1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934.
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED) JANUARY 7, 1999
KAUFMAN AND BROAD HOME CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
DELAWARE 1-9195 95-3666267
(STATE OR OTHER JURISDICTION OF (COMMISSION (IRS EMPLOYER
INCORPORATION) FILE NUMBER) IDENTIFICATION NO.)
10990 WILSHIRE BOULEVARD, LOS ANGELES, CALIFORNIA 90024
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (310) 231-4000
NOT APPLICABLE
(FORMER NAME OR FORMER ADDRESS, IF CHANGED SINCE LAST REPORT)
================================================================================
2
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
Effective January 7, 1999, Kaufman and Broad Home Corporation (the
"Company") acquired substantially all of the homebuilding assets of the Lewis
Homes group of companies ("Lewis Homes"), including (i) all of the partnership
interests in Lewis Homes of California, a California general partnership, Lewis
Development Co., a California general partnership, Lewis Homes Enterprises, a
California general partnership, Lewis Homes of Nevada, a Nevada general
partnership, and Lewis Properties, a Nevada general partnership, (ii) all of the
issued and outstanding capital stock of Lewis Homes Management Corp., a
California corporation, and Branching Tree Corp., a California corporation, and
(iii) all the member interests of Mather Housing Company, LLC, a California
limited liability company, and Desert Inn Development, LLC, a Nevada limited
liability company, along with option agreements to purchase certain assets in
the future. Lewis Homes is engaged in the acquisition, development and sale of
residential real estate in California and Nevada.
Prior to the acquisition, Lewis Homes, based in Upland, California, was one
of the largest privately held single-family homebuilders in the United States
based on units delivered, with revenues for the year ended December 31, 1998 of
$715 million on 3,631 unit deliveries. Lewis Homes also owned or controlled
approximately 24,000 lots and had a backlog of approximately 900 homes at
December 31, 1998. Lewis Homes' principal markets are Las Vegas and Northern
Nevada, Southern California, and the greater Sacramento area in Northern
California.
The purchase price as of the filing of this Report for the acquisition of
Lewis Homes is approximately $449 million, comprised of the assumption of
approximately $303 million in debt and the issuance of 7,886,686 shares of the
Company's common stock valued at approximately $146 million. This price,
together with the purchase price of real property assets which the Company has
the right to purchase under certain option agreements, is substantially
equivalent to the previously announced estimated purchase price of $544 million,
which included 7,886,686 shares of the Company's common stock plus cash and debt
assumed. The purchase price was based on the December 31, 1998 net book values
of the entities purchased. While the Company does not anticipate that there will
be further adjustments to the purchase price, should any adjustments occur, the
Company does not expect such adjustments to be material. The shares of Company
common stock issued in the acquisition are "restricted" shares and may not be
resold without a registration statement or compliance with Securities and
Exchange Commission regulations that limit the number of shares that may be
resold in a given period. The Company has agreed to file a registration
statement for those shares in three increments at the Lewis family's request
from July 1, 2000 to July 1, 2002. Under the terms of the purchase agreement, a
Lewis family member has also been appointed to the Company's board of directors.
In connection with the acquisition of Lewis Homes, the Company obtained a
$200 million unsecured term loan to refinance certain debt assumed. The
financing was obtained under a term loan agreement dated as of January 7, 1999
among the Company, Bank of America National Trust and Savings Association,
Credit Lyonnais Los Angeles Branch, The First National Bank of Chicago and Union
Bank of California and various other banks (the "Term Loan Agreement") which
provides for payments of $25 million due on January 31, 2000, April 30, 2000 and
July 31, 2000, with the remaining principal balance due on April 30, 2001.
Interest is payable monthly at the London Interbank Offered Rate plus an
applicable spread. Under the terms of the Term Loan Agreement, the Company is
required, among other things, to maintain certain financial statement ratios and
a minimum net worth and is subject to limitations on acquisitions, inventories
and indebtedness. The financing obtained under the Term Loan Agreement did not
impact the amounts available under the Company's pre-existing borrowing
arrangements. The Company used borrowings under its existing $500 million
domestic unsecured revolving credit agreement to refinance certain other
remaining debt assumed in the acquisition.
The acquisition consideration for Lewis Homes was determined by
arm's-length negotiations between the parties. The acquisition will be accounted
for as a purchase with the results of Lewis Homes included in the Company's
financial statements as of January 7, 1999.
2
3
ITEM 7(a). FINANCIAL STATEMENTS OF BUSINESSES ACQUIRED.
Included herein are the historical audited financial statements of Lewis
Homes listed in the index below.
INDEX TO FINANCIAL STATEMENTS OF LEWIS HOMES
PAGE
----
HISTORICAL FINANCIAL STATEMENTS OF LEWIS HOMES
Report of Independent Auditors.............................. 4
Combined Statements of Assets and Liabilities as of December
31, 1998 and 1997......................................... 5
Combined Statements of Operations for the years ended
December 31, 1998, 1997 and 1996.......................... 6
Combined Statements of Changes in Equity for the years ended
December 31, 1998, 1997
and 1996.................................................. 7
Combined Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996.......................... 8
Notes to Combined Financial Statements...................... 9
3
4
REPORT OF INDEPENDENT AUDITORS
To the Partners and Shareholders
Lewis Homes Group of Companies
We have audited the accompanying combined statements of assets and
liabilities of the Lewis Homes Homebuilding Business ("LHHB") as of December 31,
1998 and 1997, and the related combined statements of operations, changes in
equity and cash flows for each of the three years in the period ended December
31, 1998. These financial statements are the responsibility of LHHB'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 combined financial position of the Lewis Homes
Homebuilding Business as of December 31, 1998 and 1997, and the combined results
of their operations and cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Newport Beach, California
February 1, 1999
4
5
LEWIS HOMES HOMEBUILDING BUSINESS
COMBINED STATEMENTS OF ASSETS AND LIABILITIES
(IN THOUSANDS)
DECEMBER 31, 1998 AND 1997
1998 1997
-------- --------
ASSETS
Cash and cash equivalents................................... $ 5,671 $ 2,414
Notes and accounts receivable............................... 8,126 6,460
Real estate held for development or sale.................... 375,623 366,667
Other assets, net........................................... 10,327 11,080
-------- --------
$399,747 $386,621
======== ========
LIABILITIES AND EQUITY
Accounts payable and accrued expenses....................... $ 41,245 $ 42,989
Notes payable, secured by real estate held for development
or sale................................................... 65,162 91,260
Other notes payable......................................... 246,313 5,529
-------- --------
352,720 139,778
Minority interests in combined partnerships................. 21,065 24,476
Commitments and contingencies...............................
Equity...................................................... 25,962 222,367
-------- --------
$399,747 $386,621
======== ========
See accompanying notes
5
6
LEWIS HOMES HOMEBUILDING BUSINESS
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996
-------- -------- --------
REVENUES
Sale of homes and land...................................... $711,563 $588,104 $449,507
Other income................................................ 3,554 3,974 1,083
-------- -------- --------
715,117 592,078 450,590
-------- -------- --------
COSTS AND EXPENSES
Cost of homes and land sold................................. 579,140 505,017 388,693
Selling and marketing....................................... 22,936 22,168 18,648
General and administrative.................................. 13,032 9,442 9,320
Depreciation................................................ 481 581 399
-------- -------- --------
615,589 537,208 417,060
-------- -------- --------
INCOME BEFORE MINORITY INTERESTS............................ 99,528 54,870 33,530
MINORITY INTERESTS.......................................... 3,631 (58) (83)
-------- -------- --------
NET INCOME.................................................. $ 95,897 $ 54,928 $ 33,613
======== ======== ========
See accompanying notes
6
7
LEWIS HOMES HOMEBUILDING BUSINESS
COMBINED STATEMENTS OF CHANGES IN EQUITY
(IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996
--------- -------- --------
BALANCE -- beginning of year................................ $ 222,367 $205,984 $179,509
Distributions, net of contributions......................... (292,302) (38,545) (7,138)
Net income.................................................. 95,897 54,928 33,613
--------- -------- --------
BALANCE -- end of year...................................... $ 25,962 $222,367 $205,984
========= ======== ========
See accompanying notes
7
8
LEWIS HOMES HOMEBUILDING BUSINESS
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996
--------- --------- ---------
OPERATING ACTIVITIES
Net income.................................................. $ 95,897 $ 54,928 $ 33,613
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation........................................... 481 581 399
Minority interests..................................... 3,631 (58) (83)
Noncash charge for impairment of long-lived assets..... -- 1,300 --
Changes in assets and liabilities
(Increase) decrease in notes and accounts
receivable........................................... (1,666) (195) 2,694
Increase in real estate held for development or
sale.............................................. (8,956) (9,267) (33,001)
Decrease (increase) in other assets.................. 1,553 589 (2,287)
(Decrease) increase in accounts payable and accrued
expenses.......................................... (1,744) 6,872 3,410
--------- --------- ---------
Net cash provided by operating activities................... 89,196 54,750 4,745
--------- --------- ---------
INVESTING ACTIVITIES
Purchases of property and equipment, net.................... (1,281) (791) (395)
--------- --------- ---------
Net cash used in investing activities....................... (1,281) (791) (395)
--------- --------- ---------
FINANCING ACTIVITIES
Proceeds from loans and notes secured by real estate........ 284,676 345,854 338,543
Payments on loans and notes secured by real estate.......... (310,774) (374,975) (321,865)
Proceeds from other notes payable........................... 246,791 1,905 1,430
Payments on other notes payable............................. (6,007) (1,888) (9,814)
Contributions from minority interests....................... 329 17,692 --
Distributions to minority interests......................... (7,371) (1,856) (6,727)
Distributions, net of contributions......................... (292,302) (38,545) (7,138)
--------- --------- ---------
Net cash used in financing activities....................... (84,658) (51,813) (5,571)
--------- --------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ 3,257 2,146 (1,221)
CASH AND CASH EQUIVALENTS -- beginning of year.............. 2,414 268 1,489
--------- --------- ---------
CASH AND CASH EQUIVALENTS -- end of year.................... $ 5,671 $ 2,414 $ 268
========= ========= =========
See accompanying notes.
8
9
LEWIS HOMES HOMEBUILDING BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS
(IN THOUSANDS)
DECEMBER 31, 1998, 1997 AND 1996
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
The Lewis Homes Group of Companies ("Lewis") is engaged in the acquisition,
development and sale of residential real estate (homebuilding) and in the
acquisition, development and operation of income properties (income properties)
primarily in California and Nevada. The homebuilding operations of Lewis,
referred to herein as the "Lewis Homes Homebuilding Business" or "LHHB," are
conducted through the following entities which are under Lewis' common control:
Partnerships
- Lewis Homes of California, a California general partnership
- Lewis Development Co., a California general partnership
- Lewis Homes Enterprises, a California general partnership
- Lewis Homes of Nevada, a Nevada general partnership
- Lewis Properties, a Nevada general partnership
Corporations
- Lewis Homes Management Corp., a California corporation
- Branching Tree Corp., a California corporation
Limited Liability Companies
- Mather Housing Company, LLC, a California limited liability company
- Desert Inn Development, LLC, a Nevada limited liability company
Effective January 7, 1999, Kaufman and Broad Home Corporation ("KBHC")
acquired substantially all of the homebuilding assets and liabilities of LHHB,
as more fully described in a purchase agreement between the parties, and entered
into option agreements to purchase the balance of the homebuilding assets of
LHHB in the future.
Basis of Presentation
The financial statements of LHHB have been presented on a combined basis
utilizing LHHB's historical cost. In management's opinion, these financial
statements include the combined assets, liabilities, revenues and expenses
directly identifiable with and allocations of other costs and expenses related
to LHHB. The financial statements of LHHB are not intended to represent the
financial position of Lewis' entire operations. The net excess of assets over
liabilities related to LHHB is presented as equity in the combined financial
statements. All significant intercompany accounts and transactions have been
eliminated in combination.
Cash and Cash Equivalents
LHHB considers all highly liquid investments, which generally have a
maturity of three months or less from the date of purchase, to be cash
equivalents.
9
10
LEWIS HOMES HOMEBUILDING BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Real Estate Held for Development or Sale
Real estate held for development is carried at cost. Cost includes all
direct and indirect land costs, development and construction costs, and
applicable carrying charges (primarily interest and property taxes) which are
capitalized to real estate projects during the development period. Land and land
development costs are allocated on a relative fair value method or, if
impracticable, on an area method. Other capitalized costs are generally assigned
to individual components of real estate projects based on specific
identification. Selling expenses, overhead fees and other marketing costs are
expensed in the period incurred. Cost of homes and land sold includes estimated
future warranty costs.
FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of, requires impairment losses to be
recorded on real estate held for development in certain circumstances.
Impairment losses are recorded by LHHB when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by such real estate
(excluding interest) are less than the carrying amount of the real estate. When
the real estate is determined to be impaired, the related carrying value of the
real estate is adjusted to its estimated fair value. During 1997, LHHB recorded
an impairment loss of $1,300 which is included in cost of homes and land sold in
the accompanying combined financial statements.
Fair value represents the amount at which an asset could be bought or sold
in a current transaction between willing parties other than a forced or
liquidation sale. The estimation process involved in determining whether real
estate 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, political and market conditions, such as obtaining entitlement
approvals and the availability of suitable financing to fund development and
construction activities. Ultimate realization is dependent upon future uncertain
events and conditions and, accordingly, the actual timing and amounts realized
by LHHB may be materially different from the estimated fair values.
Revenue Recognition
Revenue from the sale of real estate is recorded and profits are recognized
when title and risk of ownership have been transferred to the buyer and other
conditions necessary for profit recognition have been met.
Expense Allocations
General and administrative expenses in the combined financial statements
include direct expenses specifically identified as incurred by LHHB and an
allocation of other services provided by Lewis in the management of LHHB. These
common services relate to acquisition, development, financing, sales, legal,
accounting, information systems and human resources, and have been allocated
based on estimated time spent by Lewis personnel. Management believes the
methods used to allocate these common services are reasonable.
401(k) Plan
Lewis sponsors a defined contribution 401(k) plan covering substantially
all full-time employees who have completed one year of service and have attained
the age of 21. Lewis made discretionary matching contributions based on amounts
contributed by employees to the 401(k) plan. The amount of Lewis' contributions
to the plan pertaining to LHHB for the years ended December 31, 1998, 1997 and
1996, were $337, $303 and $270, respectively.
10
11
LEWIS HOMES HOMEBUILDING BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income Taxes
The owners of LHHB's S corporations, limited liability companies and
partnerships are responsible for the payment of income taxes on their share of
LHHB's taxable income. Income taxes are generally paid from cash distributions
to owners. LHHB is not taxed on its income except for a 1.5% California
franchise tax on earnings of its S corporations.
Fair Value of Financial Instruments
LHHB is an issuer of, or subject to, financial instruments with off-balance
sheet risk in the normal course of business which exposes it to credit risks.
These financial instruments include letters of credit which totaled $5,000 and
$1,387 at December 31, 1998 and 1997, respectively.
For those financial instruments for which it is practicable to estimate
fair value, management has determined that the carrying amounts of LHHB's
financial instruments approximate their fair values at December 31, 1998 and
1997.
Use of Estimates
The preparation of LHHB's combined financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities as of
December 31, 1998 and 1997, and the revenues and expenses for the three years
ended December 31, 1998. Actual results could materially differ from those
estimates in the near term.
2. NOTES AND ACCOUNTS RECEIVABLE
Notes and accounts receivable consist of the following at December 31:
1998 1997
------ ------
Escrow proceeds from home sales............................ $1,929 $2,321
Receivable from joint venture partner...................... 1,529 1,120
Other receivables.......................................... 4,668 3,019
------ ------
$8,126 $6,460
====== ======
3. REAL ESTATE HELD FOR DEVELOPMENT OR SALE
Real estate held for development or sale consists of the following at
December 31:
1998 1997
-------- --------
Land................................................... $ 81,786 $ 71,746
Construction in progress............................... 245,992 218,727
Completed homes........................................ 16,806 38,043
Model homes............................................ 31,039 38,151
-------- --------
$375,623 $366,667
======== ========
11
12
LEWIS HOMES HOMEBUILDING BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
4. OTHER ASSETS
Other assets consist of the following at December 31:
1998 1997
------- -------
Property and equipment, net of accumulated depreciation
of $3,657 and $2,239, respectively..................... $ 1,880 $ 1,080
Refundable utility contracts............................. 5,760 5,783
Prepaid expenses and deposits............................ 2,328 3,847
Investments in uncombined partnership.................... 359 370
------- -------
$10,327 $11,080
======= =======
Depreciation is computed using various methods over the useful life of the
property and equipment (generally ranging from three to five years).
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following at December
31:
1998 1997
------- -------
Accounts payable......................................... $23,534 $23,725
Accrued interest......................................... 747 767
Accrued salaries and wages............................... 1,996 3,510
Customer deposits........................................ 2,845 4,424
Warranty and other accrued expenses...................... 12,123 10,563
------- -------
$41,245 $42,989
======= =======
6. NOTES PAYABLE
Notes payable secured by real estate held for development or sale consist
of land, acquisition and development and construction loans totaling $65,162 at
December 31, 1998 and $91,260 at December 31, 1997. Other notes payable consist
of a $240,000 loan payable to a bank and $6,313 of short-term lines of credit
and other notes at December 31, 1998 and $5,529 of primarily short-term credit
lines at December 31, 1997.
The $240,000 bank loan at December 31, 1998 is guaranteed by Lewis
affiliates, bears interest at the one-month LIBOR plus 0.50% and matures in
November 1999. On January 7, 1999, the guaranty related to this loan was
released upon completion of the acquisition by KBHC. The undrawn balances of
short-term lines of credit at December 31, 1998 and 1997 were $8,000 and
$20,000, respectively.
Certain LHHB entities were required to maintain certain debt covenants
related to minimum tangible net worth, liquidity, ratios of liabilities to net
worth and to real estate held for development or sale. At December 31, 1998, all
debt covenant requirements were either met or waived by LHHB's lenders.
12
13
LEWIS HOMES HOMEBUILDING BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
6. NOTES PAYABLE (CONTINUED)
Estimated aggregate future principal payments due on notes payable at
December 31, 1998 are as follows:
1999...................................................... $299,688
2000...................................................... 7,093
2001...................................................... 988
2002...................................................... 2,086
2003...................................................... 1,338
Thereafter................................................ 282
--------
$311,475
========
Interest rates on notes payable generally range from 5.62% to 10.00%,
except for acquisition and development and construction loans. The interest
rates on these loans generally range from prime to prime plus 0.75% or one-month
LIBOR plus 0.5% to one-month LIBOR plus 3.00%. These loans are generally repaid
as the related real estate projects are sold, renewed or refinanced when
necessary. The weighted average interest rate on LHHB debt was 8.61% and 9.45%
for the years ended December 31, 1998 and 1997, respectively.
The one-month LIBOR and prime rates at December 31, 1998 were 5.12% and
7.75% and averaged 5.55% and 8.38%, respectively, for the year then ended. The
one-month LIBOR and prime rates at December 31, 1997 were 5.81% and 8.50% and
averaged 5.65% and 8.44%, respectively, for the year then ended.
For the years ended December 31, 1998, 1997 and 1996, LHHB incurred
interest costs of $14,238, $14,541 and $13,505, respectively, all of which was
capitalized to real estate. Interest paid was $14,258, $14,586, and $13,341 for
the years ended December 31, 1998, 1997 and 1996, respectively.
Total interest incurred by LHHB includes interest costs related to specific
debt secured by LHHB's real estate projects totaling approximately $7,485,
$9,464 and $10,348 in 1998, 1997 and 1996, respectively. Total interest incurred
also includes an allocation of interest directly incurred by Lewis as part of
financing the operations of LHHB. Allocated interest from Lewis totaled
approximately $6,753, $5,077, and $3,157 in 1998, 1997 and 1996, respectively,
and was calculated based on LHHB's average qualifying asset balance using Lewis'
weighted average interest rate during the respective periods. Management
believes that the method used to allocate interest is reasonable.
13
14
LEWIS HOMES HOMEBUILDING BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
7. EQUITY
The combined equity of the entities constituting LHHB, which are described
in Note 1, is summarized as follows for each of the three years in the period
ended December 31, 1998:
LIMITED LIABILITY
PARTNERSHIPS CORPORATIONS COMPANIES TOTAL
------------ ------------ ----------------- --------
BALANCE -- January 1, 1996..................... $180,180 $ (671) $ -- $179,509
Net distributions.............................. (6,938) (200) -- (7,138)
Net income..................................... 29,653 3,960 -- 33,613
-------- -------- ------ --------
BALANCE -- December 31, 1996................... 202,895 3,089 -- 205,984
Net (distributions) contributions.............. (38,057) (2,438) 1,950 (38,545)
Net income (loss).............................. 51,416 4,322 (810) 54,928
-------- -------- ------ --------
BALANCE -- December 31, 1997................... 216,254 4,973 1,140 222,367
Net (distributions) contributions.............. (284,415) (10,778) 2,891 292,302
Net income (loss).............................. 96,610 (1,031) 318 95,897
-------- -------- ------ --------
BALANCE -- December 31, 1998................... $ 28,449 $ (6,836) $4,349 $ 25,962
======== ======== ====== ========
8. RELATED PARTY TRANSACTIONS
LHHB has a contingent obligation to a financing partnership whose owners
are related to the principals of LHHB. The note underlying this obligation was
$1,045 at December 31, 1998, and annual principal payments of $697 plus interest
at 7.50% are required. In the event that revenues in the financing partnership
do not meet the required note payments, LHHB is obligated to advance funds to
the partnership. At December 31, 1998, total advances to the partnership were
$2,583. Management believes that these advances will be repaid and that
ultimately, no further payments will be required as a result of this
contingency.
9. COMMITMENTS AND CONTINGENCIES
Commitments and contingencies consist of those normal and usual to real
estate developers and include such items as subdivision improvement agreements
and guarantees, bond guarantees, warranties to homebuyers and construction loan
agreement guarantees. In addition, LHHB has continuing litigation matters
incurred in the ordinary course of business and records the liability for these
contingencies when such amounts can be estimated and are considered to be
material to the results of operations. Management believes LHHB's exposure to
these contingencies will be the primary responsibility of co-defendants,
including contractors and subcontractors, as well as insurance companies, and
that the disposition of the various matters will have no material effect on the
combined statements of operations of LHHB.
In some jurisdictions in which LHHB develops and constructs real estate,
various bonds are issued by government instrumentalities to finance major
improvements in the normal course of business. As a landowner benefited by these
improvements, LHHB is responsible for bond assessments on its land. The
estimated value of bonds attributable to LHHB is not fixed or determinable at
December 31, 1998 and 1997. When properties are sold, the assessments are either
repaid or the buyers assume the responsibility for repayment of the assessments.
10. IMPACT OF YEAR 2000 (UNAUDITED)
Lewis has recognized the need to ensure that its systems, equipment and
operations will not be adversely impacted by the change to the calendar year
2000. As such, Lewis has taken steps to identify potential areas of risk and has
begun addressing these in its planning, purchasing and daily operations. The
total cost of
14
15
LEWIS HOMES HOMEBUILDING BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
10. IMPACT OF YEAR 2000 (CONTINUED)
converting all internal systems, equipment and operations into the year 2000 has
not been fully quantified, but it is not expected to be a material cost to
Lewis. Lewis does not anticipate any material adverse impact resulting from the
failure of third-party service providers and vendors to prepare for the year
2000. Lewis continues to monitor those risks and is attempting to receive
compliance certificates from all third parties that could have a material impact
on Lewis' operations. However, Lewis recognizes that there is no guarantee that
the other companies with which Lewis does business will convert on a timely
basis and without adverse impact on Lewis.
15
16
ITEM 7(B). PRO FORMA FINANCIAL INFORMATION.
KAUFMAN AND BROAD HOME CORPORATION
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
Effective January 7, 1999, the Company acquired substantially all of the
homebuilding assets of Lewis Homes. The total purchase price of Lewis Homes was
based on the December 31, 1998 net book values of the entities purchased. The
total purchase price was $449 million, comprised of the assumption of
approximately $303 million in debt and the issuance of 7,886,686 shares of the
Company's common stock valued at approximately $146 million.
The following Kaufman and Broad Home Corporation unaudited pro forma
combined financial statements and related notes give effect to the acquisition
of Lewis Homes as a purchase. The Kaufman and Broad Home Corporation unaudited
pro forma combined balance sheet assumes that the acquisition was completed as
of November 30, 1998 and the Kaufman and Broad Home Corporation unaudited pro
forma combined statement of income assumes that the acquisition was completed on
December 1, 1997 for the year ended November 30, 1998. The historical financial
statements of Lewis Homes are for the year ended December 31, 1998 and
accordingly, the historical information for the calendar year of Lewis Homes has
been combined with the November 30 fiscal year of the Company for the purpose of
the pro forma presentation.
The Kaufman and Broad Home Corporation unaudited pro forma financial
statements are presented for illustrative purposes only and are not necessarily
indicative of the consolidated financial position or consolidated results of
operations of the Company that would have been reported had the acquisition
occurred on the date indicated, nor do they represent a forecast of the
consolidated financial position of the Company at any future date or the
consolidated results of operations of the Company for any future period.
Furthermore, no effect has been given in the Kaufman and Broad Home Corporation
unaudited pro forma combined statement of income for operating and synergistic
benefits that may be realized through the combination of entities. Amounts
allocated to the assets and liabilities of Lewis Homes were based on their
estimated fair market values as of December 31, 1998. The Kaufman and Broad Home
Corporation unaudited pro forma combined financial statements, including notes
thereto, should be read in conjunction with the historical financial statements
and related notes of Lewis Homes, included herein, and the Company's historical
consolidated financial statements and related notes.
16
17
KAUFMAN AND BROAD HOME CORPORATION
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
NOVEMBER 30, 1998
(IN THOUSANDS)
COMPANY LEWIS HOMES
NOVEMBER 30, DECEMBER 31, PRO FORMA PRO FORMA
1998 1998 ADJUSTMENTS COMBINED
------------ ------------ ----------- ----------
ASSETS
CONSTRUCTION:
Cash and cash equivalents.................. $ 56,602 $ 5,671 $ $ 62,273
Trade and other receivables................ 194,841 8,126 5,760(a) 208,727
Inventories................................ 1,134,402 375,623 (45,838)(b) 1,464,187
Investments in unconsolidated joint
ventures................................ 5,608 359(a) 5,967
Goodwill................................... 45,533 177,594(c) 223,127
Other assets............................... 105,558 10,327 (7,862)(d) 108,023
---------- -------- -------- ----------
1,542,544 399,747 130,013 2,072,304
---------- -------- -------- ----------
MORTGAGE BANKING:
Cash and cash equivalents.................. 6,751 6,751
Receivables:
First mortgages and mortgage-backed
securities............................ 58,262 58,262
First mortgages held under commitment of
sale and other receivables............ 249,702 249,702
Other assets............................... 2,945 2,945
---------- -------- -------- ----------
317,660 317,660
---------- -------- -------- ----------
Total assets................................. $1,860,204 $399,747 $130,013 $2,389,964
========== ======== ======== ==========
LIABILITIES AND EQUITY
CONSTRUCTION:
Accounts payable........................... $ 211,380 $ 41,245 $(17,711)(a) $ 234,914
Accrued expenses and other liabilities..... 148,508 17,711(a) 166,219
Mortgages and notes payable................ 529,846 311,475 9,970(e) 851,291
---------- -------- -------- ----------
889,734 352,720 9,970 1,252,424
---------- -------- -------- ----------
MORTGAGE BANKING:
Accounts payable and accrued expenses...... 8,924 8,924
Notes payable.............................. 239,413 239,413
Collateralized mortgage obligations secured
by mortgage-backed securities........... 49,264 49,264
---------- -------- -------- ----------
297,601 297,601
---------- -------- -------- ----------
Minority interests
Consolidated subsidiaries and joint
ventures................................ 8,608 21,065 29,673
Company obligated mandatorily redeemable
preferred securities of subsidiary trust
holding solely debentures of the
Company................................. 189,750 189,750
---------- -------- -------- ----------
198,358 21,065 219,423
---------- -------- -------- ----------
Common stock................................. 39,992 7,887(f) 47,879
Paid-in capital.............................. 193,520 138,118(f) 331,638
Retained earnings............................ 243,356 25,962 (25,962)(g) 243,356
Cumulative foreign currency translation
adjustments................................ (2,357) (2,357)
---------- -------- -------- ----------
TOTAL EQUITY................................. 474,511 25,962 120,043 620,516
---------- -------- -------- ----------
TOTAL LIABILITIES AND EQUITY................. $1,860,204 $399,747 $130,013 $2,389,964
========== ======== ======== ==========
See accompanying notes.
17
18
KAUFMAN AND BROAD HOME CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED NOVEMBER 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
COMPANY LEWIS HOMES
NOVEMBER 30, DECEMBER 31, PRO FORMA PRO FORMA
1998 1998 ADJUSTMENTS COMBINED
------------ ------------ ----------- -----------
TOTAL REVENUES.............................. $ 2,449,362 $ 715,117 $ $ 3,164,479
=========== ========= ========= ===========
CONSTRUCTION:
Revenues.................................. $ 2,402,966 $ 715,117 $ $ 3,118,083
Construction and land costs............... (1,949,729) (579,140) 15,809(h) (2,513,060)
Selling, general and administrative
expenses............................... (304,565) (36,449) (56,731)(i) (397,745)
----------- --------- --------- -----------
Operating income....................... 148,672 99,528 (40,922) 207,278
Interest income........................... 5,674 5,674
Interest expense, net of amounts
capitalized............................ (23,341) (14,680)(j) (38,021)
Minority interests........................ (7,002) (3,631) (10,633)
Equity in pretax income of unconsolidated
joint ventures......................... 1,151 1,151
----------- --------- --------- -----------
Construction pretax income................ 125,154 95,897 (55,602) 165,449
----------- --------- --------- -----------
MORTGAGE BANKING:
Revenues:
Interest income........................ 15,569 15,569
Other.................................. 30,827 30,827
----------- --------- --------- -----------
46,396 46,396
Expenses:
Interest............................... (15,046) (15,046)
General and administrative............. (9,937) (9,937)
----------- --------- --------- -----------
Mortgage banking pretax income............ 21,413 21,413
----------- --------- --------- -----------
TOTAL PRETAX INCOME......................... 146,567 95,897 (55,602) 186,862
Income taxes................................ (51,300) (14,100)(k) (65,400)
----------- --------- --------- -----------
NET INCOME.................................. $ 95,267 $ 95,897 $ (69,702) $ 121,462
=========== ========= ========= ===========
BASIC EARNINGS PER SHARE.................... $ 2.41 $ 2.56(l)
=========== ===========
DILUTED EARNINGS PER SHARE.................. $ 2.32 $ 2.48(l)
=========== ===========
Basic average shares outstanding............ 39,553 47,440
=========== ===========
Diluted average shares outstanding.......... 41,033 48,920
=========== ===========
See accompanying notes.
18
19
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(a) This adjustment reflects the reclassification of Lewis Homes' amounts to
conform to the Company's presentation. No purchase price allocation
adjustments were made to this item.
(b) This adjustment reflects the exclusion of real property assets totaling
$81.3 million which were sold by Lewis Homes subsequent to December 31,
1998 but prior to the Company's acquisition. The Company subsequently
obtained the right to purchase these assets under certain option
agreements. This adjustment also reflects purchase price allocation
adjustments to reflect the estimated fair value of inventories in
accordance with APB No. 16, Business Combinations, as amended.
(c) This adjustment reflects the pro forma goodwill amount at November 30,
1998. The goodwill amount was estimated to be $177.6 million, based on the
estimated excess of the purchase price over the estimated fair value of the
identifiable assets less liabilities assumed in accordance with APB No. 16
Business Combinations, as amended.
(d) This adjustment reflects the reclassification of Lewis Homes' amounts to
conform to the Company's presentation as well as purchase price allocation
adjustments to reflect the estimated fair value of these assets in
accordance with APB No. 16, Business Combinations, as amended.
(e) This adjustment primarily reflects the costs related to the Lewis Homes
acquisition.
(f) This adjustment reflects the issuance of 7,886,686 shares of the Company's
common stock, $1.00 par value, as partial consideration for the acquisition
of Lewis Homes valued at approximately $146.0 million in accordance with
APB No. 16, Business Combinations, as amended.
(g) This adjustment eliminates the equity of Lewis Homes.
(h) This adjustment reflects the reclassification of Lewis Homes' amounts to
conform to the Company's presentation as well as the estimated amortization
of the purchase price allocated to inventories.
(i) This adjustment reflects the reclassification of Lewis Homes' amounts to
conform to the Company's presentation as well as the amortization of
goodwill which is assumed to be amortized on a straight-line basis over 10
years. The amortization period was determined in accordance with APB No.
17, Intangible Assets. The period estimated to be benefited was determined
from the pertinent factors including demand, competition and other
economic factors as well as legal, regulatory and contractual provisions.
(j) This adjustment reflects the pro forma effect on interest expense, net of
amounts capitalized. As the amount of Lewis Homes' debt outstanding
increased significantly at December 31, 1998, the adjustment was made to
reflect interest expense as if this higher debt amount was outstanding for
the entire year. This adjustment also reflects the interest rate impact of
the refinancing of debt assumed with borrowings under the Term Loan
Agreement.
(k) This adjustment reflects the pro forma effect on consolidated income taxes
due to the results of operations of Lewis Homes, the pro forma amortization
of goodwill, as well as the amortization of the purchase price allocated to
inventories and the net interest expense associated with the acquisition
indebtedness. The pro forma income taxes were based on the Company's
effective tax rate for the year ended November 30, 1998 of 35%.
(l) The pro forma combined basic and diluted earnings per share were
calculated to give effect to the 7,886,686 shares issued in the Lewis
Homes acquisition. For purposes of the pro forma financial statements, the
7,886,686 shares were assumed to be issued as of December 1, 1997.
19
20
ITEM 7(C). EXHIBITS.
EXHIBIT
NUMBER DESCRIPTION
------- -----------
2.1 Purchase Agreement dated as of October 20, 1998. None of the
schedules or exhibits, consisting of disclosure statements
and ancillary agreements, referred to in the agreement are
filed as exhibits herewith; however, the Company agrees to
furnish supplementally a copy of any omitted schedule or
exhibit to the Commission upon request.*
2.2 Amendment to Purchase Agreement dated as of January 7, 1999.
Exhibit C: Purchase Agreement (Amended and Restated) thereto
is filed as Exhibit 2.3 herewith. None of
the other schedules or exhibits referred to in the agreement
are filed as exhibits herewith; however, the Company agrees
to furnish supplementally a copy of any omitted schedule
or exhibit to the Commission upon request.*
2.3 Purchase Agreement (Amended and Restated) executed January
7, 1999. Exhibit E: Registration Rights Agreement, Exhibit
F: Shareholder Agreement and Exhibit P: Representation,
Warranty and Indemnity Agreement thereto are filed as
Exhibits 99.1, 99.2 and 2.4, respectively, herewith. None of
the other schedules or exhibits referred to in the agreement
are filed as exhibits herewith; however, the Company agrees
to furnish supplementally a copy of any omitted schedule or
exhibit to the Commission upon request.*
2.4 Representation, Warranty and Indemnity Agreement dated
January 7, 1999.*
10.1 Term Loan Agreement among the Company, Bank of America
National Trust and
Savings Association, as Administrative Agent and Lead
Arranger, Credit Lyonnais Los Angeles Branch, as Syndication
Agent, The First National Bank of Chicago, as Documentation
Agent and Union Bank of California, as Co-Agent and the
banks listed
therein, dated as of January 7, 1999.*
23 Consent of Ernst & Young LLP.**
99.1 Registration Rights Agreement dated January 7, 1999.*
99.2 Shareholder Agreement dated January 7, 1999.*
- ---------------
* Included in this Form 8-K as it was filed on January 22, 1999.
** Filed herewith.
20
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Dated March 22, 1999
KAUFMAN AND BROAD HOME CORPORATION
Registrant
/s/ MICHAEL F. HENN
------------------------------------------
Michael F. Henn
Senior Vice President and Chief Financial
Officer
(Principal Financial Officer)
21
22
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION PAGE
- ------- ----------- ----
2.1 Purchase Agreement dated as of October 20, 1998. None of the
schedules or exhibits, consisting of disclosure statements
and ancillary agreements, referred to in the agreement are
filed as exhibits herewith; however, the Company agrees to
furnish supplementally a copy of any omitted schedule or
exhibit to the Commission upon request.*
2.2 Amendment to Purchase Agreement dated as of January 7, 1999.
Exhibit C: Purchase Agreement (Amended and Restated) thereto
is filed as Exhibit 2.3 herewith. None of the other
schedules or exhibits referred to in the agreement are filed
as exhibits herewith; however, the Company agrees to furnish
supplementally a copy of any omitted schedule or exhibit to
the Commission upon request.*
2.3 Purchase Agreement (Amended and Restated) executed January
7, 1999. Exhibit E: Registration Rights Agreement, Exhibit
F: Shareholder Agreement and Exhibit P: Representation,
Warranty and Indemnity Agreement thereto are filed as
Exhibits 99.1, 99.2 and 2.4, respectively, herewith.
None of the other schedules or exhibits referred to in
the agreement are filed as exhibits herewith; however, the
Company agrees to furnish supplementally a copy of any
omitted schedule or exhibit to the Commission upon request.*
2.4 Representation, Warranty and Indemnity Agreement dated
January 7, 1999.*
10.1 Term Loan Agreement among the Company, Bank of America
National Trust and Savings Association, as Administrative
Agent and Lead Arranger, Credit Lyonnais Los Angeles Branch,
as Syndication Agent, The First National Bank of Chicago, as
Documentation Agent and Union Bank of California, as
Co-Agent and the banks listed therein, dated as of January
7, 1999.*
23 Consent of Ernst & Young LLP.**
99.1 Registration Rights Agreement dated January 7, 1999.*
99.2 Shareholder Agreement dated January 7, 1999.*
- ---------------
* Included in this Form 8-K as it was filed on January 22, 1999.
** Filed herewith.