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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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM
--------------- TO ---------------.
COMMISSION FILE NO. 1-9195
KAUFMAN AND BROAD HOME CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
INCORPORATED IN DELAWARE 95-3666267
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
10990 WILSHIRE BOULEVARD, LOS ANGELES, CALIFORNIA 90024
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (310) 231-4000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
COMMON STOCK (PAR VALUE $1.00 PER SHARE) NEW YORK STOCK EXCHANGE
RIGHTS TO PURCHASE SERIES A PARTICIPATING CUMULATIVE NEW YORK STOCK EXCHANGE
PREFERRED STOCK
INCOME PRIDES NEW YORK STOCK EXCHANGE
GROWTH PRIDES NEW YORK STOCK EXCHANGE
9 3/8% SENIOR SUBORDINATED NOTES DUE 2003 NEW YORK STOCK EXCHANGE
7 3/4% SENIOR NOTES DUE 2004 NEW YORK STOCK EXCHANGE
9 5/8% SENIOR SUBORDINATED NOTES DUE 2006 NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO __
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. [ ]
THE AGGREGATE MARKET VALUE OF VOTING STOCK HELD BY NON-AFFILIATES OF THE
COMPANY ON JANUARY 31, 1999 WAS $1,263,985,284.
THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S CLASSES OF
COMMON STOCK ON JANUARY 31, 1999 WAS AS FOLLOWS:
Common Stock (par value $1.00 per share) 47,894,958 shares
DOCUMENTS INCORPORATED BY REFERENCE
1998 Annual Report to Stockholders (incorporated into Part II).
Notice of 1999 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 homebuyers, 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 homebuyers
through its wholly owned subsidiary, Kaufman and Broad Mortgage Company
("KBMC").
The Company is a Delaware corporation and maintains its principal executive
offices at 10990 Wilshire Boulevard, Los Angeles, California 90024. 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 1998, the Company achieved an all-time record 15,213 unit deliveries,
surpassing the previous Company record of 11,443 units established in 1997. The
increase in deliveries in 1998 was primarily due to the Company's continued
expansion of its domestic operations outside California and the acquisition of
Houston-based Hallmark Residential Group ("Hallmark"), Denver-based PrideMark
Homebuilding Group ("PrideMark") and Phoenix/Tucson-based Estes Homebuilding Co.
("Estes"), all of which the Company completed during the second quarter of 1998.
Results for 1998 also reflect the Company's acquisition of a majority interest
in Houston-based General Homes Corporation ("General Homes") as of August 18,
1998. Subsequent to the end of fiscal 1998, in January 1999, the Company
continued to grow through the acquisition of the remaining minority interest in
General Homes and completing its purchase of substantially all of the
homebuilding assets of the Lewis Homes group of companies ("Lewis Homes"). Lewis
Homes' principal markets are Las Vegas and Northern Nevada, Southern California
and the greater Sacramento area in Northern California. Including the Lewis
Homes operations, which are expected to deliver approximately 3,500 homes in
1999, the Company believes it will be the largest homebuilder in the United
States in 1999, as measured by unit volume.
The Company continues to explore opportunities to enter new markets and
plans to grow in its existing markets. Growth in both new and existing markets
is expected to be supplemented by strategic acquisitions from time to time. In
the aggregate, the Company has established a goal of delivering approximately
21,500 units Company-wide in 1999. This goal could be materially affected by
various risk factors such as changes in general economic conditions either
nationally or in the regions in which the Company operates or may commence
operations, job growth and employment levels, home mortgage interest rates or
consumer confidence, among other things. Nevertheless, the Company remains
optimistic about its ability to continue to grow its business in 1999.
During 1998, the average number of active communities operated by the
Company was 210, an increase of approximately 27% over 1997. The average selling
price of the Company's homes was $156,400 in 1998, down 2.1% from 1997 primarily
as a result of an increase in the proportion of lower-priced deliveries
generated from operations outside of California.
The Company's principal geographic markets as of November 30, 1998 were:
California; "Other U.S." (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.
To enhance its operating capabilities in regional submarkets, the Company
conducted its domestic homebuilding business in 1998 through six divisional
offices in California, one divisional office in each of Nevada, Colorado, New
Mexico and Utah, two divisional offices in Arizona, and four divisional offices
in Texas. In addition, the Company
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operated 13 new home showrooms in 1998. 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. Since 1995, the housing
market has improved significantly in California with the number of permits
issued increasing in each succeeding year. In 1998, new housing permits issued
in the state increased approximately 11% 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 1998, the Company's average number of active communities in
California declined approximately 18% from 1997; however, its deliveries in the
state totaled 4,858, increasing nearly 3% from the previous year. The Company's
market share in California was approximately 5% in 1998, which was the largest
market share of any homebuilder in California. Due to planned increases in
active communities and the additional communities associated with the Lewis
Homes acquisition, the Company expects to record significant increases in
communities, deliveries and market share in California in 1999.
In Southern California, the Company concentrates its homebuilding 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.
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 1,200 to 3,000 square feet
in 1998 and sold at an average price of $224,500, well below the statewide new
home average of $261,600, as a result of the Company's emphasis on the
entry-level market. The Company's 1998 average selling price in California
increased approximately 8% from the prior year reflecting strategic increases in
sales prices in certain markets based on improved market conditions, as well as
a change in product mix favoring a greater number of higher-priced urban in-fill
locations and first-time move up sales.
Other U.S. In the early 1990s, the greatly improved business conditions in
other western states coupled with the prolonged economic downturn in California
caused the Company to look for opportunities to expand its domestic operations
outside California. Deliveries from the Company's Other U.S. operations in 1998
totaled 8,698 units, up 54% from the prior year. This increase was due to a
higher average number of active communities, reflecting the Company's growth
strategy; the inclusion of operating results from the acquisitions of Hallmark,
PrideMark and Estes, all of which the Company completed during the second
quarter of 1998; and operating results from the Company's acquisition of a
majority interest in General Homes. Excluding results from these acquisitions,
unit deliveries from Other U.S. operations increased 24% to 6,996 in 1998. The
Company's Other U.S. operations accounted for approximately 64% of its domestic
home deliveries in 1998, compared to approximately 54% in 1997. In 1999, the
Lewis Homes acquisition is expected to strengthen the Company's market position
in Nevada, resulting in significantly increased deliveries in the state.
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 1,000 to 3,200 square feet in 1998 and sold at an average
price of $119,100. The average selling price of the Company's Other U.S. homes
increased slightly in 1998 from $118,700 in 1997. The Company's acquisitions in
1998 did not have a material impact on the Other U.S. average selling price.
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 and 1998. The Company
believes that the greater Paris metropolitan area (which is the principal
population, economic and government center of France) and the other French
metropolitan areas in which it is currently operating offer long-term growth
potential for residential builders.
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Housing deliveries from the Company's French operations in 1998 increased
approximately 56% from the prior year to 1,609 units, primarily as a result of
the inclusion of a full year of results from French homebuilder SMCI. The
Company acquired SMCI, a builder of condominiums in Paris and other cities in
France, in mid-1997.
The Company's French homebuilding operations focused primarily on
single-family detached and attached homes in 1998, ranging in size from
approximately 800 to 1,900 square feet. The average selling price of the
Company's homes in France declined 4% to $149,200 in 1998 primarily due to
lower-priced deliveries generated from SMCI developments. With the decline in
the French economy in the early to mid-1990's, the Company's French commercial
operations, which developed commercial office buildings in Paris for sale to
institutional investors, became a smaller segment of the French operations. 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
reduced levels, reflecting the Company's decision to refocus on its expanded
French residential business and the reduced opportunities in French commercial
markets due to the lingering effects of the country's mid-1990 recession.
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 prior to the sale, the impact of
the sale on the Company's financial position and results of operations was not
significant.
Mexico. The Company established housing operations 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 conditions, in 1996 the Company
delivered its first homes from a community near Mexico City. In 1998, deliveries
from the Company's operations in Mexico totaled 48 units, up slightly from the
prior year. Mexico's economy appears to be recovering from the country's deep
recession brought on by the devaluation of its currency. Nevertheless, economic
and political conditions remain unsettled and the Company continues to closely
monitor its level of activity 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, Texas and France.
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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, 1998, 1997 and 1996
(excluding the effect of unconsolidated joint ventures).
YEARS ENDED NOVEMBER 30,
----------------------------
1998 1997 1996
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California:
Unit deliveries........................................... 4,858 4,731 5,171
Average selling price..................................... $224,500 $208,500 $192,900
Total construction revenues (in millions)(1).............. $1,105.9 $ 993.9 $1,058.0
Other U.S.:
Unit deliveries........................................... 8,698 5,642 4,294
Average selling price..................................... $119,100 $118,700 $119,700
Total construction revenues (in millions)(1).............. $1,042.4 $ 670.6 $ 516.9
France:
Unit deliveries........................................... 1,609 1,032 749
Average selling price(2).................................. $149,200 $155,500 $206,600
Total construction revenues (in millions)(1)(2)........... $ 242.0 $ 168.2 $ 171.4
Other:
Unit deliveries........................................... 48 38 35
Average selling price(2).................................. $260,500 $284,600 $212,500
Total construction revenues (in millions)(1)(2)........... $ 12.7 $ 10.9 $ 7.9
Total:
Unit deliveries........................................... 15,213 11,443 10,249
Average selling price(2).................................. $156,400 $159,700 $163,300
Total construction revenues (in millions)(1)(2)........... $2,403.0 $1,843.6 $1,754.2
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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 remained tightly focused throughout 1998 on two over-arching
strategies: the implementation of its KB2000 operational business model and the
acceleration of the Company's growth. To advance these initiatives, the Company
concentrated on two complementary strategies consisting of establishing optimum
local market positions in selected regional markets and maintaining its focus on
strategic acquisitions of regional builders. The Company plans to continue to
focus on these strategies in 1999 to enhance its ability to achieve profit
performance that is more predictable, consistent and achievable.
The KB2000 operational business model emphasizes efficiencies generated
from a more process-driven, systematic approach to homebuilding and also focuses
on gaining a deeper understanding of customer interests and needs. Key elements
of KB2000 include: improving the Company's understanding of customer desires and
preferences through frequent and localized surveys; emphasizing pre-sales in
contrast to speculative inventory; maintaining lower average levels of
in-process and standing inventory; establishing even flow production; providing
a wide spectrum of choice to customers in terms of location, design and options;
offering low base prices; and reducing the use of sales incentives. The Company
made significant progress in implementing the KB2000 operational business model
in 1997 and 1998 by, among other things, focusing on the pre-sale and backlog
building strategy, developing and implementing a rigorous and detailed customer
survey program, and opening new KB2000 communities and new home showrooms.
In order to leverage the benefits of the KB2000 operational business model,
the Company has been implementing a strategy designed to achieve a dominant
market position in its major markets. The Company's use of the term "dominant"
is not intended to imply that the Company will become the largest builder in any
market in terms of unit deliveries, revenues or market share; nor is it the
Company's intent to attempt to, in any way "control" the pricing of
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homes in any market. Rather, the Company's "dominance" goal is only intended to
achieve a market position sufficiently large that it will enable its local
business to maximize the benefits of its KB2000 operational business model. The
Company believes that by operating at large volume levels it can better execute
its KB2000 operational business model and use economies of scale to increase
profits in fewer, larger markets. These benefits can include lower land
acquisition costs, improved terms with suppliers and subcontractors, the ability
to offer maximum choice and the best value to customers, and the retention of
the best management talent.
The Company hopes to continue to increase overall unit delivery growth in
future years. The Company's growth strategies include expanding existing
operations to optimal market volume levels, as well as entering new markets at
high volume levels, principally through acquisitions. Growth in existing markets
will be driven by the Company's ability to increase the average number of active
communities in its major markets through the successful implementation of its
KB2000 operational business model. The Company's ongoing acquisition strategy is
expected to supplement growth in existing markets and facilitate expansion into
new markets.
In identifying acquisition targets, the Company seeks homebuilders that
possess the following characteristics: a business model similar to KB2000;
access to or control of land to support growth; a strong management team; and a
financial condition positioned to be accretive to earnings in the first full
year following acquisition. The Company believes that acquisitions fitting these
criteria will enable it to expand its operations in 1999 and beyond in a focused
and disciplined manner. However, the Company's continued success in acquiring
other homebuilders could be affected by several factors, including, among other
things, conditions in the U.S. securities markets, the general availability of
applicable acquisition candidates, pricing for such transactions, competition
among other national or regional builders for such target companies, changes in
general and economic conditions nationally and in target markets, and capital or
credit market conditions.
LOCAL EXPERTISE
Management believes that its business requires in-depth knowledge of local
markets in order to acquire land in desirable locations and on favorable terms,
to engage subcontractors, to plan communities keyed to local demand, to
anticipate customer tastes in specific markets and to assess the regulatory
environment. Accordingly, the Company's divisional structure is designed to
utilize local market expertise. The Company has experienced management teams in
each of its regional submarkets. Although the Company has centralized certain
functions, such as marketing, legal, materials purchasing and product
development, to benefit from economies of scale, local management continues to
exercise considerable autonomy in identifying land acquisition opportunities,
developing sales strategies, conducting production operations and controlling
costs. The Company seeks to operate sizeable businesses in each of its markets
in order to maximize its competitive advantages and the benefits of the KB2000
operational business model.
In France, the Company has assembled a French management team which is
highly experienced in its single-family housing and commercial real estate
businesses as well as the financing, development and construction of
high-density residential projects. This expertise includes knowledge of local
markets and the regulatory environment.
INNOVATIVE DESIGNS AND MARKETING STRATEGIES
The Company believes that it has been and continues to be an innovator in
the design of entry-level homes for the first-time buyer. The Company's in-house
architectural services group, whose plans are protected by copyright, has been
successful in creating distinctive design features that are not typically found
in comparably priced homes. In 1998, the Company continued its implementation of
KB2000, which seeks to keep construction costs and base prices as low as
possible while promoting customer choice.
Certain elements of the KB2000 operational business model include achieving
an in depth understanding of customer desires and preferences through detailed
market surveys and providing a wide spectrum of choice to customers in terms of
location, design and options. The Company's KB2000 communities offer entry-level
homebuyers an abundance of choices and options which allows customers to
customize their home to an extent not typically available with other builders.
As part of its implementation of KB2000, the Company opened eight new home
showrooms in 1998, bringing its total to 13. These showrooms, which range from
5,000 to 18,000 square feet, are located separately from divisional business
offices and offer customers thousands of option combinations -- from floor plans
to fireplaces to garage doors -- in a retail environment convenient to multiple
communities.
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In France, the Company created a village concept through the elimination of
front-yard walls and the extensive use of landscaping. It also introduced to the
French market the American concept of a master bedroom suite, as well as walk-
in closets, built-in kitchen cabinetry and two-car garages. The Company believes
that in each of its residential markets, its value engineering enables it to
offer appealing and well-designed homes without increasing construction costs.
In 1998, the Company opened a 6,500 square foot new home showroom in France,
offering a broad choice of options to new home and condominium buyers. A website
featuring available homes was also launched in 1998.
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 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 domestic communities, the
Company encourages participation of outside real estate brokers in bringing
prospective buyers to its communities.
COMMUNITY DEVELOPMENT
The community development process generally consists of three phases: land
acquisition; land development; and home construction and sale. The normal
development cycle for a community has historically ranged from six to 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, weather conditions and marketing results.
When feasible, the Company acquires control of lot positions through the
use of options. In addition, the Company frequently acquires finished lots
within its pricing parameters, enabling it to deliver completed homes shortly
after acquisition. The total number of lots in the Company's domestic new home
communities vary significantly but typically are comprised of 50 to 250 lots.
These domestic developments usually include three different model home designs,
and in 1998 generally offered lot sizes ranging from approximately 3,000 to
9,000 square feet, with premium lots often containing more square footage. In
many of its KB2000 communities, the Company offers a wide selection of 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. In 1996,
the Company decided to substantially eliminate its prior practice of investing
in such long-term development projects in order to reduce the operating risk
associated with such projects. However, as part of its recent acquisitions and
due to favorable market conditions for buildable land in California, the Company
has increased its long-term development holdings. In France, typical
single-family developments consist of approximately 40 lots, with average lot
sizes of 4,300 square feet.
Land Acquisition and Development. In accordance with the KB2000
operational business model, all homebuyers of new and resale homes in each
market are carefully surveyed. Based upon these surveys, a marketing strategy is
developed which targets specific price points and geographic sectors which the
Company will pursue. The Company utilizes an in-house staff of land acquisition
specialists at each division who carry out extensive site selection research and
analysis in order to identify properties in desirable locations consistent with
the Company's market strategy. In acquiring land, the Company considers such
factors as: current market conditions, with an emphasis on the prices of
comparable new and resale homes in the particular market; expected sales rates;
proximity to metropolitan areas; population, industrial and commercial growth
patterns; estimated costs of completed lot development; customer preferences;
and environmental matters. Senior corporate management controls the commitment
of the Company's resources for all land acquisitions and utilizes a series of
specific financial and budgetary controls in approving acquisition opportunities
identified by division land acquisition personnel. The Company employs strict
standards for assessing all proposed land purchases based, in part, upon
specific discounted after tax cash flow internal rate of return requirements and
also evaluates each division's overall return on investment. 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
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market conditions. These techniques are intended to enhance returns associated
with new land investments by minimizing the incremental capital required.
In 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, 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 Other U.S. 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, 1998 and 1997. The table does not include acreage
which has not yet been approved for subdivision into lots. This excluded acreage
consists of 853 acres owned in the United States in both 1998 and 1997.
TOTAL LOTS
HOMES/LOTS IN LAND UNDER LOTS UNDER OWNED OR
PRODUCTION DEVELOPMENT OPTION UNDER OPTION
--------------- --------------- --------------- ---------------
1998 1997 1998 1997 1998 1997 1998 1997
------ ------ ------ ------ ------ ------ ------ ------
California........... 4,139 4,454 9,921 8,948 10,490 7,965 24,550 21,367
Other U.S............ 12,213 8,103 6,384 4,266 21,707 6,380 40,304 18,749
France............... 1,250 767 443 210 926 715 2,619 1,692
Other................ 34 64 39 65 -- -- 73 129
------ ------ ------ ------ ------ ------ ------ ------
Total...... 17,636 13,388 16,787 13,489 33,123 15,060 67,546 41,937
====== ====== ====== ====== ====== ====== ====== ======
While the Company has reduced the proportion of unentitled and unimproved
land 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 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
operational business model, which emphasizes pre-selling, maintaining stringent
control of production inventory and reducing unsold inventory. The pre-selling
of homes also benefits homebuyers by allowing them to personalize their homes by
selecting from a wider range of customizing options. As a result of the
Company's pre-sale and backlog building strategies, the percentage of sold
inventory in production at year end 1998 rose to 71% from 67% at year end 1997.
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.
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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 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 for one or two year periods and covers
structural integrity for a period of ten years. In the aggregate, the costs
associated with the Company's warranty program are not material to its
operations.
EXTERNAL RISK FACTORS
The Company's operations and markets are affected by local and regional
factors such as local economies, demographic demand for housing, population
growth, 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 1998 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, the Company's acquisitions in Arizona, Colorado and
Texas, generally favorable economic conditions in the Company's Other U.S.
markets, and low domestic and foreign interest rates. The Company believes that
the homebuilding industry has been significantly less cyclical over the past
several years, and should continue to be less cyclical if these favorable
conditions continue. In addition, the Company's strategies, including the KB2000
operational business model are also intended to reduce the cyclical nature of
its business.
BACKLOG
Sales of the Company's homes are made pursuant to standard sales contracts
which generally require a customer deposit at the time of execution and an
additional payment upon mortgage approval. Subject to particular contract
provisions, the Company generally permits customers to cancel their obligations
and obtain refunds of their deposits in the event mortgage financing is
unobtainable within a specified period of time.
Backlog consists of homes for which the Company has entered into a sales
contract but which it has not yet delivered. Ending backlog represents the
number of units in backlog from the previous period plus the number of net
orders (sales made less cancellations) taken during the current period minus
unit deliveries made during the current period. The backlog at any given time
will be affected by cancellations which most commonly result from the inability
of a prospective purchaser to obtain financing. Historically, the Company's
cancellation rates have increased during difficult economic periods. In
addition, deliveries of new homes typically increase from the first to the
fourth quarter in any year. The Company's backlog at November 30, 1998 stood at
6,943 units, approximately 65% higher than the 4,214 backlog units at year end
1997, primarily reflecting the implementation of the KB2000 operational business
model which focuses on a pre-sale and backlog building strategy. KB2000
initiatives also caused the Company's backlog ratio to increase to approximately
152% at year end 1998 from approximately 131% at year end 1997 (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, 1998.
NET UNIT ENDING
ORDERS DELIVERIES BACKLOG*
------ ---------- --------
Fiscal 1998:
First Quarter......................... 3,716 2,629 5,301
Second Quarter........................ 4,861 3,409 7,581
Third Quarter......................... 3,883 4,167 7,630
Fourth Quarter........................ 4,321 5,008 6,943
Fiscal 1997:
First Quarter......................... 2,755 2,108 3,486
Second Quarter........................ 3,396 2,465 4,417
Third Quarter......................... 3,310 3,016 5,040
Fourth Quarter........................ 3,028 3,854 4,214
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
* Backlog amounts for 1998 have been adjusted to reflect the acquisitions of
Hallmark, PrideMark and Estes, as well as the acquisition of a majority
interest in General Homes. Therefore, backlog amounts at November 30, 1997
combined with net order and delivery activity for 1998 will not equal ending
backlog at November 30, 1998. Similarly, backlog amounts for 1997 were
adjusted to reflect the acquired SMCI developments in France, while backlog
amounts for 1996 were adjusted to reflect the San Antonio acquisition and the
disposition of the Canadian operations.
LAND AND RAW MATERIALS
Management believes that the Company's current supply of land is sufficient
for its reasonably anticipated needs over the next several years, and that it
will be able to acquire land on acceptable terms for future housing developments
absent great changes in current land acquisition market conditions. The
principal raw materials used in the construction of homes are concrete and
forest products. In 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 sales fluctuate based on the Company's decisions to maintain or decrease
its land ownership position in certain markets based upon the volume of its
holdings, the strength and number of competing developers entering particular
markets at given points in time, the availability of land in markets served by
the Company's housing divisions, and prevailing market conditions. Land revenues
totaled $22.5 million in 1998, $13.6 million in 1997 and $68.2 million in 1996.
Revenues from land sales were unusually high in 1996 due to an aggressive asset
sale program undertaken by the Company as part of its debt reduction strategy
that year. The land sold 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.
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CUSTOMER FINANCING -- KAUFMAN AND BROAD MORTGAGE COMPANY
On-site personnel at the Company's communities in the United States
facilitate sales by offering to arrange financing for prospective customers
through KBMC. Management believes that the ability to offer customers financing
on firm, competitive terms as a part of the sales process is an important factor
in completing sales.
KBMC's business consists of providing the Company's domestic customers with
competitive financing and coordinating and expediting the loan origination
transaction through the steps of loan application, loan approval and closing.
KBMC has its headquarters in Los Angeles and operates branch offices in Phoenix
and Tucson, Arizona; Fremont, Modesto, Newport Beach, Pomona, Salinas, San Diego
and San Ramon, California; Denver, Colorado; Las Vegas, Nevada; Albuquerque, New
Mexico; Austin, Dallas, Houston and San Antonio, Texas; and Salt Lake City,
Utah.
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 1998, approximately 54% of the mortgages originated for the
Company's customers were conventional (most of which conformed to Fannie Mae and
FHLMC guidelines), 34% were FHA-insured or VA-guaranteed (a portion of which are
adjustable rate loans), 10% were funded by mortgage revenue bond programs and 2%
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 1998, KBMC originated loans for
78% of the Company's domestic home deliveries to end users who obtained mortgage
financing. 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.
KBMC typically sells servicing rights on a regular basis for substantially
all of the loans it originates. However, for a small percentage of loans, and to
the extent required for loans being held for sale to investors, KBMC services
the mortgages that it originates. Servicing includes collecting and remitting
loan payments, accounting for principal and interest, making inspections of
mortgaged premises as required, monitoring delinquent mortgages and generally
administering the loans. KBMC receives fees for servicing mortgage loans,
generally ranging from .25% per annum to .375% per annum on the declining
principal balances of the loans.
The Company also assists its customers in France by arranging financing
through third-party lenders, primarily major French banks with which the Company
has established relationships. In some cases, French customers qualify for
certain government-assisted, home financing programs. A second mortgage is
usually handled through a government agency. A homebuyer in France may also have
a third mortgage provided through credit unions or other employee groups.
EMPLOYEES
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
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consultants, who guide the development of communities from their conception
through the marketing and sale of completed homes.
At January 31, 1999, the Company had approximately 3,500 full-time
employees in its operations, including approximately 310 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 operational 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 since the mid-1990s have been beneficial 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 unsecured
revolving credit facility with various banks. Financing of the Company's French
operations has been primarily generated from results of operations and
borrowings from its unsecured committed credit lines with a series of foreign
banks. 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 mortgage 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.
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.
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The Company entered into a consent order with the Federal Trade Commission
in 1979, to which the Company is still subject and pursuant to which the Company
has agreed to provide explicit warranties on the quality and workmanship of its
new homes, follow certain guidelines in advertising and provide certain
disclosures to any prospective purchaser who visits Company sales offices or
model homes.
It is Company policy to use third-party environmental consultants to
investigate land considered for acquisition for environmental risks and
requiring disclosure from land sellers of known environmental risks. Despite
these activities, there can be no assurance that the Company will avoid material
liabilities relating to the removal of toxic wastes, site restoration,
monitoring or other environmental matters affecting properties currently or
previously owned by the Company. 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 Phoenix and Tucson,
Arizona; Fremont, Fresno, Los Angeles, Modesto, Newport Beach, Palmdale,
Pleasanton, Pomona, Sacramento, Salinas, San Diego and San Ramon, California;
Denver, Colorado; Las Vegas, Nevada; Albuquerque, New Mexico; Dallas and
Houston, Texas; Salt Lake City, Utah; Paris, France; and Mexico City, Mexico.
The Company's mortgage banking subsidiaries lease executive offices in Los
Angeles, California and branch offices in Phoenix and Tucson, Arizona; Fremont,
Modesto, Newport Beach, Pomona, Salinas, San Diego and San Ramon, California;
Denver, Colorado; Las Vegas, Nevada; Albuquerque, New Mexico; Dallas and
Houston, Texas; and Salt Lake City, Utah.
The Company's operations in Austin and San Antonio, 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 1998 to a vote of
security holders, through the solicitation of proxies or otherwise.
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EXECUTIVE OFFICERS OF THE COMPANY
The following sets forth certain information regarding the executive
officers of the Company as of January 31, 1999:
YEAR
ASSUMED
PRESENT POSITION AT PRESENT OTHER POSITIONS AND OTHER BUSINESS EXPERIENCE
NAME AGE JANUARY 31, 1999 POSITION WITHIN THE LAST FIVE YEARS(1) FROM - TO
- --------------------- --- ------------------------- -------- ----------------------------------------------- ---------
Bruce Karatz 53 Chairman, President and 1993
Chief Executive Officer
Guy Nafilyan 54 Executive Vice President 1992 President and Chief Executive Officer of 1983 - Present
and President of Kaufman and Broad France
European Operations and
Director
Glen Barnard 54 Senior Vice President and 1996 President of Kaufman and Broad of Utah, Inc. 1997-1998
Regional General Manager President of Kaufman and Broad of Colorado, 1995-1998
Inc.
Chairman, American Lives, Inc. 1991-1995
William R. Cardon 55 Senior Vice President and 1998 President of Kaufman and Broad Coastal, Inc. 1997 - Present
Regional General Manager President of Kaufman and Broad of San Diego, 1987 - Present
Inc.
Michael F. Henn 50 Senior Vice President and 1994 Executive Vice President, Chief Financial and 1986-1994
Chief Financial Officer Administrative Officer, The Vons Companies,
Inc.
Randall W. Lewis 47 Senior Vice President and 1999 Executive Vice President, Lewis Operating Corp. 1999 - Present
Director Executive Vice President/Director of Marketing, 1987-1999
Lewis Homes Management Corporation
Jeffrey T. Mezger 43 Senior Vice President and 1998 President of Kaufman and Broad of Arizona, Inc. 1995 - Present
Regional General Manager
Barton P. Pachino 39 Senior Vice President and 1993
General Counsel
Albert Z. Praw 50 Senior Vice President, 1998 Senior Vice President and Regional General 1996-1998
Business Development Manager
President of Kaufman and Broad of Southern 1997-1998
California, Inc.
Senior Vice President, Real Estate 1994-1996
Partner in law firm of Sidley & Austin 1992-1994
Gary A. Ray 40 Senior Vice President, 1996 Vice President, Training and Development 1994-1996
Human Resources PepsiCo Restaurants International
Regional Vice President of Human Resources - 1992-1994
South Pacific Region, PepsiCo Restaurants
International
William R. Hollinger 40 Vice President and 1992
Controller
Mary M. McAboy 46 Vice President, Investor 1998 Principal, McAboy & Associates 1997-1998
Relations Vice President, Corporate Communications, The 1987-1997
Vons Companies, Inc.
- ---------------
(1) All positions described were with the Company, unless otherwise indicated.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
As of January 31, 1999, there were 1,671 holders of record of the Company's
common stock.
Information as to the Company's quarterly stock prices is included on page
67 of the Company's 1998 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 67 of the
Company's 1998 Annual Report to Stockholders, which is included as part of
Exhibit 13 hereto.
ITEM 6. SELECTED FINANCIAL DATA
The Five Year Summary of Kaufman and Broad Home Corporation for the
five-year period ended November 30, 1998 is included on page 25 of the Company's
1998 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 1998 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 26 through
41 of the Company's 1998 Annual Report to Stockholders, which are included as
part of Exhibit 13 hereto.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The primary market risk facing the Company is interest rate risk on its
senior and senior subordinated notes. The Company primarily enters into debt
obligations to support general corporate purposes, including acquisitions, and
the operations of its divisions. The Company has no cash flow exposure due to
interest rate changes for these notes. In connection with the Company's mortgage
banking operations, mortgage loans held for sale and the associated mortgage
warehouse line of credit are subject to interest rate risk; however, such
obligations reprice frequently and are short-term in duration and accordingly
the risk is not material. Under its current policies, the Company does not use
interest rate derivative instruments to manage exposure to interest rate
changes. The following sets forth as of November 30, 1998, the Company's
long-term debt obligations, principal cash flows by scheduled maturity, weighted
average interest rates and estimated fair market value (in thousands).
YEAR ENDED NOVEMBER 30, FAIR VALUE
----------------------------------------------------------------- AT NOVEMBER
1999 2000 2001 2002 2003 THEREAFTER TOTAL 30, 1998
-------- -------- -------- -------- -------- ---------- -------- -----------
Long-term debt(1) -- -- -- -- $174,221 $299,486 $473,707 $482,819
Fixed Rate
Weighted Average Interest Rate 8.8% 8.8% 8.8% 8.8% 8.7% 8.5%
- ---------------
(1) Includes senior and senior subordinated notes
A portion of the Company's construction operations are located in France
and Mexico. As a result, the Company's financial results could be affected by
factors such as changes in foreign currency exchange rates or weak economic
conditions in its markets. The Company's earnings are affected by fluctuations
in the value of the U.S. dollar as compared to foreign currencies in France and
Mexico, as a result of its sales in foreign markets. At November 30, 1997, the
result of a 10% uniform strengthening in the value of the dollar relative to the
currencies in which the Company's sales are denominated would result in a
decrease in revenues of $25.5 million and a decrease in pretax income of $1.7
million for the year ending November 30, 1998. This calculation assumes that
each exchange rate would change in the same
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direction relative to the U.S. dollar. The Company's sensitivity analysis of the
effects of changes in foreign currency exchange rates does not factor in a
potential change in sales levels or local currency prices.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of Kaufman and Broad Home Corporation
are included on pages 42 through 63 of the Company's 1998 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 1999 Annual Meeting of Stockholders and Proxy Statement,
filed pursuant to Regulation 14A under the Securities Exchange Act of 1934 is
incorporated by reference in this Annual Report on Form 10-K pursuant to General
Instruction G(3) of Form 10-K and provides the information required under Part
III (Items 10, 11, 12 and 13) except for the information regarding the executive
officers of the Company, which is included in Part I on page 13 herein.
PART IV
ITEM 14. FINANCIAL STATEMENTS, EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
FINANCIAL STATEMENTS
Reference is made to the index set forth on page F-1 of this Annual
Report on Form 10-K.
EXHIBITS
EXHIBIT
NO. DESCRIPTION
------- -----------
2.1 Purchase Agreement (Amended and Restated), executed January
7, 1999, between the Company and the Lewis Homes sellers,
filed as an exhibit to the Company's Current Report on Form
8-K dated January 7, 1999, is incorporated by reference
herein.
2.2 Representation, Warranty and Indemnity Agreement, dated
January 7, 1999, between the Company and certain entities
affiliated with the Lewis Homes sellers, filed as an exhibit
to the Company's Current Report on Form 8-K dated January 7,
1999, is incorporated by reference herein.
3.1 Amended Certificate of Incorporation, filed as an exhibit to
the Company's Registration Statement No. 33-6471 on Form
S-1, is incorporated by reference herein.
3.2 Amendment to Certificate of Incorporation, filed as an
exhibit to the Company's Registration Statement No. 33-30140
on Form S-1, is incorporated by reference herein.
3.3 Certificate of Designation of Series A Participating
Cumulative Preferred Stock, filed as an exhibit to the
Company's Registration Statement No. 33-30140 on Form S-1,
is incorporated by reference herein.
3.4 Certificate of Designation of Series B Mandatory Conversion
Premium Dividend Preferred Stock, filed as an exhibit to the
Company's Registration Statement No. 33-59516 on Form S-3,
is incorporated by reference herein.
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EXHIBIT
NO. DESCRIPTION
------- -----------
3.5 Amended Certificate of Designation of Series B Mandatory
Conversion Premium Dividend Preferred Stock, filed as an
exhibit to the Company's Registration Statement No. 33-59516
on Form S-3, is incorporated by reference herein.
3.6 By-Laws, filed as an exhibit to the Company's Registration
Statement No. 33-30140 on Form S-1, is incorporated by
reference herein.
3.7 Amended Certificate of Designation of Series A Participating
Cumulative Preferred Stock, filed as an exhibit to the
Company's Registration Statement No. 001-09195 on Form
8-A12B, is incorporated by reference herein.
4.1 Amended Certificate of Incorporation, filed as an exhibit to
the Company's Registration Statement No. 33-6471 on Form
S-1, is incorporated by reference herein.
4.2 Amendment to Certificate of Incorporation, filed as an
exhibit to the Company's Registration Statement No. 33-30140
on Form S-1, is incorporated by reference herein.
4.3 By-Laws, filed as an exhibit to the Company's Registration
Statement No. 33-30140 on Form S-1, is incorporated by
reference herein.
4.4 Indenture relating to 9 3/8% Senior Subordinated Notes due
2003 between the Company and First National Bank of Boston,
dated May 1, 1993, filed as an exhibit to the Company's
Registration Statement No. 33-59516 on Form S-3, is
incorporated by reference herein.
4.5 Specimen of 9 3/8% Senior Subordinated Notes due 2003, filed
as an exhibit to the Company's Registration Statement No.
33-59516 on Form S-3, is incorporated by reference herein.
4.6 Indenture relating to 9 5/8% Senior Subordinated Notes due
2006 between the Company and SunTrust Bank, Atlanta, dated
November 19, 1996, filed as an exhibit to the Company's
Current Report on Form 8-K dated November 19, 1996, is
incorporated by reference herein.
4.7 Specimen of 9 5/8% Senior Subordinated Notes due 2006, filed
as an exhibit to the Company's Current Report on Form 8-K
dated November 19, 1996, is incorporated by reference
herein.
4.8 Indenture relating to 7 3/4% Senior Notes due 2004 between
the Company and SunTrust Bank, Atlanta, dated October 14,
1997, filed as an exhibit to the Company's Current Report on
Form 8-K dated October 14, 1997, is incorporated by
reference herein.
4.9 Specimen of 7 3/4% Senior Notes due 2004, filed as an
exhibit to the Company's Current Report on Form 8-K dated
October 14, 1997, is incorporated by reference herein.
4.10 Certificate of Trust of KBHC Financing I, filed as an
exhibit to the Company's registration Statement Nos.
333-51825 and 333-51825-01 (Amendment No. 4) on Form S-3, is
incorporated by reference herein.
4.11 Declaration of Trust of KBHC Financing I, filed as an
exhibit to the Company's Registration Statement Nos.
333-51825 and 333-51825-01 (Amendment No. 4) on Form S-3, is
incorporated by reference herein.
4.12 Amended and Restated Declaration of Trust of KBHC Financing
I, dated July 7, 1998, (including Capital Security
Certificate for KBHC Financing I, with respect to the
Capital Securities) filed as an exhibit to the Company's
Current Report on Form 8-K dated August 14, 1998, is
incorporated by reference herein.
4.13 Guarantee Agreement, dated July 7, 1998, in respect of KBHC
Financing I, in respect of the Capital Securities, filed as
an exhibit to the Company's Current Report on Form 8-K dated
August 14, 1998, is incorporated by reference herein.
4.14 Indenture, dated July 7, 1998 between the Company and The
First National Bank of Chicago, as Trustee, filed as an
exhibit to the Company's Current Report on Form 8-K dated
August 14, 1998, is incorporated by reference herein.
4.15 First Supplement Indenture, dated July 7, 1998, between the
Company and The First National Bank of Chicago, as Trustee,
(including Debentures) filed as an exhibit to the Company's
Current Report on Form 8-K dated August 14, 1998, is
incorporated by reference herein.
16
18
EXHIBIT
NO. DESCRIPTION
------- -----------
4.16 Purchase Contract Agreement, dated July 7, 1998, between the
Company and The First National Bank of Chicago, as Purchase
Contract Agent, filed as an exhibit to the Company's Current
Report on Form 8-K dated August 14, 1998, is incorporated by
reference herein.
4.17 Pledge Agreement, dated July 7, 1998, between the Company,
The Chase Manhattan Bank, as Collateral Agent, Custodial
Agent and Securities Intermediary and The First National
Bank of Chicago, as Purchase Contract Agent, filed as an
exhibit to the Company's Current Report on Form 8-K dated
August 14, 1998, is incorporated by reference herein.
4.18 Remarketing Agreement, dated July 7, 1998, among the
Company, The First National Bank of Chicago and Merrill
Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated, filed as an exhibit to the Company's Current
Report on Form 8-K dated August 14, 1998, is incorporated by
reference herein.
4.19 Rights Agreement between the Company and ChaseMellon
Shareholder Services, L.L.C., as Rights Agent, dated
February 4, 1998, filed as an exhibit to the Company's
Current Report on Form 8-K dated February 4, 1999, is
incorporated by reference herein.
10.1 1986 Stock Option Plan, filed as an exhibit to the Company's
Registration Statement No. 33-6471 on Form S-1, is
incorporated by reference herein.
10.2 1988 Employee Stock Plan, filed as an exhibit to the
definitive Joint Proxy Statement for the Company's 1989
Special Meeting of Shareholders, is incorporated by
reference herein.
10.3 Consent Order, Federal Trade Commission Docket No. C-2954,
dated February 12, 1979, filed as an exhibit to the
Company's Registration Statement No. 33-6471 on Form S-1, is
incorporated by reference herein.
10.4 SunAmerica Inc. Executive Deferred Compensation Plan,
approved September 25, 1985, filed as an exhibit to
SunAmerica Inc.'s 1985 Annual Report on Form 10-K, is
incorporated by reference herein.
10.5 Directors' Deferred Compensation Plan established effective
July 27, 1989, filed as an exhibit to the Company's 1989
Annual Report on Form 10-K, is incorporated by reference
herein.
10.6 Settlement with Federal Trade Commission of June 27, 1991,
filed as an exhibit to the Company's Current Report on Form
8-K, dated June 28, 1991, is incorporated by reference
herein.
10.7 Amendments to the Kaufman and Broad Home Corporation 1988
Employee Stock Plan dated January 27, 1994, filed as an
exhibit to the Company's 1994 Annual Report on Form 10-K,
are incorporated by reference herein.
10.8 Kaufman and Broad Home Corporation Performance-Based
Incentive Plan for Senior Management, filed as an exhibit to
the Company's 1995 Annual Report on Form 10-K, is
incorporated by reference herein.
10.9 Form of Stock Option Agreement under Kaufman and Broad Home
Corporation Performance-Based Incentive Plan for Senior
Management, filed as an exhibit to the Company's 1995 Annual
Report on Form 10-K, is incorporated by reference herein.
10.10 Employment Contract of Bruce Karatz, dated December 1, 1995,
filed as an exhibit to the Company's 1995 Annual Report on
Form 10-K, is incorporated by reference herein.
10.11 Kaufman and Broad Home Corporation Non-Employee Director
Stock Unit Plan, filed as an exhibit to the Company's 1996
Annual Report on Form 10-K, is incorporated by reference
herein.
10.12 Kaufman and Broad Home Corporation Unit Performance Program,
filed as an exhibit to the Company's 1996 Annual Report on
Form 10-K, is incorporated by reference herein.
17
19
EXHIBIT
NO. DESCRIPTION
------- -----------
10.13 $500,000,000 1997 Revolving Loan Agreement dated April 21,
1997 by and among the Company, Bank of America National
Trust and Savings Association, as administrative agent,
co-syndication agent and managing agent, NationsBank of
Texas, N.A., as syndication agent and managing agent, Credit
Lyonnais Los Angeles Branch, as documentation agent and
managing agent, Guaranty Federal Bank F.S.B., Societe
Generale and Union Bank of California, N.A., as co-agents,
and the other banks listed therein, filed as an exhibit to
the Company's 1997 Annual Report on Form 10-K, is
incorporated by reference herein.
10.14 Kaufman and Broad France Incentive Plan, filed as an exhibit
to the Company's 1997 Annual Report on Form 10-K, is
incorporated by reference herein.
10.15 Registration Rights Agreement, dated January 7, 1999, filed
as an exhibit to the Company's Current Report on Form 8-K,
dated January 7, 1999, is incorporated by reference herein.
10.16 Term Loan Agreement among the Company, Bank of America
National Trust and Savings Association, as Administrative
Agent and Lead Arranger, Credit Lyonnais Los Angeles Branch,
as Syndication Agent. The First National Bank of Chicago, as
Documentation Agent and Union Bank of California as Co-Agent
and the banks listed therein, dated January 7, 1999, filed
as an exhibit to the Company's Current Report on Form 8-K,
dated January 7, 1999, is incorporated by reference herein.
10.17 Kaufman and Broad Home Corporation 1998 Stock Incentive
Plan.
10.18 Kaufman and Broad Home Corporation Directors' Legacy
Program, as amended January 1, 1999.
13 Pages 25 through 63 and page 67 of the Company's 1998 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 21, 1998, the Company filed a Current Report on Form 8-K
(Item 5), dated October 20, 1998, announcing the signing of a definitive
agreement to acquire Lewis Homes which included its October 20, 1998 press
release.
On January 22, 1999, the Company filed a Current Report on Form 8-K
(Item 5), dated January 7, 1999, announcing the consummation of the
acquisition of Lewis Homes and which included therewith, among other
things, the Purchase Agreement (Amended and Restated), executed January 7,
1999, Representation, Warranty and Indemnity Agreement, dated January 7,
1999, Registration Rights Agreement, dated January 7, 1999 and Term Loan
Agreement, dated as of January 7, 1999.
On February 12, 1999, the Company filed a Current Report on Form 8-K
(Item 5), dated February 4, 1999, announcing the Company's declaration of a
dividend of one preferred stock purchase right for each share of common
stock and special common stock held of record on March 5, 1999 and which
included therewith the Rights Agreement, dated February 4, 1999, between
the Company and ChaseMellon Shareholder Services, L.L.C., as Rights Agent.
18
20
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, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant in
the capacities and on the dates indicated:
SIGNATURE TITLE DATE
--------- ----- ----
BRUCE KARATZ Chairman, President and February 26, 1999
- ----------------------------------------------------- Chief Executive Officer
Bruce Karatz (Principal Executive Officer)
MICHAEL F. HENN Senior Vice President February 26, 1999
- ----------------------------------------------------- and Chief Financial Officer
Michael F. Henn (Principal Financial Officer)
WILLIAM R. HOLLINGER Vice President and Controller February 26, 1999
- ----------------------------------------------------- (Principal Accounting Officer)
William R. Hollinger
STEVE BARTLETT Director February 26, 1999
- -----------------------------------------------------
Steve Bartlett
RONALD W. BURKLE Director February 26, 1999
- -----------------------------------------------------
Ronald W. Burkle
JANE EVANS Director February 26, 1999
- -----------------------------------------------------
Jane Evans
Director February , 1999
- -----------------------------------------------------
Dr. Ray R. Irani
JAMES A. JOHNSON Director February 26, 1999
- -----------------------------------------------------
James A. Johnson
RANDALL W. LEWIS Director February 26, 1999
- -----------------------------------------------------
Randall W. Lewis
GUY NAFILYAN Director February 26, 1999
- -----------------------------------------------------
Guy Nafilyan
LUIS G. NOGALES Director February 26, 1999
- -----------------------------------------------------
Luis G. Nogales
CHARLES R. RINEHART Director February 26, 1999
- -----------------------------------------------------
Charles R. Rinehart
SANFORD C. SIGOLOFF Director February 26, 1999
- -----------------------------------------------------
Sanford C. Sigoloff
19
21
KAUFMAN AND BROAD HOME CORPORATION AND CONSOLIDATED SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
The consolidated financial statements, together with the report thereon of
Ernst & Young LLP, dated December 31, 1998, except as to Note 15, as to which
the date is February 4, 1999, all appearing on pages 42 through 63 of the 1998
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 1998 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............................ 63
Consolidated Statements of Income for the years ended
November 30, 1998, 1997 and 1996....................... 42
Consolidated Balance Sheets as of November 30, 1998 and
1997................................................... 43
Consolidated Statements of Stockholders' Equity for the
years ended November 30, 1998, 1997 and 1996........... 44
Consolidated Statements of Cash Flows for the years ended
November 30, 1998, 1997 and 1996....................... 45
Notes to Consolidated Financial Statements................ 46 through 62
The following pages represent pages 25 through 63 and page 67 of the 1998
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 Common Stock Prices. These pages were filed with the Securities
and Exchange Commission as Exhibit 13 hereto.
F-1
22
SELECTED FINANCIAL INFORMATION
----------------------------------------------------------------------------
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
YEARS ENDED NOVEMBER 30, 1998 1997 1996 1995 1994
=======================================================================================================================
CONSTRUCTION:
Revenues $ 2,402,966 $ 1,843,614 $ 1,754,147 $ 1,366,866 $ 1,307,570
Operating income (loss)* 148,672 101,751 (72,078) 65,531 88,323
Total assets 1,542,544 1,133,861 1,000,159 1,269,208 1,167,136
Mortgages and notes payable 529,846 496,869 442,629 639,575 565,020
=======================================================================================================================
MORTGAGE BANKING:
Revenues $ 46,396 $ 35,109 $ 33,378 $ 30,979 $ 30,008
Operating income 21,413 14,508 12,740 9,348 6,003
Total assets 317,660 285,130 243,335 304,971 287,324
Notes payable 239,413 200,828 134,956 151,000 125,000
Collateralized mortgage obligations 49,264 60,058 68,381 84,764 96,731
=======================================================================================================================
CONSOLIDATED:
Revenues $ 2,449,362 $ 1,878,723 $ 1,787,525 $ 1,397,845 $ 1,337,578
Operating income (loss)* 170,085 116,259 (59,338) 74,879 94,326
Net income (loss)* 95,267 58,230 (61,244) 29,059 46,550
Total assets 1,860,204 1,418,991 1,243,494 1,574,179 1,454,460
Mortgages and notes payable 769,259 697,697 577,585 790,575 690,020
Collateralized mortgage obligations 49,264 60,058 68,381 84,764 96,731
Mandatorily redeemable preferred
securities (Feline Prides) 189,750
Stockholders' equity* 474,511 383,056 340,350 415,478 404,747
=======================================================================================================================
BASIC EARNINGS (LOSS) PER SHARE* $ 2.41 $ 1.50 $ (1.80) $ .59 $ 1.13
DILUTED EARNINGS (LOSS) PER SHARE* 2.32 1.45 (1.80) .58 1.09
CASH DIVIDENDS PER COMMON SHARE .30 .30 .30 .30 .30
=======================================================================================================================
* Reflects a $170.8 million pretax noncash charge for impairment of long-lived
assets recorded in the second quarter of 1996.
25
23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
OVERVIEW Revenues are primarily generated from the Company's (i) housing
operations in the western United States and France and (ii) its domestic
mortgage banking operations.
The Company set a new all-time high earnings record in 1998 with net income
totaling $95.3 million. Continued progress in implementing the Company's key
operating strategies produced increases in revenues and earnings compared to the
prior records set in 1997.
In particular, the Company remained tightly focused throughout 1998 on two
over-arching strategies: the implementation of its KB2000 operational business
model and the acceleration of the Company's growth. To advance these
initiatives, the Company concentrated on two complementary strategies consisting
of establishing optimum local market positions in selected regional markets and
maintaining its focus on strategic acquisitions of regional builders. During the
year, the Company continued to make further progress in implementing the key
elements of KB2000 throughout its domestic operations. The key elements of
KB2000 include: improving the Company's understanding of customer desires and
preferences through frequent and localized surveys; emphasizing pre-sales in
contrast to speculative inventory; maintaining lower average levels of
in-process and standing inventory; establishing even flow production; providing
a wide spectrum of choice to customers in terms of location, design and options;
offering low base prices; and reducing the use of sales incentives.
Total Company revenues increased to $2.45 billion in 1998, up 30.4% from $1.88
billion in 1997, which had increased 5.1% from revenues of $1.79 billion in
1996. The 1998 increase primarily resulted from higher housing revenues and land
sale revenues, as well as increased revenues from mortgage banking operations.
Included in the operating results for 1998 are results from the acquisitions of
Houston-based Hallmark Residential Group ("Hallmark"), Denver-based PrideMark
Homebuilding Group ("PrideMark") and Phoenix/Tucson-based Estes Homebuilding Co.
("Estes"), all of which the Company completed during the second quarter of 1998.
Results for 1998 also reflect the Company's acquisition of a majority interest
in Houston-based General Homes Corporation ("General Homes") as of August 18,
1998. The Company acquired the remaining minority interest in General Homes on
January 4, 1999. The increase in revenues in 1997 compared to 1996 results was
due to 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. Included in total Company revenues
were mortgage banking revenues of $46.4 million in 1998, $35.1 million in 1997
and $33.4 million in 1996.
Net income increased $37.0 million or 63.6% to $95.3 million or $2.32 per
diluted share in 1998, up from $58.2 million or $1.45 per diluted share in 1997.
The 60.0% increase in diluted earnings per share in 1998 was primarily driven by
increases in unit deliveries and construction gross margin, and increased
mortgage banking pretax income. The Company's 1998 operating results also
benefited from the earnings contributions of the three acquisitions completed
during the second quarter of 1998, as well as the impact of the acquisition of
the majority interest in General Homes. Net income of $58.2 million or $1.45 per
diluted share in 1997 was 21.3% higher than the $48.0 million or $1.15 per
diluted share recorded in 1996 (excluding the after-tax noncash charge of $109.3
million for impairment of long-lived assets recorded in 1996). Including the
noncash charge, the Company recorded a net loss of $61.2 million or $1.80
diluted loss per share in 1996. Net income increased in 1997 due to higher unit
deliveries, lower interest expense and higher earnings from mortgage banking
operations. In addition, earnings for 1997 included a full year of operating
results from the San Antonio operations acquired in the second quarter of 1996.
CONSTRUCTION
REVENUES Construction revenues increased in 1998 to $2.40 billion from $1.84
billion in 1997, which had increased from $1.75 billion in 1996. The improvement
in 1998 was mainly the result of increased housing revenues, partly due to the
newly acquired operations in Houston, Denver and Phoenix/Tucson and the majority
ownership
26
24
investment in General Homes, and increased land sale revenues. In 1997, the
increase in revenues primarily reflected 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.
Housing revenues totaled $2.38 billion in 1998, $1.83 billion in 1997 and $1.67
billion in 1996. The increase in 1998 reflected a 33.0% increase in unit volume,
partially offset by a 2.1% decline in average selling price. In 1997, housing
revenues totaled $1.83 billion, up 9.2% from 1996 as a result of an 11.7%
increase in unit volume, partially offset by a 2.2% lower average selling price.
California housing operations generated 45.8% of Company-wide housing revenues
in 1998, down from 54.0% in 1997 and 59.6% in 1996, mainly as a result of the
Company's strategic acquisition activities and continued expansion of its Other
U.S. operations. (The Company's housing operations in Arizona, Colorado, Nevada,
New Mexico, Texas and Utah are collectively referred to as "Other U.S.".)
Housing revenues from California operations were $1.09 billion in 1998, up 10.6%
from $986.6 million in 1997. The Company's Other U.S. housing revenues totaled
$1.04 billion in 1998, up 54.7% from $669.4 million in 1997. Other U.S. housing
revenues rose in 1998 due to the inclusion of deliveries from the three
businesses acquired in the second quarter of 1998 and from the majority
ownership investment in General Homes as well as expansion of existing Other
U.S. businesses. The Company's operations in France and Mexico generated housing
revenues of $240.0 million and $12.5 million, respectively, in 1998 compared to
$160.5 million and $10.8 million, respectively, in 1997, reflecting increases in
housing deliveries in both locations. Housing revenues from operations in France
and Mexico totaled $154.7 million and $6.4 million, respectively, in 1996.
--------------------------------------------------
CALIFORNIA OTHER U.S. FOREIGN TOTAL
- -----------------------------------------------------------------------
UNIT DELIVERIES
1998
First 1,022 1,341 266 2,629
Second 1,124 1,938 347 3,409
Third 1,225 2,567 375 4,167
Fourth 1,487 2,852 669 5,008
- -----------------------------------------------------------------------
Total 4,858 8,698 1,657 15,213
=======================================================================
1997
First 914 1,102 92 2,108
Second 1,095 1,211 159 2,465
Third 1,204 1,513 299 3,016
Fourth 1,518 1,816 520 3,854
- -----------------------------------------------------------------------
Total 4,731 5,642 1,070 11,443
=======================================================================
NET ORDERS
1998
First 1,269 2,062 385 3,716
Second 1,391 2,907 563 4,861
Third 1,117 2,387 379 3,883
Fourth 985 2,630 706 4,321
- -----------------------------------------------------------------------
Total 4,762 9,986 2,033 16,781
=======================================================================
1997
First 1,077 1,528 150 2,755
Second 1,476 1,681 239 3,396
Third 1,506 1,599 205 3,310
Fourth 1,134 1,368 526 3,028
- -----------------------------------------------------------------------
Total 5,193 6,176 1,120 12,489
=======================================================================
27
25
----------------------------------------------------------------
CALIFORNIA OTHER U.S. FOREIGN TOTAL
- ---------------------------------------------------------------------------------------------------------
ENDING BACKLOG-UNITS
1998
First 1,563 3,011 727 5,301
Second 1,830 4,808 943 7,581
Third 1,722 4,961 947 7,630
Fourth 1,220 4,739 984 6,943
=========================================================================================================
1997
First 1,017 2,182 287 3,486
Second 1,398 2,652 367 4,417
Third 1,700 2,738 602 5,040
Fourth 1,316 2,290 608 4,214
=========================================================================================================
ENDING BACKLOG-VALUE IN THOUSANDS
1998
First $ 337,424 $ 363,340 $ 98,378 $ 799,142
Second 394,144 588,820 136,929 1,119,893
Third 388,998 594,575 148,464 1,132,037
Fourth 288,317 560,307 151,668 1,000,292
=========================================================================================================
1997
First $ 219,908 $ 248,835 $ 61,073 $ 529,816
Second 288,719 307,977 70,806 667,502
Third 377,332 321,007 79,361 777,700
Fourth 303,050 274,591 89,020 666,661
=========================================================================================================
Housing deliveries rose 33.0% to 15,213 units in 1998, exceeding the previous
Company-wide record of 11,443 units established in 1997. This improvement
reflected increases in U.S. and French operations of 30.7% and 55.9%,
respectively. Growth in domestic deliveries was primarily driven by a 54.2%
increase in Other U.S. operations. In California, deliveries rose 2.7% to 4,858
units in 1998 from 4,731 units in 1997, despite a 17.9% decline in the Company's
average number of active communities in the state. Other U.S. operations
delivered 8,698 units in 1998, including 1,702 deliveries from the three newly
acquired companies and the majority ownership investment in General Homes.
Excluding results from these acquisitions, deliveries from Other U.S. operations
increased 24.0% to 6,996 units, from 5,642 units delivered in 1997, due to a
higher average number of active communities in existing Other U.S. businesses.
In 1998, French deliveries increased primarily as a result of the inclusion of a
full year of results from French homebuilder SMCI. The Company acquired SMCI, a
builder of condominiums in Paris and other cities in France, in mid-1997 for
$2.2 million in cash and the assumption of approximately $8.1 million of debt.
Housing deliveries increased 11.7% to 11,443 units in 1997 from 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 results from Other U.S. operations, 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 average number of active communities, reflecting the Company's growth
strategy; the inclusion of twelve months of operating results from the San
Antonio acquisition; and first deliveries from start-up operations in Austin.
California deliveries in 1997 decreased 8.5% to 4,731 units from 5,171 units in
1996, reflecting a decline in the Company's average number of active communities
in the state. In France, 1997 deliveries increased from the previous year
primarily as a result of the acquisition of certain active SMCI developments.
28
26
The Company-wide average new home price decreased 2.1% in 1998, to $156,400 from
$159,700 in 1997. The 1997 average had decreased 2.2% from $163,300 in 1996.
These decreases were primarily due to the Company's decision to generate a
greater proportion of lower-priced domestic unit deliveries (primarily from the
Company's Other U.S. operations) as well as to the lower average selling price
in France resulting from the inclusion of SMCI deliveries. Other U.S. operations
accounted for 64.2% of domestic deliveries in 1998 compared to 54.4% in 1997.
In California, the Company's average selling price rose 7.7% in 1998 to $224,500
from $208,500 in 1997, which had increased 8.1% from $192,900 in 1996. The 1998
increase resulted from strategic increases in sales prices in certain markets
based on improved market conditions, as well as a change in product mix favoring
a greater number of higher-priced urban in-fill locations and first-time move up
sales. The increase in 1997 also reflected a shift in mix toward higher-priced
homes in the state. The Company's average selling price in Other U.S. markets
was $119,100 in 1998, compared with $118,700 in 1997 and $119,700 in 1996. The
Company's average selling price in France decreased to $149,200 in 1998 from
$155,500 in 1997, which had decreased from $206,600 in 1996. The average selling
price in France declined in 1998 primarily due to the inclusion of a full year
of lower-priced deliveries generated from SMCI developments acquired in 1997.
The French average selling price also declined in 1997 as a result of the SMCI
developments.
Revenues from the development of commercial buildings, all located in
metropolitan Paris, totaled $1.5 million in 1998, $2.7 million in 1997 and $12.2
million in 1996. Declines in 1998 and 1997 reflected both the Company's decision
to refocus on its expanded French residential business and the reduced
opportunities in French commercial markets due to lingering effects of the
country's mid-1990 recession.
Land sale revenues totaled $22.5 million in 1998, $13.6 million in 1997 and
$68.2 million in 1996. The results for 1998 and 1997 are more representative of
typical Company land sales activity levels when viewed historically. The 1996
results were unusually high due to an aggressive asset sale program undertaken
as part of the Company's 1996 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 as a result of the Company's
decision to maintain or decrease its land ownership position in certain markets
based upon the volume of its holdings, the strength and number of competing
developers entering particular markets at given points in time, the availability
of land in markets served by the Company's housing divisions, and prevailing
market conditions.
OPERATING INCOME Operating income increased 46.1% to $148.7 million in 1998 from
$101.8 million in 1997. The increase was primarily due to higher housing gross
profits, resulting from higher unit volume, partially offset by increased
selling, general and administrative expenses. Housing gross profits in 1998
increased 37.5% or $124.5 million to $456.4 million from $331.9 million in 1997.
As a percentage of related revenues, the Company's housing gross profit margin
was 19.2% in 1998, up from 18.2% in the prior year. The Company's housing gross
margin increased primarily due to the rising proportion of higher margin
deliveries produced by the Company's KB2000 communities, as well as price
increases in certain fast-selling, hard to replace communities, particularly in
certain California markets. Company-wide land sales produced a loss of $3.2
million in 1998, compared to a loss of $1.4 million in 1997.
Selling, general and administrative expenses increased 32.9% or $75.5 million in
1998 to $304.6 million. This increase was mainly due to the inclusion of
selling, general and administrative expenses of acquired entities, including
goodwill amortization, expenditures incurred in connection with extensive
information systems revisions required to support the KB2000 operational
business model, system conversions related to acquisitions and year 2000
compliance, new market entries in Texas and higher third-party sales
commissions. Sales commissions rose because a higher percentage of the Company's
domestic sales were generated from third-party brokers as part of the KB2000
operational business model. As a percentage of housing revenues, to which these
expenses are most closely correlated, selling, general and administrative
expenses increased .3 percentage points to 12.8% in 1998 from 12.5% in 1997. The
Company remains focused on cost-containment and will seek to reduce selling,
general and administrative expenses as a percentage of housing revenues.
29
27
Operating income increased to $101.8 million in 1997 from $98.7 million
(excluding the $170.8 million noncash charge for impairment of long-lived
assets) in 1996. This 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 profits 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 improved gross margins
from 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.
This increase was primarily due to the inclusion of a full year of results from
the San Antonio operations in 1997 (including the 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, 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 expenses and general and
administrative expenses. These improvements were partially offset by the
increased sales commissions associated with the Company's KB2000 operational
business model.
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 as they were not held for long-term development and
were expected to be economically successful, and as such were determined not to
be impaired.
Based on the Company's evaluation of impaired assets, a noncash 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 for the balance of 1996, or in 1997 or 1998.
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
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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 short-term
investments and mortgages receivable, amounted to $5.7 million in 1998, $5.1
million in 1997 and $2.7 million in 1996. The rise in interest income in 1998
and 1997 primarily reflected increases in the interest bearing average balances
of mortgages receivable each year.
Interest expense results principally from borrowings to finance land purchases,
housing inventory and other operating and capital needs. In 1998, interest
expense, net of amounts capitalized, decreased to $23.3 million from $29.8
million in 1997. This decrease was primarily due to the impact of the Company's
issuance of the Feline Prides in the third quarter of 1998 since distributions
associated with the Feline Prides are included in minority interests rather than
interest expense. Gross interest incurred in 1998 was higher than that incurred
in 1997 by $1.8 million, reflecting an increase in average indebtedness in 1998,
partially offset by a lower average interest rate as a result of more favorable
financing terms obtained by the Company due to the redemption of its $100.0
million 10 3/8% senior notes and the issuance of $175.0 million of 7 3/4% senior
notes in the fourth quarter of 1997.
In 1998, the Company issued $189.8 million of Feline Prides and used the
proceeds to immediately pay down outstanding debt under the Company's domestic
unsecured revolving credit facility. The distributions associated with the
Feline Prides are included in minority interests; therefore, interest expense in
future periods will generally be lower than it would be without this financing.
The percentage of interest capitalized in 1998 and 1997 was 57.0% and 43.1%,
respectively. The higher capitalization rate resulted from the effects of the
issuance of the Feline Prides in 1998 and a higher proportion of land under
development in 1998 compared to the previous year. The amount of interest
capitalized as a percentage of gross interest incurred and distributions
associated with the Feline Prides was 51.3% in 1998.
In 1997, interest expense, net of amounts capitalized, decreased to $29.8
million from $36.7 million in the prior year primarily due to a decrease in the
amount of gross interest incurred. In 1997, the amount of gross interest
incurred 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 percentage of interest capitalized in 1997 and 1996 was 43.1% and
42.3%, respectively.
MINORITY INTERESTS Minority interests are comprised of two major components:
pretax income of consolidated subsidiaries and joint ventures related to
residential and commercial activities and distributions associated with the
Company's Feline Prides issued in July 1998. Operating income was reduced by
minority interests of $7.0 million in 1998, $.4 million in 1997 and $.2 million
in 1996. The 1998 amount increased principally due to the inclusion of $6.1
million in distributions related to the Feline Prides. In the aggregate,
minority interests are expected to increase in future periods due to higher
joint venture activity and higher distributions associated with the Feline
Prides.
EQUITY IN PRETAX INCOME (LOSS) OF UNCONSOLIDATED JOINT VENTURES The Company's
unconsolidated joint venture activities, located in California, New Mexico,
Texas and France, posted combined revenues of $17.7 million in 1998, $98.2
million in 1997 and $6.7 million in 1996. Of these amounts, French commercial
activities accounted for $6.5 million in 1998, $87.7 million in 1997 and $.1
million in 1996. Combined revenues recorded by the Company's joint ventures
fluctuated widely during the three year period mainly due to the sale of a
French commercial project in 1997. The Company's unconsolidated joint ventures
generated combined pretax income of $5.0 million in 1998, compared with losses
of $2.9 million and $14.8 million generated in 1997 and 1996, respectively. The
Company's share of pretax income from unconsolidated joint ventures totaled $1.2
million in 1998. In 1997 and 1996, the Company's share of pretax losses totaled
$.1 million and $2.1 million, respectively.
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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. Interest income is
earned primarily from first mortgages, and mortgage-backed securities held for
long-term investment as collateral, while interest expense results from notes
payable and the collateralized mortgage obligations. Interest income increased
to $15.6 million in 1998 from $13.3 million in 1997 and $14.6 million in 1996.
Interest expense also increased in 1998 to $15.0 million from $12.7 million in
1997 and $13.5 million in 1996. In 1998, interest income increased primarily due
to the higher balance of first mortgages held under commitment of sale and other
receivables outstanding compared to 1997. Interest expense rose in 1998 due to
the higher amount of notes payable outstanding during 1998 compared to the prior
year. In 1997, interest income and interest expense 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. Combined
interest income and expense resulted in net interest income of $.6 million in
1998, $.6 million in 1997 and $1.1 million in 1996. 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 $30.8 million in 1998, $21.8
million in 1997 and $18.8 million in 1996. The increases in 1998 and 1997
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 addition, in 1998, improved retention and a more favorable mix of
fixed to variable interest rate loans also contributed to the increased
revenues.
GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses
associated with mortgage banking operations increased to $9.9 million in 1998
from $7.9 million in 1997 and $7.2 million in 1996. The increases in general and
administrative expenses in 1998 and 1997 were primarily due to higher mortgage
production volume.
INCOME TAXES
The Company recorded income tax expense of $51.3 million in 1998 and $32.8
million in 1997 and an income tax benefit of $34.5 million in 1996. These
amounts represented effective income tax rates of approximately 35.0% in 1998
and 36.0% in both 1997 and 1996. The effective tax rate declined in 1998 as a
result of greater utilization of affordable housing tax credits. The tax benefit
in 1996 reflected the pretax loss reported by the Company as a result of the
noncash 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 tax credits.
LIQUIDITY AND CAPITAL RESOURCES
The Company assesses its liquidity in terms of its ability to generate cash to
fund its operating and investing activities. Historically, the Company has
funded its construction and mortgage banking activities with internally
generated cash flows and external sources of debt and equity financing. In 1998,
operating, investing and financing activities used net cash of $4.9 million; in
1997, these activities provided net cash of $58.5 million.
Operating activities in 1998 used $12.8 million, while 1997 operating activities
used $29.0 million. In 1998, the Company's primary uses of operating cash
included an investment of $125.7 million in inventories (excluding the effect of
acquisitions and $29.9 million of inventories acquired through seller financing)
and an increase in receivables
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of $50.0 million. Excluding the effect of the Company's acquisitions of
Hallmark, PrideMark and Estes, and a majority ownership investment in General
Homes, inventories increased in 1998, primarily in the Company's domestic
operations, reflecting continued growth throughout its U.S. markets. The use of
cash was partially offset by the Company's earnings of $95.3 million, an
increase of $51.3 million in accounts payable, accrued expenses and other
liabilities, and various noncash items deducted from net income.
In 1997, uses of operating cash 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 noncash items deducted from net
income.
Cash used by investing activities totaled $161.8 million in 1998 compared to
$6.2 million provided in 1997. In 1998, a total of $162.8 million, net of cash
acquired, was used for the acquisitions of Hallmark, PrideMark and Estes, and
the acquisition of a majority ownership interest in General Homes. During this
same period, $15.9 million was used for net purchases of property and equipment.
Among amounts partially offsetting these uses were $12.9 million of proceeds
received from mortgage-backed securities, which were principally used to pay
down the collateralized mortgage obligations for which the mortgage-backed
securities had served as collateral, $2.2 million in distributions related to
investments in unconsolidated joint ventures and $1.7 million from the net sales
of mortgages held for long-term investment.
In 1997, cash provided by investing activities included $10.0 million in
proceeds from mortgage-backed securities 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 net purchases of property and
equipment.
Financing activities in 1998 provided $169.8 million of cash compared to $81.3
million provided in 1997. In 1998, sources of cash included proceeds of $183.1
million from the issuance of the Feline Prides and net proceeds from borrowings
of $17.9 million. Partially offsetting the cash provided in 1998 were payments
to minority interests of $7.0 million, payments on collateralized mortgage
obligations of $12.3 million and cash dividend payments of $11.9 million. The
Company's financial leverage, as measured by the ratio of debt to total capital,
net of invested cash, was 43.4% at the end of 1998 compared to 52.7% at the end
of 1997. These ratios were adjusted to reflect $20.2 million and $70.4 million
of invested cash at November 30, 1998 and 1997, respectively. The sharply
improved debt ratio at the end of 1998 was due primarily to an increase in
capital from the Company's offering of $189.8 million of Feline Prides in the
third quarter of 1998. The Company seeks to maintain its ratio of net debt to
total capital within a targeted range of 45% to 55%.
Financing activities in 1997 provided $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.
During the second quarter of 1998, the Company acquired three privately held
homebuilders with regional operations in certain key markets. On March 19, 1998,
the Company acquired all of the issued and outstanding capital stock of
Houston-based Hallmark for approximately $54.0 million, including the assumption
of debt. Hallmark built single-family homes primarily in Houston (with
additional operations in San Antonio and Austin, Texas) under the trade names of
Dover Homes and Ideal Builders. The acquisition of Hallmark marked the Company's
entry into the Houston market and formed the core of those operations, while
strengthening the Company's existing market positions in San Antonio and Austin.
The Company acquired substantially all of the assets of Denver-based PrideMark
on March 23, 1998 for approximately $65.0 million, including the assumption of
trade liabilities and debt. PrideMark built single-family homes in
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Denver, Colorado, and its acquisition significantly increased the Company's
already substantial market presence in Denver.
On April 9, 1998, the Company acquired all of the issued and outstanding capital
stock of Estes for approximately $48.0 million, including the assumption of
debt. Estes built single-family homes in Phoenix and Tucson, Arizona. Estes
provided the Company's entry into the Tucson market and significantly increased
the Company's already substantial market presence in Phoenix.
On August 18, 1998, the Company acquired a majority ownership investment in
General Homes, a builder of single-family homes primarily in Houston, Texas. The
Company invested approximately $31.8 million, including the assumption of debt,
to acquire 50.3% of the outstanding stock of General Homes, pursuant to a
completed plan of reorganization. Subsequent to year end, on January 4, 1999,
the Company acquired the remaining minority interest in General Homes.
Each acquisition and investment was accounted for under the purchase method and
the results of operations of the acquired entities are included in the Company's
consolidated financial statements from the respective dates of acquisition.
These acquisitions were financed by borrowings under the Company's domestic
unsecured revolving credit facility.
External sources of financing for the Company's construction activities include
its domestic unsecured revolving credit facility, other domestic and foreign
bank lines, third-party secured financings, and the public debt and equity
markets. Substantial unused lines of credit remain available for the Company's
future use, if required, principally through its domestic unsecured revolving
credit facility. Under this facility, $493.0 million remained committed and
$475.3 million was available for the Company's future use at November 30, 1998.
The domestic unsecured revolving credit facility is comprised of a $400 million
revolving credit facility scheduled to expire on April 30, 2001 and a 364-day
revolving credit facility which has provisions for annual renewal. In addition,
the Company's French subsidiaries have lines of credit with various banks which
totaled $110.8 million at November 30, 1998 and have various committed
expiration dates through November 2000. Under these unsecured financing
agreements, $77.2 million was available in the aggregate at November 30, 1998 in
France.
Depending upon available terms and its negotiating leverage related to specific
market conditions, the Company also finances certain land acquisitions with
purchase-money financing from land sellers and other third parties. At November
30, 1998, the Company had outstanding seller-financed notes payable of $22.5
million secured primarily by the underlying property which had a carrying value
of $45.1 million.
On December 5, 1997, the Company filed a universal shelf registration statement
with the Securities and Exchange Commission for up to $500 million of the
Company's debt and equity securities. The universal shelf registration provides
that securities may be offered from time to time in one or more series and in
the form of senior, senior subordinated or subordinated debt, preferred stock,
common stock, and/or warrants to purchase such securities. The registration was
declared effective on December 16, 1997, and no securities have been issued
thereunder.
On July 7, 1998, the Company, together with a KBHC Trust, of which all the
common securities are owned by the Company, issued an aggregate of (i)
18,975,000 Feline Prides, and (ii)1,000,000 KBHC Trust capital securities, with
a $10 stated liquidation amount. The Feline Prides consist of (i) 17,975,000
Income Prides with the stated amount per Income Prides of $10, which are units
comprised of a capital security and a stock purchase contract under which the
holders will purchase common stock from the Company not later than August 16,
2001 and the Company will pay to the holders certain unsecured contract
adjustment payments, and (ii)1,000,000 Growth Prides with a face amount per
Growth Prides equal to the $10 stated amount, which are units consisting of a
1/100th beneficial interest in a zero-coupon U.S. treasury security and a stock
purchase contract under which the holders will purchase common stock from the
Company not later than August 16, 2001 and the Company will pay to the holders
certain unsecured contract adjustment payments.
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The distribution rate on the Income Prides is 8.25% per annum, and the
distribution rate on the Growth Prides is .75% per annum. Under the stock
purchase contracts, investors will be required to purchase shares of common
stock of the Company for an effective price ranging between a minimum of $31.75
per share and a maximum of $38.10 per share, and the Company will issue
approximately 5 million to 6 million common shares by August 16, 2001, depending
upon the price of the Company's common stock upon settlement of the purchase
contracts (subject to adjustment under certain circumstances). The capital
securities associated with the Income Prides and the U.S. treasury securities
associated with the Growth Prides have been pledged as collateral to secure the
holders' obligations in respect of the common stock purchase contracts. The
capital securities issued by the KBHC Trust are entitled to a distribution rate
of 8% per annum of their $10 stated liquidation amount.
The proceeds from the issuance of Feline Prides were used immediately to pay
down outstanding debt under the Company's domestic unsecured revolving credit
facility. Subsequently, the unsecured revolving credit facility was used for
general corporate purposes, including support of the Company's growth strategies
and acquisitions.
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 facility, which expires on February 23, 2000. 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. At November 30, 1998, the mortgage banking
operations had $10.6 million available for future use under the 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 continues to benefit in all of its operations from the strength of
its capital position, which has allowed it to maintain overall profitability
during troubled economic times, finance expansion, re-engineer product lines and
diversify into new homebuilding markets. Among other reasons, secure access to
capital at competitive rates should enable the Company to continue to grow and
expand. As a result of its geographic diversification, the disciplines of the
KB2000 operational business model and a strong capital position, the Company
believes it has adequate resources and sufficient credit line facilities to
satisfy its current and reasonably anticipated future requirements for funds 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.
SUBSEQUENT EVENTS
Subsequent to year end, effective January 4, 1999, the Company acquired the
remaining equity interest in Houston-based General Homes. The Company invested
approximately $14.5 million to acquire 49.7% of the outstanding stock of General
Homes, bringing its ownership interest to 100%. This transaction was financed by
borrowings under the Company's domestic unsecured revolving credit facility.
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Effective January 7, 1999, the Company acquired substantially all of the
homebuilding assets of the Lewis Homes group of companies ("Lewis Homes"). 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 estimated revenues for the year ended December 31, 1998 of
$700 million on approximately 3,600 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 estimated purchase price for Lewis Homes is $449.0 million, comprised of the
assumption of approximately $303.0 million in debt and the issuance of 7,886,686
shares of the Company's common stock valued at approximately $146.0 million. The
estimated purchase price was based on the net book values of the entities
purchased and is subject to adjustment based on the closing balance sheets as of
December 31, 1998, which are expected to be finalized on or before April 1,
1999. While it is anticipated that there will be further adjustments to the
purchase price, the Company does not expect such adjustments to be material.
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 January 7, 1999 among the Company and
various banks, 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. 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 domestic unsecured revolving credit facility to refinance certain other
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 consolidated
financial statements as of January 7, 1999.
YEAR 2000 ISSUE
The term "year 2000 issue" is a general term used to describe the complications
that may arise from the use of existing computer hardware and software designed
by applicable manufacturers without consideration for the upcoming change in the
century. If not corrected, software programs with this embedded problem may
cause computer systems to fail or to miscalculate data.
The Company has invested in information systems required to support its KB2000
operational business model and effectively manage and control growth. In
conjunction with its investment in technology, with respect to the year 2000
issue, the Company has undertaken a project to modify or replace portions of its
existing computer operating systems to ensure they will function properly with
respect to dates in the year 2000 and thereafter. A "Year 2000 Project Office"
has been formed to direct the Company-wide efforts encompassed by this project.
The Year 2000 Project Office is responsible to assure proper planning,
sufficient resources, contemporaneous monitoring, proper certification and
timely completion of the year 2000 projects. The Company's year 2000 projects
encompass its information technology systems as well as its non-information
technology systems, such as systems embedded in its office equipment and
facilities.
STATE OF YEAR 2000 READINESS The scope of the Company's year 2000 compliance
effort has been defined to include 13 distinct projects. Four of the 13 projects
address areas of greatest business risk and require the greatest technical
effort and, therefore, have been given the highest priority. These four high
priority projects are the following: conversion and upgrade of the Company's JD
Edwards primary accounting programs (the "JD Edwards Programs"); conversion and
upgrade of the operating systems for the Company's Texas operations which were
not associated with the JD Edwards Programs; conversion and upgrade of the
operating systems for the Company's
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mortgage banking operations which were not associated with the JD Edwards
Programs; and the upgrade of the Company's primary computer network and personal
computers. Of these four high priority projects, as of January 22, 1999, the
upgrade of the Company's primary computer network and personal computers is
substantially complete and is being tested, the remediation of the JD Edwards
Programs is complete and is being tested, and the conversion and upgrade of the
operating systems for the Company's Texas operations and the Company's mortgage
banking operations are in the process of being remediated. These four projects
are on schedule for completion by June 1999.
The remaining nine projects that comprise the balance of the Company's year 2000
compliance effort present a lower business risk and require less technical
effort to complete. Eight of these nine projects are comprised of the following:
conversion of business unit personal computer applications and templates that
are not associated with the JD Edwards Programs; upgrade of the Company's
telephone and voice mail systems; certification of year 2000 readiness or
upgrade of the Company's fax machines, copiers, miscellaneous equipment and
office facilities; verification, involving three projects, that material
third-party suppliers to the Company are year 2000 compliant; upgrade and/or
certification of the systems used by the Company's operations in France; and
certification and/or upgrade of the systems used by the Company's operations in
Mexico. These eight projects are in various stages of assessment and/or
remediation. The ninth project is comprised of the Company's contingency plan in
the event problems are encountered as the year 2000 begins. This project is in
the assessment stage and is expected to be completed by September 1999.
As noted, three of the 13 projects that comprise the Company's year 2000
compliance effort involve verification that the third parties with which the
Company has a material relationship are year 2000 compliant. The Company is
currently in various stages of assessment with respect to these third-party
verification projects. As part of these projects, the Company's relationships
with suppliers, subcontractors, financial institutions and other third parties
will be examined to determine the status of their year 2000 issue efforts as
related to the Company's operations. As a general matter, the Company is
vulnerable to its suppliers' inability to remedy their own year 2000 issues.
Furthermore, the Company relies both domestically and internationally on
financial institutions, government agencies (particularly for zoning, building
permits and related matters), utility companies, telecommunication service
companies and other service providers outside of its control. There is no
assurance that such third parties will not suffer a year 2000 business
disruption and it is conceivable that such failures could, in turn, have a
material adverse effect on the Company's liquidity, financial condition or
results of operations.
COSTS OF ADDRESSING YEAR 2000 ISSUES Several of the projects included in the
Company's year 2000 plan are projects which were necessary to support the
Company's KB2000 operational business model, and would have been undertaken
regardless of year 2000 exposure. The total cost of all of the Company's
projects associated with its year 2000 plan is currently estimated to be
approximately $4.0 million; however, because such projects involve conversions
and upgrades that were not necessitated to meet year 2000 concerns, it is not
possible to determine the portion of that amount which is specifically
attributable to year 2000 compliance efforts. The total amount expended on all
projects related to year 2000 compliance was $1.7 million as of November 30,
1998. The Company believes that the total costs incurred to specifically address
the year 2000 issue will not have a material impact on the Company's liquidity,
financial condition or results of operations, for any year in the reasonably
foreseeable future. The schedule for the successful completion of the Company's
year 2000 project and the estimated costs are based upon certain assumptions by
management regarding future events, including the continued availability of
qualified resources to implement the program and the costs of such resources.
RISKS PRESENTED BY YEAR 2000 ISSUES The Company's failure to resolve a material
year 2000 issue could result in the interruption in, or a failure of, certain
normal business activities or operations. Such failures could materially and
adversely affect the Company's results of operations. Although the Company
considers its exposure to the year 2000 issue risks from third-party suppliers
as generally low, due to the uncertainty of the year 2000 readiness of third
party suppliers, the Company is unable to determine at this time the
consequences of a year 2000 failure. In addition, the Company could be
materially impacted by the widespread economic or financial market disruption by
year 2000 computer system failures at government agencies on which the Company
is dependent for mortgage
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lending, zoning, building permits and related matters. Possible risks of year
2000 failure could include, among other things, delays or errors with respect to
payments, third-party delivery of materials and government approvals. The
Company's year 2000 project is expected to significantly reduce the Company's
level of uncertainty and exposure to the year 2000 issue and, in particular, its
vulnerability to the year 2000 compliance of material third parties. To date,
the Company has not identified any operating systems, either of its own or of a
third-party supplier, that present a material risk of not being year 2000 ready
or for which a suitable alternative cannot be implemented.
CONTINGENCY PLAN The Company's year 2000 project calls for a year 2000-specific
contingency plan to be developed. This plan is expected to be completed by
August 1999. As a normal course of business, the Company maintains contingency
plans designed to address various other potential business interruptions. In
addition to the Company's year 2000-specific contingency plan, these
pre-existing contingency plans should assist in mitigating any adverse affect
because of the interruption of support provided by third parties resulting from
their failure to be year 2000 ready.
Management currently anticipates that its operating systems will be year 2000
compliant well before January 1, 2000, and that its third party verification and
overall contingency plans should enable it to mitigate third-party disruptions
to its business which are of short duration or geographically localized. At the
present time, management believes that the year 2000 issue will not have a
material adverse effect on the Company's liquidity, financial condition or
results of operations.
CONVERSION TO THE EURO CURRENCY
On January 1, 1999, certain member countries of the European Union (the "EU")
established fixed conversion rates between their existing currencies and the
European Union's common currency (the "euro"). The Company conducts substantial
business in France, an EU member country. During the established transition
period for the introduction of the euro, January 1, 1999 to June 30, 2002, the
Company will address the issues involved with the adoption of the new currency.
The most important issues facing the Company include: converting information
technology systems; reassessing currency risk; negotiating and amending
contracts; and processing tax and accounting records.
Based upon progress to date, the Company believes that use of the euro will not
have a significant impact on the manner in which it conducts its business
affairs and processes its business and accounting records. Accordingly,
conversion to the euro is not expected to have a material effect on the
Company's financial condition or results of operations.
OUTLOOK
The Company's residential backlog at November 30, 1998 consisted of 6,943 units,
representing aggregate future revenues of $1.00 billion. Both amounts represent
record year end figures and represent increases of 64.8% and 50.0%,
respectively, when compared to the 4,214 units in residential backlog,
representing aggregate future revenues of $666.7 million, at year end 1997.
Company-wide net orders for the fourth quarter of 1998 totaled 4,321, up 42.7%
from the comparable quarter of 1997. The 1998 fourth quarter total included 583
net orders generated by the Company's three 1998 acquisitions in Houston, Denver
and Phoenix/Tucson and its majority ownership investment in General Homes.
Excluding the net orders generated by these operations, Company-wide net orders
rose 23.4% in the fourth quarter of 1998 compared to the year-earlier quarter.
The Company's domestic residential backlog at November 30, 1998 increased to
$848.6 million on 5,959 units, up 65.3% on a unit basis from $577.6 million on
3,606 units at year end 1997. The increase reflects a higher ending backlog
within Other U.S. operations, partially offset by a slightly lower ending
backlog within California operations. The Company's Other U.S. operations
produced substantial year-over-year growth, with backlog at November 30, 1998
rising to $560.3 million on 4,739 units from $274.6 million on 2,290 units at
November 30, 1997. Net orders from Other U.S. operations increased 92.3% in the
fourth quarter of 1998 to 2,630 units, up from 1,368 units in the fourth
38
36
quarter of 1997. Excluding the 583 net orders associated with the Company's
three acquisitions and its majority ownership investment, the increase in net
orders in Other U.S. operations was 49.6%. In California, backlog decreased to
$288.3 million on 1,220 units at November 30, 1998, down from $303.1 million on
1,316 units at November 30, 1997, as the Company's average number of active
communities in California declined 17.9% in 1998 from the prior year. Fourth
quarter 1998 net orders in California decreased 13.1% to 985 units from 1,134
units in the year-earlier period.
In France, residential backlog at November 30, 1998 totaled $145.9 million on
961 units, up 76.4% and 64.0%, respectively, from $82.8 million on 586 units at
year end 1997. The Company's net orders in France in the fourth quarter of 1998
rose 36.1% to 698 units from 513 units in the year-earlier period. The value of
the backlog associated with the Company's French commercial development
activities declined to $1.8 million at November 30, 1998 from $5.1 million at
year end 1997, reflecting a reduced level of activity.
In Mexico, residential backlog at November 30, 1998 totaled $5.7 million on 23
units, compared to $6.3 million on 22 units at year end 1997. Net orders in the
fourth quarter of 1998 decreased to 8 units from 13 units in 1997.
Substantially all homes included in the year end 1998 backlog are expected to be
delivered during 1999. However, cancellations could occur, particularly if
market conditions deteriorate or mortgage interest rates increase, thereby
decreasing backlog and related future revenues.
Company-wide net orders during the first two months of fiscal 1999 increased
27.1% over the comparable period of 1998. Domestic net orders during the
two-month period rose 29.3% due to a 3.8% increase in net orders from California
operations and a 43.0% increase in net orders from Other U.S. operations,
including results from the Company's 1998 acquisitions (including General Homes)
and its January 1999 acquisition of Lewis Homes. Excluding the net orders from
these operations, domestic net orders remained essentially flat in the first two
months of fiscal 1999 compared to the same period a year ago. In France, net
orders for the first two months of fiscal 1999 increased 14.8% compared to the
same period in 1998. Despite the overall improvement in Company-wide net orders
during the first two months of fiscal 1999, current global market uncertainties,
mortgage interest rate volatility, softening of general domestic business
conditions, declines in consumer confidence and/or other factors could have
mitigating effects on full year results.
As a result of continued domestic expansion outside of California, the
percentage of the Company's domestic unit deliveries generated from California
operations decreased to 35.8% in 1998 from 45.6% in 1997. 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 diversified its
business through aggressive expansion into other western states. Since then, the
housing market has improved significantly in California, and the Company remains
cautiously optimistic that the improved economic climate in the state will
continue for the foreseeable future, thereby generally enabling the housing
market in the state to retain its strength.
The Company's Other U.S. operations continued to experience substantial growth
in 1998. Acquisitions in Houston, Denver and Phoenix/Tucson, coupled with the
continued expansion of existing, non-California operations resulted in a 54.2%
increase in deliveries from Other U.S. operations in 1998 compared to the prior
year. The Company has also achieved its most significant penetration of its
KB2000 operational business model in these Other U.S. markets. The Company
expects to explore additional opportunities for expansion of its Other U.S.
operations in both existing and new markets, through either de novo entry or the
acquisition of existing businesses.
The French housing market improved in 1998 from the prior year. The Company
anticipates increases in deliveries from its French housing operations in 1999
will be in line with that nation's moderately improving economy. The Company's
French commercial activities are likely to remain at low levels, consistent with
the Company's strategy to focus primarily on the expansion of its residential
development business.
39
37
Mexico's economy appears to be recovering from the country's deep recession
brought on by the 1994 devaluation of its currency. Nevertheless, economic and
political conditions remain unsettled and the Company continues to closely
monitor its level of activity there.
During 1999, the Company plans to remain focused on the two primary initiatives
it originally established in 1997; deepening the implementation of its KB2000
operational business model throughout the Company's operations and continued
acceleration of the Company's growth. To advance these initiatives, the Company
also continues to concentrate on two complementary strategies consisting of
establishing optimum local market positions and maintaining its focus on
acquisitions.
In order to leverage the benefits of the KB2000 operational business model, the
Company has been implementing a strategy designed to achieve a dominant market
position in its major markets. The Company's use of the term "dominant" is not
intended to imply that the Company will become the largest builder in any market
in terms of unit deliveries, revenues or market share; nor is it the Company's
intent to attempt to, in any way "control" the pricing of homes in any market.
Rather, the Company's "dominance" goal is only intended to achieve a market
position sufficiently large that it will enable its local business to maximize
the benefits of its KB2000 operational business model. The Company believes that
by operating at large volume levels it can better execute its KB2000 operational
business model and use economies of scale to increase profits in fewer, larger
markets. These benefits can include lower land acquisition costs, improved terms
with suppliers and subcontractors, the ability to offer maximum choice and the
best value to customers, and the retention of the best management talent.
The Company hopes to continue to increase overall unit delivery growth in future
years. The Company's growth strategies include expanding existing operations to
optimal market volume levels, as well as entering new markets at high volume
levels, principally through acquisitions. Growth in existing markets will be
driven by the Company's ability to increase the average number of active
communities in its major markets through the successful implementation of its
KB2000 operational business model. The Company's ongoing acquisition strategy is
expected to supplement growth in existing markets and facilitate expansion into
new markets.
In identifying acquisition targets, the Company seeks homebuilders that possess
the following characteristics: a business model similar to KB2000; access to or
control of land to support growth; a strong management team; and a financial
condition positioned to be accretive to earnings in the first full year
following acquisition. The Company believes that acquisitions fitting these
criteria will enable it to expand its operations in 1999 and beyond in a focused
and disciplined manner. However, the Company's continued success in acquiring
other homebuilders could be affected by several factors, including, among other
things, conditions in U.S. securities markets, the general availability of
applicable acquisition candidates, pricing for such transactions, competition
among other national or regional builders for such target companies, changes in
general and economic conditions nationally and in target markets, and capital or
credit market conditions.
In January 1999, the Company continued its growth through acquiring the
remaining minority interest in General Homes and completing its purchase of
Lewis Homes. Including the Lewis Homes operations, which are expected to deliver
approximately 3,500 homes in 1999, the Company believes it will be the largest
homebuilder in the United States in 1999, as measured by unit volume. The
Company continues to explore opportunities to enter new markets and plans to
grow in its existing markets. Growth in both new and existing markets is
expected to be supplemented by strategic acquisitions from time to time. In the
aggregate, the Company has established a goal of delivering approximately 21,500
units Company-wide in 1999.
This goal could be materially affected by various risk factors such as changes
in general economic conditions either nationally or in the regions in which the
Company operates or may commence operations, job growth and employment levels,
home mortgage interest rates or consumer confidence, among other things.
Nevertheless, the Company remains optimistic about its ability to continue to
grow its business in 1999. With the addition of Lewis Homes and high current
backlog levels, the Company believes it is well-positioned to achieve record
earnings in 1999.
40
38
IMPACT OF INFLATION
The Company's business is significantly affected by general economic conditions,
particularly by inflation and its generally associated adverse effect on
interest rates. Although inflation rates have been low in recent years, rising
inflation would likely affect the Company's revenues and earning power by
reducing demand for homes as a result of correspondingly higher interest rates.
In periods of high inflation, the rising costs of land, construction, labor,
interest and administrative expenses have often been recoverable through
increased selling prices, although this has not always been possible because of
high mortgage interest rates and competitive factors in the marketplace. In
recent years, inflation has had no significant adverse impact on the Company, as
average annual cost increases have not exceeded the average rate of inflation.
* * *
Investors are cautioned that certain statements contained in this document, as
well as some statements by the Company in periodic press releases and some oral
statements by Company officials to securities analysts and stockholders during
presentations about the Company are "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995 (the "Act").
Statements which are predictive in nature, which depend upon or refer to future
events or conditions, or which include words such as "expects", "anticipates",
"intends", "plans", "believes", "estimates", "hopes", and similar expressions
constitute forward-looking statements. In addition, any statements concerning
future financial performance (including future revenues, earnings or growth
rates), ongoing business strategies or prospects, and possible future Company
actions, which may be provided by management are also forward-looking statements
as defined by the Act. Forward-looking statements are based on current
expectations and projections about future events and are subject to risks,
uncertainties, and assumptions about the Company, economic and market factors
and the homebuilding industry, among other things. These statements are not
guaranties of future performance, and the Company has no specific intention to
update these statements.
Actual events and results may differ materially from those expressed or
forecasted in the forward-looking statements made by the Company or Company
officials due to a number of factors. The principal important risk factors that
could cause the Company's actual performance and future events and actions to
differ materially from such forward-looking statements include, but are not
limited to, 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 homebuilding material prices, labor
costs, home mortgage interest rates, competition, currency exchange rates as
they affect the Company's operations in France and 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); the success of the Company and its significant
suppliers in identifying and addressing operating systems and programs that are
not year 2000 ready; as well as seasonality, competition, population growth,
property taxes, and unanticipated delays in the Company's operations.
41
39
CONSOLIDATED STATEMENTS OF
INCOME
-----------------------------------------------
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS YEARS ENDED NOVEMBER 30, 1998 1997 1996
=======================================================================================================================
TOTAL REVENUES $ 2,449,362 $ 1,878,723 $ 1,787,525
=======================================================================================================================
CONSTRUCTION:
Revenues $ 2,402,966 $ 1,843,614 $ 1,754,147
Construction and land costs (1,949,729) (1,512,766) (1,435,081)
Selling, general and administrative expenses (304,565) (229,097) (220,387)
Noncash charge for impairment of long-lived assets (170,757)
- -----------------------------------------------------------------------------------------------------------------------
Operating income (loss) 148,672 101,751 (72,078)
Interest income 5,674 5,078 2,666
Interest expense, net of amounts capitalized (23,341) (29,829) (36,691)
Minority interests (7,002) (425) (233)
Equity in pretax income (loss) of unconsolidated joint ventures 1,151 (53) (2,148)
- -----------------------------------------------------------------------------------------------------------------------
Construction pretax income (loss) 125,154 76,522 (108,484)
- -----------------------------------------------------------------------------------------------------------------------
MORTGAGE BANKING:
Revenues:
Interest income 15,569 13,303 14,594
Other 30,827 21,806 18,784
- -----------------------------------------------------------------------------------------------------------------------
46,396 35,109 33,378
Expenses:
Interest (15,046) (12,699) (13,462)
General and administrative (9,937) (7,902) (7,176)
- -----------------------------------------------------------------------------------------------------------------------
Mortgage banking pretax income 21,413 14,508 12,740
- -----------------------------------------------------------------------------------------------------------------------
Total pretax income (loss) 146,567 91,030 (95,744)
Income taxes (51,300) (32,800) 34,500
- -----------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 95,267 $ 58,230 $ (61,244)
=======================================================================================================================
BASIC EARNINGS (LOSS) PER SHARE $ 2.41 $ 1.50 $ (1.80)
=======================================================================================================================
DILUTED EARNINGS (LOSS) PER SHARE $ 2.32 $ 1.45 $ (1.80)
=======================================================================================================================
See accompanying notes.
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40
CONSOLIDATED
BALANCE SHEETS
-----------------------------
IN THOUSANDS, EXCEPT SHARES NOVEMBER 30, 1998 1997
=======================================================================================================================
ASSETS
CONSTRUCTION:
Cash and cash equivalents $ 56,602 $ 66,343
Trade and other receivables 194,841 169,988
Inventories 1,134,402 790,243
Investments in unconsolidated joint ventures 5,608 6,338
Goodwill 45,533 31,283
Other assets 105,558 69,666
- -----------------------------------------------------------------------------------------------------------------------
1,542,544 1,133,861
- -----------------------------------------------------------------------------------------------------------------------
MORTGAGE BANKING:
Cash and cash equivalents 6,751 1,899
Receivables:
First mortgages and mortgage-backed securities 58,262 71,976
First mortgages held under commitment of sale and other receivables 249,702 208,254
Other assets 2,945 3,001
- -----------------------------------------------------------------------------------------------------------------------
317,660 285,130
- -----------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 1,860,204 $ 1,418,991
=======================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CONSTRUCTION:
Accounts payable $ 211,380 $ 163,646
Accrued expenses and other liabilities 148,508 105,376
Mortgages and notes payable 529,846 496,869
- -----------------------------------------------------------------------------------------------------------------------
889,734 765,891
- -----------------------------------------------------------------------------------------------------------------------
MORTGAGE BANKING:
Accounts payable and accrued expenses 8,924 7,300
Notes payable 239,413 200,828
Collateralized mortgage obligations secured by mortgage-backed securities 49,264 60,058
- -----------------------------------------------------------------------------------------------------------------------
297,601 268,186
- -----------------------------------------------------------------------------------------------------------------------
MINORITY INTERESTS:
Consolidated subsidiaries and joint ventures 8,608 1,858
Company obligated mandatorily redeemable preferred securities of subsidiary
trust holding solely debentures of the Company 189,750
- -----------------------------------------------------------------------------------------------------------------------
198,358 1,858
- -----------------------------------------------------------------------------------------------------------------------
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; 39,992,004 and
38,996,769 shares outstanding at November 30, 1998 and 1997, respectively 39,992 38,997
Paid-in capital 193,520 186,086
Retained earnings 243,356 159,960
Cumulative foreign currency translation adjustments (2,357) (1,987)
- -----------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 474,511 383,056
- -----------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,860,204 $ 1,418,991
=======================================================================================================================
See accompanying notes.
43
41
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY
----------------------------------------------------------------------------------
SERIES B
CONVERTIBLE FOREIGN TOTAL
IN THOUSANDS PREFERRED COMMON PAID-IN RETAINED CURRENCY STOCKHOLDERS'
YEARS ENDED NOVEMBER 30, 1998, 1997 AND 1996 STOCK STOCK CAPITAL EARNINGS TRANSLATION EQUITY
===================================================================================================================================
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
- -----------------------------------------------------------------------------------------------------------------------------------
Net income 95,267 95,267
Dividends on common stock (11,871) (11,871)
Exercise of employee stock options 995 15,699 16,694
Company obligated mandatorily redeemable
preferred securities of subsidiary
trust holding solely debentures of
the Company-contract adjustment
payments and issuance costs (8,265) (8,265)
Foreign currency translation adjustments (370) (370)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at November 30, 1998 $ 39,992 $ 193,520 $ 243,356 $ (2,357) $ 474,511
===================================================================================================================================
See accompanying notes.
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42
CONSOLIDATED STATEMENTS OF
CASH FLOWS
---------------------------------------
IN THOUSANDS YEARS ENDED NOVEMBER 30, 1998 1997 1996
================================================================================================================================
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 95,267 $ 58,230 $ (61,244)
Adjustments to reconcile net income (loss) to net cash provided (used) by
operating activities:
Equity in pretax (income) loss of unconsolidated joint ventures (1,151) 53 2,148
Minority interests 7,002 425 233
Amortization of discounts and issuance costs 1,882 2,341 1,510
Depreciation and amortization 16,178 11,860 10,819
Provision for deferred income taxes 474 (5,028) (41,208)
Noncash charge for impairment of long-lived assets 170,757
Change in assets and liabilities, net of effects from acquisitions:
Receivables (50,040) (118,123) 36,572
Inventories (125,719) 5,157 232,871
Accounts payable, accrued expenses and other liabilities 51,283 20,064 (21,918)
Other, net (8,025) (4,023) 244
- --------------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities (12,849) (29,044) 330,784
- --------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash acquired (162,818) (80,556)
Investments in unconsolidated joint ventures 2,214 1,921 (7,644)
Net sales (originations) of mortgages held for long-term investment 1,686 164 (996)
Payments received on first mortgages and mortgage-backed securities 12,933 9,988 18,069
Purchases of property and equipment, net (15,859) (5,917) (2,799)
- --------------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities (161,844) 6,156 (73,926)
- --------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from (payments on) credit agreements and other short-term borrowings 63,187 37,900 (325,323)
Proceeds from Company obligated mandatorily redeemable preferred securities of
subsidiary trust holding solely debentures of the Company 183,057
Proceeds from issuance of senior subordinated notes 124,406
Proceeds from issuance of senior notes 172,182
Payments on collateralized mortgage obligations (12,324) (9,531) (17,309)
Payments on mortgages, land contracts and other loans (45,239) (8,047) (53,894)
Redemption of senior notes (100,000)
Payments from (to) minority interests (7,006) 513 (2,232)
Payments of cash dividends (11,871) (11,668) (16,107)
- --------------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) for financing activities 169,804 81,349 (290,459)
- --------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (4,889) 58,461 (33,601)
Cash and cash equivalents at beginning of year 68,242 9,781 43,382
- --------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 63,353 $ 68,242 $ 9,781
================================================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid, net of amounts capitalized $ 37,915 $ 43,559 $ 52,063
Income taxes paid 40,521 29,982 5,093
================================================================================================================================
SUPPLEMENTAL DISCLOSURES OF NONCASH ACTIVITIES:
Cost of inventories acquired through seller financing $ 29,911 $ 15,098 $ 16,977
================================================================================================================================
See accompanying notes.
45
43
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
OPERATIONS Kaufman and Broad Home Corporation (the "Company") is a
regional builder of single-family homes with domestic operations
throughout the western United States, and international operations in
France 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 subsidiaries and joint
ventures in which a controlling interest is held. All significant
intercompany transactions have been eliminated. Investments in
unconsolidated joint ventures in which the Company has less than a
controlling interest are accounted for using the equity method.
USE OF ESTIMATES The financial statements have been prepared in
conformity with generally accepted accounting principles and, as such,
include amounts based on informed estimates and judgments of
management. Actual results could differ from these estimates.
CASH AND CASH EQUIVALENTS The Company considers all highly liquid debt
instruments and other short-term investments purchased with a maturity
of three months or less to be cash equivalents. As of November 30, 1998
and 1997, the Company's cash equivalents totaled $20,246,000 and
$70,365,000, respectively.
FOREIGN CURRENCY TRANSLATION Results of operations for foreign entities
are translated using the average exchange rates during the period. For
foreign entities, assets and liabilities are translated to U.S. dollars
using the exchange rates in effect at the balance sheet date. Resulting
translation adjustments are recorded in a separate component of
stockholders' equity, "Cumulative Foreign Currency Translation
Adjustments."
CONSTRUCTION OPERATIONS Housing and other real estate sales are
recognized when title passes to the buyer and all of the following
conditions are met: a sale is consummated, a significant down payment
is received, the earnings process is complete and the collection of any
remaining receivables is reasonably assured. In France, revenues from
development and construction of apartments, condominiums and commercial
buildings, under long-term contracts with individual investors who own
the land, are recognized using the percentage of completion method,
which is generally based on costs incurred as a percentage of estimated
total costs of individual projects. Revenues recognized in excess of
amounts billed are classified as receivables. Amounts received from
buyers in excess of revenues recognized, if any, are classified as
other liabilities.
Construction and land costs are comprised of direct and allocated
costs, including estimated future costs for warranties and amenities.
Land, land improvements and other common costs are allocated on a
relative fair value basis to units within a parcel or subdivision. Land
and land development costs generally include related interest and
property taxes incurred until development is substantially completed or
deliveries have begun within a subdivision.
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 SFAS No. 121, land to be developed
and projects under development are stated at cost unless the carrying
amount of the parcel or subdivision is determined not to be
recoverable, in which case the impaired inventories are written down to
fair value. Write-downs of impaired inventories are recorded as
adjustments to the cost basis of the inventory. The Company's
inventories typically do not consist of completed projects.
Goodwill represents the excess of the purchase price over the fair
value of net assets acquired and is amortized by the Company over
periods ranging from five to ten years using the straight-line method.
Accumulated amortization
46
44
was $25,804,000 and $16,547,000 at November 30, 1998 and 1997,
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, 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 as they were not held for long-term
development and were expected to be economically successful, and as
such were determined not to be impaired.
Based on the Company's evaluation of impaired assets, a noncash
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 or 1998.
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.
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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.
EARNINGS (LOSS) PER SHARE During the quarter ended February 28, 1998,
the Company adopted 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.
Basic earnings (loss) per share is calculated by dividing net income
(loss) by average common shares outstanding for the period. Diluted
earnings (loss) per share is calculated by dividing net income (loss)
by the average number of shares outstanding including all dilutive
potentially issuable shares under various stock option plans and stock
purchase contracts. All earnings (loss) per share amounts for all
periods have been presented and, where necessary, restated to conform
to the SFAS No. 128 requirements. In 1996, the net loss, for purposes
of the loss per share calculations, was adjusted for dividends on the
Series B Convertible Preferred Stock. The following table presents a
reconciliation of average shares outstanding:
----------------------------------
IN THOUSANDS YEARS ENDED NOVEMBER 30, 1998 1997 1996
---------------------------------------------------------------------------------------------
Basic average shares outstanding 39,553 38,889 36,693
Net effect of stock options assumed to be exercised 1,480 1,169
---------------------------------------------------------------------------------------------
Diluted average shares outstanding 41,033 40,058 36,693
=============================================================================================
RECENT ACCOUNTING PRONOUNCEMENTS 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 1998
presentation.
NOTE 2. ACQUISITIONS
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
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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.
During the second quarter of 1998, the Company acquired three privately
held homebuilders with regional operations in certain key markets. On
March 19, 1998, the Company acquired all of the issued and outstanding
capital stock of Houston-based Hallmark Residential Group ("Hallmark")
for approximately $54,000,000, including the assumption of debt.
Hallmark built single-family homes primarily in Houston (with
additional operations in San Antonio and Austin, Texas) under the trade
names of Dover Homes and Ideal Builders. The Company acquired
substantially all of the assets of Denver-based PrideMark Homebuilding
Group ("PrideMark")on March 23, 1998 for approximately $65,000,000,
including the assumption of trade liabilities and debt. PrideMark built
single family homes in Denver, Colorado. On April 9, 1998, the Company
acquired all of the issued and outstanding capital stock of Estes
Homebuilding Co. ("Estes") for approximately $48,000,000, including the
assumption of debt. Estes built single-family homes in Phoenix and
Tucson, Arizona.
On August 18, 1998, the Company acquired a majority ownership
investment in General Homes Corporation ("General Homes"), a builder of
single-family homes primarily in Houston, Texas. The Company invested
approximately $31,837,000, including the assumption of debt, to acquire
50.3% of the outstanding stock of General Homes, pursuant to a
completed plan of reorganization. Subsequent to year end, on January 4,
1999, the Company acquired the remaining minority interest in General
Homes (See Note 15. Subsequent Events).
The acquisitions of Hallmark, PrideMark, and Estes and the majority
ownership investment in General Homes were financed by borrowings under
the Company's domestic unsecured revolving credit facility. Accounted
for under the purchase method, the results of operations of the
acquired entities are included in the Company's consolidated financial
statements as of their respective dates of acquisition. The purchase
prices were allocated to the assets acquired and liabilities assumed
based upon their estimated fair market values at the date of
acquisition. The excess of the purchase prices over the fair value of
net assets acquired was $23,450,000 on an aggregate basis and was
allocated to goodwill. The Company is amortizing goodwill related to
the acquisitions on a straight-line basis over a period of ten years.
The following unaudited pro forma information presents a summary of
consolidated results of operations of the Company as if the
acquisitions had occurred as of December 1, 1996 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:
YEARS ENDED NOVEMBER 30,
----------------------------
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS 1998 1997
--------------------------------------------------------------------------
Total revenues $2,564,170 $2,199,555
Total pretax income 144,648 85,951
Net income 94,048 54,951
Basic earnings per share 2.38 1.41
Diluted earnings per share 2.29 1.37
==========================================================================
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 four acquisitions been
consummated as of December 1, 1996, nor are they necessarily indicative
of future operating results.
NOTE 3. RECEIVABLES
CONSTRUCTION Trade receivables amounted to $67,771,000 and $42,591,000
at November 30, 1998 and 1997, 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
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$37,804,000 at November 30, 1998 and $13,160,000 at November 30, 1997.
The buyers are contractually obligated to remit payments against their
unbilled balances. Other receivables of $127,070,000 at November 30,
1998 and $127,397,000 at November 30, 1997 included mortgages
receivable, escrow deposits and amounts due from municipalities and
utility companies.
At November 30, 1998 and 1997, receivables were net of allowances for
doubtful accounts of $9,146,000 and $5,728,000, respectively.
MORTGAGE BANKING First mortgages and mortgage-backed securities
consisted of loans of $6,334,000 at November 30, 1998 and $8,019,000 at
November 30, 1997 and mortgage-backed securities of $51,928,000 and
$63,957,000 at November 30, 1998 and 1997, 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 2/5% and 8 1/2% at November 30, 1998 and 1997, respectively
(with rates ranging from 7% to 12% in 1998 and 1997).
First mortgages and mortgage-backed securities were net of discounts
and premiums of $546,000 at November 30, 1998 and $1,371,000 at
November 30, 1997. 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 $3,457,000 and $0, respectively at November 30, 1998
and $4,782,000 and $0, respectively at November 30, 1997.
First mortgages held under commitment of sale and other receivables
consisted of first mortgages held under commitment of sale of
$242,537,000 at November 30, 1998 and $203,113,000 at November 30, 1997
and other receivables of $7,165,000 and $5,141,000 at November 30, 1998
and 1997, respectively. The first mortgages held under commitment of
sale bore interest at an average rate of 7 1/2% and 7 1/3% at November
30, 1998 and 1997, 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 1998 1997
------------------------------------------------------------------------------
Homes, lots and improvements in production $ 835,300 $605,227
Land under development 299,102 185,016
------------------------------------------------------------------------------
Total inventories $1,134,402 $790,243
==============================================================================
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:
------------------------------------------
IN THOUSANDS YEARS ENDED NOVEMBER 30, 1998 1997 1996
--------------------------------------------------------------------------------------------
Interest incurred $ 54,299 $ 52,468 $ 63,628
Interest expensed (23,341) (29,829) (36,691)
--------------------------------------------------------------------------------------------
Interest capitalized 30,958 22,639 26,937
Interest amortized (30,752) (25,480) (24,893)
--------------------------------------------------------------------------------------------
Net impact on consolidated pretax income $ 206 $ (2,841) $ 2,044
============================================================================================
NOTE 5. INVESTMENTS IN UNCONSOLIDATED JOINT VENTURES
The Company participates in a number of joint ventures in which it has
less than a controlling interest. These joint ventures are based in
California, New Mexico, Texas and France and are engaged in the
development, construction and sale of residential properties and
commercial projects. Combined condensed financial information
concerning the Company's unconsolidated joint venture activities
follows:
----------------------
IN THOUSANDS NOVEMBER 30, 1998 1997
------------------------------------------------------------
Cash $ 6,286 $ 3,376
Receivables 5,727 7,532
Inventories 15,042 18,421
Other assets 637 183
------------------------------------------------------------
Total assets $27,692 $29,512
============================================================
Mortgages and notes payable $ 4,593 $ 4,528
Other liabilities 5,696 5,549
Equity of:
The Company 5,608 6,338
Others 11,795 13,097
------------------------------------------------------------
Total liabilities and equity $27,692 $29,512
============================================================
The joint ventures finance land and inventory investments primarily
through a variety of borrowing arrangements. The Company typically does
not guarantee these financing arrangements.
------------------------------------------
IN THOUSANDS YEARS ENDED NOVEMBER 30, 1998 1997 1996
-----------------------------------------------------------------------------------------------
Revenues $ 17,657 $ 98,183 $ 6,678
Cost of sales (12,245) (94,901) (8,232)
Other expenses, net (384) (6,147) (13,207)
-----------------------------------------------------------------------------------------------
Total pretax income (loss) $ 5,028 $ (2,865) $(14,761)
===============================================================================================
The Company's share of pretax income (loss) $ 1,151 $ (53) $ (2,148)
===============================================================================================
The Company's share of pretax income (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):
------------------------
IN THOUSANDS NOVEMBER 30, 1998 1997
-------------------------------------------------------------------------------------------
Unsecured French borrowings (4 1/5% to 5 3/8% in 1998 and
4% to 5 3/8% in 1997) $ 33,647 $ 9,045
Mortgages and land contracts due to land sellers and other
loans (8% to 10 1/4% in 1998 and 8 1/10% to 11% in 1997) 22,492 14,294
Senior notes due 2004 at 7 3/4% 175,000 175,000
Senior subordinated notes due 2003 at 9 3/8% 174,221 174,085
Senior subordinated notes due 2006 at 9 5/8% 124,486 124,445
-------------------------------------------------------------------------------------------
Total mortgages and notes payable $529,846 $496,869
===========================================================================================
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, $493,000,000 remained committed and $475,287,000 was
available for the Company's future use at November 30, 1998. 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.
The Company's French subsidiaries have lines of credit with various
banks which totaled $110,838,000 at November 30, 1998 and have various
committed expiration dates through November 2000. These lines of credit
provide for interest on borrowings at either the French Federal Funds
Rate or the Paris Interbank Offered Rate plus an applicable spread.
The weighted average interest rate on aggregate unsecured borrowings,
excluding the senior and senior subordinated notes, was 4 3/5% and
4 3/10% at November 30, 1998 and 1997, respectively.
On April 26, 1993, the Company issued $175,000,000 principal amount of
9 3/8% senior subordinated notes at 99.202%. The notes are due May 1,
2003 with interest payable semi-annually. The notes represent unsecured
obligations of the Company and are subordinated to all existing and
future senior indebtedness of the Company. The Company may redeem the
notes, in whole or in part, at any time on or after May 1, 2000 at 100%
of their principal amount.
On October 29, 1996, the Company filed a universal shelf registration
statement (the "1996 Shelf Registration") with the Securities and
Exchange Commission for up to $300,000,000 of the Company's debt and
equity securities. The Company's previously outstanding shelf
registration for debt securities in the amount of $100,000,000 was
subsumed within the 1996 Shelf Registration. On November 14, 1996, the
Company utilized the 1996 Shelf Registration to issue $125,000,000 of
9 5/8% senior subordinated notes at 99.525%. The notes, which are due
November 15, 2006 with interest payable semi-annually, represent
unsecured obligations of the Company and are subordinated to all
existing and future senior indebtedness of the Company. The notes are
redeemable at the option of the Company, in whole or in part, at
104.8125% of their principal amount beginning November 15, 2001, and
thereafter at prices declining annually to 100% on and after November
15, 2004.
On September 4, 1997, the Company completed the optional redemption of
its $100,000,000 principal amount of 10 3/8% senior notes due in 1999.
The Company used borrowings under its Revolving Credit Facility to
retire the
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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. Under the terms of
the Revolving Credit Facility, the Company is required, among other
things, to maintain certain financial statement ratios and a minimum
net worth and is subject to limitations on acquisitions, inventories
and indebtedness. Based on the terms of the Company's Revolving Credit
Facility, senior notes and senior subordinated notes, retained earnings
of $163,535,000 were available for payment of cash dividends or stock
repurchases at November 30, 1998.
Principal payments on senior and senior subordinated notes, mortgages,
land contracts and other loans are due as follows: 1999, $18,999,000;
2000, $3,346,000; 2001, $77,000; 2002, $70,000; 2003, $174,221,000; and
thereafter, $299,486,000.
Assets (primarily inventories) having a carrying value of approximately
$45,060,000 are pledged to collateralize mortgages, land contracts and
other secured loans.
On December 5, 1997, the Company filed a new universal shelf
registration statement with the Securities and Exchange Commission for
up to $500,000,000 of the Company's debt and equity securities. This
universal shelf registration provides that securities may be offered
from time to time in one or more series and in the form of senior,
senior subordinated or subordinated debt, preferred stock, common
stock, and/or warrants to purchase such securities. The registration
was declared effective on December 16, 1997, and no securities have
been issued thereunder.
MORTGAGE BANKING Notes payable included the following (interest rates
are as of November 30):
------------------------
IN THOUSANDS NOVEMBER 30, 1998 1997
---------------------------------------------------------------------------------------------------------
Notes payable secured by trust deed notes (5 3/5% in 1998 and 6% in 1997) $239,413 $200,828
---------------------------------------------------------------------------------------------------------
Total notes payable $239,413 $200,828
=========================================================================================================
First mortgages receivable are financed through a $250,000,000
revolving mortgage warehouse agreement (the "Mortgage Warehouse
Facility"). The Mortgage Warehouse Facility, which expires on February
23, 2000, provides for an annual fee based on the committed balance of
the facility and provides for interest at either the Federal Funds Rate
or the London Interbank Offered Rate plus an applicable spread on
amounts borrowed.
The 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.
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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, 1998 and 1997, 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. COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF
SUBSIDIARY TRUST HOLDING SOLELY DEBENTURES OF THE COMPANY (FELINE
PRIDES)
On July 7, 1998, the Company, together with KBHC Financing I, a
Delaware statutory business trust (the "KBHC Trust"), of which all the
common securities are owned by the Company, issued an aggregate of (i)
18,975,000 Feline Prides, and (ii) 1,000,000 KBHC Trust capital
securities, with a $10 stated liquidation amount. The Feline Prides
consist of (i) 17,975,000 Income Prides with a stated amount per Income
Prides of $10 (the "Stated Amount"), which are units comprised of a
capital security and a stock purchase contract under which the holders
will purchase common stock from the Company not later than August 16,
2001 and the Company will pay to the holders certain unsecured contract
adjustment payments, and (ii) 1,000,000 Growth Prides with a face
amount per Growth Prides equal to the Stated Amount, which are units
consisting of a 1/100th beneficial interest in a zero-coupon U.S.
treasury security and a stock purchase contract under which the holders
will purchase common stock from the Company not later than August 16,
2001 and the Company will pay to the holders certain unsecured contract
adjustment payments.
The distribution rate on the Income Prides is 8.25% per annum, and the
distribution rate on the Growth Prides is .75% per annum. Under the
stock purchase contracts, investors will be required to purchase shares
of common stock of the Company for an effective price ranging between a
minimum of $31.75 per share and a maximum of $38.10 per share, and the
Company will issue approximately 5,000,000 to 6,000,000 common shares
by August 16, 2001, depending upon the price of the Company's common
stock upon settlement of the purchase contracts (subject to adjustment
under certain circumstances). The capital securities associated with
the Income Prides and the U.S. treasury securities associated with the
Growth Prides have been pledged as collateral to secure the holders'
obligations in respect of the common stock purchase contracts. The
capital securities issued by the KBHC Trust are entitled to a
distribution rate of 8% per annum of their $10 stated liquidation
amount.
The KBHC Trust utilized the proceeds from the issuance of the Feline
Prides and capital securities to purchase an equivalent principal
amount of the Company's 8% Debentures due August 16, 2003 (the "8%
Debentures"). The 8% Debentures are the sole asset of the KBHC Trust.
The Company's obligations under the Debentures and related agreements,
taken together constitute a firm and unconditional guarantee by the
Company of the KBHC Trust's obligations under the capital securities.
The interest rate on the 8% Debentures and the distribution rate on the
capital securities of the KBHC Trust are to be reset, subject to
certain limitations, effective August 16, 2001. The Company has
recorded the present value of the contract adjustment payments on the
Feline Prides, totaling $1,600,000, as a liability and a reduction of
stockholders' equity. The liability will be reduced as the contract
adjustment payments are made. The Company has the right to defer the
contract adjustment payments and the payment of interest on the 8%
Debentures, but any such election will subject the Company to
restrictions on the payment of dividends on, and redemption of, its
outstanding shares of common stock, and on the payment of interest on,
or redemption of, debt securities of the Company junior in rank to the
8% Debentures, none of which are currently outstanding. Distributions
totaling $6,072,000 are included as minority interests in the Company's
results of operations for the year ended November 30, 1998.
The proceeds from the issuance of Feline Prides were used immediately
to pay down outstanding debt under the Company's domestic unsecured
revolving credit facility. Subsequently, the unsecured revolving credit
facility was used for general corporate purposes, including support of
the Company's growth strategies and acquisitions. The Company incurred
costs of approximately $6,700,000 in connection with the issuance of
the Feline Prides and the capital securities.
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NOTE 8. FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair values of financial instruments have been determined
based on available market information and appropriate valuation
methodologies. However, judgment is necessarily required in
interpreting market data to develop the estimates of fair value. In
that regard, the estimates presented herein are not necessarily
indicative of the amounts that the Company could realize in a current
market exchange.
The carrying values and estimated fair values of the Company's
financial instruments, except for those financial instruments for which
the carrying values approximate fair values, are summarized as follows:
---------------------------------------------------------
IN THOUSANDS NOVEMBER 30, 1998 1997
--------------------------------------------------------------------------------------------------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
--------------------------------------------------------------------------------------------------------------------
Construction:
Financial liabilities
7 3/4% Senior notes $175,000 $169,698 $175,000 $173,688
9 3/8% Senior subordinated notes 174,221 178,833 174,085 182,158
9 5/8% Senior subordinated notes 124,486 134,288 124,445 131,988
Mortgage banking:
Financial assets
Mortgage-backed securities 51,928 55,386 63,957 68,739
Financial liabilities
Collateralized mortgage obligations secured by
mortgage-backed securities 49,264 53,693 60,058 67,451
Company obligated mandatorily redeemable
preferred securities of subsidiary trust holding
solely debentures of the Company 189,750 162,200
===================================================================================================================
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.
Company obligated mandatorily redeemable preferred securities of
subsidiary trust holding solely debentures of the Company: The fair
values of these financial instruments are based on quoted market prices
on the New York Stock Exchange.
NOTE 9. COMMITMENTS AND CONTINGENCIES
Commitments and contingencies include the usual obligations of
homebuilders for the completion of contracts and those incurred in the
ordinary course of business. The Company is also involved in litigation
incidental to its business, the disposition of which should have no
material effect on the Company's financial position or results of
operations.
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NOTE 10. STOCKHOLDERS' EQUITY
PREFERRED STOCK On January 11, 1989, the Company adopted a Stockholder
Rights Plan (the "1989 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 combination
transaction, or 50% or more of the Company's assets or earning power is
sold, each right will entitle its holder to receive, upon exercise,
common stock of the acquiring company having a market value of twice
the 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. Subsequent to year end, on February 4, 1999, the Company
adopted a new Stockholder Rights Agreement (See Note 15. Subsequent
Events).
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 Stock). 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 11. EMPLOYEE BENEFIT AND STOCK PLANS
Benefits are provided to most employees under the Company's 401(k)
Savings Plan under which contributions by employees are partially
matched by the Company. The aggregate cost of this plan to the Company
was $3,025,000in 1998, $2,081,000 in 1997 and $1,867,000 in 1996.
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 a Performance-Based Incentive Plan for Senior Management (the
"Incentive Plan") and the 1998 Stock Incentive Plan which provide for
the same awards as may be made under the 1988 Plan, but require that
such awards be subject to certain conditions which are designed to
assure that annual compensation paid in excess of $1,000,000 to
participating executives is tax deductible for the Company.
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 1998, 1997 and 1996
consistent with the provisions of SFAS No. 123, the Company's net
income (loss) and diluted earnings (loss) per share would have been
reduced to the pro forma amounts as follows:
56
54
----------------------------------------------
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
YEARS ENDED NOVEMBER 30, 1998 1997 1996
-----------------------------------------------------------------------------------------------------
Net income (loss)-- as reported $ 95,267 $ 58,230 $ (61,244)
Net income (loss)-- pro forma 91,398 57,463 (61,757)
Diluted earnings (loss) per share-- as reported 2.32 1.45 (1.80)
Diluted earnings (loss) per share-- pro forma 2.24 1.44 (1.82)
=====================================================================================================
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 1998, 1997 and 1996, respectively: a
risk free interest rate of 4.38%, 5.84% and 5.88%, an expected
volatility factor for the market price of the Company's common stock of
41.31%, 34.62% and 40.06%; a dividend yield of 1.19%, 1.38% and 2.33%
and an expected life of 4 years, 4 years and 6 years. The weighted
average fair value of options granted in 1998, 1997 and 1996 was $6.09,
$3.68 and $4.48, respectively.
Stock option transactions are summarized as follows:
----------------------------------------------------------------------------------
1998 1997 1996
-------------------------------------------------------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
-------------------------------------------------------------------------------------------------------------------------
Options outstanding at beginning
of year 2,747,318 $ 9.98 2,830,268 $ 10.00 2,406,718 $ 9.30
Granted 1,318,017 22.83 387,000 14.07 665,000 14.21
Exercised (995,235) 10.70 (169,183) 12.10 (37,100) 10.12
Cancelled (105,033) 16.56 (300,767) 14.25 (204,350) 15.38
-------------------------------------------------------------------------------------------------------------------------
Options outstanding at end of year 2,965,067 $ 15.22 2,747,318 $ 9.98 2,830,268 $ 10.00
-------------------------------------------------------------------------------------------------------------------------
Options exercisable at end of year 1,586,455 $ 12.16 1,816,346 $ 7.92 1,732,468 $ 7.54
-------------------------------------------------------------------------------------------------------------------------
Options available for grant at end
of year 2,464,014 1,776,998 1,863,431
=========================================================================================================================
Stock options outstanding at November 30, 1998 are as follows:
------------------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------------------------------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
CONTRACTUAL EXERCISE EXERCISE
RANGE OF EXERCISE PRICE OPTIONS LIFE PRICE OPTIONS PRICE
----------------------------------------------------------------------------------------------
$4.38 to $4.75 847,222 4.65 $ 4.75 847,222 $ 4.75
$5.50 to $14.56 770,728 11.96 13.72 231,116 13.34
$16.13 to $21.59 858,100 9.01 21.32 61,600 18.53
$23.74 to $33.94 489,017 9.54 25.02 446,517 24.75
---------------- --------- -------- -------- --------- --------
$4.38 to $33.94 2,965,067 8.62 $ 15.22 1,586,455 $ 12.16
================ ========= ======== ======== ========= ========
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.
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55
In 1991, the Board of Directors approved the issuance of restricted
stock awards under the 1988 Plan of up to an aggregate 600,000 shares
of common stock to certain officers and key employees. Restrictions
lapse each year through May 10, 2005 on specified portions of the
shares awarded to each participant so long as the participant has
remained in the continuous employ of the Company. Restricted shares
under this grant outstanding at the end of the year totaled 151,665 in
1998, 226,668 in 1997 and 255,001 in 1996.
NOTE 12. INCOME TAXES
The components of pretax income (loss) are as follows:
----------------------------------------
IN THOUSANDS
YEARS ENDED NOVEMBER 30, 1998 1997 1996
----------------------------------------------------------------------------
Domestic $136,042 $ 87,545 $(51,399)
Foreign 10,525 3,485 (44,345)
----------------------------------------------------------------------------
Total pretax income (loss) $146,567 $ 91,030 $(95,744)
============================================================================
The components of income taxes are as follows:
-----------------------------------------------------------
IN THOUSANDS TOTAL FEDERAL STATE FOREIGN
------------------------------------------------------------------------------------
1998
Currently payable $ 52,628 $ 39,989 $ 8,498 $ 4,141
Deferred (1,328) (3,145) 1,817
------------------------------------------------------------------------------------
Total $ 51,300 $ 36,844 $ 8,498 $ 5,958
====================================================================================
1997
Currently payable $ 35,159 $ 28,254 $ 4,847 $ 2,058
Deferred (2,359) (1,892) (467)
------------------------------------------------------------------------------------
Total $ 32,800 $ 26,362 $ 4,847 $ 1,591
====================================================================================
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)
====================================================================================
58
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Deferred income taxes result from temporary differences in the
financial and tax bases of assets and liabilities. Significant
components of the Company's deferred tax liabilities and assets are as
follows:
----------------------
IN THOUSANDS NOVEMBER 30, 1998 1997
------------------------------------------------------------------------------------
Deferred tax liabilities:
Installment sales $ 6,520 $ 2,372
Bad debt and other reserves 166 333
Capitalized expenses 20,800 17,789
Partnerships and joint ventures 2,457 2,712
Computer equipment leases 432
Repatriation of foreign subsidiaries 12,018 11,785
Other 3,491 3,314
------------------------------------------------------------------------------------
Total deferred tax liabilities 45,452 38,737
------------------------------------------------------------------------------------
Deferred tax assets:
Warranty, legal and other accruals 15,315 12,394
Depreciation and amortization 7,476 4,764
Capitalized expenses 9,827 6,684
Noncash charge for impairment of long-lived assets 8,902 13,307
Foreign tax credits 11,857 11,603
Net operating losses 931 1,099
Other 15,238 10,674
------------------------------------------------------------------------------------
Total deferred tax assets 69,546 60,525
------------------------------------------------------------------------------------
Net deferred tax assets $24,094 $21,788
====================================================================================
Net operating loss carryforwards expire in 1999, 2000, 2001 and 2003.
The Company expects that the entire deferred tax benefit of the tax
loss carryforwards will be recognized in future periods.
Income taxes computed at the statutory United States federal income tax
rate and income tax expense provided in the financial statements differ
as follows:
------------------------------------------
IN THOUSANDS YEARS ENDED NOVEMBER 30, 1998 1997 1996
---------------------------------------------------------------------------------------------------
Amount computed at statutory rate $ 51,298 $ 31,861 $(33,510)
Increase (decrease) resulting from:
State taxes, net of federal income tax benefit 5,524 3,150 (4,552)
Differences in foreign tax rates 1,594 (885) (167)
Intercompany dividends 977 352 1,170
Affordable housing credits (3,351) (2,046) (2,024)
Other, net (4,742) 368 4,583
---------------------------------------------------------------------------------------------------
Total $ 51,300 $ 32,800 $(34,500)
===================================================================================================
The Company has commitments to invest $13,123,000 over six years in
affordable housing partnerships which are scheduled to provide tax
credits.
The Company had foreign tax credit carryforwards at November 30, 1998
of $4,666,000 for United States federal income tax purposes which
expire in 2000, 2002 and 2003.
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 $17,565,000 at November 30,
1998. If these earnings were currently distributed, the resulting
withholding taxes payable would be $877,000.
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NOTE 13. GEOGRAPHICAL AND SEGMENT INFORMATION
Geographical and segment information follows:
------------------------------------------------
OPERATING
INCOME IDENTIFIABLE
IN THOUSANDS REVENUES (LOSS) ASSETS
-------------------------------------------------------------------------------------------------------------
1998
Construction:
California $1,105,849 $ 79,871 $ 655,920
Other U.S. 1,042,408 55,343 656,389
Foreign 254,709 13,458 230,235
-------------------------------------------------------------------------------------------------------------
Total construction 2,402,966 148,672 1,542,544
Mortgage banking 46,396 21,413 317,660
-------------------------------------------------------------------------------------------------------------
Total $2,449,362 $ 170,085 $1,860,204
============================================================================================================
1997
Construction:
California $ 993,921 $ 65,554 $ 717,949
Other U.S. 670,590 34,166 283,794
Foreign 179,103 2,031 132,118
-------------------------------------------------------------------------------------------------------------
Total construction 1,843,614 101,751 1,133,861
Mortgage banking 35,109 14,508 285,130
-------------------------------------------------------------------------------------------------------------
Total $1,878,723 $ 116,259 $1,418,991
============================================================================================================
1996
Construction:
California $1,057,980 $ 65,308 $ 620,823
Other U.S. 516,921 33,251 234,959
Foreign 179,246 120 144,377
Noncash charge for impairment of long-lived assets* (170,757)
-------------------------------------------------------------------------------------------------------------
Total construction 1,754,147 (72,078) 1,000,159
Mortgage banking 33,378 12,740 243,335
-------------------------------------------------------------------------------------------------------------
Total $1,787,525 $ (59,338) $1,243,494
============================================================================================================
* The $170.8 million pretax noncash 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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NOTE 14. QUARTERLY RESULTS (UNAUDITED)
Quarterly results for the years ended November 30, 1998 and 1997
follow:
--------------------------------------------------------
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS FIRST SECOND THIRD FOURTH
------------------------------------------------------------------------------------------------------
1998
Revenues $426,245 $537,459 $659,014 $826,644
Operating income 18,323 32,637 48,888 70,237
Pretax income 12,698 26,222 43,298 64,349
Net income 8,098 17,222 28,098 41,849
Basic earnings per share .21 .44 .70 1.05
Diluted earnings per share .20 .42 .68 1.02
======================================================================================================
1997
Revenues $347,246 $415,000 $469,171 $647,306
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
Basic earnings per share .11 .28 .39 .72
Diluted earnings per share .11 .27 .38 .69
======================================================================================================
Quarterly and year-to-date computations of per share amounts are made
independently. Therefore, the sum of per share amounts for the quarters
may not agree with per share amounts for the year.
NOTE 15. SUBSEQUENT EVENTS
Subsequent to year end, effective January 4, 1999, the Company acquired
the remaining equity interest in Houston-based General Homes. The
Company invested approximately $14,500,000 to acquire 49.7% of the
outstanding stock of General Homes, bringing its ownership interest to
100%. This transaction was financed by borrowings under the Company's
domestic unsecured revolving credit facility.
Effective January 7, 1999, the Company acquired substantially all of
the homebuilding assets of the Lewis Homes group of companies ("Lewis
Homes"). 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 estimated unaudited revenues for the
year ended December 31, 1998 of $700,000,000 on approximately 3,600
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 estimated purchase price for Lewis Homes is $449,000,000, comprised
of the assumption of approximately $303,000,000 in debt and the
issuance of 7,886,686 shares of the Company's common stock valued at
approximately $146,000,000. The current estimated purchase price was
based on the net book values of the entities purchased and is subject
to adjustment based on the closing balance sheets as of December 31,
1998, which are expected to be finalized before April 1, 1999. While it
is anticipated that there will be further adjustments to the purchase
price, 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
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59
family's request from July 1, 2000 to July 1, 2002. Under the terms of
the purchase agreement, a Lewis family member has also been appointed
to the Company's board of directors.
In connection with the acquisition of Lewis Homes, the Company obtained
a $200,000,000 unsecured term loan agreement with various banks (the
"Term Loan Agreement") to refinance certain debt assumed. The Term Loan
Agreement dated January 7, 1999 provides for payments of $25,000,000
due on January 31, 2000, April 30, 2000 and July 31, 2000, with the
remaining principal balance due on April 30, 2001. Interest is payable
monthly at the London Interbank Offered Rate plus an applicable spread.
Under the terms of the Term Loan Agreement, the Company is required,
among other things, to maintain certain financial statement ratios and
a minimum net worth and is subject to limitations on acquisitions,
inventories and indebtedness. The financing obtained under the Term
Loan Agreement did not impact the amounts available under the Company's
pre-existing borrowing arrangements. The Company used borrowings under
its existing domestic unsecured revolving credit facility to refinance
certain other debt assumed in the Lewis Homes acquisition.
The acquisition consideration for Lewis Homes was determined by
arm's-length negotiations between the parties. The acquisition will be
accounted for as a purchase, with the results of Lewis Homes included
in the Company's consolidated financial statements as of January 7,
1999.
On February 4, 1999, the Company adopted a new Stockholder Rights Plan
to replace the 1989 Rights Plan, and declared a dividend distribution
of one preferred share purchase right for each outstanding share of
common stock, such rights to be issued on March 7, 1999, simultaneously
with the expiration of the rights issued under the 1989 Rights Plan.
Under certain circumstances, each right entitles the holder to purchase
1/100th of a share of the Company's Series A Participating Cumulative
Preferred Stock at a price of $135.00, subject to certain antidilution
provisions. The rights are not exercisable until the earlier to occur
of (i) 10 days following a public announcement that a person or group
has acquired Company stock representing 15% or more of the aggregate
votes entitled to be cast by all shares of common stock or (ii) 10 days
following the commencement of a tender offer for Company stock
representing 15% or more of the aggregate votes entitled to be cast by
all shares of common stock. The holdings of or acquisitions by any of
the members of the Lewis family, a former officer of Lewis Homes and
any entity controlled by any of them (the "Lewis Holders"), who held in
the aggregate approximately 16% of the Company's common stock as of
January 7, 1999, will not cause the rights to become exercisable by
virtue of their ownership so long as their aggregate ownership remains
below 17% of the issued and outstanding common stock. In the event the
aggregate ownership of the Lewis Holders falls below 15.5% of the
issued and outstanding shares of the Company's common stock, the rights
will become exercisable as described above if their holdings should at
anytime thereafter exceed 16% of the issued and outstanding shares of
the Company's common stock. In the event the aggregate ownership of the
Lewis Holders falls below 14.5% of the issued and outstanding shares of
the Company's common stock, the Lewis Holders' exemption will
terminate, and the rights will become exercisable as described above.
If, without approval of the Board of Directors, the Company is acquired
in a merger or other business combination transaction, or 50% or more
of the Company's assets or earning power is sold, each right will
entitle its holder to receive, upon exercise, common stock of the
acquiring company having a market value of twice the exercise price of
the right; and if, without approval of the Board of Directors, any
person or group acquires Company stock representing 15% or more of the
aggregate votes entitled to be cast by all shares of common stock, each
right will entitle its holder to receive, upon exercise, common stock
of the Company having a market value of twice the exercise price of the
right. At the option of the Company, the rights are redeemable prior to
becoming exercisable at $.005 per right. Unless previously redeemed,
the rights will expire on March 7, 2009. Until a right is exercised,
the holder will have no rights as a stockholder of the Company,
including the right to vote or receive dividends.
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60
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, 1998 and 1997, and the
related consolidated statements of income, stockholders' equity, and
cash flows for each of the three years in the period ended November 30,
1998. 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, 1998 and 1997,
and the consolidated results of its operations and its cash flows for
each of the three years in the period ended November 30, 1998, in
conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Los Angeles, California
December 31, 1998, except as to Note 15, as to which the date is
February 4, 1999
REPORT ON
FINANCIAL STATEMENTS
The accompanying consolidated financial statements are the
responsibility of management. The statements have been prepared in
conformity with generally accepted accounting principles. Estimates and
judgments of management based on its current knowledge of anticipated
transactions and events are made to prepare the financial statements as
required by generally accepted accounting principles. Management relies
on internal accounting controls, among other things, to produce records
suitable for the preparation of financial statements.
The responsibility of our external auditors for the financial
statements is limited to their expressed opinion on the fairness of the
consolidated financial statements taken as a whole. Their examination
is performed in accordance with generally accepted auditing standards
which include tests of our accounting records and internal accounting
controls and evaluation of estimates and judgments used to prepare the
financial statements. The Company employs a staff of internal auditors
whose work includes evaluating and testing internal accounting
controls.
An audit committee of outside members of the Board of Directors
periodically meets with management, the external auditors and the
internal auditors to evaluate the scope of auditing activities and
review results. Both the external and internal auditors have the
unrestricted opportunity to communicate privately with the audit
committee.
/s/ MICHAEL F. HENN
Michael F. Henn
Senior Vice President and Chief Financial Officer
December 31, 1998
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61
STOCKHOLDER
INFORMATION
COMMON STOCK PRICES
-------------------------------------------------------
1998 1997
- -----------------------------------------------------------------------------
HIGH LOW HIGH LOW
- -----------------------------------------------------------------------------
First Quarter $26 7/8 $20 5/16 $14 5/8 $11 3/4
Second Quarter 34 1/2 22 5/16 15 1/4 12 7/8
Third Quarter 35 21 3/8 22 1/8 14 3/4
Fourth Quarter 31 1/4 17 1/8 23 1/8 18 15/16
- ------------------------------------------------------------------------------
DIVIDEND DATA
Kaufman and Broad Home Corporation paid a quarterly cash dividend of $.075 per
common share in 1998 and 1997.
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 1, 1999.
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
85 Challenger Road
Ridgefield Park, New Jersey 07660
(800) 356-2017
www.chasemellon.com
INDEPENDENT AUDITORS
Ernst & Young LLP
Los Angeles, California
SHAREHOLDER INFORMATION
Kaufman and Broad Home Corporation common stock is traded on the New York Stock
Exchange under the symbol KBH. There were approximately 47,898,793 shares
outstanding as of February 1, 1999.
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 may also be obtained on-line
through Company News On Call at HYPERLINK www.prnewswire.com.
HEADQUARTERS
Kaufman and Broad Home Corporation
10990 Wilshire Boulevard, Seventh Floor
Los Angeles, California 90024
(310) 231-4000
(310) 231-4222 Fax
WWW.KAUFMANANDBROAD.COM
Location and Community Information:
(800) 34-HOMES
INVESTOR CONTACT
Mary M. McAboy
Vice President, Investor Relations
Kaufman and Broad Home Corporation
10990 Wilshire Boulevard, Seventh Floor
Los Angeles, California 90024
(310) 231-4033
mmcaboy@kbhomes.com
BONDHOLDER SERVICES ADDRESSES &
PHONE NUMBERS
8 1/4% $189,750,000 FELINE PRIDES - Due 8/16/01
Trustee:
The First National Bank of Chicago
Corporate Trust Investor Relations
One First National Plaza
Mail Suite 0126
Chicago, Illinois 60670-0126
bondholder@em.fcnbd.com
(800) 524-9472
9 3/8% $175,000,000 Note - Due 5/1/03
Trustee:
State Street Bank and Trust Company of California, N.A.
Corporate Trust Department
633 West 5th Street, 12th Floor
Los Angeles, California 90071
corporatetrust.statestreet.com
(800) 531-0368
7 3/4% $175,000,000 Note - Due 10/15/04
9 5/8% $125,000,000 Note - Due 11/15/06
Trustee:
Sun Trust Bank, Atlanta
Corporate Trust Division
3495 Piedmont Road
Building 10, Suite 810
Atlanta, Georgia 30305
(800) 711-1614
67
62
LIST OF EXHIBITS FILED
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
- ------- ----------- ----------
10.17 Kaufman and Broad Home Corporation 1998 Stock Incentive
Plan........................................................
10.18 Kaufman and Broad Home Corporation Directors' Legacy
Program, as amended January 1, 1999.........................
13 Pages 25 through 63 and page 67 of the Company's 1998
Annual Report to Stockholders...............................
22 Subsidiaries of the Company.................................
24 Consent of Independent Auditors.............................
27 Financial Data Schedule.....................................