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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-
26
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 housing market remains soft, as
well as continued investment in other western states where the Company has
developed a recent track record of profitable growth. Overall, the Company
believes domestic operating results will improve in 1996 as its newer divisions
develop market positions and existing operations further penetrate their
markets. Nonetheless, significant challenges remain within the domestic
operating environment. These include a continuing weak housing market in
California, where approximately two-thirds of the Company's 1995 deliveries
were generated, and a lack of urgency among potential home buyers in many of
the Company's markets.
The Company is cautiously optimistic that economic conditions for
housing in California will improve based on more favorable general economic and
employment forecasts; however, in view of the last five years of adverse
conditions, any California housing recovery will likely be slow to develop. In
addition, the timing of any such improvements in California's new housing
market remains uncertain. To better position itself domestically, particularly
in California, the Company implemented a series of initiatives in 1995 designed
to improve overall domestic profitability in 1996 and beyond. These
initiatives, which were intended to improve gross margins and reduce overhead
expenses, included a greater focus on maximizing rates of return in lieu of
maximizing market share, more selective investment in land in California and
greater emphasis on the sale of high-margin amenities. The Company also
consolidated several divisions in California during 1995 and reduced staffing
levels where appropriate. Other initiatives involved the continued
simplification and standardization of home designs to lower construction costs,
better regulation of quarterly production cycles and benchmarking of overhead
costs. In general, the Company intends to maintain its rigorous pursuit of
greater operating efficiencies, a leaner cost structure and an emphasis on
return-on-investment concepts in assessing new investments. The initial results
of these efforts were apparent in the Company's improving quarterly gross
margins and expense ratios as the 1995 year progressed, trends which the
Company believes will continue during 1996.
The French housing market proved difficult in 1995 as the economy was
plagued by recession and high unemployment during an economically disruptive
election year, while home buyers deferred purchases through much of the year in
anticipation of a key government support program to assist home buyers
introduced in October 1995. Although the general uncertainty surrounding the
direction of the French economy continued into early 1996, the installation of
a new French government in mid-1995 followed by the implementation of the new
government program could improve the Company's housing sales volumes and
housing profitability in Paris during 1996. French commercial activities are
likely to remain at or below 1995 levels as the market continues to absorb
existing properties in a period of high vacancy rates. Notwithstanding the
possibilities of a more favorable economic climate, generally weak market
conditions may persist in France throughout 1996 and the Company remains
cautious in its business outlook.
In Mexico, where a start-up operation has yet to deliver its first
homes, the Company continues to closely monitor the unsettled economic
environment. The new home market in Mexico remains seriously hampered by the
continuing decline in value of the peso and the economic recession this
devaluation has created. These events have slowed an already complex regulatory
process and heightened consumer concerns about new home purchases. In spite of
these turbulent conditions, demand for housing in Mexico remains substantial
and the Company has begun to generate a modest level of orders which it
believes should result in 1996 deliveries. Nevertheless, the Company remains
cautious regarding these operations and continues to reassess its level of
activity in Mexico and the desirability of expanding its market presence there.
The Company continues to benefit in all of its operations from the
strength of its capital position, which has allowed it to finance expansion,
re-engineer product lines and diversify into strong new home building markets.
The Company's strong capital position has also helped enable it to maintain
overall profitability during troubled economic times in California and France,
where the lingering effects of severe recessions continue
31
27
to inhibit demand for affordable new housing. The Company believes it is
particularly well-positioned to capitalize on any sustained improvement in the
economies of California and France and has established strategies to help
maximize future performance even under continued challenging economic
conditions.
At November 30, 1995, the Company had outstanding sales contracts of
1,412 units in residential backlog, representing aggregate future revenues of
approximately $243.8 million. Year-end 1995 backlog levels increased from the
1,016 units in residential backlog representing aggregate future revenues of
$163.6 million at year-end 1994. Substantially all homes included in backlog
are expected to be delivered during 1996. However, cancellations could occur,
particularly if market conditions deteriorate or interest rates rise, thereby
decreasing backlog and related future revenues.
In the United States, the Company's residential backlog at November
30, 1995 totaled 1,172 units, up 41.7% from 827 units at year-end 1994. This
increase was primarily attributable to domestic operations outside of
California. In California, residential unit backlog was essentially flat at 626
units compared to 628 units a year earlier, while non-California backlog rose
174.4% to 546 units at November 30, 1995 from 199 units at November 30, 1994.
Net orders for non-California U.S. operations increased to 503 units in the
fourth quarter of 1995, from 248 units in the year-earlier quarter. Net orders
in California decreased 10.2% during the same period. Since year end, net order
rates have improved sharply in California, up 17.7% in the first two months of
1996 compared to the same period of 1995. Total domestic net orders for the
first two months of 1996 increased 25.8% versus the same period of 1995.
In France, the residential backlog at November 30, 1995 totaled 229
units, up 35.5% from 169 units at year-end 1994. Net orders in the fourth
quarter of 1995 were comparable to the year-earlier period at 210 versus 215
units. For the year, however, net orders decreased 11.6% to 634 units from 717
units in 1994. In the first two months of 1996, net orders in France declined
35.2% compared to the same period a year ago. Given the decreased level of the
Company's commercial development activities, the backlog associated with these
operations declined to a value of approximately $10.8 million at November 30,
1995 from $31.1 million at year-end 1994.
In light of higher year-end backlog levels, improved recent domestic
order trends and the maturation of the Company's non-California domestic
divisions, the Company currently anticipates higher overall delivery volumes
for full year 1996 when compared to full year 1995. Assuming stable or
improving business conditions, interest rates and consumer confidence in its
major markets, the Company believes an anticipated increase in delivery volumes
coupled with the ongoing benefits of its strategic profitability and cost
control initiatives will result in improved operating income and earnings per
share in 1996 compared to 1995.
POTENTIAL ACQUISITION
On January 22, 1996, the Company entered into a definitive agreement to acquire
San Antonio, Texas-based Rayco, Ltd. and certain affiliates 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,
currently commands approximately a 45% market share. For the year ended
December 31, 1995, Rayco, Ltd. delivered 2,585 homes, generating revenues of
approximately $235 million. Although the transaction remains subject to certain
conditions, completion of this acquisition is expected to occur on March 1,
1996. If the acquisition is consummated as anticipated, the results of Rayco
Ltd.'s operations will be included in the Company's consolidated financial
statements from the date of acquisition, with the Company expecting the
transaction to be accretive to earnings per share beginning in the second
quarter.
The acquisition of Rayco, Ltd. represents a major stride forward in
the Company's expansion strategy -- Texas would be the Company's sixth
non-California U.S. market. San Antonio is the ninth largest city in the United
States and has ranked among the top ten cities in the nation in both job
creation and economic growth for the past several years.
IMPACT OF INFLATION
The Company's business is significantly affected by general economic
conditions, particularly by the impact of inflation and the generally
associated adverse effect on interest rates. Although inflation rates have been
low in recent years, rising inflation would likely have a long-term impact on
the Company's revenues and earning power by reducing demand for homes as a
result of correspondingly higher interest rates. In periods of high inflation,
the rising costs of land, construction, labor, interest and administrative
expenses have often been recoverable through increased selling prices, although
this has not always been possible because of high mortgage interest rates and
competitive factors in the marketplace. In recent years, however, inflation has
had no significant adverse impact on the Company, as cost increases have not
exceeded the average rate of inflation.
32
28
CONSOLIDATED STATEMENTS OF INCOME
Years ended November 30,
- -------------------------------------------------------------------------------------------------------------------
In thousands, except per share amounts 1995 1994 1993
===================================================================================================================
TOTAL REVENUES $1,396,526 $1,336,271 $1,237,854
==========================================
CONSTRUCTION:
Revenues $1,366,866 $1,307,570 $1,199,776
Construction and land costs (1,119,405) (1,048,323) (970,595)
Selling, general and administrative expenses (181,930) (170,924) (142,572)
------------------------------------------
Operating income 65,531 88,323 86,609
Interest income 2,140 2,026 3,477
Interest expense, net of amounts capitalized (27,501) (17,849) (16,840)
Minority interests in pretax income of consolidated
joint ventures (584) (917) (10,156)
Equity in pretax loss of unconsolidated joint ventures (3,475) (3,736) (6,303)
------------------------------------------
Construction pretax income 36,111 67,847 56,787
------------------------------------------
MORTGAGE BANKING:
Revenues:
Interest income 15,555 16,978 24,188
Other 14,105 11,723 13,890
------------------------------------------
29,660 28,701 38,078
Expenses:
Interest (14,821) (17,151) (25,147)
General and administrative (5,491) (5,547) (5,397)
------------------------------------------
Mortgage banking pretax income 9,348 6,003 7,534
------------------------------------------
Total pretax income 45,459 73,850 64,321
Income taxes (16,400) (27,300) (24,400)
------------------------------------------
NET INCOME $ 29,059 $ 46,550 $ 39,921
==========================================
EARNINGS PER SHARE $ .73 $ 1.16 $ .96
===================================================================================================================
See accompanying notes.
33
29
CONSOLIDATED BALANCE SHEETS
November 30,
- -----------------------------------------------------------------------------------------------------------------
In thousands, except shares 1995 1994
=================================================================================================================
ASSETS
CONSTRUCTION:
Cash and cash equivalents $24,793 $49,497
Trade and other receivables 111,620 114,921
Inventories 1,059,179 942,713
Investments in unconsolidated joint ventures 21,154 25,314
Other assets 52,462 34,691
--------------------------------
1,269,208 1,167,136
--------------------------------
MORTGAGE BANKING:
Cash and cash equivalents 18,589 5,311
Receivables
First mortgages and mortgage-backed securities 97,672 110,223
First mortgages held under commitment of sale and other receivables 181,764 164,365
Other assets 6,946 7,425
--------------------------------
304,971 287,324
--------------------------------
TOTAL ASSETS $1,574,179 $1,454,460
================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CONSTRUCTION:
Accounts payable $156,097 $146,179
Accrued expenses and other liabilities 90,237 72,845
Mortgages and notes payable 639,575 565,020
--------------------------------
885,909 784,044
--------------------------------
MORTGAGE BANKING:
Accounts payable and accrued expenses 9,661 10,293
Notes payable 151,000 125,000
Collateralized mortgage obligations secured by
mortgage-backed securities 84,764 96,731
--------------------------------
245,425 232,024
--------------------------------
Deferred income taxes 24,448 31,373
--------------------------------
Minority interests in consolidated joint ventures 2,919 2,272
--------------------------------
STOCKHOLDERS' EQUITY:
Preferred stock--$1.00 par value; authorized, 10,000,000 shares:
Series A participating cumulative preferred stock; none outstanding
Series B convertible preferred stock; 1,300,000 shares outstanding 1,300 1,300
Common stock--$1.00 par value; authorized, 100,000,000 shares;
32,346,736 and 32,378,217 shares outstanding at November 30, 1995
and 1994, respectively 32,347 32,378
Paid-in capital 188,839 188,970
Retained earnings 190,749 181,282
Cumulative foreign currency translation adjustments 2,243 817
--------------------------------
TOTAL STOCKHOLDERS' EQUITY 415,478 404,747
--------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,574,179 $1,454,460
=================================================================================================================
See accompanying notes.
34
30
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended November 30, 1995, 1994 and 1993
---------------------------------------------------------------------------------------------
Series B
Convertible Special Foreign Total
Preferred Common Common Paid-in Retained Currency Stockholders'
In thousands Stock Stock Stock Capital Earnings Translation Equity
===================================================================================================================================
Balance at November 30, 1992 $29,488 $5,123 $150,536 $129,761 $3,525 $318,433
Net income 39,921 39,921
Dividends on Series B
convertible preferred stock (4,940) (4,940)
Dividends on common and
special common stock (10,404) (10,404)
Issuance of Series B convertible
preferred stock $1,300 107,870 109,170
Exercise of employee stock options 223 1,669 1,892
Cancellation of restricted stock (110) (1,305) (1,415)
Foreign currency translation
adjustments (8,317) (8,317)
-----------------------------------------------------------------------------------------
Balance at November 30, 1993 1,300 29,601 5,123 258,770 154,338 (4,792) 444,340
-----------------------------------------------------------------------------------------
Net income 46,550 46,550
Dividends on Series B convertible
preferred stock (9,880) (9,880)
Dividends on common and special
common stock (9,726) (9,726)
Exercise of employee stock options 125 1,406 1,531
Purchase of special common stock
and warrants (2,332) (71,345) (73,677)
Exchange of special common
stock for common stock 2,652 (2,791) 139
Foreign currency translation
adjustments 5,609 5,609
-----------------------------------------------------------------------------------------
Balance at November 30, 1994 1,300 32,378 188,970 181,282 817 404,747
-----------------------------------------------------------------------------------------
Net income 29,059 29,059
Dividends on Series B convertible
preferred stock (9,880) (9,880)
Dividends on common stock (9,712) (9,712)
Exercise of employee stock options 17 103 120
Cancellation of restricted stock (48) (234) (282)
Foreign currency translation
adjustments 1,426 1,426
-----------------------------------------------------------------------------------------
Balance at November 30, 1995 $1,300 $32,347 $ $188,839 $190,749 $2,243 $415,478
===================================================================================================================================
See accompanying notes.
35
31
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended November 30,
- -------------------------------------------------------------------------------------------------------------------------------
In thousands 1995 1994 1993
===============================================================================================================================
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $29,059 $46,550 $39,921
Adjustments to reconcile net income to net cash provided (used)
by operating activities:
Equity in pretax loss of unconsolidated joint ventures 3,475 3,736 6,303
Minority interests in pretax income of consolidated joint ventures 584 917 10,156
Amortization of discounts and issuance costs 1,765 2,276 9,680
Depreciation and amortization 6,274 3,408 2,617
Provision for deferred income taxes (6,925) 4,498 (42,057)
Change in:
Receivables (14,664) (13,836) 63,874
Inventories (80,317) (137,594) (44,151)
Accounts payable, accrued expenses and other liabilities 26,680 (26,314) 15,684
Other, net (18,801) 5,279 (5,099)
--------------------------------------
Net cash provided (used) by operating activities (52,870) (111,080) 56,928
--------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in unconsolidated joint ventures 685 (5,329) (1,233)
Net originations of mortgages held for long-term investment (253) (442) (1,538)
Payments received on first mortgages and mortgage-backed securities 13,786 49,687 84,015
Other, net (4,252) (6,447) (2,499)
-------------------------------------
Net cash provided by investing activities 9,966 37,469 78,745
-------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from (payments on) credit agreements and other
short-term borrowings 92,358 215,476 (51,114)
Proceeds from issuance of senior subordinated notes 173,603
Payments on collateralized mortgage obligations (13,296) (49,259) (81,363)
Payments on mortgages, land contracts and other loans (28,055) (4,460) (81,429)
Redemption of convertible subordinated notes (168,760)
Payments from (to) minority interests in consolidated joint ventures 63 (15,177) (11,254)
Proceeds from issuance of Series B convertible preferred stock 109,170
Purchase of special common stock and warrants (73,677)
Payments of cash dividends (19,592) (19,606) (15,344)
-------------------------------------
Net cash provided (used) for financing activities 31,478 53,297 (126,491)
-------------------------------------
Net increase (decrease) in cash and cash equivalents (11,426) (20,314) 9,182
Cash and cash equivalents at beginning of year 54,808 75,122 65,940
-------------------------------------
Cash and cash equivalents at end of year $43,382 $54,808 $75,122
=====================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid, net of amounts capitalized $42,032 $36,034 $39,319
Income taxes paid 17,275 45,270 23,230
=====================================
SUPPLEMENTAL DISCLOSURES OF NONCASH ACTIVITIES:
Cost of inventories acquired through seller financing $36,149 $27,054 $8,900
==============================================================================================================================
See accompanying notes.
36
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
OPERATIONS Kaufman and Broad Home Corporation (the Company) is a regional
builder of single-family homes with domestic operations throughout the western
United States, and international operations in France, Canada and Mexico. In
France, the Company is also a developer of commercial and high-density
residential projects. Through its mortgage banking subsidiary, Kaufman and
Broad Mortgage Company, the Company provides mortgage banking services to its
domestic home buyers.
BASIS OF PRESENTATION The consolidated financial statements include the
accounts of the Company and all significant majority-owned or controlled
subsidiaries and joint ventures. All significant intercompany transactions have
been eliminated. Investments in unconsolidated joint ventures in which the
Company has less than a controlling interest are accounted for using the equity
method.
CASH AND CASH EQUIVALENTS The Company considers all highly liquid debt
instruments and other short-term investments purchased with a maturity of three
months or less to be cash equivalents.
CONSTRUCTION OPERATIONS Inventories are stated at the lower of cost or
estimated net realizable value for each parcel or subdivision. Estimated net
realizable value is based upon the net sales proceeds anticipated in the normal
course of business, less estimated costs to complete or improve the property to
the condition used in determining the estimated selling price.
Housing and other real estate sales are recognized when all conditions
precedent to closing have been fulfilled. In France, sales of apartments,
condominiums and commercial buildings to investors are recognized using the
percentage of completion method which is generally based on costs incurred as a
percentage of estimated total costs of individual projects. Revenues recognized
in excess of amounts billed are classified as receivables. Amounts received
from investors in excess of revenues recognized, if any, are classified as
other liabilities.
Construction and land costs are comprised of direct and allocated
costs including estimated future costs for warranties and amenities. Land, land
improvements and other common costs are generally allocated equally to units
within a parcel or subdivision. Land and land development costs generally
include related interest and property taxes incurred until development is
substantially completed or deliveries have begun within a subdivision.
MORTGAGE BANKING OPERATIONS Principal and interest payments received on
mortgage-backed securities are invested in short-term securities maturing on
the next debt service date of the collateralized mortgage obligations for which
the securities are held as collateral. Such payments are restricted to the
payment of the debt service on the collateralized mortgage obligations.
First mortgages and mortgage-backed securities consist of securities
held for long-term investment and are valued at amortized cost. First mortgages
held under commitment of sale are valued at the lower of aggregate cost or
market. Market is principally based on public market quotations or outstanding
commitments obtained from investors to purchase first mortgages receivable.
INCOME TAXES 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.
Income taxes are provided for at rates applicable in the countries in
which the income is earned. Provision is made currently for United States
federal income taxes on earnings of foreign subsidiaries which are not expected
to be reinvested indefinitely.
EARNINGS PER SHARE The computation of earnings per share is based on the
weighted average number of common shares, special common shares, equivalent
Series B Convertible Preferred Shares and common share equivalents outstanding
during each year. The Series B Convertible Preferred Shares are considered
common stock due to their mandatory conversion into common stock, and the
related dividends are not deducted from net income for purposes of calculating
earnings per share. Common share equivalents include dilutive stock options and
warrants using the treasury stock method. Earnings per share were based on the
weighted average number of common shares, special common shares, equivalent
Series B Convertible Preferred Shares and common share equivalents outstanding
of 39,757,000 in 1995, 40,026,000 in 1994 and 41,547,000 in 1993.
If, for purposes of calculating earnings per share, the Series B
Convertible Preferred Shares were excluded from the weighted average shares
outstanding and the related dividends deducted from net income, the computation
would have resulted in earnings per share of $.58 in 1995, $1.09 in 1994 and
$.93 in 1993.
37
33
RECENT ACCOUNTING PRONOUNCEMENTS 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. The provisions of this statement are
effective for fiscal years beginning after December 15, 1995. The Company has
not assessed the impact on the financial statements. However, the future
adoption of this statement may have a material effect on the Company's
financial position or results of operations.
RECLASSSIFICATIONS Certain amounts in the consolidated financial statements of
prior years have been reclassified to conform to the 1995 presentation.
NOTE 2. RECEIVABLES
CONSTRUCTION Trade receivables amounted to $48,699,000 and $43,057,000 at
November 30, 1995 and 1994, respectively. Included in these amounts are
unbilled receivables due from investors on French apartment, condominium and
commercial building sales accounted for using the percentage of completion
method, totaling $8,478,000 at November 30, 1995 and $14,267,000 at November
30, 1994. The investors are contractually obligated to remit payments against
their unbilled balances. Other receivables of $62,921,000 at November 30, 1995
and $71,864,000 at November 30, 1994 included mortgages receivable, escrow
deposits and amounts due from municipalities and utility companies.
At November 30, 1995 and 1994, receivables were net of allowances for
doubtful accounts of $3,034,000 and $3,269,000, respectively.
MORTGAGE BANKING First mortgages and mortgage-backed securities consisted of
loans of $7,187,000 at November 30, 1995 and $6,934,000 at November 30, 1994
and mortgage-backed securities of $90,485,000 and $103,289,000 at November 30,
1995 and 1994, respectively. The mortgage-backed securities serve as collateral
for related collateralized mortgage obligations. The property covered by the
mortgages underlying the mortgage-backed securities are single-family
residences. Issuers of the mortgage-backed securities are the Government
National Mortgage Association and Federal National Mortgage Association. The
first mortgages and mortgage-backed securities bore interest at an average rate
of 8-3/5% and 8-7/8% at November 30, 1995 and 1994, respectively (with rates
ranging from 7% to 13% for both years).
Mortgages were net of discounts of $4,353,000 at November 30, 1995 and
$6,243,000 at November 30, 1994. These discounts, which primarily represent
loan origination discount points and acquisition price discounts, are deferred
as an adjustment to the carrying value of the related first mortgages and
mortgage-backed securities and amortized into interest income using the
interest method.
The Company adopted the provisions of Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" effective December 1, 1994. In accordance with this
pronouncement, the Company's mortgage-backed securities held for long-term
investment have been classified as held-to-maturity and are stated at amortized
cost, adjusted for amortization of premiums and accretion of discounts to
maturity. Such amortization is included in interest income. There was no
impact on the Company's financial position or results of operations from the
adoption of this pronouncement. The total gross unrealized gains and gross
unrealized losses on the mortgage-backed securities were $6,175,000 and $0,
respectively at November 30, 1995.
NOTE 3. INVENTORIES
Inventories consist of the following:
November 30,
- -----------------------------------------------------------------------------------------------------
In thousands 1995 1994
=====================================================================================================
Homes, lots and improvements in production $ 803,926 $712,563
Land under development 255,253 230,150
-------------------------------
Total inventories $1,059,179 $942,713
=====================================================================================================
Land under development primarily consists of parcels on which 50% or
less of estimated development costs have been incurred.
The impact of capitalizing interest costs on consolidated pretax
income is as follows:
Years ended November 30,
- ------------------------------------------------------------------------------------------------------------------------
In thousands 1995 1994 1993
========================================================================================================================
Interest incurred $64,629 $45,410 $41,272
Interest expensed (27,501) (17,849) (16,840)
---------------------------------------------
Interest capitalized 37,128 27,561 24,432
Interest amortized (18,508) (16,156) (17,617)
---------------------------------------------
Net impact on consolidated pretax income $18,620 $11,405 $ 6,815
========================================================================================================================
38
34
NOTE 4. INVESTMENTS IN UNCONSOLIDATED JOINT VENTURES
The Company participates in a number of joint ventures in which it has less
than a controlling interest. These joint ventures are based primarily in France
and Canada and are engaged in the development, construction and sale of
residential properties and commercial projects. Combined condensed financial
information concerning the Company's unconsolidated joint venture activities
follows:
November 30,
- -----------------------------------------------------------------------------------------------------
In thousands 1995 1994
=====================================================================================================
Cash $ 2,426 $ 5,530
Receivables 9,407 16,987
Inventories 874,624 856,239
Other assets 5,854 5,955
-----------------------------
Total assets $892,311 $884,711
=============================
Mortgages and notes payable $630,006 $631,353
Other liabilities 98,539 142,619
Equity of:
The Company 21,154 25,314
Others 142,612 85,425
-----------------------------
Total liabilities and equity $892,311 $884,711
=====================================================================================================
The joint ventures finance land and inventory investments primarily
through a variety of borrowing arrangements. The Company typically does not
guarantee these financing arrangements.
Years ended November 30,
- -------------------------------------------------------------------------------------------------------------------------
In thousands 1995 1994 1993
=========================================================================================================================
Revenues $ 33,917 $ 82,734 $ 6,404
Cost of sales (49,289) (102,981) (16,160)
Other expenses, net (5,108) (15,434) (20,992)
----------------------------------------------
Total pretax loss $(20,480) $(35,681) $(30,748)
==============================================
The Company's share of pretax loss $ (3,475) $ (3,736) $ (6,303)
=========================================================================================================================
The Company's share of pretax loss includes management fees earned
from the unconsolidated joint ventures.
NOTE 5. MORTGAGES AND NOTES PAYABLE
CONSTRUCTION Mortgages and notes payable consist of the following (interest
rates are as of November 30):
November 30,
- -----------------------------------------------------------------------------------------------------
In thousands 1995 1994
=====================================================================================================
Unsecured domestic borrowings with banks under a revolving
credit agreement (7% to 7-1/10% in 1995 and 6-4/5% in 1994) $250,000 $100,000
Other unsecured domestic borrowings with banks due within
one year (6-3/5% to 6-7/8% in 1995 and 6-1/8% to
6-5/8% in 1994) 13,000 110,100
Unsecured French borrowings (6-3/8% to 7-1/5% in 1995
and 6% to 7% in 1994) 59,011 45,553
Mortgages and land contracts due to land sellers
and other loans (6-3/5% to 59-2/5% in 1995 and
6% to 26-3/10% in 1994) 43,715 35,621
Senior notes due 1999 at 10-3/8% 100,000 100,000
Senior subordinated notes due 2003 at 9-3/8% 173,849 173,746
-----------------------------
Total mortgages and notes payable $639,575 $565,020
=====================================================================================================
Terms under the domestic unsecured revolving credit agreement with
various banks dated December 24, 1992 and scheduled to expire in 1995 provided
for a $350,000,000 commitment. On November 21, 1994, the agreement was amended,
increasing the revolving credit facility to $500,000,000 with a $200,000,000
sublimit for the Company's mortgage banking operations. This facility has a
three-year term expiring on December 31, 1997. As of November 30, 1995, the
entire amount of the revolving credit facility was committed and $197,000,000
was available for the Company's future use. The agreement provides for interest
on borrowings at either the applicable bank reference rate or the London
Interbank Offered Rate plus an applicable spread and an annual commitment fee
based on the unused portion of the commitment.
Under the terms of the revolving credit agreement, the Company is
required, among other things, to maintain certain financial statement ratios
and a minimum net worth and is subject to limitations on acquisitions,
inventories, indebtedness, dividend payments and repurchases of stock. Under
the conditions of the agreement, retained earnings of $71,554,000 were
available for payment of cash dividends or stock repurchases at November 30,
1995.
39
35
The Company's French subsidiaries have lines of credit with various
banks which totaled $140,339,000 at November 30, 1995 and have various
committed expiration dates through December 1996. These lines of credit provide
for interest on borrowings at either the French Federal Funds Rate or the Paris
Interbank Offered Rate plus an applicable spread.
The weighted average interest rate on aggregate unsecured borrowings,
excluding the senior and senior subordinated notes, was 6-9/10% and 6-1/2% at
November 30, 1995 and 1994, respectively.
On August 11, 1992, the Company filed a registration statement with
the Securities and Exchange Commission under which the Company could offer for
sale from time to time up to $200,000,000 of unsecured debt securities. On
September 8, 1992, the Company, pursuant to this registration statement, issued
$100,000,000 of 10-3/8% senior notes, due September 1, 1999, with interest
payable semi-annually. The Company may redeem, in whole or in part, at any time
on or after September 1, 1997, 100% of the principal amount of the notes.
On April 26, 1993, the Company issued $175,000,000 principal amount of
9-3/8% senior subordinated notes at 99.202%. The notes are due May 1, 2003 with
interest payable semi-annually. The notes represent unsecured obligations of
the Company and are subordinated to all existing and future senior indebtedness
of the Company. The Company may redeem the notes, in whole or in part, at any
time on or after May 1, 2000 at 100% of their principal amount.
The 10-3/8% senior notes and 9-3/8% senior subordinated notes contain
certain restrictive covenants that, among other things, limit the ability of
the Company to incur additional indebtedness, pay dividends, make certain
investments, create certain liens, engage in mergers, consolidations, or sales
of assets, or engage in certain transactions with officers, directors and
employees.
Principal payments on senior and senior subordinated notes, mortgages,
land contracts and other loans are due as follows: 1996, $33,025,000; 1997,
$1,761,000; 1998, $1,067,000; 1999, $100,068,000; 2000, $158,000; and
thereafter, $181,485,000.
Assets (primarily inventories) having a carrying value of
approximately $73,338,000 are pledged to collateralize mortgages, land
contracts and other secured loans.
MORTGAGE BANKING Notes payable include the following (interest rates are as of
November 30):
November 30,
-----------------------------
In thousands 1995 1994
- -----------------------------------------------------------------------------------------------------
Notes payable secured by trust deed notes (7-1/8% in 1995
and 6-4/5% in 1994) $40,000 $21,000
Advances under asset-backed commercial paper
facility (5-9/10% in 1995 and 5-3/4% in 1994) 111,000 104,000
-----------------------------
Total notes payable $151,000 $125,000
=====================================================================================================
First mortgages receivable have historically been financed through a
$230,000,000 collateralized revolving warehouse credit facility and a
$120,000,000 asset-backed commercial paper facility (the Commercial Paper
Facility). On November 21, 1994, the collateralized revolving warehouse credit
facility was replaced with the amended revolving credit agreement which
contains a $200,000,000 sublimit (the Revolving Warehouse Facility) for
financing the mortgage banking operations. This Revolving Warehouse Facility
provides for interest on borrowings at either the applicable bank reference
rate or the Federal Funds rate plus an applicable spread and an annual
commitment fee based on the unused portion of the commitment.
The Commercial Paper Facility expires on September 15, 1997 and
provides for an annual commitment fee based on the unused portion of the
commitment. Interest rates charged under the Commercial Paper Facility reflect
those available in commercial paper markets plus an applicable spread on
amounts borrowed.
There are no compensating balance requirements under either facility.
These facilities are collateralized by first mortgages held under commitment of
sale and are repayable from proceeds on the sales of first mortgages.
The terms of these facilities include financial covenants which, among
other things, require the maintenance of certain financial statement ratios and
a minimum tangible net worth and limit indebtedness of the mortgage banking
operations (excluding indebtedness to the Company) to a maximum of
$320,000,000. This maximum may be further limited as the $200,000,000 sublimit
on the Revolving Warehouse Facility is available to fund mortgage banking
operations only to the extent that borrowings under the amended revolving
credit agreement for construction operations do not exceed $300,000,000.
Collateralized mortgage obligations represent bonds issued to third
parties which are collateralized by mortgage-backed
40
36
securities with substantially the same terms. At November 30, 1995, the
collateralized mortgage obligations bore interest at rates ranging from 8% to
12-1/4% with stated principal maturities ranging from 3 to 30 years. Actual
maturities are dependent on the rate at which the underlying mortgage-backed
securities are repaid. No collateralized mortgage obligations have been issued
since 1988.
NOTE 6. FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments," requires companies to disclose the estimated
fair value of their financial instruments. The estimated fair value of
financial instruments has been determined based on available market information
and appropriate valuation methodologies. However, judgement is necessarily
required in interpreting market data to develop the estimates of fair value. In
that regard, the estimates presented herein are not necessarily indicative of
the amounts that the Company could realize in a current market exchange.
The carrying values and fair values of the Company's financial
instruments, except for those financial instruments for which the carrying
values approximate fair values, are summarized as follows:
November 30,
--------------------------------------------------------------
1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
In thousands Value Value Value Value
=================================================================================================================================
Construction:
Financial liabilities
10-3/8% Senior notes $100,000 $101,875 $100,000 $ 99,000
9-3/8% Senior subordinated notes 173,849 171,063 173,746 155,094
Mortgage banking:
Financial assets
Mortgage-backed securities 90,485 96,660 103,289 104,149
Financial liabilities
Collateralized mortgage obligations
secured by mortgage-backed securities 84,764 97,597 96,731 97,395
=================================================================================================================================
The Company used the following methods and assumptions in estimating
fair values:
Cash and cash equivalents; borrowings under the domestic revolving
credit facility, French lines of credit and Commercial Paper Facility; first
mortgages and first mortgages held under commitment of sale and other
receivables: The carrying amounts reported approximate fair values.
Senior notes and senior subordinated notes: The fair values of the
Company's senior notes and senior subordinated notes are estimated based on
quoted market prices.
Mortgage-backed securities and collateralized mortgage obligations
secured by mortgage-backed securities: The fair values of these financial
instruments were based on quoted market prices for the same or similar issues.
NOTE 7. COMMITMENTS AND CONTINGENCIES
Commitments and contingencies include the usual obligations of housing
producers for the completion of contracts and those incurred in the ordinary
course of business. The Company is also involved in litigation incidental to
its business, the disposition of which should have no material effect on the
Company's financial position or results of operations.
NOTE 8. STOCKHOLDERS' EQUITY
PREFERRED STOCK On January 11, 1989, the Company adopted a Stockholder Rights
Plan and declared a dividend distribution of one preferred share purchase right
for each outstanding share of common stock. Under certain circumstances, each
right entitles the holder to purchase 1/100th of a share of a new Series A
Participating Cumulative Preferred Stock at a price of $30.00, subject to
certain antidilution provisions. The rights are not exercisable until the
earlier to occur of (i) 10 days following a public announcement that a person
or group has acquired 20% or more of the aggregate votes entitled from all
shares of common stock and special common stock or (ii) 10 days following the
commencement of a tender offer for 20% or more of the aggregate votes entitled
from all shares of common stock and special common stock. In the event the
Company is acquired in a merger or other business combination transaction, or
50% or more of the Company's assets or earning power is sold, each right will
entitle its holder to receive, upon exercise, common stock of the acquiring
company having a market value of twice the exercisable price of the right. At
the option of the Company, the rights are redeemable prior to becoming
exercisable at $.01 per right. Unless previously redeemed, the rights will
expire on March 7, 1999. Until a right is exercised, the holder will have no
rights as a stockholder of the Company, including the right to vote or receive
dividends.
In 1993, the Company issued 6,500,000 depositary shares, each
representing a one-fifth ownership interest in a share of Series B Mandatory
Conversion Premium Dividend Preferred Stock (the Series B Convertible Preferred
Shares). Dividends are cumulative and payable quarterly in arrears at an annual
dividend rate of $1.52 per depositary share. On the
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37
mandatory conversion date of April 1, 1996, each of the outstanding depositary
shares will convert, upon the automatic conversion of the Series B Convertible
Preferred Shares, into one share of the Company's common stock, subject to
adjustment in certain events. The Company may call any or all of the
outstanding depositary shares prior to the mandatory conversion date at a call
price initially equal to $27.12, declining to $23.66 by February 1, 1996, and
equal to $23.46 thereafter, payable in shares of common stock having a market
price equal to the applicable call price, plus an amount in cash equal to all
accrued and unpaid dividends. The depositary shares are not convertible into
common stock at the holders' option. The depositary shares were issued at
$17.375 per share and have a liquidation preference price per depositary share
equal to the issuance price.
SPECIAL COMMON STOCK In connection with its restructuring in 1989, the Company
issued warrants (the Warrants) to certain subsidiaries of SunAmerica Inc., the
Company's former parent. The Warrants give the holder the right to purchase, at
any time prior to March 1, 1999, up to 7,500,000 shares of special common stock
at an exercise price of $6.96 per share. The rights of the special common stock
are generally identical to the rights of the common stock except that the
holder of special common stock is entitled to one-tenth of a vote per share on
all matters to be voted on by stockholders.
In 1992, the Company issued in a public offering 5,123,000 shares of
the special common stock in connection with the exercise of the Warrants. On
November 8, 1993, the Company commenced a tender offer to purchase all of the
outstanding shares of its special common stock at a price of $19 per share. The
offer expired on December 7, 1993 with 2,331,785 shares of special common stock
tendered. In addition, on December 23, 1993, the Company purchased the
remaining 2,377,000 Warrants at a price equal to the tender offer price per
share less the $6.96 per Warrant exercise price. The total consideration paid
for these transactions was $73,677,000, including related costs.
The remaining 2,791,215 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 throughout 1994.
NOTE 9. EMPLOYEE BENEFIT AND STOCK PLANS
Benefits are provided to most employees under the Company's 401(k) Savings Plan
under which contributions by employees are partially matched by the Company.
The aggregate cost of this plan to the Company was $1,795,000 in 1995,
$1,734,000 in 1994 and $1,135,000 in 1993.
The Kaufman and Broad Home Corporation 1988 Employee Stock Plan (the
1988 Plan) provides that stock options, associated limited stock appreciation
rights, restricted shares of common stock and stock units may be awarded to
eligible individuals for periods of up to 15 years. The 1988 Plan replaced all
existing employee stock plans.
Stock option transactions are summarized as follows:
Years ended November 30,
-----------------------------------------------
1995 1994 1993
========================================================================================================
Options outstanding at beginning of year 2,044,718 2,191,268 2,154,568
Granted 512,000 52,000 331,000
Exercised (17,000) (125,000) (223,000)
Cancelled (133,000) (73,550) (71,300)
-----------------------------------------------
Options outstanding at end of year 2,406,718 2,044,718 2,191,268
===============================================
Options exercisable at end of year 1,646,768 1,614,068 1,604,418
Options available for grant at end of year 1,268,581 954,100 1,443,600
Price range of options exercised $3.50-$12.38 $3.50-$16.13 $3.50-$16.13
Price range of options outstanding $3.50-$22.94 $3.50-$22.94 $3.50-$19.06
========================================================================================================
The Company records proceeds from the exercise of stock options as
additions to common stock and paid-in capital. The tax benefit, if any, is
recorded as additional paid-in capital.
In 1991, the Board of Directors approved the issuance of restricted
stock awards under the 1988 Plan of up to an aggregate 600,000 shares of common
stock to certain officers and key employees. Restrictions lapse each year
through May 10, 2005 on specified portions of the shares awarded to each
participant so long as the participant has remained in the continuous employ of
the Company. Restricted stock awards issued in 1991 totaled 575,000 shares
with 48,000 and 110,000 of these shares being cancelled in 1995 and 1993,
respectively.
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NOTE 10. INCOME TAXES
The components of pretax income are as follows:
Years ended November 30,
- -----------------------------------------------------------------------------------------------
In thousands 1995 1994 1993
===============================================================================================
Domestic $45,393 $72,352 $72,295
Foreign 66 1,498 (7,974)
---------------------------------------
Total pretax income $45,459 $73,850 $64,321
===============================================================================================
The components of the provisions for income taxes are as follows:
In thousands Total Federal State Foreign
==================================================================================================
1995
Currently payable $22,569 $16,700 $2,634 $ 3,235
Deferred (6,169) (3,729) (2,440)
------------------------------------------------
Total income tax expense $16,400 $12,971 $2,634 $795
================================================
1994
Currently payable $30,835 $24,931 $5,000 $904
Deferred (3,535) (3,603) 68
------------------------------------------------
Total income tax expense $27,300 $21,328 $5,000 $972
================================================
1993
Currently payable $45,078 $22,789 $4,084 $18,205
Deferred (20,678) 171 (20,849)
------------------------------------------------
Total income tax expense $24,400 $22,960 $4,084 $(2,644)
==================================================================================================
Deferred income taxes result from temporary differences in the
financial and tax bases of assets and liabilities. Significant components of
the Company's deferred tax liabilities and assets are as follows:
November 30,
------------------------------
In thousands 1995 1994
===============================================================================================================
Deferred tax liabilities:
Installment sales $ 4,840 $ 2,678
Bad debt and other reserves 1,758 4,046
Depreciation and amortization 5,465 6,273
Capitalized expenses 23,479 22,460
Partnerships and joint ventures 4,511 4,041
Computer equipment leases 6,573 10,040
Repatriation of foreign subsidiaries 25,961 30,638
Other 3,579 4,643
-----------------------------
Total deferred tax liabilities 76,166 84,819
-----------------------------
Deferred tax assets:
Warranty, legal and other accruals 9,194 6,772
Depreciation and amortization 1,281 475
Capitalized expenses 8,383 6,723
Affordable housing credits 2,111 2,111
Foreign tax credits 38,339 43,345
Net operating losses 943 596
Other 4,243 6,626
Valuation allowance (12,776) (13,202)
-----------------------------
Total deferred tax assets 51,718 53,446
-----------------------------
Net deferred tax liabilities $24,448 $31,373
===============================================================================================================
Net operating loss carryforwards expire in 1999 and 2000. The Company
expects that the entire deferred tax benefit of the tax loss carryforwards will
be recognized in future periods.
Income taxes computed at the statutory United States federal income
tax rate and income tax expense provided in the financial statements differ as
follows:
Years ended November 30,
-------------------------------------
In thousands 1995 1994 1993
============================================================================================================
Amount computed at statutory rate $15,911 $25,848 $22,461
Increase (decrease) resulting from:
California franchise taxes, net of
federal income tax benefit 1,712 3,250 2,658
Differences in foreign tax rates 2,042 550 430
Intercompany dividends 391 139
Affordable housing credits (2,387) (1,179) (1,005)
Other, net (878) (1,560) (283)
-------------------------------------
Total income tax expense $16,400 $27,300 $24,400
============================================================================================================
The Company has commitments to invest $5,732,000 over three years in
affordable housing partnerships which are scheduled to provide tax credits.
The Company had foreign tax credit carryforwards at November 30, 1995
of $5,421,000 for United States federal income tax purposes which expire in
1996 through 2000.
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39
The undistributed earnings of foreign subsidiaries, which the Company
plans to invest indefinitely and for which no United States federal income
taxes have been provided, totaled $42,030,000 at November 30, 1995. If these
earnings were currently distributed, the resulting withholding taxes payable
would be $3,024,000.
NOTE 11. GEOGRAPHICAL AND SEGMENT INFORMATION
Geographical and segment information follows:
Operating Identifiable
In thousands Revenues Income Assets
================================================================================================================
1995
Construction:
California $ 971,132 $51,428 $ 852,753
Other United States 246,958 12,308 139,875
France 138,616 4,700 235,031
Other 10,160 (2,905) 41,549
--------------------------------------------------------
Total construction 1,366,866 65,531 1,269,208
Mortgage banking 29,660 9,348 304,971
--------------------------------------------------------
Total $1,396,526 $74,879 $1,574,179
========================================================
1994
Construction:
California $1,048,050 $81,149 $ 836,783
Other United States 101,129 4,145 69,448
France 143,422 5,019 210,686
Other 14,969 (1,990) 50,219
--------------------------------------------------------
Total construction 1,307,570 88,323 1,167,136
Mortgage banking 28,701 6,003 287,324
--------------------------------------------------------
Total $1,336,271 $94,326 $1,454,460
========================================================
1993
Construction:
California $ 938,561 $78,323 $ 714,358
Other United States 22,623 627 22,529
France 219,802 8,082 210,328
Other 18,790 (423) 36,227
--------------------------------------------------------
Total construction 1,199,776 86,609 983,442
Mortgage banking 38,078 7,534 355,936
--------------------------------------------------------
Total $1,237,854 $94,143 $1,339,378
================================================================================================================
A director of the Company served between 1981 and 1993 as chairman and
chief executive officer of a French bank, which in 1989 formed a joint venture
controlled by the Company. The joint venture acquired and subsequently sold, to
a group of international investors, a commercial building in Paris, France,
under a five-year redevelopment agreement, with the bank financing the
acquisition and redevelopment of the property. The project, completed in 1993,
generated commercial revenues of $63,141,000 in 1993, representing 5% of total
revenues.
NOTE 12. QUARTERLY RESULTS (UNAUDITED)
Quarterly results for the years ended November 30, 1995 and 1994 follow:
In thousands, except per
share amounts First Second Third Fourth
==================================================================================================================
1995
Revenues $229,832 $315,493 $372,314 $478,887
Operating income 5,922 13,102 19,269 36,586
Pretax income 685 6,091 10,863 27,820
Net income 435 3,841 6,863 17,920
Earnings per share .01 .10 .17 .45
===================================================
1994
Revenues $256,879 $326,021 $348,850 $404,521
Operating income 17,819 23,005 22,954 30,548
Pretax income 14,054 17,847 17,084 24,865
Net income 8,854 11,247 10,784 15,665
Earnings per share .22 .28 .27 .39
==================================================================================================================
NOTE 13. SUBSEQUENT EVENT
On January 22, 1996, the Company entered into a definitive agreement to acquire
Rayco, Ltd. and certain affiliates for approximately $110,000,000, comprised of
$80,000,000 in cash and the assumption of $30,000,000 in debt. Rayco, Ltd., a
regional builder of single-family homes in San Antonio, Texas, delivered 2,585
homes, generating revenues of approximately $235,000,000 for the year ended
December 31, 1995. Although the transaction remains subject to certain
conditions, completion of this acquisition is expected on March 1, 1996. If the
acquisition is consummated as anticipated, the results of Rayco, Ltd.'s
operations will be included in the Company's consolidated financial statements
from the date of acquisition.
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40
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and
Stockholders' of Kaufman and Broad Home Corporation
We have audited the accompanying consolidated balance sheets of Kaufman and
Broad Home Corporation as of November 30, 1995 and 1994, and the related
consolidated statements of income, stockholders' equity, and cash flows for
each of the three years in the period ended November 30, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Kaufman and Broad Home Corporation at November 30, 1995 and 1994, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended November 30, 1995, in conformity with generally
accepted accounting principles.
/s/ ERNST & YOUNG LLP
Los Angeles, California
January 4, 1996, except as to Note 13, as to
which the date is January 22, 1996
REPORT ON FINANCIAL STATEMENTS
The accompanying consolidated financial statements are the responsibility of
management. The statements have been prepared in conformity with generally
accepted accounting principles. Estimates and judgments of management based on
its current knowledge of anticipated transactions and events are made to
prepare the financial statements as required by generally accepted accounting
principles. Management relies on internal accounting controls, among other
things, to produce records suitable for the preparation of financial
statements.
The responsibility of our external auditors for the financial
statements is limited to their expressed opinion on the fairness of the
consolidated financial statements taken as a whole. Their examination is
performed in accordance with generally accepted auditing standards which
include tests of our accounting records and internal accounting controls and
evaluation of estimates and judgments used to prepare the financial statements.
The Company employs a staff of internal auditors whose work includes evaluating
and testing internal accounting controls.
An audit committee of outside members of the Board of Directors
periodically meets with management, the external auditors and the internal
auditors to evaluate the scope of auditing activities and review results. Both
the external and internal auditors have the unrestricted opportunity to
communicate privately with the audit committee.
/s/ MICHAEL F. HENN
Michael F. Henn
Senior Vice President and
Chief Financial Officer
January 4, 1996
45
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STOCKHOLDER INFORMATION
Special
Common Stock Common Stock
--------------------------------------------
Stock Prices High Low High Low
============================================================================================
1995
First Quarter $14-3/4 $12-1/8
Second Quarter 15-7/8 11-1/8
Third Quarter 16 13-1/8
Fourth Quarter 13-3/8 10-7/8
============================================
1994
First Quarter $25-1/2 $20 $22-1/4 $18-1/2
Second Quarter 24-5/8 16-1/4 21-3/4 14
Third Quarter 16-1/4 13 * *
Fourth Quarter 16-1/2 12-1/4
============================================================================================
*Following the suspension of trading on the New York Stock Exchange on May 31,
1994, the special common stock was de-listed by the New York Stock Exchange and
de-registered by the Securities and Exchange Commission on August 9, 1994.
Subsequently, the Company completed the exchange for all remaining outstanding
shares.
DIVIDEND DATA
Kaufman and Broad Home Corporation paid a quarterly cash dividend of $.075 per
common share in 1995 and 1994.
ANNUAL STOCKHOLDERS' MEETING
The annual stockholders' meeting will be held in the Dynasty Room at the
Westwood Marquis Hotel in Los Angeles, California, at 9:00 a.m. on Thursday,
March 28, 1996.
STOCK EXCHANGE LISTINGS
The common stock (ticker symbol: KBH) is listed on the New York Stock Exchange
and is also traded on the Boston, Cincinnati, Midwest, Pacific and Philadelphia
Exchanges.
TRANSFER AGENT
Chemical Mellon Shareholder Services
Los Angeles, California
INDEPENDENT AUDITORS
Ernst & Young LLP
Los Angeles, California
FORM 10-K
The Company's Form 10-K filed with the Securities and Exchange Commission may
be obtained without charge by writing to the Investor Relations Department,
Kaufman and Broad Home Corporation.
HEADQUARTERS
Kaufman and Broad Home Corporation
10990 Wilshire Boulevard
Los Angeles, California 90024
(310) 231-4000
Fax (310) 231-4222
42
LIST OF EXHIBITS FILED
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
- ------ ------------------------------------------------------------------ ---------------
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...........................................