. markets.
Despite an increase in land sale revenues in 1996, Company-wide profits from
these sales decreased by $2.7 million to $2.6 million from $5.3 million in 1995.
The decrease reflected the Company's accelerated disposition of certain real
estate assets, many of which were written down to fair value in 1996 in order to
reduce financial leverage and redeploy capital to improve overall return on
investment.
Selling, general and administrative expenses increased by $38.5 million in 1996.
This increase was primarily due to the inclusion of three quarters of San
Antonio operations which added $25.9 million of selling, general and
administrative expenses (including the amortization of goodwill), as well as
higher marketing expenses generated by increased unit volume from the Company's
remaining operations. As a percentage of housing revenues, selling, general and
administrative expenses declined .5 percentage points to 13.2% in 1996 from
13.7% in 1995. This improvement reflected higher unit volume, primarily as a
result of the 1996 acquisition of the San Antonio operations, and more favorable
ratios for sales incentives, advertising expenses and general and administrative
expenses, partially offset by increased sales commissions associated with a
higher proportion of third party broker commissions.
In the second quarter of 1996, the Company decided to accelerate the disposition
of certain real estate assets in order to help effectuate the Company's
strategies to improve overall return on investment, restore financial leverage
to targeted levels, and position the Company for continued geographic expansion.
In addition, in 1996, the Company substantially eliminated its prior practice of
investing in long term development projects in order to reduce the operating
risk associated with such projects. The accelerated disposition of long term
development assets caused certain assets, primarily inventories and investments
in unconsolidated joint ventures in California and France, to be identified as
being impaired and to be written down. Certain of the Company's California
properties were impacted by the charge, while none of its non-California
domestic properties were affected. The Company's non-California domestic
properties were not affected since they were not held for long term development
and were expected to be economically successful such that they were determined
not to be impaired.
Based on the Company's evaluation of impaired assets, a non-cash write-down of
$170.8 million ($109.3 million, net of income taxes) was recorded in the second
quarter of 1996 to state the impaired assets at their fair values. The fair
values established were based on various methods, including discounted cash flow
projections, appraisals and evaluations of comparable market prices, as
appropriate. The inventories affected by the charge primarily consisted of land
which was not under active development and the charge did not have a material
effect on gross margins in the balance of 1996 or in 1997.
49
26
The write-down for impairment of long-lived assets was calculated in accordance
with Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
("SFAS No. 121"), which the Company decided to adopt in the second quarter of
1996; however, the write-down was not necessitated by implementation of this
standard. Had the Company not adopted SFAS No. 121, a substantial write-down
would have nonetheless been recorded. SFAS No. 121 requires that long-lived
assets be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of the asset may not be recoverable, and
requires impairment losses to be recorded on long-lived assets when indicators
of impairment are present and the undiscounted cash flows estimated to be
generated by those assets are less than the assets' carrying amount.
Under the standard, when an impairment write-down is required, the related
assets are adjusted to their estimated fair value. Fair value for purposes of
SFAS No. 121 is deemed to be the amount a willing buyer would pay a willing
seller for such property in a current transaction, that is, other than in a
forced or liquidation sale. This is a change from the previous accounting
standard which required homebuilders to carry real estate assets at the lower of
cost or net realizable value.
INTEREST INCOME AND EXPENSE Interest income, which is generated from mortgages
receivable, principally from land sales, and from short-term investments,
amounted to $5.1 million in 1997, $2.7 million in 1996 and $2.1 million in 1995.
The higher interest income in 1997 reflected an increase in the average balances
of interest bearing mortgages receivable compared to a year ago. Interest income
in 1996 reflected little change from the 1995 average balances of interest
bearing short-term investments and mortgages receivable.
Interest expense results principally from borrowings to finance land purchases,
housing inventory, and other operating and capital needs. In 1997, interest
expense, net of amounts capitalized, decreased to $29.8 million from $36.7
million in 1996. Gross interest incurred in 1997 was lower than that incurred in
1996 by $11.2 million, reflecting a decrease in average indebtedness in 1997.
The Company's average debt level for 1997 decreased primarily as a result of the
Company's 1996 debt reduction strategy. The percentages of interest capitalized
during 1997 and 1996 were 43.1% and 42.3%, respectively. These rates reflect the
timing and proportion of land in production during each period. In 1996,
interest expense, net of amounts capitalized, increased to $36.7 million from
$27.5 million in the prior year, largely due to a decline in the percentage of
interest capitalized (42.3% versus 57.4% capitalized in 1995). The lower
capitalization rate during 1996 reflected a higher proportion of land in
production that year compared to 1995 and the non-capitalization of interest on
borrowings associated with the San Antonio acquisition.
MINORITY INTERESTS IN PRETAX INCOME OF CONSOLIDATED JOINT VENTURES The Company
conducts a portion of both its residential and commercial development activities
through majority-owned partnerships, primarily in France, which are fully
consolidated in the accompanying financial statements. As a result, operating
income has been reduced by minority interests in the pretax income of these
partnerships of $.4 million in 1997, $.2 million in 1996 and $.6 million in
1995. Minority interests are expected to remain at relatively low levels,
reflecting the limited opportunities currently available and reasonably expected
to be available in the French commercial market as well as the Company's
strategy to focus on its residential development business.
EQUITY IN PRETAX INCOME (LOSS) OF UNCONSOLIDATED JOINT VENTURES The Company's
unconsolidated joint-venture activities, located in California, New Mexico and
France, posted combined revenues of $98.2 million in 1997, $6.7 million in 1996
and $33.9 million in 1995. Of these amounts, French commercial activities
accounted for $87.7 million in 1997, $.1 million in 1996 and $5.9 million in
1995. Combined revenues recorded by the Company's joint ventures increased in
1997 primarily as a result of the sale of a commercial project in France. The
Company's unconsolidated joint ventures generated combined pretax losses of $2.9
million in 1997, $14.8 million in 1996 and $20.5 million in 1995. Losses in 1996
and 1995 primarily consisted of selling, general, administrative and interest
expenses associated with a single French multi-family residential project, as
well as reserves taken on a French commercial development project. The Company's
share
50
27
of pretax losses from these joint ventures totaled $.1 million in 1997, $2.1
million in 1996, and $3.5 million in 1995. Overall, the Company's share of
pretax losses from unconsolidated joint ventures declined in 1997 and 1996 due
to a lower level of activity from these ventures and the effects of charges
taken in previous years. As a result of the non-cash charge taken in 1996 to
reflect the impairment in unconsolidated joint ventures, the Company does not
anticipate incurring significant additional losses from these joint ventures in
the foreseeable future.
Mortgage Banking
INTEREST INCOME AND EXPENSE The Company's mortgage banking operations provide
financing to purchasers of homes sold by the Company's domestic housing
operations through the origination of residential mortgages. Revenues are also
realized from the sale of such mortgages and related servicing rights to outside
financial institutions. Prior to 1989, substantially all such mortgages were
pledged for collateralized mortgage obligations. Accordingly, interest income is
earned primarily from mortgage-backed securities held for long-term investment
as collateral, while interest expense results mainly from the associated
collateralized mortgage obligations.
Interest income decreased to $13.3 million in 1997 from $14.6 million in 1996,
and $15.6 million in 1995, while interest expense also declined to $12.7 million
in 1997 from $13.5 million in 1996, and $14.8 million in 1995. These amounts
decreased primarily 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 of mortgage
collateral. These balances, and the related interest income and expense, will
continue to decline as the Company's practice of participating in collateralized
mortgage financings was discontinued in 1988 due to market conditions and tax
law changes. Combined interest income and expense resulted in net interest
income of $.6 million in 1997, $1.1 million in 1996 and $.8 million in 1995.
These differences reflect variations in mortgage production mix; movements in
short-term versus long-term interest rates; and the amount, timing and rates of
return on interim reinvestments of monthly principal amortization and
prepayments.
OTHER MORTGAGE BANKING REVENUES Other mortgage banking revenues, which
principally consist of gains on sales of mortgages and servicing rights and, to
a lesser extent, mortgage servicing fees, totaled $19.4 million in 1997, $17.2
million in 1996 and $14.1 million in 1995. The increases in 1997 and 1996
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 in the United States. In 1996, a more favorable mix of fixed to variable
rate loans also contributed to the increased revenues.
GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses for
mortgage banking operations have remained relatively constant at $5.5 million in
1997, $5.6 million in 1996 and $5.5 million in 1995, despite increases in the
volume of loans closed.
Income Taxes
The Company recorded income tax expense of $32.8 million in 1997 and $16.4
million in 1995 and an income tax benefit of $34.5 million in 1996. These
amounts represented effective income tax rates of approximately 36.0% in all
three years. The tax benefit in 1996 reflected the pretax loss reported by the
Company as a result of the non-cash charge for impairment of long-lived assets
recorded in the second quarter of that year. The pretax income/loss for
financial reporting purposes and taxable income/loss 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 affordable
housing 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. Typically, the Company has funded
its construction and mortgage banking activities with internally generated cash
flows and external sources of debt and equity financing. In 1997, operating,
investing and financing activities provided net cash of $58.5 million; in 1996,
these activities used net cash of $33.6 million.
51
28
Operating activities in 1997 used $29.0 million, while 1996 operating activities
provided $330.8 million. The Company's uses of operating cash in 1997 included
an increase in receivables of $118.1 million and a change in deferred taxes of
$5.0 million. The use of cash was partially offset by the Company's earnings of
$58.2 million, an increase of $20.1 million in accounts payable, accrued
expenses and other liabilities, a reduction in inventories of $5.2 million
(excluding $15.1 million of inventories acquired through seller financing), and
various non-cash items deducted from net income.
In 1996, the sources of operating cash included a reduction in inventories
totaling $232.9 million (excluding $17.0 million of inventories acquired through
seller financing and $73.9 million in acquired San Antonio inventories), a
reduction in receivables of $36.6 million and various non-cash items. These
non-cash items included the $170.8 million non-cash charge for impairment of
long-lived assets, which more than offset the Company's net loss of $61.2
million (which included the non-cash charge for impairment of long-lived assets)
recorded for 1996. Uses of cash in 1996 included a $41.2 million change in
deferred taxes and a $21.9 million decrease in accounts payable, accrued
expenses and other liabilities. The decrease in inventories in 1996 (excluding
San Antonio inventories acquired and the non-cash charge for impairment of
long-lived assets), occurred primarily in California as the Company continued to
execute a debt reduction strategy that included an aggressive asset sale
program.
Cash provided by investing activities totaled $6.2 million in 1997 compared to
$73.9 million used in 1996. In 1997, cash was provided by $10.0 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 had served as collateral, and $1.9 million in
distributions related to investments in unconsolidated joint ventures. Partially
offsetting these proceeds was $5.9 million of cash used for other investing
activities.
In 1996, cash used by investing activities included $80.6 million of cash used
for the March 1, 1996 San Antonio acquisition for a total purchase price of
$104.5 million, which included cash to pay off debt assumed in the purchase. In
addition, cash of $7.6 million was used for investments in unconsolidated joint
ventures and $2.8 million was used for other investing activities. Partially
offsetting these uses was $18.1 million in proceeds received from
mortgage-backed securities.
Financing activities in 1997 provided $81.3 million of cash compared to $290.5
million used in 1996. In 1997, sources of cash included proceeds of $172.2
million from the issuance of 7 3/4% senior notes and net proceeds of $29.9
million from borrowings. Partially offsetting the cash provided was cash used
for the redemption of the Company's 10 3/8% senior notes of $100.0 million,
dividend payments of $11.7 million and payments on collateralized mortgage
obligations of $9.5 million. The Company's financial leverage, as measured by
the ratio of debt to total capital, was 52.7% at the end of 1997 compared to
56.5% at the end of 1996. The 1997 ratio was adjusted to reflect the $70.4
million of invested cash at November 30, 1997; without this adjustment, the 1997
year end ratio of debt to capital was 56.5%.
Financing activities in 1996 used $379.2 million for net payments on borrowings,
reflecting the Company's aggressive debt reduction strategy. Uses of cash in
1996 also included payments on collateralized mortgage obligations of $17.3
million, the funds for which were provided by receipts on mortgage-backed
securities, and $16.1 million of cash dividend payments. Partially offsetting
these uses of cash were proceeds of $124.4 million from the issuance of 9 5/8%
senior subordinated notes. The Company's debt to capital ratio improved to 56.5%
in 1996 from 60.6% in 1995 despite substantial additional borrowings related to
the San Antonio acquisition and the non-cash charge for impairment of long-lived
assets.
In 1996, the Company sold its Canadian operations. Proceeds of $9.5 million
received from the sale of all of the issued and outstanding shares of the
Canadian subsidiary were used to reduce the Company's debt. The Company had been
slowly winding down its operations in Canada during the several years preceding
the sale, and the impact of the transaction on the Company's financial position
and results of operations was not significant.
52
29
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. On April 21, 1997, the Company entered into a $500 million
domestic unsecured revolving credit agreement (the "Revolving Credit Facility")
which provides for more favorable terms than the Company's prior credit
facility. The more favorable terms were made available to the Company largely
because of its improved operating results and a lower debt to total capital
ratio. The Revolving Credit Facility 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. Under the Revolving Credit Facility, $500 million
remained committed and $488.4 million was available for the Company's future use
at November 30, 1997. The Company's French subsidiaries have lines of credit
with various banks which totaled $63.2 million at November 30, 1997 and have
various committed expiration dates through September 1999. Under the Company's
French unsecured financing agreements, $54.2 million was available in the
aggregate at November 30, 1997.
Depending upon available terms and its negotiating leverage related to specific
market conditions, the Company also finances certain land acquisitions with
borrowings from land sellers and other third parties. At November 30, 1997, the
Company had outstanding seller-financed notes payable of $14.3 million secured
primarily by the underlying property which had a carrying value of $23.3
million.
On September 4, 1997, the Company completed the optional redemption of its $100
million 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 million
of senior notes at 100% of the principal amount of the notes, together with
accrued and unpaid interest. On October 14, 1997, pursuant to its then-existing
universal shelf registration, the Company issued $175 million 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 Company's then-existing shelf
registration.
On December 5, 1997, the Company filed a new universal shelf registration
statement with the Securities and Exchange Commission for up to $500 million of
the Company's debt and equity securities. This universal shelf registration
provides that securities may be offered from time to time in one or more series
and in the form of senior, senior subordinated or subordinated debt, preferred
stock, common stock, and/or warrants to purchase such securities. The
registration was declared effective on December 16, 1997, and no securities have
been issued thereunder.
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 and carefully
managing the timing of the production process. During the 1990's, the Company's
inventories have become more geographically diverse, primarily through 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 million revolving mortgage
warehouse agreement. On February 24, 1997, the Company's mortgage banking
subsidiary replaced its $120 million asset-backed commercial paper facility and
$100 million mortgage loan purchase and interim servicing agreement 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
53
30
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. At November 30, 1997, the mortgage banking operations had $49.2 million
available for future use under the Mortgage Warehouse Facility.
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 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 other needs of its business, both on a
short and long-term basis.
Impact of the Year 2000 Issue
The "year 2000 issue" refers to complications that may be caused by existing
computer hardware and software that were designed without consideration for the
upcoming change in the century. If not corrected, such programs may cause
computer systems to fail or to miscalculate data. To prevent any complications
related to the year 2000 issue, the Company has undertaken a project to modify
or replace portions of its existing hardware and software so that its computer
systems will function properly with respect to dates in the year 2000 and
thereafter. Management currently anticipates that the project will be completed
by the end of fiscal 1998, and that the year 2000 issue will not have a
materially adverse effect upon the Company's financial position or results of
operations.
Outlook
At November 30, 1997, the Company had outstanding sales contracts of 4,214 units
in residential backlog, representing aggregate future revenues of approximately
$666.7 million. These figures represented increases of 48.4% and 55.8%,
respectively, from the 2,839 units in residential backlog, representing
aggregate future revenues of $427.9 million, at year-end 1996. The
year-over-year increases resulted in part from the Company's substantial
progress on one of the principal tenets of the KB2000 business model,
emphasizing the pre-sale of homes. Substantially all homes included in the
year-end 1997 backlog are expected to be delivered during 1998; however,
cancellations could occur, particularly if market conditions deteriorate or
mortgage interest rates increase, thereby decreasing backlog and related future
revenues. For the first two months of the 1998 fiscal year, Company-wide net
orders were 1,932, reflecting an increase of 23.1% from the same period a year
ago.
In the United States, the Company's residential backlog at November 30, 1997
increased to $577.6 million on 3,606 units, up from $376.7 million on 2,610
units at year-end 1996. This 38.2% increase in unit backlog reflected higher
backlog from both California and other U.S. operations. In California, year-end
1997 backlog increased to $303.1 million on 1,316 units, compared to $180.5
million on 854 units at the prior year's end, while other U.S. residential unit
backlog rose to $274.6 million on 2,290 units from $196.2 million on 1,756
units. The Company's average number of active communities in California declined
in 1997 from the prior year. As a result, fourth quarter 1997 net orders in
California were flat compared to year earlier levels, and California order rates
during the first two months of the 1998 fiscal year declined 6.6% compared to
the same period of fiscal 1997. Net orders from other U.S. operations increased
41.3% to 1,368 units in the fourth quarter of 1997, up from 968 units in the
fourth quarter of 1996 as a result of the Company's continued expansion in these
markets. Other U.S. net orders for the first two months of fiscal 1998 increased
29.5% compared to the same period of fiscal 1997.
54
31
In France, residential backlog at November 30, 1997 totaled $82.8 million on 586
units, up from $47.6 million on 215 units at year-end 1996. This 172.6% increase
in unit backlog primarily resulted from the Company's acquisition of SMCI, as
well as generally improving market conditions. These factors also boosted net
orders in the fourth quarter of 1997, which rose 92.1% compared to the
year-earlier period, to 513 units from 267 units. In the first two months of
fiscal 1998, net orders in France improved 210.0% compared to the same period a
year ago. The value of the backlog associated with the Company's French
commercial development activities declined to approximately $5.1 million at
November 30, 1997 from $8.9 million at year-end 1996, reflecting a reduced level
of activity.
In Mexico, residential backlog at November 30, 1997 totaled $6.3 million on 22
units, up from $3.6 million on 14 units at year-end 1996. Net orders in the
fourth quarter of 1997 increased to 13 units from 5 units in 1996. In the first
two months of fiscal 1998, net orders in Mexico rose 125.0% compared to the same
period a year ago.
As a result of continued domestic expansion outside of California, 54.4% of the
Company's domestic deliveries were generated from other U.S. operations in 1997,
compared to 45.4% in 1996. In response to persistently weak conditions for new
housing and general recessionary trends in California during the first half of
the 1990's, the Company has diversified its business through aggressive
expansion into other western states. Although market conditions appear to have
improved in many markets within California (particularly in Northern
California), the Company remains selective in its land investments in the state
while focusing on improving gross margins, reducing overhead expenses and
maximizing rates of return. The Company is cautiously optimistic that improving
economic trends statewide will soon lead to stronger housing markets in other
areas of the state.
The Company's domestic operations outside of California experienced continued
growth in 1997, with the Company delivering its first homes in Austin, Texas.
This new source of deliveries combined with the first full year of San Antonio
operations and the continued maturation of non-California operations resulted in
a 31.4% increase in other U.S. deliveries in 1997 compared to the prior year.
The Company expects to continue to actively seek additional opportunities for
non-California domestic expansion in future years, in both existing and new
markets, through either de novo entry or the acquisition of existing businesses.
The French housing market improved modestly in 1997 from the prior year, which
was marked by lingering high unemployment and other recessionary factors. The
Company anticipates increases in deliveries from its French housing operations
in 1998 in line with the nation's modestly improving economy and as a result of
its mid-1997 acquisition of SMCI developments. The Company's French commercial
activities are likely to remain at or below 1997 levels, reflecting persistently
poor conditions in the French commercial market and the Company's strategy to
focus on its residential development business.
Mexico's economy has also shown signs of recovering from the country's recent
deep recession brought about by the devaluation of the peso. Nevertheless,
economic and political conditions remain unsettled and the Company continues to
closely monitor its level of activity and the desirability of expanding its
market presence there.
The Company continues to benefit in all of its operations from the strength of
its capital position, which has allowed it to finance expansion, re-engineer
product lines and diversify into new homebuilding markets during the 1990's.
Secure access to capital at competitive rates should enable the Company to
continue to grow and expand in 1998. The Company's capital position has helped
enable it to maintain overall profitability during troubled economic times in
California and France, its two primary markets at the outset of the decade. As a
result of its geographic diversification, the disciplines of the KB2000 business
model and a strong capital position, the Company believes it has established
strategies to help maximize future performance under both robust and difficult
market conditions.
55
32
The Company plans during 1998 to continue to maintain its focus on the two
strategic initiatives it established for 1997 -- acceleration of the Company's
growth and the implementation of its KB2000 business model.
In 1998 the Company's first strategic goal, which involves accelerated growth,
is planned to occur both in certain existing markets as well as new market
entry. The Company has identified certain existing domestic markets as
candidates for accelerated growth programs due to their strength, size and
ability to generate returns which meet or exceed Company objectives. In the
markets specifically identified for growth, the Company has set a goal that
aggregate 1999 deliveries will approximately double from comparable 1996
delivery levels. In addition, the Company plans to enter new markets
(particularly in Texas and other western states) and achieve modest growth in
existing markets such that, in aggregate, the Company has established a goal of
delivering in excess of 16,000 units Company-wide in 1999. Growth in both new
and existing markets is expected to be supplemented by strategic acquisitions
from time to time.
The Company's second strategic goal involves the continued development and
implementation of the KB2000 business model in 1998. This 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. KB2000 is comprised of ten key elements: knowing
the buyer, determining which customers to target, buying land consistent with
targeted customers, designing homes to meet customer needs through providing a
wide array of choice, pricing below immediate competitors on a price per square
foot basis, emphasizing even flow production, establishing large backlogs
through pre-sale of homes, focusing on quality, partnering with third-party
brokers and offering integrated mortgage loan financing. The Company made
significant progress in implementing the KB2000 business model in 1997 by, among
other things, focusing on a 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. As expected, the Company's focus on
KB2000 initiatives in 1997 resulted in both higher year-end backlog levels and
an increase in the percentage of homes sold to homes in production (67% at
November 30, 1997 compared to 44% at November 30, 1996). In addition, the
Company's backlog ratio rose to 130.8% at the end of 1997 from 115.8% at the end
of 1996 (Backlog ratio is defined as the ratio of beginning backlog to actual
deliveries in the succeeding quarter). The Company believes that the continued
implementation of the KB2000 business model will result in further improvement
in its operating margin, particularly as the proportion of deliveries from
KB2000 communities increases. In addition, the Company expects the KB2000 model
to enhance its ability to achieve profit performance that is more predictable,
consistent and sustainable.
Entering 1998, the Company is well positioned to take advantage of favorable
economic conditions for homebuilders, particularly the current low mortgage
interest rates available across the United States and France and the low
unemployment rates in most of its domestic markets. Assuming stable or improving
business conditions, employment levels, interest rates, weather conditions and
consumer confidence in its major markets, the Company believes that continued
focus on its two primary strategic initiatives should result in rising delivery
volumes from a higher average number of active communities and improved
operating income in 1998 compared to 1997. In addition, benefits from the
continued implementation of these two initiatives should provide long-term
sustainable improvement throughout the Company's operations, boosting earnings
per share and return on investment in 1998 and beyond.
56
33
Impact of Inflation
The Company's business is significantly affected by general economic conditions,
particularly by inflation and the generally associated adverse effect on
interest rates. Although inflation rates have been low in recent years, rising
inflation would likely impact 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 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, changes in general economic conditions either nationally or in
regions where the Company operates or may commence operations, employment growth
or unemployment rates, lumber or other key homebuilding material prices, labor
costs, home mortgage interest rates, currency exchange rates as they affect the
Company's operations in France or Mexico, consumer confidence, and government
regulation or restrictions on real estate development, costs and effects of
unanticipated legal or administrative proceedings and capital or credit market
conditions affecting the Company's cost of capital; the availability and cost of
land in desirable areas and conditions in the overall homebuilding market in the
Company's geographic markets (including the historic cyclicality of the
industry); as well as seasonality, competition, population growth, property
taxes, and unanticipated delays in the Company's operations.
57
34
CONSOLIDATED STATEMENTS OF INCOME
Years Ended November 30,
-----------------------------------------------
In thousands, except per share amounts 1997 1996 1995
-----------------------------------------------
TOTAL REVENUES $ 1,876,271 $ 1,785,905 $ 1,396,526
-----------------------------------------------
CONSTRUCTION:
Revenues $ 1,843,614 $ 1,754,147 $ 1,366,866
Construction and land costs (1,512,766) (1,435,081) (1,119,405)
Selling, general and administrative expenses (229,097) (220,387) (181,930)
Non-cash charge for impairment of long-lived assets (170,757)
-----------------------------------------------
Operating income (loss) 101,751 (72,078) 65,531
Interest income 5,078 2,666 2,140
Interest expense, net of amounts capitalized (29,829) (36,691) (27,501)
Minority interests in pretax income of consolidated joint ventures (425) (233) (584)
Equity in pretax loss of unconsolidated joint ventures (53) (2,148) (3,475)
-----------------------------------------------
Construction pretax income (loss) 76,522 (108,484) 36,111
-----------------------------------------------
MORTGAGE BANKING:
Revenues:
Interest income 13,303 14,594 15,555
Other 19,354 17,164 14,105
-----------------------------------------------
32,657 31,758 29,660
Expenses:
Interest (12,699) (13,462) (14,821)
General and administrative (5,450) (5,556) (5,491)
-----------------------------------------------
Mortgage banking pretax income 14,508 12,740 9,348
-----------------------------------------------
Total pretax income (loss) 91,030 (95,744) 45,459
Income taxes (32,800) 34,500 (16,400)
-----------------------------------------------
NET INCOME (LOSS) $ 58,230 $ (61,244) $ 29,059
-----------------------------------------------
EARNINGS (LOSS) PER SHARE $ 1.45 $ (1.54) $ .73
-----------------------------------------------
See accompanying notes.
58
35
CONSOLIDATED BALANCE SHEETS
November 30,
-----------------------------
In thousands, except shares 1997 1996
-----------------------------
ASSETS
CONSTRUCTION:
Cash and cash equivalents $ 66,343 $ 4,723
Trade and other receivables 169,988 107,037
Inventories 790,243 780,302
Investments in unconsolidated joint ventures 6,338 8,312
Goodwill 31,283 39,356
Other assets 69,666 60,429
-----------------------------
1,133,861 1,000,159
-----------------------------
MORTGAGE BANKING:
Cash and cash equivalents 1,899 5,058
Receivables:
First mortgages and mortgage-backed securities 71,976 81,536
First mortgages held under commitment of sale and other receivables 208,254 153,459
Other assets 3,001 3,282
-----------------------------
285,130 243,335
-----------------------------
TOTAL ASSETS $ 1,418,991 $ 1,243,494
-----------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CONSTRUCTION:
Accounts payable $ 163,646 $ 151,791
Accrued expenses and other liabilities 105,376 96,986
Mortgages and notes payable 496,869 442,629
-----------------------------
765,891 691,406
-----------------------------
MORTGAGE BANKING:
Accounts payable and accrued expenses 7,300 7,481
Notes payable 200,828 134,956
Collateralized mortgage obligations secured by mortgage-backed securities 60,058 68,381
-----------------------------
268,186 210,818
-----------------------------
Minority interests in consolidated joint ventures 1,858 920
-----------------------------
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; 38,996,769 and
38,827,586 shares outstanding at November 30, 1997 and 1996, respectively 38,997 38,828
Paid-in capital 186,086 183,801
Retained earnings 159,960 113,398
Cumulative foreign currency translation adjustments (1,987) 4,323
-----------------------------
TOTAL STOCKHOLDERS' EQUITY 383,056 340,350
-----------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,418,991 $ 1,243,494
-----------------------------
See accompanying notes.
59
36
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended November 30, 1997, 1996 and 1995
-------------------------------------------------------------------------------
SERIES B
CONVERTIBLE FOREIGN TOTAL
PREFERRED COMMON PAID-IN RETAINED CURRENCY STOCKHOLDERS'
In thousands STOCK STOCK CAPITAL EARNINGS TRANSLATION EQUITY
-------------------------------------------------------------------------------
Balance at November 30, 1994 $1,300 $32,378 $188,970 $181,282 $817 $404,747
Net income 29,059 29,059
Dividends on Series B convertible
preferred stock (9,880) (9,880)
Dividends on common stock (9,712) (9,712)
Exercise of employee stock options 17 103 120
Cancellation of restricted stock (48) (234) (282)
Foreign currency translation
adjustments 1,426 1,426
-------------------------------------------------------------------------------
Balance at November 30, 1995 1,300 32,347 188,839 190,749 2,243 415,478
-------------------------------------------------------------------------------
Net loss (61,244) (61,244)
Dividends on Series B convertible
preferred stock (4,940) (4,940)
Dividends on common stock (11,167) (11,167)
Conversion of Series B convertible
preferred stock (1,300) 6,500 (5,200)
Exercise of employee stock options 37 390 427
Cancellation of restricted stock (56) (228) (284)
Foreign currency translation
adjustments 2,080 2,080
-------------------------------------------------------------------------------
Balance at November 30, 1996 38,828 183,801 113,398 4,323 340,350
-------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
Net income 58,230 58,230
Dividends on common stock (11,668) (11,668)
Exercise of employee stock options 169 2,285 2,454
Foreign currency translation
adjustments (6,310) (6,310)
-------------------------------------------------------------------------------
Balance at November 30, 1997 $ $38,997 $186,086 $159,960 $(1,987) $383,056
-------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
See accompanying notes.
60
37
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended November 30,
-----------------------------------------
In thousands 1997 1996 1995
-----------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 58,230 $ (61,244) $ 29,059
Adjustments to reconcile net income (loss) to net cash provided (used) by
operating activities:
Equity in pretax loss of unconsolidated joint ventures 53 2,148 3,475
Minority interests in pretax income of consolidated joint ventures 425 233 584
Amortization of discounts and issuance costs 2,341 1,510 1,765
Depreciation and amortization 11,860 10,819 6,274
Provision for deferred income taxes (5,028) (41,208) (6,925)
Non-cash charge for impairment of long-lived assets 170,757
Change in assets and liabilities, net of effects from purchase of San
Antonio operations:
Receivables (118,123) 36,572 (14,664)
Inventories 5,157 232,871 (80,317)
Accounts payable, accrued expenses and other liabilities 20,064 (21,918) 26,680
Other, net (4,023) 244 (18,801)
-----------------------------------------
Net cash provided (used) by operating activities (29,044) 330,784 (52,870)
-----------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of San Antonio operations, net of cash acquired (80,556)
Investments in unconsolidated joint ventures 1,921 (7,644) 685
Net sales (originations) of mortgages held for long-term investment 164 (996) (253)
Payments received on first mortgages and mortgage-backed securities 9,988 18,069 13,786
Other, net (5,917) (2,799) (4,252)
-----------------------------------------
Net cash provided (used) by investing activities 6,156 (73,926) 9,966
-----------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from (payments on) credit agreements and other
short-term borrowings 37,900 (325,323) 92,358
Proceeds from issuance of senior subordinated notes 124,406
Proceeds from issuance of senior notes 172,182
Payments on collateralized mortgage obligations (9,531) (17,309) (13,296)
Payments on mortgages, land contracts and other loans (8,047) (53,894) (28,055)
Redemption of senior notes (100,000)
Payments from (to) minority interests in consolidated joint ventures 513 (2,232) 63
Payments of cash dividends (11,668) (16,107) (19,592)
-----------------------------------------
Net cash provided (used) for financing activities 81,349 (290,459) 31,478
-----------------------------------------
Net increase (decrease) in cash and cash equivalents 58,461 (33,601) (11,426)
Cash and cash equivalents at beginning of year 9,781 43,382 54,808
-----------------------------------------
Cash and cash equivalents at end of year $ 68,242 $ 9,781 $ 43,382
-----------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid, net of amounts capitalized $ 43,559 $ 52,063 $ 42,032
Income taxes paid 29,982 5,093 17,275
-----------------------------------------
SUPPLEMENTAL DISCLOSURES OF NONCASH ACTIVITIES:
Cost of inventories acquired through seller financing $ 15,098 $ 16,977 $ 36,149
-----------------------------------------
See accompanying notes.
61
38
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 and Mexico. In France, the
Company is also a developer of commercial and high-density residential projects.
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 majority-owned or controlled subsidiaries and
joint ventures. 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 judgements 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, 1997 and 1996, the
Company's cash equivalents totaled $70,365,000 and $6,286,000, respectively.
CONSTRUCTION OPERATIONS Housing and other real estate sales are recognized when
all conditions precedent to closing have been fulfilled. In France, sales of
apartments, condominiums and commercial buildings to buyers 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 generally allocated equally 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.
The Company adopted Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" ("SFAS No. 121"), in the second quarter of 1996. Prior to the
adoption of SFAS No. 121, inventories were stated at the lower of cost or
estimated net realizable value for each parcel or subdivision. Under the new
standard, inventories to be held and used are stated at cost unless a parcel or
subdivision is determined to be impaired, 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.
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 seven years using the straight-line method. Accumulated amortization was
$16,547,000 and $8,836,000 at November 30, 1997 and 1996, 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.
CHARGE FOR IMPAIRMENT OF LONG-LIVED ASSETS In 1996, the Company decided to
accelerate the disposition of certain real estate assets in order to help
effectuate the Company's strategies to improve its overall return on investment,
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39
restore financial leverage to targeted levels, and position the Company for
continued geographic expansion. In addition, in 1996, the Company substantially
eliminated its prior practice of investing in long term development projects in
order to reduce the operating risk associated with such projects. The
accelerated disposition of long term development assets caused certain assets,
primarily inventories and investments in unconsolidated joint ventures in
California and France, to be identified as being impaired and to be written
down. Certain of the Company's California properties were impacted by the
charge, while none of its non-California domestic properties were affected. The
Company's non-California domestic properties were not affected since they were
not held for long term development and were expected to be economically
successful such that they were determined not to be impaired.
Based on the Company's evaluation of impaired assets, a non-cash write-down of
$170,757,000 ($109,257,000, net of income taxes) was recorded in the second
quarter of 1996 to state the impaired assets at their fair values. The fair
values established were based on various methods, including discounted cash flow
projections, appraisals and evaluations of comparable market prices, as
appropriate. The inventories affected by the charge primarily consisted of land
which was not under active development and the charge did not have a material
effect on gross margins in the balance of 1996 or in 1997.
The write-down for impairment of long-lived assets was calculated in accordance
with the requirements of SFAS No. 121 but was not necessitated by implementation
of this standard. Had the Company not adopted SFAS No. 121, a substantial
write-down would have nonetheless been recorded. SFAS No. 121 requires that
long-lived assets be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of the asset may not be
recoverable, and requires impairment losses to be recorded on long-lived assets
when indicators of impairment are present and the undiscounted cash flows
estimated to be generated by those assets are less than the assets' carrying
amount.
Under the standard, when an impairment write-down is required, the related
assets are adjusted to their estimated fair value. Fair value for purposes of
SFAS No. 121 is deemed to be the amount a willing buyer would pay a willing
seller for such property in a current transaction, that is, other than in a
forced or liquidation sale. This is a change from the previous accounting
standard which required homebuilders to carry real estate assets at the lower of
cost or net realizable value.
The estimation process involved in determining if assets have been impaired and
in the determination of fair value is inherently uncertain since it requires
estimates of current market yields as well as future events and conditions. Such
future events and conditions include economic and market conditions, as well as
the availability of suitable financing to fund development and construction
activities. The realization of the estimates applied to the Company's real
estate projects is dependent upon future uncertain events and conditions and,
accordingly, the actual timing and amounts realized by the Company may be
materially different from the estimated fair values as described herein.
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 commitment of sale are valued at the lower of
aggregate cost or market. Market is principally based on public market
quotations or outstanding commitments obtained from investors to purchase first
mortgages receivable.
Principal and interest payments received on mortgage-backed securities are
invested in short-term securities maturing on the next debt service date of the
collateralized mortgage obligations for which the securities are held as
collateral. Such payments are restricted to the payment of the debt service on
the collateralized mortgage obligations.
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.
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40
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 each year. All
of the 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 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. Earnings per share were based on
the weighted average number of common shares, equivalent Series B Convertible
Preferred Shares and common share equivalents outstanding of 40,058,000 in 1997,
39,763,000 in 1996 and 39,757,000 in 1995.
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 $1.76 in 1996 and earnings per share of $.58 in
1995. This computation is not applicable for 1997 due to the conversion of the
Series B Convertible Preferred Shares into common stock in 1996.
RECENT ACCOUNTING PRONOUNCEMENTS In February 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 128,
"Earnings per Share" ("SFAS No. 128"), which simplifies existing computational
guidelines, revises disclosure requirements, and increases the comparability of
earnings per share on an international basis. Under the computational guidance
provided in SFAS No. 128, the Company's basic earnings per share for the years
ended November 30, 1997 and 1995 would have been $1.50 and $.59, respectively,
and its diluted earnings per share would have been $1.45 and $.58, respectively.
For the year ended November 30, 1996, both the Company's basic loss per share
and diluted loss per share would have been $1.80. SFAS No. 128 is effective for
periods ending after December 15, 1997 and requires restatement of all prior
period earnings per share data presented. The Company will adopt SFAS No. 128 in
its first quarter of fiscal year 1998.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
No. 130"), 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. The Company will adopt
SFAS No. 130 in its fiscal year 1999.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosure about Segments of an
Enterprise and Related Information" ("SFAS No. 131"), which changes the way
public companies report information about operating segments. SFAS No. 131,
which is based on the management approach to segment reporting, establishes
requirements to report selected segment information quarterly and to report
entity-wide disclosures about products and services, major customers, and the
material countries in which the entity holds assets and reports revenues. The
Company will adopt SFAS No. 131 in its fiscal year 1999.
RECLASSIFICATIONS Certain amounts in the consolidated financial statements of
prior years have been reclassified to conform to the 1997 presentation.
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41
NOTE 2. Acquisition
- --------------------------------------------------------------------------------
On March 1, 1996, the Company acquired San Antonio, Texas-based Rayco, Ltd. and
affiliates (the "San Antonio operations") for a total purchase price of
approximately $104,500,000, including cash used to pay off certain assumed debt.
The acquisition was financed through borrowings under the Company's revolving
credit agreement. The total purchase price for the San Antonio operations was
based on the net assets 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 $32,274,000
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, 1994, 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 below for the year ended November 30, 1996 are presented both
before and after the $170,757,000 non-cash charge for impairment of long-lived
assets.
Years Ended November 30,
--------------------------------------------------
1996
-------------------------------
After Before
Non-cash Non-cash
In thousands, except per share amounts Charge Charge 1995
--------------------------------------------------
Total revenues $ 1,850,329 $ 1,850,329 $ 1,634,574
Total pretax income (loss) (92,740) 78,017 57,625
Net income (loss) (59,440) 49,817 36,825
Earnings (loss) per share (1.49) 1.25 .93
--------------------------------------------------
This pro forma financial information is presented for informational purposes
only and is not necessarily indicative of the operating results that would have
occurred had the acquisition of the San Antonio operations been consummated as
of December 1, 1994, nor are they necessarily indicative of future operating
results.
NOTE 3. Receivables
- --------------------------------------------------------------------------------
CONSTRUCTION Trade receivables amounted to $42,591,000 and $28,368,000 at
November 30, 1997 and 1996, 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
$13,160,000 at November 30, 1997 and $6,444,000 at November 30, 1996. The buyers
are contractually obligated to remit payments against their unbilled balances.
Other receivables of $127,397,000 at November 30, 1997 and $78,669,000 at
November 30, 1996 included mortgages receivable, escrow deposits and amounts due
from municipalities and utility companies.
At November 30, 1997 and 1996, receivables were net of allowances for doubtful
accounts of $5,728,000 and $3,773,000, respectively.
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42
MORTGAGE BANKING First mortgages and mortgage-backed securities consisted of
loans of $8,019,000 at November 30, 1997 and $8,184,000 at November 30, 1996 and
mortgage-backed securities of $63,957,000 and $73,352,000 at November 30, 1997
and 1996, respectively. The mortgage-backed securities serve as collateral for
related collateralized mortgage obligations. The property 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 1/2% at both
November 30, 1997 and 1996 (with rates ranging from 7% to 12% in 1997 and 1996).
First mortgages and mortgage-backed securities were net of discounts and
premiums of $1,371,000 at November 30, 1997 and $2,490,000 at November 30, 1996.
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 $4,782,000 and $0,
respectively at November 30, 1997 and $4,391,000 and $0, respectively at
November 30, 1996.
First mortgages held under commitment of sale and other receivables consisted of
first mortgages held under commitment of sale of $203,113,000 at November 30,
1997 and $147,619,000 at November 30, 1996 and other receivables of $5,141,000
and $5,840,000 at November 30, 1997 and 1996, respectively. The first mortgages
held under commitment of sale bore interest at an average rate of 7 1/3% and
7 3/4% at November 30, 1997 and 1996, respectively. The balance in first
mortgages held under commitment of sale and other receivables fluctuates
significantly during the year and typically reaches its highest level at
quarter-ends, corresponding with the Company's home and mortgage delivery
activity.
NOTE 4. Inventories
- --------------------------------------------------------------------------------
Inventories consisted of the following:
November 30,
-------------------------
In thousands 1997 1996
-------------------------
Homes, lots and improvements in production $605,227 $646,069
Land under development 185,016 134,233
-------------------------
Total inventories $790,243 $780,302
-------------------------
Land under development primarily consists of parcels on which 50% or less of
estimated development costs have been incurred.
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The impact of capitalizing interest costs on consolidated pretax income is as
follows:
Years Ended November 30,
---------------------------------------
In thousands 1997 1996 1995
---------------------------------------
Interest incurred $ 52,468 $ 63,628 $ 64,629
Interest expensed (29,829) (36,691) (27,501)
---------------------------------------
Interest capitalized 22,639 26,937 37,128
Interest amortized (25,480) (24,893) (18,508)
---------------------------------------
Net impact on consolidated pretax income $ (2,841) $ 2,044 $ 18,620
---------------------------------------
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 primarily in New Mexico
and France and are engaged in the development, construction and sale of
residential properties and commercial projects. Combined condensed financial
information concerning the Company's unconsolidated joint venture activities
follows:
November 30,
---------------------------
In thousands 1997 1996
---------------------------
Cash $ 3,376 $ 5,449
Receivables 7,532 6,112
Inventories 18,421 121,802
Other assets 183 168
---------------------------
Total assets $ 29,512 $133,531
---------------------------
Mortgages and notes payable $ 4,528 $116,477
Other liabilities 5,549 8,583
Equity of:
The Company 6,338 8,312
Others 13,097 159
---------------------------
Total liabilities and equity $ 29,512 $133,531
---------------------------
The joint ventures finance land and inventory investments primarily through a
variety of borrowing arrangements. The Company typically does not guarantee
these financing arrangements.
Years Ended November 30,
-----------------------------------------
In thousands 1997 1996 1995
-----------------------------------------
Revenues $ 98,183 $ 6,678 $ 33,917
Cost of sales (94,901) (8,232) (49,289)
Other expenses, net (6,147) (13,207) (5,108)
-----------------------------------------
Total pretax loss $ (2,865) $(14,761) $(20,480)
-----------------------------------------
The Company's share of pretax loss $ (53) $ (2,148) $ (3,475)
-----------------------------------------
The Company's share of pretax loss includes management fees earned from the
unconsolidated joint ventures.
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NOTE 6. Mortgages and Notes Payable
- --------------------------------------------------------------------------------
CONSTRUCTION Mortgages and notes payable consisted of the following (interest
rates are as of November 30):
November 30,
----------------------
In thousands 1997 1996
----------------------
Unsecured domestic borrowings with banks due within one year (6 5/8% in 1996) $30,400
Unsecured French borrowings (4% to 5 3/8% in 1997 and 4 1/10% to 4 1/2% in 1996) $9,045 6,617
Mortgages and land contracts due to land sellers and other loans
(8 1/10% to 11% in 1997 and 7% to 30 7/10% in 1996) 14,294 7,243
Senior notes due 1999 at 10 3/8% 100,000
Senior notes due 2004 at 7 3/4% 175,000
Senior subordinated notes due 2003 at 9 3/8% 174,085 173,961
Senior subordinated notes due 2006 at 9 5/8% 124,445 124,408
----------------------
Total mortgages and notes payable $496,869 $442,629
----------------------
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 $488,361,000 was available
for the Company's future use at November 30, 1997. 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.
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. Under the conditions of the agreement, retained earnings of
$54,703,000 were available for payment of cash dividends or stock repurchases at
November 30, 1997.
The Company's French subsidiaries have lines of credit with various banks which
totaled $63,231,000 at November 30, 1997 and have various committed expiration
dates through September 1999. 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 4 3/10% and 6 2/10% at November
30, 1997 and 1996, 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.
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45
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, consolidations, or sales
of assets, or engage in certain transactions with officers, directors and
employees.
Principal payments on senior and senior subordinated notes, mortgages, land
contracts and other loans are due as follows: 1998, $11,817,000; 1999,
$2,350,000; 2000, $108,000; 2001, $19,000; 2002, $0; and thereafter,
$473,530,000.
Assets (primarily inventories) having a carrying value of approximately
$23,259,000 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.
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46
Mortgage Banking Notes payable included the following (interest rates are as of
November 30):
November 30,
---------------------
In thousands 1997 1996
---------------------
Notes payable secured by trust deed notes (6% in 1997) $200,828
Advances under asset-backed commercial paper facility (5 7/10% in 1996) $ 74,000
Advances under mortgage loan purchase and interim servicing agreement (6 1/5% in 1996) 60,956
---------------------
Total notes payable $200,828 $134,956
---------------------
First mortgages receivable are financed through a $250,000,000 revolving
mortgage warehouse agreement (the "Mortgage Warehouse Facility"). Prior to
entering into the Mortgage Warehouse Facility on February 24, 1997, the
Company's mortgage banking subsidiary obtained financing under a $120,000,000
asset-backed commercial paper facility and a $100,000,000 Mortgage Loan Purchase
and Interim Servicing Agreement. 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 amount outstanding under the Mortgage Warehouse Facility is secured by a
borrowing base, which includes certain mortgage loans held under commitment of
sale and is repayable from proceeds on the sale 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.
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, 1997 and 1996, the collateralized mortgage
obligations bore interest at rates ranging from 8% to 12 1/4% with stated
original principal maturities ranging from 3 to 30 years. Actual maturities are
dependent on the rate at which the underlying mortgage-backed securities are
repaid. No collateralized mortgage obligations have been issued since 1988.
Note 7. 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,
judgement 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.
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47
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:
November 30,
------------------------------------------------
1997 1996
------------------------------------------------
Carrying Estimated Carrying Estimated
In thousands Value Fair Value Value Fair Value
------------------------------------------------
Construction:
Financial liabilities
10 3/8% Senior notes $100,000 $102,800
7 3/4% Senior notes $175,000 $173,688
9 3/8% Senior subordinated notes 174,085 182,158 173,961 177,415
9 5/8% Senior subordinated notes 124,445 131,988 124,408 125,375
Mortgage banking:
Financial assets
Mortgage-backed securities 63,957 68,739 73,352 77,743
Financial liabilities
Collateralized mortgage obligations secured by
mortgage-backed securities 60,058 67,451 68,381 77,979
-------- -------- -------- --------
The Company used the following methods and assumptions in estimating fair
values:
Cash and cash equivalents; first mortgages held under commitment of sale and
other receivables; borrowings under the Revolving Credit Facility, French lines
of credit and Mortgage Warehouse Facility: 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.
Note 8. 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 9. Stockholders' Equity
- --------------------------------------------------------------------------------
Preferred Stock On January 11, 1989, the Company adopted a Stockholder Rights
Plan and declared a dividend distribution of one preferred share purchase right
for each outstanding share of common stock. Under certain circumstances, each
right entitles the holder to purchase 1/100th of a share of a new Series A
Participating Cumulative Preferred Stock at a price of $30.00, 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 20% or more of the aggregate votes entitled from all shares
of common stock or (ii) 10 days following the commencement of a tender offer for
20% or more of the aggregate votes entitled from all shares of common stock. In
the event the Company is acquired in a merger or other business combina-
71
48
tion 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 exercisable price of
the right. At the option of the Company, the rights are redeemable prior to
becoming exercisable at $.01 per right. Unless previously redeemed, the rights
will expire on March 7, 1999. 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.
In 1993, the Company issued 6,500,000 depository shares, each representing a
one-fifth ownership interest in a share of Series B Mandatory Conversion Premium
Dividend Preferred Stock (the Series B Convertible Preferred Shares). Dividends
were cumulative and payable quarterly in arrears at an annual dividend rate of
$1.52 per depository share. On the mandatory conversion date of April 1, 1996,
each of the Company's 6,500,000 depository shares was converted into one share
of the Company's common stock.
Note 10. 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 $2,081,000 in 1997, $1,867,000 in
1996 and $1,795,000 in 1995.
The Company's 1988 Employee Stock Plan (the "1988 Plan") provides that stock
options, associated limited stock appreciation rights, restricted shares of
common stock, stock units and other securities may be awarded to eligible
individuals for periods of up to 15 years. The 1988 Plan is the Company's
primary existing employee stock plan. The Company also has the Performance-Based
Incentive Plan for Senior Management (the "Incentive Plan") which provides for
the same awards as may be made under the 1988 Plan, but requires 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.
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 Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" 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 1997 and 1996 consistent with the
provisions of SFAS No. 123, the Company's net income (loss) and earnings (loss)
per share would have been reduced to the pro forma amounts indicated below:
Years Ended November 30,
------------------------
In thousands, except per share amounts 1997 1996
--------------------
Net income (loss)-- as reported $58,230 $(61,244)
Net income (loss)-- pro forma 57,463 (61,757)
Earnings (loss) per share-- as reported 1.45 (1.54)
Earnings (loss) per share-- pro forma 1.44 (1.56)
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 1997 and 1996, respectively: a risk free interest rate of 5.84% and
5.88%, an expected volatility factor for the market price of the Company's
common stock of 34.62% and 40.06%; a dividend yield of 1.38% and 2.33% and an
expected life of 4 years and 6 years. The weighted average fair value of options
granted in 1997 and 1996 was $3.68 and $4.48, respectively.
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49
Stock option transactions are summarized as follows:
1997 1996 1995
------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------------------------------------------------------------------------------
Options outstanding at
beginning of year 2,830,268 $10.00 2,406,718 $9.30 2,044,718 $8.75
Granted 387,000 $14.07 665,000 $14.21 512,000 $12.85
Exercised (169,183) $12.10 (37,100) $10.12 (17,000) $5.56
Cancelled (300,767) $14.25 (204,350) $15.38 (133,000) $14.15
------------------------------------------------------------------------------
Options outstanding at
end of year 2,747,318 $9.98 2,830,268 $10.00 2,406,718 $9.30
------------------------------------------------------------------------------
Options exercisable at
end of year 1,816,346 $7.92 1,732,468 $7.54 1,646,768 $7.21
------------------------------------------------------------------------------
Options available for grant
at end of year 1,776,998 1,863,431 2,268,581
--------- --------- ---------
Stock options outstanding at November 30, 1997 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
-----------------------------------------------------------------
$ 3.50 to $ 5.50 1,218,118 5.48 $4.66 1,218,118 $4.66
$ 7.06 to $13.125 487,500 12.03 $12.44 203,628 $11.75
$13.88 to $14.50 529,400 12.60 $14.20 180,400 $14.47
$14.56 to $19.06 512,300 12.03 $15.95 214,200 $17.28
-----------------------------------------------------------------
$ 3.50 to $19.06 2,747,318 9.24 $9.98 1,816,346 $7.92
-----------------------------------------------------------------
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 outstanding at the end of the year totaled 226,668 in 1997, 255,001 in
1996 and 345,834 in 1995.
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50
Note 11. Income Taxes
- --------------------------------------------------------------------------------
The components of pretax income (loss) are as follows:
Years Ended November 30,
---------------------------------
In thousands 1997 1996 1995
---------------------------------
Domestic $87,545 $(51,399) $45,393
Foreign 3,485 (44,345) 66
---------------------------------
Total pretax income (loss) $91,030 $(95,744) $45,459
---------------------------------
The components of income taxes are as follows:
In thousands Total Federal State Foreign
------------------------------------------------
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
------------------------------------------------
1996
Currently payable $5,659 $17,013 $(7,003) $(4,351)
Deferred (40,159) (28,754) (11,405)
------------------------------------------------
Total $(34,500) $(11,741) $(7,003) $(15,756)
------------------------------------------------
1995
Currently payable $22,569 $16,700 $ 2,634 $3,235
Deferred (6,169) (3,729) (2,440)
------------------------------------------------
Total $16,400 $12,971 $ 2,634 $795
------------------------------------------------
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51
Deferred income taxes result from temporary differences in the financial and tax
bases of assets and liabilities. Significant components of the Company's
deferred tax liabilities and assets are as follows:
November 30,
--------------------
In thousands 1997 1996
--------------------
Deferred tax liabilities:
Installment sales $ 2,372 $ 831
Bad debt and other reserves 333 463
Capitalized expenses 17,789 18,311
Partnerships and joint ventures 2,712 3,718
Computer equipment leases 432 439
Repatriation of foreign subsidiaries 11,785 13,481
Other 3,314 4,725
--------------------
Total deferred tax liabilities 38,737 41,968
--------------------
Deferred tax assets:
Warranty, legal and other accruals 12,394 10,943
Depreciation and amortization 4,764 2,542
Capitalized expenses 6,684 7,576
Non-cash charge for impairment of long-lived assets 13,307 17,096
Foreign tax credits 11,603 13,254
Net operating losses 1,099 1,557
Other 10,674 5,760
--------------------
Total deferred tax assets 60,525 58,728
--------------------
Net deferred tax assets $21,788 $16,760
--------------------
Net operating loss carryforwards expire in 1999, 2000 and 2001. The Company
expects that the entire deferred tax benefit of the tax loss carryforwards will
be recognized in future periods.
Income taxes computed at the statutory United States federal income tax rate and
income tax expense provided in the financial statements differ as follows:
Years Ended November 30,
---------------------------------
In thousands 1997 1996 1995
---------------------------------
Amount computed at statutory rate $31,861 $(33,510) $15,911
Increase (decrease) resulting from:
State taxes, net of federal income tax benefit 3,150 (4,552) 1,712
Differences in foreign tax rates (885) (167) 2,042
Intercompany dividends 352 1,170
Affordable housing credits (2,046) (2,024) (2,387)
Other, net 368 4,583 (878)
---------------------------------
Total $32,800 $(34,500) $16,400
---------------------------------
The Company has commitments to invest $7,691,000 over seven years in affordable
housing partnerships which are scheduled to provide tax credits.
75
52
The Company had foreign tax credit carryforwards at November 30, 1997 of
$4,074,000 for United States federal income tax purposes which expire in 1998
through 2002.
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 $17,592,000 at November 30, 1997. If these earnings were
currently distributed, the resulting withholding taxes payable would be
$878,000.
Note 12. Geographical and Segment Information
- --------------------------------------------------------------------------------
Geographical and segment information follows:
Operating
Income Identifiable
In thousands Revenues (Loss) Assets
-------------------------------------
1997
Construction:
California $ 993,921 $ 65,554 $ 717,949
Other United States 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 32,657 14,508 285,130
-------------------------------------
Total $1,876,271 $116,259 $1,418,991
-------------------------------------
1996
Construction:
California $1,057,980 $ 65,308 $ 620,823
Other United States 516,921 33,251 234,959
Foreign 179,246 120 144,377
Non-cash charge for impairment of long-lived assets* (170,757)
-------------------------------------
Total construction 1,754,147 (72,078) 1,000,159
Mortgage banking 31,758 12,740 243,335
-------------------------------------
Total $1,785,905 $(59,338) $1,243,494
-------------------------------------
1995
Construction:
California $ 971,132 $ 51,428 $ 852,753
Other United States 246,958 12,308 139,875
Foreign 148,776 1,795 276,580
-------------------------------------
Total construction 1,366,866 65,531 1,269,208
Mortgage banking 29,660 9,348 304,971
-------------------------------------
Total $1,396,526 $ 74,879 $1,574,179
-------------------------------------
*The $170.8 million pretax non-cash charge for impairment of long-lived assets
was recorded in the geographic regions as follows: California $112.1 million;
France $43.5 million; and Other $15.2 million.
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53
Note 13. Quarterly Results (unaudited)
- --------------------------------------------------------------------------------
Quarterly results for the years ended November 30, 1997 and 1996 follow:
In thousands, except per share amounts First Second Third Fourth
------------------------------------------------
1997
Revenues $346,384 $414,202 $468,776 $646,909
Operating income 14,266 23,629 29,595 48,769
Pretax income 6,944 16,705 23,763 43,618
Net income 4,444 10,705 15,163 27,918
Earnings per share .11 .27 .38 .69
------------------------------------------------
- -------------------------------------------------------------------------------------------------
1996
Revenues $302,475 $481,927 $480,988 $520,515
Operating income (loss)* 14,067 (142,380) 29,152 39,823
Pretax income (loss)* 6,386 (153,882) 20,667 31,085
Net income (loss)* 4,086 (98,482) 13,267 19,885
Earnings (loss) per share* .10 (2.47) .33 .50
------------------------------------------------
*Reflects a $170.8 million pretax non-cash charge for impairment of long-lived
assets recorded in the second quarter of 1996.
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54
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, 1997 and 1996, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended November 30, 1997. 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 generally accepted auditing
standards. 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, 1997 and 1996, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended November 30, 1997, in conformity with generally accepted accounting
principles.
/s/ ERNST & YOUNG LLP
Los Angeles, California
January 2, 1998
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
judgements 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
January 2, 1998
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55
STOCKHOLDER INFORMATION
1997 1996
-------------------------------------------
Common Stock Prices High Low High Low
-------------------------------------------
First Quarter $14 5/8 $11 3/4 $16 7/8 $12 3/4
Second Quarter 15 1/4 12 7/8 16 3/8 13 3/8
Third Quarter 22 1/8 14 3/4 15 11 1/4
Fourth Quarter 23 1/8 18 15/16 13 5/8 11 3/4
-------------------------------------------
Dividend Data
Kaufman and Broad Home Corporation paid a quarterly cash dividend of $.075 per
common share in 1997 and 1996.
Annual Stockholders' Meeting
The 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 2, 1998.
Stock Exchange Listings
The Company's common stock (ticker symbol: KBH) is listed on the New York Stock
Exchange and is also traded on the Boston, Cincinnati, Midwest, Pacific and
Philadelphia Exchanges.
Transfer Agent
ChaseMellon Shareholder Services, LLC
Los Angeles, California
Independent Auditors
Ernst & Young LLP
Los Angeles, California
Form 10-K
The Company's Report on Form 10-K filed with the Securities and Exchange
Commission may be obtained without charge by writing to Investor Relations,
Kaufman and Broad Home Corporation or by calling 1-888-KBH-NYSE toll free.
Company Information
News and earnings releases may be obtained at no charge by facsimile. Call
1-888-KBH-NYSE toll free. Company information can also be obtained on-line
through Company News On Call at http://www.prnewswire.com.
Headquarters
Kaufman and Broad Home Corporation
10990 Wilshire Boulevard
Los Angeles, California 90024
(310) 231-4000
(310) 231-4222 Fax
Internet address: kaufmanandbroad.com
A contribution was made to Habitat for Humanity by Kaufman and Broad on behalf
of the Future in Focus participants.
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56
LIST OF EXHIBITS FILED
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
- ------ ------------------------------------------------------------------ ---------------
10.14 $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.....................
10.15 Kaufman and Broad France Incentive Plan...........................
11 Statement of Computation of Per Share Earnings (Loss).............
13 Pages 44 through 78 and page 82 of the Company's 1997
Annual Report to Stockholders.....................................
22 Subsidiaries of the Company.......................................
24 Consent of Independent Auditors...................................
27 Financial Data Schedule...........................................