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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED NOVEMBER 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM
--------------- TO ---------------.
COMMISSION FILE NO. 1-9195
KAUFMAN AND BROAD HOME CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
INCORPORATED IN DELAWARE 95-3666267
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
10990 WILSHIRE BOULEVARD, LOS ANGELES, CALIFORNIA 90024
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (310) 231-4000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
COMMON STOCK (PAR VALUE $1.00 PER SHARE) NEW YORK STOCK EXCHANGE
RIGHTS TO PURCHASE SERIES A PARTICIPATING CUMULATIVE NEW YORK STOCK EXCHANGE
PREFERRED STOCK
INCOME PRIDES NEW YORK STOCK EXCHANGE
GROWTH PRIDES NEW YORK STOCK EXCHANGE
9 3/8% SENIOR SUBORDINATED NOTES DUE 2003 NEW YORK STOCK EXCHANGE
7 3/4% SENIOR NOTES DUE 2004 NEW YORK STOCK EXCHANGE
9 5/8% SENIOR SUBORDINATED NOTES DUE 2006 NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO __
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. [ ]
THE AGGREGATE MARKET VALUE OF VOTING STOCK HELD BY NON-AFFILIATES OF THE
COMPANY ON JANUARY 31, 1999 WAS $1,263,985,284.
THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S CLASSES OF
COMMON STOCK ON JANUARY 31, 1999 WAS AS FOLLOWS:
Common Stock (par value $1.00 per share) 47,894,958 shares
DOCUMENTS INCORPORATED BY REFERENCE
1998 Annual Report to Stockholders (incorporated into Part II).
Notice of 1999 Annual Meeting of Stockholders and Proxy Statement
(incorporated into Part III).
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PART I
ITEM 1. BUSINESS
GENERAL
The Company is a builder of single-family homes with domestic operations in
seven western states, and international operations in France and Mexico.
Domestically, the Company is the largest homebuilder west of the Mississippi
River, delivering more single-family homes than any other builder in the region.
Founded in 1957, the Company builds innovatively designed homes which cater
primarily to first-time homebuyers, generally in medium-sized developments close
to major metropolitan areas. Internationally, the Company is among the largest
builders in greater metropolitan Paris, France, based on the number of homes
delivered. In France, the Company also builds commercial projects and
high-density residential properties, such as condominium and apartment
complexes. The Company provides mortgage banking services to domestic homebuyers
through its wholly owned subsidiary, Kaufman and Broad Mortgage Company
("KBMC").
The Company is a Delaware corporation and maintains its principal executive
offices at 10990 Wilshire Boulevard, Los Angeles, California 90024. Its
telephone number is (310) 231-4000. As used herein, the term "Company" refers to
Kaufman and Broad Home Corporation and its subsidiaries, unless the context
indicates otherwise.
MARKETS
In 1998, the Company achieved an all-time record 15,213 unit deliveries,
surpassing the previous Company record of 11,443 units established in 1997. The
increase in deliveries in 1998 was primarily due to the Company's continued
expansion of its domestic operations outside California and the acquisition of
Houston-based Hallmark Residential Group ("Hallmark"), Denver-based PrideMark
Homebuilding Group ("PrideMark") and Phoenix/Tucson-based Estes Homebuilding Co.
("Estes"), all of which the Company completed during the second quarter of 1998.
Results for 1998 also reflect the Company's acquisition of a majority interest
in Houston-based General Homes Corporation ("General Homes") as of August 18,
1998. Subsequent to the end of fiscal 1998, in January 1999, the Company
continued to grow through the acquisition of the remaining minority interest in
General Homes and completing its purchase of substantially all of the
homebuilding assets of the Lewis Homes group of companies ("Lewis Homes"). Lewis
Homes' principal markets are Las Vegas and Northern Nevada, Southern California
and the greater Sacramento area in Northern California. Including the Lewis
Homes operations, which are expected to deliver approximately 3,500 homes in
1999, the Company believes it will be the largest homebuilder in the United
States in 1999, as measured by unit volume.
The Company continues to explore opportunities to enter new markets and
plans to grow in its existing markets. Growth in both new and existing markets
is expected to be supplemented by strategic acquisitions from time to time. In
the aggregate, the Company has established a goal of delivering approximately
21,500 units Company-wide in 1999. This goal could be materially affected by
various risk factors such as changes in general economic conditions either
nationally or in the regions in which the Company operates or may commence
operations, job growth and employment levels, home mortgage interest rates or
consumer confidence, among other things. Nevertheless, the Company remains
optimistic about its ability to continue to grow its business in 1999.
During 1998, the average number of active communities operated by the
Company was 210, an increase of approximately 27% over 1997. The average selling
price of the Company's homes was $156,400 in 1998, down 2.1% from 1997 primarily
as a result of an increase in the proportion of lower-priced deliveries
generated from operations outside of California.
The Company's principal geographic markets as of November 30, 1998 were:
California; "Other U.S." (Arizona, Colorado, Nevada, New Mexico, Texas and
Utah); France (principally metropolitan Paris); and Mexico City, Mexico. The
Company delivered its first homes in California in 1963, France in 1970, Nevada
in 1993, Arizona and Colorado in 1994, New Mexico and Utah in 1995, and Texas
and Mexico in 1996.
To enhance its operating capabilities in regional submarkets, the Company
conducted its domestic homebuilding business in 1998 through six divisional
offices in California, one divisional office in each of Nevada, Colorado, New
Mexico and Utah, two divisional offices in Arizona, and four divisional offices
in Texas. In addition, the Company
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operated 13 new home showrooms in 1998. Internationally, the Company operates
its construction business through two divisional offices in France and one
divisional office in Mexico.
California. The Company benefited during the 1980s from the relative
strength and growth of the California housing market. During the first half of
the 1990s, however, weak conditions for new housing and general recessionary
trends in California persisted, prompting the Company to diversify its business
through aggressive expansion into other western states. Since 1995, the housing
market has improved significantly in California with the number of permits
issued increasing in each succeeding year. In 1998, new housing permits issued
in the state increased approximately 11% from the prior year. Nevertheless, the
Company continues to be selective in its land investments in California while
focusing on improving gross margins, reducing overhead expenses and maximizing
rates of return. In 1998, the Company's average number of active communities in
California declined approximately 18% from 1997; however, its deliveries in the
state totaled 4,858, increasing nearly 3% from the previous year. The Company's
market share in California was approximately 5% in 1998, which was the largest
market share of any homebuilder in California. Due to planned increases in
active communities and the additional communities associated with the Lewis
Homes acquisition, the Company expects to record significant increases in
communities, deliveries and market share in California in 1999.
In Southern California, the Company concentrates its homebuilding activity
in Los Angeles, Kern, San Bernardino, Riverside, Ventura, Orange and San Diego
counties. In Northern California, the Company's activities are concentrated in
the San Francisco Bay-Oakland-San Jose, Monterey Bay, Sacramento, Central Valley
and Fresno regions.
Most of the communities developed by the Company in California consist of
single-family detached homes primarily designed for the entry-level housing
market. These homes ranged in size from approximately 1,200 to 3,000 square feet
in 1998 and sold at an average price of $224,500, well below the statewide new
home average of $261,600, as a result of the Company's emphasis on the
entry-level market. The Company's 1998 average selling price in California
increased approximately 8% from the prior year reflecting strategic increases in
sales prices in certain markets based on improved market conditions, as well as
a change in product mix favoring a greater number of higher-priced urban in-fill
locations and first-time move up sales.
Other U.S. In the early 1990s, the greatly improved business conditions in
other western states coupled with the prolonged economic downturn in California
caused the Company to look for opportunities to expand its domestic operations
outside California. Deliveries from the Company's Other U.S. operations in 1998
totaled 8,698 units, up 54% from the prior year. This increase was due to a
higher average number of active communities, reflecting the Company's growth
strategy; the inclusion of operating results from the acquisitions of Hallmark,
PrideMark and Estes, all of which the Company completed during the second
quarter of 1998; and operating results from the Company's acquisition of a
majority interest in General Homes. Excluding results from these acquisitions,
unit deliveries from Other U.S. operations increased 24% to 6,996 in 1998. The
Company's Other U.S. operations accounted for approximately 64% of its domestic
home deliveries in 1998, compared to approximately 54% in 1997. In 1999, the
Lewis Homes acquisition is expected to strengthen the Company's market position
in Nevada, resulting in significantly increased deliveries in the state.
The communities developed by the Company's Other U.S. divisions primarily
consist of single-family detached entry-level homes. These homes ranged in size
from approximately 1,000 to 3,200 square feet in 1998 and sold at an average
price of $119,100. The average selling price of the Company's Other U.S. homes
increased slightly in 1998 from $118,700 in 1997. The Company's acquisitions in
1998 did not have a material impact on the Other U.S. average selling price.
France. The French residential and commercial real estate markets,
particularly within the greater metropolitan Paris region where the Company's
operations are concentrated, experienced substantial growth through the second
half of the 1980s as a strong economy and approaching European market
unification fueled business expansion and individual home purchases. In the
first half of the 1990s, however, the French economy experienced a significant
recession reflecting low consumer confidence, high unemployment and declines in
both consumer and business investments in real estate. The French economy
improved modestly in 1996 and continued to improve in 1997 and 1998. The Company
believes that the greater Paris metropolitan area (which is the principal
population, economic and government center of France) and the other French
metropolitan areas in which it is currently operating offer long-term growth
potential for residential builders.
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Housing deliveries from the Company's French operations in 1998 increased
approximately 56% from the prior year to 1,609 units, primarily as a result of
the inclusion of a full year of results from French homebuilder SMCI. The
Company acquired SMCI, a builder of condominiums in Paris and other cities in
France, in mid-1997.
The Company's French homebuilding operations focused primarily on
single-family detached and attached homes in 1998, ranging in size from
approximately 800 to 1,900 square feet. The average selling price of the
Company's homes in France declined 4% to $149,200 in 1998 primarily due to
lower-priced deliveries generated from SMCI developments. With the decline in
the French economy in the early to mid-1990's, the Company's French commercial
operations, which developed commercial office buildings in Paris for sale to
institutional investors, became a smaller segment of the French operations. With
the completion of certain large projects in the early 1990s, the Company's level
of commercial operations has declined as the market absorbs existing commercial
properties. The Company's French commercial activities are likely to remain at
reduced levels, reflecting the Company's decision to refocus on its expanded
French residential business and the reduced opportunities in French commercial
markets due to the lingering effects of the country's mid-1990 recession.
Canada. In 1996, the Company received proceeds of $9.5 million from the
sale of all of the issued and outstanding shares of its Canadian subsidiary.
These proceeds were used to reduce the Company's debt. As the Company had been
slowly winding down its operations in Canada prior to the sale, the impact of
the sale on the Company's financial position and results of operations was not
significant.
Mexico. The Company established housing operations in Mexico in 1993 upon
determining that the then-projected growth in the Mexican economy and housing
shortages in that country's major metropolitan areas would represent a unique
opportunity for the Company. The decline in the value of the peso in early 1995
and the resulting economic recession created thereby seriously hampered the new
home market in Mexico. Despite difficult market conditions, in 1996 the Company
delivered its first homes from a community near Mexico City. In 1998, deliveries
from the Company's operations in Mexico totaled 48 units, up slightly from the
prior year. Mexico's economy appears to be recovering from the country's deep
recession brought on by the devaluation of its currency. Nevertheless, economic
and political conditions remain unsettled and the Company continues to closely
monitor its level of activity there.
Unconsolidated Joint Ventures. The Company participates in the development,
construction and sale of residential properties and commercial projects through
a number of unconsolidated joint ventures. These include joint ventures in
California, New Mexico, Texas and France.
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Selected Market Data. The following table sets forth, for each of the
Company's principal markets, unit deliveries, average selling price of homes and
total construction revenues for the years ended November 30, 1998, 1997 and 1996
(excluding the effect of unconsolidated joint ventures).
YEARS ENDED NOVEMBER 30,
----------------------------
1998 1997 1996
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California:
Unit deliveries........................................... 4,858 4,731 5,171
Average selling price..................................... $224,500 $208,500 $192,900
Total construction revenues (in millions)(1).............. $1,105.9 $ 993.9 $1,058.0
Other U.S.:
Unit deliveries........................................... 8,698 5,642 4,294
Average selling price..................................... $119,100 $118,700 $119,700
Total construction revenues (in millions)(1).............. $1,042.4 $ 670.6 $ 516.9
France:
Unit deliveries........................................... 1,609 1,032 749
Average selling price(2).................................. $149,200 $155,500 $206,600
Total construction revenues (in millions)(1)(2)........... $ 242.0 $ 168.2 $ 171.4
Other:
Unit deliveries........................................... 48 38 35
Average selling price(2).................................. $260,500 $284,600 $212,500
Total construction revenues (in millions)(1)(2)........... $ 12.7 $ 10.9 $ 7.9
Total:
Unit deliveries........................................... 15,213 11,443 10,249
Average selling price(2).................................. $156,400 $159,700 $163,300
Total construction revenues (in millions)(1)(2)........... $2,403.0 $1,843.6 $1,754.2
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(1) Total construction revenues include revenues from residential development,
commercial activities and land sales.
(2) Average selling prices and total construction revenues for France and Other
(Canada and Mexico) have been translated into U.S. dollars using weighted
average exchange rates for each period.
STRATEGY
The Company remained tightly focused throughout 1998 on two over-arching
strategies: the implementation of its KB2000 operational business model and the
acceleration of the Company's growth. To advance these initiatives, the Company
concentrated on two complementary strategies consisting of establishing optimum
local market positions in selected regional markets and maintaining its focus on
strategic acquisitions of regional builders. The Company plans to continue to
focus on these strategies in 1999 to enhance its ability to achieve profit
performance that is more predictable, consistent and achievable.
The KB2000 operational business model emphasizes efficiencies generated
from a more process-driven, systematic approach to homebuilding and also focuses
on gaining a deeper understanding of customer interests and needs. Key elements
of KB2000 include: improving the Company's understanding of customer desires and
preferences through frequent and localized surveys; emphasizing pre-sales in
contrast to speculative inventory; maintaining lower average levels of
in-process and standing inventory; establishing even flow production; providing
a wide spectrum of choice to customers in terms of location, design and options;
offering low base prices; and reducing the use of sales incentives. The Company
made significant progress in implementing the KB2000 operational business model
in 1997 and 1998 by, among other things, focusing on the pre-sale and backlog
building strategy, developing and implementing a rigorous and detailed customer
survey program, and opening new KB2000 communities and new home showrooms.
In order to leverage the benefits of the KB2000 operational business model,
the Company has been implementing a strategy designed to achieve a dominant
market position in its major markets. The Company's use of the term "dominant"
is not intended to imply that the Company will become the largest builder in any
market in terms of unit deliveries, revenues or market share; nor is it the
Company's intent to attempt to, in any way "control" the pricing of
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homes in any market. Rather, the Company's "dominance" goal is only intended to
achieve a market position sufficiently large that it will enable its local
business to maximize the benefits of its KB2000 operational business model. The
Company believes that by operating at large volume levels it can better execute
its KB2000 operational business model and use economies of scale to increase
profits in fewer, larger markets. These benefits can include lower land
acquisition costs, improved terms with suppliers and subcontractors, the ability
to offer maximum choice and the best value to customers, and the retention of
the best management talent.
The Company hopes to continue to increase overall unit delivery growth in
future years. The Company's growth strategies include expanding existing
operations to optimal market volume levels, as well as entering new markets at
high volume levels, principally through acquisitions. Growth in existing markets
will be driven by the Company's ability to increase the average number of active
communities in its major markets through the successful implementation of its
KB2000 operational business model. The Company's ongoing acquisition strategy is
expected to supplement growth in existing markets and facilitate expansion into
new markets.
In identifying acquisition targets, the Company seeks homebuilders that
possess the following characteristics: a business model similar to KB2000;
access to or control of land to support growth; a strong management team; and a
financial condition positioned to be accretive to earnings in the first full
year following acquisition. The Company believes that acquisitions fitting these
criteria will enable it to expand its operations in 1999 and beyond in a focused
and disciplined manner. However, the Company's continued success in acquiring
other homebuilders could be affected by several factors, including, among other
things, conditions in the U.S. securities markets, the general availability of
applicable acquisition candidates, pricing for such transactions, competition
among other national or regional builders for such target companies, changes in
general and economic conditions nationally and in target markets, and capital or
credit market conditions.
LOCAL EXPERTISE
Management believes that its business requires in-depth knowledge of local
markets in order to acquire land in desirable locations and on favorable terms,
to engage subcontractors, to plan communities keyed to local demand, to
anticipate customer tastes in specific markets and to assess the regulatory
environment. Accordingly, the Company's divisional structure is designed to
utilize local market expertise. The Company has experienced management teams in
each of its regional submarkets. Although the Company has centralized certain
functions, such as marketing, legal, materials purchasing and product
development, to benefit from economies of scale, local management continues to
exercise considerable autonomy in identifying land acquisition opportunities,
developing sales strategies, conducting production operations and controlling
costs. The Company seeks to operate sizeable businesses in each of its markets
in order to maximize its competitive advantages and the benefits of the KB2000
operational business model.
In France, the Company has assembled a French management team which is
highly experienced in its single-family housing and commercial real estate
businesses as well as the financing, development and construction of
high-density residential projects. This expertise includes knowledge of local
markets and the regulatory environment.
INNOVATIVE DESIGNS AND MARKETING STRATEGIES
The Company believes that it has been and continues to be an innovator in
the design of entry-level homes for the first-time buyer. The Company's in-house
architectural services group, whose plans are protected by copyright, has been
successful in creating distinctive design features that are not typically found
in comparably priced homes. In 1998, the Company continued its implementation of
KB2000, which seeks to keep construction costs and base prices as low as
possible while promoting customer choice.
Certain elements of the KB2000 operational business model include achieving
an in depth understanding of customer desires and preferences through detailed
market surveys and providing a wide spectrum of choice to customers in terms of
location, design and options. The Company's KB2000 communities offer entry-level
homebuyers an abundance of choices and options which allows customers to
customize their home to an extent not typically available with other builders.
As part of its implementation of KB2000, the Company opened eight new home
showrooms in 1998, bringing its total to 13. These showrooms, which range from
5,000 to 18,000 square feet, are located separately from divisional business
offices and offer customers thousands of option combinations -- from floor plans
to fireplaces to garage doors -- in a retail environment convenient to multiple
communities.
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In France, the Company created a village concept through the elimination of
front-yard walls and the extensive use of landscaping. It also introduced to the
French market the American concept of a master bedroom suite, as well as walk-
in closets, built-in kitchen cabinetry and two-car garages. The Company believes
that in each of its residential markets, its value engineering enables it to
offer appealing and well-designed homes without increasing construction costs.
In 1998, the Company opened a 6,500 square foot new home showroom in France,
offering a broad choice of options to new home and condominium buyers. A website
featuring available homes was also launched in 1998.
In all of its residential markets, the sale of homes is carried out by the
Company's in-house sales force. The Company markets its homes principally
through the use of fully furnished and landscaped model homes which are
decorated to emphasize the distinctive design features and the choices available
to customers. The Company also markets its homes through various types of media,
including newspaper advertisements, highway signs and direct mail. In addition,
the Company extends its marketing programs beyond these more traditional
approaches through the use of television advertising, off-site telemarketing,
large-scale promotions and the internet. In all of its domestic communities, the
Company encourages participation of outside real estate brokers in bringing
prospective buyers to its communities.
COMMUNITY DEVELOPMENT
The community development process generally consists of three phases: land
acquisition; land development; and home construction and sale. The normal
development cycle for a community has historically ranged from six to 20 months
in California and is typically a somewhat shorter duration in the Company's
Other U.S. markets. In France, the development cycle has historically ranged
from 12 to 30 months. Development cycles vary depending on the extent of the
government approvals required, the size of the development, necessary site
preparation, weather conditions and marketing results.
When feasible, the Company acquires control of lot positions through the
use of options. In addition, the Company frequently acquires finished lots
within its pricing parameters, enabling it to deliver completed homes shortly
after acquisition. The total number of lots in the Company's domestic new home
communities vary significantly but typically are comprised of 50 to 250 lots.
These domestic developments usually include three different model home designs,
and in 1998 generally offered lot sizes ranging from approximately 3,000 to
9,000 square feet, with premium lots often containing more square footage. In
many of its KB2000 communities, the Company offers a wide selection of floor
plans, although only three or four model homes are typically constructed.
In prior years, the Company also acquired undeveloped and/or unentitled
properties, often with total lots significantly in excess of 250 lots. In 1996,
the Company decided to substantially eliminate its prior practice of investing
in such long-term development projects in order to reduce the operating risk
associated with such projects. However, as part of its recent acquisitions and
due to favorable market conditions for buildable land in California, the Company
has increased its long-term development holdings. In France, typical
single-family developments consist of approximately 40 lots, with average lot
sizes of 4,300 square feet.
Land Acquisition and Development. In accordance with the KB2000
operational business model, all homebuyers of new and resale homes in each
market are carefully surveyed. Based upon these surveys, a marketing strategy is
developed which targets specific price points and geographic sectors which the
Company will pursue. The Company utilizes an in-house staff of land acquisition
specialists at each division who carry out extensive site selection research and
analysis in order to identify properties in desirable locations consistent with
the Company's market strategy. In acquiring land, the Company considers such
factors as: current market conditions, with an emphasis on the prices of
comparable new and resale homes in the particular market; expected sales rates;
proximity to metropolitan areas; population, industrial and commercial growth
patterns; estimated costs of completed lot development; customer preferences;
and environmental matters. Senior corporate management controls the commitment
of the Company's resources for all land acquisitions and utilizes a series of
specific financial and budgetary controls in approving acquisition opportunities
identified by division land acquisition personnel. The Company employs strict
standards for assessing all proposed land purchases based, in part, upon
specific discounted after tax cash flow internal rate of return requirements and
also evaluates each division's overall return on investment. Consistent with
these standards, the Company seeks to minimize, or defer the timing of, cash
expenditures for new land purchases and development by acquiring lots under
option, phasing the land purchase and lot development, relying upon non-recourse
seller financing or working with third-party land developers. In addition, the
Company focuses on acquiring finished or partially improved lots, which allow
the Company to begin delivery of finished homes within six months of the
purchase of such lots and reduces the risks of unforeseen improvement costs and
volatile
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market conditions. These techniques are intended to enhance returns associated
with new land investments by minimizing the incremental capital required.
In 1996, management determined that it was in the Company's best interest
to accelerate the disposition of certain real estate assets in order to help
effectuate the Company's strategies to improve overall return on investment,
restore financial leverage to targeted levels, and position the Company for
continued geographic expansion. In addition, the Company substantially
eliminated its prior practice of investing in long-term development projects in
order to reduce the operating risk associated with such projects. The
accelerated disposition of long-term development assets caused certain assets,
primarily inventories and investments in unconsolidated joint ventures in
California and France, to be identified as being impaired and to be written
down. Certain of the Company's California properties were impacted by the
charge, while none of its Other U.S. properties were affected. The Company's
non-California domestic properties were not affected since they were not held
for long-term development and were expected to be economically successful such
that they were determined not to be impaired.
The following table shows the number of lots owned by the Company in
various stages of development and under option contracts in its principal
markets as of November 30, 1998 and 1997. The table does not include acreage
which has not yet been approved for subdivision into lots. This excluded acreage
consists of 853 acres owned in the United States in both 1998 and 1997.
TOTAL LOTS
HOMES/LOTS IN LAND UNDER LOTS UNDER OWNED OR
PRODUCTION DEVELOPMENT OPTION UNDER OPTION
--------------- --------------- --------------- ---------------
1998 1997 1998 1997 1998 1997 1998 1997
------ ------ ------ ------ ------ ------ ------ ------
California........... 4,139 4,454 9,921 8,948 10,490 7,965 24,550 21,367
Other U.S............ 12,213 8,103 6,384 4,266 21,707 6,380 40,304 18,749
France............... 1,250 767 443 210 926 715 2,619 1,692
Other................ 34 64 39 65 -- -- 73 129
------ ------ ------ ------ ------ ------ ------ ------
Total...... 17,636 13,388 16,787 13,489 33,123 15,060 67,546 41,937
====== ====== ====== ====== ====== ====== ====== ======
While the Company has reduced the proportion of unentitled and unimproved
land in its portfolio, when all acquired property is considered, the Company has
and expects to continue to purchase raw land under options which require little
or no initial payments, or pursuant to purchase agreements in which the
Company's obligations are contingent upon the Company being satisfied with the
feasibility of developing and selling homes. During the option period of its
acquisition agreements, the Company performs technical, environmental,
engineering and entitlement feasibility studies and seeks to obtain necessary
government approvals. The use of such option arrangements allows the Company to
evaluate and obtain regulatory approvals for a project, to reduce its financial
commitments, including interest and other carrying costs, and to minimize land
inventories. It also improves the Company's capacity to estimate costs
accurately, an important element in planning communities and pricing homes. The
Company only purchases amounts sufficient for its expected production needs and
does not purchase land for speculative investment.
In France, despite the improvement in the French real estate market, the
Company continues to employ conservative strategies, including a greater
emphasis on the entry-level market segment and generally restrictive policies
regarding land acquisition.
Home Construction and Sale. Following the purchase of land and, if
necessary, the completion of the entitlement process, the Company typically
begins marketing homes and constructing model homes. The construction of
production homes is generally contingent upon customer orders to minimize the
costs and risks of standing inventory. The Company began to focus on contracting
for sales prior to construction in 1996 as part of its debt reduction program
undertaken that year. The Company continued this focus with its KB2000
operational business model, which emphasizes pre-selling, maintaining stringent
control of production inventory and reducing unsold inventory. The pre-selling
of homes also benefits homebuyers by allowing them to personalize their homes by
selecting from a wider range of customizing options. As a result of the
Company's pre-sale and backlog building strategies, the percentage of sold
inventory in production at year end 1998 rose to 71% from 67% at year end 1997.
The Company acts as the general contractor for its communities and hires
subcontractors for all production activities. The use of subcontractors enables
the Company to reduce its investment in direct labor costs, equipment and
facilities.
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Where practical, the Company uses mass production techniques, and prepackaged,
standardized components and materials to streamline the on-site production
phase. During the early 1990s, the Company developed systems for national and
regional purchasing of certain building materials, appliances and other items to
take advantage of economies of scale and to reduce costs. At all stages of
production, the Company's own administrative and on-site supervisory personnel
coordinate the activities of subcontractors and subject their work to quality
and cost controls. As part of its KB2000 strategies, the Company has also
emphasized "even flow" production methods to enhance the quality of its new
homes, minimize production costs and improve the predictability of revenues and
earnings.
The Company generally prices its homes only after it has entered into
contracts for the construction of such homes with subcontractors, an approach
which improves its ability to estimate costs accurately. Wherever possible, the
Company seeks to acquire land and construct homes at prices below immediate
competitors on a per square foot basis.
The Company provides customers with a limited home warranty program
administered by the personnel in each of its divisions. This arrangement is
designed to give customers prompt and efficient post-delivery service directly
from the Company. The warranty program covers certain repairs which may be
necessary following new home construction for one or two year periods and covers
structural integrity for a period of ten years. In the aggregate, the costs
associated with the Company's warranty program are not material to its
operations.
EXTERNAL RISK FACTORS
The Company's operations and markets are affected by local and regional
factors such as local economies, demographic demand for housing, population
growth, property taxes and energy costs, and by national factors such as short
and long-term interest rates, federal mortgage financing programs, federal
income tax provisions and general economic trends. In addition, homebuilders are
subject to various risks including availability and cost of land, conditions of
supply and demand in local markets, weather conditions, and delays in
construction schedules and the entitlement process. Net orders often vary on a
seasonal basis, with the lowest sales activity typically occurring in the winter
months.
The Company's 1998 financial results were affected by various factors,
including but not limited to, improved demand for new housing in certain markets
in California and in France, the Company's acquisitions in Arizona, Colorado and
Texas, generally favorable economic conditions in the Company's Other U.S.
markets, and low domestic and foreign interest rates. The Company believes that
the homebuilding industry has been significantly less cyclical over the past
several years, and should continue to be less cyclical if these favorable
conditions continue. In addition, the Company's strategies, including the KB2000
operational business model are also intended to reduce the cyclical nature of
its business.
BACKLOG
Sales of the Company's homes are made pursuant to standard sales contracts
which generally require a customer deposit at the time of execution and an
additional payment upon mortgage approval. Subject to particular contract
provisions, the Company generally permits customers to cancel their obligations
and obtain refunds of their deposits in the event mortgage financing is
unobtainable within a specified period of time.
Backlog consists of homes for which the Company has entered into a sales
contract but which it has not yet delivered. Ending backlog represents the
number of units in backlog from the previous period plus the number of net
orders (sales made less cancellations) taken during the current period minus
unit deliveries made during the current period. The backlog at any given time
will be affected by cancellations which most commonly result from the inability
of a prospective purchaser to obtain financing. Historically, the Company's
cancellation rates have increased during difficult economic periods. In
addition, deliveries of new homes typically increase from the first to the
fourth quarter in any year. The Company's backlog at November 30, 1998 stood at
6,943 units, approximately 65% higher than the 4,214 backlog units at year end
1997, primarily reflecting the implementation of the KB2000 operational business
model which focuses on a pre-sale and backlog building strategy. KB2000
initiatives also caused the Company's backlog ratio to increase to approximately
152% at year end 1998 from approximately 131% at year end 1997 (Backlog ratio is
defined as the ratio of beginning backlog to actual deliveries in the succeeding
quarter).
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The following table sets forth net orders, unit deliveries and ending
backlog relating to sales of homes and homes under contract for each quarter
during the three-year period ended November 30, 1998.
NET UNIT ENDING
ORDERS DELIVERIES BACKLOG*
------ ---------- --------
Fiscal 1998:
First Quarter......................... 3,716 2,629 5,301
Second Quarter........................ 4,861 3,409 7,581
Third Quarter......................... 3,883 4,167 7,630
Fourth Quarter........................ 4,321 5,008 6,943
Fiscal 1997:
First Quarter......................... 2,755 2,108 3,486
Second Quarter........................ 3,396 2,465 4,417
Third Quarter......................... 3,310 3,016 5,040
Fourth Quarter........................ 3,028 3,854 4,214
Fiscal 1996:
First Quarter......................... 1,976 1,683 1,705
Second Quarter........................ 3,238 2,883 3,497
Third Quarter......................... 2,650 2,749 3,398
Fourth Quarter........................ 2,375 2,934 2,839
* Backlog amounts for 1998 have been adjusted to reflect the acquisitions of
Hallmark, PrideMark and Estes, as well as the acquisition of a majority
interest in General Homes. Therefore, backlog amounts at November 30, 1997
combined with net order and delivery activity for 1998 will not equal ending
backlog at November 30, 1998. Similarly, backlog amounts for 1997 were
adjusted to reflect the acquired SMCI developments in France, while backlog
amounts for 1996 were adjusted to reflect the San Antonio acquisition and the
disposition of the Canadian operations.
LAND AND RAW MATERIALS
Management believes that the Company's current supply of land is sufficient
for its reasonably anticipated needs over the next several years, and that it
will be able to acquire land on acceptable terms for future housing developments
absent great changes in current land acquisition market conditions. The
principal raw materials used in the construction of homes are concrete and
forest products. In addition, the Company uses a variety of other construction
materials, including sheetrock, plumbing and electrical items. The Company
attempts to maintain efficient operations by utilizing standardized materials
which are commercially available on competitive terms from a variety of sources.
In addition, the Company's centralized purchasing of certain building materials,
appliances and fixtures, enable it to benefit from large quantity purchase
discounts for its domestic operations. The Company makes bulk purchases of such
products at favorable prices from suppliers and instructs subcontractors to
submit bids based on such prices.
The principal materials used in the construction of French commercial
buildings are steel, concrete and glass.
LAND SALES
In the normal course of its business, the Company sells land which either
can be sold at an advantageous price due to market conditions or does not meet
its marketing needs. This property may consist of land zoned for commercial use
which is part of a larger parcel being developed for single-family homes or in
areas where the Company may consider its inventory to be excessive. Generally,
land sales fluctuate based on the Company's decisions to maintain or decrease
its land ownership position in certain markets based upon the volume of its
holdings, the strength and number of competing developers entering particular
markets at given points in time, the availability of land in markets served by
the Company's housing divisions, and prevailing market conditions. Land revenues
totaled $22.5 million in 1998, $13.6 million in 1997 and $68.2 million in 1996.
Revenues from land sales were unusually high in 1996 due to an aggressive asset
sale program undertaken by the Company as part of its debt reduction strategy
that year. The land sold was primarily property previously held for long-term
development, which the Company disposed of in order to redeploy the invested
capital at potentially higher returns.
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CUSTOMER FINANCING -- KAUFMAN AND BROAD MORTGAGE COMPANY
On-site personnel at the Company's communities in the United States
facilitate sales by offering to arrange financing for prospective customers
through KBMC. Management believes that the ability to offer customers financing
on firm, competitive terms as a part of the sales process is an important factor
in completing sales.
KBMC's business consists of providing the Company's domestic customers with
competitive financing and coordinating and expediting the loan origination
transaction through the steps of loan application, loan approval and closing.
KBMC has its headquarters in Los Angeles and operates branch offices in Phoenix
and Tucson, Arizona; Fremont, Modesto, Newport Beach, Pomona, Salinas, San Diego
and San Ramon, California; Denver, Colorado; Las Vegas, Nevada; Albuquerque, New
Mexico; Austin, Dallas, Houston and San Antonio, Texas; and Salt Lake City,
Utah.
KBMC's principal sources of revenues are: (i) interest income earned on
mortgage loans during the period they are held by KBMC prior to their sale to
investors; (ii) net gains from the sale of loans; (iii) loan servicing fees; and
(iv) revenues from the sale of the rights to service loans.
KBMC is approved by the Government National Mortgage Association ("GNMA")
as a seller-servicer of Federal Housing Administration ("FHA") and Veterans
Administration ("VA") loans. A portion of the conventional loans originated by
KBMC (i.e., loans other than those insured by FHA or guaranteed by VA) qualify
for inclusion in loan guarantee programs sponsored by Fannie Mae or the Federal
Home Loan Mortgage Corporation ("FHLMC"). KBMC arranges for fixed and adjustable
rate, conventional, privately insured mortgages, FHA-insured or VA-guaranteed
mortgages, and mortgages funded by revenue bond programs of states and
municipalities. In 1998, approximately 54% of the mortgages originated for the
Company's customers were conventional (most of which conformed to Fannie Mae and
FHLMC guidelines), 34% were FHA-insured or VA-guaranteed (a portion of which are
adjustable rate loans), 10% were funded by mortgage revenue bond programs and 2%
were adjustable rate mortgages ("ARMs") provided through commitments from
institutional investors. The percentages set forth above change from year to
year reflecting then-current fixed interest rates, introductory rates for ARMs,
housing prices and other economic conditions. In 1998, KBMC originated loans for
78% of the Company's domestic home deliveries to end users who obtained mortgage
financing. Generally, KBMC receives an origination fee of approximately 1% of
the principal amount of the loan.
KBMC is a delegated underwriter under the FHA Direct Endorsement and VA
Automatic programs in accordance with criteria established by such agencies.
Additionally, KBMC has delegated underwriting authority from Fannie Mae and
FHLMC. As a delegated underwriter, KBMC may underwrite and close mortgage loans
under programs sponsored by these agencies without their prior approval, which
expedites the loan origination process.
KBMC, like other mortgage bankers, customarily sells nearly all of the
loans that it originates. Loans are sold either individually or in pools to
GNMA, Fannie Mae or FHLMC or against forward commitments to institutional
investors, including banks and savings and loan associations.
KBMC typically sells servicing rights on a regular basis for substantially
all of the loans it originates. However, for a small percentage of loans, and to
the extent required for loans being held for sale to investors, KBMC services
the mortgages that it originates. Servicing includes collecting and remitting
loan payments, accounting for principal and interest, making inspections of
mortgaged premises as required, monitoring delinquent mortgages and generally
administering the loans. KBMC receives fees for servicing mortgage loans,
generally ranging from .25% per annum to .375% per annum on the declining
principal balances of the loans.
The Company also assists its customers in France by arranging financing
through third-party lenders, primarily major French banks with which the Company
has established relationships. In some cases, French customers qualify for
certain government-assisted, home financing programs. A second mortgage is
usually handled through a government agency. A homebuyer in France may also have
a third mortgage provided through credit unions or other employee groups.
EMPLOYEES
The Company employs a trained staff of land acquisition specialists,
architects, planners, engineers, construction supervisors, marketing and sales
personnel and finance and accounting personnel, supplemented as necessary by
outside
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consultants, who guide the development of communities from their conception
through the marketing and sale of completed homes.
At January 31, 1999, the Company had approximately 3,500 full-time
employees in its operations, including approximately 310 in KBMC's operations.
The Company considers its employee relationships to be good. No employees are
represented by a collective bargaining agreement.
COMPETITION AND OTHER FACTORS
The Company expects the use of the KB2000 operational business model,
particularly the aspects which involve gaining a deeper understanding of
customer interests and needs, to provide it with a long-term competitive
advantage. The housing industry is highly competitive, and the Company competes
with numerous housing producers ranging from regional and national firms to
small local builders primarily on the basis of price, location, financing,
design, reputation, quality and amenities. In addition, the Company competes
with other housing alternatives including existing homes and rental housing. In
certain markets and at times when housing demand is high, the Company also
competes with other builders to hire subcontractors.
Increases in interest rates typically have a negative impact on the
Company's operations in that such increases adversely affect the availability of
home financing to, or qualification for such financing by, the Company's
customers. Conversely, significant reductions in interest rates typically have a
positive effect on the Company's operations. Indeed, the relatively low interest
rates which have been in effect since the mid-1990s have been beneficial to the
Company's improved domestic results.
The Company does not generally finance the development of its domestic
communities with proceeds of loans specifically obtained for, or secured by,
particular communities, i.e., project financing. Instead, financing of the
Company's domestic operations has been primarily generated from results of
operations, public debt and equity financing, and borrowings under its unsecured
revolving credit facility with various banks. Financing of the Company's French
operations has been primarily generated from results of operations and
borrowings from its unsecured committed credit lines with a series of foreign
banks. As a result of these diverse external sources of financing, the Company
was not adversely affected by the tight credit conditions that much of the
homebuilding industry experienced during the recession of the early to
mid-1990s, both domestically and in France.
KBMC competes with other mortgage lenders, including mortgage bankers,
savings and loan associations and other financial institutions, in the
origination, sale and servicing of mortgage loans. Principal competitive factors
include interest rates and other features of mortgage loan products available to
the consumer. KBMC's operations are financed primarily through a $250 million
revolving mortgage warehouse agreement.
REGULATION AND ENVIRONMENTAL MATTERS
The housing industry is subject to extensive and complex regulations. The
Company and its subcontractors must comply with various federal, state and local
laws, ordinances, rules and regulations concerning zoning, building design,
construction and similar matters. The operations of the Company are affected by
environmental laws and regulations, including regulations pertaining to
availability of water, municipal sewage treatment capacity, land use, protection
of endangered species, population density and preservation of the natural
terrain and coastlines. These and other requirements could become more
restrictive in the future, resulting in additional time and expense to obtain
approvals for the development of communities.
The Company is also subject to regulations and restrictions by the
governments of France and Mexico concerning investments in business operations
in those countries by U.S. companies, none of which has to date had a material
adverse effect on the Company's consolidated operations. The Company's foreign
operations are also subject to exchange rate fluctuations, which affect the
Company's financial statements and the reporting of profits and payment of
dividends from foreign subsidiaries, and to the terms of the Foreign Corrupt
Practices Act with which it is the strict policy of the Company to comply. In
addition, the Company periodically receives dividends from its French operations
without burdensome restrictions, although tax considerations have limited the
amount of such dividends.
KBMC is subject to numerous federal, state and local laws, ordinances,
rules and regulations concerning loans to purchasers of homes as well as Company
eligibility for participation in programs of the VA, FHA, GNMA, Fannie Mae and
FHLMC.
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The Company entered into a consent order with the Federal Trade Commission
in 1979, to which the Company is still subject and pursuant to which the Company
has agreed to provide explicit warranties on the quality and workmanship of its
new homes, follow certain guidelines in advertising and provide certain
disclosures to any prospective purchaser who visits Company sales offices or
model homes.
It is Company policy to use third-party environmental consultants to
investigate land considered for acquisition for environmental risks and
requiring disclosure from land sellers of known environmental risks. Despite
these activities, there can be no assurance that the Company will avoid material
liabilities relating to the removal of toxic wastes, site restoration,
monitoring or other environmental matters affecting properties currently or
previously owned by the Company. Costs associated with the use of environmental
consultants are not material to the Company's results of operations. No estimate
of such potential liabilities can be made although the Company may, from time to
time, purchase property which requires modest environmental clean-up costs after
appropriate due diligence. In such instances, the Company takes steps prior to
acquisition to assure itself as to the precise scope of work required and costs
associated with removal, site restoration and/or monitoring, using detailed
investigations by environmental consultants. To the extent such contamination or
other environmental issues have occurred in the past, the Company believes it
may be able to recover restoration costs from third parties, including, but not
limited to, the generators of hazardous waste, land sellers or others in the
prior chain of title and/or insurers. Utilizing such policies, the Company
anticipates that it is not likely that environmental clean-up costs will have a
material effect on future results of operations or the Company's financial
position. The Company has not been notified by any governmental agency of any
claim that any of the properties owned or formerly owned by the Company are
identified by the Environmental Protection Agency as being a "Superfund" clean-
up site requiring clean-up costs, which could have a material effect on the
Company's future financial position or results of operations.
ITEM 2. PROPERTIES
The Company's executive offices are in leased premises at 10990 Wilshire
Boulevard, Los Angeles, California. The Company's housing operations are
principally conducted from leased premises located in Phoenix and Tucson,
Arizona; Fremont, Fresno, Los Angeles, Modesto, Newport Beach, Palmdale,
Pleasanton, Pomona, Sacramento, Salinas, San Diego and San Ramon, California;
Denver, Colorado; Las Vegas, Nevada; Albuquerque, New Mexico; Dallas and
Houston, Texas; Salt Lake City, Utah; Paris, France; and Mexico City, Mexico.
The Company's mortgage banking subsidiaries lease executive offices in Los
Angeles, California and branch offices in Phoenix and Tucson, Arizona; Fremont,
Modesto, Newport Beach, Pomona, Salinas, San Diego and San Ramon, California;
Denver, Colorado; Las Vegas, Nevada; Albuquerque, New Mexico; Dallas and
Houston, Texas; and Salt Lake City, Utah.
The Company's operations in Austin and San Antonio, Texas (including
mortgage banking operations) are principally conducted from premises which the
Company owns.
The Company believes that such properties, including the equipment located
therein, are suitable and adequate to meet the requirements of its businesses.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in litigation incidental to its business. These
cases are in various procedural stages and, based on reports of counsel, it is
management's opinion that provisions or reserves made for potential losses are
adequate and any liabilities or costs arising out of currently pending
litigation will not have a materially adverse effect upon the Company's
financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of 1998 to a vote of
security holders, through the solicitation of proxies or otherwise.
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EXECUTIVE OFFICERS OF THE COMPANY
The following sets forth certain information regarding the executive
officers of the Company as of January 31, 1999:
YEAR
ASSUMED
PRESENT POSITION AT PRESENT OTHER POSITIONS AND OTHER BUSINESS EXPERIENCE
NAME AGE JANUARY 31, 1999 POSITION WITHIN THE LAST FIVE YEARS(1) FROM - TO
- --------------------- --- ------------------------- -------- ----------------------------------------------- ---------
Bruce Karatz 53 Chairman, President and 1993
Chief Executive Officer
Guy Nafilyan 54 Executive Vice President 1992 President and Chief Executive Officer of 1983 - Present
and President of Kaufman and Broad France
European Operations and
Director
Glen Barnard 54 Senior Vice President and 1996 President of Kaufman and Broad of Utah, Inc. 1997-1998
Regional General Manager President of Kaufman and Broad of Colorado, 1995-1998
Inc.
Chairman, American Lives, Inc. 1991-1995
William R. Cardon 55 Senior Vice President and 1998 President of Kaufman and Broad Coastal, Inc. 1997 - Present
Regional General Manager President of Kaufman and Broad of San Diego, 1987 - Present
Inc.
Michael F. Henn 50 Senior Vice President and 1994 Executive Vice President, Chief Financial and 1986-1994
Chief Financial Officer Administrative Officer, The Vons Companies,
Inc.
Randall W. Lewis 47 Senior Vice President and 1999 Executive Vice President, Lewis Operating Corp. 1999 - Present
Director Executive Vice President/Director of Marketing, 1987-1999
Lewis Homes Management Corporation
Jeffrey T. Mezger 43 Senior Vice President and 1998 President of Kaufman and Broad of Arizona, Inc. 1995 - Present
Regional General Manager
Barton P. Pachino 39 Senior Vice President and 1993
General Counsel
Albert Z. Praw 50 Senior Vice President, 1998 Senior Vice President and Regional General 1996-1998
Business Development Manager
President of Kaufman and Broad of Southern 1997-1998
California, Inc.
Senior Vice President, Real Estate 1994-1996
Partner in law firm of Sidley & Austin 1992-1994
Gary A. Ray 40 Senior Vice President, 1996 Vice President, Training and Development 1994-1996
Human Resources PepsiCo Restaurants International
Regional Vice President of Human Resources - 1992-1994
South Pacific Region, PepsiCo Restaurants
International
William R. Hollinger 40 Vice President and 1992
Controller
Mary M. McAboy 46 Vice President, Investor 1998 Principal, McAboy & Associates 1997-1998
Relations Vice President, Corporate Communications, The 1987-1997
Vons Companies, Inc.
- ---------------
(1) All positions described were with the Company, unless otherwise indicated.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
As of January 31, 1999, there were 1,671 holders of record of the Company's
common stock.
Information as to the Company's quarterly stock prices is included on page
67 of the Company's 1998 Annual Report to Stockholders, which is included as
part of Exhibit 13 hereto.
Information as to the principal markets on which the Company's common stock
is being traded and quarterly cash dividends is included on page 67 of the
Company's 1998 Annual Report to Stockholders, which is included as part of
Exhibit 13 hereto.
ITEM 6. SELECTED FINANCIAL DATA
The Five Year Summary of Kaufman and Broad Home Corporation for the
five-year period ended November 30, 1998 is included on page 25 of the Company's
1998 Annual Report to Stockholders, which is included as part of Exhibit 13
hereto. It should be read in conjunction with the consolidated financial
statements included in the Company's 1998 Annual Report to Stockholders which
are also included as part of Exhibit 13 hereto.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations of Kaufman and Broad Home Corporation is included on pages 26 through
41 of the Company's 1998 Annual Report to Stockholders, which are included as
part of Exhibit 13 hereto.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The primary market risk facing the Company is interest rate risk on its
senior and senior subordinated notes. The Company primarily enters into debt
obligations to support general corporate purposes, including acquisitions, and
the operations of its divisions. The Company has no cash flow exposure due to
interest rate changes for these notes. In connection with the Company's mortgage
banking operations, mortgage loans held for sale and the associated mortgage
warehouse line of credit are subject to interest rate risk; however, such
obligations reprice frequently and are short-term in duration and accordingly
the risk is not material. Under its current policies, the Company does not use
interest rate derivative instruments to manage exposure to interest rate
changes. The following sets forth as of November 30, 1998, the Company's
long-term debt obligations, principal cash flows by scheduled maturity, weighted
average interest rates and estimated fair market value (in thousands).
YEAR ENDED NOVEMBER 30, FAIR VALUE
----------------------------------------------------------------- AT NOVEMBER
1999 2000 2001 2002 2003 THEREAFTER TOTAL 30, 1998
-------- -------- -------- -------- -------- ---------- -------- -----------
Long-term debt(1) -- -- -- -- $174,221 $299,486 $473,707 $482,819
Fixed Rate
Weighted Average Interest Rate 8.8% 8.8% 8.8% 8.8% 8.7% 8.5%
- ---------------
(1) Includes senior and senior subordinated notes
A portion of the Company's construction operations are located in France
and Mexico. As a result, the Company's financial results could be affected by
factors such as changes in foreign currency exchange rates or weak economic
conditions in its markets. The Company's earnings are affected by fluctuations
in the value of the U.S. dollar as compared to foreign currencies in France and
Mexico, as a result of its sales in foreign markets. At November 30, 1997, the
result of a 10% uniform strengthening in the value of the dollar relative to the
currencies in which the Company's sales are denominated would result in a
decrease in revenues of $25.5 million and a decrease in pretax income of $1.7
million for the year ending November 30, 1998. This calculation assumes that
each exchange rate would change in the same
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direction relative to the U.S. dollar. The Company's sensitivity analysis of the
effects of changes in foreign currency exchange rates does not factor in a
potential change in sales levels or local currency prices.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of Kaufman and Broad Home Corporation
are included on pages 42 through 63 of the Company's 1998 Annual Report to
Stockholders, which are included as part of Exhibit 13 hereto. Reference is made
to the Index to Financial Statements on page F-1 herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
The Notice of 1999 Annual Meeting of Stockholders and Proxy Statement,
filed pursuant to Regulation 14A under the Securities Exchange Act of 1934 is
incorporated by reference in this Annual Report on Form 10-K pursuant to General
Instruction G(3) of Form 10-K and provides the information required under Part
III (Items 10, 11, 12 and 13) except for the information regarding the executive
officers of the Company, which is included in Part I on page 13 herein.
PART IV
ITEM 14. FINANCIAL STATEMENTS, EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
FINANCIAL STATEMENTS
Reference is made to the index set forth on page F-1 of this Annual
Report on Form 10-K.
EXHIBITS
EXHIBIT
NO. DESCRIPTION
------- -----------
2.1 Purchase Agreement (Amended and Restated), executed January
7, 1999, between the Company and the Lewis Homes sellers,
filed as an exhibit to the Company's Current Report on Form
8-K dated January 7, 1999, is incorporated by reference
herein.
2.2 Representation, Warranty and Indemnity Agreement, dated
January 7, 1999, between the Company and certain entities
affiliated with the Lewis Homes sellers, filed as an exhibit
to the Company's Current Report on Form 8-K dated January 7,
1999, is incorporated by reference herein.
3.1 Amended Certificate of Incorporation, filed as an exhibit to
the Company's Registration Statement No. 33-6471 on Form
S-1, is incorporated by reference herein.
3.2 Amendment to Certificate of Incorporation, filed as an
exhibit to the Company's Registration Statement No. 33-30140
on Form S-1, is incorporated by reference herein.
3.3 Certificate of Designation of Series A Participating
Cumulative Preferred Stock, filed as an exhibit to the
Company's Registration Statement No. 33-30140 on Form S-1,
is incorporated by reference herein.
3.4 Certificate of Designation of Series B Mandatory Conversion
Premium Dividend Preferred Stock, filed as an exhibit to the
Company's Registration Statement No. 33-59516 on Form S-3,
is incorporated by reference herein.
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EXHIBIT
NO. DESCRIPTION
------- -----------
3.5 Amended Certificate of Designation of Series B Mandatory
Conversion Premium Dividend Preferred Stock, filed as an
exhibit to the Company's Registration Statement No. 33-59516
on Form S-3, is incorporated by reference herein.
3.6 By-Laws, filed as an exhibit to the Company's Registration
Statement No. 33-30140 on Form S-1, is incorporated by
reference herein.
3.7 Amended Certificate of Designation of Series A Participating
Cumulative Preferred Stock, filed as an exhibit to the
Company's Registration Statement No. 001-09195 on Form
8-A12B, is incorporated by reference herein.
4.1 Amended Certificate of Incorporation, filed as an exhibit to
the Company's Registration Statement No. 33-6471 on Form
S-1, is incorporated by reference herein.
4.2 Amendment to Certificate of Incorporation, filed as an
exhibit to the Company's Registration Statement No. 33-30140
on Form S-1, is incorporated by reference herein.
4.3 By-Laws, filed as an exhibit to the Company's Registration
Statement No. 33-30140 on Form S-1, is incorporated by
reference herein.
4.4 Indenture relating to 9 3/8% Senior Subordinated Notes due
2003 between the Company and First National Bank of Boston,
dated May 1, 1993, filed as an exhibit to the Company's
Registration Statement No. 33-59516 on Form S-3, is
incorporated by reference herein.
4.5 Specimen of 9 3/8% Senior Subordinated Notes due 2003, filed
as an exhibit to the Company's Registration Statement No.
33-59516 on Form S-3, is incorporated by reference herein.
4.6 Indenture relating to 9 5/8% Senior Subordinated Notes due
2006 between the Company and SunTrust Bank, Atlanta, dated
November 19, 1996, filed as an exhibit to the Company's
Current Report on Form 8-K dated November 19, 1996, is
incorporated by reference herein.
4.7 Specimen of 9 5/8% Senior Subordinated Notes due 2006, filed
as an exhibit to the Company's Current Report on Form 8-K
dated November 19, 1996, is incorporated by reference
herein.
4.8 Indenture relating to 7 3/4% Senior Notes due 2004 between
the Company and SunTrust Bank, Atlanta, dated October 14,
1997, filed as an exhibit to the Company's Current Report on
Form 8-K dated October 14, 1997, is incorporated by
reference herein.
4.9 Specimen of 7 3/4% Senior Notes due 2004, filed as an
exhibit to the Company's Current Report on Form 8-K dated
October 14, 1997, is incorporated by reference herein.
4.10 Certificate of Trust of KBHC Financing I, filed as an
exhibit to the Company's registration Statement Nos.
333-51825 and 333-51825-01 (Amendment No. 4) on Form S-3, is
incorporated by reference herein.
4.11 Declaration of Trust of KBHC Financing I, filed as an
exhibit to the Company's Registration Statement Nos.
333-51825 and 333-51825-01 (Amendment No. 4) on Form S-3, is
incorporated by reference herein.
4.12 Amended and Restated Declaration of Trust of KBHC Financing
I, dated July 7, 1998, (including Capital Security
Certificate for KBHC Financing I, with respect to the
Capital Securities) filed as an exhibit to the Company's
Current Report on Form 8-K dated August 14, 1998, is
incorporated by reference herein.
4.13 Guarantee Agreement, dated July 7, 1998, in respect of KBHC
Financing I, in respect of the Capital Securities, filed as
an exhibit to the Company's Current Report on Form 8-K dated
August 14, 1998, is incorporated by reference herein.
4.14 Indenture, dated July 7, 1998 between the Company and The
First National Bank of Chicago, as Trustee, filed as an
exhibit to the Company's Current Report on Form 8-K dated
August 14, 1998, is incorporated by reference herein.
4.15 First Supplement Indenture, dated July 7, 1998, between the
Company and The First National Bank of Chicago, as Trustee,
(including Debentures) filed as an exhibit to the Company's
Current Report on Form 8-K dated August 14, 1998, is
incorporated by reference herein.
16
18
EXHIBIT
NO. DESCRIPTION
------- -----------
4.16 Purchase Contract Agreement, dated July 7, 1998, between the
Company and The First National Bank of Chicago, as Purchase
Contract Agent, filed as an exhibit to the Company's Current
Report on Form 8-K dated August 14, 1998, is incorporated by
reference herein.
4.17 Pledge Agreement, dated July 7, 1998, between the Company,
The Chase Manhattan Bank, as Collateral Agent, Custodial
Agent and Securities Intermediary and The First National
Bank of Chicago, as Purchase Contract Agent, filed as an
exhibit to the Company's Current Report on Form 8-K dated
August 14, 1998, is incorporated by reference herein.
4.18 Remarketing Agreement, dated July 7, 1998, among the
Company, The First National Bank of Chicago and Merrill
Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated, filed as an exhibit to the Company's Current
Report on Form 8-K dated August 14, 1998, is incorporated by
reference herein.
4.19 Rights Agreement between the Company and ChaseMellon
Shareholder Services, L.L.C., as Rights Agent, dated
February 4, 1998, filed as an exhibit to the Company's
Current Report on Form 8-K dated February 4, 1999, is
incorporated by reference herein.
10.1 1986 Stock Option Plan, filed as an exhibit to the Company's
Registration Statement No. 33-6471 on Form S-1, is
incorporated by reference herein.
10.2 1988 Employee Stock Plan, filed as an exhibit to the
definitive Joint Proxy Statement for the Company's 1989
Special Meeting of Shareholders, is incorporated by
reference herein.
10.3 Consent Order, Federal Trade Commission Docket No. C-2954,
dated February 12, 1979, filed as an exhibit to the
Company's Registration Statement No. 33-6471 on Form S-1, is
incorporated by reference herein.
10.4 SunAmerica Inc. Executive Deferred Compensation Plan,
approved September 25, 1985, filed as an exhibit to
SunAmerica Inc.'s 1985 Annual Report on Form 10-K, is
incorporated by reference herein.
10.5 Directors' Deferred Compensation Plan established effective
July 27, 1989, filed as an exhibit to the Company's 1989
Annual Report on Form 10-K, is incorporated by reference
herein.
10.6 Settlement with Federal Trade Commission of June 27, 1991,
filed as an exhibit to the Company's Current Report on Form
8-K, dated June 28, 1991, is incorporated by reference
herein.
10.7 Amendments to the Kaufman and Broad Home Corporation 1988
Employee Stock Plan dated January 27, 1994, filed as an
exhibit to the Company's 1994 Annual Report on Form 10-K,
are incorporated by reference herein.
10.8 Kaufman and Broad Home Corporation Performance-Based
Incentive Plan for Senior Management, filed as an exhibit to
the Company's 1995 Annual Report on Form 10-K, is
incorporated by reference herein.
10.9 Form of Stock Option Agreement under Kaufman and Broad Home
Corporation Performance-Based Incentive Plan for Senior
Management, filed as an exhibit to the Company's 1995 Annual
Report on Form 10-K, is incorporated by reference herein.
10.10 Employment Contract of Bruce Karatz, dated December 1, 1995,
filed as an exhibit to the Company's 1995 Annual Report on
Form 10-K, is incorporated by reference herein.
10.11 Kaufman and Broad Home Corporation Non-Employee Director
Stock Unit Plan, filed as an exhibit to the Company's 1996
Annual Report on Form 10-K, is incorporated by reference
herein.
10.12 Kaufman and Broad Home Corporation Unit Performance Program,
filed as an exhibit to the Company's 1996 Annual Report on
Form 10-K, is incorporated by reference herein.
17
19
EXHIBIT
NO. DESCRIPTION
------- -----------
10.13 $500,000,000 1997 Revolving Loan Agreement dated April 21,
1997 by and among the Company, Bank of America National
Trust and Savings Association, as administrative agent,
co-syndication agent and managing agent, NationsBank of
Texas, N.A., as syndication agent and managing agent, Credit
Lyonnais Los Angeles Branch, as documentation agent and
managing agent, Guaranty Federal Bank F.S.B., Societe
Generale and Union Bank of California, N.A., as co-agents,
and the other banks listed therein, filed as an exhibit to
the Company's 1997 Annual Report on Form 10-K, is
incorporated by reference herein.
10.14 Kaufman and Broad France Incentive Plan, filed as an exhibit
to the Company's 1997 Annual Report on Form 10-K, is
incorporated by reference herein.
10.15 Registration Rights Agreement, dated January 7, 1999, filed
as an exhibit to the Company's Current Report on Form 8-K,
dated January 7, 1999, is incorporated by reference herein.
10.16 Term Loan Agreement among the Company, Bank of America
National Trust and Savings Association, as Administrative
Agent and Lead Arranger, Credit Lyonnais Los Angeles Branch,
as Syndication Agent. The First National Bank of Chicago, as
Documentation Agent and Union Bank of California as Co-Agent
and the banks listed therein, dated January 7, 1999, filed
as an exhibit to the Company's Current Report on Form 8-K,
dated January 7, 1999, is incorporated by reference herein.
10.17 Kaufman and Broad Home Corporation 1998 Stock Incentive
Plan.
10.18 Kaufman and Broad Home Corporation Directors' Legacy
Program, as amended January 1, 1999.
13 Pages 25 through 63 and page 67 of the Company's 1998 Annual
Report to Stockholders.
22 Subsidiaries of the Company.
24 Consent of Independent Auditors.
27 Financial Data Schedule.
FINANCIAL STATEMENT SCHEDULES
Financial statement schedules have been omitted because they are not
applicable or the required information is shown in the consolidated
financial statements and notes thereto.
REPORTS ON FORM 8-K
On October 21, 1998, the Company filed a Current Report on Form 8-K
(Item 5), dated October 20, 1998, announcing the signing of a definitive
agreement to acquire Lewis Homes which included its October 20, 1998 press
release.
On January 22, 1999, the Company filed a Current Report on Form 8-K
(Item 5), dated January 7, 1999, announcing the consummation of the
acquisition of Lewis Homes and which included therewith, among other
things, the Purchase Agreement (Amended and Restated), executed January 7,
1999, Representation, Warranty and Indemnity Agreement, dated January 7,
1999, Registration Rights Agreement, dated January 7, 1999 and Term Loan
Agreement, dated as of January 7, 1999.
On February 12, 1999, the Company filed a Current Report on Form 8-K
(Item 5), dated February 4, 1999, announcing the Company's declaration of a
dividend of one preferred stock purchase right for each share of common
stock and special common stock held of record on March 5, 1999 and which
included therewith the Rights Agreement, dated February 4, 1999, between
the Company and ChaseMellon Shareholder Services, L.L.C., as Rights Agent.
18
20
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
KAUFMAN AND BROAD HOME CORPORATION
By: MICHAEL F. HENN
------------------------------------
Michael F. Henn
Senior Vice President
and Chief Financial Officer
Dated: February 26, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant in
the capacities and on the dates indicated:
SIGNATURE TITLE DATE
--------- ----- ----
BRUCE KARATZ Chairman, President and February 26, 1999
- ----------------------------------------------------- Chief Executive Officer
Bruce Karatz (Principal Executive Officer)
MICHAEL F. HENN Senior Vice President February 26, 1999
- ----------------------------------------------------- and Chief Financial Officer
Michael F. Henn (Principal Financial Officer)
WILLIAM R. HOLLINGER Vice President and Controller February 26, 1999
- ----------------------------------------------------- (Principal Accounting Officer)
William R. Hollinger
STEVE BARTLETT Director February 26, 1999
- -----------------------------------------------------
Steve Bartlett
RONALD W. BURKLE Director February 26, 1999
- -----------------------------------------------------
Ronald W. Burkle
JANE EVANS Director February 26, 1999
- -----------------------------------------------------
Jane Evans
Director February , 1999
- -----------------------------------------------------
Dr. Ray R. Irani
JAMES A. JOHNSON Director February 26, 1999
- -----------------------------------------------------
James A. Johnson
RANDALL W. LEWIS Director February 26, 1999
- -----------------------------------------------------
Randall W. Lewis
GUY NAFILYAN Director February 26, 1999
- -----------------------------------------------------
Guy Nafilyan
LUIS G. NOGALES Director February 26, 1999
- -----------------------------------------------------
Luis G. Nogales
CHARLES R. RINEHART Director February 26, 1999
- -----------------------------------------------------
Charles R. Rinehart
SANFORD C. SIGOLOFF Director February 26, 1999
- -----------------------------------------------------
Sanford C. Sigoloff
19
21
KAUFMAN AND BROAD HOME CORPORATION AND CONSOLIDATED SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
The consolidated financial statements, together with the report thereon of
Ernst & Young LLP, dated December 31, 1998, except as to Note 15, as to which
the date is February 4, 1999, all appearing on pages 42 through 63 of the 1998
Annual Report to Stockholders, are incorporated in this Annual Report on Form
10-K between page F-1 and the List of Exhibits Filed. With the exception of the
aforementioned information and the information incorporated in Items 5, 6 and 7,
the 1998 Annual Report to Stockholders is not to be deemed filed as part of this
Annual Report on Form 10-K.
Separate combined financial statements of the Company's unconsolidated
joint venture activities have been omitted because, if considered in the
aggregate, they would not constitute a significant subsidiary as defined by Rule
3-09 of Regulation S-X.
------------------------
PAGE NO. IN
ANNUAL REPORT
TO STOCKHOLDERS
---------------
KAUFMAN AND BROAD HOME CORPORATION
Report of Independent Auditors............................ 63
Consolidated Statements of Income for the years ended
November 30, 1998, 1997 and 1996....................... 42
Consolidated Balance Sheets as of November 30, 1998 and
1997................................................... 43
Consolidated Statements of Stockholders' Equity for the
years ended November 30, 1998, 1997 and 1996........... 44
Consolidated Statements of Cash Flows for the years ended
November 30, 1998, 1997 and 1996....................... 45
Notes to Consolidated Financial Statements................ 46 through 62
The following pages represent pages 25 through 63 and page 67 of the 1998
Annual Report to Stockholders of Kaufman and Broad Home Corporation, and include
the Five Year Summary, Management's Discussion and Analysis of Financial
Condition and Results of Operations, the Consolidated Financial Statements and
related notes thereto, the Report of Independent Auditors, Stockholder
Information and Common Stock Prices. These pages were filed with the Securities
and Exchange Commission as Exhibit 13 hereto.
F-1
22
SELECTED FINANCIAL INFORMATION
----------------------------------------------------------------------------
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
YEARS ENDED NOVEMBER 30, 1998 1997 1996 1995 1994
=======================================================================================================================
CONSTRUCTION:
Revenues $ 2,402,966 $ 1,843,614 $ 1,754,147 $ 1,366,866 $ 1,307,570
Operating income (loss)* 148,672 101,751 (72,078) 65,531 88,323
Total assets 1,542,544 1,133,861 1,000,159 1,269,208 1,167,136
Mortgages and notes payable 529,846 496,869 442,629 639,575 565,020
=======================================================================================================================
MORTGAGE BANKING:
Revenues $ 46,396 $ 35,109 $ 33,378 $ 30,979 $ 30,008
Operating income 21,413 14,508 12,740 9,348 6,003
Total assets 317,660 285,130 243,335 304,971 287,324
Notes payable 239,413 200,828 134,956 151,000 125,000
Collateralized mortgage obligations 49,264 60,058 68,381 84,764 96,731
=======================================================================================================================
CONSOLIDATED:
Revenues $ 2,449,362 $ 1,878,723 $ 1,787,525 $ 1,397,845 $ 1,337,578
Operating income (loss)* 170,085 116,259 (59,338) 74,879 94,326
Net income (loss)* 95,267 58,230 (61,244) 29,059 46,550
Total assets 1,860,204 1,418,991 1,243,494 1,574,179 1,454,460
Mortgages and notes payable 769,259 697,697 577,585 790,575 690,020
Collateralized mortgage obligations 49,264 60,058 68,381 84,764 96,731
Mandatorily redeemable preferred
securities (Feline Prides) 189,750
Stockholders' equity* 474,511 383,056 340,350 415,478 404,747
=======================================================================================================================
BASIC EARNINGS (LOSS) PER SHARE* $ 2.41 $ 1.50 $ (1.80) $ .59 $ 1.13
DILUTED EARNINGS (LOSS) PER SHARE* 2.32 1.45 (1.80) .58 1.09
CASH DIVIDENDS PER COMMON SHARE .30 .30 .30 .30 .30
=======================================================================================================================
* Reflects a $170.8 million pretax noncash charge for impairment of long-lived
assets recorded in the second quarter of 1996.
25
23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
OVERVIEW Revenues are primarily generated from the Company's (i) housing
operations in the western United States and France and (ii) its domestic
mortgage banking operations.
The Company set a new all-time high earnings record in 1998 with net income
totaling $95.3 million. Continued progress in implementing the Company's key
operating strategies produced increases in revenues and earnings compared to the
prior records set in 1997.
In particular, the Company remained tightly focused throughout 1998 on two
over-arching strategies: the implementation of its KB2000 operational business
model and the acceleration of the Company's growth. To advance these
initiatives, the Company concentrated on two complementary strategies consisting
of establishing optimum local market positions in selected regional markets and
maintaining its focus on strategic acquisitions of regional builders. During the
year, the Company continued to make further progress in implementing the key
elements of KB2000 throughout its domestic operations. The key elements of
KB2000 include: improving the Company's understanding of customer desires and
preferences through frequent and localized surveys; emphasizing pre-sales in
contrast to speculative inventory; maintaining lower average levels of
in-process and standing inventory; establishing even flow production; providing
a wide spectrum of choice to customers in terms of location, design and options;
offering low base prices; and reducing the use of sales incentives.
Total Company revenues increased to $2.45 billion in 1998, up 30.4% from $1.88
billion in 1997, which had increased 5.1% from revenues of $1.79 billion in
1996. The 1998 increase primarily resulted from higher housing revenues and land
sale revenues, as well as increased revenues from mortgage banking operations.
Included in the operating results for 1998 are results from the acquisitions of
Houston-based Hallmark Residential Group ("Hallmark"), Denver-based PrideMark
Homebuilding Group ("PrideMark") and Phoenix/Tucson-based Estes Homebuilding Co.
("Estes"), all of which the Company completed during the second quarter of 1998.
Results for 1998 also reflect the Company's acquisition of a majority interest
in Houston-based General Homes Corporation ("General Homes") as of August 18,
1998. The Company acquired the remaining minority interest in General Homes on
January 4, 1999. The increase in revenues in 1997 compared to 1996 results was
due to higher housing revenues, partially offset by lower land sale revenues. In
addition, 1997 results included a full year's contribution from the Company's
San Antonio homebuilding operations (formerly Rayco, Ltd.); in contrast, 1996
results included only a nine-month contribution as the Company's acquisition of
these operations occurred on March 1, 1996. Included in total Company revenues
were mortgage banking revenues of $46.4 million in 1998, $35.1 million in 1997
and $33.4 million in 1996.
Net income increased $37.0 million or 63.6% to $95.3 million or $2.32 per
diluted share in 1998, up from $58.2 million or $1.45 per diluted share in 1997.
The 60.0% increase in diluted earnings per share in 1998 was primarily driven by
increases in unit deliveries and construction gross margin, and increased
mortgage banking pretax income. The Company's 1998 operating results also
benefited from the earnings contributions of the three acquisitions completed
during the second quarter of 1998, as well as the impact of the acquisition of
the majority interest in General Homes. Net income of $58.2 million or $1.45 per
diluted share in 1997 was 21.3% higher than the $48.0 million or $1.15 per
diluted share recorded in 1996 (excluding the after-tax noncash charge of $109.3
million for impairment of long-lived assets recorded in 1996). Including the
noncash charge, the Company recorded a net loss of $61.2 million or $1.80
diluted loss per share in 1996. Net income increased in 1997 due to higher unit
deliveries, lower interest expense and higher earnings from mortgage banking
operations. In addition, earnings for 1997 included a full year of operating
results from the San Antonio operations acquired in the second quarter of 1996.
CONSTRUCTION
REVENUES Construction revenues increased in 1998 to $2.40 billion from $1.84
billion in 1997, which had increased from $1.75 billion in 1996. The improvement
in 1998 was mainly the result of increased housing revenues, partly due to the
newly acquired operations in Houston, Denver and Phoenix/Tucson and the majority
ownership
26
24
investment in General Homes, and increased land sale revenues. In 1997, the
increase in revenues primarily reflected increased housing revenues, which
included a full year's operating results from the Company's San Antonio
division, partially offset by a decline in revenues from land sales.
Housing revenues totaled $2.38 billion in 1998, $1.83 billion in 1997 and $1.67
billion in 1996. The increase in 1998 reflected a 33.0% increase in unit volume,
partially offset by a 2.1% decline in average selling price. In 1997, housing
revenues totaled $1.83 billion, up 9.2% from 1996 as a result of an 11.7%
increase in unit volume, partially offset by a 2.2% lower average selling price.
California housing operations generated 45.8% of Company-wide housing revenues
in 1998, down from 54.0% in 1997 and 59.6% in 1996, mainly as a result of the
Company's strategic acquisition activities and continued expansion of its Other
U.S. operations. (The Company's housing operations in Arizona, Colorado, Nevada,
New Mexico, Texas and Utah are collectively referred to as "Other U.S.".)
Housing revenues from California operations were $1.09 billion in 1998, up 10.6%
from $986.6 million in 1997. The Company's Other U.S. housing revenues totaled
$1.04 billion in 1998, up 54.7% from $669.4 million in 1997. Other U.S. housing
revenues rose in 1998 due to the inclusion of deliveries from the three
businesses acquired in the second quarter of 1998 and from the majority
ownership investment in General Homes as well as expansion of existing Other
U.S. businesses. The Company's operations in France and Mexico generated housing
revenues of $240.0 million and $12.5 million, respectively, in 1998 compared to
$160.5 million and $10.8 million, respectively, in 1997, reflecting increases in
housing deliveries in both locations. Housing revenues from operations in France
and Mexico totaled $154.7 million and $6.4 million, respectively, in 1996.
--------------------------------------------------
CALIFORNIA OTHER U.S. FOREIGN TOTAL
- -----------------------------------------------------------------------
UNIT DELIVERIES
1998
First 1,022 1,341 266 2,629
Second 1,124 1,938 347 3,409
Third 1,225 2,567 375 4,167
Fourth 1,487 2,852 669 5,008
- -----------------------------------------------------------------------
Total 4,858 8,698 1,657 15,213
=======================================================================
1997
First 914 1,102 92 2,108
Second 1,095 1,211 159 2,465
Third 1,204 1,513 299 3,016
Fourth 1,518 1,816 520 3,854
- -----------------------------------------------------------------------
Total 4,731 5,642 1,070 11,443
=======================================================================
NET ORDERS
1998
First 1,269 2,062 385 3,716
Second 1,391 2,907 563 4,861
Third 1,117 2,387 379 3,883
Fourth 985 2,630 706 4,321
- -----------------------------------------------------------------------
Total 4,762 9,986 2,033 16,781
=======================================================================
1997
First 1,077 1,528 150 2,755
Second 1,476 1,681 239 3,396
Third 1,506 1,599 205 3,310
Fourth 1,134 1,368 526 3,028
- -----------------------------------------------------------------------
Total 5,193 6,176 1,120 12,489
=======================================================================
27
25
----------------------------------------------------------------
CALIFORNIA OTHER U.S. FOREIGN TOTAL
- ---------------------------------------------------------------------------------------------------------
ENDING BACKLOG-UNITS
1998
First 1,563 3,011 727 5,301
Second 1,830 4,808 943 7,581
Third 1,722 4,961 947 7,630
Fourth 1,220 4,739 984 6,943
=========================================================================================================
1997
First 1,017 2,182 287 3,486
Second 1,398 2,652 367 4,417
Third 1,700 2,738 602 5,040
Fourth 1,316 2,290 608 4,214
=========================================================================================================
ENDING BACKLOG-VALUE IN THOUSANDS
1998
First $ 337,424 $ 363,340 $ 98,378 $ 799,142
Second 394,144 588,820 136,929 1,119,893
Third 388,998 594,575 148,464 1,132,037
Fourth 288,317 560,307 151,668 1,000,292
=========================================================================================================
1997
First $ 219,908 $ 248,835 $ 61,073 $ 529,816
Second 288,719 307,977 70,806 667,502
Third 377,332 321,007 79,361 777,700
Fourth 303,050 274,591 89,020 666,661
=========================================================================================================
Housing deliveries rose 33.0% to 15,213 units in 1998, exceeding the previous
Company-wide record of 11,443 units established in 1997. This improvement
reflected increases in U.S. and French operations of 30.7% and 55.9%,
respectively. Growth in domestic deliveries was primarily driven by a 54.2%
increase in Other U.S. operations. In California, deliveries rose 2.7% to 4,858
units in 1998 from 4,731 units in 1997, despite a 17.9% decline in the Company's
average number of active communities in the state. Other U.S. operations
delivered 8,698 units in 1998, including 1,702 deliveries from the three newly
acquired companies and the majority ownership investment in General Homes.
Excluding results from these acquisitions, deliveries from Other U.S. operations
increased 24.0% to 6,996 units, from 5,642 units delivered in 1997, due to a
higher average number of active communities in existing Other U.S. businesses.
In 1998, French deliveries increased primarily as a result of the inclusion of a
full year of results from French homebuilder SMCI. The Company acquired SMCI, a
builder of condominiums in Paris and other cities in France, in mid-1997 for
$2.2 million in cash and the assumption of approximately $8.1 million of debt.
Housing deliveries increased 11.7% to 11,443 units in 1997 from 10,249 units in
1996. This improvement reflected increases in U.S. and French operations of 9.6%
and 37.8%, respectively. Growth in domestic deliveries was driven by a 31.4%
increase in results from Other U.S. operations, to 5,642 units in 1997 from
4,294 units in 1996, partially offset by a decline in California deliveries.
Unit deliveries in Other U.S. operations increased in 1997 for several reasons:
a higher average number of active communities, reflecting the Company's growth
strategy; the inclusion of twelve months of operating results from the San
Antonio acquisition; and first deliveries from start-up operations in Austin.
California deliveries in 1997 decreased 8.5% to 4,731 units from 5,171 units in
1996, reflecting a decline in the Company's average number of active communities
in the state. In France, 1997 deliveries increased from the previous year
primarily as a result of the acquisition of certain active SMCI developments.
28
26
The Company-wide average new home price decreased 2.1% in 1998, to $156,400 from
$159,700 in 1997. The 1997 average had decreased 2.2% from $163,300 in 1996.
These decreases were primarily due to the Company's decision to generate a
greater proportion of lower-priced domestic unit deliveries (primarily from the
Company's Other U.S. operations) as well as to the lower average selling price
in France resulting from the inclusion of SMCI deliveries. Other U.S. operations
accounted for 64.2% of domestic deliveries in 1998 compared to 54.4% in 1997.
In California, the Company's average selling price rose 7.7% in 1998 to $224,500
from $208,500 in 1997, which had increased 8.1% from $192,900 in 1996. The 1998
increase resulted from strategic increases in sales prices in certain markets
based on improved market conditions, as well as a change in product mix favoring
a greater number of higher-priced urban in-fill locations and first-time move up
sales. The increase in 1997 also reflected a shift in mix toward higher-priced
homes in the state. The Company's average selling price in Other U.S. markets
was $119,100 in 1998, compared with $118,700 in 1997 and $119,700 in 1996. The
Company's average selling price in France decreased to $149,200 in 1998 from
$155,500 in 1997, which had decreased from $206,600 in 1996. The average selling
price in France declined in 1998 primarily due to the inclusion of a full year
of lower-priced deliveries generated from SMCI developments acquired in 1997.
The French average selling price also declined in 1997 as a result of the SMCI
developments.
Revenues from the development of commercial buildings, all located in
metropolitan Paris, totaled $1.5 million in 1998, $2.7 million in 1997 and $12.2
million in 1996. Declines in 1998 and 1997 reflected both the Company's decision
to refocus on its expanded French residential business and the reduced
opportunities in French commercial markets due to lingering effects of the
country's mid-1990 recession.
Land sale revenues totaled $22.5 million in 1998, $13.6 million in 1997 and
$68.2 million in 1996. The results for 1998 and 1997 are more representative of
typical Company land sales activity levels when viewed historically. The 1996
results were unusually high due to an aggressive asset sale program undertaken
as part of the Company's 1996 debt reduction strategy. Land sold in 1996 was
primarily property previously held for long-term development, which the Company
disposed of in order to redeploy the invested capital at potentially higher
returns. Generally, land sale revenues fluctuate as a result of the Company's
decision to maintain or decrease its land ownership position in certain markets
based upon the volume of its holdings, the strength and number of competing
developers entering particular markets at given points in time, the availability
of land in markets served by the Company's housing divisions, and prevailing
market conditions.
OPERATING INCOME Operating income increased 46.1% to $148.7 million in 1998 from
$101.8 million in 1997. The increase was primarily due to higher housing gross
profits, resulting from higher unit volume, partially offset by increased
selling, general and administrative expenses. Housing gross profits in 1998
increased 37.5% or $124.5 million to $456.4 million from $331.9 million in 1997.
As a percentage of related revenues, the Company's housing gross profit margin
was 19.2% in 1998, up from 18.2% in the prior year. The Company's housing gross
margin increased primarily due to the rising proportion of higher margin
deliveries produced by the Company's KB2000 communities, as well as price
increases in certain fast-selling, hard to replace communities, particularly in
certain California markets. Company-wide land sales produced a loss of $3.2
million in 1998, compared to a loss of $1.4 million in 1997.
Selling, general and administrative expenses increased 32.9% or $75.5 million in
1998 to $304.6 million. This increase was mainly due to the inclusion of
selling, general and administrative expenses of acquired entities, including
goodwill amortization, expenditures incurred in connection with extensive
information systems revisions required to support the KB2000 operational
business model, system conversions related to acquisitions and year 2000
compliance, new market entries in Texas and higher third-party sales
commissions. Sales commissions rose because a higher percentage of the Company's
domestic sales were generated from third-party brokers as part of the KB2000
operational business model. As a percentage of housing revenues, to which these
expenses are most closely correlated, selling, general and administrative
expenses increased .3 percentage points to 12.8% in 1998 from 12.5% in 1997. The
Company remains focused on cost-containment and will seek to reduce selling,
general and administrative expenses as a percentage of housing revenues.
29
27
Operating income increased to $101.8 million in 1997 from $98.7 million
(excluding the $170.8 million noncash charge for impairment of long-lived
assets) in 1996. This increase was primarily due to higher housing gross
profits, resulting from higher unit volume, partially offset by lower gross
profits from commercial activities and losses from land sales. Gross profits in
1997 (excluding profits from land sales) increased by $15.7 million to $332.2
million from $316.5 million in 1996. As a percentage of related revenues, the
Company's gross profit margin (excluding losses from land sales) was 18.2% in
1997, down from 18.8% in the prior year. The Company's housing gross margin
dropped to 18.2% in 1997 from 18.7% in 1996, primarily due to the accelerated
sell-through of older, lower margin non-KB2000 communities, particularly in
California, and lower margins associated with the Company's entry into new
markets in Austin and Dallas, Texas, partially offset by improved gross margins
from KB2000 communities. Company-wide land sales produced a loss of $1.4 million
in 1997, compared to profits of $2.6 million in 1996.
Selling, general and administrative expenses increased by $8.7 million in 1997.
This increase was primarily due to the inclusion of a full year of results from
the San Antonio operations in 1997 (including the amortization of goodwill),
compared to nine months of results in 1996, and higher sales commissi