M o re K B 9 9 Kaufman and Broad Home Corporation is one of America’s premier homebuilders. Founded in 1957, the company has built more than 225,000 homes during its history. The company targets first time and first move-up buyers by combining value with the ability to customize homes with thousands of options featured at its New Home Showrooms. Kaufman and Broad also operates a full service mortgage company for the convenience of its buyers. Today, Kaufman and Broad builds homes in California, Nevada, Arizona, New Mexico, Texas and Colorado and is also one of the largest homebuilders in France. Financial Highlights in th ou sand s, e xc ept per share and unit amount s Years ended November 30, 1999 1998 1997 1996 1995 Net Orders, Deliveries and Backlog (number of homes) Net orders Deliveries Unit backlog Revenues and Income Revenues Operating income* Pretax income* Net income* Basic earnings per share* Diluted earnings per share* Assets, Debt and Equity Total assets Mortgages and notes payable Mandatorily redeemable preferred securities Stockholders’ equity Return on average stockholders’ equity 23,094 22,460 8,777 16,781 15,213 6,943 12,489 11,443 4,214 10,239 10,249 2,839 8,253 7,857 1,412 $3,836,295 $2,449,362 $1,878,723 $1,787,525 $1,397,845 294,726 245,024 159,224 3.41 3.33 170,085 146,567 95,267 2.41 2.32 116,259 111,419 91,030 58,230 1.50 1.45 75,013 48,013 1.17 1.15 74,879 45,459 29,059 .59 .58 $2,664,235 $1,860,204 $1,418,991 $1,243,494 $1,574,179 1,191,090 189,750 676,583 25.6% 769,259 189,750 474,511 22.2% 697,697 577,585 790,575 — — — 383,056 340,350 415,478 16.1% 12.7% 7.1% Compound A n n u a l Growth Rate 1995-1999 29.3% 30.0% 57.9% 28.7% 40.9% 52.4% 53.0% 55.1% 54.8% 14.1% 10.8% —% —% —% Sell Earn Think Create Do M o re ** Excludes impact of a pretax secondary marketing trading loss of $18.2 million recorded in the third quarter of 1999 and a $170.8 million pretax noncash charge for impairment of long-lived assets recorded in the second quarter of 1996. For further discussion of the secondary marketing trading loss see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the accompanying consolidated financial statements and notes thereto. Kaufman and Broad. 1999 Annual Report F eb rua ry 10 , 2 0 0 0 To Our Shareholders, This morning I listened to yet another commentator talking about America Online’s proposed acquisition of Time Warner – a merger that’s dominated the business headlines for the past month. I share the belief that this deal is perhaps the most signif- icant in recent American history. It institutionalizes the power of the Internet, and represents the ascendancy of “new media” over “old media.” And if history is any judge, it’s just the tip of the iceberg. There could be no better time for me to share my thoughts with you on how Kaufman and Broad will be a part of this new world. KB AR 99 02 03 > Bruce Karatz, Chairman and Chief Executive Officer We are part of it – make no mistake. Any company that expects to lead its industry will do One look at these results and I’m sure you’ll agree that Kaufman and Broad has never so because it has the vision and savvy to stay ahead of the technology and communi- been stronger or more prepared to assert its leadership of the homebuilding industry. cations curve. And those who believe that homebuilding is somehow insulated from these dramatic changes will be hopelessly left behind. As we finished the year, we began repositioning many of our assets and businesses in New rules are being written. Not only are we following them, we’re writing a few of – creating more value for shareholders while positioning ourselves for future growth. our own. Our market leadership is enabling us to use technology to strengthen our This process has resulted in: relationships with our customers. And our detailed understanding of what homebuyers • Taking our French subsidiary, Kaufman & Broad S. A., public, making it order to reduce debt and reinvest in our business through a stock repurchase program want is becoming an increasingly valuable e-commerce asset. the first developer to be listed on the ParisBourse (in fact, it immediately became part of the “Premier Marché” – where the largest and most While our deliveries, backlog, market share and earnings have reached new highs, it’s prestigious stocks are traded) no longer enough. That’s why I’m promising you more of what’s now expected from a • Putting our multi-housing business on the market, to sharpen the focus on company in this new age. More products and services for customers. More creative our core homebuilding operations marketing. More strategic alliances. More big ideas. In a word… more. • Strategically reducing land purchases and holdings, including forming a joint I’ll discuss that in a moment. But first, a recap of 1999: venture for the development of our large City Ranch property near Santa Clarita, California, with Newhall Land and Farming – the premier master-planned • Earnings per share hit $3.33 (1) – an increase of 43.5% over last year community developer • Deliveries up 47.6% to 22,460 • Total revenues up 56.6% to $3.8 billion • Operating income up 73.3% to $294.7 million(1) • EBITDA up 74.0% to $376.4 million(1) • Selling or winding up under-performing operations, such as our Utah division I’m particularly proud of what happened in France. It’s a great example of how our vision and methods create value, and what our new asset repositioning strategy can do • Backlog up 26.4% to 8,777 units, with a backlog value of $1.4 billion for us. The transaction provided us with approximately $120 million, a majority interest • Return on average stockholders’ equity reached 25.6% • Net debt to total capital ratio stood at 48.4% at year’s end 1 Excluding a secondary marketing trading loss in the 3rd quarter of 1999 in the new company that will bring us approximately 50% of all its profits, and lastly we will receive annual royalty payments. As the largest shareholder in Kaufman & Broad S.A., we’ll also be reaping the benefits of its ambitious expansion plans within the dynamic European market. KB AR 99 04 05 > With its initial market capitalization, all told, the transaction valued our French opera- and can remain a low-price leader. We’re achieving all the benefits we thought we’d tions at approaching $300 million – which means our continuing ownership stake is achieve when we launched our market leadership strategy four years ago. substantially higher than current book value. When you consider that France produced only about 11% of our deliveries and revenues in 1999, you’ll see the real and signifi- What’s more, the outlook for our markets remains positive with job and population cant value that we’ve already created. growth throughout the West expected to remain strong. Conventional wisdom says that there’s an iron link between current interest rates and how many homes we can sell. We’ll continue reevaluating and repositioning other assets throughout the year as we Well, that’s only partly true. While interest rates crept up during 1999, our home sales increase our commitment to our core U.S. homebuilding operations and focus even also increased. With interest rates still at historically low levels and an unprecedented more intently on improving our margins and operational discipline. number of available loan products (our Kaufman and Broad Mortgage Company offers It wasn’t that long ago when the idea of any homebuilder delivering 24,000 homes a they can afford. And while rising interest rates could conspire with a cooling economy year seemed completely outlandish. We hope to reach that in 2000 with stronger internal to slow sales growth, earnings should continue rising if we execute our strategy and more than 75 of their own), customers have tremendous flexibility to choose a loan processes and controls than we’ve ever had before. Leading that effort will be Jeff maintain strong positions in key markets. Mezger, our new chief operating officer, who will focus on leveraging our economies of scale to capture every cent of profit possible in every phase of our homebuilding With our homebuilding business in the best shape it’s ever been in and with our asset operations. Jeff’s proven success in implementing our KB2000 operational business repositioning strategy providing a sizable cash infusion, we’re moving into position to model, both as a division president and as a regional general manager, makes him the launch initiatives that won’t just break us out of the homebuilding pack, but will break right person for the job. Under his leadership, our core business should do even better. the stereotype of what a homebuilder can be. Kaufman and Broad is different from the other large builders because we’re building all Kaufman and Broad has always pushed the envelope. Four years ago, we opened our homes in just six states, as well as France. We’re building very large businesses in houseCALL™ – one of the industry’s first customer fulfillment call centers. Two years strategic markets – in many cases delivering 2,000 homes or more in a single market. ago we launched kbhomes.com, one of the industry ’s best Web sites, which con- It’s not surprising that we’re obtaining our highest margins in markets where we have tributed approximately $100 million in sales in 1999. And we’ve continually broken new the largest market share. By becoming a leader in these markets, we get among the ground in marketing, which in 1999 included a promotional tie-in with Pokémon: The most competitive pricing from our subcontractors, our choice of the best land deals, First Movie, capitalizing on the year’s hottest kids’ trend to reach a key target market of KB AR 99 06 07 > young families. For these reasons, no other homebuilder is better positioned than we we know that in 4-6 months they’re going to take possession of a beautiful new home. are to seize the opportunities created by the new economy. We’ll be looking to monetize that knowledge by offering buyers access to an array of home-related goods and services, either on our own or through strategic partnerships. Our commitment to investing in leading edge technology has created significant Our customers have turned to us for the most important purchase they’ve ever made opportunities. We’ve built centralized systems and uniform processes to maximize our and that position of trust gives us a remarkable opportunity to extend our relationship operational efficiency. That commitment has also provided us with a platform to effi- by providing other services of high quality and value. ciently launch technology-based business and Internet solutions, enabling us to take our business to another level. It’s a different world and we’re a different company. While continuing a 42-year tradition of building quality homes for first-time and move-up buyers, we’re not tied to At the core of our technology initiatives is e.kb. Under the leadership of Glen Barnard past notions of what we should look like or what homebuying-related services we as president, e.kb will leverage technology so we can provide a new level of superior should provide. service. We’re building on our centralized technology base to integrate all our sales plat- forms – including each of our sales offices, houseCALL, ™ our Web site and our 15 New I can’t predict the future of the AOL-Time Warner merger. But regardless of its ultimate Home Showrooms. The objective is to ensure our customers receive consistent and outcome, it’s a watershed event in American business. It confirms that the ultimate up-to-date information on all Kaufman and Broad products, while at the same time low- winners in the new economy are those who innovate, listen to the market, and have the ering our marketing and sales costs. courage to make big decisions. The e.kb initiative also includes a commitment to business-to-business e-commerce – Because we’ve completely transformed our business over the past five years, Kaufman building electronic links with our suppliers that decrease the time and cost of building and Broad is in position to be a player in this game. And I can promise you that we’ll be a home while increasing quality and reliability. The business-to-business e-commerce playing by the new rules. That alone will mean far more than any of us can now imagine. market is growing rapidly, and a large production builder like Kaufman and Broad is in an ideal position to help develop advanced systems for the entire industry – which we’ve begun doing. Sincerely, But our ambitions extend far beyond this. Our database of homebuyers will become an increasingly valuable asset. When a qualified customer signs a sales contract with us, Bruce Karatz, Chairman and Chief Executive Officer KB AR 99 08 09 > More leadership the process of homebuilding it’s all about listening If knowledge is power, then it’s no wonder Kaufman and Broad is America’s #1 homebuilder. During the last three years, we’ve solicited more than one million detailed surveys of homebuyers in our markets, giving us insight into what our customers want in their new homes. That knowledge is driving our s t r a t e g y on everything from where we’re opening new communities to how we’re designing our homes. M o re in touch KB AR 99 12 13 > pinpointing great communities M o re great places to live Before we sell our first home we know we’ll be successful – because we’ve chosen the right location for a new community. Our in-depth community mapping process factors in our exclusive homebuyer surveys, as well as local infrastru c t u re, schools, major employers, cultural attractions and a host of other criteria. As a result, we’re building our homes where our customers want to live. KB AR 99 14 15 > creative promotions M o re cutting edge Gone are those traditional homebuilding ads that only feature pretty homes and happy homeowners. In are provocative ads and promotional tie-ins with some of America’s hottest consumer trends, like Pokémon. Buyers are more media savvy than ever, used to companies bombarding them with cutting-edge messages. We’re offering the sizzle that they’ve come to expect while building a powerful consumer brand. That’s why Kaufman and Broad is becoming the most recognizable name in homebuilding in all of our markets. KB AR 99 16 17 > M o re dreams coming tru e building quality and value Building affordable homes is far more than a philosophy – it’s our strategic edge. We’re a low-price leader in e v e ry one of our markets, offering great value to first-time and first move-up buyers. That enables us to build volume and market share, which creates even more cost savings that we can pass back to our customers. It means that m o re young families who never thought they could aff o rd a home can fulfill their d re a m s with Kaufman and Broad. KB AR 99 18 19 > making it simple and affordable Lots of companies talk about one-stop shopping, but Kaufman and Broad delivers. A large majority of our buyers who finance their homes choose Kaufman and Broad Mortgage Company (KBMC). They’re getting competitive rates and the best service from professionals who understand that building a new home is different than buying a used one. What’s more, our mortgage professionals work closely with the customer’s sales representative to ensure the loan will be ready to fund when the buyer is ready to move in. M o re help with the hard part KB AR 99 20 21 > 5,000 choices M o re of you Homebuyers should always have the power to express themselves. At our New Home Showrooms, buyers choose from thousands of o p t i o n s – from carpet to countertops, and from lighting fixtures to garage doors. Because our Showro o m s offer buyers everything they need to turn a well-built house into a home filled with warmth and personality, t h e y ’ re a key selling feature that gives buyers another reason to choose us instead of our competitors. More than just about home décor, however, our Showrooms are also powerful sales centers where buyers can pre-qualify for a mortgage and browse among the many Kaufman and Broad communities in the area. They’re one-stop shops for anyone looking to build their dream home. KB AR 99 22 23 > M o re contro l s even flow production When it comes to production, all of us are “Type A” personalities. Want to know whose homes we’re framing today or how many slabs we’re pouring a week from Tuesday? We can tell you. Because we pre-sell most of our homes, we can implement centralized scheduling procedures that enable us to deliver a consistent number of homes, day after day. T h a t ’s the kind of p re d i c t a b i l i t y subcontractors want and they re w a rd us by offering their best pricing. With one p e rson in the division office worrying about logistics instead of dozens of superintendents in the field, our construction teams can focus on what they do best – building great homes that meet the highest quality standards. KB AR 99 24 25 > M o re environmental solutions innovative recycling Supporting the environment takes a little creativity and a big commitment from everyone. For example, at our Independence community growing out of the old Mather Air Force Base in Sacramento, we’re taking 125,000 tons of concrete that normally would go into landfills, grinding it up and using it to help build roads. Woodframing from the base is being converted into mulch for commercial landscaping. And we’re looking to replicate ideas like these in other communities. Which means that while we’re building more homes, we’re learning how to generate less waste. KB AR 99 26 27 > (no) More worr i e s we’ve got it covered Just as the home buying process begins with us listening to our customers, it ends with us listening too. At the final orientation, every last detail about the home is checked and explained, and every question a customer has is answered. We then leave our buyers with the best housewarming gift of all – an unsurpassed 10-year limited warranty. KB AR 99 28 29 > wired for the future M o re bright ideas I t ’s no longer just “what have you done for me lately?” it’s “what will you do for me tomorrow?” The answer is e . k b . This company-wide initiative will integrate our Web site, our New Home Showrooms, our sales offices and our houseCALL™ call center into a technology platform that will significantly lower our marketing costs and give our customers consistent, detailed, and up-to-date information on all Kaufman and Broad products and services. We’re also rapidly expanding both our business-to-business e-commerce programs and our online marketing, ensuring we become the homebuilding i n d u s t ry ’s most wire d c o m p a n y. KB AR 99 30 31 > More Numbers KB AR 99 00 00> $4 $3 $2 $1 $0 Non-Cash Charges Increase Cash EPS $3.70 $3.33 * $2.47 $2.32 * $1.58 $1.45 * $1.26 $1.15 * $0.62 $0.58 * 95 96** 97 98 99*** Cash EPS Perf o rm a n c e Compound Annual Growth Rate = 56.3% Goodwill amortization *** Reported EPS *** Excludes non-cash charge for impairment of long-lived assets *** Excludes secondary marketing trading loss 16% Lower SG&A Ratio 14% 13.7 % 13.2 % 12.8 % 12.5 % 12.4 % S G & A 12% 10% 20% 19% 18% 17% 16% 15% 95 96 97 98 99 As a percent of housing revenues Improved Housing Gross Margin 19.2 % 19.3 % 18.7 % 18.2 % 17.9 % 95 96 97 98 99 Housing Gross Marg i n As a percent of housing revenues KB AR 99 34 35 > 60% 50% 40% 30% 20% 10% 0% Increased Use of Lot Options Reduces Risk 51.5 % 49.0 % 34.2 % 35.9 % 27.5 % 95 96 97 98 99 P e rcentage of Lots Optioned 7.4 % 10.6 % Geographic Diversity Reduces Risk 25.8 % 3.3 % 11.1 % 13.7 % 28.1 % Geographically Diversified Deliveries 1999 Deliveries 1.8 % 6.8 % 12.5 % 8.5 % Excellent Lot Position Supports Growth 33.0 % 27.6 % 9.8 % Geographically Diversified Land Positions Lots Owned and Controlled as of 11/30/99 C A L I F O R N I A N E VA D A T E X A S C O L O R A D O A R I Z O N A NE W MEX ICO AND UTA H F O R E I G N KB AR 99 36 37 > Accelerating Unit Growth 22,460 Backlog Goal = Two Forward Quarters of Deliveries 8,777 6,943 4,214 2,839 10,000 8,000 6,000 4,000 2,000 1,412 15,213 0 95 96 97 98 99 25,000 20,000 15,000 11,443 10,249 10,000 7,857 5,000 0 95 96 97 98 99 Unit Deliveries Compound Annual Growth Rate = 30.0% Unit Backlog Compound Annual Growth Rate = 57.9% 25,000 20,000 15,000 Strong Unit Orders Support Growth 23,094 16,781 12,489 10,239 10,000 8,253 5,000 0 95 96 97 98 99 Net Unit Ord e r s Compound Annual Growth Rate = 29.3% KB AR 99 38 39 > 30% 20% 10% 0% Aiming to Stay at or Above 20% ROE 22.2 % 25.6 % 16.1 % 12.7 % 7.1 % 95 96 97 98 99 R e t u rn on Equity 80% 60% 40% 20% 0% 60.6 % 56.2% 52.7 % Targeting a More Conservative Leverage Posture 48.4% 43.4 % 95 96 97 98 99 Net Debt to Total Capital 4.x 3.x 2.x 1.x 0.x Strong Cash Flow Improves Coverage Ratio 3.6 x 3.1x 2.4 x 1.9 x 1.3 x 95 96 97 98 99 E B I T DA* to Fixed Charge Coverage Ratio * Earnings Before Interest, Tax, Depreciation, and Amortization KB AR 99 40 41 > Selected Financial Inform a t i o n M a n a g e m e n t ’s Discussion and Analysis of Financial Condition and Results of Operations i n t h ou s a n d s, e xc e p t p e r s ha r e a m o u n t s R es u l t s o f O p e ra t i on s Years Ended November 30, 1999 1998 1997 1996 1995 $3,772,121 $2,402,966 $1,843,614 $1,754,147 $1,366,866 259,107 148,672 101,751 (72,078) 65,531 2,214,076 1,542,544 1,133,861 1,000,159 1,269,208 813,424 529,846 496,869 442,629 639,575 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 achieved record performance levels for the second consecutive year in 1999, with net income of $147.5 million and unit deliveries totaling 22,422. During the year, the Company remained focused on two primary initiatives it originally established in 1997: deepening the imple- mentation of its KB2000 operational business model and continuing growth. To advance these initiatives, the Company also concentrated on two complementary strategies consisting of establishing optimally large local market positions and maintaining its focus on integrating $0,064,174 $0,046,396 $0,035,109 $0,033,378 $0,030,979 strategic acquisitions. Construction: Revenues Operating income (loss)* Total assets Mortgages and notes payable Mortgage banking: Revenues Operating income* Total assets Notes payable Collateralized mortgage obligations Consolidated: Revenues Operating income (loss)* Net income (loss)* Total assets Mortgages and notes payable Collateralized mortgage obligations Mandatorily redeemable preferred securities (Feline Prides) Stockholders’ equity* Basic earnings (loss) per share* Diluted earnings (loss) per share* Cash dividends per common share 17,464 450,159 377,666 36,219 21,413 317,660 239,413 49,264 14,508 285,130 200,828 60,058 12,740 243,335 134,956 68,381 9,348 304,971 151,000 84,764 $3,836,295 $2,449,362 $1,878,723 $1,787,525 $1,397,845 276,571 147,469 2,664,235 1,191,090 36,219 189,750 676,583 170,085 95,267 116,259 58,230 (59,338) (61,244) 74,879 29,059 1,860,204 1,418,991 1,243,494 1,574,179 769,259 49,264 189,750 474,511 697,697 60,058 577,585 68,381 790,575 84,764 383,056 340,350 415,478 $0,0003.16 $0,0002.41 $0,0001.50 $0000(1.80) $00,000.59 3.08 .30 2.32 .30 1.45 .30 (1.80) .30 .58 .30 *Reflects an $18.2 million mortgage banking pretax secondary marketing trading loss recorded in the third quarter of 1999 and a $170.8 million construction pretax noncash charge for impairment of long-lived assets recorded in the second quarter of 1996. The Company made two strategic acquisitions during early 1999 which fueled its growth and contributed to the achievement of record results. In January 1999, the Company completed its acquisition of Lewis Homes, which greatly supplemented growth in the Company’s existing California and Nevada markets. Also in January 1999, the Company purchased the remaining minority interest in Houston-based General Homes. Total Company revenues increased to a record $3.84 billion in 1999, up 56.6% from $2.45 billion in 1998, which had increased 30.4% from rev- enues of $1.88 billion in 1997. The 1999 increase primarily resulted from higher housing and land sale revenues, as well as increased revenues from mortgage banking operations. Operating results for 1999 include the results of Lewis Homes from the January 1999 acquisition date as well as the first full year of results from the acquisitions of Houston-based Hallmark Residential Group (“Hallmark”) and Phoenix/Tucson-based Estes Homebuilding Co. (“Estes”) and the assets of Denver-based PrideMark Homebuilding Group (“PrideMark”), all of which the Company completed in the second quarter of 1998. Operating results for 1999 also reflect the acquisition of the remaining minority interest of General Homes, which occurred on January 4, 1999. The increase in revenues in 1998 compared to 1997 was primarily due to higher housing and land sale revenues, as well as increased revenues from mortgage banking operations. In addition, 1998 operating results included revenues from the acquisitions of Hallmark, PrideMark and Estes, as of their respective second quarter 1998 acquisition dates. Results for 1998 also reflected the Company’s acqui- sition of a majority interest in General Homes in August 1998. Included in total Company revenues were mortgage banking revenues of $64.2 mil- lion in 1999, $46.4 million in 1998 and $35.1 million in 1997. Net income increased $52.2 million or 54.8% to $147.5 million or $3.08 per diluted share in 1999, both Company records, up from $95.3 million or $2.32 per diluted share in 1998. Net income and diluted earnings per share for 1999 include the impact of a third quarter secondary marketing trading loss, resulting from unauthorized trading by an employee at the Company’s mortgage banking subsidiary. The loss totaled $11.8 million, or $.25 per diluted share, on an after tax basis. Excluding the impact of the trading loss, diluted earnings per share for 1999 were $3.33. The growth in diluted earnings per share occurred despite the trading loss and despite an increase of 16.6% in the diluted average number of common shares outstanding in 1999, as a result of the Lewis Homes acquisition which closed on January 7, 1999. The increase in diluted earnings per share in 1999 was principally driven by significantly higher unit deliveries, an improved construction gross margin and a reduction in the selling, general and administrative expense ratio. Net income of $95.3 million or $2.32 per diluted share in 1998 was 63.6% higher than the $58.2 million or $1.45 per diluted share recorded in 1997. Net income increased in 1998 mainly due to 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 acquisition of a majority interest in General Homes. C on st ru c t i o n Revenues Construction revenues increased in 1999 to $3.77 billion from $2.40 billion in 1998, which had increased from $1.84 billion in 1997. The improvement in 1999 was mainly the result of increased housing revenues, due, among other things, to the acquisition of Lewis Homes in 1999, the inclusion of a full year’s operating results from the operations in Houston, Denver and Phoenix/Tucson acquired during 1998, and higher land sale revenues. In 1998, the increase in revenues primarily reflected increased housing revenues, partly due to the operations in Houston, Denver and Phoenix/Tucson acquired during the year, and increased revenues from land sales. KB AR 99 42 43> Unit Deliveries 1999 First Second Third Fourth Total Unconsolidated joint ventures 1998 First Second Third Fourth Total Net Orders 1999 First Second Third Fourth Total Unconsolidated joint ventures 1998 First Second Third Fourth Total 1,199 1,430 1,629 2,065 6,323 1,022 1,124 1,225 1,487 4,858 1,572 2,104 1,660 1,314 6,650 1,269 1,391 1,117 985 4,762 38 38 1,341 1,938 2,567 2,852 8,698 3,514 4,198 3,177 2,908 266 347 375 669 2,629 3,409 4,167 5,008 1,657 15,213 535 917 510 647 5,621 7,219 5,347 4,869 13,797 2,609 23,056 38 38 2,062 2,907 2,387 2,630 9,986 385 563 379 706 3,716 4,861 3,883 4,321 2,033 16,781 California Other U.S. Foreign Total California Other U.S. Foreign Total 2,757 3,221 3,526 4,106 323 488 948 730 4,279 5,139 6,103 6,901 Ending Backlog-Units 1999 First Second Third Fourth 13,610 2,489 22,422 Unconsolidated joint ventures 1998 First Second Third Fourth Ending Backlog-Value In thousands 1999 First Second Third Fourth Unconsolidated joint ventures 1998 First Second Third Fourth 1,925 2,599 2,630 1,879 1,563 1,830 1,722 1,220 6,095 7,072 6,723 5,306 219 3,011 4,808 4,961 4,739 1,196 1,625 1,456 1,373 727 943 947 984 9,216 11,296 10,809 8,558 219 5,301 7,581 7,630 6,943 $449,993 $760,283 $196,028 $1,406,304 613,466 631,823 457,439 913,523 882,538 696,482 33,945 270,229 1,797,218 235,544 228,213 1,749,905 1,382,134 33,945 $337,424 $363,340 $ 98,378 $ 799,142 394,144 388,998 288,317 588,820 594,575 560,307 136,929 1,119,893 148,464 1,132,037 151,668 1,000,292 Housing revenues totaled a record $3.73 billion in 1999, $2.38 billion in 1998 and $1.83 billion in 1997. The increase in 1999 reflected a 47.4% increase in unit volume and a 6.5% rise in the average selling price. Excluding the impact of acquisitions within the trailing twelve-month period, housing revenues and unit deliveries rose 21.3% and 15.2%, respectively. In 1998, housing revenues totaled $2.38 billion, up 30.2% from 1997 as a result of a 33.0% increase in unit volume, partially offset by a 2.1% decline in average selling price. California housing operations generated 41.7% of Company-wide housing revenues in 1999, down from 45.8% in 1998 and 54.0% in 1997, 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 $1.56 billion in 1999, up 42.6% from $1.09 billion in 1998. Other U.S. housing revenues totaled $1.77 billion in 1999, up 70.8% from $1.04 billion in 1998. Increased hous- ing revenues in California and Other U.S. operations in 1999 were due to acquisition activities and improved market conditions. Operations in France generated housing revenues of $403.4 million in 1999, an increase of 68.1% compared to $240.0 million in 1998, reflecting increases in housing deliveries and substantial improvement in the French housing market. In 1997, housing revenues from operations in France totaled $160.5 million. KB AR 99 44 45 > Housing deliveries rose 47.4% to 22,422 units in 1999, surpassing the previous Company-wide record of 15,213 units established in 1998. This Operating Income Operating income increased 74.3% to a new Company record of $259.1 million in 1999 from $148.7 million in 1998. The improvement reflected increases in U.S. and French deliveries of 47.0% and 53.2%, respectively. Growth in domestic deliveries was comprised of increase was primarily due to higher housing gross profits, resulting from higher unit volume partially offset by increased selling, general and a 30.2% increase in California and a 56.5% increase in Other U.S. operations. In California, deliveries rose to 6,323 units in 1999 from 4,858 units administrative expenses. Housing gross profits in 1999 increased 58.1% or $265.2 million to $721.6 million from $456.4 million in 1998. As a in 1998, reflecting a 34.4% increase in the average number of active communities in the state. Other U.S. operations delivered 13,610 units in percentage of related revenues, housing gross profit margin was 19.3% in 1999, up from 19.2% in the prior year. This increase in housing gross 1999, up from 8,698 units in 1998 as the average number of active communities rose 53.9% to 177. Excluding the impact of acquisitions within margin was primarily due to efficient home designs and construction costs in KB2000 communities, and overall improved market conditions, as the trailing twelve-month period, domestic unit deliveries rose 12.2% in 1999 from the previous year. French deliveries increased 53.2% to 2,465 well as market-driven price increases in selected communities, particularly in California. Company-wide land sales produced losses of $1.2 mil- units in 1999 from 1,609 units in 1998, partly due to improved market conditions. lion and $3.2 million in 1999 and 1998, respectively. Housing deliveries increased 33.0% to 15,213 units in 1998 from 11,443 units in 1997. This improvement reflected increases in U.S. and French Selling, general and administrative expenses increased 51.5%, or $156.7 million in 1999 to $461.3 million. As a percentage of housing revenues, operations of 30.7% and 55.9%, respectively. Growth in domestic deliveries was primarily driven by a 54.2% increase in results from Other U.S. to which these expenses are most closely correlated, selling, general and administrative expenses decreased .4 percentage points to 12.4% operations, to 8,698 units in 1998 from 5,642 units in 1997, and a 2.7% rise in California deliveries to 4,858 units in 1998 from 4,731 units in in 1999 from 12.8% in 1998. The improvement in the selling, general and administrative expense ratio was due to the strong increase in unit 1997. The increase in California deliveries occurred despite a 17.9% year over year decline in the Company’s average number of active communi- volume and reduced reliance on sales initiatives, partially offset by increased expenditures for information systems in support of the KB2000 ties in the state to 64. Unit deliveries in Other U.S. operations in 1998 included 1,702 deliveries from companies acquired that year. Excluding operational business model and the Company’s year 2000 compliance plan, and by goodwill amortization and other expenses related to 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 the Lewis Homes transaction. higher average number of active communities in existing Other U.S businesses. In 1998, French deliveries increased from the previous year pri- marily as a result of the inclusion of a full year of results from SMCI. The Company acquired SMCI, a builder of condominiums in Paris and other Operating income increased to $148.7 million in 1998 from $101.8 million in 1997. This increase was primarily due to higher housing gross prof- cities in France, in mid-1997. its, 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 from $331.9 million in 1997. As a percentage of related revenues, housing gross profit margin was 19.2% in The Company-wide average new home price increased 6.5% in 1999, to $166,500 from $156,400 in 1998. The 1998 average had decreased 2.1% 1998, up from 18.2% in 1997. Housing gross margin increased primarily due to the rising proportion of higher margin deliveries produced by from $159,700 in 1997. The increase in the average selling price in 1999 reflected the inclusion of somewhat higher-priced deliveries in California KB2000 communities, as well as price increases in certain fast-selling, hard to replace communities, particularly in certain California markets. and Nevada related to the Lewis Homes acquisition, as well as higher prices in France. In addition, the Company increased prices in certain fast Company-wide land sales produced losses of $3.2 million and $1.4 million in 1998 and 1997, respectively. selling, hard to replace communities due to improved market conditions in several of its major markets. These price increases were partially offset by a higher proportion of lower-priced deliveries from Other U.S. markets. Other U.S. operations accounted for 68.3% of domestic deliveries in Selling, general and administrative expenses increased by 32.9% or $75.5 million to $304.6 million in 1998. However, as a percentage of housing 1999 compared to 64.2% in 1998. The decrease in 1998 was primarily due to the Company’s decision to generate a greater proportion of lower- revenues, selling, general and administrative expenses increased .3 percentage points to 12.8% in 1998 from 12.5% in 1997. This increase was priced domestic unit deliveries (primarily from Other U.S. operations) as well as to the lower average selling price in France resulting from the mainly due to the inclusion of selling, general and administrative expenses of acquired entities, including goodwill amortization, expenditures inclusion of SMCI deliveries. incurred in connection with extensive information systems revisions required to support the KB2000 operational business model, system conver- sions related to acquisitions and initial efforts toward year 2000 compliance, new market entries in Texas and higher third-party sales commis- In California, the average selling price rose 9.6% in 1999 to $246,000 from $224,500 in 1998, which had increased 7.7% from $208,500 in 1997. sions. Sales commissions rose because a higher percentage of domestic sales were generated from third-party brokers as part of the KB2000 The average selling price in Other U.S. markets increased 9.1% to $129,900 in 1999, compared with $119,100 in 1998 and $118,700 in 1997. operational business model. Domestic price increases in 1999 resulted from the inclusion of higher-priced deliveries from the Lewis Homes operations in California and Nevada and selected increases in sales prices in certain markets due to favorable market conditions. In 1998, the increase in the Company’s California Interest Income and Expense Interest income, which is generated from short-term investments and mortgages receivable, amounted to average selling price resulted from strategic increases in sales prices in certain markets based on improved market conditions, as well as a change $7.8 million in 1999, $5.7 million in 1998 and $5.1 million in 1997. Increases in interest income in 1999 and 1998 primarily reflected increases in product mix favoring a greater number of higher-priced urban in-fill locations and first-time move-up sales. in the interest bearing average balances of mortgages receivable each year. In 1999, a higher average balance of short-term investments also contributed to the increase in interest income. The Company’s average selling price in France rose to $163,600 in 1999 from $149,200 in 1998, which had decreased from $155,500 in 1997. The average selling price in France rose in 1999 primarily due to a change in the mix of deliveries and price appreciation in the French housing market. Interest expense results principally from borrowings to finance land purchases, housing inventory and other operating and capital needs. In 1999, The French average selling price had declined in 1998 primarily due to the inclusion of a full year of lower-priced deliveries generated from SMCI interest expense, net of amounts capitalized, increased to $28.3 million from $23.3 million in 1998. Gross interest incurred in 1999 was $23.7 mil- developments acquired in 1997. lion higher than that incurred in 1998, reflecting an increase in average indebtedness, primarily as a result of the Lewis Homes acquisition and Revenues from the development of commercial buildings, all located in metropolitan Paris, totaled $.7 million in 1999, $1.5 million in 1998 and $2.7 million in 1997. growth in the number of new communities in 1999. The percentages of interest capitalized in 1999 and 1998 were 63.7% and 57.0%, respectively. The higher capitalization rate in 1999 resulted from the effect of the issuance of Feline Prides in the third quarter of 1998 and a higher proportion of land under development in 1999 compared to the Land sale revenues totaled $37.8 million in 1999, $22.5 million in 1998 and $13.6 million in 1997. Generally, land sale revenues fluctuate with previous year. The amounts of interest capitalized as a percentage of gross interest incurred and distributions associated with the Feline Prides decisions to maintain or decrease the Company’s land ownership position in certain markets based upon the volume of its holdings, the strength were 53.3% in 1999 and 51.3% in 1998. and number of competing developers entering particular markets at given points in time, the availability of land in markets served by the Company and prevailing market conditions. Land sales are expected to increase in 2000 in connection with the Company’s review of its assets and busi- In 1998, interest expense, net of amounts capitalized, decreased to $23.3 million from $29.8 million in 1997 primarily due to the issuance of Feline nesses for the purpose of monetizing non-strategic or marginal positions. Prides in the third quarter of 1998, as distributions associated with the Feline Prides are included in minority interests rather than interest expense. KB AR 99 46 47> Gross interest incurred in 1998 was higher than that incurred in 1997 by $1.8 million, reflecting an increase in average indebtedness in 1998, par- General and Administrative Expenses General and administrative expenses associated with mortgage banking operations increased to tially offset by a lower average interest rate as a result of more favorable financing terms obtained by the Company due to the redemption of its $11.6 million in 1999 from $9.9 million in 1998 and $7.9 million in 1997. The increases in general and administrative expenses in both 1999 and $100.0 million 10 3⁄ 8% senior notes and the issuance of $175.0 million of 7 3⁄ 4% senior notes in the fourth quarter of 1997. The percentage of inter- 1998 were primarily due to higher mortgage production volume. est capitalized in 1998 increased from the 43.1% capitalized in 1997, due to the issuance of Feline Prides in 1998 and a higher proportion of land under development in 1998 compared to 1997. Secondary Marketing Trading Loss On August 31, 1999, the Company disclosed that it had discovered unauthorized mortgage loan trading activity by an employee of its mortgage banking subsidiary resulting in a pretax trading loss of $18.2 million ($11.8 million, or $.25 per diluted In 1998, the Company issued $189.8 million of Feline Prides and used the proceeds to immediately pay down outstanding debt under its domes- share, on an after tax basis). It is normal practice for the Company’s mortgage banking subsidiary to sell loans into the market that approxi- tic unsecured revolving credit facility. The distributions associated with the Feline Prides are included in minority interests; therefore, interest mately match loan commitments to the Company’s homebuyers. This practice is intended to hedge exposure to changes in interest rates that expense in future periods will generally be lower than it would be without this financing. may occur until loans are sold to secondary market investors in the ordinary course of business. The loss was the result of a single employee engaging in unauthorized mortgage loan trading largely unrelated to mortgage originations. The employee who conducted the unauthorized trad- Minority Interests Minority interests are comprised of two major components: pretax income of consolidated subsidiaries and joint ventures ing was terminated. related to residential and commercial activities; and distributions associated with Feline Prides issued in July 1998. Operating income was reduced by minority interests of $29.4 million in 1999, $7.0 million in 1998 and $.4 million in 1997. Minority interests increased in 1999 and I nc o m e Tax e s 1998 due to the inclusion of $15.2 million and $6.1 million, respectively, in distributions related to the Feline Prides. In 1999, increased joint ven- ture activity also contributed to the rise in minority interests. In the aggregate, minority interests are expected to remain at higher levels due to increased joint venture activity and distributions associated with the Feline Prides. Equity in Pretax Income (Loss) of Unconsolidated Joint Ventures The Company’s unconsolidated joint venture activities, located in Cali- fornia, Nevada, New Mexico, Texas and France, posted combined revenues of $13.9 million in 1999, $17.7 million in 1998 and $98.2 million in 1997. All unconsolidated joint venture revenues in 1999 were generated from residential properties. French commercial activities accounted for $6.5 and $87.7 million of the combined revenues in 1998 and 1997, respectively. Combined revenues recorded by the Company’s joint ventures fluctuated during the three-year period mainly due to the sale of a French commercial project in 1997. Unconsolidated joint ventures generated combined pretax income of $3.6 million in 1999, compared with pretax income of $5.0 million and a pretax loss of $2.9 million in 1998 and 1997, respectively. The Company’s share of pretax income from unconsolidated joint ventures totaled $.2 million in 1999 and $1.2 million in 1998. In 1997, the Company’s share of pretax losses totaled $.1 million. M or t ga g e B a n k i n g Interest Income and Expense The Company’s mortgage banking operations provide financing principally to purchasers of homes sold by the Company’s domestic housing operations through the origination of residential mortgages. Interest income is earned primarily from first mort- gages, and mortgage-backed securities held for long-term investment as collateral, while interest expense results from notes payable and the collateralized mortgage obligations. Interest income increased to a record $19.2 million in 1999 from $15.6 million in 1998 and $13.3 million in 1997. Interest expense also reached record levels, increasing to $16.9 million in 1999 from $15.0 million in 1998 and $12.7 million in 1997. In both 1999 and 1998, interest income increased primarily due to a higher balance of first mortgages held under commitments of sale and other receivables outstanding compared to the previous year. Interest expense rose in both 1999 and 1998 due to a higher amount of notes payable outstanding compared to the prior year. Combined interest income and expense resulted in net interest income of $2.3 million in 1999 and $.6 million in both 1998 and 1997. These differences reflect varia- tions in mortgage production mix; movements in short-term versus long-term interest rates; and the amount, timing and rates of return on interim reinvestments of monthly principal amortization and prepayments. Other Mortgage Banking Revenues Other mortgage banking revenues, which principally consist of gains on sales of mortgages, servicing rights and, to a lesser extent, mortgage servicing fees and insurance commissions, totaled $45.0 million in 1999, $30.8 million in 1998 and $21.8 million in 1997. The increases in 1999 and 1998 reflected higher gains on the sales of mortgages and servicing rights due to a higher vol- ume of mortgage originations associated with increases in housing unit volume and improved retention in the United States. In addition, in 1998 a more favorable mix of fixed to variable interest rate loans contributed to the increased revenues. The Company recorded income tax expense of $79.4 million in 1999, $51.3 million in 1998 and $32.8 million in 1997. These amounts represented effective income tax rates of approximately 35.0% in both 1999 and 1998 and 36.0% in 1997. The effective tax rate declined in 1998 as a result of greater utilization of affordable housing tax credits. Pretax income for financial reporting purposes and taxable income for income tax pur- poses historically have differed primarily due to the impact of state income taxes, foreign tax rate differences, intercompany dividends and the use of tax credits. L i qu i d i t y a n d C ap i ta l R e s ou r c es The Company assesses its liquidity in terms of its ability to generate cash to fund its operating and investing activities. Historically, the Company has funded its construction and mortgage banking activities with internally generated cash flows and external sources of debt and equity financing. In 1999, operating, investing and financing activities used net cash of $35.0 million; in 1998, these activities used net cash of $4.9 million. Operating activities in 1999 provided $106.8 million, while 1998 operating activities used $12.8 million. In 1999, cash was provided by earnings of $147.5 million, an increase of $130.3 million in accounts payable, accrued expenses and other liabilities, and various noncash items deducted from net income. The cash provided was partially offset by an increase in receivables of $184.1 million and an investment of $38.8 million in inven- tories (excluding the effect of acquisitions and $43.5 million of inventories acquired through seller financing). Excluding the effect of the Company’s acquisitions, inventories increased in 1999, primarily in domestic operations, reflecting continued growth throughout U.S. markets. In 1998, uses of operating cash included an investment of $125.7 million in inventories (excluding the effect of acquisitions and $29.9 million of inventories acquired through seller financing) and an increase in receivables of $50.0 million. The use of cash was partially offset by earnings of $95.3 million, an increase of $51.3 million in accounts payable, accrued expenses and other liabilities, and various noncash items deducted from net income. Cash used by investing activities totaled $34.0 million in 1999 compared to $161.8 million in 1998. In 1999, $19.2 million was used for net pur- chases of property and equipment, $15.0 million was used for investments in unconsolidated joint ventures, $11.6 million, net of cash acquired, was used for acquisitions, and $2.8 million was used for originations of mortgages held for long-term investment. Partially offsetting these uses were $14.6 million of proceeds received from mortgage-backed securities, which were principally used to pay down collateralized mortgage oblig- ations for which the mortgage-backed securities had served as collateral. In 1998, cash used by investing activities included $162.8 million, net of cash acquired, used for acquisitions and $15.9 million used for net pur- chases of property and equipment. Among amounts partially offsetting these uses were $12.9 million of proceeds received from mortgage-backed securities, $2.2 million in distributions related to investments in unconsolidated joint ventures and $1.7 million from the net sales of mortgages held for long-term investment. KB AR 99 48 49 > Financing activities in 1999 used $107.8 million of cash compared to $169.8 million provided in 1998. In 1999, the Company’s uses of cash December 31, 1998 net book values of the entities purchased. The excess of the purchase price over the estimated fair value of net assets acquired included repurchases of common stock of $81.9 million, payments to minority interests of $43.7 million, cash dividend payments of $14.2 million was $177.6 million and was allocated to goodwill. The Company is amortizing the goodwill on a straight-line basis over a period of ten years. The and payments on collateralized mortgage obligations of $14.1 million. Partially offsetting these uses was cash provided from net proceeds from shares of Company common stock issued in the acquisition are “restricted” shares and may not be resold without a registration statement or com- borrowings of $46.1 million. The Company’s financial leverage, as measured by the ratio of debt to total capital, net of invested cash, was 48.4% pliance with Securities and Exchange Commission regulations that limit the number of shares that may be resold in a given period. The Company at the end of 1999 compared to 43.4% at the end of 1998. The ratios were adjusted to reflect $.7 million and $20.2 million of invested cash at has agreed to file a registration statement for those shares in three increments at the Lewis family’s request from July 1, 2000 to July 1, 2002. November 30, 1999 and 1998, respectively. The Company seeks to maintain its ratio of debt to total capital within a targeted range of 45% to 55%, Under the terms of the purchase agreement, a Lewis family member has also been appointed to the Company’s Board of Directors. and achieved this goal in 1999 despite its share repurchase program and the impact of the secondary marketing trading loss. The Company believes its debt to total capital ratio for 1999 reflects the initial impact of a strategic review of its assets and businesses initiated late in the year. In connection with the acquisition of Lewis Homes, the Company obtained a $200 million unsecured Term Loan Agreement with various banks to The debt to capital ratio at the end of 1998 was impacted by an increase in capital from the offering of $189.8 million of Feline Prides in the third refinance certain debt assumed. The Term Loan Agreement dated January 7, 1999 provides for three payments of $25 million, due on January 31, quarter of 1998. 2000, April 30, 2000 and July 31, 2000, with the remaining principal balance due on April 30, 2001. Interest is payable monthly at the London Interbank Offered Rate plus an applicable spread. Under the terms of the Term Loan Agreement, the Company is required, among other things, to Financing activities in 1998 provided $183.1 million from the issuance of Feline Prides and $17.9 million in net proceeds from borrowings. Partially maintain certain financial statement ratios and a minimum net worth and is subject to limitations on acquisitions, inventories and indebtedness. offsetting cash provided in 1998 were payments to minority interests of $7.0 million, payments on collateralized mortgage obligations of $12.3 The financing obtained under the Term Loan Agreement did not affect the amounts available under the pre-existing borrowing arrangements, million and cash dividend payments of $11.9 million. although the Company used borrowings under its $500 million domestic unsecured revolving credit facility to refinance certain other debt During the second quarter of 1998, the Company acquired three privately held homebuilders with regional operations in certain key markets. On March 19, 1998, the Company acquired all of the issued and outstanding capital stock of Houston-based Hallmark for approximately $54.0 million, The acquisition consideration for Lewis Homes was determined by arms-length negotiations between the parties. The acquisition was accounted including the assumption of debt. Hallmark built single-family homes primarily in Houston (with additional operations in San Antonio and Austin, for as a purchase, with the results of Lewis Homes included in the Company’s consolidated financial statements as of January 7, 1999. Texas) under the trade names of Dover Homes and Ideal Builders. The acquisition of Hallmark marked the Company’s entry into the Houston mar- ket and formed the core of those operations, while strengthening its existing market positions in San Antonio and Austin. During the second half of 1999, the Company completed the acquisition of the outstanding shares of Park, a French apartment builder, for a total price of approximately $16.6 million. The acquisition was financed by a three-year bank loan that provides for interest at the Euro Interbank Offered The Company acquired substantially all of the assets of Denver-based PrideMark on March 23, 1998 for approximately $65.0 million, including the Rate Plus 1.45%. The acquisition was accounted for under the purchase method, and the results of operations of the builder are included in the assumption of trade liabilities and debt. PrideMark built single-family homes in Denver, Colorado, and its acquisition significantly increased the Company’s consolidated financial statements as of the date of purchase. The excess of the purchase price over the estimated fair value of net Company’s already substantial market presence in Denver. assets acquired was $10.0 million and was allocated to goodwill. The Company is amortizing goodwill related to the acquisition on a straight-line assumed in the Lewis Homes acquisition. basis over a period of ten years. On April 9, 1998, the Company acquired all of the issued and outstanding capital stock of Estes for approximately $48.0 million, including the assumption of debt. Estes built single-family homes in Phoenix and Tucson, Arizona. Estes provided the Company’s entry into the Tucson market On August 4, 1999, the Company’s Board of Directors authorized a share repurchase program which allowed the Company to purchase up to 2.5 and significantly increased its already substantial market presence in Phoenix. million shares of the Company’s common stock at prices not to exceed $28 per share. The Company repurchased all of the 2.5 million shares orig- inally authorized and on November 1, 1999, the Board of Directors authorized the repurchase of up to 4.0 million additional shares of Company On August 18, 1998, the Company acquired a majority ownership investment in General Homes, a builder of single-family homes primarily in common stock. As of November 30, 1999, the Company had repurchased 3.8 million shares under the repurchase program. Houston, Texas. The Company invested approximately $31.8 million, including the assumption of debt, to acquire 50.3% of the outstanding stock of General Homes, pursuant to a completed plan of reorganization. Effective January 4, 1999, the Company invested approximately $14.5 million As of February 3, 2000, the Company had repurchased a total of 6.5 million shares of the Company’s common stock under authorizations made by to acquire the remaining 49.7% of the outstanding stock of General Homes, bringing its ownership interest to 100%. the Board of Directors on August 4, 1999 and November 1, 1999. On February 3, 2000, the Company’s Board of Directors authorized the repur- chase of up to an additional 4.0 million shares of the Company’s common stock. Each acquisition and investment was accounted for under the purchase method and the results of operations of the acquired entities were included in the Company’s consolidated financial statements as of their respective dates of acquisition. Each of these was financed by borrowings under the In connection with the repurchase program, on August 27, 1999, the Company established a grantor stock ownership trust (the “Trust”) into which Company’s domestic unsecured revolving credit facility. the repurchased shares are transferred. The Trust, administered by an independent trustee, acquires, holds and distributes the shares of common stock for the purpose of funding certain employee compensation and employee benefit obligations of the Company under its existing stock option, Effective January 7, 1999, the Company acquired substantially all of the homebuilding assets of Lewis Homes. Lewis Homes was engaged in the 401(k) and other employee benefit plans. The existence of the Trust will have no impact on the amount of benefits or compensation that will be acquisition, development and sale of residential real estate in California and Nevada. Prior to the acquisition, Lewis Homes was one of the largest paid under these plans. privately held single-family homebuilders in the United States based on units delivered, with revenues for the year ended December 31, 1998 of $715 million on 3,631 unit deliveries. Lewis Homes also owned or controlled approximately 24,000 lots and had a backlog of approximately For financial reporting purposes, the Trust is consolidated with the Company. Any dividend transactions between the Company and the Trust are 900 homes at December 31,1998. Lewis Homes’ principal markets were Las Vegas and Northern Nevada, Southern California and the greater eliminated. Acquired shares held by the Trust remain valued at the market price at the date of purchase and are shown as a reduction to stock- Sacramento area in Northern California. holders’ equity in the consolidated balance sheet. The difference between the Trust share value and the fair market value on the date shares are released from the Trust, for the benefit of employees, will be included in additional paid-in capital. Common stock held in the Trust is not consid- The purchase price for Lewis Homes was approximately $449.2 million, comprised of the assumption of approximately $303.2 million in debt and ered outstanding in the computation of earnings per share. The Trust held 3.8 million shares of common stock at November 30, 1999. The trustee the issuance of 7.9 million shares of the Company’s common stock valued at approximately $146.0 million. The purchase price was based on the votes shares held by the Trust in accordance with voting directions from eligible employees, as specified in a trust agreement with the trustee. KB AR 99 50 51 > External sources of financing for the Company’s construction activities include its domestic unsecured revolving credit facility, other domestic and On May 25, 1999, the Company’s mortgage banking subsidiary entered into a $150.0 million Master Loan and Security Agreement with an invest- foreign bank lines, third-party secured financings, and the public debt and equity markets. Substantial unused lines of credit remain available for ment bank. The agreement, which expires on May 25, 2000, provides for a facility fee based on the $150.0 million maximum amount available and the Company’s future use, if required, principally through its domestic unsecured revolving credit facility. Under this facility, $500.0 million provides for interest to be paid monthly at the Eurodollar Rate plus an applicable spread on amounts borrowed. remained committed and $416.9 million was available for the Company’s future use at November 30, 1999. The domestic unsecured revolving credit facility is comprised of a $400 million revolving credit facility scheduled to expire on April 30, 2001 and a 364-day revolving credit facility The amounts outstanding under the revolving mortgage warehouse facility and the Master Loan and Security agreement are secured by a borrow- which has provisions for annual renewal. In addition, the Company’s French subsidiaries have lines of credit with various banks which totaled ing base, which includes certain mortgage loans held under commitments of sale and are repayable from sales proceeds. There are no compen- $198.7 million at November 30, 1999 and have various committed expiration dates through November 2001. Under these unsecured financing sating balance requirements under either facility. Both facilities include financial covenants and restrictions which, among other things, require the agreements, $148.8 million was available in the aggregate at November 30, 1999. maintenance of certain financial statement ratios, a minimum tangible net worth and a minimum net income. Depending upon available terms and its negotiating leverage related to specific market conditions, the Company also finances certain land acqui- Debt service on the Company’s collateralized mortgage obligations is funded by receipts from mortgage-backed securities. Such funds are sitions with purchase-money financing from land sellers and other third parties. At November 30, 1999, the Company had outstanding seller- expected to be adequate to meet future debt-payment schedules for the collateralized mortgage obligations and therefore these securities have vir- financed notes payable of $30.6 million secured primarily by the underlying property which had a carrying value of $106.3 million. tually no impact on the capital resources and liquidity of the mortgage banking operations. On December 5, 1997, the Company filed a universal shelf registration statement with the Securities and Exchange Commission for up to $500 The Company continues to benefit in all of its operations from the strength of its capital position, which has allowed it to maintain overall prof- million of the Company’s debt and equity securities. The universal shelf registration provides that securities may be offered from time to time in itability during troubled economic times, finance domestic and international expansion, re-engineer product lines and diversify into new markets. one or more series and in the form of senior, senior subordinated or subordinated debt, preferred stock, common stock, and/or warrants to pur- Secure access to capital at competitive rates, among other reasons, should enable the Company to continue to grow and expand. As a result of its chase such securities. The registration was declared effective on December 16, 1997, and no securities have been issued thereunder. geographic diversification, the disciplines of the KB2000 operational business model and its strong capital position, the Company believes it has On July 7, 1998, the Company, together with a KBHC Trust that is wholly owned by the Company, issued an aggregate of (i)18,975,000 Feline acquire capital assets and land, to construct homes, to fund its mortgage banking operations, and to meet other needs of its business, both on a adequate resources and sufficient credit line facilities to satisfy its current and reasonably anticipated future requirements for funds needed to Prides, and (ii)1,000,000 KBHC Trust capital securities, with a $10 stated liquidation amount. The Feline Prides consisted of (i)17,975,000 Income short and long-term basis. Prides with the stated amount per Income Prides of $10, which are units comprised of a capital security and a stock purchase contract under which the holders will purchase common stock from the Company not later than August 16, 2001 and the Company will pay to the holders certain unse- Yea r 2 0 0 0 I s s u e cured contract adjustment payments, and (ii)1,000,000 Growth Prides with a face amount per Growth Prides equal to the $10 stated amount, which are units consisting of a 1/100th beneficial interest in a zero-coupon U.S. treasury security and a stock purchase contract under which the holders will purchase common stock from the Company not later than August 16, 2001 and the Company will pay to the holders certain unsecured contract adjustment payments. The distribution rate on the Income Prides is 8.25% per annum and the distribution rate on the Growth Prides is .75% per annum. Under the stock purchase contracts, investors will be required to purchase shares of common stock of the Company for an effective price ranging between a min- imum of $31.75 per share and a maximum of $38.10 per share, and the Company will issue approximately 5 to 6 million common shares by August 16, 2001, depending upon the price of the common stock upon settlement of the purchase contracts (subject to adjustment under certain circumstances). The capital securities associated with the Income Prides and the U.S. treasury securities associated with the Growth Prides have been pledged as collateral to secure the holders’ obligations in respect of the common stock purchase contracts. The capital securities issued by the KBHC Trust are entitled to a distribution rate of 8% per annum of their $10 stated liquidation amount. The Company uses its capital resources primarily for land purchases, land development and housing construction. The Company typically man- ages its investments in land by purchasing property under options and other types of conditional contracts whenever possible, and similarly con- trols its investment in housing inventories by emphasizing the pre-sale of homes over speculative construction and carefully managing the timing of the production process. During the 1990’s, the Company’s inventories became geographically more diverse, primarily as a result of its extensive domestic expansion outside of California. The Company continues to concentrate its housing operations in desirable areas within targeted growth markets, principally oriented toward entry-level purchasers. The principal sources of liquidity for the Company’s mortgage banking operations are internally generated funds from the sales of mortgages and related servicing rights. Mortgages originated by the mortgage banking operations are generally sold in the secondary market within 60 days of origination. External sources of financing for these operations include a $250.0 million revolving mortgage warehouse facility, which expires on February 23, 2000. At November 30, 1999, the mortgage banking operations had borrowed the maximum amount available under the facility. The Company’s mortgage banking subsidiary is currently in the process of renewing its revolving mortgage warehouse facility. The term “year 2000 issue” is a general term that was used to describe the complications that were feared would arise from the use of existing computer hardware and software designed by applicable manufacturers without consideration for the change in the century as of J a n u a ry 1, 2000. If not corrected, software programs with this embedded problem were considered to possibly cause computer systems to fail or to miscalculate data. During the late 1990’s, the Company invested in information systems required to support its KB2000 operational business model and effectively manage and control growth. In conjunction with this investment in technology, and with respect to the year 2000 issue in particular, the Company undertook to modify or replace portions of its existing computer operating systems to ensure that they would function properly with respect to dates in the year 2000 and thereafter. In 1998, the Company formed a “Year 2000 Project Office” to direct the Company-wide efforts encompassed by this project. During calendar year 1999, the Company successfully completed a year 2000 effort that was comprised of 13 distinct projects. Each of the projects was timely com- pleted and certified as year 2000 compliant by key management participants. With the passing of the new year and the month of January 2000 completed, neither the Company nor any of its key vendors or other third party providers have been materially adversely impacted by technologi - cal issues associated with the turning of the century. At this time, the Company considers the risk of any year 2000 related failures or the conse- quences of any year 2000 failures to be extremely low. Management believes that the year 2000 issue has not and will not have any material adverse effect on the Company’s liquidity, financial condition or results of operations. Several of the projects included in the Company’s year 2000 plan were projects which were necessary to support the Company’s KB2000 opera- tional business model, and would have been undertaken regardless of year 2000 exposure. The total cost of all of the Company’s projects associ- ated with its year 2000 plan was approximately $4.0 million; however, because such projects involved conversions and upgrades that were not necessitated to meet year 2000 concerns, it is not possible to determine the portion of the total cost which is specifically attributable to year 2000 compliance efforts. KB AR 99 52 53 > C on v e r s i on t o t h e E u r o C u r r e nc y On January 1, 1999, certain member countries of the European Union (the “EU”) established fixed conversion rates between their existing curren- cies and the European Union’s common currency (the “euro”). The Company conducts substantial business in France, an EU member country. During the established transition period for the introduction of the euro, which extends to June 30, 2002, the Company will address the issues involved with the adoption of the new currency. The most important issues facing the Company include: converting information technology sys- tems; reassessing currency risk; negotiating and amending contracts; and processing tax and accounting records. Based upon progress to date, the Company believes that use of the euro will not have a significant impact on the manner in which it conducts its business affairs and processes its business and accounting records. Accordingly, conversion to the euro is not expected to have a material effect on the Company’s financial condition or results of operations. S ub se qu e n t E v e n t s On January 24, 2000, Kaufman & Broad S.A. (“KBSA”), the Company’s wholly owned French subsidiary filed a preliminary public offering memo- randum for the initial public offering of ordinary shares of KBSA. On February 7, 2000, KBSA successfully completed its public offering and is now listed on the Premier Marche of the ParisBourse. The offering of approximately 5.1 million shares (before exercise of the over allotment option) was made in France and in Europe and was priced at 23 euros per share, representing a total offering of approximately $120.0 million. Proceeds from the offering will be used to fund internal and external growth of the French homebuilding operations, obtain better financing condi- tions, and finance the payment of a dividend of approximately $85.0 million to the Company, which the Company will use to reduce its domestic debt and repurchase additional shares of its common stock. The Company continues to own a majority interest in KBSA and will continue to con- solidate these operations in its financial statements. In connection with the ongoing review of its assets and operations, and to reposition its core homebuilding operations, the Company is actively exploring the sale of certain of its operating divisions. Such divisions, which do not individually or in the aggregate comprise a material portion of the Company’s financial position or results of operations, operate businesses that are inconsistent with the Company’s strategic focus on fewer, larger homebuilding markets to maximize execution of its KB2000 operational business model. To the extent the sale of any division occurs during fiscal year 2000 as planned, the Company does not anticipate such transactions to have a material effect on its financial position or results of oper- ations in fiscal year 2000 or in future years. O ut lo o k The Company’s residential backlog at November 30, 1999 consisted of 8,558 units, representing aggregate future revenues of $1.38 billion. Both amounts established new year-end records, and reflected increases of 23.3% and 38.2%, respectively, when compared to the 6,943 units in resi- dential backlog, representing aggregate future revenues of $1.00 billion, at year-end 1998. Company-wide net orders for the fourth quarter of 1999 totaled 4,869, up 12.7% from the comparable quarter of 1998. The 1999 fourth quarter net order total included orders generated by the acquired Lewis Homes operations and operations acquired in France. Excluding the impact of sis on pre-sales. The success of communities designed under its KB2000 operational business model also contributed to the increase in total United States backlog levels. California operations produced substantial year-over-year growth, with backlog at November 30, 1999 rising to $457.4 million on 1,879 units from $288.3 million on 1,220 units at November 30, 1998. Net orders from California operations increased 33.4% in the fourth quarter of 1999 to 1,314 units, up from 985 units in the fourth quarter of 1998; however, excluding 504 net orders associated with the C o m p a n y ’s Lewis Homes acquisition, fourth quarter net orders in California operations decreased 17.8%. In Other U.S. operations, backlog increased to $696.5 million on 5,306 units at November 30, 1999, up from $560.3 million on 4,739 units at November 30, 1998, as the average number of active communities rose 53.9% from the prior year. Fourth quarter 1999 net orders in Other U.S. operations increased 10.6% to 2,908 units from 2,630 units in the year-earlier period. In France, residential backlog at November 30, 1999 totaled $227.2 million on 1,369 units, up 55.7% and 42.5%, respectively, from $145.9 million on 961 units at year-end 1998. French net orders decreased 7.3% to 647 units in the fourth quarter of 1999 from 698 units in the year-earlier period primarily due to existing communities selling out more quickly than expected. The value of the backlog associated with French commer- cial development activities totaled approximately $1.7 million at November 30, 1999 from $1.8 million at year end 1998, reflecting a reduced level of activity. Substantially all homes included in the year-end 1999 backlog are expected to be delivered during 2000. However, cancellations could occur, particularly if market conditions deteriorate or mortgage interest rates increase, thereby decreasing backlog and related future revenues. Company-wide net orders during the first two months of fiscal 2000 decreased 2.1% from the comparable period of 1999. Domestic net orders during the two-month period decreased 3.7% due to a 5.9% decrease in net orders from Other U.S. operations, partially offset by a 1.9% increase in net orders from California operations. Excluding net orders from operations acquired in the trailing twelve-month period, domestic net orders decreased 14.8% in the first two months of fiscal 2000 compared to the same period a year ago. The decrease is primarily due to higher mortgage interest rates compared to the year-earlier period. In France, net orders for the first two months of fiscal 2000 increased 12.9% compared to the same period in 1999, reflecting the inclusion of Park and new community openings. Excluding net orders from operations acquired in the trailing twelve-month period, French net orders rose 3.2% in the first two months of fiscal 2000. Full year Company-wide net order results could be fur- ther affected by current global market uncertainties, mortgage interest rate volatility, declines in consumer confidence and/or other factors. As a result of continued domestic expansion outside of California, the percentage of domestic unit deliveries generated from California operations decreased to 31.7% in 1999 from 35.8% in 1998. On a revenue basis, these percentages were 46.8% in 1999 and 51.3% in 1998. In response to persistently weak conditions for new housing and general recessionary trends in California during the first half of the 1990’s and in order to spur growth, the Company diversified its business through aggressive expansion into other western states. Since then, the housing market has improved significantly in California, and the Company remains cautiously optimistic that the improved economic climate will continue for the fore- seeable future, thereby generally enabling the housing market, and the Company’s business in the state to retain its strength. Other U.S. operations continued to experience substantial growth in 1999. The acquisition of Lewis Homes’ market-leading operations in Nevada, coupled with the continued expansion of preexisting Other U.S. operations, resulted in a 56.5% increase in deliveries in 1999 compared to the prior year. The Company has also achieved the most significant penetration of its KB2000 operational business model in these Other U.S. markets. The Company is seeking to continue to expand its Other U.S. operations and continues to explore opportunities to enter new markets as well as acquisitions within the trailing twelve-month period, Company-wide net orders decreased 12.2% in the fourth quarter of 1999 compared to the grow its existing markets. year-earlier quarter. The Company’s domestic residential backlog at November 30, 1999 increased to $1.15 billion, up 36.0% from $848.6 million at year-end 1998. On a unit basis, the domestic backlog stood at 7,185 units at year-end 1999, up 20.6% from 5,959 units at year-end 1998. Improvement occurred in both California and Other U.S. operations, and resulted primarily from the Lewis Homes acquisition, completed during the first quarter of 1999, higher order rates reflecting generally good market conditions throughout the United States, particularly in California, and the Company’s empha- The French housing market has continued to improve in recent years. In 1999, unit deliveries in France rose by 53.2% from the previous year, including the impact of the acquisition of Park. The Company anticipates that increases in deliveries from French housing operations in 2000 will be in line with that nation’s improving economy. French commercial activities are not likely to increase materially, consistent with the strategy to focus primarily on the expansion of its residential development business. The initial public offering of KBSA, completed in February 2000, has strengthened the French business by providing it with access to additional capital to support its growth. KB AR 99 54 55 > As the Company enters fiscal year 2000, it plans to continue to operate under the principles of the KB2000 operational business model — now I m pa c t o f I n f l at i o n renamed KBnxt — and to strive for continued growth. The Company believes its KB2000 operational business model has been instrumental in its achievement of record deliveries and earnings in 1998 and 1999. Since implementing KB2000 in 1997, the Company has leveraged the business model with additional and complementary initiatives including strategies to establish leading market positions and maintain focus on acquisitions. In order to leverage the benefits of the KB2000/KBnxt operational business model, the Company has concentrated on a strategy designed to achieve a leading position in its major markets. By operating in fewer, larger markets at sufficiently large volume levels, the Company believes it can better execute its operational business model and use economies of scale to increase profits. The expected benefits of this strategy can include lower land acquisition costs, improved terms with suppliers and subcontractors, the ability to offer maximum choice and the best value to cus- tomers, and the retention of the best management talent. The Company hopes to continue to increase overall unit delivery growth in future years, with its current primary growth strategies to expand exist- ing operations to optimal market volume levels, while still exploring entry into new markets, at high volume levels, through acquisitions. The Company expects to continue to consider acquisitions from time to time to supplement growth in existing markets and facilitate expansion into new markets. However, the Company’s ability to acquire other homebuilders could be affected by several factors, including, among other things, conditions in U.S. securities markets, the Company’s stock price, 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. Merger and acquisition activity within the U.S homebuilding industry has slowed in recent months as a result of the generally depressed stock prices of leading builders. The Company is also in the process of reviewing its assets and businesses for the purpose of monetizing non-strategic or marginal positions, and has instituted even more stringent criteria for prospective land acquisitions. Included among these initiatives is the Company’s exploration of the sale of certain operating divisions, which do not individually or in the aggregate comprise a material portion of the Company’s business. These ini- tiatives are intended to increase cash flows available to reduce debt and/or repurchase additional stock. The Company believes that the improve- ment in its debt ratio from the end of the third quarter to the end of the fourth quarter of fiscal 1999, which occurred despite the stock buyback program, reflects the early benefits of this review. The Company’s business is significantly affected by general economic conditions, particularly by inflation and its generally associated adverse effect on interest rates. Although inflation rates have been low in recent years, rising inflation would likely affect the Company’s revenues and earn- ing power by reducing demand for homes as a result of correspondingly higher interest rates. In periods of high inflation, the rising costs of land, construction, labor, interest and administrative expenses have often been recoverable through increased selling prices, although this has not always been possible because of high mortgage interest rates and competitive factors in the marketplace. In recent years, inflation has had no sig- nificant adverse impact on the Company, as average annual cost increases have not exceeded the average rate of inflation. * * * Investors are cautioned that certain statements contained in this document, as well as some statements by the Company in periodic press releases and some oral statements by Company officials to securities analysts and stockholders during presentations about the Company are “forward- looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Act”). Statements which are predictive in nature, which depend upon or refer to future events or conditions, or which include words such as “expects”, “anticipates”, “intends”, “plans”, “believes”, “estimates”, “hopes”, and similar expressions constitute forward-looking statements. In addition, any statements concerning future financial performance (including future revenues, earnings or growth rates), ongoing business strategies or prospects, and possible future Company actions, which may be provided by management are also forward-looking statements as defined by the Act. Forward-looking statements are based on current expectations and projections about future events and are subject to risks, uncertainties, and assumptions about the Company, economic and market factors and the homebuilding industry, among other things. These statements are not guaranties of future performance, and the Company has no specific intention to update these statements. Actual events and results may differ materially from those expressed or forecasted in the forward-looking statements made by the Company or Company officials due to a number of factors. The principal important risk factors that could cause the Company’s actual performance and future events and actions to differ materially from such forward-looking statements include, but are not limited to, national or regional changes in gen- eral economic conditions, employment levels, costs of homebuilding material and labor, home mortgage and other interest rates, the secondary market for mortgage loans, competition, currency exchange rates as they affect the Company’s operations in France, consumer confidence, gov- ernment regulation or restrictions on real estate development, capital or credit market conditions affecting the Company’s cost of capital; the avail- ability and cost of land in desirable areas; environmental factors, governmental regulations, unanticipated violations of Company policy, property The Company’s agreement to joint venture its interest in “City Ranch”, a master planned community in north Los Angeles County, California, is an taxes, and unanticipated delays in the Company’s operations. example of its ongoing asset review process. Notwithstanding the asset review, the Company hopes to continue to increase overall unit deliveries in future years. Subject to various risk factors, the Company’s growth strategies include expanding existing operations to sizable 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 operational business model. Based on its current projections, the Company expects to establish record earnings in fiscal 2000, although 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, and the extent of its internal asset review, among other things. In particular, interest rates have risen since the beginning of the Company’s 1999 fiscal year. Recent increases in short-term interest rates instituted by the Federal Reserve Board may give rise to further increases in mortgage interest rates. With its acquisi- tion of companies in 1998 and 1999, including Lewis Homes, its asset repositioning program, and its high current backlog levels, the Company believes it is well-positioned to achieve record earnings in 2000. KB AR 99 56 57> Consolidated Statements of Income Consolidated Balance Sheets i n t h ou s a n d s, e xc e p t p e r s h a r e a m o u n t s Years Ended November 30, Total revenues Construction: Revenues Construction and land costs Selling, general and administrative expenses Operating income Interest income Interest expense, net of amounts capitalized Minority interests Equity in pretax income (loss) of unconsolidated joint ventures 1999 1998 1997 $(3,836,295 $(2,449,362 $(1,878,723 $(3,772,121 $(2,402,966 $(1,843,614 (3,051,698) (1,949,729) (1,512,766) (461,316) (304,565) (229,097) 259,107 7,806 (28,340) (29,392) 224 148,672 5,674 (23,341) (7,002) 1,151 101,751 5,078 (29,829) (425) (53) Construction pretax income 209,405 125,154 76,522 Mortgage banking: Revenues: Interest income Other Expenses: Interest General and administrative Secondary marketing trading loss Mortgage banking pretax income Total pretax income Income taxes Net income Basic earnings per share Diluted earnings per share See accompanying notes. 19,186 44,988 64,174 (16,941) (11,614) (18,155) 17,464 226,869 (79,400) 15,569 30,827 46,396 13,303 21,806 35,109 (15,046) (9,937) (12,699) (7,902) 21,413 14,508 146,567 (51,300) 91,030 (32,800) $(0,147,469 $00095,267 $(0,058,230 $(0,0003.16 $(0,0022.41 $(0,0001.50 $(0,0003.08 $(0,0002.32 $(0,0001.45 i n t h ou s a n d s, e xc e p t s h ar e s November 30, Assets Construction: Cash and cash equivalents Trade and other receivables Mortgages and notes receivable Inventories Investments in unconsolidated joint ventures Deferred income taxes Goodwill Other assets Mortgage banking: Cash and cash equivalents Receivables: First mortgages and mortgage-backed securities First mortgages held under commitments of sale and other receivables Other assets Total assets Liabilities and stockholders’ equity Construction: Accounts payable Accrued expenses and other liabilities Mortgages and notes payable Mortgage banking: Accounts payable and accrued expenses Notes payable Collateralized mortgage obligations secured by mortgage-backed securities Minority interests: Consolidated subsidiaries and joint ventures Company obligated mandatorily redeemable preferred securities of subsidiary trust holding solely debentures of the Company Stockholders’ equity: Preferred stock—$1.00 par value; authorized, 10,000,000 shares: none outstanding Common stock—$1.00 par value; authorized, 100,000,000 shares; 48,090,615 and 39,992,004 shares outstanding at November 30, 1999 and 1998, respectively Paid-in capital Retained earnings Accumulated other comprehensive income Grantor stock ownership trust, at cost: 3,750,100 shares at November 30, 1999 Total stockholders’ equity Total liabilities and stockholders’ equity See accompanying notes. 1999 1998 $0,015,576 205,847 58,702 1,521,265 21,290 99,519 205,618 86,259 $0,056,602 140,771 54,070 1,134,402 5,608 24,094 45,533 81,464 2,214,076 1,542,544 12,791 6,751 47,080 386,076 4,212 450,159 58,262 249,702 2,945 317,660 $2,664,235 $1,860,204 $0,328,528 222,855 813,424 $0,211,380 148,508 529,846 1,364,807 889,734 9,711 377,666 36,219 423,596 8,924 239,413 49,264 297,601 9,499 8,608 189,750 199,249 189,750 198,358 48,091 335,324 376,626 (1,584) (81,874) 676,583 39,992 193,520 243,356 (2,357) 474,511 $2,664,235 $1,860,204 KB AR 99 58 59 > Consolidated Statements of Stockholders’ Equity Consolidated Statements of Cash Flows Number of Shares i n t h ou s a n d s Years Ended November 30, 1999, 1998 and 1997 Common Stock Grantor Stock Ownership Trust Common Stock Paid-in Capital Retained Earnings Accumulated Other Comprehensive Income Grantor Stock Total Ownership Stockholders’ Equity Trust Balance at November 30, 1996 38,828 $38,828 $183,801 $113,398 $(4,323 $340,350 Comprehensive income: Net income Foreign currency translation adjustments Total comprehensive income Dividends on common stock Exercise of employee stock 58,230 (11,668) (6,310) options 169 169 2,285 Balance at November 30, 1997 38,997 38,997 186,086 159,960 (1,987) Comprehensive income: Net income Foreign currency translation adjustments Total comprehensive income Dividends on common stock Exercise of employee stock 95,267 (11,871) (370) options 995 995 15,699 Company obligated mandatorily redeemable preferred securities of subsidiary trust holding solely debentures of the Company – contract adjustment payments and issuance costs (8,265) Balance at November 30, 1998 39,992 39,992 193,520 243,356 (2,357) Comprehensive income: Net income Foreign currency translation adjustments Total comprehensive income Dividends on common stock Exercise of employee stock options 212 212 3,686 Issuance of common stock related to an acquisition 7,887 7,887 138,118 147,469 (14,199) 773 58,230 (6,310) 51,920 (11,668) 2,454 383,056 95,267 (370) 94,897 (11,871) 16,694 (8,265) 474,511 147,469 773 148,242 (14,199) 3,898 146,005 Grantor stock ownership trust (3,750) $(81,874) (81,874) Balance at November 30, 1999 48,091 (3,750) $48,091 $335,324 $376,626 $(1,584) $(81,874) $676,583 See accompanying notes. i n t h ou s a n d s Years Ended November 30, Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided (used) by operating activities: Equity in pretax (income) loss of unconsolidated joint ventures Minority interests Amortization of discounts and issuance costs Depreciation and amortization Provision for deferred income taxes Change in assets and liabilities, net of effects from acquisitions: Receivables Inventories Accounts payable, accrued expenses and other liabilities Other, net 1999 1998 1997 $(147,469 $(095,267 $(058,230 (224) 29,392 1,501 38,251 (25,913) (184,116) (38,761) 130,257 8,911 (1,151) 7,002 1,882 16,178 474 (50,040) (125,719) 51,283 (8,025) 53 425 2,341 11,860 (5,028) (118,123) 5,157 20,064 (4,023) Net cash provided (used) by operating activities 106,767 (12,849) (29,044) Cash flows from investing activities: Acquisitions, net of cash acquired Investments in unconsolidated joint ventures Net sales (originations) of mortgages held for long-term investment Payments received on first mortgages and mortgage-backed securities Purchases of property and equipment, net Net cash provided (used) by investing activities Cash flows from financing activities: Net proceeds from credit agreements and other short-term borrowings Proceeds from Company obligated mandatorily redeemable preferred securities of subsidiary trust holding solely debentures of the Company Proceeds from issuance of senior notes Payments on collateralized mortgage obligations Payments on mortgages, land contracts and other loans Redemption of senior notes Payments from (to) minority interests Payments of cash dividends Repurchases of common stock Net cash provided (used) for financing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year (11,646) (15,022) (2,756) 14,629 (19,160) (33,955) (162,818) 2,214 1,686 12,933 (15,859) (161,844) 1,921 164 9,988 (5,917) 6,156 119,425 63,187 37,900 183,057 (12,324) (45,239) (7,006) (11,871) (14,098) (73,329) (43,723) (14,199) (81,874) (107,798) 169,804 (34,986) 63,353 (4,889) 68,242 172,182 (9,531) (8,047) (100,000) 513 (11,668) 81,349 58,461 9,781 Cash and cash equivalents at end of year $(028,367 $(063,353 $(068,242 Supplemental disclosures of cash flow information: Interest paid, net of amounts capitalized Income taxes paid Supplemental disclosures of noncash activities: Cost of inventories acquired through seller financing Issuance of common stock related to an acquisition Debt assumed related to an acquisition See accompanying notes. $(043,014 74,560 $(037,915 40,521 $(043,559 29,982 $(029,911 $(015,098 $(043,529 146,005 303,239 KB AR 99 60 61 > Notes to Consolidated Financial Statements N ot e 1 . S um m a r y o f S i g n i f i c a n t A c c o u nt i n g P o l i c i e s Operations Kaufman and Broad Home Corporation (the “Company”) is a regional builder of single-family homes with domestic operations throughout the western United States, and international operations in France. The Company is also a developer of commercial and high-density residential projects in France. Through its mortgage banking subsidiary, Kaufman and Broad Mortgage Company, the Company provides mortgage banking services to its domestic homebuyers. Basis of Presentation The consolidated financial statements include the accounts of the Company and all significant subsidiaries and joint ventures in which a controlling interest is held. All significant intercompany transactions have been eliminated. Investments in unconsolidated joint ventures in which the Company has less than a controlling interest are accounted for using the equity method. Use of Estimates The financial statements have been prepared in conformity with generally accepted accounting principles and, as such, include amounts based on informed estimates and judgments of management. Actual results could differ from these estimates. Cash and Cash Equivalents The Company considers all highly liquid debt instruments and other short-term investments purchased with a maturity of three months or less to be cash equivalents. As of November 30, 1999 and 1998, the Company’s cash equivalents totaled $704,000and $20,246,000, respectively. Foreign Currency Translation Results of operations for foreign entities are translated using the average exchange rates during the period. For foreign entities, assets and liabilities are translated to U.S. dollars using the exchange rates in effect at the balance sheet date. Resulting transla- tion adjustments are recorded in stockholders’ equity as foreign currency translation adjustments. Construction Operations Housing and other real estate sales are recognized when title passes to the buyer and all of the following conditions are met: a sale is consummated, a significant down payment is received, the earnings process is complete and the collection of any remaining receivables is reasonably assured. In France, revenues from development and construction of apartments, condominiums and commercial build- ings, under long-term contracts with individual investors who own the land, are recognized using the percentage of completion method, which is generally based on costs incurred as a percentage of estimated total costs of individual projects. Revenues recognized in excess of amounts billed are classified as receivables. Amounts received from buyers in excess of revenues recognized, if any, are classified as other liabilities. Construction and land costs are comprised of direct and allocated costs, including estimated future costs for warranties and amenities. Land, land improvements and other common costs are allocated on a relative fair value basis to units within a parcel or subdivision. Land and land develop- ment costs generally include related interest and property taxes incurred until development is substantially completed or deliveries have begun within a subdivision. Land to be developed and projects under development are stated at cost unless the carrying amount of the parcel or subdivision is determined not to be recoverable, in which case the impaired inventories are written down to fair value. Write-downs of impaired inventories are recorded as adjustments to the cost basis of the inventory. The Company’s inventories typically do not consist of completed projects. Goodwill represents the excess of the purchase price over the fair value of net assets acquired and is amortized by the Company over periods rang- ing from five to ten years using the straight-line method. Accumulated amortization was $52,765,000 and $25,804,000 at November 30, 1999 and 1998, respectively. In the event that facts and circumstances indicate that the carrying value of goodwill may be impaired, an evaluation of recov- erability would be performed. If an evaluation is required, the estimated future undiscounted cash flows associated with the goodwill would be compared to its carrying amount to determine if a write-down to fair value or discounted cash flow is required. Mortgage Banking Operations First mortgages and mortgage-backed securities consist of securities held for long-term investment and are valued at amortized cost. First mortgages held under commitments of sale are valued at the lower of aggregate cost or market. Market is princi- pally based on public market quotations or outstanding commitments obtained from investors to purchase first mortgages receivable. Principal and interest payments received on mortgage-backed securities are invested in short-term securities maturing on the next debt service date of the collateralized mortgage obligations for which the securities are held as collateral. Such payments are restricted to the payment of the debt service on the collateralized mortgage obligations. Secondary Marketing Trading Loss On August 31, 1999, the Company disclosed that it had discovered unauthorized mortgage loan trading activity by an employee of its mortgage banking subsidiary resulting in a pretax trading loss of $18,155,000 ($11,755,000, or $.25 per diluted share, on an after tax basis). It is normal practice for the Company’s mortgage banking subsidiary to sell loans into the market that approximately match loan commitments to the Company’s homebuyers. This practice is intended to hedge exposure to changes in interest rates that may occur until loans are sold to secondary market investors in the ordinary course of business. The loss was the result of a single employee engaging in unauthorized mortgage loan trading largely unrelated to mortgage originations. The employee who conducted the unauthorized trading was terminated. Stock Options The Company’s employee stock option plans are accounted for under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB Opinion No. 25”). Income Taxes Income taxes are provided for at rates applicable in the countries in which the income is earned. Provision is made currently for United States federal income taxes on earnings of foreign subsidiaries which are not expected to be reinvested indefinitely. Earnings Per Share Basic earnings per share is calculated by dividing net income by the average number of common shares outstanding for the period. Diluted earnings per share is calculated by dividing net income by the average number of shares outstanding including all dilutive potentially issuable shares under various stock option plans and stock purchase contracts. Earnings per share amounts for all periods have been presented and, where necessary, restated to conform to the Statement of Financial Accounting Standards No. 128, “Earnings Per Share” require- ments. The following table presents a reconciliation of average shares outstanding: i n t h ou s a nd s Years Ended November 30, Basic average shares outstanding Net effect of stock options assumed to be exercised Diluted average shares outstanding 1999 1998 1997 46,730 1,101 39,553 38,889 1,480 1,169 47,831 41,033 40,058 Comprehensive Income During the quarter ended February 28, 1999, the Company adopted Statement of Financial Accounting Standards No. 130, “Reporting Comprehensive Income”, which establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general-purpose financial statements. Segment Information Effective November 30, 1999, the Company adopted Statement of Financial Accounting Standards No. 131, “Disclosures about Segments of an Enterprise and Related Information” (“SFAS No. 131”). SFAS No. 131 establishes new standards for segment reporting which are based on the way management organizes segments within a company for making operating decisions and assessing performance. In accordance with SFASNo. 131, the Company identified two reportable segments: construction and mortgage banking. The Company’s con- struction segment consists primarily of domestic and foreign homebuilding operations. The Company’s construction operations are engaged in the acquisition and development of land primarily for residential purposes and offer a wide variety of homes that are designed to appeal to the first- time homebuyer. Domestically, the Company currently sells homes in six western states. Internationally, the Company operates in France. The Company also builds commercial projects and high-density residential properties, such as condominium and apartment complexes, in France. The Company’s mortgage banking operations provide mortgage banking services to the Company’s domestic homebuyers. The mortgage banking segment originates, processes and sells mortgages to third-party investors. The Company does not retain or service the mortgages that it originates but, rather, sells the mortgages and related servicing rights to investors. KB AR 99 62 63 > Information for the Company’s reportable segments are presented in its consolidated statements of income and consolidated balance sheets was $177,600,000 and was allocated to goodwill. The Company is amortizing the goodwill on a straight-line basis over a period of ten years. The included herein. The Company’s reporting segments follow the same accounting policies used for the Company’s consolidated financial statements shares of Company common stock issued in the acquisition are “restricted” shares and may not be resold without a registration statement or com- as described in the summary of significant accounting policies. Management evaluates a segment’s performance based upon a number of factors pliance with Securities and Exchange Commission regulations that limit the number of shares that may be resold in a given period. The Company including pretax results. has agreed to file a registration statement for those shares in three increments at the Lewis family’s request from July 1, 2000 to July 1, 2002. Under the terms of the purchase agreement, a Lewis family member has also been appointed to the Company’s Board of Directors. In connection Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting with the acquisition of Lewis Homes, the Company obtained a $200,000,000 unsecured term loan agreement with various banks (the “Term Loan Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS No. 133”). SFAS No. 133 requires all derivatives to be Agreement”) to refinance certain debt assumed. The Company used borrowings under its existing $500,000,000 domestic unsecured revolving recorded on the balance sheet at fair value. The Company will adopt SFAS No. 133 in its fiscal year 2000. The Company does not anticipate that the credit facility to refinance certain other debt assumed in the Lewis Homes acquisition. adoption of SFAS No. 133 will have a significant effect on its results of operations or financial position. R e c l a s s i f i c a t i o ns Certain amounts in the consolidated financial statements of prior years have been reclassified to conform to the for as a purchase, with the results of Lewis Homes included in the Company’s consolidated financial statements as of January 7, 1999. The acquisition consideration for Lewis Homes was determined by arm’s-length negotiations between the parties. The acquisition was accounted 1999 presentation. N ot e 2 . A c q u i s i t i on s During the second quarter of 1998, the Company acquired three privately held home builders with regional operations in certain key markets. On March 19, 1998, the Company acquired all of the issued and outstanding capital stock of Houston-based Hallmark Residential Group (“Hallmark”) for approximately $54,000,000, including the assumption of debt. Hallmark built single-family homes primarily in Houston (with additional opera- tions in San Antonio and Austin, Texas) under the trade names of Dover Homes and Ideal Builders. The Company acquired substantially all of the assets of Denver-based PrideMark Homebuilding Group (“PrideMark”)on March 23, 1998 for approximately $65,000,000, including the assump- tion of trade liabilities and debt. PrideMark built single-family homes in Denver, Colorado. On April 9, 1998, the Company acquired all of the issued and outstanding capital stock of Estes Homebuilding Co. (“Estes”) for approximately $48,000,000, including the assumption of debt. Estes built single-family homes in Phoenix and Tucson, Arizona. On August 18, 1998, the Company acquired a majority ownership investment in General Homes Corporation (“General Homes”), a builder of single-family homes primarily in Houston, Texas. The Company invested approximately $31,837,000, including the assumption of debt, to acquire 50.3% of the outstanding stock of General Homes, pursuant to a completed plan of reorganization. Effective January 4, 1999, the Company invested approximately $14,500,000 to acquire the remaining 49.7% of the outstanding stock of General Homes, bringing its owner- ship interest to 100%. The acquisitions of Hallmark, PrideMark, Estes and General Homes were financed by borrowings under the Company’s domestic unsecured revolv- ing credit facility. Each acquisition was accounted for under the purchase method and the results of operations of the acquired entities were included in the Company’s consolidated financial statements as of their respective dates of acquisition. The purchase prices were allocated to the assets acquired and liabilities assumed based upon their estimated fair market values at the date of acquisition. The excess of the purchase prices over the fair value of net assets acquired was $23,450,000 on an aggregate basis and was allocated to goodwill. The Company is amortizing good- will related to the acquisitions on a straight-line basis over a period of ten years. Effective January 7, 1999, the Company acquired substantially all of the homebuilding assets of the Lewis Homes group of companies (“Lewis Homes”). Lewis Homes was engaged in the acquisition, development and sale of residential real estate in California and Nevada. Prior to the acqui- sition, Lewis Homes was one of the largest privately held single-family homebuilders in the United States based on units delivered, with revenues for the year ended December 31, 1998 of $715,000,000 on 3,631 unit deliveries. Lewis Homes also owned or controlled approximately 24,000 lots and had a backlog of approximately 900 homes at December 31, 1998. Lewis Homes’ principal markets were Las Vegas and Northern Nevada, Southern California and the greater Sacramento area in Northern California. The purchase price for Lewis Homes was approximately $449,244,000, comprised of the assumption of approximately $303,239,000 in debt and the issuance of 7,886,686 shares of the Company’s common stock valued at approximately $146,005,000. The purchase price was based on the December 31, 1998 net book values of the entities purchased. The excess of the purchase price over the estimated fair value of net assets acquired The following unaudited pro forma information presents a summary of the consolidated results of operations of the Company as if the acquisitions of Hallmark, PrideMark, Estes, General Homes and Lewis Homes had occurred as of December 1, 1997 with pro forma adjustments to give effect to amortization of goodwill, interest expense on acquisition debt and certain other adjustments, together with related income tax effects: i n t h ou s a n d s, e xc e p t p e r s h a r e a m o u n t s Years Ended November 30, Total revenues Total pretax income Net income Basic earnings per share Diluted earnings per share 1999 1998 $3,919,247 $3,279,287 231,384 150,384 3.16 3.09 184,993 120,293 2.54 2.46 This pro forma financial information is presented for informational purposes only and is not necessarily indicative of the operating results that would have occurred had the acquisitions been consummated as of December 1, 1997, nor are they necessarily indicative of future operating results. N ot e 3. R e c e i va b l e s Construction Trade receivables amounted to $138,250,000 and $67,771,000 at November 30, 1999 and 1998, respectively. Included in these amounts are unbilled receivables due from buyers on French apartment, condominium and commercial building sales accounted for using the per- centage of completion method, totaling $97,264,000at November 30, 1999 and $37,804,000 at November 30, 1998. The buyers are contractually obligated to remit payments against their unbilled balances. Other receivables of $67, 5 97, 0 0 0 at November 30, 1999 and $73,000,000 at November 30, 1998 included escrow deposits and amounts due from municipalities and utility companies. At November 30, 1999 and 1998, receivables were net of allowances for doubtful accounts of $16,578,000 and $9,146,000, respectively. Mortgage Banking First mortgages and mortgage-backed securities consisted of loans of $9,089,000at November 30, 1999 and $6,334,000 at November 30, 1998 and mortgage-backed securities of $37,991,000and $51,928,000 at November 30, 1999 and 1998, respectively. The mort - gage-backed securities serve as collateral for related collateralized mortgage obligations. The properties covered by the mortgages underlying the mortgage-backed securities are single-family residences. Issuers of the mortgage-backed securities are the Government National Mortgage Association and Fannie Mae. The first mortgages and mortgage-backed securities bore interest at an average rate of 8 3⁄8% and 8 2⁄5% at November 30, 1999 and 1998, respectively (with rates ranging from 7% to 12% in both 1999 and 1998). KB AR 99 64 65> First mortgages and mortgage-backed securities were net of discounts and premiums of $18,000 at November 30, 1999 and $546,000 at November 30, 1998. These discounts and premiums, which primarily represent loan origination discount points and acquisition price discounts or premiums, are deferred as an adjustment to the carrying value of the related first mortgages and mortgage-backed securities and amortized into interest income using the interest method. The Company’s mortgage-backed securities held for long-term investment have been classified as held-to-maturity and are stated at amortized cost, adjusted for amortization of discounts and premiums to maturity. Such amortization is included in interest income. The total gross unrealized gains and gross unrealized losses on the mortgage-backed securities were $685,000and $0, respectively at November 30, 1999 and $3,457,000 and $0, respectively at November 30, 1998. First mortgages held under commitments of sale and other receivables consisted of first mortgages held under commitments of sale of $376,377,000at November 30, 1999 and $242,537,000 at November 30, 1998 and other receivables of $9,699,000and $7,165,000 at November 30, 1999 and 1998, respectively. The first mortgages held under commitments of sale bore interest at an average rate of 7 1⁄2% at both November 30, 1999 and 1998. The balance in first mortgages held under commitments of sale and other receivables fluctuates significantly during the year and typically reaches its highest level at quarter-ends, corresponding to the Company’s home and mortgage delivery activity. i n t h ou s a n d s November 30, Cash Receivables Inventories Other assets Total assets Mortgages and notes payable Other liabilities Equity of: The Company Others Total liabilities and equity 1999 1998 $03,386 $06,286 4,914 82,021 377 5,727 15,042 637 $90,698 $27,692 $30,988 11,111 21,290 27,309 $04,593 5,696 5,608 11,795 $90,698 $27,692 N ot e 4 . I nv e n t o r i es Inventories consisted of the following: i n t h ou s a n d s November 30, Homes, lots and improvements in production Land under development Total inventories The joint ventures finance land and inventory investments primarily through a variety of borrowing arrangements. The Company typically does not 1999 1998 $1,063,505 $0,835,300 457,760 299,102 $1,521,265 $1,134,402 guarantee these financing arrangements. i n t h ou s a n d s Years Ended November 30, Revenues Cost of sales Other expenses, net Total pretax income (loss) The Company’s share of pretax income (loss) 1999 1998 1997 $13,889 $(17,657 $(98,183 (9,842) (426) (12,245) (94,901) (384) (6,147) $03,621 $(05,028 $0(2,865) $00,224 $(01,151 $0,00(53) Land under development primarily consists of parcels on which 50% or less of estimated development costs have been incurred. The impact of capitalizing interest costs on consolidated pretax income is as follows: The Company’s share of pretax income (loss) includes management fees earned from the unconsolidated joint ventures. i n t h ou s a n d s Years Ended November 30, Interest incurred Interest expensed Interest capitalized Interest amortized Net impact on consolidated pretax income N ot e 5. I nv e s t m en t s i n U n c o n s ol i d at e d Jo i n t Ve n tu r e s 1999 1998 1997 $(78,041 (28,340) 49,701 (44,257) $(54,299 $(52,468 (23,341) (29,829) 30,958 22,639 (30,752) (25,480) $(05,444 $(00,206 $0(2,841) The Company participates in a number of joint ventures in which it has less than a controlling interest. These joint ventures are based in California, Nevada, New Mexico, Texas and France and are engaged in the development, construction and sale of residential properties and commercial pro - jects. Combined condensed financial information concerning the Company’s unconsolidated joint venture activities follows: N ot e 6. M or t g ag es a n d N o t e s Paya b l e Construction Mortgages and notes payable consisted of the following (interest rates are as of November 30): i n t h ou s a n d s November 30, Unsecured domestic borrowings with banks under a revolving credit agreement (6 3⁄8% in 1999) Other unsecured domestic borrowings with banks due within one year (6 3⁄8% to 6 1⁄2% in 1999) Unsecured French borrowings (3 3⁄4% to 7% in 1999 and 4 1⁄5% to 5 3⁄8% in 1998) Term loan borrowings due 2001 (6 7⁄8% in 1999) Mortgages and land contracts due to land sellers and other loans (7% to 10 1⁄4% in 1999 and 8% to 10 1⁄4% in 1998) Senior notes due 2004 at 7 3⁄4% Senior subordinated notes due 2003 at 9 3⁄8% Senior subordinated notes due 2006 at 9 5⁄8% Total mortgages and notes payable 1999 1998 $050,000 9,000 49,940 200,000 30,583 175,000 174,370 124,531 $033,647 22,492 175,000 174,221 124,486 $813,424 $529,846 KB AR 99 66 67 > On April 21, 1997, the Company entered into a $500,000,000 domestic unsecured revolving credit agreement (the “Revolving Credit Facility”) with solidations, or sales of assets, or engage in certain transactions with officers, directors and employees. Under the terms of the Revolving Credit various banks. The Revolving Credit Facility is comprised of a $400,000,000 revolving credit facility scheduled to expire on April 30, 2001 and a Facility, the Company is required, among other things, to maintain certain financial statement ratios and a minimum net worth and is subject to $100,000,000 364-day revolving credit facility. Upon expiration, the $100,000,000 revolving credit facility is renewable at the lenders’ option or limitations on acquisitions, inventories and indebtedness. Based on the terms of the Company’s Revolving Credit Facility, Term Loan Agreement, may be converted, at the Company’s option, to a term loan expiring on April 30, 2001. Under the Revolving Credit Facility, $500,000,000 remained senior notes and senior subordinated notes, retained earnings of $150,180,000 were available for payment of cash dividends or stock repurchases committed and $416,904,000 was available for the Company’s future use at November 30, 1999. The Revolving Credit Facility provides for inter- at November 30, 1999. est on borrowings at either the applicable bank reference rate or the London Interbank Offered Rate plus an applicable spread and an annual com- mitment fee based on the unused portion of the commitment. On January 7, 1999, in connection with the acquisition of Lewis Homes, the Company obtained a $200,000,000 Term Loan Agreement to refinance Principal payments on senior and senior subordinated notes, term loan borrowings, mortgages, land contracts and other loans are due as follows: 2000, $91,767,000; 2001, $135,644,000; 2002, $1,389,000; 2003, $175,205,000; 2004, $175,948,000; and thereafter, $124,531,000. certain debt assumed. The Term Loan Agreement provides for three payments of $25,000,000, due on January 31, 2000, April 30, 2000 and July Assets (primarily inventories) having a carrying value of approximately $106,266,000 are pledged to collateralize mortgages, land contracts and 31, 2000, with the remaining principal balance due on April 30, 2001. Interest is payable monthly at the London Interbank Offered Rate plus an other secured loans. applicable spread. Under the terms of the Term Loan Agreement, the Company is required, among other things, to maintain certain financial state- ment ratios and a minimum net worth and is subject to limitations on acquisitions, inventories and indebtedness. The financing obtained under the On December 5, 1997, the Company filed a new universal shelf registration statement with the Securities and Exchange Commission for up to Term Loan Agreement did not affect the amounts available under the Company’s pre-existing borrowing arrangements. $500,000,000 of the Company’s debt and equity securities. This universal shelf registration provides that securities may be offered from time to time in one or more series and in the form of senior, senior subordinated or subordinated debt, preferred stock, common stock, and/or warrants The Company’s French subsidiaries have lines of credit with various banks which totaled $198,658,000 at November 30, 1999 and have various to purchase such securities. The registration was declared effective on December 16, 1997, and no securities have been issued thereunder. committed expiration dates through November 2000. These lines of credit provide for interest on borrowings at either the French Federal Funds Rate or the Paris Interbank Offered Rate plus an applicable spread. Mortgage Banking Notes payable included the following (interest rates are as of November 30): The weighted average interest rate on aggregate unsecured borrowings, excluding the senior and senior subordinated notes, was 6 3⁄5% and 4 3⁄5% at November 30, 1999 and 1998, respectively. i n t h ou s a n d s November 30, Notes payable secured by trust deed notes (6 1⁄8% to 7 1⁄8% in 1999 and 5 3⁄5% in 1998) On April 26, 1993, the Company issued $175,000,000 principal amount of 9 3⁄8% senior subordinated notes at 99.202%. The notes are due May 1, Total notes payable 1999 1998 $377,666 $239,413 $377,666 $239,413 2003 with interest payable semi-annually. The notes represent unsecured obligations of the Company and are subordinated to all existing and future senior indebtedness of the Company. The Company may redeem the notes, in whole or in part, at any time on or after May 1, 2000 at 100% of their principal amount. On October 29, 1996, the Company filed a universal shelf registration statement (the “1996 Shelf Registration”) with the Securities and Exchange Commission for up to $300,000,000 of the Company’s debt and equity securities. The Company’s previously outstanding shelf registration for debt securities in the amount of $100,000,000 was subsumed within the 1996 Shelf Registration. On November 14, 1996, the Company utilized the 1996 Shelf Registration to issue $125,000,000 of 9 5⁄8% senior subordinated notes at 99.525%. The notes, which are due November 15, 2006 with interest payable semi-annually, represent unsecured obligations of the Company and are subordinated to all existing and future senior indebted- ness of the Company. The notes are redeemable at the option of the Company, in whole or in part, at 104.8125% of their principal amount begin- ning November 15, 2001, and thereafter at prices declining annually to 100% on and after November 15, 2004. On September 4, 1997, the Company completed the optional redemption of its $100,000,000 principal amount of 10 3⁄8% senior notes due in 1999. The Company used borrowings under its Revolving Credit Facility to retire the entire $100,000,000 of senior notes at 100% of the principal amount of the notes, together with accrued and unpaid interest. On October 14, 1997, pursuant to the 1996 Shelf Registration, the Company issued $175,000,000 of 7 3⁄4% senior notes at 100% of the principal amount of the notes. The notes, which are due October 15, 2004 with interest payable semi-annually, represent unsecured obligations of the Company and rank pari passu in right of payment with all other senior unsecured indebtedness of the Company. The notes are not redeemable by the Company prior to stated maturity. This offering resulted in the issuance of all available securities under the 1996 Shelf Registration. The 7 3⁄4% senior notes and 9 3⁄8% and 9 5⁄8% senior subordinated notes contain certain restrictive covenants that, among other things, limit the ability of the Company to incur additional indebtedness, pay dividends, make certain investments, create certain liens, engage in mergers, con- First mortgages receivable are financed through a $250,000,000 revolving mortgage warehouse agreement (the “Mortgage Warehouse Facility”). The Mortgage Warehouse Facility, which expires on February 23, 2000, provides for an annual fee based on the committed balance of the facility and provides for interest at either the Federal Funds Rate or the London Interbank Offered Rate plus an applicable spread on amounts borrowed. The Company is in the process of renewing this facility. On May 25, 1999, the Company’s mortgage banking subsidiary entered into a $150,000,000 Master Loan and Security Agreement with an invest- ment bank. The agreement, which expires on May 25, 2000, provides for a facility fee based on the $150,000,000 maximum amount available and provides for interest to be paid monthly at the Eurodollar Rate plus an applicable spread on amounts borrowed. The amounts outstanding under the Mortgage Warehouse Facility and the Master Loan and Security Agreement are secured by a borrowing base, which includes certain mortgage loans held under commitments of sale and are repayable from sales proceeds. There are no compensating balance requirements under either facility. Both facilities include financial covenants and restrictions which, among other things, require the maintenance of certain financial statement ratios, a minimum tangible net worth and a minimum net income. Collateralized mortgage obligations represent bonds issued to third parties which are collateralized by mortgage-backed securities with substan- tially the same terms. At both November 30, 1999 and 1998, the collateralized mortgage obligations bore interest at rates ranging from 8% to 12 1⁄4% with stated original principal maturities ranging from 3 to 30 years. Actual maturities are dependent on the rate at which the underlying mortgage-backed securities are repaid. No collateralized mortgage obligations have been issued since 1988. KB AR 99 68 69 > N ote 7. C om pa n y O b l i g at e d M a n d at o r i ly R e d e e ma b l e P r e f er r e d S e c u r i t i e s o f S u b s i d i a r y Tr u st H o l d i n g The carrying values and estimated fair values of the Company’s financial instruments, except for those financial instruments for which the carry- S ol e l y D e b en t u r e s o f th e C o m pa n y ( F e l i n e P r i de s ) ing values approximate fair values, are summarized as follows: On July 7, 1998, the Company, together with KBHC Financing I, a Delaware statutory business trust (the “KBHC Trust”) that is wholly owned by the Company, issued an aggregate of (i) 18,975,000 Feline Prides, and (ii) 1,000,000 KBHC Trust capital securities, with a $10 stated liquidation amount. The Feline Prides consisted of (i) 17,975,000 Income Prides with a stated amount per Income Prides of $10 (the “Stated Amount”), which are units comprised of a capital security and a stock purchase contract under which the holders will purchase common stock from the Company not later than August 16, 2001 and the Company will pay to the holders certain unsecured contract adjustment payments, and (ii) 1,000,000 Growth Prides with a face amount per Growth Prides equal to the Stated Amount, which are units consisting of a 1⁄100th beneficial interest in a zero- coupon U.S. treasury security and a stock purchase contract under which the holders will purchase common stock from the Company not later than August 16, 2001 and the Company will pay to the holders certain unsecured contract adjustment payments. The distribution rate on the Income Prides is 8.25% per annum and the distribution rate on the Growth Prides is .75% per annum. Under the stock purchase contracts, investors will be required to purchase shares of common stock of the Company for an effective price ranging between a min- imum of $31.75 per share and a maximum of $38.10 per share, and the Company will issue approximately 5,000,000 to 6,000,000 common shares by August 16, 2001, depending upon the price of the common stock upon settlement of the purchase contracts (subject to adjustment under certain circumstances). The capital securities associated with the Income Prides and the U.S. treasury securities associated with the Growth Prides have been pledged as collateral to secure the holders’ obligations in respect of the common stock purchase contracts. The capital securities issued by the KBHC Trust are entitled to a distribution rate of 8% per annum of their $10 stated liquidation amount. The KBHC Trust utilized the proceeds from the issuance of the Feline Prides and capital securities to purchase an equivalent principal amount of the Company’s 8% Debentures due August 16, 2003 (the “8% Debentures”). The 8% Debentures are the sole asset of the KBHC Trust. The C o m p a n y ’s obligations under the Debentures and related agreements, taken together, constitute a firm and unconditional guarantee by the Company of the KBHC Trust’s obligations under the capital securities. The interest rate on the 8% Debentures and the distribution rate on the cap- ital securities of the KBHC Trust are to be reset, subject to certain limitations, effective August 16, 2001. The Company has recorded the present value of the contract adjustment payments on the Feline Prides, totaling $1,600,000, as a liability and a reduction of stockholders’ equity. The lia- bility will be reduced as the contract adjustment payments are made. The Company has the right to defer the contract adjustment payments and the payment of interest on the 8% Debentures, but any such election will subject the Company to restrictions on the payment of dividends on, and redemption of, its outstanding shares of common stock, and on the payment of interest on, or redemption of, debt securities of the Company junior in rank to the 8% Debentures, none of which are currently outstanding. Distributions totaling $15,180,000 and $6,072,000 are included as minority interests in the Company’s results of operations for the years ended November 30, 1999 and 1998, respectively. N ot e 8. F a i r Va l u e s o f F i n a nc i a l I n s t ru m en t s The estimated fair values of financial instruments have been determined based on available market information and appropriate valuation method- ologies. However, judgment is necessarily required in interpreting market data to develop the estimates of fair value. In that regard, the estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange. i n t h ou s a n d s November 30, Construction: Financial liabilities 7 3⁄4% Senior notes 9 3⁄8% Senior subordinated notes 9 5⁄8% Senior subordinated notes Mortgage banking: Financial assets Mortgage-backed securities Financial liabilities Collateralized mortgage obligations secured by mortgage-backed securities Company obligated mandatorily redeemable preferred securities of subsidiary trust holding solely debentures of the Company 1999 1998 Carrying Value Estimated Fair Value Carrying Value Estimated Fair Value $175,000 $163,520 $175,000 $169,698 174,370 124,531 174,738 125,700 174,221 124,486 178,833 134,288 37,991 38,676 51,928 55,386 36,219 36,897 49,264 53,693 189,750 141,800 189,750 162,200 The Company used the following methods and assumptions in estimating fair values: Cash and cash equivalents; first mortgages held under commitments of sale and other receivables; borrowings under the Revolving Credit Facility, Term Loan Agreement, French lines of credit, Mortgage Warehouse Facility and Master Loan and Security Agreement: The carrying amounts reported approximate fair values. Senior notes and senior subordinated notes: The fair values of the Company’s senior notes and senior subordinated notes are estimated based on quoted market prices. Mortgage-backed securities and collateralized mortgage obligations secured by mortgage-backed securities: The fair values of these financial instruments are estimated based on quoted market prices for the same or similar issues. Company obligated mandatorily redeemable preferred securities of subsidiary trust holding solely debentures of the Company: The fair values of these financial instruments are based on quoted market prices on the New York Stock Exchange. N ot e 9 . C om m i tm e n t s a n d C o n t i ng e n c i e s Commitments and contingencies include the usual obligations of homebuilders for the completion of contracts and those incurred in the ordinary course of business. The Company is also involved in litigation incidental to its business, the disposition of which should have no material effect on the Company’s financial position or results of operations. N ot e 10 . S t o c k h ol d e r s ’ E qu i t y On February 4, 1999, the Company adopted a new Stockholder Rights Plan to replace its preexisting shareholder rights plan adopted in 1989 (the “1989 Rights Plan”), and declared a dividend distribution of one preferred share purchase right for each outstanding share of common stock, such rights were issued on March 7, 1999, simultaneously with the expiration of the rights issued under the 1989 Rights Plan. Under certain circum- KB AR 99 70 71 > stances, each right entitles the holder to purchase 1⁄100th of a share of the Company’s Series A Participating Cumulative Preferred Stock at a price ket price of the Company’s common stock of 43.14%, 41.31% and 34.62%; a dividend yield of 1.36%, 1.19% and 1.38%; and an expected life of of $135.00, subject to certain antidilution provisions. The rights are not exercisable until the earlier to occur of (i) 10 days following a public 4 years, 4 years and 4 years. The weighted average fair value of options granted in 1999, 1998 and 1997 was $6.92, $6.09 and $3.68, respectively. announcement that a person or group has acquired Company stock representing 15% or more of the aggregate votes entitled to be cast by all shares of common stock or (ii) 10 days following the commencement of a tender offer for Company stock representing 15% or more of the aggre- Stock option transactions are summarized as follows: The Company’s 1988 Employee Stock Plan (the “1988 Plan”) and the 1999 Incentive Plan (the “1999 Plan”) provide that stock options, associated limited stock appreciation rights, restricted shares of common stock, stock units and other securities may be awarded to eligible individuals for Range of Exercise Price gate votes entitled to be cast by all shares of common stock. The holdings of or acquisitions by any of the members of the Lewis family, a former officer of Lewis Homes and any entity controlled by any of them (the “Lewis Holders”), who held in the aggregate approximately 16% of the Company’s common stock as of January 7, 1999, will not cause the rights to become exercisable by virtue of their ownership so long as their aggregate ownership remains below 17% of the issued and outstanding common stock. In the event the aggregate ownership of the Lewis Holders falls below 15.5% of the issued and outstanding shares of the Company’s common stock, the rights will become exercisable as described above if their holdings should at anytime thereafter exceed 16% of the issued and outstanding shares of the Company’s common stock. In the event the aggregate ownership of the Lewis Holders falls below 14.5% of the issued and outstanding shares of the Company’s common stock, the Lewis Holders’ exemption will terminate, and the rights will become exercisable as described above. If, without approval of the Board of Directors, the Company is acquired in a merger or other business combination transaction, or 50% or more of the Company’s assets or earning power is sold, each right will entitle its holder to receive, upon exercise, common stock of the acquiring company having a market value of twice the exercise price of the right; and if, without approval of the Board of Directors, any person or group acquires Company stock representing 15% or more of the aggregate votes entitled to be cast by all shares of common stock, each right will entitle its holder to receive, upon exercise, common stock of the Company having a market value of twice the exercise price of the right. At the option of the Company, the rights are redeemable prior to becoming exercisable at $.005 per right. Unless previously redeemed, the rights will expire on March 7, 2009. Until a right is exercised, the holder will have no rights as a stockholder of the Company, including the right to vote or receive dividends. N ot e 11. E m p l o y e e B e n e f i t a n d S t o c k P l an s Benefits are provided to most employees under the Company’s 401(k) Savings Plan under which contributions by employees are partially matched by the Company. The aggregate cost of this plan to the Company was $3,937,000 in 1999, $3,025,000 in 1998 and $2,081,000 in 1997. periods of up to 15 years. The Company also has a Performance-Based Incentive Plan for Senior Management (the “Incentive Plan”) and the Company’s 1998 Stock Incentive Plan which provide for the same awards as may be made under the 1988 Plan and the 1999 Plan, but require that such awards be subject to certain conditions which are designed to assure that annual compensation paid in excess of $1,000,000 to participating executives is tax deductible for the Company. The 1988 Plan and the 1999 Plan are the Company’s primary existing employee stock plans. Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”), issued in October 1995, established financial accounting and reporting standards for stock-based employee compensation plans. As permitted by SFAS No. 123, the Company elected to continue to use APB Opinion No. 25 and related interpretations, in accounting for its stock options. Had compensation expense for the Company’s stock option plans been determined based on the fair value at the grant date for awards in 1999, 1998 and 1997 con- sistent with the provisions of SFAS No. 123, the Company’s net income and diluted earnings per share would have been reduced to the pro forma amounts indicated below: i n t h ou s a n d s, e xc e p t p e r s h a r e a m o u n t s Years Ended November 30, Net income — as reported Net income — pro forma Diluted earnings per share — as reported Diluted earnings per share — pro forma 1999 1998 1997 $147,469 142,816 3.08 2.99 $95,267 91,398 2.32 2.24 $58,230 57,463 1.45 1.44 The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions used for grants in 1999, 1998 and 1997, respectively: a risk free interest rate of 6.14%, 4.38% and 5.84%; an expected volatility factor for the mar- Options outstanding at beginning of year Granted Exercised Cancelled 1999 1998 1997 Weighted Average Exercise Price Weighted Average Exercise Price Options Weighted Average Exercise Price Options $15.22 2,747,318 $ 9.98 2,830,268 $10.00 20.12 16.43 21.00 1,318,017 (995,235) (105,033) 22.83 10.70 16.56 387,000 (169,183) (300,767) 14.07 12.10 14.25 Options 2,965,067 2,241,736 (211,925) (145,056) Options outstanding at end of year 4,849,822 $17.26 2,965,067 $15.22 2,747,318 $ 9.98 Options exercisable at end of year 2,041,106 $13.83 1,586,455 $12.16 1,816,346 $ 7.92 Options available for grant at end of year 2,867,334 2,464,014 1,776,998 Stock options outstanding at November 30, 1999 are as follows: $04.38 to $14.13 $14.38 to $17.75 $19.06 to $22.44 $23.06 to $33.94 $04.38 to $33.94 Options Outstanding Options Exercisable Weighted Average Remaining Contractual Life Weighted Average Exercise Price Weighted Average Exercise Price Options 5.97 14.10 13.57 13.64 $07.40 1,086,761 $06.58 17.22 21.94 24.82 127,185 372,965 454,195 14.78 21.43 24.70 Options 1,232,191 1,339,250 1,749,193 529,188 4,849,822 11.79 $17.26 2,041,106 $13.83 The Company records proceeds from the exercise of stock options as additions to common stock and paid-in capital. The tax benefit, if any, is recorded as additional paid-in capital. In 1991, the Board of Directors approved the issuance of restricted stock awards under the 1988 Plan of up to an aggregate 600,000 shares of common stock to certain officers and key employees. Restrictions lapse each year through May 10, 2005 on specified portions of the shares awarded to each participant so long as the participant has remained in the continuous employ of the Company. Restricted shares under this grant outstanding at the end of the year totaled 129,998 in 1999, 151,665 in 1998 and 226,668 in 1997. On August 4, 1999, the Company’s Board of Directors authorized a share repurchase program which allows the Company to purchase up to 2,500,000 shares of the Company’s common stock at prices not to exceed $28 per share. TheCompany repurchased all of the 2,500,000 shares originally authorized and on November 1,1999, the Board of Directors authorized the repurchase of up to 4,000,000 additional shares of Company common stock. As of November 30, 1999, the Company had repurchased 3,750,100 shares under the repurchase program. KB AR 99 72 73 > In connection with its share repurchase program, on August 27, 1999, the Company established a grantor stock ownership trust (the “Trust”) into Deferred income taxes result from temporary differences in the financial and tax bases of assets and liabilities. Significant components of the which the repurchased shares are transferred. The Trust, administered by an independent trustee, acquires, holds and distributes the shares of Company’s deferred tax liabilities and assets are as follows: common stock for the purpose of funding certain employee compensation and employee benefit obligations of the Company under its existing stock option, 401(k) and other employee benefit plans. The existence of the Trust will have no impact on the amount of benefits or compensation that will be paid under these plans. For financial reporting purposes, the Trust is consolidated with the Company. Any dividend transactions between the Company and the Trust are eliminated. Acquired shares held by the Trust remain valued at the market price at the date of purchase and are shown as a reduction to stock- holders’ equity in the consolidated balance sheet. The difference between the Trust share value and the fair market value on the date shares are released from the Trust, for the benefit of employees, will be included in additional paid-in capital. Common stock held in the Trust is not considered outstanding in the computation of earnings per share. The Trust held 3,750,100 shares of common stock at November 30, 1999. The trustee votes shares held by the Trust in accordance with voting directions from eligible employees, as specified in a trust agreement with the trustee. N ot e 12 . I nc o m e Ta x e s The components of pretax income are as follows: i n t h ou s a n d s Years Ended November 30, Domestic Foreign Total pretax income The components of income taxes are as follows: i n t h ou s a n d s 1999 Currently payable Deferred Total 1998 Currently payable Deferred Total 1997 Currently payable Deferred Total 1999 1998 1997 $200,272 $136,042 $87,545 26,597 10,525 3,485 $226,869 $146,567 $91,030 Total Federal State Foreign $(87,428 $(65,557 $11,755 $10,116 (8,028) (12,411) 4,383 $(79,400 $(53,146 $11,755 $14,499 $(52,628 $(39,989 $08,498 $04,141 (1,328) (3,145) 1,817 $(51,300 $(36,844 $08,498 $05,958 $(35,159 $(28,254 $04,847 $02,058 (2,359) (1,892) (467) $(32,800 $(26,362 $04,847 $01,591 i n t h ou san d s November 30, Deferred tax liabilities: Installment sales Bad debt and other reserves Capitalized expenses Partnerships and joint ventures Repatriation of foreign subsidiaries Other Total deferred tax liabilities Deferred tax assets: Warranty, legal and other accruals Depreciation and amortization Capitalized expenses Partnerships and joint ventures Noncash charge for impairment of long-lived assets Foreign tax credits Net operating losses Other Total deferred tax assets Net deferred tax assets 1999 1998 $015,471 $06,520 449 15,704 2,439 12,381 12,179 58,623 29,210 27,957 16,370 13,183 7,686 12,346 40,121 11,269 158,142 166 20,800 2,457 12,018 3,491 45,452 15,315 7,476 9,827 4,186 8,902 11,857 931 11,052 69,546 $099,519 $24,094 Net operating loss carryforwards expire in various years from 2000 through 2019. The Company expects that the entire deferred tax benefit of the tax loss carryforwards will be recognized in future periods. Income taxes computed at the statutory United States federal income tax rate and income tax expense provided in the financial statements differ as follows: i n t h ou s an d s Years Ended November 30, Amount computed at statutory rate Increase (decrease) resulting from: State taxes, net of federal income tax benefit Differences in foreign tax rates Intercompany dividends Tax credits Other, net Total 1999 1998 1997 $(79,404 $51,298 $31,861 7,641 4,379 1,153 (11,329) (1,848) 5,524 1,594 977 (3,351) (4,742) 3,150 (885) 352 (2,046) 368 $(79,400 $51,300 $32,800 The Company has commitments to invest $12,900,000 over six years in affordable housing partnerships which are scheduled to provide tax credits. KB AR 99 74 75 > The Company had foreign tax credit carryforwards at November 30, 1999 of $3,433,000 for United States federal income tax purposes which N ot e 14 . Q uar t e r ly R e s u lt s ( u n a u d i t e d ) expire in 2000, 2002 and 2004. Quarterly results for the years ended November 30, 1999 and 1998 follow: The undistributed earnings of foreign subsidiaries, which the Company plans to invest indefinitely and for which no United States federal income taxes have been provided, totaled $28,421,000at November 30, 1999. If these earnings were currently distributed, the resulting withholding taxes i n t h ou s an d s, e xc e p t p e r s h a r e am o u n t s First Second Third Fourth payable would be $1,420,000. N ot e 13. G e o g ra p h i ca l I n f or ma t i o n Geographical information follows: i n t h ou s a n d s 1999 Construction: California Other U.S. Foreign Total construction Mortgage banking Total 1998 Construction: California Other U.S. Foreign Total construction Mortgage banking Total 1997 Construction: California Other U.S. Foreign Total construction Mortgage banking Total Revenues Operating Income Identifiable Assets $1,579,226 $110,942 $0,905,890 1,780,595 412,300 112,765 35,400 987,141 321,045 3,772,121 259,107 2,214,076 64,174 17,464 450,159 $3,836,295 $276,571 $2,664,235 $1,105,849 $079,871 $0,655,920 1,042,408 254,709 55,343 13,458 656,389 230,235 2,402,966 148,672 1,542,544 46,396 21,413 317,660 $2,449,362 $170,085 $1,860,204 $0,993,921 $065,554 $0,717,949 670,590 179,103 34,166 2,031 283,794 132,118 1,843,614 101,751 1,133,861 35,109 14,508 285,130 $1,878,723 $116,259 $1,418,991 1999 Revenues Operating income Pretax income Net income Basic earnings per share Diluted earnings per share 1998 Revenues Operating income Pretax income Net income Basic earnings per share Diluted earnings per share $694,143 $862,270 $1,057,113 $1,222,769 34,134 24,886 16,186 .36 .35 56,494 43,975 28,575 .60 .58 72,058 58,781 38,181 .80 .78 113,885 99,227 64,527 1.39 1.36 $426,245 $537,459 $659,014 $826,644 18,323 12,698 8,098 .21 .20 32,637 26,222 17,222 .44 .42 48,888 43,298 28,098 .70 .68 70,237 64,349 41,849 1.05 1.02 Quarterly and year-to-date computations of per share amounts are made independently. Therefore, the sum of per share amounts for the quarters may not agree with per share amounts for the year. N ot e 15 . S ub se qu e n t E v e n t s ( u n au d i t e d ) On January 24, 2000, Kaufman & Broad S.A. (“KBSA”), the Company’s wholly owned French subsidiary filed a preliminary public offering memorandum for the initial public offering of ordinary shares of KBSA. On February 7, 2000, KBSA successfully completed its public offering and is now listed on the Premier Marche of the ParisBourse. The offering of 5,148,937 shares (before exercise of the over allotment option) was made in France and in Europe and was priced at 23 euros per share, representing a total offering of approximately $120,000,000. Proceeds from the offering will be used to fund internal and external growth of the French homebuilding operations, obtain better financing condi- tions, and finance the payment of a dividend of approximately $85,000,000 to the Company, which the Company will use to reduce its domestic debt and repurchase additional shares of its common stock. The Company continues to own a majority interest in KBSA and will continue to con- solidate these operations in its financial statements. As of February 3, 2000, the Company had repurchased a total of 6,500,000 shares of the Company’s common stock under authorizations made by the Board of Directors on August 4, 1999 and November 1, 1999. On February 3, 2000, the Company’s Board of Directors authorized the repurchase of up to an additional 4,000,000 shares of the Company’s common stock. KB AR 99 76 77> R e p o rt of Independent Auditors R e p o rt on Financial Statements To the Board of Directors and Stockholders of Kaufman and Broad Home Corporation: The accompanying consolidated financial statements are the responsibility of management. The statements have been prepared in conformity with generally accepted accounting principles. Estimates and judgments of management based on its current knowledge of anticipated transac- We have audited the accompanying consolidated balance sheets of Kaufman and Broad Home Corporation as of November 30, 1999 and 1998, tions and events are made to prepare the financial statements as required by generally accepted accounting principles. Management relies on and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended Novem- internal accounting controls, among other things, to produce records suitable for the preparation of financial statements. ber 30, 1999. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. The responsibility of our external auditors for the financial statements is limited to their expressed opinion on the fairness of the consolidated financial statements taken as a whole. Their examination is performed in accordance with generally accepted auditing standards which include We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan tests of our accounting records and internal accounting controls and evaluation of estimates and judgments used to prepare the financial state- and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes ments. The Company employs a staff of internal auditors whose work includes evaluating and testing internal accounting controls. examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We An audit committee of outside members of the Board of Directors periodically meets with management, the external auditors and the internal believe that our audits provide a reasonable basis for our opinion. auditors to evaluate the scope of auditing activities and review results. Both the external and internal auditors have the unrestricted opportunity to communicate privately with the audit committee. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Kaufman and Broad Home Corporation at November 30, 1999 and 1998, and the consolidated results of its operations and its cash flows for each of the three years in the period ended November 30, 1999, in conformity with accounting principles generally accepted in the United States. Los Angeles, California December 23, 1999 Michael F. Henn Senior Vice President and Chief Financial Officer December 23, 1999 KB AR 99 78 79> B o a rd of Dire c t o r s M a n a g e m e n t Randall W. Lewis Executive Vice President, Lewis Operating Corp. Los Angeles Dr. Barry Munitz 1 President, The J. Paul Getty Trust Los Angeles Guy Nafilyan Executive Vice President, Kaufman and Broad Home Corporation Los Angeles Chairman and Chief Executive Officer, Kaufman & Broad S.A., France Paris Luis G. Nogales 1,4 President, Nogales Partners Los Angeles Sanford C. Sigoloff 1,2 Chairman, President and Chief Executive Officer, Sigoloff & Associates, Inc. Los Angeles Ron Burkle 4 Managing Partner, The Yucaipa Companies Chairman of the Executive Committee of the Board, The Kroger Company Los Angeles Jane Evans 1,3 President and Chief Executive Officer, @Hand.com,Inc. Los Angeles Dr. Ray R. Irani 3,4 Chairman and Chief Executive Officer, Occidental Petroleum Corporation Los Angeles James A. Johnson 3,4 Chairman and Chief Executive Officer, Johnson Capital Partners Former Chairman and Chief Executive Officer, Fannie Mae Washington, D.C. Bruce Karatz 2 Chairman and Chief Executive Officer, Kaufman and Broad Home Corporation Los Angeles 1 Committees of the Board of Directors 1 Audit and Compliance Committee 2 Executive Committee 3 Nominating and Corporate Governance Committee 4 Personnel, Compensation and Stock Plan Committee C or p ora t e O f f i c e r s Glen Barnard Executive Vice President, President e.kb George A. Brenner Vice President and Chief Information Officer James R. Caldwell Vice President, Information Technology Resource Center and Strategic Planning William R. Cardon Senior Vice President and Regional General Manager Cory F. Cohen Vice President, Tax John “Buddy” E. Goodwin Senior Vice President, Regional General Manager and President, San Antonio Division Lawrence B. Gotlieb Vice President, Government and Public Affairs Michael F. Henn Senior Vice President and Chief Financial Officer William R. Hollinger Vice President and Controller Lisa G. Kalmbach Senior Vice President Wendy L. Marlett Vice President, Marketing and Employee Communications Mary M. McAboy Vice President, Investor and Public Relations Jeffrey T. Mezger Executive Vice President and Chief Operating Officer Guy Nafilyan Executive Vice President, Kaufman and Broad Home Corporation Chairman and Chief Executive Officer, Kaufman & Broad S.A., France Barton P. Pachino Senior Vice President and General Counsel Albert Z. Praw Senior Vice President, Asset Management and Acquisitions Gary A. Ray Senior Vice President, Human Resources Nancy S. Schwappach Vice President, Southern Region Legal Affairs D iv i s i o n M a n ag e m e n t Pierre Beauchef President, Condominium Division Kaufman & Broad S.A., France Bruce Karatz Chairman and Chief Executive Officer John H. Bremond President, Tucson Division Leah S. W. Bryant President, Las Vegas Division Michael A. Costa President, Kaufman and Broad Multi-Housing Group Kimberly N. King Corporate Secretary and Director, Corporate Legal Affairs Kathleen L. Knoblauch Vice President, National Human Resources Leonard P. Leichnitz Vice President, Northern California Legal Affairs Mark Crivelli President, Kaufman and Broad Mortgage Company Jeffry M. David Executive Vice President, Reno Division Steven M. Davis Regional General Manager and President, Phoenix Division Robert Freed Regional General Manager and President, South Bay Division Michael J. Heim Senior Vice President, New Mexico Division William A. June President, North Bay Division Martin Lighterink President, San Diego Division Chris L. Matzke President, Dallas Division Joel Monribot President, Single Family Homes Division Kaufman & Broad S.A., France Jay L. Moss Regional General Manager and President, Greater Los Angeles Division Larry E. Oglesby President, Austin Division Eric A. Wittenberg President, Orange County Division Dennis Welsch Regional General Manager and President, Colorado Division Cora B. Wiltshire President, Houston Division KB AR 99 80 81> O ffice Locations Stockholder Inform a t i o n New Mexico New Mexico Division 4921 Alexander, NE, Suite B Albuquerque, New Mexico 87107 (505) 344-9400 (505) 344-5700 Fax Texas Austin Division 11911 Burnet Road Austin, Texas 78758 (512) 833-8880 (512) 491-9432 Fax Dallas Division 2611 Westgrove Road, Suite 101 Carrollton, Texas 75006 (972) 267-0700 (972) 267-0701 Fax Houston Division 9990 Richmond Avenue, Suite 400 Houston, Texas 77042 (713) 977-6633 (713) 977-6678 Fax San Antonio Division 4800 Fredericksburg Road San Antonio, Texas 78229 (210) 349-1111 (210) 524-2641 Fax I nt e r n at i o n a l D i v i s i o n Kaufman & Broad S.A. Tour Maine Montparnasse 33 avenue due Maine 75755 Paris, Cedex 15 011-331-4-538-2000 011-331-4-538-2250 Fax C or p ora t e Headquarters 10990 Wilshire Boulevard Seventh Floor Los Angeles, California 90024 (310) 231-4000 (310) 231-4222 Fax Architecture Group 801 Corporate Center Drive Suite 100 Pomona, California 91768 (909) 802-2400 (909) 623-5167 Fax houseCALL™ Center 4226 Rosewood Drive Pleasanton, California 94588 (800) 34-HOMES (925) 467-5506 Fax Mortgage Company 21650 Oxnard Street, Suite 300 Woodland Hills, California 91367 (818) 887-2275 (818) 712-2422 Fax Multi-Housing Group 320 Golden Shore, Suite 200 Long Beach, California 90802 (562) 256-2000 (562) 256-2001 Fax D om es t i c D i v i s i on s Arizona Phoenix Division Two Gateway 432 North 44th Street, Suite 200 Phoenix, Arizona 85008 (602) 306-1000 (602) 306-1010 Fax Tucson Division 5780 North Swan Road, Suite 100 Tucson, Arizona 85718 (520) 577-7007 (520) 299-2725 Fax California Greater Los Angeles Division 801 Corporate Center Drive Suite 201 Pomona, California 91768 (909) 802-1100 (909) 802-1111 Fax Orange County Division 3 Jenner, Suite 100 Irvine, California 92618 (949) 790-9100 (949) 790-9119 Fax North Bay Division 611 Orange Drive Vacaville, California 95687 (707) 469-2400 (707) 469-2401 Fax San Diego Division 12235 El Camino Real, Suite 100 San Diego, California 92130 (858) 259-6000 (858) 259-5108 Fax South Bay Division 2201 Walnut Avenue, Suite 150 Fremont, California 94538 (510) 792-2900 (510) 792-5262 Fax Colorado Colorado Division 8401 East Belleview Avenue, Suite 200 Denver, Colorado 80237 (303) 220-6000 (303) 773-1930 Fax Nevada Las Vegas Division 750 Pilot Road #F Las Vegas, Nevada 89119 (702) 614-2500 (702) 614-2614 Fax Reno Division 1380 Greg Street, Suite 230 Sparks, Nevada 89431 (775) 331-0345 (775) 331-0360 Fax C om m o n S t o c k P r i c e s 1999 1998 H ea d qua rt e r s Kaufman and Broad Home Corporation 10990 Wilshire Boulevard, Seventh Floor High Low High Low Los Angeles, California 90024 First Quarter $317⁄ 1 6 $21 3⁄ 8 $26 7⁄ 8 $20 5⁄ 1 6 Second Quarter Third Quarter Fourth Quarter 28 3⁄ 46 25 7⁄ 1 6 25 9⁄ 16 21 3⁄ 8 19 1⁄ 4 16 3⁄ 4 34 1⁄ 2 35 1⁄ 2 31 1⁄ 4 22 5⁄ 1 6 21 3⁄ 86 17 1⁄ 86 D iv i d e n d D a ta Kaufman and Broad Home Corporation paid a quarterly cash divi- dend of $.075 per common share in 1999 and 1998. A nnua l Stoc k h ol de rs ’ M e et i n g The 2000 Annual Stockholders’ meeting will be held at the C o m p a n y ’s offices at 10990 Wilshire Boulevard, Seventh Floor, in Los Angeles, California, at 9:00 a.m. on Thursday, April 6, 2000. S t o c k E x c ha n g e L i s t i ng s Kaufman and Broad Home Corporation’s common stock is listed on the New York Stock Exchange and is also traded on the Boston, Cincinnati, Midwest, Pacific and Philadelphia Exchanges. The ticker symbol is KBH. Kaufman & Broad S.A. is listed on the ParisBourse. The ticker symbol is KOF. Tr a n sf er A g en t ChaseMellon Shareholder Services 85 Challenger Road Ridgefield Park, New Jersey 07660 (800) 356-2017 www.chasemellon.com I nd e p e n d e n t A u d i t o r s Ernst & Young LLP Los Angeles, California S ha r e h ol de r I n f or m at i o n The Company’s common stock is traded on the New York Stock Exchange under the symbol KBH. There were 48,090,615 shares of common stock outstanding as of February 1, 2000. F o r m 10 - K The Company’s 1999 Report on Form 10-K filed with the Securities and Exchange Commission may be obtained without charge by writ- ing to the Company’s Investor Relations department, or by visiting the Company’s Web site at kbhomes.com. (310) 231-4000 (310) 231-4222 Fax Location and Community Information: kbhomes.com (800) 34-HOMES I nv e s t o r C o n ta c t Mary M. McAboy Vice President, Investor and Public Relations Kaufman and Broad Home Corporation 10990 Wilshire Boulevard, Seventh Floor Los Angeles, California 90024 (310) 231-4033 mmcaboy@kbhomes.com B on d h ol de r S e rv i c e s A dd r e s se s & P h o n e N u m b e r s 8 1⁄ 4% $189,750,000 FELINE PRIDES – Due 8/16/01 Trustee: Bank One, N.A. Corporate Trust Investor Relations One Bank One Plaza Mail Code IL1-0126 Chicago, Illinois 60670 bondholder@em.fcnbd.com (800) 524-9472 9 3⁄ 8% $175,000,000 Note – Due 5/1/03 Trustee: State Street Bank and Trust Company of California, N.A. Corporate Trust Department 633 West 5th Street, 12th Floor Los Angeles, California 90071 corporatetrust.statestreet.com (800) 531-0368 7 3⁄ 4% $175,000,000 Note – Due 10/15/04 9 5⁄ 8% $125,000,000 Note – Due 11/15/06 Trustee: Sun Trust Bank Corporate Trust Division Mail Code 008 25 Park Place, 24th Floor Building 10, Suite 810 Atlanta, Georgia 30303-2900 olga.warren@suntrust.com (800) 711-1614 KB AR 99 82 83> Visit us at kbhomes.com Design Louey/Rubino Design Group Inc., Santa Monica, CA–NYC–Hong Kong Photography portrait Michele Smith editorial Victor John Penner Printing Lithographix Kaufman and Broad Home Corporation 10990 Wi l s h i re Boulevard, Los Angeles, California 90024