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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, 1995
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
DEPOSITARY SHARES, EACH REPRESENTING ONE-FIFTH OF A NEW YORK STOCK EXCHANGE
SHARE OF SERIES B MANDATORY CONVERSION PREMIUM
DIVIDEND PREFERRED STOCK (PAR VALUE $1.00 PER SHARE)
10 3/8% SENIOR NOTES DUE 1999 NEW YORK STOCK EXCHANGE
9 3/8% SENIOR SUBORDINATED NOTES DUE 2003 NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO
THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION
STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY
AMENDMENT TO THIS FORM 10-K. /X/
THE AGGREGATE MARKET VALUE OF VOTING STOCK HELD BY NON-AFFILIATES OF THE
COMPANY ON JANUARY 31, 1996 WAS $510,923,456.
THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S CLASSES OF
COMMON STOCK ON JANUARY 31, 1996 WAS AS FOLLOWS:
Common Stock (par value $1.00 per share) 32,352,736 shares
DOCUMENTS INCORPORATED BY REFERENCE
1995 Annual Report to Shareholders (incorporated into Part II).
Notice of 1996 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
six western states, and international operations in France, Canada and Mexico.
The Company is the largest home builder in the western United States and among
the largest builders in greater metropolitan Paris, France. The Company builds
and markets innovatively designed homes, generally in medium-sized developments
close to major metropolitan areas, that cater primarily to first-time home
buyers. In France, the Company is also a developer of commercial projects and
high-density residential properties, such as condominium and apartment
complexes. The Company also provides mortgage banking services to its domestic
home buyers through its wholly owned subsidiary, Kaufman and Broad Mortgage
Company ("KBMC").
The Company's business originated in 1957 and was operated through various
subsidiaries of SunAmerica Inc. ("SunAmerica"), previously known as Kaufman and
Broad Inc. or Broad Inc., until 1986. At that time, SunAmerica transferred to
the Company all of the outstanding stock of the subsidiaries then conducting
SunAmerica's on-site housing businesses as well as the stock of KBMC. The
Company shortly thereafter completed an initial public offering of its common
stock, after which SunAmerica continued to own approximately 92.6% of the
Company's outstanding common stock. In 1989, SunAmerica distributed
substantially all of its holdings in the Company's common stock pro-rata to
holders of SunAmerica's common stock. SunAmerica, through one of its wholly
owned subsidiaries, continued to hold certain warrants to purchase shares of the
Company's special common stock, which were subsequently either exercised by the
subsidiary of SunAmerica or repurchased by the Company. No securities were held
by SunAmerica or any of its subsidiaries as of December 1993.
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
The Company's three principal geographic markets are California, other
United States (Nevada, Arizona, Colorado, New Mexico and Utah) and the greater
metropolitan area of Paris, France. To a lesser extent, the Company builds
single-family homes in Toronto, Canada. The Company delivered its first homes in
California in 1963, France in 1970, Toronto in 1971, Nevada in 1993, Arizona and
Colorado in 1994 and New Mexico and Utah in 1995. The Company expects to deliver
its first homes in Dallas and San Antonio, Texas in 1996, as recent domestic
expansion activities have included the purchase of land parcels in Dallas and
the signing of a definitive agreement on January 22, 1996, to acquire San
Antonio, Texas-based Rayco, Ltd. and certain affiliates. Rayco Ltd. is the
largest single-family homebuilder in San Antonio. Although the Rayco, Ltd.
transaction remains subject to certain conditions, completion of the acquisition
is expected to occur on March 1, 1996. The Company also anticipates delivery of
its first homes from its start-up housing operation in Mexico in 1996, as it has
begun to generate a modest level of orders from its project near Mexico City.
To enhance its operating capabilities in regional submarkets, the Company
conducted its domestic homebuilding business in 1995 through eleven divisional
offices and two satellite offices in California and one divisional office in
each of Nevada, Arizona, Colorado, New Mexico and Utah.
California. During the 1980s, the Company benefited from the relative
strength and growth of the California housing market. However, in five of the
last six years, new housing permits issued in the state have declined. The
California housing market was soft in 1995, with new housing permits issued
decreasing approximately 12% in 1995 from 1994. While the Company had generally
maintained a trend of increasing deliveries in California in spite of declines
in housing permits issued, in 1995, for the first time in five years the
Company's deliveries in California fell below prior year levels. The Company
delivered 5,430 new homes in California in 1995, a decrease of approximately 13%
from 1994. This decrease was due to severe weather conditions in California
early in the year combined with the state's
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generally weak economy. In spite of the weak economic conditions in California,
the Company has maintained approximately an eight percent share of the
California housing market since 1993.
In Southern California, the Company concentrates its home building activity
in Los Angeles, Kern, San Bernardino, Riverside, Orange and San Diego counties.
In Northern California, the Company's activities are concentrated in the San
Francisco Bay-San Jose, Monterey Bay, Sacramento, Central Valley and Fresno
regions.
Most of the communities developed by the Company consist of single-family
detached homes primarily focused on the entry-level housing market. These homes
ranged in size from 854 to 4,050 square feet in 1995 and sold at an average
price of $176,800, well below the statewide new home average of $224,100, as a
result of the Company's emphasis on the entry-level market. The Company's 1995
average selling price in California increased from the prior year reflecting a
shift in mix to higher-priced homes and an increase in first-time move-up sales.
Other United States. The prolonged economic downturn in California, the
Company's largest market, has caused the Company to look for opportunities to
expand its domestic operations outside the state. The Company began to implement
its expansion strategy in 1993 with the opening of its Nevada division and since
that time has developed a track record of profitable growth outside of
California. The Company's operations outside of California accounted for
approximately 25% of domestic home deliveries in 1995, a percentage which is
expected to increase as these domestic divisions further establish and solidify
their market positions.
Recent developments in the Company's expansion strategy include its entry
into Texas. The Company recently acquired land parcels in Dallas and has also
signed a definitive agreement to acquire Rayco, Ltd. of San Antonio for
approximately $110 million, comprised of $80 million cash and the assumption of
$30 million of debt. Rayco, Ltd., San Antonio's largest single-family
homebuilder, commanded a market share of approximately 45% in 1995. For the year
ended December 31, 1995, Rayco, Ltd. delivered 2,585 homes, generating revenues
of approximately $235 million. It is expected that the Rayco, Ltd. transaction
will be completed on March 1, 1996. If this acquisition had been included in the
Company's operations during the 1995 year, the Company's other United States
deliveries would have represented approximately 45% of domestic deliveries in
1995.
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
early 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 housing market
continued to prove difficult in 1995 as turbulent economic conditions continued
and home buyers deferred purchases until a key government support program was
instituted in October 1995. Despite the current tenuous economic climate in
France, the Company continues to believe that the greater Paris metropolitan
area, which is the principal population, economic and government center of
France, continues to offer long-term potential for growth in both the Company's
residential and commercial operations.
In 1995, the Company's French operations had a break even year with housing
deliveries decreasing approximately 16% to 574 units in 1995 from 1994, as the
French economy remained weak and high unemployment continued during the
economically disruptive election year. The French home building operations
focused primarily on single-family detached and attached homes in 1995, ranging
in size from 807 to 2,691 square feet with an average selling price of $203,700.
The French commercial operation which has been engaged, directly and through
joint ventures, in developing commercial office buildings in Paris for sale to
institutional investors has become a smaller segment of the French operations in
recent years. With the completion of large projects in prior years, the level of
commercial operations has declined as the market absorbed existing commercial
properties. Although commercial development revenues increased modestly in 1995,
the Company does not expect a significant increase from these levels in 1996 as
high vacancy rates are expected to persist in the French commercial market.
The Company's involvement in its most significant commercial project is as
a member of a consortium, consisting of eight of France's largest financial
institutions and three development firms, that was selected in 1992 to acquire
and redevelop the former Paris headquarters of Esso, the French subsidiary of
the Exxon Corporation, located in the prestigious La Defense quarter of
metropolitan Paris. The Company, with a 7% interest in the project, is a
minority partner in the joint venture and one of the three managing contractors
for the redevelopment work for which it will receive a contractor's fee.
Development of this project has been postponed as the consortium made the
decision to await the recovery of the commercial market and the financial
institutions study other alternatives. However, the Company has
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recently entered into negotiations with the financial institutions whereby the
Company would no longer be part of the consortium or have any involvement or
obligations for the development of the project.
Canada. In addition to its principal markets in the western United States
and France, the Company operates a housing division in Toronto, Canada, which
has been slowly winding down over the past few years. The Company has engaged in
negotiations and expects to enter into a definitive agreement pursuant to which
it will sell all of the issued and outstanding shares of Victoria Wood
Development Corporation Inc., its Canadian subsidiary. If executed as
anticipated, the share purchase and sale agreement will remain subject to the
buyer's due diligence review and certain other conditions.
Mexico. In 1993, the Company determined that the projected growth in the
Mexican economy and a shortage of housing in that country's major metropolitan
areas would represent a unique opportunity for the Company, and on that basis
established a new housing operation in Mexico City. However, recent economic
events, particularly the continuing decline in value of the peso and the
resulting economic recession, have seriously hampered the new home market in
Mexico. These events have slowed an already complex regulatory process and
heightened market uncertainties for new home sales. As a result, although the
Company has opened a single-family home project near Mexico City and has begun
to generate a modest number of orders for homes expected to be delivered in
1996, the Company remains cautious regarding its Mexican operations and
continues to reassess its level of activity in Mexico and the desirability of
expanding its market presence there.
Unconsolidated Joint Ventures. The Company currently 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 the Los Angeles, Paris and Toronto metropolitan areas.
Selected Market Data. The following table sets forth, for each of the
Company's markets, unit deliveries, average selling price of homes and total
construction revenues for the years ended November 30, 1995, 1994 and 1993
(excluding the effect of unconsolidated joint ventures).
YEARS ENDED NOVEMBER 30,
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1995 1994 1993
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California:
Unit deliveries............................................. 5,430 6,238 5,745
Average selling price....................................... $ 176,800 $ 165,900 $ 163,100
Total construction revenues (in millions)(1)................ $ 971.1 $ 1,048.1 $ 938.3
Other United States:
Unit deliveries............................................. 1,800 834 207
Average selling price....................................... $ 136,300 $ 114,900 $ 109,300
Total construction revenues (in millions)(1)................ $ 247.0 $ 101.1 $ 22.6
France:
Unit deliveries............................................. 574 685 657
Average selling price(2).................................... $ 203,700 $ 182,300 $ 187,800
Total construction revenues (in millions)(1)(2)............. $ 138.6 $ 143.4 $ 219.8
Canada:
Unit deliveries............................................. 53 67 155
Average selling price(2).................................... $ 99,400 $ 97,300 $ 88,300
Total construction revenues (in millions)(1)(2)............. $ 10.2 $ 15.0 $ 19.1
Total:
Unit deliveries............................................. 7,857 7,824 6,764
Average selling price(2).................................... $ 168,900 $ 161,300 $ 162,100
Total construction revenues (in millions)(1)(2)............. $ 1,366.9 $ 1,307.6 $ 1,199.8
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(1) Total construction revenues include revenues from commercial and residential
development activities and land sales.
(2) Average selling prices and total construction revenues for France and Canada
have been translated into U.S. dollars using weighted average exchange rates
for each period.
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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. The Company's divisional structure is designed to utilize local
market expertise. The Company has experienced management teams in each of its
regional submarkets. Although the Company has centralized certain functions,
such as marketing, materials purchasing and product development to benefit from
economies of scale, local management continues to exercise considerable autonomy
in identifying land acquisition opportunities, developing sales strategies,
conducting production operations and controlling costs.
In France, the Company has assembled a management team which is highly
experienced in the financing, development, construction and rehabilitation of
commercial and high-density residential projects, as well as single-family
housing. This expertise includes knowledge of local markets and the regulatory
environment.
INNOVATIVE DESIGN AND MARKETING STRATEGY
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. The Company is typically able to offer as standard
features vaulted ceilings, kitchen islands, kitchens that open to family rooms,
wall-to-wall carpeting and front-yard landscaping. To an even greater extent
than in the past, the Company is emphasizing space-efficient functionality. One
example of this is the broader use of the Company's unique L'Office(TM) computer
workstation area. The L'Office(TM) (a combination of "loft" and "office") areas
are designed to meet most families' home office needs without using up valuable
bedroom or family room space. In France, the Company created a village concept
through the elimination of front-yard walls and the extensive use of
landscaping. It also introduced to the French market the American concept of a
master bedroom suite, as well as walk-in closets, built-in kitchen cabinetry and
two-car garages. The Company believes that in each of its residential markets,
its value engineering enables it to offer appealing and well-designed homes
without increasing construction costs.
In all of its residential markets, the sale of homes is carried out by the
Company's in-house sales force. The Company markets its homes principally
through the use of fully furnished and landscaped model homes which are
decorated to emphasize the distinctive design features. 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 traditional real estate avenues through the use of
television advertising, off-site telemarketing, and large-scale promotions.
Since 1985, the Company's California divisions have utilized an umbrella
marketing concept, The California Series(R). This concept seeks to increase
brand identification by incorporating certain common features in the marketing
programs of its different development communities and by using "California" in
the names of these communities. The Company has registered this trademark name
and features The California Series(R) designs in its sales brochures and other
promotional material.
In 1995, the Company introduced a television advertising campaign featuring
its celebrity spokesperson, award-winning actor Tom Skerritt, to millions of
potential homebuyers in the western United States. Skerritt is perhaps best
known for his leading role in the CBS television series "Picket Fences" and
movie roles in "Top Gun" and "A River Runs Through It."
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 in the past ranged from six to 20 months
in California and from 12 to 30 months in France. The development cycle varies
depending on the extent of government approvals required, the size of the
development, the site preparation necessary and marketing results.
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The Company attempts to acquire finished lots within its pricing
parameters, where available, 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 home designs, and in
1995 generally offered lot sizes ranging from 3,500 to 8,500 square feet. The
Company, in prior years, has also acquired certain developments with total lots
significantly in excess of 250 lots. Such developments are not consistent with
the Company's current investment strategy. Strategies to reduce or eliminate
such developments may be considered. In France, typical single-family
developments are smaller, consisting of approximately 40 lots, with lot sizes
generally ranging from 2,500 to 6,500 square feet.
Land Acquisition and Development. 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 homes in the particular market; proximity to
metropolitan areas; population, industrial and commercial growth patterns;
estimated costs of completed lot development; customer preferences; and
environmental matters. Senior corporate management controls the commitment of
the Company's resources for land acquisition and utilizes a series of specific
financial and budgetary controls in approving acquisition opportunities
identified by division land acquisition personnel. During 1995, the Company
implemented stricter standards for assessing all proposed land purchases based,
in part, upon discounted after tax cash flow internal rate of return
requirements. In addition, all operating divisions are measured for the first
time based upon overall return on investment. Among other things, this focus
will likely result in reductions in new land purchases and inventory investment
in California during 1996 as a step toward improving the Company's overall
return on equity over time. Cash flow available from reduced California
investment will be used to fund the Company's expansion into other western
states as well as reduce overall leverage as measured by the ratio of debt to
total capital.
The following table shows the number of lots owned by the Company in
various stages of development and under option contract in its principal markets
as of November 30, 1995. The following table does not include acreage which has
not yet been approved for subdivision into lots. This excluded acreage includes
1,089 acres owned in the United States and 223 acres owned in other areas.
TOTAL LOTS
HOMES/LOTS IN LAND UNDER LOTS UNDER OWNED OR
PRODUCTION DEVELOPMENT OPTION UNDER OPTION
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California........................ 9,698 11,331 10,338 31,367
Other United States............... 2,046 825 2,515 5,386
France............................ 694 547 373 1,614
Canada and other.................. 153 158 -- 311
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Total................... 12,591 12,861 13,226 38,678
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The Company has focused its domestic efforts on acquiring finished or
partially improved lots, usually under options which are exercised as the lots
are needed. The purchase of finished lots generally allows the Company to begin
delivery of finished homes within six months of the purchase of such lots and
reduces the risks of unforeseen improvement costs and volatile market
conditions. During the early 1990s, the Company made a number of advantageous
purchases of finished lots in California, as many builders were unable to
proceed with projects due to the tight restrictions on the availability of
capital imposed by financial institutions. Although such opportunities were not
as prevalent in the Company's domestic markets in 1995, the Company expects to
continue this strategy into the immediate future to the extent such
opportunities remain available.
While the Company has significantly reduced the proportion of unentitled
and unimproved land purchases, 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 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.
Generally, the Company purchases only amounts sufficient for its expected
production needs and does not purchase land for speculative investment.
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In France, as a result of the continued uncertainty in the French real
estate market, the Company is employing a number of recession-conscious
strategies, including a greater emphasis on the entry-level market segment and
generally more restrictive policies regarding new 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 the homes and constructing several model homes. The
construction of production homes is generally contingent upon customer orders to
minimize the costs and risks of standing inventory. Due to the Company's
continued domestic expansion overall inventory levels increased in 1995.
The Company acts as the general contractor for its communities and hires
subcontractors for all production. The use of subcontractors enables the Company
to reduce its investment in direct labor costs, equipment and facilities. Where
practical, the Company uses mass production techniques, construction on
contiguous lots, and prepackaged, standardized components and materials to
streamline the on-site production phase. During the early 1990s, the Company
developed a system of national 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.
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.
The Company provides customers with a limited home warranty program
operated by the personnel in each of its divisions to give customers prompt and
efficient post-delivery service. The warranty program covers certain repairs
which may be necessary following new home construction and covers structural
integrity for a period of ten years. In the aggregate, the costs associated with
the Company's warranty program are not material to its operations.
CYCLICALITY
The Company's business, and the housing industry in general, are cyclical.
The Company's operations and markets are affected by local and regional factors
such as local economies, demographic demand for housing, population growth,
property taxes and energy costs, and by national factors such as short and
long-term interest rates, federal mortgage financing programs, federal income
tax provisions and general economic trends. In addition homebuilders are subject
to various risks including availability and cost of land, conditions of supply
and demand in local markets, weather conditions, 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 1995 financial results were particularly affected by certain
factors, including but not limited to the weak economic conditions in California
and France, severe weather conditions in California in early 1995 and a lack of
urgency among potential homebuyers in many of the Company's markets.
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. 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, as demonstrated by the table below, deliveries of new homes have
typically increased from the first to the fourth quarter in any year.
Accordingly, the Company usually experiences a relatively low backlog of orders
at year end.
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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, 1995.
NET UNIT ENDING
ORDERS DELIVERIES BACKLOG
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Fiscal 1995:
First Quarter.......................... 1,636 1,367 1,285
Second Quarter......................... 2,241 1,875 1,651
Third Quarter.......................... 2,311 2,111 1,851
Fourth Quarter......................... 2,065 2,504 1,412
Fiscal 1994:
First Quarter.......................... 1,684 1,539 1,204
Second Quarter......................... 2,035 1,954 1,285
Third Quarter.......................... 2,078 2,082 1,281
Fourth Quarter......................... 1,984 2,249 1,016
Fiscal 1993:
First Quarter.......................... 1,387 1,067 1,451
Second Quarter......................... 1,752 1,558 1,645
Third Quarter.......................... 1,717 1,885 1,477
Fourth Quarter......................... 1,836 2,254 1,059
LAND AND RAW MATERIALS
Management believes that the Company's current supply of land is sufficient
for its reasonably anticipated needs, and that it will be able to acquire land
on acceptable terms for future housing developments. The principal raw materials
used in the construction of homes are concrete and forest products. In addition,
the Company uses a variety of other construction materials, including sheetrock
and glass. The Company attempts to maintain efficient operations by utilizing
standardized materials which are commercially available on competitive terms
from a variety of sources. Since 1992, the Company has increasingly utilized
centralized purchasing of certain building materials, appliances and fixtures,
enabling 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 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. The
Company's decisions to maintain or decrease its land ownership position in
certain markets may be impacted by 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.
CUSTOMER FINANCING -- KAUFMAN AND BROAD MORTGAGE COMPANY
At the Company's communities in the United States, on-site personnel
facilitate sales by offering to arrange financing for prospective customers
through KBMC. Management believes that the ability to offer customers financing
on firm, competitive terms as a part of the sales process is an important factor
in completing sales. The Company typically assists customers in arranging for
guaranteed maximum interest rates at the time of sale even though delivery may
take place in the future.
KBMC's business consists of providing the Company's domestic customers with
competitive financing and coordinating and expediting the loan origination
transaction through the steps of loan application, loan approval and closing.
KBMC has its headquarters in Los Angeles and operates branch offices in Anaheim,
Dublin, Fremont, Fresno, Los
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Angeles, Modesto, Newport Beach, Palmdale, Sacramento, Salinas and San Diego,
California; Las Vegas, Nevada; Phoenix, Arizona; Denver, Colorado; Albuquerque,
New Mexico; 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 the Federal National
Mortgage Association ("FNMA") 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 fiscal 1995,
approximately 44% of the mortgages originated for the Company's customers were
conventional, (most of which conformed to FNMA and FHLMC guidelines) 36% were
FHA-insured or VA-guaranteed, a portion of which are adjustable rate loans, 15%
were funded by mortgage revenue bond programs and 5% were adjustable rate
mortgages ("ARMs") primarily 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 1995, KBMC originated loans for 80% of the
Company's domestic home deliveries. Generally, KBMC receives an origination fee
of approximately 1% of the principal amount of the loan.
KBMC is a delegated underwriter under the FHA Direct Endorsement and VA
Automatic programs in accordance with criteria established by such agencies.
Additionally, KBMC has delegated underwriting authority from FNMA 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, FNMA or FHLMC or against forward commitments to institutional investors,
including banks and savings and loan associations.
For a small percentage of loans, and to the extent required for loans being
held for sale to investors, KBMC services the mortgages that it originates.
Servicing includes collecting and remitting loan payments, accounting for
principal and interest, making inspections of mortgaged premises as required,
monitoring delinquent mortgages and generally administering the loans.
KBMC receives fees for servicing mortgage loans, generally ranging from
.20% per annum to .50% per annum on the declining principal balances of the
loans. KBMC typically sells servicing rights on a regular basis.
The Company also assists its customers in France by arranging financing
through third party lenders, primarily major French banks with which the Company
has established relationships. In some cases, French customers qualify for
certain government-assisted, home financing programs. A second mortgage is
usually handled through a government agency. A home buyer in France may also
have a third mortgage provided through credit unions or other employee groups.
EMPLOYEES
The Company employs a trained staff of land acquisition specialists,
architects, planners, engineers, construction supervisors, marketing and sales
personnel and finance and accounting personnel, supplemented as necessary by
outside consultants, who guide the development of communities from their
conception through the marketing and sale of completed homes.
At January 31, 1996, the Company had approximately 1,220 full-time
employees in its operations, including approximately 130 in KBMC's operations.
COMPETITION AND OTHER FACTORS
The Company's business is highly competitive. It competes primarily on the
basis of price, location, financing, design, reputation, quality and amenities
with numerous housing producers ranging from regional and national firms to
8
10
small builders. Resales of housing provide additional competition. In certain
markets and at times when housing demand is high, the Company also competes with
other builders to hire subcontractors.
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.
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.
The Company does not generally finance the development of its domestic
communities with proceeds of loans specifically obtained for, or secured by,
particular communities, i.e., project financing. Instead, financing of the
Company's domestic operations has been primarily generated from results of
operations, public debt and equity financing and borrowings under its $500
million unsecured revolving credit facility with a consortium of domestic and
foreign banks. This revolving credit facility includes a $200 million sublimit
for the Company's mortgage banking operations. Financing of its French
operations has been primarily generated from results of operations and
borrowings from its aggregate $140 million unsecured committed credit lines from
a series of foreign banks. As a result of these diverse external sources of
financing, the Company was not adversely affected by the tight credit conditions
that much of the homebuilding industry experienced during the recent recession,
both domestically and in France.
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, Canada and Mexico concerning investments in business
operations in those countries by United States companies, none of which has to
date had a material adverse effect on the Company's consolidated operations. The
Company's foreign operations are subject to exchange rate fluctuations, which
affect the Company's financial statements and the reporting of profits and
payment of dividends from foreign subsidiaries, to restrictive foreign
government regulations which may be in effect from time to time 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 has received dividends from its
French and Canadian 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, FNMA and FHLMC.
The Company entered into a consent order with the Federal Trade Commission
("FTC") in 1979 pursuant to which the Company 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. In 1991, the Company
reached a monetary settlement with the FTC, covering alleged violations of the
Company's consent order. The FTC acknowledged that the Company did not admit any
of the allegations and did not impose any additional requirements on the
Company.
The Company currently has policies of using outside environmental
specialists 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,
9
11
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 costs have occurred in the past, the Company believes it may
be able to recover such 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 future results of
operations or the Company's financial position.
ITEM 2. PROPERTIES
The Company's executive offices are in leased premises at 10990 Wilshire
Boulevard, Los Angeles, California. The Company's housing operations are
principally conducted from leased premises located in Anaheim, Bakersfield,
Dublin, Fremont, Fresno, Los Angeles, Modesto, Newport Beach, Palmdale,
Pleasanton, Sacramento, Salinas and San Diego, California; Las Vegas, Nevada;
Phoenix, Arizona; Denver, Colorado; Albuquerque, New Mexico; Salt Lake City,
Utah; Paris, France; Toronto, Canada; and Mexico City, Mexico.
The Company's mortgage banking subsidiaries lease executive offices in Los
Angeles, California and branch offices in Anaheim, Dublin, Fremont, Fresno, Los
Angeles, Modesto, Newport Beach, Palmdale, Sacramento, Salinas and San Diego,
California; Las Vegas, Nevada; Phoenix, Arizona; Denver, Colorado; Albuquerque,
New Mexico; and Salt Lake City, Utah.
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
In August 1992, homeowners from the Company's California Meadows community
in Riverside County filed a lawsuit against the Company in Riverside County
Superior Court seeking compensatory and punitive damages and alleging, among
other things, defective construction, breach of warranty, negligence and fraud.
The owners of approximately 115 homes are currently involved in the litigation.
In February 1994, the Company filed cross-complaints against relevant
subcontractors and certain other third parties. The Company believes that it has
acted fairly and responsibly toward all homeowners at that community. Based upon
its thorough investigation of the site, the Company believes that the most
serious allegations in this lawsuit are substantially without merit and has
contested such claims.
The Company is involved in other litigation incidental to its business.
These cases are in various stages of development and, based on reports of
counsel, it is management's opinion that provisions made for potential losses in
the California Meadows and other matters are adequate and any further
liabilities and 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 1995 to a vote of
security holders, through the solicitation of proxies or otherwise.
10
12
EXECUTIVE OFFICERS OF THE COMPANY
The following sets forth certain information regarding the executive
officers of the Company as of January 31, 1996:
YEAR
ASSUMED OTHER POSITIONS AND OTHER
PRESENT POSITION AT PRESENT BUSINESS EXPERIENCE WITHIN
NAME AGE JANUARY 31, 1996 POSITION THE LAST FIVE YEARS(1) FROM - TO
- ---------------------- --- ------------------------------ -------- ----------------------------------------- ---------------
Bruce Karatz 50 Chairman, President and 1993 President and Chief Executive Officer 1986 - 1993
Chief Executive Officer
Roger B. Menard 54 Executive Vice President 1993 Executive Vice President and President 1992 - 1993
and President of United of California Operations
States Operations President of Kaufman and Broad-South 1985 - 1992
Bay, Inc.
Guy Nafilyan 51 Executive Vice President 1992 President and Chief Executive Officer 1983 - Present
and President of European of Kaufman and Broad France
Operations Senior Vice President 1987 - 1992
Michael F. Henn 47 Senior Vice President and 1994 Executive Vice President, Chief Financial 1986-1994
Chief Financial Officer and Administrative Officer, The Vons
Companies, Inc.
Alan Kaye 42 Senior Vice President, 1996 Vice President, Human Resources 1991 - 1996
Human Resources and and Organizational Planning
Organizational Planning Senior Vice President for 1988 - 1991
Human Resources and Corporate Services,
Columbia Savings & Loan Association
Barton P. Pachino 36 Senior Vice President 1993 Vice President and Corporate Counsel 1991 - 1993
and General Counsel Associate Corporate Counsel 1987 - 1991
Albert Z. Praw 47 Senior Vice President, 1994 Partner in law firm of Sidley & Austin 1992-1994
Real Estate Senior Vice President, General 1989-1992
Counsel and Secretary
Michael L. Woodley 38 Senior Vice President, 1992 Vice President, Architecture 1989 - 1992
Architecture
William R. Hollinger 37 Vice President 1992 Director of Accounting 1988 - 1992
and Controller
Dennis Welsch 39 Vice President 1995 Vice President and Controller 1995
and Treasurer of Kaufman and Broad - South Bay, Inc.
Controller of Kaufman and Broad - 1993-1994
South Bay, Inc.
Vice President, Treasurer A-M Homes 1986-1993
- ---------------
(1) All positions described were with the Company, unless otherwise indicated.
11
13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
As of January 31, 1996, there were 2,186 holders of record of the Company's
common stock.
Information as to the Company's quarterly stock prices is included on the
inside back cover of the Company's 1995 Annual Report to Stockholders, which is
included as part of Exhibit 13 and is incorporated in this Annual Report on Form
10-K.
Information as to the principal markets on which the Company's common stock
is being traded and quarterly cash dividends is included on the inside back
cover of the Company's 1995 Annual Report to Stockholders, which is included as
part of Exhibit 13 and is incorporated in this Annual Report on Form 10-K.
ITEM 6. SELECTED FINANCIAL DATA
The Five Year Summary of Kaufman and Broad Home Corporation and its
consolidated subsidiaries for the five-year period ended November 30, 1995 is
included on page 24 in the Company's 1995 Annual Report to Stockholders, which
is included as part of Exhibit 13 and is incorporated in this Annual Report on
Form 10-K. It should be read in conjunction with the consolidated financial
statements included in the Company's 1995 Annual Report to Stockholders which
are also included as part of Exhibit 13.
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 25 through
32 in the Company's 1995 Annual Report to Stockholders, which are included as
part of Exhibit 13 and are incorporated in this Annual Report on Form 10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of Kaufman and Broad Home Corporation
are included on pages 33 through 45 in the Company's 1995 Annual Report to
Stockholders, which are included as part of Exhibit 13 and are incorporated in
this Annual Report on Form 10-K. 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 1996 Annual Meeting of Stockholders and Proxy Statement,
filed pursuant to Regulation 14A under the Securities Exchange Act of 1934,
incorporated by reference in this Annual Report on Form 10-K pursuant to General
Instruction G(3) of Form 10-K, provides the information required under Part III
(Items 10, 11, 12 and 13) except for the information regarding the executive
officers of the Company, which is included in Part I on page 11 herein.
12
14
PART IV
ITEM 14. FINANCIAL STATEMENTS, EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
FINANCIAL STATEMENTS
Reference is made to the index set forth on page F-1 of this Annual
Report on Form 10-K.
EXHIBITS
EXHIBIT
NO. DESCRIPTION
------- ------------------------------------------------------------------------
3.1 Amended Certificate of Incorporation, filed as an exhibit to the
Company's Registration Statement No. 33-6471 on Form S-1, is
incorporated by reference herein.
3.2 Amendment to Certificate of Incorporation, filed as an exhibit to the
Company's Registration Statement No. 33-30140 on Form S-1, is
incorporated by reference herein.
3.3 Certificate of Designation of Series A Participating Cumulative
Preferred Stock, filed as an exhibit to the Company's Registration
Statement No. 33-30140 on Form S-1, is incorporated by reference herein.
3.4 Certificate of Designation of Series B Mandatory Conversion Premium
Dividend Preferred Stock, filed as an exhibit to the Company's
Registration Statement No. 33-59516 on Form S-3, is incorporated by
reference herein.
3.5 Amended Certificate of Designation of Series B Mandatory Conversion
Premium Dividend Preferred Stock, filed as an exhibit to the Company's
Registration Statement No. 33-59516 on Form S-3, is incorporated by
reference herein.
3.6 By-Laws, filed as an exhibit to the Company's Registration Statement No.
33-30140 on Form S-1, is incorporated by reference herein.
4.1 Amended Certificate of Incorporation, filed as an exhibit to the
Company's Registration Statement No. 33-6471 on Form S-1, is
incorporated by reference herein.
4.2 Amendment to Certificate of Incorporation, filed as an exhibit to the
Company's Registration Statement No. 33-30140 on Form S-1, is
incorporated by reference herein.
4.3 By-Laws, filed as an exhibit to the Company's Registration Statement No.
33-30140 on Form S-1, is incorporated by reference herein.
4.4 Rights Agreement between the Company and Bank of America National Trust
and Savings Association, successor-by-merger to Security Pacific
National Bank, as Rights Agent, dated February 21, 1989, filed as an
exhibit to the Company's 1989 Annual Report on Form 10-K, is
incorporated by reference herein.
4.5 Indenture relating to 10 3/8% Senior Notes due 1999 between the Company
and NBD Bank, N.A., dated September 1, 1992, filed as an exhibit to the
Company's Registration Statement No. 33-50732 on Form S-3, is
incorporated by reference herein.
4.6 Specimen of 10 3/8% Senior Notes filed as an exhibit to the Company's
Current Report on Form 8-K, reporting certain exhibits in connection
with the Company's Registration Statement No. 33-50732 on Form S-3 filed
by the Company relating to the registration of 10 3/8% Senior Notes due
1999, is incorporated by reference herein.
4.7 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.
13
15
EXHIBIT
NO. DESCRIPTION
------- ------------------------------------------------------------------------
4.8 Specimen of 9 3/8% Senior Subordinated Notes filed as an exhibit to the
Registration Statement No. 33-59516 on Form S-3 filed by the Company
relating to the registration of 9 3/8% Senior Subordinated Notes due
2003, is incorporated by reference herein.
10.1 Employment Contract of Bruce Karatz, dated January 4, 1988, filed as an
exhibit to the Company's 1987 Annual Report on Form 10-K, is
incorporated by reference herein.
10.2 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.
10.3 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.
10.4 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.
10.5 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.
10.6 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.
10.7 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.
10.8 Indenture relating to 10 3/8% Senior Notes due 1999 between the Company
and NBD Bank, N.A., dated September 1, 1992, filed as an exhibit to the
Company's Registration Statement No. 33-50732 on Form S-3, is
incorporated by reference herein.
10.9 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.
10.10 Employment Contract of Roger B. Menard, dated April 6, 1992, filed as an
exhibit to the Company's 1992 Annual Report on Form 10-K, is
incorporated by reference herein.
10.11 1993 Directors' Stock Plan, approved April 1, 1993, filed as an exhibit
to the definitive Proxy Statement for the Company's 1993 Annual Meeting
of Shareholders, is incorporated by reference herein.
10.12 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, is incorporated by reference herein.
10.13 Employment Agreement of Albert Z. Praw, dated February 20, 1994, filed
as an exhibit to the Company's 1994 Annual Report on Form 10-K, is
incorporated by reference herein.
10.14 Employment Agreement of Michael F. Henn, dated June 7, 1994, filed as an
exhibit to the Company's 1994 Annual Report on Form 10-K, is
incorporated by reference herein.
10.15 Third Amended and Restated Loan Agreement among the Company, Bank of
America National Trust and Savings Association, and the First National
Bank of Chicago, as managing agents, and the banks listed therein, dated
November 21, 1994, filed as an exhibit to the Company's 1994 Annual
Report on Form 10-K, is incorporated by reference herein.
10.16 Letter dated February 16, 1995 amending Employment Contract of Bruce
Karatz, filed as an exhibit to the Company's 1994 Annual Report on Form
10-K, is incorporated by reference herein.
14
16
EXHIBIT
NO. DESCRIPTION
------- ------------------------------------------------------------------------
10.17 Letter dated February 27, 1995 amending Employment Contract of Roger B.
Menard, filed as an exhibit to the Company's 1994 Annual Report on Form
10-K, is incorporated by reference herein.
10.18 Kaufman and Broad Home Corporation Performance-Based Incentive Plan for
Senior Management, approved by Stockholders on March 23, 1995.
10.19 Form of Stock Option Agreement under Kaufman and Broad Home Corporation
Performance-Based Incentive Plan for Senior Management.
10.20 Employment Contract of Bruce Karatz, dated December 1, 1995.
10.21 Kaufman and Broad Home Corporation Directors' Restricted Stock Plan.
10.22 Kaufman and Broad Home Corporation Directors' Legacy Program.
11 Statement of Computation of Per Share Earnings.
13 Pages 24 through 45 and the inside back cover of the Company's 1995
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
No reports on Form 8-K were filed during the fourth quarter of 1995.
15
17
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 22, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant in
the capacities and on the dates indicated:
SIGNATURE TITLE DATE
--------- ----- ----
BRUCE KARATZ Chairman, President February 22, 1996
- ---------------------------------------------- and Chief Executive
Bruce Karatz Officer
MICHAEL F. HENN Senior Vice President February 22, 1996
- ---------------------------------------------- and Chief Financial Officer
Michael F. Henn
RONALD W. BURKLE Director February 22, 1996
- ---------------------------------------------
Ronald W. Burkle
JANE EVANS Director February 22, 1996
- ---------------------------------------------
Jane Evans
DR. RAY R. IRANI Director February 22, 1996
- ---------------------------------------------
Dr. Ray R. Irani
ANTOINE JEANCOURT-GALIGNANI Director February 22, 1996
- ---------------------------------------------
Antoine Jeancourt-Galignani
JAMES A. JOHNSON Director February 22, 1996
- ---------------------------------------------
James A. Johnson
GUY NAFILYAN Director February 22, 1996
- ---------------------------------------------
Guy Nafilyan
LUIS G. NOGALES Director February 22, 1996
- ---------------------------------------------
Luis G. Nogales
LESTER POLLACK Director February 22, 1996
- ---------------------------------------------
Lester Pollack
SANFORD C. SIGOLOFF Director February 22, 1996
- ---------------------------------------------
Sanford C. Sigoloff
16
18
KAUFMAN AND BROAD HOME CORPORATION AND CONSOLIDATED SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
The consolidated financial statements, together with the report thereon of
Ernst & Young LLP, dated January 4, 1996, except as to Note 13, as to which the
date is January 22, 1996, all appearing on pages 33 through 45 in the 1995
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 1995 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 SHAREHOLDERS
-----------------
KAUFMAN AND BROAD HOME CORPORATION
Report of Independent Auditors............................................ 45
Consolidated Statements of Income for the years ended November 30, 1995,
1994 and 1993.......................................................... 33
Consolidated Balance Sheets as of November 30, 1995 and 1994.............. 34
Consolidated Statements of Stockholders' Equity for the years ended
November 30, 1995, 1994 and 1993....................................... 35
Consolidated Statements of Cash Flows for the years ended November 30,
1995, 1994 and 1993.................................................... 36
Notes to Consolidated Financial Statements................................ 37 through 44
The following pages represent pages 24 through 45 and the inside back cover
of the 1995 Annual Report to Stockholders of Kaufman and Broad Home Corporation,
and include the Five Year Summary, Management's Discussion and Analysis of
Financial Condition and Results of Operations, the Consolidated Financial
Statements and related notes thereto, the Report of Independent Auditors,
Stockholder Information and Quarterly Stock Prices. These pages were filed with
the Securities and Exchange Commission as Exhibit 13 to this Annual Report on
Form 10-K.
F-1
19
SELECTED FINANCIAL INFORMATION
Years ended November 30,
- ------------------------------------------------------------------------------------------------------------------------------
In thousands, except per share amounts 1995 1994 1993 1992 1991
==============================================================================================================================
CONSTRUCTION:
Revenues $1,366,866 $1,307,570 $1,199,776 $1,052,525 $1,176,386
Operating income 65,531 88,323 86,609 58,897 76,037
Total assets 1,269,208 1,167,136 983,442 987,104 916,002
Mortgages and notes payable 639,575 565,020 313,357 258,147 230,580
===================================================================
MORTGAGE BANKING:
Revenues $ 29,660 $ 28,701 $ 38,078 $ 41,643 $ 44,609
Operating income 9,348 6,003 7,534 4,556 4,436
Total assets 304,971 287,324 355,936 444,656 457,021
Notes payable 151,000 125,000 138,500 143,700 84,000
Collateralized mortgage obligations 84,764 96,731 144,143 222,948 300,894
===================================================================
CONSOLIDATED:
Revenues $1,396,526 $1,336,271 $1,237,854 $1,094,168 $1,220,995
Operating income 74,879 94,326 94,143 63,453 80,473
Net income 29,059 46,550 39,921 28,198 26,520
Total assets 1,574,179 1,454,460 1,339,378 1,431,760 1,373,023
Mortgages and notes payable 790,575 690,020 451,857 401,847 314,580
Collateralized mortgage obligations 84,764 96,731 144,143 222,948 300,894
Convertible subordinated notes 162,022 149,798
Stockholders' equity 415,478 404,747 444,340 318,433 258,106
===================================================================
EARNINGS PER SHARE $ .73 $ 1.16 $ .96 $ .78 $ .80
CASH DIVIDENDS PER COMMON SHARE .30 .30 .30 .30 .30
==============================================================================================================================
24
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
OVERVIEW Revenues are generated from the Company's housing operations in the
western United States, France and Canada; commercial development activities in
France; and domestic mortgage banking operations. The Company's start-up
housing operation in Mexico has yet to produce revenues. Operating results in
1995 were adversely affected by weak housing markets in California and France
as well as severe weather conditions in California in early 1995. Beyond these
markets, the Company continued its profitable expansion of domestic housing
operations in five other western states. Divisions in New Mexico and Utah --
the Company's fourth and fifth entries into new U.S. markets in three years --
delivered their first homes in 1995, contributing to a 115.8% year-over-year
increase in domestic housing deliveries from operations outside of California.
During 1995, the Company continued strategic efforts to reduce overhead costs
and improve operating efficiency. As a result, gross margin and selling,
general and administrative expense ratios improved in each of the last three
quarters of the year.
Total revenues increased to $1.40 billion in 1995, up 4.5% from $1.34
billion in 1994, which had increased 8.0% from revenues of $1.24 billion in
1993. The increase in 1995 reflected higher housing revenues, partially offset
by a decline in revenues from land sales. In 1994, revenues rose due to higher
housing revenues, partially offset by a significant decline in French
commercial development revenues. Included in total revenues are mortgage
banking revenues of $29.7 million in 1995, $28.7 million in 1994 and $38.1
million in 1993.
Net income decreased 37.6% in 1995 to $29.1 million from $46.6 million
in 1994, which had increased 16.6% from the prior year's $39.9 million. Net
income fell in 1995 due to lower earnings from housing operations, as a decline
in earnings from California operations, primarily stemming from continued
weakness in the state's housing market, was only partially offset by an
increase in earnings from domestic operations outside the state. In 1994, the
improvement in net income reflected increased housing volume in the United
States and improved results from French housing operations compared to the year
earlier.
Earnings per share decreased to $.73 in 1995, reflecting lower net
income. Earnings per share increased to $1.16 in 1994 from $.96 in 1993 on
higher earnings and a lower average number of shares outstanding. The Company's
buyback of special common stock and warrants in December 1993 and its exchange
and cancellation of the remaining shares of special common stock on various
dates throughout 1994 reduced the number of shares outstanding for 1994.
CONSTRUCTION
REVENUES Construction revenues increased in 1995 to $1.37 billion from $1.31
billion in 1994, which had increased from $1.20 billion in 1993. The increase
in 1995 primarily reflected higher domestic housing revenues, as a decline in
California housing revenues was more than offset by increased housing revenues
from other U.S. operations (including the Company's first deliveries in New
Mexico and Utah). In 1994, revenues improved primarily due to increased
domestic housing revenues, including initial contributions from the Company's
then newly established divisions in Arizona and Colorado, partially offset by a
reduction in French commercial revenues.
Housing revenues totaled $1.33 billion in 1995, $1.26 billion in 1994
and $1.10 billion in 1993. The Company's 1995 increase in housing revenues
reflected a 4.7% increase in the Company's average selling price as well as a
modest increase in unit volume. In 1994, housing revenues increased on higher
unit volume while the average selling price decreased slightly. California
housing operations accounted for 72.3% of housing revenues in 1995, down from
82.0% in 1994, due to the Company's expansion into New Mexico and Utah during
the year, combined with the maturation of the Nevada, Arizona and Colorado
divisions and the still-stagnant economic conditions in California. California
housing revenues were $959.8 million in 1995, down from $1.03 billion in 1994,
while other U.S. housing revenues increased to $245.4 million in 1995 from
$95.8 million in 1994. In 1994, the Company's California-generated revenues as
a percentage of total housing revenues decreased from 85.4% in 1993 primarily
due to the Company's diversification of its domestic housing business to
Nevada, Arizona, and Colorado.
Housing deliveries increased by 33 units to 7,857 units in 1995,
exceeding the previous Company-wide record of 7,824 units set in 1994.
Deliveries in the United States increased 2.2%, more than offsetting a 16.2%
decline in French deliveries. The increase in domestic unit volume reflected
continued expansion outside of California, with non-California deliveries
increasing to 1,800 units in 1995 from 834 units in 1994, partially offset by a
decline in deliveries from California's soft housing market. California
deliveries, which decreased 13.0% to 5,430 units in 1995 from 6,238 units in
1994, were severely hampered by poor weather early in the year, the effects of
which carried into the second quarter. French unit volume remained depressed by
that country's adverse economic climate as well as the deferral of home
purchases by many buyers anticipating new government incentive programs which
did not take effect until October 1995.
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RESIDENTIAL QUARTERLY UNIT AND BACKLOG DATA
Unit Other
Deliveries California United States France Canada Total
============================================================================================================================
1995
First 972 293 102 1,367
Second 1,295 446 110 24 1,875
Third 1,454 511 133 13 2,111
Fourth 1,709 550 229 16 2,504
-------------------------------------------------------------------------
Total 5,430 1,800 574 53 7,857
=========================================================================
1994
First 1,281 136 110 12 1,539
Second 1,560 245 139 10 1,954
Third 1,694 194 176 18 2,082
Fourth 1,703 259 260 27 2,249
-------------------------------------------------------------------------
Total 6,238 834 685 67 7,824
=========================================================================
Net Other
Orders California United States France Canada Total
============================================================================================================================
1995
First 1,101 374 152 9 1,636
Second 1,397 698 134 12 2,241
Third 1,588 572 138 13 2,311
Fourth 1,342 503 210 10 2,065
-------------------------------------------------------------------------
Total 5,428 2,147 634 44 8,253
=========================================================================
1994
First 1,277 227 171 9 1,684
Second 1,642 180 194 19 2,035
Third 1,683 241 137 17 2,078
Fourth 1,494 248 215 27 1,984
-------------------------------------------------------------------------
Total 6,096 896 717 72 7,781
=========================================================================
Ending
Backlog-- Other
Units California United States France Canada Total
============================================================================================================================
1995
First 757 280 219 29 1,285
Second 859 532 243 17 1,651
Third 993 593 248 17 1,851
Fourth 626 546 229 11 1,412
=======================================================================
1994
First 766 228 198 12 1,204
Second 848 163 253 21 1,285
Third 837 210 214 20 1,281
Fourth 628 199 169 20 1,016
=======================================================================
Ending
Backlog-- Other
Value California United States France Canada Total
============================================================================================================================
In thousands
1995
First $125,870 $38,971 $44,820 $2,958 $212,619
Second 149,796 75,455 48,658 1,666 275,575
Third 191,182 86,096 54,560 1,683 333,521
Fourth 114,207 78,436 50,044 1,122 243,809
============================================================================
1994
First $125,045 $22,704 $32,875 $948 $181,572
Second 132,917 18,428 45,113 2,079 198,537
Third 137,289 27,548 41,546 2,000 208,383
Fourth 104,711 26,743 30,075 2,060 163,589
============================================================================
Housing deliveries increased in 1994 from 6,764 units in 1993, with
U.S. deliveries up 18.8% and French deliveries up 4.3%. The improvement in
domestic unit volume reflected the Company's expansion in the western United
States. In France, higher unit volume resulted from increased market demand for
the Company's entry-level products in a modestly improved, but still weak
French economy.
The Company's average new home price increased 4.7% to $168,900 in
1995 from $161,300 in 1994, which had decreased .5% from $162,100 in 1993. The
1995 increase was due to higher average selling prices in both the United
States and France, reflecting a shift in product mix to higher priced, urban
in-fill locations and first time move-up sales. In 1994, a modest decline in
the average selling price was primarily due to a reduction in the Company's
domestic average selling price.
In California, the Company's average selling price rose 6.6% to
$176,800 in 1995 from $165,900 in 1994 which increased 1.7% from $163,100 in
1993. The increase in both years reflected a shift in mix toward higher-priced
homes. Average selling prices in other U.S. markets were $136,300 in 1995,
$114,900 in 1994 and $109,300 in 1993. These increases were the result of the
Company's entry into new, higher-priced states in 1995 and 1994. Average
selling prices in France have also fluctuated during the past two years with
changes in product mix. The Company's average selling price in France increased
to $203,700 in 1995 from $182,300 in 1994, which had decreased from $187,800 in
1993.
Revenues from the development of commercial buildings, all of which
are located in metropolitan Paris, totaled $20.5 million in 1995, $17.4 million
in 1994 and $94.2 million in 1993. Although commercial development revenues
increased modestly in 1995, the Company does not expect a significant increase
from these levels in 1996 as high vacancy rates are expected to persist in the
French commercial market. In 1994, the significant decrease in commercial
revenues primarily reflected the Company's completion of large projects in
prior years.
Land sale revenues totaled $18.2 million in 1995, $27.2 million in
1994 and $8.0 million in 1993. Land sale revenues in these periods have
fluctuated based on the Company's decisions to maintain or decrease its land
ownership position in certain markets; the strength and number of competing
developers entering particular markets at given points in time; the
availability of land in markets served by the Company's housing divisions; and
prevailing market conditions.
OPERATING INCOME Operating income decreased by $22.8 million to $65.5 million
in 1995 from $88.3 million in 1994. Operating income, net of minority interests
in pretax income of consol-
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22
idated joint ventures, decreased by $22.5 million to $64.9 million in 1995 from
$87.4 million in 1994. This decline reflected lower gross profits from
commercial activities and land sales as well as an increase in selling, general
and administrative expenses. Housing gross profits in 1995 were essentially
flat compared to 1994 on slightly higher unit volume offset by a lower housing
gross margin. Gross profits (excluding profits from land sales) in 1995
decreased by $8.5 million to $242.2 million from $250.7 million in 1994,
largely due to lower gross profits from French commercial operations resulting
from a lower commercial gross profit margin. As a percentage of related
revenues, the Company's gross profit margin (excluding profits from land sales)
was 18.0% in 1995, down from 19.6% in the prior year. The Company's housing
gross margin decreased to 17.9% in 1995 from 19.0% in the prior year, primarily
reflecting a lower gross margin in California. The lower gross margin from
California operations stemmed from the severe and prolonged winter rain storms
in early 1995 which reduced sales volumes and slowed production and from the
large sales incentives which continued to be required throughout the year to
stimulate buying activity in a generally stagnant market. Higher mortgage
interest rates in early 1995 also depressed Company performance. Despite these
obstacles, the Company's California housing gross margin showed steady
improvement from the first through the fourth quarters of 1995 as a rising
proportion of deliveries was generated from more recently opened higher-margin
communities. Assuming market conditions in California do not deteriorate
further, the Company expects its California gross margin to continue to improve
in 1996 on a year-over-year basis as strategies to enhance profitability
implemented during the course of 1995 are anticipated to have a favorable
impact on operating results.
Company-wide profits from land sales decreased by $3.2 million to $5.3
million in 1995 from $8.5 million in 1994 with profit margins from these sales
also down slightly.
Selling, general and administrative expenses increased by $11.0
million in 1995. As a percentage of housing revenues, to which these expenses
are most closely correlated, selling, general and administrative expenses
increased to 13.7% in 1995 from 13.5% in 1994. Selling, general and
administrative expenses rose mainly due to the continued expansion of the
Company's domestic operations outside of California and increased financing
incentives and sales commissions. These increases were partially offset by
ongoing cost reduction programs which contributed to an improving expense ratio
in each of the last three quarters of 1995. In the first quarter of 1995,
selling, general and administrative expenses were 14.6% of housing revenues,
gradually declining to 13.3% by the fourth quarter. With benefits of these
cost-cutting initiatives anticipated to continue, and assuming market
conditions in the Company's principal markets do not deteriorate further, the
Company believes its 1996 selling, general and administrative expense ratio
will be lower than the 1995 level.
In 1994, operating income increased slightly by $1.7 million to $88.3
million from $86.6 million in 1993. Operating income, net of minority
interests, increased by $11.0 million to $87.4 million in 1994 from $76.5
million in 1993. This improvement reflected higher gross profits from housing
sales and land sales, partially offset by higher selling, general and
administrative expenses. Gross profits (excluding profits from land sales) rose
by $22.6 million to $250.7 million in 1994 from $228.1 million in 1993, due to
higher housing unit volume in the United States, partially offset by a decline
in commercial development gross profits. As a percentage of related revenues,
the Company's gross profit margin (excluding profits from land sales) was 19.6%
in 1994, up from 19.1% a year earlier, on a higher residential gross margin
and, to a lesser extent, a higher commercial gross margin. The Company's
housing gross margin increased to 19.0% in 1994 from 18.4% in 1993 primarily
reflecting gross margin improvement in France. The French housing gross margin
improved in 1994 largely due to a lower land-cost basis and a modest
strengthening of the French economy.
Company-wide profits from land sales increased to $8.5 million in 1994
from $1.1 million in 1993.
Selling, general and administrative expenses increased by $28.4
million in 1994, as the Company expanded its operations in the western United
States and commenced operations in Mexico. In addition, higher marketing and
advertising costs and sales incentives were required in the latter half of 1994
to maintain sales momentum in the face of persistent mortgage rate increases
triggered by actions of the Federal Reserve Board. These actions caused the
average thirty-year fixed rate mortgage to increase by more than two percentage
points during the year. In France, the Company continued to reduce selling,
general and administrative expenses to levels commensurate with its
significantly reduced commercial operations. Company-wide selling, general and
administrative expenses as a percentage of housing revenues increased to 13.5%
in 1994 from 13.0% in 1993.
INTEREST INCOME AND EXPENSE Interest income, which is generated from mortgages
receivable, principally from land sales, and from short-term investments,
amounted to $2.1 million in 1995, $2.0 million in 1994 and $3.5 million in
1993. Interest income remained stable in 1995 compared to 1994 reflecting
little change in the interest bearing average balances of short-
27
23
term investments and mortgages receivable. The reduction in interest income
in 1994 from 1993 reflected lower average balances of short-term investments
and mortgages receivable and the fluctuation in interest rates.
Interest expense results principally from borrowings to finance land
purchases, housing inventory, and other operating and capital needs. In 1995,
interest expense, net of amounts capitalized, increased to $27.5 million from
$17.8 million in 1994, reflecting higher average indebtedness, a higher overall
effective borrowing rate than in 1994 and a lower percentage of interest
capitalized. The Company's average debt level increased as inventory levels
grew due to continued expansion. In addition, the Company's effective borrowing
rate rose as a result of interest rate increases implemented by the Federal
Reserve Board throughout 1994 and into early 1995. In 1994, interest expense,
net of amounts capitalized, increased to $17.8 million from $16.8 million in
the prior year, reflecting higher average indebtedness and a higher overall
effective borrowing rate than in 1993. The average debt level rose as the
Company increased inventory levels in conjunction with continued domestic
expansion and executed the buyback of special common stock and warrants in
December 1993.
MINORITY INTERESTS IN PRETAX INCOME OF CONSOLIDATED JOINT VENTURES The Company
conducts a portion of both its residential and commercial development
activities through majority-owned partnerships, primarily in France, which are
fully consolidated in the accompanying financial statements. As a result,
operating income has been reduced by minority interests in the pretax income of
these partnerships of $.6 million in 1995, $.9 million in 1994 and $10.2
million in 1993. Minority interests decreased both years on declining profit
contributions from the Company's consolidated commercial development projects.
Minority interests are expected to remain at low levels in 1996, consistent
with the Company's reduced level of development activities in a generally
depressed French commercial market.
EQUITY IN PRETAX LOSS OF UNCONSOLIDATED JOINT VENTURES The Company's
unconsolidated joint venture activities, located in the Los Angeles, Paris and
Toronto metropolitan areas, posted combined revenues of $33.9 million in 1995,
$82.7 million in 1994 and $6.4 million in 1993. Of these amounts, revenues from
commercial activities in France accounted for $5.9 million in 1995, $34.0
million in 1994 and $2.6 million in 1993. These unconsolidated joint ventures
generated combined pretax losses of $20.5 million in 1995, $35.7 million in
1994 and $30.8 million in 1993. The losses in 1995 and 1994 primarily consisted
of selling, general, administrative and interest expenses from a single French
multi-family residential project, as well as reserves taken in 1995 on a
commercial development project. The loss in 1993 primarily resulted from
selling, general, administrative and interest expenses incurred on a large
project under construction prior to the recognition of related revenues. The
Company's share of pretax losses from these joint ventures totaled $3.5 million
in 1995, $3.7 million in 1994, and $6.3 million in 1993. These amounts have
declined over the three year period due to the combined effect of changes in
joint venture activity and the Company's proportionate share of related losses,
as well as the amount and timing of management fees recognized.
MORTGAGE BANKING
INTEREST INCOME AND EXPENSE The Company's mortgage banking operations
principally consist of providing financing to purchasers of homes sold by the
Company's domestic housing operations through the origination of residential
mortgages. The mortgage banking operations also realize revenues from the sale
of such mortgages and related servicing rights to outside financial
institutions. Prior to 1989, substantially all such mortgages were pledged for
collateralized mortgage obligations. Accordingly, interest income is earned
primarily from mortgage-backed securities held for long-term investment as
collateral, while interest expense results mainly from the associated
collateralized mortgage obligations.
Interest income decreased to $15.6 million in 1995 from $17.0 million
in 1994, and $24.2 million in 1993, while interest expense also declined to
$14.8 million in 1995 from $17.2 million in 1994, and $25.1 million in 1993.
These amounts decreased primarily due to the declining balances of outstanding
mortgage-backed securities and related collateralized mortgage obligations,
stemming from both regularly scheduled, monthly principal amortization and the
prepayment of mortgage collateral. These balances, and the related interest
income and expense, will continue to decline, as the Company's practice of
participating in collateralized mortgage financings was discontinued in 1988
due to market conditions and tax law changes. Combined interest income and
expense resulted in net interest income of $.8 million in 1995 and net interest
expense of $.2 million in 1994 and $.9 million in 1993. 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 $14.1 million in 1995, $11.7
million in 1994 and
28
24
$13.9 million in 1993. The increase in these revenues in 1995 reflected higher
gains on the sales of mortgages and servicing rights due to a higher volume of
mortgage originations -- resulting from higher housing unit volume in the
United States -- and a more favorable mix of fixed to variable rate loans. In
1994, the decrease in other mortgage banking revenues primarily reflected lower
gains on the sales of both servicing rights and mortgages.
GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses for
mortgage banking operations amounted to $5.5 million in 1995 and 1994, and $5.4
million in 1993. Despite increased mortgage production volume in 1995, general
and administrative expenses remained flat compared to 1994 levels due to the
Company's successful cost containment efforts which extended to lending
operations. General and administrative expenses increased in 1994 largely due
to higher mortgage production levels, which rose in line with domestic unit
deliveries, and the opening of new branches as part of the Company's domestic
expansion.
INCOME TAXES
The Company's income tax expense totaled $16.4 million in 1995, $27.3 million
in 1994 and $24.4 million in 1993. These amounts represented effective income
tax rates of approximately 36.1% in 1995, 37.0% in 1994 and 37.9% in 1993. The
effective tax rate declined over the two-year period as a result of greater
utilization of affordable housing investment credits. Pretax income for
financial reporting purposes and taxable income for income tax purposes
historically have differed primarily due to the impact of state income taxes,
foreign tax rate differences, intercompany dividends and the use of affordable
housing credits.
In 1993, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." The impact of the
adoption on the Company's financial position and results of operations was not
significant.
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
1995, operating, investing and financing activities used net cash of $11.4
million; in 1994, these activities used net cash of $20.3 million.
Operating activities in 1995 used $52.9 million, while 1994 operating
activities used $111.1 million. The Company's uses of cash in 1995 included a
net investment of $80.3 million in inventories (excluding $36.1 million of
inventories acquired through seller financing), an increase of $14.7 million in
receivables and $18.8 million of other operating uses. The use of cash was
partially offset by earnings of $29.1 million, various noncash items deducted
from net income and a $26.7 million increase in accounts payable, accrued
expenses and other liabilities. Consistent with its continued domestic
expansion, inventories increased, primarily in the United States, where they
rose 11.6% to $901.4 million at November 30, 1995 from $807.5 million at
year-end 1994.
In 1994, the use of operating cash included net investments of $137.6
million in inventories (excluding $27.1 million of inventories acquired through
seller financing) and $26.3 million in payments to reduce accounts payable,
accrued expenses and other liabilities. The use of cash was partially offset by
earnings of $46.6 million and various noncash items deducted from net income.
In 1994, inventories substantially increased, principally in the United States,
rising to $807.5 million at November 30, 1994 from $633.0 million at year-end
1993, as the Company accelerated its domestic expansion, while sales rates
slowed in the latter half of the year.
Cash provided by investing activities totaled $10.0 million in 1995
and $37.5 million in 1994, primarily from $13.8 million and $49.7 million,
respectively, in proceeds from mortgage-backed securities paid off during the
year within the mortgage banking operations. These proceeds were used largely
to pay down the collateralized mortgage obligations for which the
mortgage-backed securities had served as collateral.
Financing activities in 1995 and 1994 resulted in a net cash inflow of
$31.5 million and $53.3 million, respectively. In 1995, cash was provided by
$64.3 million in net proceeds from borrowings. These cash inflows were
partially offset by payments on collateralized mortgage obligations of $13.3
million, the funds for which were provided by receipts on mortgage-backed
securities; and $19.6 million of cash dividend payments. The Company's
debt-to-capital ratio increased to 60.6% in 1995 from 58.3% in 1994 reflecting
additional financing required for the higher level of inventories resulting
from domestic expansion.
Financing activities in 1994 provided $211.0 million in net proceeds
from borrowings, partially offset by the purchase of the Company's special
common stock and warrants for $73.7 million; payments on collateralized
mortgage obligations of $49.3 million, the funds for which were provided by
receipts on mortgage-backed securities; and $19.6 million of cash dividend
payments.
In order to simplify its capital structure, the Company commenced a
tender offer in 1993 to purchase all of the 5.1
29
25
million outstanding shares of its special common stock at a price of $19 per
share. The offer expired on December 7, 1993 with 2.3 million shares tendered.
In addition, on December 23, 1993, the Company purchased the remaining 2.4
million warrants to purchase shares of special common stock at a price equal to
the tender offer price per share less the $6.96 per warrant exercise price.
Subsequent to the expiration of the tender offer, the remaining 2.8 million
outstanding shares of special common stock were exchanged by the Company at a
ratio of .95 shares of common stock for each share of special common stock on
various dates in 1994. There were no outstanding shares of special common
stock at November 30, 1994. The purchase of special common stock and warrants
was largely responsible for an increase in the Company's debt-to-capital ratio
to 58.3% in 1994 from 41.4% in 1993.
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, and are centered mainly in its
domestic unsecured revolving credit facility. Terms under this facility, as
amended in November 1994, provide for a $500 million commitment with a $200
million sublimit for the Company's mortgage banking operations through December
31, 1997. As of November 30, 1995, there was $197.0 million available under the
revolving credit facility for the Company's future use. In addition, under the
Company's French unsecured financing agreements, $81.3 million was available in
the aggregate at November 30, 1995. Depending upon available terms, the Company
also finances certain land acquisitions with borrowings from land sellers and
other third parties. At November 30, 1995, the Company had outstanding
seller-financed notes payable of $43.7 million secured primarily by the
underlying property which had a carrying value of $73.3 million.
The Company uses 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 carefully managing the timing of the production
process. The Company's inventories are geographically diverse and primarily
located in desirable areas within targeted growth markets principally oriented
toward entry-level purchasers. In 1995, the Company focused on continued
expansion of its domestic operations outside of California, while becoming more
selective with regard to investment in California where the economy remains
weak.
During 1995, the Company implemented stricter standards for assessing
all proposed land purchases based in part upon discounted after tax cash flow
internal rate of return requirements. In addition, all operating divisions are
measured for the first time based upon overall return on investment. Among
other things, this focus will likely result in reductions in new land purchases
and inventory investment in California during 1996 as a step toward improving
the Company's overall return on equity over time. Cash flow available from
reduced California investment will be used to fund the Company's expansion into
other western states as well as reduce overall leverage as measured by the
ratio of debt to total capital.
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 $200
million sublimit within the Company's $500 million revolving credit facility
and a $120 million asset-backed commercial paper facility. The $200 million
sublimit on the revolving credit facility is available to fund mortgage banking
operations only to the extent that borrowings under the agreement for
construction operations do not exceed $300 million.
Debt service on the Company's collateralized mortgage obligations is
funded by receipts from mortgage-backed securities. Such funds are expected to
be adequate to meet future debt-payment schedules for the collateralized
mortgage obligations and therefore these securities have virtually no impact on
the capital resources and liquidity of the mortgage banking operations.
The Company believes it has adequate resources and sufficient credit
line facilities to satisfy its current and reasonably anticipated future
requirements for funds to acquire capital assets and land, to construct homes,
to fund its mortgage banking operations, and to meet other needs of its
business, both on a short and long-term basis.
NEW ACCOUNTING PRONOUNCEMENT
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which requires
impairment losses to be recorded on long-lived assets used in operations 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. This
new pronouncement is effective for fiscal years beginning after December 15,
1995.
30
26
The Company plans to adopt the provisions of this pronouncement during 1996.
The Company has not analyzed the impact of this pronouncement on the financial
statements, although adoption may result in a non-cash charge to earnings which
may have a material effect on the Company's financial position or results of
operations.
OUTLOOK
The Company's domestic operating results in 1995 reflected its ongoing
expansion outside of California and included the Company's first housing
deliveries from new divisions based in Albuquerque, New Mexico and Salt Lake
City, Utah. Operations outside of California have generally produced successful
results as evidenced by rapidly growing contributions from the Company's five
non-California housing divisions. These operations produced 24.9% of domestic
deliveries in 1995, up sharply from 11.8% in 1994. The Company expects to
further expand and re-position its domestic operations in 1996 through more
selective investment in California, where the housi