UNITED STATES SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

For the quarterly period ended February 28, 2005.

or

For the transition period from [ ] to [ ].

Commission File No. 001-09195

KB HOME

10990 Wilshire Boulevard
Los Angeles, California 90024
(310) 231-4000

(Address and telephone number of principal executive offices)

INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS.

Yes þ No o

INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS DEFINED IN RULE 12b-2 OF THE EXCHANGE ACT).

Yes þ No o

INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT’S CLASSES OF COMMON STOCK AS OF FEBRUARY 28, 2005.

Common stock, par value $1.00 per share, 95,755,280 shares outstanding, including 14,716,400 shares held by the Registrant’s Grantor Stock Ownership Trust and excluding 17,001,396 shares held in treasury.

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FORM 10-Q
INDEX

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

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See accompanying notes.

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See accompanying notes.

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See accompanying notes.

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1. Basis of Presentation and Significant Accounting Policies

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and the rules and regulations of the Securities and Exchange Commission. Accordingly, certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted.

In the opinion of the Company, the accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) necessary to present fairly the Company’s financial position as of February 28, 2005, the results of its consolidated operations for the three months ended February 28, 2005 and February 29, 2004, and its consolidated cash flows for the three months ended February 28, 2005 and February 29, 2004. The results of operations for the three months ended February 28, 2005 are not necessarily indicative of the results to be expected for the full year. The consolidated balance sheet at November 30, 2004 has been taken from the audited financial statements as of that date. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements for the year ended November 30, 2004 contained in the Company’s 2004 Annual Report to Stockholders.

On April 7, 2005, the Company’s board of directors declared a two-for-one split of the Company’s common stock to be effected in the form of a 100% stock dividend payable on or about April 28, 2005. Accordingly, all share and per share amounts have been restated to reflect the impact of the two-for-one stock split.

Segment information

The Company has identified two reportable segments: construction and mortgage banking. Information for the Company’s reportable segments is presented in its consolidated statements of income and consolidated balance sheets included herein. The Company’s reporting segments follow the same accounting policies used for the Company’s consolidated financial statements. Management evaluates a segment’s performance based upon a number of factors including pretax results.

Stock based compensation

The Company has elected to account for stock-based compensation using the intrinsic value method as prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB Opinion No. 25”) and related interpretations and, therefore, recorded no compensation expense in the determination of net income during the three-month periods ended February 28, 2005 and February 29, 2004. The following table illustrates the effect on net income and earnings per share if the fair value method had been applied to all outstanding and unvested awards in the three-month periods ended February 28, 2005 and February 29, 2004 (in thousands, except per share amounts):

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. Basis of Presentation and Significant Accounting Policies (continued)

Earnings per share

Basic earnings per share is calculated by dividing net income by the average number of common shares outstanding for the period. Diluted earnings per share is calculated by dividing net income by the average number of common shares outstanding including all dilutive potentially issuable shares under various stock option plans and stock purchase contracts.

The following table presents a reconciliation of average shares outstanding (in thousands):

Comprehensive income

The following table presents the components of comprehensive income (in thousands):

The accumulated balances of other comprehensive income in the balance sheets as of February 28, 2005 and November 30, 2004 are comprised solely of cumulative foreign currency translation adjustments of $60.8 million and $60.0 million, respectively.

Reclassifications

Certain amounts in the consolidated financial statements of prior years have been reclassified to conform to the 2005 presentation.

2. Inventories

Inventories consist of the following (in thousands):

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

2. Inventories (continued)

The Company’s interest costs are as follows (in thousands):

3. Consolidation of Variable Interest Entities

In January 2003, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities” (as amended, “FASB Interpretation No. 46”) to clarify the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” to certain entities (referred to as “variable interest entities” or “VIEs”) in which equity investors do not have the characteristics of a controlling interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. Pursuant to FASB Interpretation No. 46, an enterprise that absorbs a majority of the VIEs expected losses, receives a majority of the VIEs expected residual returns, or both, is determined to be the primary beneficiary of the VIE and must consolidate the entity.

In the ordinary course of its business, the Company enters into land option contracts in order to procure land for the construction of homes. Under such land option contracts, the Company will fund a specified option deposit or earnest money deposit in consideration for the right to purchase land in the future, usually at a predetermined price. Under the requirements of FASB Interpretation No. 46, certain of the Company’s land option contracts may create a variable interest for the Company, with the land seller being identified as a VIE.

In compliance with FASB Interpretation No. 46, the Company analyzed its land option contracts and other contractual arrangements and has consolidated the fair value of certain VIEs from which the Company is purchasing land under option contracts. The consolidation of these VIEs, where the Company was determined to be the primary beneficiary, added $113.8 million to inventory and other liabilities in the Company’s consolidated balance sheet at February 28, 2005. The Company’s cash deposits related to these land option contracts totaled $15.7 million at February 28, 2005. Creditors, if any, of these VIEs have no recourse against the Company. As of February 28, 2005, excluding consolidated VIEs, the Company had cash deposits and/or letters of credit totaling $187.6 million which were associated with land option contracts having an aggregate purchase price of $2.82 billion.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

4. Goodwill

The changes in the carrying amount of goodwill for the three months ended February 28, 2005, are as follows (in thousands):

5. Accounting for Derivative Instruments and Hedging Activities

To meet the financing needs of its customers, the Company’s mortgage banking subsidiary is party to interest rate lock commitments (“IRLCs”), which are extended to borrowers who have applied for funding and meet certain defined credit and underwriting criteria. In accordance with Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS No. 133”), the Company’s mortgage banking subsidiary classifies and accounts for IRLCs as non-designated derivative instruments at fair value with gains and losses recorded to earnings.

In the normal course of business and pursuant to its risk management policy, the Company’s mortgage banking subsidiary uses derivative financial instruments to reduce its exposure to fluctuations in interest rates. When interest rates rise, IRLCs and mortgage loans held for sale decline in value. To preserve the value of its mortgage inventory and minimize the impact of movements in market interest rates on the IRLCs and mortgage loans held for sale, the mortgage banking subsidiary enters into mandatory and non-mandatory forward contracts to sell loans.

The following table summarizes the interest rate sensitive instruments of the mortgage banking operations (in thousands):

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NOTE TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

6. Mortgages and Notes Payable

On December 3, 2004, the Company exchanged all of its privately placed $350 million 6 3/8% senior notes for notes that are substantially identical except that the new notes are registered under the Securities Act of 1933.

On December 15, 2004, pursuant to its universal shelf registration statement filed with the Securities and Exchange Commission on November 12, 2004, the Company issued $300 million of 5 7/8% senior notes (the $300 Million Senior Notes”) at 99.357% of the principal amount of the notes. The notes, which are due January 15, 2015, with interest payable semi-annually, represent senior unsecured obligations of the Company and rank equally in right of payment with all of the Company’s existing and future senior unsecured indebtedness. The $300 Million Senior Notes may be redeemed, in whole at any time or from time to time in part at a price equal to the greater of (1) 100% of their principal amount and (2) the sum of the present values of the remaining scheduled payments, plus, in each case a premium, plus accrued and unpaid interest to the applicable redemption date. The $300 Million Senior Notes are unconditionally guaranteed jointly and severally by certain of the Company’s domestic subsidiaries (the “Guarantor Subsidiaries”) on a senior unsecured basis. The Company used all of the net proceeds from the issuance of the $300 Million Senior Notes to repay borrowings under its $1.00 billion unsecured revolving credit facility (the “$1 Billion Credit Facility”).

7. Investment in French Subsidiary

On February 7, 2005, the Company transferred 481,352 shares of its French subsidiary’s (“KBSA”) stock, held by the Company, to KBSA to fulfill certain equity compensation obligations of KBSA to certain KBSA employees. Since the transfer of shares, as of February 7, 2005, the Company has maintained a 49% equity interest in KBSA and has 68% of the voting rights associated with KBSA stock. KBSA continues to be consolidated in the Company’s financial statements.

8. Commitments and Contingencies

The Company provides a limited warranty on all of its homes. The specific terms and conditions of warranties vary depending upon the market in which the Company does business. For homes sold in the United States, the Company generally provides a structural warranty of 10 years, a warranty on electrical, heating, cooling, plumbing and other building systems each varying from two to five years based on geographic market and state law, and a warranty of one year for other components of the home such as appliances. The Company estimates the costs that may be incurred under each limited warranty and records a liability in the amount of such costs at the time the revenue associated with the sale of each home is recognized. Factors that affect the Company’s warranty liability include the number of homes sold, historical and anticipated rates of warranty claims, and cost per claim. The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary.

Changes in the Company’s warranty liability are as follows (in thousands):

In the normal course of its business, the Company issues certain representations, warranties and guarantees related to its home sales, land sales, commercial construction and mortgage loan originations that may be affected by FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” Based on historical evidence, the Company does not

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

8. Commitments and Contingencies (continued)

believe any of these representations, warranties or guarantees would result in a material effect on its financial condition or results of operations.

The Company is often required to obtain bonds and letters of credit in support of its obligations to various municipalities and other government agencies with respect to subdivision improvements, including roads, sewers and water, among other things. At February 28, 2005, the Company had outstanding approximately $888.4 million and $170.9 million of performance bonds and letters of credit, respectively. In the event any such bonds or letters of credit are called, the Company would be obligated to reimburse the issuer of the bond or letter of credit. However, the Company does not believe that any currently outstanding bonds or letters of credit will be called.

Borrowings outstanding and letters of credit issued under the Company’s $1 Billion Credit Facility are guaranteed by the Guarantor Subsidiaries. As of February 28, 2005, such borrowings and letters of credit totaled $435.9 million and $170.9 million, respectively.

The Company conducts a portion of its land acquisition, development and other residential and commercial activities through unconsolidated joint ventures. These joint ventures had outstanding secured construction debt of approximately $662.5 million at February 28, 2005. In certain instances, the Company provides varying levels of guarantees on debt of unconsolidated joint ventures. When the Company or its subsidiaries provide a guarantee, the unconsolidated joint venture generally receives more favorable terms from lenders than would otherwise be available to it. At February 28, 2005, the Company had payment guarantees related to the third-party debt of three unconsolidated joint ventures. One of these joint ventures had aggregate third-party debt of $402.1 million at February 28, 2005, of which each of the joint venture partners guaranteed a pro rata share. The Company’s share of the payment guarantee, which is triggered only in the event of bankruptcy of the joint venture, was 48.5% or $195.0 million. The remaining two joint ventures collectively had total third-party debt of $18.2 million at February 28, 2005, of which each of the joint venture partners guaranteed a pro rata share. The Company’s share of this guarantee was 50% or $9.1 million. The Company had limited maintenance guarantees of $99.9 million of unconsolidated entity debt at February 28, 2005. The limited maintenance guarantees only apply if the value of the collateral (generally land and improvements) is less than a specific percentage of the loan balance. If the Company is required to make a payment under a limited maintenance guarantee to bring the value of the collateral above the specified percentage of the loan balance, the payment would constitute a capital contribution and/or loan to the affected unconsolidated joint venture and increase the Company’s share of any funds such unconsolidated joint venture distributes.

In January 2003, the Company received a request for information from the U.S. Environmental Protection Agency (“EPA”) pursuant to Section 308 of the Clean Water Act. Several other public homebuilders have received similar requests. The request sought information about storm water discharge practices at certain of the Company’s construction sites, and the Company provided information pursuant to the request. In May 2004, on behalf of the EPA, the U.S. Department of Justice (“DOJ”) tentatively asserted that certain regulatory requirements applicable to storm water discharges were violated at certain of the Company’s construction sites, and civil penalties and injunctive relief might be warranted. The DOJ has also proposed certain steps it would expect the Company to take in the future relating to compliance with the EPA’s requirements applicable to storm water discharges. The Company has defenses to the claims that have been asserted and is exploring methods of resolving the matter. While the costs associated with the claims cannot be determined at this time, the Company believes that such costs are not likely to be material to its financial position or results of operations.

The Company’s mortgage banking subsidiary originates loans insured by the U.S. Department of Housing and Urban Development (“HUD”). In May 2004, HUD initiated an audit of certain loans which were underwritten by the mortgage banking subsidiary during 2001 and 2002 in Texas, Arizona and Colorado. HUD has informed the Company’s mortgage banking subsidiary that it may seek indemnification for any loans in default, as well as possible administrative action and civil penalties. While the magnitude of any payments and the likelihood of administrative action cannot be determined at this time, the Company believes that the outcome is not likely to be material to its financial position or results of operations.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

9. Stockholders Equity

On December 2, 2004, the Company’s board of directors increased the annual cash dividend on the Company’s common stock to $.75 per share from $.50 per share. The first quarterly dividend at the increased rate of $.1875 per share was paid on February 24, 2005 to shareholders of record on February 10, 2005. (The per share amounts reflect the impact of the two-for-one stock split.)

10. Recent Accounting Pronouncement

On December 16, 2004, the FASB issued Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment,” (“SFAS No. 123R”) which is a revision of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation.” SFAS No. 123R supersedes APB Opinion No. 25 and its related implementation guidance. SFAS No. 123R requires companies to record compensation expense for share-based payments to employees, including grants of employee stock options, at fair value. SFAS No. 123R is effective for most public companies at the beginning of the first interim or annual period beginning after June 15, 2005. The Company believes that the implementation of the provisions of SFAS No. 123R will not have a material impact on its financial position or results of operations.

11. Supplemental Guarantor Information

The Company’s obligation to pay principal, premium, if any, and interest under certain debt instruments are guaranteed on a joint and several basis by the Guarantor Subsidiaries. The guarantees are full and unconditional and the Guarantor Subsidiaries are 100% owned by KB Home. The Company has determined that separate, full financial statements of the Guarantor Subsidiaries would not be material to investors and, accordingly, supplemental financial information for the Guarantor Subsidiaries is presented.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

11. Supplemental Guarantor Information (continued)

Condensed Consolidating Income Statements
Three Months Ended February 28, 2005 (in thousands)

Three Months Ended February 29, 2004 (in thousands)

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

11. Supplemental Guarantor Information (continued)

Condensed Consolidating Balance Sheet
February 28, 2005 (in thousands)

November 30, 2004 (in thousands)

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

11. Supplemental Guarantor Information (continued)

Condensed Consolidating Statements of Cash Flows
Three Months Ended February 28, 2005 (in thousands)

Three Months Ended February 29, 2004 (in thousands)