KB Home

K B H O M E   AN N UA L   R E PO RT   2 0 0 2

UP

Q UA L I T Y  

VA LU E

C H O I C E

$5.03
$5.03

BI LLION

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F I N A N C I A L   H I G H L I G H T S

YEARS ENDED NOVEMBER 30,

in thousands, except per share and unit amounts

N ET   O R D E R S ,   D E L I V E R I E S   A N D   B AC K LO G

(NUM BER OF HOMES)

Net orders

Deliveries

Unit backlog

R E V E N U E S   A N D   I N C O M E

Revenues

Operating income

Pretax income 

Net income

Basic earnings per share

Diluted earnings per share

A S S ET S ,   D E BT   A N D   E Q U I T Y

2002

2001

2000

1999

1998

25,800

25,565

12,023

24,935

24,868

11,225

24,275

22,847

10,767

23,094

22,460

8,777

16,781

15,213

6,943

$5,030,816

$4,574,184

$3,930,858

$3,836,295

$2,449,362

510,423

386,087

312,441

276,571

170,085

469,250

324,517

297,660

226,869

146,567

314,350

214,217

209,960

147,469

95,267

7.57

7.15

5.72

5.50

5.39

5.24

3.16

3.08

2.41

2.32

Total assets

$4,025,540

$3,692,866

$2,828,921

$2,664,235

$1,860,204

Mortgages and notes payable

1,674,627

1,683,650

1,373,274

1,191,090

769,259

Mandatorily redeemable preferred securities

189,750

189,750

189,750

Stockholders’ equity

1,274,351

1,092,481

654,759

676,583

474,511

Return on average stockholders’ equity

26.6%

24.5%

25.6%

25.6%

22.2%

“ KB Home is kicking butt.”

F OR T U N E   M AGA Z I N E ,   SE P T E M B E R   20 02

02/ 03

2 0 %

1 5 %

1 0 %

5 %

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9 8

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R ET U R N   O N   I N V E ST E D   C A P I TA L

9 8 /   12 .5 % 9 9 /   12 .7 % 0 0 /   12 .8 % 01/   14 .5 % 0 2 /   16 .9 %

S & P   5 0 0   I N D E X

9 8 /   7. 9 % 9 9 /   7. 9 % 0 0 /   7. 7 % 01/   6 . 3 % 0 2 /   6 .1 %

Source: Compustat

16.9%

NEARLY TRIPLE THE S&P 500 INDEX

0 1

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K B   H O M E   2 0 0 2   B O A R D   O F   D I R E CTO R S

A. Bruce Karatz  B. Jane Evans  C. Dr. Ray R. Irani  D. Ron Burkle  E. Dr. Barry Munitz  F. Sanford C. Sigoloff

G. Henry G. Cisneros  H. Kenneth M. Jastrow, II  I. Guy Nafilyan  J. Luis G. Nogales  K. James A. Johnson

D E A R   S H A R E H O L D E R S

KB Home is now a $5.03 billion company. Like most major milestones, this one

has a compelling story behind it. Ours is about change.

Leaf  through  any  book  on  the  business  bestseller  list  today  and  you’re

almost certain to spot a few pages, if not entire chapters, dedicated to the topic 

of change. 

Just about everyone, it seems, has particular ideas on how to handle it, but

most  agree  on  one  point:  Successful  organizations  don’t  fear  change,  or  simply

manage through it. Rather, they anticipate it, embrace it, profit from it—even, in

some cases, speed it along for their own benefit, and that of their customers.

KB Home and the homebuilding industry’s other major players probably

don’t  strike  most  casual  observers  as  revolutionaries.  And  yet,  few  modern 

industries  have  transformed  themselves  as  completely  as  the  homebuilding 

business has in recent years. Our innovative KBnxt business model, implemented

in  1996,  has  seen  us  grow  from  a  more  speculative  business  into  a  more 

disciplined organization that doesn’t expose itself to the risk inherent in building

large numbers of homes that sit unoccupied until a buyer turns up. Today, with 

a  handful  of  exceptions,  we  build  homes  only  after  we’ve  lined  up  a  buyer 

with mortgage approval, and this practice has brought an unprecedented degree

of  predictability — and  sustainability — to  our  business.  This  is  a  major  part 

of  the  reason  why,  in  2002,  KB  Home  revenues  exceeded  the  $5  billion  mark 

for  the  first  time  in  our  history  as  we  expanded  our  East  Coast  operations 

and  solidified  our  position  as  a  leading  builder  in  nearly  all  of  our  markets  in 

the U.S. and France.

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1 6 0

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E ST I M AT E D   N E W   U.S .   H O U S E H OLD   FOR M AT I O N S ( I N   M I L L I O N S )

0 0 /   10 5 . 5

0 5 /   111. 5

10 /   11 7. 4

15 /   12 3 . 4

2 0 /   12 9 . 3

Source: The U.S. Census Bureau and the 
Joint Center for Housing Studies of Harvard University

ESTIMATED

1.2

MILLION NEW U.S. HOUSEHOLDS 

EXPECTED EACH YEAR THROUGH 2020

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An article in the September 2002 issue of Fortune magazine characterized

our evolution this way: “Ten years ago, KB Home might have chosen to develop

houses …because  some  executive  had  a  fuzzy  gut  feeling.  Today,  Karatz  and 

his team choose to build …because they’ve conducted vast surveys and statistical

studies  of  the  region  and  they  know  they  can  sell  a  lot  of  houses  there

— profitably.”

“Profitably” is an understatement. In 2002, KB Home’s diluted earnings

per share (EPS) climbed to $7.15, a 30 percent increase over 2001’s $5.50 EPS.

Revenues  for  the  year,  meanwhile,  rose  to  just  over  $5  billion.  Unit  deliveries

grew  to  25,565,  while  our  year-end  backlog  reached  12,023  units,  which 

represents  nearly  six  months’  worth  of  unit  deliveries  and  margins,  as  well  as

future  revenues  of  approximately  $2.3  billion.  These  figures  capped  a  five-year

growth spurt that saw KB Home achieve a 25 percent average annual return on

stockholder’s  equity,  and  a  393  percent  growth  in  EPS.  In  2002,  the  Company

achieved  a  17  percent  return  on  invested  capital — nearly  triple  the  S&P  500

Index  average.  Very  few  Fortune  500  companies  today  can  boast  this  kind  of

extraordinary track record.

“YOU AIN’T SEEN NOTHIN’ YET.”

While  some  are  forecasting  that  the  best  of  times  may  already  be  behind  the

homebuilding industry, consider some basic points about our business, and basic

demographic forces shaping the housing marketplace.

VA ST   G R OW T H   I N   N E W   H O U S E H O L D S   W I L L   F U E L   ST E A DY,   O N G O I N G   D E M A N D .

With  the  expected  formation  of  an  estimated  1.2  million  new  U.S.  households

each year through 2020, experts agree that the national homeownership rate will

continue to grow, while housing supply will remain constrained. The U.S. Census

Bureau and the Joint Center for Housing Studies of Harvard University issued 

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a  report  in  2002  predicting  that  this  increase  in  households  will  far  outstrip 

current housing inventory, requiring construction of 1.7 million new homes and

apartments  annually  for  decades  to  come.  The  extreme  cyclicality  that  plagued

our industry in years past, therefore, is unlikely to recur. 

In  summarizing  the  current  supply/demand  imbalance,  Harvard’s  Joint

Center for Housing Studies wrote, “With 24 million new households expected to

form between 2000 and 2020, the housing sector is poised to set new records for

production, sales and aggregate home equity.” 

B I G   B U I L D E R S :   B E ST   P O S I T I O N E D   F O R   2 1 ST   C E N T U RY   M A R K ET   C H A L L E N G E S .

Given that the top 10 U.S. homebuilders command only about 20 percent of the

$200 billion-a-year U.S. new home market, we believe that further consolidation

is  in  the  cards  for  our  industry.  Big  builders  enjoy  significant  advantages  over 

the  roughly  50,000  capital-constrained  smaller  builders  scattered  throughout 

the  United  States.  A  builder  such  as  KB  Home  with  coast-to-coast  operations 

and  a  strong,  nationwide  supplier  network  can  flex  its  purchasing  power  and

financial strength to secure prime parcels of land, and to lock in favorable prices

on building materials and other essentials. The ability to pass those savings on to

consumers,  meanwhile,  helps  KB  Home  keep  home  prices  well  below  those  of

smaller competitors. 

Fifty  builders  were  acquired  by  larger  peers  in  the  past  two  years 

alone,  and  we  at  KB  Home  haven’t  been  standing  on  the  sidelines.  In  2002, 

we  completed  the  acquisition  of  Orlando,  Florida-based  American  Heritage

Homes,  a  major  regional  builder  whose  presence  in  Tampa  will  augment  the

operations  we  established  there  earlier  in  the  year.  American  Heritage’s 

30  years  of  experience  in  the  Central  Florida  market  and  its  outstanding  local 

reputation provide KB Home with the platform to become a major force in the 

Sunshine State. 

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A N N U A L   E M P LOY M E N T   G R OW T H   9 9 — 0 4

.0 6 % – 1. 3 %

1.3 % – 1.9 %

1.9 % – 4 .1%

Source: The U.S. Census Bureau

25.6

THOUSAND HOMES DELIVERED

K B H   2 0 0 2   TA R G ET E D   G R OW T H  

M A R K ET S   A N D   U N I T   D E L I V E R I E S

AR I Z O NA

2 ,841

CAL I F O R N I A

5,34 4

C O LOR AD O

1,7 3 2

F LO R I DA

6 7 9

F R ANC E

3,78 7

N E VADA

2,92 4

N E W   M E X I C O

38 5

T E XAS

7,873

1 2 / 1 3

In 2002, we also established a new operating division in the Rio Grande

Valley in Texas and expanded our operations within the Tucson, Arizona, market

by  purchasing  the  assets  of  New  World  Homes.  KB  Home  is  guided  by  a 

measured,  intelligent  growth  strategy  that  combines  organic  expansion — what

we call de novo growth — with strategic acquisitions that serve our shareholders’

long-term interests. We believe this balance is essential to our long-term success. 

“OPPORTUNITY AS BIG AS A HOUSE …RIGHT UNDER INVESTORS’ NOSES.”

Our  industry  as  a  whole  has  performed  brilliantly  in  recent  years.  But  even 

in  such  elite  company,  KB  Home  stands  out  as  a  star  performer.  Surprisingly,

while  KB  Home  has  far  outpaced  the  S&P  500  by  several  critical  measures 

of  financial  performance,  we’re  still  waiting  for  financial  markets  to  reward 

our  strong  performance  with  a  commensurate  valuation.  As  of  this  writing, 

KB  Home’s  stock  is  trading  at  roughly  six  times  earnings,  compared  with  the 

S&P 500 Index average of 20 times earnings. It’s worth noting that our KB Home

Board  of  Directors  has  expressed  a  resounding  vote  of  confidence  in  our

prospects  by  authorizing  the  buyback  of  an  additional  two  million  shares  of 

KB Home common stock following our repurchase of four million shares in 2002.

WHAT, EXACTLY, INSPIRES THAT HIGH DEGREE OF CONFIDENCE?

Here are some of the key factors:

O U R   F I R ST-T I M E ,   F I R ST- M OV E - U P   B U Y E R   F O C U S .

They say you can’t be all things to all people. But we at KB Home believe it’s well

within  our  grasp  to  be  all  things  to  two  very  large  groups  of  people:  first-time

homebuyers and first-move-up homebuyers. These buyers tend not to have much

of their savings invested in stocks, which means market volatility doesn’t typically

impact their homebuying decisions. 

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Price  does,  however,  and  KB  Home,  with  an  average  domestic  sales 

price of $196,000*, weighs in well below the $215,000 U.S. new-home average.

We’ve  become  the  low-price  leader  by  building  quality  homes  efficiently  and

offering everything buyers want and nothing they don’t — an objective we’re able

to  achieve  by  taking  stock  of  their  preferences  each  year  in  our  exhaustive, 

proprietary Homebuyers’ Survey.

R I G H T   B U I L D E R ,   R I G H T   P L AC E S ,   R I G H T   T I M E .

All housing markets aren’t created equal. The fast-growing west coast, southwest

and central U.S. markets in which KB Home already has a strong presence are

expected to continue absorbing a major influx of new residents in coming years.

When considering new markets, meanwhile, we look for solid job growth, large

numbers of first-time buyers and long-term growth characteristics that allow us

to create a sizeable business of value. Anything less simply won’t make the grade. 

P E O P L E   W H O   M A K E   A   R E A L   D I F F E R E N C E .

No  company  with  goals  as  ambitious  as  ours  can  hope  to  succeed  without  the

right people. Fortunately, KB Home employees share a common passion: to put

homeownership  within  reach  of  more  working  families.  Everywhere  I  turn, 

I  see  hardworking  people  jumping  through  hoops  to  clinch  a  sale  or  solve 

a problem.

It’s  a  spirit  and  attitude  we  encourage.  As  you  can  see,  KB  Home’s 

continued success depends on the dedication, innovation and intelligence of our

employees.  During  the  past  year,  we’ve  promoted  more  than  700  employees 

within the organization—illustrating the strength of the people who work here.

Helping our employees move forward in their KB Home careers, we’re continuing

to  expand  KB  University — known  here  simply  as  KBU — our  in-house  online

education and knowledge-sharing network, providing training and development

to employees. Though each of our operating divisions is unique and geographically

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*U.S. only

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$ 5 0

$ 4 0

$ 3 0

$ 2 0

$ 1 0

$ 0

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STO C K   P R I C E

9 8 /   $ 2 5 . 1 9 9 9 /   $ 2 2 . 1 3 0 0 /   $ 3 1 . 3 8 0 1 /   $ 3 3 . 6 2 0 2 /   $ 4 4 . 6 9

*Compound annual growth rate 1997–2002

CAGR*

15%

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enables us to speak a common language, share information and communicate as

effectively as if we were all working side by side. KBU is just one way we help

employees realize their professional potential at KB Home.

A   B R A N D   SY N O N Y M O U S   W I T H   Q U A L I T Y,   I N N OVAT I O N ,   VA L U E   A N D   S E RV I C E .

KB Home has become one of the best-recognized and most-respected brands in

homebuilding by delivering a consumer experience that follows through on the

promise of our distinctive marketing. 

KB Home’s marketing is founded on the premise that creative print and

broadcast materials, promotions, signage and events should educate prospective

buyers  as  well  as  entice  them  to  visit  our  new-home  communities.  That’s  why,

even  before  they’ve  selected  their  home,  many  of  our  first-time  buyers  benefit

from membership in our Homebuyers Club, which can provide credit assistance

while explaining everything from how much home they can afford to exactly what

“escrow” means. It’s an example of the kind of one-stop shopping we’ve become

known for, and it’s a powerful sales tool and loyalty-builder for buyers who might

otherwise consider the entire process too daunting to embark on. 

We believe consumers’ feelings about the quality of their overall home-

buying experience can shape their perceptions of the finished product, so from

our sales force to our site superintendents, our buyers benefit from working with

a  company  whose  goal  is  to  make  homebuying  painless,  seamless  and  entirely

trouble-free.  And  even  though  we  notched  the  highest  customer-satisfaction

rankings in our history in 2002, a full-court press for quality building remains our

top priority. No one ever got ahead by clinging to the status quo.

O F F E R I N G   B U Y E R S   A   W E A LT H   O F   C H O I C E S   T H R O U G H   K B   H O M E   ST U D I O S .

The  same  aspect  of  our  KBnxt  business  model  that  helps  us  guard  against  risk

enables  us  to  offer  exceptional  freedom  of  choice  to  our  buyers.  At  KB  Home

Studios, buyers select the options and features they want, and enjoy the ability to 

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Studios, buyers select the options and features they want, and enjoy the ability to

roll the cost of those options into their monthly mortgage payments. Headaches

associated  with  running  from  store  to  store  in  search  of  the  right  carpet  or 

window  coverings  are  eliminated,  along  with  the  hassle  of  securing  a  loan — a

need  we  address  through  our  wholly  owned  KB  Home  Mortgage  lending 

subsidiary. We don’t simply sell buyers a house; we help them create their own 

KB home, built to suit their unique needs.

A   S E A S O N E D   M A N AG E M E N T   T E A M ,   E XC E PT I O N A L   C O R P O R AT E   G OV E R N A N C E .

During  my  30  years  with  KB  Home,  I’ve  taken  pride  in  helping  our  company

evolve from a regional player engaged in the business of speculative homebuilding

to  a  $5  billion  corporation  with  coast-to-coast  operations,  significant  strategic

advantages and a conservative, world-class operating model. 

Those of us who have spent decades working to establish our organiza-

tions’  reputations  were  both  disheartened  and  angered  by  the  revelations 

that  undermined  public  confidence  in  corporate  America  in  2002.  KB  Home

shareholders will be pleased to learn that our company has corporate governance

policies in place and employs sound accounting practices that ensure executives’

and directors’ interests are perfectly in sync with those of our investors.

With regard to financial reporting, ours is an easily understood business with

conservative accounting; the source of our earnings is visible and straightforward.

What you see truly is what you get. Our KB Home Board of Directors, meanwhile,

is comprised of some of the highest-caliber independent directors in the country—

individuals who are business leaders in their own right, and whose expertise and

diverse backgrounds enable them to ask tough questions on your behalf.

Our  Board  and  senior  management  began  focusing  on  creating  a  solid

governance structure a decade ago — long before this became imperative. Indeed,

the Company’s governance practices were already substantially in compliance with

the new SEC and NYSE regulations before those mandates took effect this year. 

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Our  Board  will  continue  to  actively  evaluate  and,  as  necessary,  make  improve-

ments  to  KB  Home’s  governance  structure  to  ensure  shareholders’ 

interests  are  paramount  at  all  times.  This  past  year,  the  Board  changed  its 

composition guidelines to reduce the maximum number of KB Home employee

directors  from  two  to  one.  As  a  result,  after  15  years  of  dedicated  service  as  a

director,  Guy  Nafilyan  will  step  aside,  though  he  will  continue  contributing 

outstanding results to the company as chairman and CEO of Kaufman & Broad

S.A., our publicly held, majority-owned French subsidiary, which is listed on the

Paris Bourse.

Similarly, Henry Cisneros, who joined our Board in 2000 when we formed

our American City Vista partnership, has chosen not to stand for re-election in

2003. In recent years, our close business relationship with Henry has broadened,

and for that reason Henry is not considered an “independent” director under new

NYSE rules and is ineligible to sit on our Board committees. Since KB Home’s

corporate governance principles — posted on our website at kbhome.com — now

dictate  that  all  non-employee  directors  should  be  eligible  to  participate  on 

committees of the Board, Henry has chosen to step down as of our 2003 annual

meeting. Henry and American City Vista will continue to work with KB Home 

on  urban-development  initiatives  aimed  at  increasing  the  available  supply  of

affordable housing in some of our key markets. 

Finally,  our  longest-serving  director,  Sandy  Sigoloff,  has  reached 

retirement  age,  thus  bringing  to  a  close  an  extraordinary  tenure  marked  by  a

determination  to  help  make  KB  Home  one  of  the  most  admired  companies  in 

our industry, and in the nation. We have achieved that goal in no small measure 

due  to  Sandy’s  wisdom,  leadership  and  thoughtful,  reasoned  debate.  Personally 

speaking, Sandy has been a trusted advisor, confidant and friend whose counsel

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and guidance have been invaluable to me for more than 20 years. I first met him

when I returned from France in the early 1980s, when Sandy was our Company’s

vice chairman. Although he left to continue a remarkable business career in which

he  spearheaded  numerous  turnaround  successes,  Sandy  continued  to  serve  our

company brilliantly as a director. I know his impact will be felt on our business

for many years to come.

—

From a business and financial standpoint, the year 2002 may well be remembered

as the Year of the House — a period in which the family home sheltered Americans

from the storms ravaging virtually every other area of the U.S. economy.  

My  hope  and  expectation  is  that  the  year  2003  will  be  the  Year  of  the

Homebuilder — a  period  in  which  smart  investors  rethink  outdated  views 

on  our  industry,  take  a  closer  look  at  our  accomplishments  and  prospects,  and

reconfigure their portfolios accordingly.  

In the meantime, we at KB Home will continue doing what we do best:

offering  exceptional  quality  and  value  to  our  buyers  and  to  our  shareholders.

That,  after  all,  as  Fortune magazine  quaintly  put  it  last  September,  is  what  has

allowed KB Home to keep “kicking butt.” 

S I N C E R E LY,

B R U CE  KARATZ,  CHAI R MAN  AN D  CH I E F  EX E CU TI V E  OFFI CE R

FE B R UAR Y  1 2,  2 003

I

L
A
T
P
A
C

D
E
T
S
E
V
N

I

N
O

S
N
R
U
T
E
R

I

D
L
O
S

2 2 / 2 3

 
 
 
 
W HAT   MAT T ER S   M O ST   TO   T H E M . . .

QUALITY

VALUE

. . . MAT T E R S   M O ST   TO   U S .

CHOICE

24 / 2 5

A brand-new KB home is much, much more than the sum of its parts. It’s the professionalism

and expert craftsmanship we invest in each one of those parts that guarantees our buyers’ lasting

satisfaction with the finished product.

Backed  by  an  unsurpassed  10-year  limited  warranty,  every  KB  home  is  built  from  quality 

materials on a rock-solid foundation of experience, commitment and trust. That’s what enables

Q UA LI T Y

our homes — and our Company — to stand the test of time.

E X T.   S TA I R   AT   T O P

SWEATING THE SMALL STUFF.

2 6 / 2 7

10 YR.

WARRANTY

24 HR.

ON-CALL SERVICE

45 YRS.

EXPERIENCE

2 8 / 2 9

S E RV I C E

D ETA I L S

C O M M I T M E N T

F O R   K B   H O M E ,   G ET T I N G   I T   R I G H T   T H E   F I R ST   T I M E ,   E V E RY   T I M E ,   I S   T H E   F I R ST   O R D E R   O F   B U S I N E S S .  

W E ’ V E   B E C O M E   O N E   O F   T H E   N AT I O N ’ S   B I G G E ST   B U I L D E R S   BY   PAY I N G   C LO S E   AT T E N T I O N   TO   T H E   S M A L L E ST   D ETA I L S .

FA M I LY

T R U ST

E X P E R I E N C E

“ O N E   H O M E   AT   A   T I M E ,   O N E   FA M I LY   AT   A   T I M E ” :   I T ’ S   A   U N I Q U E LY   K B   H O M E

A P P R O AC H   T H AT   I M P R E S S E S   H O M E B U Y E R S   T I M E   A N D   AG A I N .

3 0 / 3 1

Think  expansive,  not  expensive.  Our  challenge  at  KB  Home  is  to  give  homebuyers  plenty  of

what they need without costing them everything they’ve got. It’s a delicate balance, but it’s one

VALU E

we’ve been able to strike successfully year after year.

MORE HOME FOR LESS: 
IT’S AN OFFER THAT’S HARD TO RESIST.

W A L K - I N - C L O S E T

M .   B AT H

M A S T E R   B E D R O O M

R E T R E AT

3 2 / 3 3

AVG. SQ. FT.

2,000

196,000 *

AVG. PRICE

1,000

FLOOR PLANS

*U.S. only

3 4 / 3 5

S PAC E

C O M M U N I T Y

D R E A M

TO D AY ’ S   FA M I L I E S   H AV E   B I G   D R E A M S   A N D   B I G   P L A N S   F O R   T H E   F U T U R E .  

A   S PAC I O U S   K B   H O M E   I S   D E S I G N E D   W I T H   T H E I R   N E E D S   I N   M I N D .

W H Y   R E N T ?

P E R S O N A L

H AV E N

W I T H   G E N E R O U S ,   E V E N   O U T S I Z E D   B E D R O O M S ,   C LO S ET S ,   K I TC H E N S   A N D   L I V I N G   A R E A S ,   K B   H O M E

O F F E R S   R O O M   TO   M A N E U V E R ,   R O O M   TO   G R OW,   A N D   R O O M   TO   S I M P LY   ST R ETC H   O U T   A N D   R E L A X .

3 6 / 3 7

NO SHORTAGE OF OPTIONS.

Our  KB  Home  Studios  are  staffed  by  knowledgeable  professionals  who  excel  at  making  sure 

buyers  are  overjoyed,  and  never  overwhelmed,  by  the  vast  variety  of  cabinets,  countertops, 

carpeting, and other finishings available to them.

KB Home is dedicated to making the home-personalization process perfectly painless. And that’s

C H O I C E

a primary point-of-difference between our Company and our competitors.

M A S T E R   B AT H

O P T.   M A S T E R   B AT H

3 8 / 3 9

7,100

CARPETS

3,600

TILES & STONES

1,300

WOODS & LAMINATES

4 0 / 4 1

T E X T U R E

C A R P ET S

W I N D OW S

T I L E S

R O O F S

C O LO R

S I N K S

F I N I S H E S

C A B I N ET S

ST Y L E

C A ST   I R O N

C O M F O RT

T H E   A B I L I T Y   TO   C H O O S E   F R O M   T H O U S A N D S   O F   O PT I O N S   A N D   U P G R A D E S   A N D   A   VA R I ET Y   O F  

D I F F E R E N T   F LO O R   P L A N S   I S   W H AT   M A K E S   E AC H   A N D   E V E RY   K B   H O M E   A S   U N I Q U E   A S   I T S   OW N E R S .

G R A N I T E

STO N E

L I G H T I N G

C U STO M

F LO O R I N G

STA I N L E S S

B R I C K

D O O R S

STA I N S

B AT H R O O M S

C H O I C E   E X T E N D S   TO   F I N A N C I N G   O PT I O N S   A S   W E L L ,   S I N C E   B U Y E R S   H AV E   T H E

O PT I O N   O F   R O L L I N G   T H E   C O ST   O F   M O ST   O PT I O N S   I N TO   T H E I R   M O RTG AG E .

4 2 / 4 3

T H AT ’ S   W H Y   T H E R E ’ S   O N LY   O N E   P L AC E   TO   G O   F R O M   H E R E :

UP

4 4 / 4 5

D I LU T E D  
E A R N I N G S   P E R   S H A R E

TOTA L   R E V E N U E S

( I N   B I L L I O N S )

R ET U R N   O N   E Q U I T Y

CAG R * + 38%

CAG R * + 22%

5 -Y R. AV G. + 25%

5
1
7
$

.

0
5

.

5
$

4
2

.

5
$

$ 7. 5 0

$ 6 . 2 5

$ 5 . 0 0

$ 3 . 7 5

2
3

.

2
$

$ 2 . 5 0

$ 1 . 2 5

8
0

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3
$

3
0

.

5
$

7
5

.

4
$

3
9

.

3
$

4
8

.

3
$

5
4

.

2
$

$ 5

$ 4

$ 3

$ 2

$ 1

$ 0

%
6

.

6
2

%
6

.

5
2

%
6

.

5
2

%
5

.

4
2

2 7 %

2 6 %

2 5 %

2 4 %

2 3 %

2 2 %

%
2

.

2
2

9 8

9 9

0 0

0 1

0 2

9 8

9 9

0 0

0 1

0 2

9 8

9 9

0 0

0 1

0 2

*Compound annual growth rate 1997–2002

U N I T   D E L I V E R I E S

Y EAR -E N D   BAC KLOG

C AG R * + 17%

C AG R * + 23%

5
6
5

,

5
2

8
6
8

,

4
2

0
6
4

,

2
2

7
4
8

,

2
2

3
1
2

,

5
1

2 5 , 0 0 0

2 0 , 0 0 0

1 5 , 0 0 0

1 0 , 0 0 0

5 , 0 0 0

0

3
2
0

,

2
1

5
2
2

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1
1

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6
7

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0
1

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7
7

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1 2 , 0 0 0

1 0 , 0 0 0

8 , 0 0 0

3
4
9

,

6

6 , 0 0 0

4 , 0 0 0

2 , 0 0 0

9 8

9 9

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0 1

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9 8

9 9

0 0

0 1

0 2

*Compound annual growth rate 1997–2002

4 6 / 4 7

FINANCIAL REVIEW

SELECTED FINANCIAL INFORMATION

YEARS ENDED NOVEMBER 30,
in thousands, except per share amounts

2002

2001

2000

1999

1998

C O N ST R U CT I O N :

Revenues

Operating income

Total assets

Mortgages and notes payable

M O RTG AG E   B A N K I N G :

Revenues

Operating income

Total assets

Notes payable

Collateralized mortgage obligations

C O N S O L I D AT E D :

Revenues

Operating income

Net income

Total assets

Mortgages and notes payable

Collateralized mortgage obligations

Mandatorily redeemable preferred 

securities (Feline Prides)

Stockholders’ equity

B A S I C   E A R N I N G S   P E R   S H A R E

$

D I L U T E D   E A R N I N G S   P E R   S H A R E

C A S H   D I V I D E N D S   P E R   C O M M O N   S H A R E

$4,938,894

$4,501,715

$3,870,488

$3,772,121

$2,402,966

452,917

3,391,434

1,167,053

352,316

2,983,522

1,088,615

288,609

2,361,768

987,980

259,107

2,214,076

813,424

148,672

1,542,544

529,846

$

91,922

$ 72,469

$ 60,370

$

64,174

$ 46,396

57,506

634,106

507,574

14,079

33,771

709,344

595,035

22,359

23,832

467,153

385,294

29,928

17,464

450,159

377,666

36,219

21,413

317,660

239,413

49,264

$5,030,816

$4,574,184

$3,930,858

$3,836,295

$2,449,362

510,423

314,350

4,025,540

1,674,627

14,079

386,087

214,217

3,692,866

1,683,650

22,359

1,274,351

1,092,481

7.57

7.15

.30

$

5.72

5.50

.30

312,441

209,960

2,828,921

1,373,274

29,928

189,750

654,759

5.39

5.24

.30

$

276,571

147,469

2,664,235

1,191,090

36,219

189,750

676,583

3.16

3.08

.30

$

170,085

95,267

1,860,204

769,259

49,264

189,750

474,511

2.41

2.32

.30

$

4 8 / 4 9

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

OV E RV I E W Revenues  are  primarily  generated  from  the  Company’s  (i)  homebuilding  operations  in  the  United  States  and  France  and  (ii)  its

domestic mortgage banking operations.

Domestically, the Company’s construction revenues are generated from operating divisions in the following regional groups: “West Coast” —

California; “Southwest” — Arizona, Nevada and New Mexico; and “Central” — Colorado, Florida and Texas. Internationally, the Company operates

in France through a majority-owned subsidiary, Kaufman & Broad S.A. (“KBSA”).

In January 2001, the Company changed its name from “Kaufman and Broad Home Corporation” to “KB Home.” This new name, which resulted

from homebuyer input, is intended to convey the Company’s strong customer focus and its commitment to helping homebuyers realize their

dream of homeownership.

The  Company  has  expanded  its  operations  in  recent  years  by  executing  a  strategy  that  includes  both  organic  growth  and  acquisitions.  On

September 30, 2002, the Company acquired Orlando, Florida-based American Heritage Homes (“AHH”), which marked the Company’s entry

into the Orlando market and supplemented the start-up business it had established in the Tampa market earlier in the year. The Company first

entered the Florida market on July 19, 2001 with the acquisition of Trademark Home Builders, Inc. (“Trademark”), a builder of single-family homes

in Jacksonville, Florida. 

The  Company’s  international  operations  have  pursued  similar  growth  strategies  in  recent  years.  To  supplement  the  expansion  of  its  existing 

operations,  on  September  26,  2001,  KBSA  completed  the  acquisition  of  Résidences  Bernard  Teillaud  (“RBT”),  a  France-based  builder  of 

condominiums. 

The Company achieved record unit deliveries, revenues and diluted earnings per share in 2002. During the year ended November 30, 2002, the

Company  delivered  25,452  homes,  surpassing  its  previous  record  of  24,538  unit  deliveries  established  in  2001.  Total  Company  revenues

reached  a  record  $5.03  billion  in  2002,  up  10.0%  from  $4.57  billion  in  2001,  which  had  increased  16.4%  from  $3.93  billion  in  2000.  The

Company’s double-digit revenue growth in 2002 and 2001 was primarily driven by an increase in housing revenues stemming from increased unit

delivery volume and higher average selling prices. Included in total Company revenues were mortgage banking revenues of $91.9 million in 2002,

$72.5 million in 2001 and $60.4 million in 2000.

The  Company  also  generated  record  earnings  for  the  fifth  consecutive  year  in  2002.  Net  income  for  the  year  ended  November  30,  2002

increased 46.7% to $314.4 million, or $7.15 per diluted share, from $214.2 million, or $5.50 per diluted share, for the year ended November 30,

2001. Net income growth in 2002 stemmed from higher unit delivery volume, expanded housing gross margins and increased net income from

mortgage banking operations. Diluted earnings per share for 2002 was negatively impacted by a 12.9% year-over-year increase in the average

number of diluted shares outstanding. The higher share count resulted from the conversion of the Company’s Feline Prides securities to common

stock in August 2001, which more than offset share repurchases made by the Company during 2002. 

Net  income  of  $214.2  million  in  2001  was  higher  than  the  $210.0  million,  or  $5.24  per  diluted  share,  recorded  in  2000.  Results  for  2000

included a one-time gain of $39.6 million, or $.99 per diluted share, on the issuance of stock by the Company’s French subsidiary in an initial pub-

lic offering (the “French IPO” gain). Excluding the French IPO gain, 2000 net income and diluted earnings per share were $170.4 million and

$4.25, respectively. Net income in 2001 rose on higher unit delivery volume, expanded gross margins and increased net income from mortgage

banking operations.

CONSTRUCTION

R E V E N U E S Construction revenues totaled $4.94 billion in 2002, the highest level for any fiscal year in the Company’s history, increasing 9.7%

from $4.50 billion in 2001, which had increased from $3.87 billion in 2000. The increases in both 2002 and 2001 resulted primarily from higher

housing revenues driven by increased unit delivery volume and higher average selling prices. 

West Coast

Southwest

Central

France

Total

Unconsolidated
Joint Ventures

U N I T   D E L I V E R I E S

2002

First

Second

Third

Fourth

Total

2001

First

Second

Third

Fourth

Total

N ET   O R D E R S

2002

First

Second

Third

Fourth

Total

2001

First

Second

Third

Fourth

Total

863

1,152

1,469

1,860

5,344

981

1,388

1,553

1,628

5,550

1,697

1,892

1,386

1,106

6,081

1,176

1,541

1,082

973

4,772

1,246

1,412

1,574

1,805

6,037

1,248

1,503

1,690

1,797

6,238

1,512

1,522

1,680

1,567

6,281

1,973

1,855

1,494

1,156

6,478

2,182

2,565

2,511

3,026

10,284

1,746

2,121

2,432

3,069

9,368

2,418

2,663

2,438

1,964

9,483

2,531

3,078

2,369

2,051

10,029

734

876

936

1,241

3,787

553

711

798

1,320

3,382

814

1,117

815

1,194

3,940

664

896

720

1,156

3,436

5,025

6,005

6,490

7,932

25,452

4,528

5,723

6,473

7,814

24,538

6,441

7,194

6,319

5,831

25,785

6,344

7,370

5,665

5,336

24,715

56

47

10

113

84

98

79

69

330

13

1

1

15

65

74

64

17

220

5 0 / 5 1

E N D I N G   B AC K LO G – U N I T S

2002

First

Second

Third

Fourth

2001

First

Second

Third

Fourth

West Coast

Southwest

Central

France

Total

Unconsolidated
Joint Ventures

2,477

3,217

3,134

2,380

2,616

2,769

2,298

1,643

2,817

2,927

3,033

2,795

3,036

3,388

3,192

2,551

5,157

5,255

5,182

4,683

4,795

5,752

5,939

4,921

2,092

2,333

2,212

2,165

1,928

2,113

2,035

2,012

12,543

13,732

13,561

12,023

12,375

14,022

13,464

11,127

55

9

189

165

150

98

E N D I N G   B AC K LO G – VA L U E ,   I N   T H O U S A N D S

2002

First

Second

Third

Fourth

2001

First

Second

Third

Fourth

$767,836

$479,822

$746,481

$293,776

$2,287,915

977,628

989,927

789,719

512,544

512,872

475,208

782,033

772,046

707,989

365,147

366,733

373,750

2,637,352

2,641,578

2,346,666

$10,780

1,809

$754,618

$460,411

$667,155

$297,706

$2,179,890

$37,611

790,862

653,487

474,645

523,751

497,700

420,282

805,022

847,614

700,251

285,255

306,470

294,870

2,404,890

2,305,271

1,890,048

33,330

30,000

20,384

Housing revenues totaled $4.86 billion in 2002, $4.37 billion in 2001 and $3.77 billion in 2000, with each amount establishing a new Company

record for the year in which it was reported. In 2002, housing revenues rose 11.2% over the previous year due to a 3.7% increase in unit volume

and a 7.2% increase in the average selling price. In 2001, housing revenues rose 15.9% above 2000 results due to a 9.6% increase in unit 

volume and a 5.8% increase in the average selling price. Each of the Company’s geographic regions posted year-over-year growth in housing

revenues in 2002 and 2001.

Housing revenues from West Coast operations rose 8.3% to $1.70 billion in 2002, from $1.57 billion in 2001, due primarily to a 12.4% increase

in the average selling price, partially offset by a 3.7% decrease in unit delivery volume during the year. West Coast housing operations generated

40.0% of domestic housing revenues in 2002, down from 40.6% in 2001 and 42.7% in 2000. The continuing decline in the percentage of rev-

enues generated by the Company’s West Coast operations is consistent with the Company’s efforts to diversify its domestic operations outside

of California since 1993. Housing revenues generated from the Company’s Southwest region rose 4.0% to $1.02 billion in 2002, from $983.1

million in 2001, due to a 7.5% increase in the average selling price, which more than offset a 3.2% decrease in unit deliveries. Southwest region

housing revenues accounted for 24.1% of domestic housing revenues in 2002, compared to 25.4% in 2001 and 25.7% in 2000. The Central

region posted housing revenues of $1.52 billion, up 15.5% from $1.32 billion in 2001, the result of year-over-year increases of 9.8% in unit deliv-

eries and 5.3% in the average selling price. Central region housing revenues accounted for 35.9% of domestic housing revenues in 2002, com-

pared to 34.0% in 2001 and 31.6% in 2000. In France, housing revenues of $609.6 million in 2002 rose 23.2% from $494.8 million in 2001, the

result of a 12.0% increase in unit volume and a 10.0% increase in the average selling price. French housing revenues accounted for 12.6% of

the Company’s total housing revenues in 2002, compared to 11.3% in 2001 and 12.5% in 2000.

In 2001, West Coast region housing revenues increased 11.6% from $1.41 billion in 2000 due to a 1.4% increase in unit deliveries and a 10.2%

increase in the average selling price. Housing revenues in the Southwest region rose 16.1% in 2001 from $846.9 million in 2000, reflecting

increases of 7.0% in unit deliveries and 8.5% in the average selling price. In the Central region, housing revenues in 2001 rose 26.3% from $1.04

billion in 2000, the result of a 15.5% increase in unit delivery volume and a 9.4% increase in the average selling price. In France, housing rev-

enues rose 5.2% in 2001 from $470.3 million in 2000, reflecting a 14.0% increase in unit volume, partially offset by a 7.7% decline in the aver-

age selling price. 

Company-wide housing deliveries increased 3.7% to 25,452 units in 2002 from 24,538 units in 2001, reflecting growth in U.S. and French deliv-

eries of 2.4% and 12.0%, respectively. The increase in domestic deliveries was driven by a 9.8% increase in the Company’s Central region, par-

tially offset by decreases of 3.7% and 3.2% in the West Coast and Southwest regions, respectively. West Coast region deliveries decreased to

5,344  units  in  2002  from  5,550  units  in  2001,  as  the  Company  operated  from  21.5%  fewer  active  communities  in  the  region  during  2002.

Southwest region operations delivered 6,037 units in 2002, down from 6,238 units in 2001, reflecting a decrease of 9.5% in the average num-

ber of active communities operated in this region. In the Central region, deliveries totaled 10,284 units in 2002, increasing from 9,368 units in

2001, partly due to the Company’s expansion into Florida through a start-up business established in 2002 and acquisitions completed in 2002

and 2001. The average number of active communities in the Central region rose 12.8% in 2002. French deliveries increased to 3,787 units in

2002 from 3,382 units in 2001, with the average number of active communities increasing 16.2% from year to year. 

In 2001, housing deliveries increased 9.6% to 24,538 units from 22,392 units in 2000, due to improvement in all geographic regions of the

Company. The growth in domestic deliveries reflected increases of 1.4%, 7.0% and 15.5% in the West Coast, Southwest and Central regions,

respectively. West Coast deliveries rose to 5,550 units in 2001 from 5,476 units in 2000 despite an 8.1% decline in the average number of

active communities in the region during 2001. Southwest operations delivered 6,238 units in 2001, up from 5,832 units in 2000, despite a

decrease of 5.1% in the average number of active communities operated in the region. Deliveries from Central region operations increased to

9,368 units in 2001 from 8,112 units in 2000, as the average number of active communities in the region rose 9.0% from the prior year. French

deliveries increased 14.0% to 3,382 units in 2001 from 2,967 units in 2000, partly due to the inclusion of a full year of results from acquisitions 

made during 2000. 

The Company-wide average new home price increased 7.2% in 2002, to $190,800 from $178,000 in 2001, due to increases in the average sell-

ing prices in each domestic region and in France. The 2001 average new home price had advanced 5.8% from $168,300 in 2000, as a higher

domestic average selling price was partially offset by a lower average selling price in France. 

In the West Coast region, the average selling price rose 12.4% in 2002 to $318,300 from $283,100 in 2001, which had increased 10.2% from

$257,000 in 2000. The average selling price in the Southwest region increased 7.5% to $169,400 in 2002, compared with $157,600 in 2001,

which had increased 8.5% from $145,200 in 2000. The Central region average selling price rose 5.3% to $148,100 in 2002 compared with

$140,700 in 2001, which had increased 9.4% from $128,600 in 2000. The higher average selling prices in each of the Company’s domestic

regions in 2002 resulted from a combination of factors: generally higher prices throughout the West Coast region; selected increases in sales

prices in certain markets and communities in the Southwest and Central regions; and increases in lot premiums and options sold through the KB

Home  studios  in  all  of  the  Company’s  domestic  regions.  The  increase  in  the  Company’s  domestic  average  selling  price  in  2001  from  2000

resulted from strategic increases in sales prices in most of its markets.

The Company’s average selling price in France increased 10.0% to $161,000 in 2002 from $146,300 in 2001, which had decreased 7.7% from

$158,500 in 2000. The increase in 2002 resulted primarily from a positive foreign currency translation impact. The decrease in 2001 was largely

the result of a Company strategy to increase the proportion of condominiums in its French deliveries. Condominiums are typically priced below

single-family detached homes. The decrease also resulted from an adverse foreign currency translation impact.  

5 2 / 5 3

Revenues from the development of commercial buildings, all located in metropolitan Paris, totaled $43.8 million in 2002, down from $69.9 mil-

lion in 2001 and $.8 million in 2000. The decrease in French commercial revenues in 2002 versus 2001 reflected the completion of certain pro-

jects during the year and a lack of new commercial construction contracts initiated in 2002. In 2001, the Company’s French commercial revenues

increased substantially from 2000 due to the Company’s decision to expand its commercial activity as market conditions for this type of devel-

opment improved. For several years prior to 2001, the Company had de-emphasized its commercial development operations, which had gener-

ated revenues as high as $362.3 million in 1990, in light of less favorable commercial market conditions. 

Land sale revenues totaled $39.2 million in 2002, $64.8 million in 2001 and $100.5 million in 2000. Generally, land sale revenues fluctuate with

management’s decisions to maintain or decrease the Company’s land ownership position in certain markets based upon the volume of its hold-

ings, the strength and number of competing developers entering particular markets at given points in time, the availability of land in markets

served by the Company and prevailing market conditions. The results for 2002 and 2001 were representative of typical historical fluctuations in

Company land sales activity. 

O P E R AT I N G   I N C O M E Operating income increased to a new Company record of $452.9 million in 2002, up 28.6% from the previous record 

of $352.3 million achieved in 2001. As a percentage of revenues, operating income rose to 9.2% in 2002 from 7.8% in 2001. Housing gross

profits  in  2002  increased  18.1%,  or  $158.7  million,  to  $1.04  billion  from  $876.4  million  in  2001.  As  a  percentage  of  related  revenues,  the 

housing gross profit margin was 21.3% in 2002, up from 20.1% in the prior year, primarily due to a higher average selling price. The Company’s

housing gross profit margin also showed sequential improvement during each quarter of 2002, progressing from 20.0% in the first quarter to

22.6% in the fourth quarter. Commercial activities in France generated profits of $10.3 million in 2002, compared to $10.6 million in 2001.

Company-wide land sales generated profits of $3.2 million in 2002 and $1.7 million in 2001. 

Selling, general and administrative expenses totaled $595.7 million in 2002 compared with $536.5 million in 2001. As a percentage of housing

revenues, to which these expenses are most closely correlated, selling, general and administrative expenses in 2002 remained unchanged from

2001 at 12.3%.

Operating income increased 22.1% to $352.3 million in 2001 from $288.6 million in 2000. As a percentage of revenues, operating income rose

to 7.8% in 2001 from 7.5% in 2000. Housing gross profits in 2001 increased 17.8%, or $132.7 million, to $876.4 million from $743.7 million in

2000. As a percentage of related revenues, the housing gross profit margin was 20.1% in 2001, up from 19.7% in 2000, primarily due to a higher

average selling price. Commercial activities in France generated profits of $10.6 million in 2001, compared to $.2 million in 2000. Company-wide

land sales generated profits of $1.7 million in 2001 and $2.8 million in 2000.

Selling, general and administrative expenses increased to $536.5 million in 2001 from $458.0 million in 2000. As a percentage of housing rev-

enues, selling, general and administrative expenses increased slightly to 12.3% in 2001 from 12.2% in 2000. For the first nine months of 2001,

the Company achieved a lower selling, general and administrative expense ratio compared to the same period of 2000. Selling expenses rose

significantly  in  the  fourth  quarter  of  2001,  however,  as  marketing  efforts  had  to  be  stepped  up  to  stimulate  traffic  in  the  aftermath  of  the

September 11, 2001 tragedy and to attract sales in the increasingly competitive marketplace. Selling expenses remained at higher levels into the

first quarter of 2002, before returning to more normal levels in the remainder of the year.

I N T E R E ST   I N C O M E   A N D   E X P E N S E Interest  income,  which  is  generated  from  short-term  investments  and  mortgages  receivable,  amounted 

to $4.2 million in 2002, $3.6 million in 2001 and $5.8 million in 2000. Generally, increases and decreases in interest income are attributable 

to changes in the interest-bearing average balances of short-term investments and mortgages receivable as well as fluctuations in interest rates.

Interest expense results principally from borrowings to finance land purchases, housing inventory and other operating and capital needs. In 2002,

interest expense, net of amounts capitalized, decreased by $8.4 million to $32.7 million from $41.1 million in 2001. Gross interest incurred in

2002 was $1.9 million lower than that incurred in 2001, mainly due to lower interest rates in 2002. The percentage of interest capitalized in 2002

and 2001 was 67.6% and 60.1%, respectively. The increase in the percentage of interest capitalized in 2002 primarily resulted from a higher 

proportion of land under development in 2002 compared to 2001.

In 2001, interest expense, net of amounts capitalized, increased to $41.1 million from $31.5 million in 2000. Gross interest incurred in 2001 was

$8.8 million higher than that incurred in 2000, reflecting an increase in average indebtedness. The percentage of interest capitalized in 2001

decreased from the 66.6% capitalized in 2000. 

M I N O R I T Y   I N T E R E ST S Operating income was reduced by minority interests of $17.0 million in 2002, $27.9 million in 2001 and $31.6 million

in 2000. Minority interests for 2002 were comprised solely of the minority ownership portion of income from consolidated subsidiaries and joint

ventures related to residential and commercial activities. In 2001 and 2000, minority interests also included distributions of $11.4 million and

$15.2 million, respectively, associated with the Company’s Feline Prides securities. Since the Feline Prides mandatorily converted into common

stock of the Company on August 16, 2001, distributions on these securities terminated on that date. Minority interests related to consolidated

subsidiaries and joint ventures in 2002 were essentially flat compared with 2001 and 2000. 

E Q U I T Y  I N  P R ETA X  I N C O M E  O F  U N C O N S O L I D AT E D  J O I N T  V E N T U R E S The Company’s unconsolidated joint venture activities were located in

California, Florida, Nevada, New Mexico and France in 2002; Nevada, New Mexico and France in 2001; and California, Nevada, New Mexico and

France in 2000. These unconsolidated joint ventures posted combined revenues of $65.9 million in 2002, $82.1 million in 2001 and $116.8 mil-

lion in 2000. Revenues from unconsolidated joint ventures in 2002 were lower than in 2001 and 2000 due to a decrease in joint venture unit

deliveries  in  2002.  All  unconsolidated  joint  venture  revenues  in  2002,  2001  and  2000  were  generated  from  residential  properties.

Unconsolidated joint ventures generated combined pretax income of $9.7 million in 2002, $6.5 million in 2001 and $4.9 million in 2000. The

Company’s share of pretax income from unconsolidated joint ventures totaled $4.4 million in 2002, $3.9 million in 2001 and $2.9 million in 2000. 

G A I N   O N   I S S U A N C E   O F   F R E N C H   S U B S I D I A RY   STO C K In the first quarter of 2000, the Company recognized a one-time gain of $39.6 million

from the issuance of 5,314,327 common shares (including the over allotment option) by KBSA, the Company’s French subsidiary, in an initial

public offering. The offering was made in France and elsewhere in Europe and was priced at 23 euros per share. Since the initial public offering,

KBSA has been listed on the Premier Marché of the Paris Bourse. The offering generated total net proceeds of $113.1 million, of which $82.9

million was used by the Company to reduce its domestic debt and repurchase shares of its common stock. The remainder was used to fund inter-

nal and external growth of KBSA. Since the initial public offering, the Company has maintained a 57% majority ownership interest in KBSA and

continues to consolidate these operations in its financial statements. 

MORTGAGE BANKING

I N T E R E ST   I N C O M E   A N D   E X P E N S E 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 col-

lateralized  mortgage  obligations.  Interest  income  increased  to  $22.6  million  in  2002  from  $21.9  million  in  2001  and  $21.1  million  in  2000.

Interest  expense  decreased  to  $11.5  million  in  2002  from  $18.4  million  in  2001,  which  had  decreased  from  $19.4  million  in  2000.  Interest

income increased in both 2002 and 2001 primarily due to a higher average balance of first mortgages held under commitments of sale and other

receivables outstanding compared to the previous year. 

Interest expense decreased in 2002 due to a lower average balance of notes payable outstanding and lower interest rates compared to 2001. In

2001, interest expense decreased from the previous year due to lower interest rates. Combined interest income and expense resulted in net

interest income of $11.1 million in 2002, $3.5 million in 2001 and $1.7 million in 2000. These differences reflect variations in mortgage produc-

tion 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.

5 4 / 5 5

OT H E R   M O RTG AG E   B A N K I N G   R E V E N U E S Other mortgage banking revenues, which principally consist of gains on sales of mortgages and

servicing rights and, to a lesser extent, mortgage servicing fees and insurance commissions, totaled $69.3 million in 2002, $50.5 million in 2001

and $39.2 million in 2000. The increase in 2002 reflected a higher volume of mortgage originations resulting from both higher housing unit deliv-

ery volume and increased retention. The term “retention” refers to the percentage of the Company’s domestic homebuyers using its mortgage

banking  subsidiary  as  a  loan  originator.  In  2001,  the  increase  in  other  mortgage  banking  revenues  reflected  higher  gains  on  the  sales  of 

mortgages and servicing rights primarily due to a higher volume of mortgage originations associated with both increases in underlying housing

unit delivery volume and higher retention. Also contributing to the increase in 2001 was a shift in product mix toward a higher proportion of 

fixed rate loans. 

G E N E R A L   A N D   A D M I N I ST R AT I V E   E X P E N S E S General and administrative expenses associated with mortgage banking operations increased

to $22.9 million in 2002 from $20.3 million in 2001 and $17.2 million in 2000. In 2002 and 2001, general and administrative expenses increased

as a result of higher staff levels needed to accommodate the Company’s increasing backlog and the continued growth of its mortgage banking

operations in line with rising delivery volumes. The increase in general and administrative expenses in 2001 also resulted from the expansion of

certain ancillary businesses. 

INCOME TAXES

The Company recorded income tax expense of $154.9 million in 2002, $110.3 million in 2001 and $87.7 million in 2000. These amounts repre-

sented  effective  income  tax  rates  of  approximately  33.0%  in  2002  and  34.0%  in  both  2001  and  2000  (excluding  the  one-time  gain  on  the

issuance of French subsidiary stock in 2000). The effective tax rate declined by 1.0 percentage point in 2002 as a result of tax reduction strate-

gies employed by the Company. Pretax income for financial reporting purposes and taxable income for income tax purposes historically have 

differed  primarily  due  to  the  impact  of  state  income  taxes,  treatment  of  foreign-related  income,  intercompany  dividends  and  the  investment 

in tax credit partnerships.

LIQUIDITY AND CAPITAL RESOURCES

The Company assesses its liquidity in terms of its ability to generate cash to fund its operating and investing activities. Historically, the Company

has funded its construction and mortgage banking activities with internally generated cash flows and external sources of debt and equity financ-

ing. Operating, investing and financing activities provided net cash of $48.7 million in 2002 and $248.3 million in 2001.

Operating activities provided $357.0 million in 2002 and $45.9 million in 2001. The Company’s sources of operating cash in 2002 included

earnings of $314.4 million, an increase in accounts payable, accrued expenses and other liabilities of $149.5 million, a decrease in receivables

of $114.0 million, and various noncash items deducted from net income. The cash provided was partially offset by investments in inventories of

$186.6 million (excluding the effect of the AHH acquisition and $32.6 million of inventories acquired through seller financing) and other operat-

ing uses of $6.7 million. 

In 2001, sources of operating cash included an increase in accounts payable, accrued expenses and other liabilities of $295.9 million, earnings

of $214.2 million, other operating sources of $21.3 million, and various noncash items deducted from net income. The increase in accounts

payable, accrued expenses and other liabilities primarily reflected increased production activity at the end of the year as the Company’s payment

terms were essentially unchanged from the previous year. The cash provided was partially offset by an increase in receivables of $372.9 million

and investments in inventories of $137.1 million (excluding the effect of the Trademark and RBT acquisitions and $54.6 million of inventories

acquired through seller financing). 

Investing activities used $52.8 million in 2002 and $48.3 million in 2001. In 2002, $31.2 million was used for net purchases of property and

equipment, $27.5 million, net of cash acquired, was used for the acquisition of AHH and $4.0 million was used for investments in unconsolidated

joint ventures. Partially offsetting these uses were proceeds of $8.7 million received on mortgage-backed securities, which were principally used

to pay down collateralized mortgage obligations for which the mortgage-backed securities had served as collateral, and net sales of $1.2 million

of mortgages held for long-term investment. 

In 2001, cash used by investing activities included $53.7 million, net of cash acquired, used for the acquisitions of Trademark and RBT, and

$12.2 million for net purchases of property and equipment. Partially offsetting these uses were proceeds of $7.9 million received from mortgage-

backed securities, distributions of $5.4 million relating to investments in unconsolidated joint ventures and net sales of $4.3 million of mortgages

held for long-term investment. 

Financing activities in 2002 used $255.5 million of cash compared to $250.6 million provided in 2001. In 2002, cash was used for net payments

on borrowings of $262.5 million, redemption of the Company’s 93/8% senior subordinated notes of $175.0 million, repurchases of common stock

of $190.8 million, cash dividend payments of $12.4 million, payments on collateralized mortgage obligations of $8.3 million and payments to

minority interests of $6.4 million. Partially offsetting these uses were $198.4 million in proceeds from the sale of 85/8% senior subordinated notes,

$144.3 million in proceeds from KBSA’s sale of 83/4% French senior notes and $57.2 million from the issuance of common stock under employee

stock plans. On December 14, 2001, pursuant to its universal shelf registration statement filed with the Securities and Exchange Commission

(“SEC”) on December 5, 1997 (the “1997 Shelf Registration”), the Company issued $200.0 million of 85/8% senior subordinated notes at 100%

of the principal amount of the notes. The notes, which are due December 15, 2008, with interest payable semi-annually, represent unsecured

obligations of the Company and are subordinated to all existing and future senior indebtedness of the Company. On or prior to December 15,

2004, the Company may redeem up to 35% of the aggregate principal amount of the notes with the net proceeds of one or more public or pri-

vate equity offerings at a redemption price of 108.625% of their principal amount, together with accrued and unpaid interest. The notes are not

otherwise redeemable at the option of the Company. The Company used $175.0 million of the net proceeds from the issuance of the notes to

redeem all of its outstanding 93/8% senior subordinated notes due 2003. The remaining net proceeds were used for general corporate purposes. 

On July 29, 2002, KBSA issued 150.0 million euros principal amount of 83/4% French senior notes at 100% of the principal amount of the notes.

The notes, which are publicly traded and are due August 1, 2009 with interest payable semi-annually, represent unsecured obligations of KBSA

and rank pari passu in right of payment with all other senior unsecured indebtedness of KBSA. The Company does not guarantee these KBSA

notes. On or prior to August 1, 2005, KBSA may redeem up to 35% of the aggregate principal amount of the notes with the net cash proceeds

of qualified equity offerings at a redemption price of 108.75% of their principal amount together with accrued and unpaid interest, if any. The

notes are not otherwise redeemable at the option of KBSA, except in the event of certain changes in tax laws. Proceeds from the issuance of the

notes were used to pay down bank borrowings and other indebtedness.

Financing activities in 2001 provided $247.5 million from the issuance of 91/2% senior subordinated notes, $37.9 million from the issuance of

common stock under employee stock plans and $5.1 million from net proceeds on borrowings. Partially offsetting these sources were payments

to minority interests of $21.1 million, cash dividend payments of $11.2 million and payments of $7.6 million on collateralized mortgage obliga-

tions. Pursuant to its 1997 Shelf Registration, the Company issued $250.0 million of 91/2% senior subordinated notes at 100% of the principal

amount of the notes. The notes, which are due February 15, 2011 with interest payable semi-annually, represent unsecured obligations of the

Company and are subordinated to all existing and future senior indebtedness of the Company. The notes are redeemable at the option of the

Company, in whole or in part, at 104.750% of their principal amount beginning February 15, 2006, and thereafter at prices declining annually to

100% on and after February 15, 2009. Proceeds from the issuance of the notes were used to pay down bank borrowings. 

The Company’s financial leverage, as measured by the ratio of debt to total capital, was 47.8% at the end of 2002 compared to 49.9% at the end

of 2001. The Company seeks to maintain its ratio of debt to total capital within a targeted range of 45% to 55%. 

On  September  30,  2002,  the  Company  acquired  Orlando,  Florida-based  AHH  for  approximately  $74.0  million,  including  the  assumption  of

approximately $46.5 million in debt. AHH, which in 2001 delivered more than 800 single-family homes in Orlando and Tampa and generated rev-

5 6 / 5 7

enues  of  approximately  $140.0  million,  controlled  more  than  4,000  lots  at  the  time  of  the  acquisition.  The  AHH  acquisition  strengthens  the

Company’s  market  position  in  Florida,  marking  its  entry  into  the  Orlando  market  and  supplementing  its  Tampa  start-up  business.  AHH  was

accounted for under the purchase method of accounting and was assigned to the Company’s construction segment. No goodwill was recorded

in connection with the acquisition. The results of AHH’s operations were included in the Company’s consolidated financial statements as of the

date of acquisition.

On  July  19,  2001,  the  Company  acquired  Trademark,  a  builder  of  single-family  homes  in  Jacksonville,  Florida.  The  acquisition  marked  the

Company’s entry into Florida. Trademark was acquired for approximately $30.1 million, including the assumption of approximately $16.3 million

in debt, and was accounted for under the purchase method of accounting. The excess of the purchase price over the estimated fair value of net

assets acquired was $9.2 million and was allocated to goodwill and assigned to the Company’s construction segment. On September 26, 2001,

KBSA completed the acquisition of RBT, a France-based builder of condominiums. As a result of the acquisition, KBSA believes it has a leading

market position in the Rhône-Alpes region of France. RBT was acquired for approximately $28.7 million and was accounted for under the pur-

chase method of accounting. The excess of the purchase price over the estimated fair value of net assets acquired was $10.2 million and was

allocated to goodwill and assigned to the Company’s construction segment. In accordance with Statement of Financial Accounting Standards

No.  142,  “Goodwill  and  Other  Intangible  Assets”  (“SFAS  No.  142”),  the  goodwill  amounts  recorded  in  connection  with  the  acquisitions  of

Trademark and RBT are not being amortized but are being reviewed for impairment on an annual basis. The results of Trademark and RBT were

included in the Company’s consolidated financial statements as of their respective acquisition dates.

During 2002 and 2000, the Company repurchased 4.0 million and 10.7 million shares of its common stock at an aggregate price of $190.8 mil-

lion and $247.2 million, respectively, under stock repurchase programs authorized by its Board of Directors. On July 16, 2002, the Company’s

Board of Directors approved an increase in the Company’s previously authorized stock repurchase program to permit future purchases of up to 2.0

million additional shares of the Company’s common stock. No shares had been repurchased under this authorization as of November 30, 2002.

External sources of financing for the Company’s construction activities include its domestic unsecured credit facility, other domestic and foreign

bank lines, third-party secured financings, and the public debt and equity markets. Substantial unused lines of credit remain available for the

Company’s future use, if required, principally through its domestic unsecured revolving credit facility. On October 6, 2000, the Company entered

into an unsecured credit agreement (the “Unsecured Credit Facility”) consisting of a four-year committed revolving credit facility and a five-year

term loan. The Unsecured Credit Facility totaled $827.0 million at November 30, 2002 and was comprised of a $644.0 million four-year commit-

ted revolving credit facility and a $183.0 million five-year term loan. The Unsecured Credit Facility has the capacity to be expanded up to an

aggregate  total  of  $900.0  million  if  additional  bank  lending  commitments  are  obtained.  Interest  on  the  Unsecured  Credit  Facility  is  payable

monthly  at  the  London  Interbank  Offered  Rate  plus  an  applicable  spread  on  amounts  borrowed.  At  November  30,  2002,  the  Company  had

$580.6 million available for its future use under the Unsecured Credit Facility, net of $63.4 million of outstanding letters of credit. In addition, the

Company’s French subsidiaries had lines of credit with various banks which totaled $304.0 million at November 30, 2002 and have various com-

mitted expiration dates through April 2006. Under these unsecured financing agreements, $286.5 million was available to the Company’s French

subsidiaries at November 30, 2002.

Depending upon available terms and its negotiating leverage related to specific market conditions, the Company also finances certain land acqui-

sitions with purchase-money financing from land sellers and other third parties. At November 30, 2002, the Company had outstanding seller-

financed notes payable of $67.7 million secured primarily by the underlying property which had a carrying value of $152.7 million.

The Company’s primary contractual financing obligations at November 30, 2002 were comprised of senior and senior subordinated notes, term

loan borrowings, mortgages, land contracts and other loans with principal payments due as follows: 2003: $9.3 million; 2004: $178.8 million;

2005: $183.0 million; 2006: $179.2 million; 2007: $0; and thereafter: $599.2 million.

The Company’s current universal shelf registration statement filed on October 15, 2001 with the SEC (as subsequently amended, the “2001

Shelf  Registration”)  for  up  to  $750.0  million  of  the  Company’s  debt  and  equity  securities  was  declared  effective  on  January  28,  2002.  The 

2001 Shelf Registration provides that securities may be offered from time to time in one or more series and in the form of senior, senior subor-

dinated  or  subordinated  debt,  preferred  stock,  common  stock,  stock  purchase  contracts,  stock  purchase  units  and/or  warrants  to  purchase 

such securities. As of November 30, 2002, no securities had been issued under the 2001 Shelf Registration and $750.0 million of capacity

remained available.

On July 7, 1998, the Company, together with a KBHC Trust that was wholly owned by the Company, issued an aggregate of 19.0 million Feline

Prides securities. The Feline Prides consisted of (i) 18.0 million Income Prides with a stated amount per Income Prides of $10 (the “Stated

Amount”), which were units comprised of a capital security and a stock purchase contract under which the holders were to purchase common

stock from the Company not later than August 16, 2001 and the Company was to pay to the holders certain unsecured contract adjustment

payments, and (ii) 1.0 million Growth Prides with a face amount per Growth Prides equal to the Stated Amount, which were 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 were to purchase

common stock from the Company not later than August 16, 2001 and the Company was to pay to the holders certain unsecured contract adjust-

ment  payments.  On  August  16,  2001,  all  of  the  Company’s  Feline  Prides  mandatorily  converted  into  approximately  6.0  million  shares  of  the

Company’s common stock. 

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 strongly emphasizing the pre-sale of homes over speculative construction and carefully managing

the timing of the production process. The Company’s backlog ratio (beginning backlog as a percentage of unit deliveries in the succeeding quar-

ter) was 171.0% for the fourth quarter of 2002, slightly lower than the 174.1% ratio for the fourth quarter of 2001. The Company’s inventories

have become significantly more geographically diverse in the last decade, primarily as a result of the Company’s extensive domestic expansion

outside of the West Coast region. As of November 30, 2002, 16.9% of the lots owned or controlled by the Company were located in the West

Coast region, 25.9% were in the Southwest region, 48.1% were in the Central region and 9.1% were in France. The Company continues to con-

centrate its housing operations in desirable areas within targeted growth markets, principally oriented toward entry-level and first-time move up

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 $200.0 million master loan and security agreement (the “$200.0 Million

Master Loan and Security Agreement”) and a $400.0 million master loan and security agreement. The $200.0 Million Master Loan and Security

Agreement was renewed on May 13, 2002 with an investment bank. The agreement, which expires on May 26, 2003, provides for a facility fee

based on the $200.0 million maximum amount available and provides for interest to be paid monthly at the London Interbank Offered Rate plus

an applicable spread on amounts borrowed. The Company’s mortgage banking subsidiary entered into an additional $400.0 million master loan

and security agreement with another investment bank on May 13, 2002. The agreement, which expires on May 13, 2003, provides for interest to

be paid monthly at the London Interbank Offered Rate plus an applicable spread on amounts borrowed. During the fourth quarter of 2002, the

Company’s mortgage banking subsidiary negotiated a temporary increase in the maximum credit amount available under the $400.0 million mas-

ter loan and security agreement to $550.0 million (the “$550.0 Million Master Loan and Security Agreement”) through February 13, 2003. The

temporary increase was obtained to meet the Company’s increased volume of loan originations. The mortgage banking subsidiary’s previously

outstanding  $300.0  million  mortgage  warehouse  facility,  which  was  scheduled  to  expire  on  February  18,  2003,  was  terminated  early  by  the

Company on November 13, 2002. 

The  amounts  outstanding  under  the  $200.0  Million  Master  Loan  and  Security  Agreement  and  the  $550.0  Million  Master  Loan  and  Security

Agreement are secured by separate borrowing bases, which include certain mortgage loans held under commitments of sale and are repayable

5 8 / 5 9

from sales proceeds. There are no compensating balance requirements under either facility. Each facility includes financial covenants and restric-

tions which, among other things, require the maintenance of certain financial statement ratios, a minimum tangible net worth and a minimum net

income.  At  November  30,  2002,  the  Company’s  mortgage  banking  subsidiary  had  $143.1  million  available  under  its  $200.0  Million  Master 

Loan and Security Agreement and $99.4 million available under its $550.0 Million Master Loan and Security Agreement. The Company believes

its sources of financing are adequate to fund its mortgage banking operations.

Debt  service  on  the  Company’s  collateralized  mortgage  obligations  is  funded  by  receipts  from  mortgage-backed  securities.  Such  funds  are

expected to be adequate to meet future debt-payment schedules for the collateralized mortgage obligations and therefore these securities have

virtually no impact on the capital resources and liquidity of the mortgage banking operations. 

The Company continues to benefit in all of its operations from the strength of its capital position, which has allowed it to maintain overall prof-

itability during troubled economic times, finance domestic and international expansion, re-engineer product lines and diversify into new markets

through both de novo entry and acquisition. 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 geographic diversification, the disciplines of its KBnxt operational business model and its strong

capital position, the Company believes it has adequate resources and sufficient credit facilities to satisfy its current and reasonably anticipated

future requirements for funds needed to acquire capital assets and land, construct homes, fund its mortgage banking operations, and meet other

needs of its business, both on a short and long-term basis.

CRITICAL ACCOUNTING POLICIES

As  discussed  in  Note  1  to  the  Company’s  consolidated  financial  statements,  housing  and  other  real  estate  sales  are  recognized  when  title

passes to the buyer and certain other conditions are met. As a result, the Company’s revenue recognition process does not involve significant

judgments or estimations. Nonetheless, the Company does rely on certain estimates to determine the related construction and land costs and

resulting gross margins associated with revenues recognized. The Company’s construction and land costs are comprised of direct and allocated

costs, including estimated costs for future warranties and amenities. Land, land improvements and other common costs are allocated on a rela-

tive fair value basis to units within a parcel or subdivision. Land and land development costs generally include related interest and property taxes

incurred until development is substantially completed or deliveries have begun within a subdivision. 

In determining a portion of the construction and land costs for each period, the Company relies on project budgets that are based on a variety of

assumptions, including assumptions about construction schedules and future costs to be incurred. It is possible that actual results could differ

from budgeted amounts for various reasons, including construction delays, increases in costs which have not yet been committed, changes in

governmental requirements, unforeseen environmental hazard discoveries or other unanticipated issues encountered during construction that fall

outside the scope of contracts obtained. While the actual results for a particular construction project are accurately reported over time, variances

between the budgeted and actual costs of a project could result in the understatement or overstatement of construction and land costs and con-

struction gross margins in a specific reporting period. To reduce the potential for such distortion, the Company has set forth procedures that col-

lectively comprise a “critical accounting policy.” These procedures, which have been applied by the Company on a consistent basis, include

updating, assessing and revising project budgets on a monthly basis, obtaining commitments from subcontractors and vendors for future costs

to be incurred, reviewing the adequacy of warranty accruals and historical warranty claims experience, and utilizing the most recent information

available to estimate construction and land costs to be charged to expense. The variances between budgeted and actual amounts identified by

the Company have historically not had a material impact on its consolidated results of operations. Management believes that the Company’s poli-

cies provide for reasonably dependable estimates to be used in the calculation and reporting of construction and land costs. 

As disclosed in the consolidated financial statements, the Company had goodwill in the amount of $194.6 million at November 30, 2002. In

accordance with SFAS No. 142, the Company performed impairment tests of goodwill as of November 30, 2002 and identified no impairment.

However, the process of evaluating goodwill for impairment involves the determination of the fair value of the Company’s reporting units. Inherent

in such fair value determinations are certain judgments and estimates, including the interpretation of current economic indicators and market val-

uations, and assumptions about the Company’s strategic plans with regard to its operations. To the extent additional information arises or the

Company’s strategies change, it is possible that the Company’s conclusion regarding goodwill impairment could change and result in a material

effect on its financial position or results of operations. 

SUBSEQUENT EVENTS

On  January  27,  2003,  pursuant  to  the  2001  Shelf  Registration,  the  Company  issued  $250.0  million  of  73/4%  senior  subordinated  notes  at

98.444% of the principal amount of the notes and on February 7, 2003, the Company issued an additional $50.0 million notes in the same series

(collectively, the “$300.0 Million Senior Subordinated Notes”). The $300.0 Million Senior Subordinated Notes, which are due February 1, 2010,

with  interest  payable  semi-annually,  represent  unsecured  obligations  of  the  Company  and  are  subordinated  to  all  existing  and  future  senior

indebtedness of the Company. The $300.0 Million Senior Subordinated Notes are redeemable at the option of the Company at 103.875% of

their principal amount beginning February 1, 2007 and thereafter at prices declining annually to 100% on and after February 1, 2009. In addition,

before February 1, 2006, the Company may redeem up to 35% of the aggregate principal amount of the $300.0 Million Senior Subordinated

Notes with the net proceeds of one or more public or private equity offerings at a redemption price of 107.75% of their principal amount, together

with  accrued  and  unpaid  interest.  The  Company  used  $129.0  million  of  the  net  proceeds  from  the  issuance  of  the  $300.0  Million  Senior

Subordinated Notes to redeem all of its outstanding $125.0 million 95/8% senior subordinated notes due 2006. The remaining net proceeds were

used for general corporate purposes.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 142. SFAS No. 142 requires goodwill to be tested for

impairment under certain circumstances, and written off when impaired, rather than amortized as previous standards required. SFAS No. 142 is

effective for fiscal years beginning after December 15, 2001, although early application was permitted for entities, like the Company, with fiscal

years beginning after March 15, 2001. The Company has recorded goodwill in connection with various acquisitions completed in recent years.

Goodwill  represents  the  excess  of  the  purchase  price  over  the  fair  value  of  net  assets  acquired.  The  Company  adopted  SFAS  No.  142  on

December 1, 2001, earlier than required. Since adopting SFAS No. 142, the Company tests goodwill for impairment using the two-step process

prescribed in the pronouncement. The first step is used to identify potential impairment, while the second step measures the amount of impair-

ment, if any. The impairment tests of goodwill performed by the Company as of November 30, 2002 and December 1, 2001 indicated no impair-

ment. Application of the provisions of SFAS No. 142 by the Company resulted in the elimination of amortization expense in 2002. Prior to the

adoption  of  SFAS  No.  142,  the  Company  amortized  goodwill  over  periods  ranging  from  five  to  ten  years  using  the  straight-line  method. 

At November 30, 2001, accumulated goodwill amortization totaled $107.7 million. Results reported for the years ended November 30, 2001 

and 2000 included after tax goodwill amortization expense of $18.5 million and $17.8 million, respectively. For the year ended November 30,

2001, elimination of this amortization expense would have resulted in net income of $232.7 million and an increase of $.49 in basic earnings 

per share, from the amount reported, to $6.21 and an increase of $.48 in diluted earnings per share, from the amount reported, to $5.98. For the

year ended November 30, 2000, elimination of this amortization expense would have resulted in net income of $227.8 million and an increase of

$.46 in basic earnings per share, from the amount reported, to $5.85 and an increase of $.44 in diluted earnings per share, from the amount

reported, to $5.68.

In December 2001, the Accounting Standards Executive Committee issued Statement of Position 01-6, “Accounting by Certain Entities (includ-

ing Entities With Trade Receivables) That Lend to or Finance the Activities of Others” (“SOP 01-6”). SOP 01-6 is effective for annual and interim

financial statements issued for fiscal years beginning after December 15, 2001. Under SOP 01-6, mortgage companies are explicitly subject to

6 0 / 6 1

new  accounting  and  reporting  provisions  and  disclosure  requirements,  including  disclosures  about  regulatory  capital  and  net  worth  require-

ments. SOP 01-6 also requires the carrying amounts of loans and servicing rights to be allocated using relative fair values in a manner consistent

with Statement of Financial Accounting Standards No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of

Liabilities” (“SFAS No. 140”). Such allocation was not previously required and the Company’s mortgage banking operations recognized servic-

ing rights income upon closing of the respective loans as permitted under the applicable accounting guidance. The Company plans to adopt

SOP 01-6 in the first quarter of 2003 and is currently evaluating the potential impact of the adoption of SOP 01-6 on its financial statements.

In  November  2002,  the  FASB  issued  FASB  Interpretation  No.  45,  “Guarantor’s  Accounting  and  Disclosure  Requirements  for  Guarantees,

Including Indirect Guarantees of Indebtedness of Others” (“FASB Interpretation No. 45”), which addresses the disclosures to be made by a guar-

antor in its interim and annual financial statements about its obligations under guarantees. FASB Interpretation No. 45 also clarifies the require-

ments related to the recognition of a liability by a guarantor at the inception of a guarantee for the obligations the guarantor has undertaken in

issuing the guarantee. The disclosure requirements of FASB Interpretation No. 45 are effective for financial statements of interim or annual peri-

ods ending after December 15, 2002, while the initial recognition and initial measurement provisions are applicable on a prospective basis to

guarantees issued or modified after December 31, 2002. The Company plans to adopt FASB Interpretation No. 45 in the first quarter of 2003

and is currently evaluating the potential impact of the interpretation on its financial statements.

In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation —

Transition  and  Disclosure”  (“SFAS  No.  148”),  which  amends  Statement  of  Financial  Accounting  Standards  No.  123,  “Accounting  for  Stock-

Based Compensation” (“SFAS No. 123”) to provide alternative methods of transition for an entity that voluntarily changes to the fair value method

of accounting for stock-based employee compensation. It also amends the disclosure provisions of SFAS No. 123 to require prominent disclo-

sure about the effects on reported net income of an entity’s accounting policy decisions with respect to stock-based employee compensation.

Finally, SFAS No. 148 amends Accounting Principles Board Opinion No. 28, “Interim Financial Reporting” (“APB Opinion No. 28”) to require dis-

closure about those effects in interim financial information. SFAS No. 148’s amendment of the transition and disclosure requirements of SFAS

No. 123 are effective for fiscal years ending after December 15, 2002, with earlier application permitted. SFAS No. 148’s amendment of the dis-

closure requirements of APB Opinion No. 28 is effective for interim periods beginning after December 15, 2002. The Company does not plan to

change to the fair value method of accounting, but plans to adopt the disclosure requirements of SFAS No. 148 in the second quarter of 2003.

In  January  2003,  the  FASB  issued  FASB  Interpretation  No.  46,  “Consolidation  of  Variable  Interest  Entities”  (“FASB  Interpretation  No.  46”). 

FASB Interpretation No. 46 clarifies the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” to certain 

entities in which equity investors do not have the characteristics of a controlling interest or do not have sufficient equity at risk for the entity to

finance its activities without additional subordinated financial support from other parties. FASB Interpretation No. 46 applies immediately to vari-

able interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. 

It applies to the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable

interest that it acquired before February 1, 2003. The Company is currently evaluating the potential impact of FASB Interpretation No. 46 on 

its financial statements.

OUTLOOK

The Company’s residential backlog at November 30, 2002 stood at 12,023 units, the highest year-end backlog level in its history, and repre-

sented aggregate future revenues of $2.35 billion, also a year-end record. The Company’s backlog in terms of units and value at November 30,

2002  increased  8.1%  and  24.2%,  respectively,  compared  to  11,127  units  in  residential  backlog,  representing  aggregate  future  revenues  of

$1.89 billion, at year-end 2001. The average number of active communities in the fourth quarter of 2002 rose 1.8% from the year-earlier quarter.

Company-wide net orders of 5,831 units for the quarter ending November 30, 2002 were up 9.3% from the 5,336 net orders reported in the cor-

responding quarter of 2001. 

The  Company’s  domestic  residential  backlog  at  November  30,  2002  rose  23.7%  to  $1.97  billion,  from  $1.60  billion  at  year-end  2001.  The

growth in domestic backlog value at year-end 2002 reflected increases in all of the Company’s geographic regions. On a unit basis, domestic

backlog  stood  at  9,858  units  at  year-end  2002,  up  8.2%  from  9,115  units  at  year-end  2001.  The  West  Coast  region  backlog  value  totaled

$789.7 million on 2,380 units at November 30, 2002, up from $474.6 million on 1,643 units at November 30, 2001. West Coast region net

orders increased 13.7% in the fourth quarter of 2002, to 1,106 units, from 973 units in the fourth quarter of 2001, while the average number of

active  communities  remained  virtually  unchanged.  In  the  Southwest  region,  backlog  value  increased  to  $475.2  million  on  2,795  units  at

November 30, 2002, up from $420.3 million on 2,551 units at November 30, 2001. This improvement also occurred with essentially no year-

over-year change in the number of active communities in the region.  Fourth quarter net orders in the Southwest region increased 35.6% to 1,567

units in 2002 from 1,156 units in 2001. In the Central region, backlog value rose to $708.0 million on 4,683 units at November 30, 2002 from

$700.3 million on 4,921 units at November 30, 2001. Fourth quarter net orders in the Central Region decreased 4.2% to 1,964 units in 2002

from 2,051 units in the year-earlier period despite a 13.9% increase in the average number of active communities. 

In France, residential backlog at November 30, 2002 totaled $373.8 million on 2,165 units, up 26.8% and 7.6%, respectively, from $294.9 mil-

lion on 2,012 units at year-end 2001. French net orders increased 3.3% to 1,194 units in the fourth quarter of 2002 from 1,156 units in the year-

earlier  period.  The  value  of  the  backlog  associated  with  French  commercial  development  activities  totaled  approximately  $54.2  million  at

November 30, 2002 compared to $41.6 million at year-end 2001.

Substantially all homes included in the year-end 2002 backlog are expected to be delivered during 2003. However, cancellation rates could

increase, particularly if market conditions deteriorate, international hostilities accelerate, further terrorist attacks occur or mortgage interest rates

increase, thereby decreasing backlog and related future revenues. 

The Company remains committed to increasing its overall unit deliveries in future years through the well-developed, long-term growth strategies

it has in place. These strategies include the expansion of existing operations to achieve optimal market volume levels as well as the possible entry

into new geographic markets through de novo entry, acquisitions or a combination of the two approaches. The Company’s ultimate growth will be

determined  by  its  ability  to  increase  the  average  number  of  active  communities  it  operates  in  new  and  existing  markets,  with  this  expansion

enhanced or tempered by changes in the U.S. and French political and economic environments.

While adhering to the disciplines of its longstanding KBnxt operational business model, the Company has leveraged the model with additional

complementary initiatives, including strategies to establish and deepen its leading market positions and to identify new acquisition opportunities.

The Company believes its capital structure and operational disciplines will allow it to deliver consistent results even during challenging economic

conditions. The Company has successfully diversified its operations in recent years while at the same time maintaining a selective approach to

land investment. The Company’s strategies are intended to reduce financial risk and limit the Company’s exposure and sensitivity to swings in

economic conditions.

The Company currently expects to achieve its sixth consecutive year of record earnings in fiscal 2003. However, this expectation could be mate-

rially affected by various risk factors, such as the continued impact of terrorist activities and U.S. military response (including the much-discussed

potential U.S. conflict with Iraq), accelerating recessionary trends and other adverse changes in general economic conditions either nationally, in

the U.S. or France, or in the localized regions in which the Company operates; continued diminution in domestic job growth or employment lev-

els; a continued downturn in the economy’s pace; or changes in home mortgage interest rates or consumer confidence, among other things.

With such risk factors as background, the Company currently expects its 2003 unit deliveries to increase by 10% to 12% over 2002, mainly due

to growth in the average number of active communities planned for 2003 due to organic expansion and recent acquisition activity. The Company

anticipates its projected earnings growth for 2003 will result from increased unit delivery volume, a higher housing gross margin and a decrease

in its selling, general and administrative expense ratio. The Company currently believes that it is well-positioned to meet its financial goals for

2003 due to the performance it achieved in 2002, its excellent cash and borrowing capacity positions, the backlog of homes in place at the

beginning of fiscal year 2003 and its commitment to adhere to the disciplines of its KBnxt operational business model. 

6 2 / 6 3

*

*

*

*

*

*

*

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 pre-

dictive 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 state-

ments 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  guarantees  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, changes in general economic condi-

tions, material prices, labor costs, interest rates, the continued impact of terrorist activities and U.S. response, accelerating recessionary trends

and  other  adverse  changes  in  general  economic  conditions,  the  secondary  market  for  loans,  consumer  confidence,  competition,  currency

exchange  rates  (insofar  as  they  affect  the  Company’s  operations  in  France),  environmental  factors,  government  regulations  affecting  the

Company’s  operations,  the  availability  and  cost  of  land  in  desirable  areas,  unanticipated  violations  of  Company  policy,  unanticipated  legal 

proceedings, and conditions in the capital, credit and homebuilding markets. 

CONSOLIDATED STATEMENTS OF INCOME

YEARS ENDED NOVEMBER 30,
in thousands, except per share amounts

TOTAL REVENUES

C O N ST R U CT I O N :

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 of unconsolidated joint ventures

Gain on issuance of French subsidiary stock

2002

2001

2000

$ 5,030,816

$ 4,574,184

$ 3,930,858

$ 4,938,894

$ 4,501,715

$ 3,870,488

(3,890,243)

(3,612,936)

(3,123,869)

(595,734)

(536,463)

(458,010)

452,917

4,173

(32,730)

(16,994)

4,378

352,316

3,559

(41,072)

(27,932)

3,875

288,609

5,782

(31,479)

(31,640)

2,926

39,630

Construction pretax income 

411,744

290,746

273,828

M O RTG AG E   B A N K I N G :

Revenues:

Interest income

Other

Expenses:

Interest

General and administrative

Mortgage banking pretax income

Total pretax income 

Income taxes

NET INCOME

BASIC EARNINGS PER SHARE

DILUTED EARNINGS PER SHARE

See accompanying notes.

22,578

69,344

91,922

(11,467)

(22,949)

21,935

50,534

72,469

(18,436)

(20,262)

21,130

39,240

60,370

(19,374)

(17,164)

57,506

33,771

23,832

469,250

(154,900)

324,517

(110,300)

297,660

(87,700)

$  314,350

$ 214,217

$ 209,960

$

$

7.57

7.15

$

$

5.72

5.50

$

$

5.39

5.24

6 4 / 6 5

CONSOLIDATED BALANCE SHEETS

NOVEMBER 30,
in thousands, except shares

ASSETS

C O N ST R U CT I O N :

Cash and cash equivalents
Trade and other receivables
Inventories
Investments in unconsolidated joint ventures
Deferred income taxes
Goodwill
Other assets

M O RTG AG E   B A N K I N G :

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

C O N ST R U CT I O N :

Accounts payable
Accrued expenses and other liabilities
Mortgages and notes payable

M O RTG AG E   B A N K I N G :

Accounts payable and accrued expenses
Notes payable
Collateralized mortgage obligations secured by mortgage-backed securities

M I N O R I T Y   I N T E R E ST S :

Consolidated subsidiaries and joint ventures

STO C K H O L D E R S ’   E Q U I T Y :

Preferred stock — $1.00 par value; authorized, 10,000,000 shares: none outstanding
Common stock — $1.00 par value; authorized, 100,000,000 shares; 53,422,339 and
51,825,270 shares outstanding at November 30, 2002 and 2001, respectively

Paid-in capital
Retained earnings
Accumulated other comprehensive income
Deferred compensation
Grantor stock ownership trust, at cost: 7,900,140 shares and 8,142,831 shares at 

November 30, 2002 and 2001, respectively

Treasury stock, at cost: 5,448,100 and 1,448,100 shares at 

November 30, 2002 and 2001, respectively

TOTAL STOCKHOLDERS’ EQUITY

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

See accompanying notes.

2002

2001

$ 309,434
403,957
2,173,497
21,023
178,022
194,614
110,887

$ 266,195
437,043
1,884,761
8,844
118,584
190,785
77,310

3,391,434

2,983,522

20,551

15,138

21,020
578,549
13,986

634,106

30,912
655,491
7,803

709,344

$4,025,540

$3,692,866

$ 487,237
466,876
1,167,053

$ 446,279
351,144
1,088,615

2,121,166

1,886,038

34,104
507,574
14,079

555,757

74,266

74,266

53,422
508,448
1,103,387
8,895
(8,978)

33,289
595,035
22,359

650,683

63,664

63,664

51,825
458,089
801,408
(3,084)
(10,444)

(171,702)

(176,976)

(219,121)

(28,337)

1,274,351

1,092,481

$4,025,540

$3,692,866

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

YEARS ENDED NOVEMBER 30,
in thousands

0,

Number of Shares

Grantor
Stock
Ownership
Trust

Common
Stock

Treasury
Stock

Common
Stock

Paid-in
Capital

Retained
Earnings

Accumulated
Other
Comprehensive

Deferred
Income (Loss) Compensation

Grantor
Stock
Ownership
Trust

Treasury
Stock

Balance at November 30, 1999

48,091

(3,750)

$48,091 $335,324

$376,626

$(1,584)

$(81,874)

Comprehensive income:

Net income

Foreign currency translation 

adjustments

Total comprehensive income

Dividends on common stock

Exercise of employee 

stock options

Common stock purchased 

and retired

306

(4,000)

306

5,445

(4,000)

(100,000)

209,960

(11,465)

(7,980)

Grantor stock ownership trust

(5,032)

(8)

(108,998)

Total
Stockholders’
Equity

$676,583

209,960

(7,980)

201,980

(11,465)

5,751

(104,000)

(109,006)

Treasury stock

Issuance of French 

subsidiary stock

(1,448)

$(28,337)

(28,337)

23,253

23,253

Balance at November 30, 2000

44,397

(8,782)

(1,448)

44,397

240,761

598,374

(9,564)

(190,872)

(28,337)

654,759

Comprehensive income:

Net income

Foreign currency translation 

adjustments

Net unrealized gain on hedges

Total comprehensive income

Dividends on common stock

Exercise of employee 

stock options

Feline Prides conversion

Employee deferred

stock compensation

1,451

5,977

1,451

27,365

5,977

183,773

Grantor stock ownership trust

639

6,190

214,217

(11,183)

2,594

3,886

$(10,444)

13,896

214,217

2,594

3,886

220,697

(11,183)

28,816

189,750

(10,444)

20,086

Balance at November 30, 2001

51,825

(8,143)

(1,448)

51,825

458,089

801,408

(3,084)

(10,444)

(176,976)

(28,337) 1,092,481

Comprehensive income:

Net income

Foreign currency translation 

adjustments

Net unrealized loss on hedges

Total comprehensive income

Dividends on common stock

Exercise of employee 

stock options

Employee deferred 

stock compensation

1,597

1,597

45,883

Grantor stock ownership trust

243

4,476

314,350

(12,371)

14,535

(2,556)

314,350

14,535

(2,556)

326,329

(12,371)

47,480

1,466

9,750

1,466

5,274

Treasury stock

(4,000)

(190,784)

(190,784)

Balance at November 30, 2002

53,422

(7,900)

(5,448) $53,422 $508,448 $1,103,387

$8,895

$(8,978) $(171,702) $(219,121) $1,274,351

See accompanying notes.

6 6 / 6 7

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED NOVEMBER 30,
in thousands

C A S H   F LOW S   F R O M   O P E R AT I N G   ACT I V I T I E S :

Net income
Adjustments to reconcile net income to net cash provided by operating activities:

2002

2001

2000

$ 314,350

$ 214,217

$ 209,960

Equity in pretax income of unconsolidated joint ventures
Minority interests
Gain on issuance of French subsidiary stock
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

(4,378)
16,994

2,155
17,173
(59,438)

113,956
(186,588)
149,513
(6,747)

(3,875)
27,932

1,284
43,858
(44,742)

(372,852)
(137,103)
295,856
21,345

Net cash provided by operating activities

356,990

45,920

C A S H   F LOW S   F R O M   I N V E ST I N G   ACT I V I T I E S :

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 used by investing activities

C A S H   F LOW S   F R O M   F I N A N C I N G   ACT I V I T I E S :

Net proceeds from (payments on) credit agreements and other short-term borrowings
Proceeds from issuance of senior subordinated notes
Proceeds from issuance of French senior notes
Redemption of senior subordinated notes
Issuance of French subsidiary stock
Payments on collateralized mortgage obligations
Payments on mortgages, land contracts and other loans
Issuance of common stock under employee stock plans
Payments to minority interests
Payments of cash dividends
Repurchases of common stock

Net cash provided (used) by financing activities

Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of year

(27,548)
(4,010)
1,220
8,672
(31,145)

(52,811)

(239,076)
198,412
144,302
(175,000)

(8,358)
(23,490)
57,230
(6,392)
(12,371)
(190,784)

(255,527)

48,652
281,333

(53,724)
5,438
4,270
7,955
(12,189)

(48,250)

31,336
247,500

(7,569)
(26,277)
37,909
(21,134)
(11,183)

250,582

248,252
33,081

(2,926)
31,640
(39,630)
1,012
41,298
25,677

(53,935)
(96,078)
(54,970)
(9,140)

52,908

(24,292)
13,885
(2,645)
6,615
(18,500)

(24,937)

84,984

113,118
(6,312)
(25,857)
11,636
(20,133)
(11,465)
(169,228)

(23,257)

4,714
28,367

Cash and cash equivalents at end of year

$ 329,985

$ 281,333

$ 33,081

S U P P L E M E N TA L   D I S C LO S U R E S   O F   C A S H   F LOW   I N F O R M AT I O N :

Interest paid, net of amounts capitalized
Income taxes paid

S U P P L E M E N TA L   D I S C LO S U R E S   O F   N O N C A S H   ACT I V I T I E S :

Cost of inventories acquired through seller financing
Conversion of Feline Prides
Issuance of promissory notes to repurchase common stock

See accompanying notes.

$  36,555
121,283

$ 54,128
61,033

$ 50,042
40,818

$  32,637

$ 54,550
189,750

$ 25,054

78,000

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

O P E R AT I O N S KB Home (the “Company”) is a builder of single-family homes with operations in the United States and France. Domestically, 

the Company operates in Arizona, California, Colorado, Florida, Nevada, New Mexico and Texas. In France, the Company operates through a

majority-owned  subsidiary  which  also  develops  commercial  and  high-density  residential  projects,  such  as  condominium  complexes.  Through 

its  mortgage  banking  subsidiary,  KB  Home  Mortgage  Company,  the  Company  provides  mortgage  banking  services  to  a  majority  of  its 

domestic homebuyers.

B A S I S  O F  P R E S E N TAT I O N 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 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.

U S E   O F   E ST I M AT E S 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.

C A S H   A N D   C A S H   E Q U I VA L E N T S 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,  2002  and  2001,  the  Company’s  cash  equivalents  totaled

$264,432,000 and $291,713,000, respectively.

F O R E I G N   C U R R E N CY   T R A N S L AT I O N Results of operations for French entities are translated to U.S. dollars using the average exchange rates

during the period. Assets and liabilities are translated using the exchange rates in effect at the balance sheet date. Resulting translation adjust-

ments are recorded in stockholders’ equity as foreign currency translation adjustments. 

C O N ST R U CT I O N   O P E R AT I O N S Housing and other real estate sales are recognized when title passes to the buyer and all of the following con-

ditions  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 single-family detached homes,

condominiums and commercial buildings, under long-term contracts with individual investors who own the land, are recognized using the per-

centage  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 collected are classified as receivables. Amounts received from buyers in excess of revenues recog-

nized, 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 devel-

opment 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.

M O RTG AG E   B A N K I N G   O P E R AT I O N S 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 prin-

cipally based on public market quotations or outstanding commitments obtained from investors to purchase first mortgages receivable.

6 8 / 6 9

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. 

AC C O U N T I N G   F O R   D E R I VAT I V E   I N ST R U M E N T S   A N D   H E D G I N G   ACT I V I T I E S Effective December 1, 2000, the Company adopted Statement

of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS No. 133”), as amended,

which addresses the accounting for and disclosure of derivative instruments, including derivative instruments embedded in other contracts, and

hedging activities. SFAS No. 133 requires the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not

hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value

of derivatives are either offset against changes in the fair value of assets, liabilities or firm commitments through earnings or recognized in other

comprehensive income until the hedged item is recognized in earnings.

In the normal course of business, the Company uses financial instruments to meet the financing needs of its customers and reduce its exposure

to fluctuations in interest rates. The Company’s risk management program involves the use of mortgage forward delivery contracts and non-

mandatory commitments to mitigate its exposure to movements in interest rates on interest rate lock agreements and mortgage loans held for

sale. The Company forecasts the amount and timing of its future loan sales and uses mortgage forward delivery contracts and non-mandatory

commitments to hedge the variability of the cash flows associated with the Company’s future loan sales. The mortgage forward delivery contracts

and non-mandatory commitments are designated as cash flow hedges and changes in the value of these instruments are recognized in other

comprehensive income until such time as earnings are affected by the underlying hedged item. At the inception of a hedge, the Company formally

documents the relationship between the mortgage forward delivery contracts or non-mandatory commitments and the forecasted loan sales as

well as the risk management objective and strategy for undertaking the hedge transactions. Mortgage forward delivery contracts are obtained

through the U.S. public markets and non-mandatory commitments are entered into with major financial institutions in order to minimize counter-

party credit risk.

In its mortgage loan origination process, the Company also uses interest rate lock agreements which represent commitments to originate loans

to customers at market rates on the date such agreements are established, typically three months or less before settlement. Although these 

interest rate lock agreements generally have no value on the date of origination, they may gain or lose value due to subsequent changes in mort-

gage  interest  rates.  All  of  the  Company’s  interest  rate  lock  agreements  are  classified  as  held  for  sale  upon  funding  of  the  underlying  loans. 

In  accordance  with  SFAS  No.  133,  the  Company  classifies  and  accounts  for  its  interest  rate  lock  agreements  as  non-designated  derivative 

instruments and records these agreements at fair value with changes in value recorded to current earnings.

In connection with the adoption of SFAS No. 133, at December 1, 2000, the Company recognized a pretax cumulative effect transition adjust-

ment which reduced other comprehensive income by $2,400,000. This amount represented the cumulative net adjustments at December 1,

2000  of  mortgage  forward  delivery  contracts  and  non-mandatory  commitments.  Pursuant  to  the  requirements  of  SFAS  No.  133,  cumulative

losses in other comprehensive income of $2,400,000 were recognized in earnings during the year ended November 30, 2001, concurrent with

the settlement of the related forecasted loan sales. Cumulative gains related to the derivative instruments in the amount of $3,886,000 were

recorded in other comprehensive income at November 30, 2001 and were recognized in earnings, generally within three months or less, con-

current with the recognition in earnings of the hedged forecasted loan sales.

STO C K   O PT I O N S 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”).

I N C O M E   TA X E S 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 that are not expected to be reinvested indefinitely.

E A R N I N G S   P E R   S H A R E 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. The following table presents a reconciliation of aver-

age shares outstanding:

YEARS ENDED NOVEMBER 30,
in thousands

Basic average shares outstanding

Net effect of stock options assumed to be exercised

Diluted average shares outstanding

2002

41,511

2,443

43,954

2001

37,465

1,454

38,919

2000

38,931

1,138

40,069

G O O DW I L L In June 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 142,

“Goodwill and Other Intangible Assets” (“SFAS No. 142”). SFAS No. 142 requires goodwill to be tested for impairment under certain circum-

stances, and written off when impaired, rather than amortized as previous standards required. SFAS No. 142 is effective for fiscal years begin-

ning after December 15, 2001, although early application was permitted for entities, like the Company, with fiscal years beginning after March 15,

2001. The Company has recorded goodwill in connection with various acquisitions completed in recent years. Goodwill represents the excess of

the purchase price over the fair value of net assets acquired. The Company adopted SFAS No. 142 on December 1, 2001, earlier than required.

Since  adopting  SFAS  No.  142,  the  Company  tests  goodwill  for  impairment  using  the  two-step  process  prescribed  in  the  pronouncement. 

The first step is used to identify potential impairment, while the second step measures the amount of impairment, if any. The impairment tests of

goodwill performed by the Company as of November 30, 2002 and December 1, 2001 indicated no impairment. Application of the provisions of

SFAS No. 142 by the Company resulted in the elimination of amortization expense in 2002. Prior to the adoption of SFAS No. 142, the Company

amortized goodwill over periods ranging from five to ten years using the straight-line method. At November 30, 2001, accumulated goodwill

amortization totaled $107,744,000. Results reported for the years ended November 30, 2001 and 2000 included after tax goodwill amortization

expense of $18,472,000 and $17,813,000, respectively. For the year ended November 30, 2001, elimination of this amortization expense would

have resulted in net income of $232,689,000 and an increase of $.49 in basic earnings per share, from the amount reported, to $6.21 and an

increase of $.48 in diluted earnings per share, from the amount reported, to $5.98. For the year ended November 30, 2000, elimination of this

amortization expense would have resulted in net income of $227,773,000 and an increase of $.46 in basic earnings per share, from the amount

reported, to $5.85 and an increase of $.44 in diluted earnings per share, from the amount reported, to $5.68.

S E G M E N T   I N F O R M AT I O N In  accordance  with  Statement  of  Financial  Accounting  Standards  No.  131,  “Disclosures  about  Segments  of 

an  Enterprise  and  Related  Information,”  the  Company  has  identified  two  reportable  segments:  construction  and  mortgage  banking.  The

Company’s construction segment consists primarily of domestic and international homebuilding operations. The Company’s construction opera-

tions  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  Arizona,  California,  Colorado,  Florida,

Nevada, New Mexico and Texas. Internationally, the Company operates in France through a majority-owned subsidiary. In addition to constructing

homes, the Company’s French subsidiary builds commercial projects and high-density residential properties, such as condominium complexes,

in France. The Company’s mortgage banking operations provide mortgage banking services primarily 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.

Information for the Company’s reportable segments are presented in its consolidated statements of income and consolidated balance sheets

included herein. The Company’s reporting segments follow the same accounting policies used for the Company’s consolidated financial state-

ments as described in the summary of significant accounting policies. Management evaluates a segment’s performance based upon a number of

factors including pretax results.

70 / 7 1

R E C E N T   AC C O U N T I N G   P R O N O U N C E M E N T S In  December  2001,  the  Accounting  Standards  Executive  Committee  issued  Statement  of

Position  01-6,  “Accounting  by  Certain  Entities  (including  Entities  With  Trade  Receivables)  That  Lend  to  or  Finance  the  Activities  of Others”

(“SOP 01-6”). SOP 01-6 is effective for annual and interim financial statements issued for fiscal years beginning after December 15, 2001.

Under SOP 01-6, mortgage companies are explicitly subject to new accounting and reporting provisions and disclosure requirements, including

disclosures about regulatory capital and net worth requirements. SOP 01-6 also requires the carrying amounts of loans and servicing rights to be

allocated using relative fair values in a manner consistent with Statement of Financial Accounting Standards No. 140, “Accounting for Transfers

and  Servicing  of  Financial  Assets  and  Extinguishments  of  Liabilities”  (“SFAS  No.  140”).  Such  allocation  was  not  previously  required  and 

the Company’s mortgage banking operations recognized servicing rights income upon closing of the respective loans as permitted under the

applicable accounting guidance. The Company plans to adopt SOP  01-6  in  the  first  quarter  of  2003  and  is  currently  evaluating  the  potential

impact of the adoption of SOP 01-6 on its financial statements.

In  November  2002,  the  FASB  issued  FASB  Interpretation  No.  45, “Guarantor’s  Accounting  and  Disclosure  Requirements  for  Guarantees,

Including Indirect Guarantees of Indebtedness of Others” (“FASB Interpretation No. 45”), which addresses the disclosures to be made by a guar-

antor in its interim and annual financial statements about its obligations under guarantees. FASB Interpretation No. 45 also clarifies the require-

ments related to the recognition of a liability by a guarantor at the inception of a guarantee for the obligations the guarantor has undertaken in

issuing that guarantee. The disclosure requirements of FASB Interpretation No. 45 are effective for financial statements of interim or annual peri-

ods ending after December 15, 2002, while the initial recognition and initial measurement provisions are applicable on a prospective basis to

guarantees issued or modified after December 31, 2002. The Company plans to adopt FASB Interpretation No. 45 in the first quarter of 2003

and is currently evaluating the potential impact of the interpretation on its financial statements.

In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation —

Transition  and  Disclosure”  (“SFAS  No.  148”),  which  amends  Statement  of  Financial  Accounting  Standards  No.  123,  “Accounting  for  Stock-

Based  Compensation”  (“SFAS  No.  123”)  to  provide  alternative  methods  of  transition  for  an  entity  that  voluntarily  changes  to  the  fair  value 

method of accounting for stock-based employee compensation. It also amends the disclosure provisions of SFAS No. 123 to require prominent

disclosure about the effects on reported net income of an entity’s accounting policy decisions with respect to stock-based employee compen-

sation. Finally, SFAS No. 148 amends Accounting Principles Board Opinion No. 28, “Interim Financial Reporting” (“APB Opinion No. 28”) to

require disclosure about those effects in interim financial information. SFAS No. 148’s amendment of the transition and disclosure requirements 

of  SFAS  No.  123  are  effective  for  fiscal  years  ending  after  December  15,  2002,  with  earlier  application  permitted.  SFAS  No.  148’s  amend-

ment of the disclosure requirements of APB Opinion No. 28 is effective for interim periods beginning after December 15, 2002. The Company

does not plan to change to the fair value method of accounting, but plans to adopt the disclosure requirements of SFAS No. 148 in the second

quarter of 2003.

In January 2003, the FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FASB Interpretation No. 46”). FASB

Interpretation No. 46 clarifies the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” to certain entities 

in which equity investors do not have the characteristics of a controlling interest or do not have sufficient equity at risk for the entity to finance 

its  activities  without  additional  subordinated  financial  support  from  other  parties.  FASB  Interpretation  No.  46  applies  immediately  to  variable 

interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies 

to  the  first  fiscal  year  or  interim  period  beginning  after  June  15,  2003,  to  variable  interest  entities  in  which  an  enterprise  holds  a  variable 

interest that it acquired before February 1, 2003. The Company is currently evaluating the potential impact of FASB Interpretation No. 46 on its

financial statements.

R E C L A S S I F I C AT I O N S Certain amounts in the consolidated financial statements of prior years have been reclassified to conform to the 2002

presentation.

Note 2

ISSUANCE OF FRENCH SUBSIDIARY STOCK

On  February  7,  2000,  Kaufman  &  Broad  S.A.  (“KBSA”),  the  Company’s  wholly  owned  French  subsidiary,  issued  5,314,327  common  shares

(including the over-allotment option) in an initial public offering. The offering was made in France and elsewhere in Europe and was priced at 23

euros per share. Since the initial public offering, KBSA has been listed on the Premier Marché of the Paris Bourse. The offering generated total

net proceeds of $113,100,000, of which $82,900,000 was used by the Company to reduce its domestic debt and repurchase shares of its 

common stock. The remainder was used to fund internal and external growth of KBSA. The Company recognized a gain of $39,630,000, or $.99

per diluted share as a result of the offering. For tax purposes, the proceeds received by the Company in connection with the initial public offering

were treated as a dividend paid out of the accumulated earnings and profits of KBSA. While such dividends are generally taxed on a current

basis, the Company had sufficient foreign tax credits to offset any federal taxes due on the dividend received; therefore, no deferred taxes were

provided on the gain recognized in the financial statements for the year ended November 30, 2000. Since the initial public offering, the Company

has maintained a 57% majority ownership interest in KBSA and continues to consolidate these operations in its financial statements.

Note 3

ACQUISITIONS

During the year ended November 30, 2000, the Company’s French subsidiary, KBSA, completed the acquisitions of four homebuilders in France.

These  companies  were  acquired  for  an  aggregate  purchase  price  of  $33,516,000  and  were  accounted  for  under  the  purchase  method  of

accounting. The excess of the purchase price over the estimated fair value of the net assets acquired was $24,745,000 and was allocated to

goodwill. Through November 30, 2001, the Company amortized the goodwill on a straight-line basis over a period of ten years. However, in

accordance with SFAS No. 142, which the Company adopted as of December 1, 2001, the goodwill is no longer amortized but is reviewed for

impairment  on  an  annual  basis.  The  results  of  these  acquisitions  were  included  in  the  Company’s  financial  statements  as  of  their  respective

acquisition dates.

On July 19, 2001, the Company acquired Trademark Home Builders, Inc. (“Trademark”), a builder of single-family homes in Jacksonville, Florida.

The acquisition marked the Company’s entry into Florida. Trademark was acquired for approximately $30,146,000, including the assumption of

approximately $16,284,000 in debt, and was accounted for under the purchase method of accounting. The excess of the purchase price over the

estimated fair value of net assets acquired was $9,240,000 and was allocated to goodwill and assigned to the Company’s construction seg-

ment. On September 26, 2001, KBSA completed the acquisition of Résidences Bernard Teillaud (“RBT”), a France-based builder of condomini-

ums. As a result of the acquisition, KBSA believes it has a leading market position in the Rhône-Alpes region of France. RBT was acquired for

approximately $28,675,000 and was accounted for under the purchase method of accounting. The excess of the purchase price over the esti-

mated fair value of net assets acquired was $10,152,000 and was allocated to goodwill and assigned to the Company’s construction segment.

In accordance with SFAS No. 142, the goodwill amounts recorded in connection with the acquisitions of Trademark and RBT are not being amor-

tized but are reviewed for impairment on an annual basis. The results of Trademark and RBT were included in the Company’s consolidated finan-

cial statements as of their respective acquisition dates. The pro forma results of the Company for 2001, assuming these acquisitions had been

made at the beginning of the year, would not be materially different from reported results.

On September 30, 2002, the Company acquired Orlando, Florida-based American Heritage Homes (“AHH”) for approximately $74,032,000,

including the assumption of approximately $46,484,000 in debt. AHH, which in 2001 delivered more than 800 single-family homes in Orlando

and Tampa and generated revenues of approximately $140,000,000, controlled more than 4,000 lots at the time of the acquisition. The AHH

acquisition strengthens the Company’s market position in Florida, marking its entry into the Orlando market and supplementing its Tampa start-

up business. AHH was accounted for under the purchase method of accounting and was assigned to the Company’s construction segment. 

No goodwill was recorded in connection with the acquisition. The results of AHH’s operations were included in the Company’s consolidated

financial statements as of the date of acquisition. The pro forma results of the Company for 2002 and 2001, assuming this acquisition had been

made at the beginning of each year, would not be materially different from reported results.

72 / 7 3

Note 4

RECEIVABLES

C O N ST R U CT I O N Trade receivables amounted to $293,457,000 and $329,812,000 at November 30, 2002 and 2001, respectively. Included 

in these amounts are unbilled receivables due from buyers on sales of French single-family detached homes, condominiums and commercial

buildings  accounted  for  using  the  percentage  of  completion  method  totaling  $270,686,000  at  November  30,  2002  and  $311,871,000 

at  November  30,  2001.  The  buyers  are  contractually  obligated  to  remit  payments  against  their  unbilled  balances.  Other  receivables  of

$110,500,000 at November 30, 2002 and $107,231,000 at November 30, 2001 included mortgages and notes receivable, escrow deposits

and amounts due from municipalities and utility companies. At November 30, 2002 and 2001, trade and other receivables were net of allowances

for doubtful accounts of $22,882,000 and $19,487,000, respectively.

M O RTG AG E   B A N K I N G First  mortgages  and  mortgage-backed  securities  consisted  of  loans  of  $6,244,000  at  November  30,  2002  and

$7,464,000  at  November  30,  2001  and  mortgage-backed  securities  of  $14,776,000  and  $23,448,000  at  November  30,  2002  and  2001,

respectively.  The  mortgage-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 83⁄8% and 81⁄4% at November 30, 2002 and 2001, respectively (with rates ranging from 7% to 113⁄4% in 2002 and 7% to 115⁄8%

in 2001).

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  $1,023,000  and  $0,  respectively,  at  November  30,  2002  and

$1,060,000 and $0, respectively, at November 30, 2001.

First  mortgages  held  under  commitments  of  sale  and  other  receivables  consisted  of  first  mortgages  held  under  commitments  of  sale  of

$549,113,000 at November 30, 2002 and $628,627,000 at November 30, 2001 and other receivables of $29,436,000 and $26,864,000 at

November 30, 2002 and 2001, respectively. The first mortgages held under commitments of sale bore interest at average rates of 61⁄2% and

7 1⁄4%  at  November  30,  2002  and  2001,  respectively.  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 mort-

gage delivery activity.

The Company uses mortgage forward delivery contracts and non-mandatory commitments to mitigate its exposure to movements in interest rates

on interest rate lock agreements and mortgage loans held for sale. At November 30, 2002 and 2001, the Company had aggregate notional

amounts of $625,226,000 and $825,760,000, respectively, outstanding under mortgage forward delivery contracts and non-mandatory com-

mitments and notional amounts of $147,485,000 and $108,077,000, respectively, outstanding under interest rate lock agreements. Interest rate

lock agreements had interest rates ranging from 41⁄2% to 7% as of November 30, 2002 and 5% to 8% as of November 30, 2001. The estimated

fair value of mortgage forward delivery contracts and non-mandatory commitments exceeded the contract value by $1,330,000 at November 30,

2002  and  $3,886,000  at  November  30,  2001.  The  estimated  fair  value  of  interest  rate  lock  agreements  exceeded  the  contract  value  by

$1,238,000 at November 30, 2002 and was less than the contract value by $209,000 at November 30, 2001. All of the fair values were based

on available market information.

Note 5

INVENTORIES

Inventories consisted of the following:

NOVEMBER 30,
in thousands

Homes, lots and improvements in production

Land under development

Total inventories

2002

2001

$1,776,430

$1,433,880

397,067

450,881

$2,173,497

$1,884,761

Land under development primarily consists of parcels on which 50% or less of estimated development costs have been incurred.

The impact of capitalizing interest costs on consolidated pretax income is as follows:

YEARS ENDED NOVEMBER 30,
in thousands

Interest incurred

Interest expensed

Interest capitalized

Interest amortized

2002

2001

2000

$101,100

$103,046

(32,730)

(41,072)

68,370

(68,808)

61,974

(64,025)

$ 94,201

(31,479)

62,722

(40,679)

Net impact on consolidated pretax income

$

(438)

$ (2,051)

$ 22,043

Note 6

INVESTMENTS IN UNCONSOLIDATED JOINT VENTURES

The Company participates in a number of joint ventures in which it has less than a controlling interest. These joint ventures, which operate in cer-

tain markets in the United States and France where the Company’s consolidated construction operations are located, are typically engaged in

the development, construction and sale of residential properties and commercial projects. Combined condensed financial information concern-

ing the Company’s unconsolidated joint venture activities follows:

NOVEMBER 30,
in thousands

Cash

Receivables

Inventories

Other assets

Total assets

Mortgages and notes payable

Other liabilities

Equity of:

The Company

Others

Total liabilities and equity

2002

2001

$ 13,627

$10,136

27,608

86,949

1,006

16,905

35,565

1,066

$129,190

$63,672

$ 41,490

32,145

21,023

34,532

$18,373

21,517

8,844

14,938

$129,190

$63,672

74 / 7 5

The joint ventures finance land and inventory investments of the Company’s operating subsidiaries through a variety of borrowing arrangements.

The Company typically does not guarantee these financing arrangements.

YEARS ENDED NOVEMBER 30,
in thousands

Revenues

Cost of sales

Other expenses, net

Total pretax income 

2002

2001

2000

$ 65,884

$ 82,122

$116,837

(45,490)

(10,715)

(56,969)

(18,668)

(85,383)

(26,533)

$  9,679

$ 6,485

$ 4,921

The Company’s share of pretax income 

$  4,378

$ 3,875

$ 2,926

The Company’s share of pretax income includes management fees earned from the unconsolidated joint ventures.

Note 7

MORTGAGES AND NOTES PAYABLE

C O N ST R U CT I O N Mortgages and notes payable consisted of the following (interest rates are as of November 30):

NOVEMBER 30,
in thousands

Term loan borrowings (3% in 2002 and 41⁄8% in 2001)

Unsecured French borrowings (4% to 53⁄8% in 2002 and 41⁄5% to 51⁄2% in 2001)

Mortgages and land contracts due to land sellers and other loans (51⁄2% to 12% in 2002 

and 41⁄4% to 10% in 2001)

Senior notes due 2004 at 73⁄4%

French senior notes due 2009 at 83⁄4%

Senior subordinated notes due 2003 at 93⁄8%

Senior subordinated notes due 2006 at 95⁄8%

Senior subordinated notes due 2008 at 85⁄8%

Senior subordinated notes due 2011 at 91⁄2%

Total mortgages and notes payable

2002

2001

$ 182,950

$ 167,950

17,515

137,730

67,733

175,000

149,160

124,695

200,000

250,000

58,586

175,000

174,714

124,635

250,000

$1,167,053

$1,088,615

The Company has an unsecured credit agreement (the “Unsecured Credit Facility”), dated October 6, 2000, consisting of a four-year committed

revolving credit facility and a five-year term loan. The Unsecured Credit Facility totaled $827,000,000 at November 30, 2002 and was comprised

of  a  $644,050,000  four-year  committed  revolving  credit  facility  and  a  $182,950,000  five-year  term  loan.  The  Unsecured  Credit  Facility  has 

the capacity to be expanded up to an aggregate total of $900,000,000 if additional bank lending commitments are obtained. Interest on the

Unsecured Credit Facility is payable monthly at the London Interbank Offered Rate plus an applicable spread on amounts borrowed. No borrow-

ings were outstanding under the four-year committed revolving credit facility at November 30, 2002 or 2001.

The Company’s French subsidiaries have lines of credit with various banks which totaled $304,028,000 at November 30, 2002 and have various

committed expiration dates through April 2006. These lines of credit provide for interest on borrowings at the European Interbank Offered Rate

plus an applicable spread.

The weighted average annual interest rate on aggregate unsecured borrowings, excluding the senior and senior subordinated notes, was 33⁄8%

and 43⁄8% at November 30, 2002 and 2001, respectively.

The $175,000,000 of 73⁄4% senior notes were issued on October 14, 1997 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.

On July 29, 2002, KBSA issued 150,000,000 euros principal amount of 83⁄4% senior notes at 100% of the principal amount of the notes. The

notes, which are publicly traded and are due August 1, 2009 with interest payable semi-annually, represent unsecured obligations of KBSA and

rank pari passu in right of payment with all other senior unsecured indebtedness of KBSA. The Company does not guarantee these KBSA notes.

On or prior to August 1, 2005, KBSA may redeem up to 35% of the aggregate principal amount of the notes with the net cash proceeds of qual-

ified equity offerings at a redemption price of 108.75% of their principal amount together with accrued and unpaid interest, if any. The notes are

not otherwise redeemable at the option of KBSA, except in the event of certain changes in tax laws. Proceeds from the issuance of the notes

were used to pay down bank borrowings and other indebtedness.

The $125,000,000 of 95⁄8% senior subordinated notes were issued on November 14, 1996 at 99.525% of the principal amount of the notes. The

notes, which are due November 15, 2006 with interest payable semi-annually, represent unsecured obligations of the Company and are subor-

dinated to all existing and future senior indebtedness 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 beginning November 15, 2001, and thereafter, at prices declining annually to 100% on and after

November 15, 2004.

On December 14, 2001, pursuant to its universal shelf registration statement filed with the Securities and Exchange Commission (“SEC”) on

December 5, 1997 (the “1997 Shelf Registration”), the Company issued $200,000,000 of 85⁄8% senior subordinated notes at 100% of the prin-

cipal amount of the notes. The notes, which are due December 15, 2008, with interest payable semi-annually, represent unsecured obligations 

of the Company and are subordinated to all existing and future senior indebtedness of the Company. On or prior to December 15, 2004, the

Company may redeem up to 35% of the aggregate principal amount of the notes with the net proceeds of one or more public or private equity

offerings at a redemption price of 108.625% of their principal amount, together with accrued and unpaid interest. The notes are not otherwise

redeemable at the option of the Company. The Company used $175,000,000 of the net proceeds from the issuance of the notes to redeem all

of its outstanding 93⁄8% senior subordinated notes due 2003. The remaining net proceeds were used for general corporate purposes.

On February 8, 2001, pursuant to its 1997 Shelf Registration, the Company issued $250,000,000 of 91⁄2% senior subordinated notes at 100%

of the principal amount of the notes. The notes, which are due February 15, 2011 with interest payable semi-annually, represent unsecured oblig-

ations of the Company and are subordinated to all existing and future senior indebtedness of the Company. The notes are redeemable at the

option of the Company, in whole or in part, at 104.750% of their principal amount beginning February 15, 2006, and thereafter at prices declin-

ing annually to 100% on and after February 15, 2009. Proceeds from the issuance of the notes were used to pay down bank borrowings.

The Company’s current universal shelf registration statement filed on October 15, 2001 with the SEC (as subsequently amended, the “2001

Shelf Registration”) was declared effective on January 28, 2002. The remaining capacity under the 1997 Shelf Registration was rolled into the

2001 Shelf Registration, thereby providing the Company with a total issuance capacity of $750,000,000 under the 2001 Shelf Registration. 

The 2001 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,  stock  purchase  contracts,  stock  purchase  units  and/or  warrants  to 

purchase such securities. As of November 30, 2002, no securities had been issued under the 2001 Shelf Registration and $750,000,000 of

capacity remained available.

The 73⁄4% senior notes and 95⁄8%, 85⁄8% and 91⁄2% senior subordinated notes contain certain restrictive covenants that, among other things, limit

the ability of the Company to incur additional indebtedness, pay dividends, make certain investments, create certain liens, engage in mergers,

consolidations, or sales of assets, or engage in certain transactions with officers, directors and employees. Under the terms of the Unsecured

Credit  Facility,  the  Company  is  required,  among  other  things,  to  maintain  certain  financial  statement  ratios  and  a  minimum  net  worth  and  is 

76 / 7 7

subject to limitations on acquisitions, inventories and indebtedness. Based on the terms of the Company’s Unsecured Credit Facility, senior

notes and senior subordinated notes, retained earnings of $197,291,000 were available for payment of cash dividends or stock repurchases at

November 30, 2002.

Principal payments on senior and senior subordinated notes, term loan borrowings, mortgages, land contracts and other loans are due as follows:

2003: $9,336,000; 2004: $178,816,000; 2005: $183,039,000; 2006: $179,187,000; 2007: $0; and thereafter: $599,160,000.

Assets (primarily inventories) having a carrying value of approximately $152,738,000 are pledged to collateralize mortgages, land contracts and

other secured loans.

M O RTG AG E   B A N K I N G Notes payable included the following (interest rates are as of November 30):

NOVEMBER 30,
in thousands

Mortgage Warehouse Facility (24⁄5% in 2001)

$200,000 Master Loan and Security Agreement (2% in 2002 and 25⁄8% in 2001)

$550,000 Master Loan and Security Agreement (2% in 2002)

Total notes payable

2002

2001

$280,863

314,172

$ 56,945

450,629

$507,574

$595,035

First mortgages receivable had been financed through a $300,000,000 revolving mortgage warehouse agreement (the “Mortgage Warehouse

Facility”). The Mortgage Warehouse Facility, which was scheduled to expire on February 18, 2003, provided for an annual fee based on the com-

mitted balance of the facility and provided for interest at either the London Interbank Offered Rate or the Federal Funds Rate plus an applicable

spread on amounts borrowed. The Mortgage Warehouse Facility was terminated early by the Company on November 13, 2002.

On May 13, 2002, the Company’s mortgage banking subsidiary renewed an existing $200,000,000 master loan and security agreement with 

an investment bank, (the “$200,000,000 Master Loan and Security Agreement”). The agreement, which expires on May 26, 2003, provides for a

facility fee based on the $200,000,000 maximum amount available and provides for interest to be paid monthly at the London Interbank Offered

Rate plus an applicable spread on amounts borrowed. During the fourth quarter of 2001, the Company’s mortgage banking subsidiary negotiated

a temporary increase in the maximum credit amount available under the $200,000,000 Master Loan and Security Agreement to $325,000,000

through December 31, 2001. The temporary increase was necessary to meet the Company’s increased volume of loan originations.

The Company’s mortgage banking subsidiary entered into an additional $400,000,000 master loan and security agreement with another invest-

ment bank on May 13, 2002. The agreement, which expires on May 13, 2003, provides for interest to be paid monthly at the London Interbank

Offered Rate plus an applicable spread on amounts borrowed. During the fourth quarter of 2002, the Company’s mortgage banking subsidiary

negotiated  a  temporary  increase  in  the  maximum  credit  amount  available  under  the  $400,000,000  master  loan  and  security  agreement  to

$550,000,000 (the “$550,000,000 Master Loan and Security Agreement”) through February 13, 2003. The temporary increase was obtained to

meet the Company’s increased volume of loan originations.

The  amounts  outstanding  under  the  $200,000,000  Master  Loan  and  Security  Agreement  and  the  $550,000,000  Master  Loan  and  Security

Agreement are secured by separate borrowing bases, which include certain mortgage loans held under commitments of sale and are repayable

from sales proceeds. There are no compensating balance requirements under either facility. Each facility includes financial covenants and restric-

tions 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 sub-

stantially the same terms. At November 30, 2002 and 2001, the collateralized mortgage obligations bore interest at rates ranging from 83/4% to

113/4% and 8% to 121⁄4%, respectively, 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.

Note 8

COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES

OF SUBSIDIARY TRUST HOLDING SOLELY DEBENTURES OF THE COMPANY (FELINE PRIDES)

On July 7, 1998, the Company, together with KBHC Financing I, a Delaware statutory business trust (the “KBHC Trust”) that was wholly owned

by the Company, issued an aggregate of 18,975,000 Feline Prides securities. The Feline Prides consisted of (i) 17,975,000 Income Prides with

a stated amount per Income Prides of $10 (the “Stated Amount”), which were units comprised of a capital security and a stock purchase con-

tract under which the holders were to purchase common stock from the Company not later than August 16, 2001 and the Company was to 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 were 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 were to purchase common stock from the Company not later than August 16, 2001 and the Company was to

pay to the holders certain unsecured contract adjustment payments. The distribution rate on the Income Prides was 8.25% per annum and the

distribution rate on the Growth Prides was .75% per annum. Distributions of $11,385,000 and $15,180,000 were included as minority interests

in the Company’s results of operations for each of the years ended November 30, 2001 and 2000, respectively. On August 16, 2001, all of the

Company’s Feline Prides mandatorily converted into 5,977,109 shares of the Company’s common stock.

Note 9

FAIR VALUES OF FINANCIAL INSTRUMENTS

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.

The carrying values and estimated fair values of the Company’s financial instruments, except for those for which the carrying values approximate

fair values, are summarized as follows:

NOVEMBER 30,
in thousands

C O N ST R U CT I O N :

Financial liabilities 

73⁄4% Senior notes

83⁄4% French senior notes

93⁄8% Senior subordinated notes

95⁄8% Senior subordinated notes

85⁄8% Senior subordinated notes

91⁄2% Senior subordinated notes

M O RTG AG E   B A N K I N G :

Financial assets

Mortgage-backed securities

Financial liabilities

2002

2001

Carrying
Value

Estimated
Fair Value

Carrying
Value

Estimated
Fair Value

$175,000

149,160

$179,060

149,906

124,695

200,000

250,000

129,600

209,750

272,300

$175,000

$177,013

174,714

124,635

176,750

131,288

250,000

263,600

14,776

15,799

23,448

24,508

Collateralized mortgage obligations secured 

by mortgage-backed securities

14,079

14,973

22,359

23,578

78 / 7 9

Note 10

Note 11

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  unsecured  credit 

facilities, French lines of credit, Mortgage Warehouse Facility, master loan and security agreements: 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.

COMMITMENTS AND CONTINGENCIES

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.

STOCKHOLDERS’ EQUITY

P R E F E R R E D   STO C K 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  circumstances,  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 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 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 repre-

senting 15% or more of the aggregate votes entitled to be cast by all shares of common stock. 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.

Note 12

EMPLOYEE BENEFIT AND STOCK PLANS

Benefits  are  provided  to  most  employees  under  the  Company’s  401(k)  Savings  Plan  under  which  contributions  by  employees  are  partially

matched by the Company. The aggregate cost of this plan to the Company was $5,398,000 in 2002, $4,296,000 in 2001 and $4,513,000 

in  2000.  The  assets  of  the  Company’s  401(k)  Savings  Plan  are  held  by  a  third  party  trustee.  Plan  participants  may  direct  the  investment  of 

their funds among one or more of the several fund options offered by the plan. The Company’s common stock is one of the investment options

available to participants. As of November 30, 2002, 2001 and 2000, less than 5% of the plan’s net assets were invested in the Company’s 

common stock.

The Company’s 1999 Incentive Plan (the “1999 Plan”) provides 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 periods of up to 15 years. The Company also has a

Performance-Based Incentive Plan for Senior Management (the “Incentive Plan”), a 1998 Stock Incentive Plan (the “1998 Plan”) and a 2001

Stock  Incentive  Plan  (the  “2001  Plan”),  each  of  which  provide  for  the  same  awards  as  may  be  made  under  the  1999  Plan,  but  require  that 

such awards be subject to certain conditions which are designed to enable the Company to pay annual compensation in excess of $1,000,000

to participating executives and maintain tax deductibility for such compensation for the Company. The 1999 Plan and the 2001 Plan are the

Company’s primary existing employee stock plans.

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 2002, 2001 and 2000 consistent 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:

YEARS ENDED NOVEMBER 30,
in thousands, excepzt per share amounts

Net income — as reported

Net income — pro forma

Diluted earnings per share — as reported

Diluted earnings per share — pro forma

2002

2001

2000

$314,350

301,934

7.15

7.00

$214,217

207,254

5.50

5.35

$209,960

205,652

5.24

5.05

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 2002, 2001 and 2000, respectively: a risk free interest rate of 2.89%, 3.68% and 5.44%; an expected volatility factor for the

market price of the Company’s common stock of 50.86%, 48.88% and 44.82%; a dividend yield of .67%, .90% and 1.00%; and an expected 

life  of  4  years,  4  years  and  4  years.  The  weighted  average  fair  value  of  options  granted  in  2002,  2001  and  2000  was  $14.54,  $9.09  and 

$7.70, respectively.

Stock option transactions are summarized as follows:

2002

2001

2000

Weighted
Average
Exercise
Price

$23.78

43.03

21.80

25.15

Weighted
Average
Exercise
Price

$19.13

28.24

11.90

24.74

Weighted
Average
Exercise
Price

$17.26

24.74

16.46

21.08

Options

4,849,822

1,615,176

(306,628)

(419,638)

Options

5,738,732

2,138,700

(1,456,188)

(176,152)

Options

6,245,092

1,960,177

(1,597,069)

(160,737)

Options outstanding at 

beginning of year

Granted

Exercised

Cancelled

Options outstanding at end of year

6,447,463

$30.08

6,245,092

$23.78

5,738,732

$19.13

Options exercisable at end of year

3,168,539

$24.98

2,843,650

$21.51

2,773,254

$15.60

Options available for grant at end of year

4,109,608

3,909,248

1,671,996

8 0 / 8 1

Stock options outstanding at November 30, 2002 are as follows:

Range of Exercise Price

$ 5.50 to $23.74

$24.25 to $26.88

$27.90 to $39.90

$40.14 to $52.58

$ 5.50 to $52.58

Options Outstanding

Options Exercisable

Weighted
Average
Remaining
Contractual
Life

10.98

12.87

13.86

14.74

13.27

Weighted
Average
Exercise
Price

$19.57

25.05

28.43

43.34

$30.08

Options

1,493,849

1,154,098

1,935,795

1,863,721

6,447,463

Options

1,477,185

706,167

684,416

300,771

3,168,539

Weighted
Average
Exercise
Price

$19.58

25.06

28.52

43.28

$24.98

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 of up to an aggregate 600,000 shares of common stock to cer-

tain officers and key employees. Restrictions lapse each year through May 10, 2005 on specified portions of the shares awarded to each parti-

cipant 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 64,997 in 2002, 86,664 in 2001 and 108,331 in 2000.

Effective  July  11,  2001,  the  Company  awarded  350,000  shares  of  restricted  common  stock  to  its  Chairman  and  Chief  Executive  Officer  in 

accordance  with  the  terms  and  conditions  of  his  amended  and  restated  employment  agreement.  The  restrictions  imposed  with  respect  to 

the  shares  covered  by  the  award  lapse  on  December  31,  2008  if  certain  conditions  are  met.  During  the  restriction  period,  the  executive  is 

entitled to vote and receive dividends on such shares. Upon issuance of the 350,000 shares, a deferred compensation expense equivalent to 

the  market  value  of  the  shares  on  the  date  of  grant  was  charged  to  stockholders’  equity  and  is  being  amortized  over  the  restriction  period. 

The compensation expense associated with the restricted shares totaled $1,466,000 and $550,000 for the years ended November 30, 2002

and 2001, respectively.

During  2002  and  2000,  the  Company  repurchased  4,000,000  and  10,747,400  shares  of  its  common  stock  at  an  aggregate  price  of

$190,784,000 and $247,228,000, respectively, under stock repurchase programs authorized by its Board of Directors. On July 16, 2002, the

Company’s Board of Directors approved an increase in the Company’s previously authorized stock repurchase program to permit future pur-

chases of up to 2,000,000 additional shares of the Company’s common stock. No shares had been repurchased under this authorization as of

November 30, 2002.

In connection with a share repurchase program, on August 27, 1999, the Company established a grantor stock ownership trust (the “Trust”) into

which certain shares repurchased in 2000 and 1999 were transferred. The Trust, administered by an independent trustee, holds and distributes

the  shares  of  common  stock  acquired  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 has no impact on the amount of

benefits or compensation that is 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, is 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  7,900,140,  8,142,831  and  8,782,252  shares  of  common  stock  at

November 30, 2002, 2001 and 2000, respectively. 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.

Note 13

POSTRETIREMENT BENEFITS

The Company has two supplemental non-qualified, unfunded retirement plans, the KB Home Supplemental Executive Retirement Plan, restated

effective as of July 12, 2001, and the KB Home Retirement Plan, effective as of July 11, 2002, pursuant to which the Company will pay supple-

mental pension benefits to certain key employees upon retirement. In connection with the plans, the Company has purchased cost recovery life

insurance on the lives of certain employees. Insurance contracts associated with each plan are held by a trust, established as part of the plans to

implement and carry out the provisions of the plans and to finance the benefits offered under the plans. The trust is the owner and beneficiary of

such contracts. The amount of the insurance coverage is designed to provide sufficient revenues to cover all costs of the plans if assumptions

made as to employment term, mortality experience, policy earnings and other factors are realized. As of November 30, 2002, the cash surrender

value of these insurance contracts was $8,183,000. Net periodic benefit costs for the Company’s supplemental retirement plans for the year

ended November 30, 2002 totaled $2,514,000 and were comprised of service costs of $2,373,000 and interest costs of $141,000. The pro-

jected benefit obligation at November 30, 2002 of $2,514,000 was equal to the net liability recognized in the balance sheet at that date. For the

year ended November 30, 2002, the weighted average discount rates used for the KB Home Supplemental Executive Retirement Plan and the

KB Home Retirement Plan were 8% and 7%, respectively.

On  November  1,  2001,  the  Company  implemented  an  unfunded  death  benefit  only  plan  (the  “KB Home  Death  Benefit  Only  Plan”)  for 

certain  key  management  employees.  In  connection  with  the  plan,  the  Company  has  purchased  cost  recovery  life  insurance  on  the  lives  of 

certain employees. Insurance contracts associated with the plan are held by a trust, established as part of the plan to implement and carry out 

the provisions of the plan and to finance the benefits offered under the plan. The trust is the owner and beneficiary of such contracts. The amount

of the coverage is designed to provide sufficient revenues to cover all costs of the plan if assumptions made as to employment term, mortality

experience,  policy  earnings  and  other  factors  are  realized.  As  of  November  30,  2002,  the  cash  surrender  value  under  these  policies  was

$5,992,000. Net periodic benefit costs for the KB Home Death Benefit Only Plan for the year ended November 30, 2002 totaled $507,000 and

were  comprised  of  service  costs  of  $467,000  and  interest  costs  of  $40,000.  The  projected  benefit  obligation  at  November  30,  2002  of

$507,000 was equal to the net liability recognized in the balance sheet at that date. For the year ended November 30, 2002, the weighted 

average discount rate used for the KB Home Death Benefit Only Plan was 8%.

8 2 / 8 3

Note 14

INCOME TAXES

The components of pretax income are as follows:

YEARS ENDED NOVEMBER 30,
in thousands

United States

France

Total pretax income 

The components of income taxes are as follows:

in thousands

2 0 0 2

Currently payable

Deferred

Total

2 0 0 1

Currently payable

Deferred

Total

2 0 0 0

Currently payable

Deferred

Total 

2002

2001

2000

$430,450

$286,629

$263,266

38,800

37,888

34,394

$469,250

$324,517

$297,660

Total

Federal

State

France

$206,283

$168,063

$23,000

$15,220

(51,383)

(50,955)

(428)

$154,900

$117,108

$23,000

$14,792

$156,051

$134,755

$17,500

(45,751)

(57,321)

$110,300

$ 77,434

$17,500

$ 70,818

$ 43,776

$17,000

16,882

11,586

$ 87,700

$ 55,362

$17,000

$ 3,796

11,570

$15,366

$10,042

5,296

$15,338

Deferred income taxes result from temporary differences in the financial and tax bases of assets and liabilities. Significant components of the

Company’s deferred tax liabilities and assets are as follows:

NOVEMBER 30,
in thousands

D E F E R R E D   TA X   L I A B I L I T I E S :

Installment sales

Bad debt and other reserves

Capitalized expenses

Repatriation of French subsidiaries

Other

Total deferred tax liabilities

D E F E R R E D   TA X   A S S ET S :

Warranty, legal and other accruals

Depreciation and amortization

Capitalized expenses

Partnerships and joint ventures

Employee benefits

Noncash charge for impairment of long-lived assets

French minority interest

Tax credits

Foreign tax credits

Other

Total deferred tax assets

Net deferred tax assets

2002

2001

$ 34,045

$ 30,934

286

16,917

9,927

935

62,110

55,765

20,687

24,663

61,420

18,661

8,756

9,201

22,845

9,880

8,254

343

15,147

5,220

1,912

53,556

29,850

18,779

20,518

31,623

17,799

7,168

7,108

31,890

4,625

2,780

240,132

172,140

$178,022

$118,584

Income taxes computed at the statutory United States federal income tax rate and income tax expense provided in the financial statements differ

as follows:

YEARS ENDED NOVEMBER 30,
in thousands

Amount computed at statutory rate

Increase (decrease) resulting from:

State taxes, net of federal income tax benefit

Differences in French tax rates

Intercompany dividends

Tax credits

Other, net

Total 

2002

2001

2000

$164,238

$113,581

$104,181

14,950

59

(14)

(22,155)

(2,178)

11,375

640

5,019

(26,314)

5,999

11,050

853

(2,537)

(24,211)

(1,636)

$154,900

$110,300

$ 87,700

The  Company  has  commitments  to  invest  $1,105,000  over  three  years  in  affordable  housing  partnerships  which  are  scheduled  to  provide 

tax credits.

8 4 / 8 5

Note 15

GEOGRAPHICAL INFORMATION

The following table presents information about the Company by geographic area.

in thousands

2 0 0 2

Construction:

West Coast

Southwest

Central

France

Total construction

Mortgage banking

Total

2 0 0 1

Construction:

West Coast

Southwest

Central

France

Total construction

Mortgage banking

Total

2 0 0 0

Construction:

West Coast

Southwest

Central

France

Total construction

Mortgage banking

Total

Revenues

Operating
Income

Identifiable
Assets

$1,716,078

$161,821

$1,028,564

1,022,746

1,524,316

675,754

4,938,894

91,922

113,180

127,871

50,045

452,917

57,506

661,758

845,710

855,402

3,391,434

634,106

$5,030,816

$510,423

$4,025,540

$1,605,917

$101,367

$ 995,826

992,949

1,326,133

576,716

4,501,715

72,469

88,787

117,248

44,914

352,316

33,771

494,519

697,692

795,485

2,983,522

709,344

$4,574,184

$386,087

$3,692,866

$1,466,418

$ 95,243

$ 907,956

862,822

1,065,803

475,445

3,870,488

60,370

67,899

90,018

35,449

288,609

23,832

427,347

531,074

495,391

2,361,768

467,153

$3,930,858

$312,441

$2,828,921

Note 16

QUARTERLY RESULTS (UNAUDITED)

Quarterly results for the years ended November 30, 2002 and 2001 follow:

in thousands, except per share amounts 

First

Second

Third

Fourth

2 0 0 2

Revenues

Operating income

Pretax income

Net income

Basic earnings per share

Diluted earnings per share

2 0 0 1

Revenues

Operating income

Pretax income

Net income

Basic earnings per share

Diluted earnings per share

$915,665

$1,139,654

$1,292,969

$1,682,528

71,265

63,664

42,664

1.00

.95

102,108

95,662

64,062

1.50

1.42

135,402

125,192

83,892

2.06

1.95

201,648

184,732

123,732

3.09

2.92

$821,065

$1,066,945

$1,235,313

$1,450,861

53,501

39,118

25,818

.74

.70

73,743

59,904

39,504

1.11

1.07

109,235

91,487

60,387

1.63

1.58

149,608

134,008

88,508

2.10

2.03

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.

Note 17

SUBSEQUENT EVENTS

On  January  27,  2003,  pursuant  to  the  2001  Shelf  Registration,  the  Company  issued  $250,000,000  of  73/4%  senior  subordinated  notes  at

98.444% of the principal amount of the notes and on February 7, 2003, the Company issued an additional $50,000,000 notes in the same series

(collectively, the “$300,000,000 Senior Subordinated Notes”). The $300,000,000 Senior Subordinated Notes, which are due February 1, 2010,

with  interest  payable  semi-annually,  represent  unsecured  obligations  of  the  Company  and  are  subordinated  to  all  existing  and  future  senior

indebtedness of the Company. The $300,000,000 Senior Subordinated Notes are redeemable at the option of the Company at 103.875% of

their principal amount beginning February 1, 2007 and thereafter at prices declining annually to 100% on and after February 1, 2009. In addition,

before February 1, 2006, the Company may redeem up to 35% of the aggregate principal amount of the $300,000,000 Senior Subordinated

Notes with the net proceeds of one or more public or private equity offerings at a redemption price of 107.75% of their principal amount, together

with  accrued  and  unpaid  interest.  The  Company  used  $129,016,000  of  the  net  proceeds  from  the  issuance  of  the  $300,000,000  Senior

Subordinated Notes to redeem all of its outstanding $125,000,000 95⁄8% senior subordinated notes due 2006. The remaining net proceeds were

used for general corporate purposes.

8 6 / 8 7

REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Stockholders of KB Home:

We  have  audited  the  accompanying  consolidated  balance  sheets  of  KB  Home  as  of  November  30,  2002  and  2001,  and  the  related  con-
solidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended November 30, 2002. These
financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial state-
ments based on our audits.

We  conducted  our  audits  in  accordance  with  auditing  standards  generally  accepted  in  the  United  States.  Those  standards  require  that  we 
plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assess-
ing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presen-
tation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of KB Home at
November 30, 2002 and 2001, and the consolidated results of its operations and its cash flows for each of the three years in the period ended
November 30, 2002, in conformity with accounting principles generally accepted in the United States.

As  discussed  in  Note  1  to  the  consolidated  financial  statements,  on  December  1,  2001  the  Company  adopted  Statement  of  Financial
Accounting Standards No. 142, “Goodwill and Other Intangible Assets”.

Los Angeles, California
December 19, 2002

REPORT ON FINANCIAL STATEMENTS

The management of the Company is responsible for the preparation, integrity, and fair presentation of the accompanying consolidated financial
statements. The statements have been prepared in conformity with accounting principles generally accepted in the United States and include the
best estimates and judgments of management. Management also prepared the other information included in the annual report and is responsible
for its accuracy and consistency with the financial statements. The opinion of the independent auditors, Ernst & Young LLP, based upon their
audits of the consolidated financial statements, is included in this annual report.

Management  is  responsible  for  maintaining  a  system  of  internal  control  over  financial  reporting  that  provides  reasonable  assurance,  at  an 
appropriate cost-benefit relationship, about the reliability of financial reporting. The system contains self-monitoring mechanisms, and is regu-
larly tested by the Company’s internal auditors. Actions are taken to correct deficiencies as they are identified. Even an effective internal control
system, no matter how well designed, has inherent limitations — including the possibility of the circumvention or over-riding of controls — and
therefore can provide only reasonable assurance with respect to the financial statement preparation. Further, because of changes in conditions,
internal control system effectiveness may vary over time.

The audit and compliance committee of the Company’s Board of Directors, composed solely of Directors who are not officers of the Company,
regularly meets with the independent auditors, internal auditors and management to discuss the system of internal control over financial reporting
and auditing and financial reporting matters. Both the independent auditors and internal auditors have unrestricted access to the audit and com-
pliance committee, without the presence of management, to discuss any appropriate items.

Domenico Cecere
Senior Vice President and Chief Financial Officer
December 19, 2002

BOARD OF DIRECTORS

R O N   B U R K L E 1 , 3

Managing Partner, 

The Yucaipa Companies

Los Angeles

D R .   B A R RY   M U N I T Z 1 , 4

President,

The J. Paul Getty Trust

Los Angeles

H E N RY   G .   C I S N E R O S

G U Y   N A F I LYA N

Chairman and Chief Executive Officer,

Chairman and Chief Executive Officer,

Kaufman & Broad S.A.

Paris

L U I S   G .   N O G A L E S 3 , 4

Managing Partner,

Nogales Investors, LLC

Los Angeles

S A N F O R D   C .   S I G O LO F F 1 , 2

Chairman, President and Chief Executive Officer,

Sigoloff & Associates, Inc.

Los Angeles

American CityVista

San Antonio

J A N E   E VA N S 1 , 4

Chief Executive Officer,

Opnix, Inc.

Phoenix

D R .   R AY   R .   I R A N I 2 , 4

Chairman and Chief Executive Officer,

Occidental Petroleum Corporation

Los Angeles

K E N N ET H   M .   J A ST R OW,   I I 3

Chairman and Chief Executive Officer,

Temple-Inland Inc.

Austin

J A M E S   A .   J O H N S O N 3

Co-Chairman,

Perseus, LLC

Former Chairman and Chief Executive Officer,

Fannie Mae

Washington, D.C.

B R U C E   K A R AT Z 2

Chairman and Chief Executive Officer,

KB Home 

Los Angeles

COMMITTEES OF THE BOARD OF DIRECTORS

1Audit and Compliance Committee

2Executive Committee

3Nominating and Corporate Governance Committee

4Management Development and Compensation Committee

8 8 / 8 9

MANAGEMENT

CORPORATE OFFICERS

DIVISION MANAGEMENT

D O M E N I C O   C E C E R E
Senior Vice President and 
Chief Financial Officer

C O RY   F.   C O H E N
Senior Vice President, Tax

W I L L I A M   R .   H O L L I N G E R
Senior Vice President and Controller

L I S A   G .   K A L M B AC H
Senior Vice President, Studios

B R U C E   K A R AT Z
Chairman and Chief Executive Officer

K I M B E R LY   N .   K I N G
Vice President, Corporate Secretary

W E N DY   L .   M A R L ET T
Senior Vice President, Marketing

WEST COAST

W I L L I A M   R .   C A R D O N
Regional General Manager and 
President, Orange County Division

J E F F   FAU T T
President, Sacramento Division

R O B E RT   F R E E D
Regional General Manager,
South Bay Division

D R E W   K U S N I C K
President, South Bay Division

M A RT I N   L I G H T E R I N K
President, San Diego Division

J AY   L .   M O S S
Regional General Manager and
President, Greater Los Angeles Division

J O H N   M O LY N E AU X
President, Jacksonville Division

L A R RY   E .   O G L E S BY
Regional General Manager 
and President, Austin and
San Antonio Divisions

D E N N I S   W E L S C H
Regional General Manager and
President, Colorado Division

FRANCE

J O E L   M O N R I B OT
President, KBSA Group
Kaufman & Broad S.A., France

G U Y   N A F I LYA N
Chairman and 
Chief Executive Officer,
Kaufman & Broad S.A., France

KB HOME MORTGAGE COMPANY

J O E L   VA N RYC K E G H E N
President, KB Home Mortgage Company

J E F F R EY   T.   M E Z G E R
Executive Vice President and
Chief Operating Officer

B A RTO N   P.   PAC H I N O
Senior Vice President and 
General Counsel

A L B E RT   Z .   P R AW
Senior Vice President,
Asset Management

G A RY   A .   R AY
Senior Vice President, 
Human Resources

C H A R L E S   O .   S C H ET T E R
Senior Vice President, 
Business Development

VICE PRESIDENTS

K E L LY   M .   A L L R E D

J U L I A   A M B R O S E

D O N   B LO D G ET T

G E O R G E   A .   B R E N N E R

K E N   G A N C A R C Z Y K

J A M E S   A .   G O N Z A L E Z

L AW R E N C E   B .   G OT L I E B

J O H N   A .   H U G H E S

R O S S   K AY

K AT H L E E N   L .   K N O B L AU C H

J O S E P H   M .   M A N I S C O

J O E   S A N TO R O

N A N CY   S .   S C H WA P PAC H

D AV I D   B .   S I M O N S

V I CTO R   TO L E D O

SOUTHWEST

J O H N   H .   B R E M O N D
President, Tucson Division

L E A H   S .   W.   B RYA N T
President, Las Vegas Division

ST E V E N   M .   D AV I S
Regional General Manager and
President, Phoenix Division

M A R K   K I N S L EY
President, New Mexico Division

CENTRAL

S E A N   B OY D
President, Texas Valley Division

R I C K   C A R R U T H E R S
President, Orlando Division

D AV I D   C H R I ST I A N
President, Dallas Division

K Y L E   D AV I S O N
President, Houston Division

J O H N   “ B U D DY ”   E .   G O O DW I N
Regional General Manager

M A R S H A L L   G R AY
President, Tampa Division

OFFICE LOCATIONS

CORPORATE

H E A D Q U A RT E R S
10990 Wilshire Boulevard
Los Angeles, California 90024
(310) 231-4000
(310) 231-4222 Fax

B U I L D E R   S E RV I C E S
801 Corporate Center Drive
Suite 100
Pomona, California 91768
(909) 802-2400
(909) 623-5167 Fax

h o u s e C A L L   C E N T E R
4226 Rosewood Drive
Pleasanton, California 94588
(888) KB-HOMES
(925) 467-5506 Fax

K B   H O M E   M O RTG AG E   C O M PA N Y
10990 Wilshire Boulevard, Ninth Floor
Los Angeles, California 90024
(310) 893-7300
(310) 444-9519 Fax

DOMESTIC DIVISIONS

A R I Z O N A
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

C A L I F O R N I A
Greater Los Angeles Division
801 Corporate Center Drive 
Suite 201
Pomona, California 91768
(909) 802-1100
(909) 802-1111 Fax

North Bay Division
611 Orange Drive
Vacaville, California 95687
(707) 469-2400
(707) 469-2401 Fax

Orange County Division
3 Jenner, Suite 100
Irvine, California 92618
(949) 790-9100
(949) 790-9119 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

C O LO R A D O
Colorado Division
5975 South Quebec Street
Suite 300
Centennial, Colorado 80111
(303) 323-1100
(720) 488-3860 Fax

F LO R I D A
Jacksonville Division
3840 Crown Point Road, Suite C
Jacksonville, Florida 32257
(904) 260-8616
(904) 260-8608 Fax

Orlando Division
108 Park Place Boulevard
Kissimee, Florida 34741
(407) 846-4130
(407) 846-3365 Fax

Tampa Division
2202 N. West Shore Boulevard, Suite 200
Tampa, Florida 33607
(813) 639-7581
(813) 639-7582 Fax

N E VA D A  
Las Vegas Division
750 Pilot Road #F
Las Vegas, Nevada 89119
(702) 614-2500
(702) 614-2614 Fax

N E W   M E X I C O  
New Mexico Division
4921 Alexander, NE, Suite B
Albuquerque, New Mexico 87107
(505) 344-9400
(505) 344-5700 Fax

T E X A S  
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

Texas Valley Division
1800 S. Main Street
Suite MP-1
McAllen, Texas 78503
(956) 661-6500
(956) 994-0678 Fax

INTERNATIONAL DIVISION

K AU F M A N   &   B R O A D   S . A .
Tour Maine Montparnasse
33 avenue du Maine
75755 Paris, Cedex 15
011-331-4-538-2000
011-331-4-538-2250 Fax

9 0 / 9 1

STOCKHOLDER INFORMATION

COMMON STOCK PRICES

FORM 10-K

2002

2001

High

Low

High

Low

First Quarter

$44.34

$32.80

$38.31

$25.50

Second Quarter

Third Quarter

Fourth Quarter

53.60

54.39

53.00

39.31

40.07

41.20

33.20

36.20

34.50

24.83

25.06

24.67

DIVIDEND DATA

The Company’s 2002 Report on Form 10-K filed with the Securities

and Exchange Commission may be obtained without charge by writing

to  the  Company’s  Investor  Relations  department,  or  by  visiting  the

Company’s Web site at kbhome.com.

HEADQUARTERS

KB Home

10990 Wilshire Boulevard

Los Angeles, California 90024

KB Home paid a quarterly cash dividend of $.075 per common share

(310) 231-4000

in 2002 and 2001.

(310) 231-4222 Fax

Location and Community Information: 

ANNUAL STOCKHOLDERS’ MEETING

kbhome.com

The 2003 Annual Stockholders’ meeting will be held at the W Los

(888) KB-HOMES

Angeles  hotel,  930  Hilgard  Avenue,  in  Los  Angeles,  California,  at

9:00 a.m. on Thursday, April 3, 2003.

STOCK EXCHANGE LISTINGS

INVESTOR CONTACT

James A. Gonzalez

Vice President, Investor Relations

KB Home’s common stock is listed on the New York Stock Exchange

KB Home

and  is  also  traded  on  the  Boston,  Chicago,  Cincinnati,  Midwest,

10990 Wilshire Boulevard

Pacific and Philadelphia Exchanges. The ticker symbol is KBH.

Los Angeles, California 90024

Kaufman & Broad S.A. is listed on the Paris Bourse. The ticker symbol

jagonzalez@kbhome.com

is KOF. Kaufman & Broad S.A.’s Web site address is ketb.com.

(310) 231-4000

TRANSFER AGENT

Mellon Investor Services LLC

P.O. Box 3315

South Hackensack, New Jersey 07606

(800) 356-2017

melloninvestor.com

INDEPENDENT AUDITORS

Ernst & Young LLP

Los Angeles, California

STOCKHOLDER INFORMATION

The  Company’s  common  stock  is  traded  on  the  New  York  Stock

Exchange under the symbol KBH. There were 47,866,730 shares of

common stock outstanding as of January 31, 2003.

BONDHOLDER SERVICES ADDRESS & PHONE NUMBER

73⁄4% $175,000,000 Notes – Due 10/15/04

85⁄8% $200,000,000 Notes – Due 12/15/08

73⁄4% $300,000,000 Notes – Due 2/1/10

91⁄2% $250,000,000 Notes – Due 2/15/11

Trustee:

Sun Trust Bank

Corporate Trust Division

Mail Code 008

25 Park Place, 24th Floor

Atlanta, Georgia 30303-2900

muriel.shaw@suntrust.com

(404) 588-7067

Design: Louey/Rubino Design Group Inc.

Santa Monica, CA / New York City / Hong Kong

Photography: Jeff Corwin Printing: Lithographix, Inc.

10990 WILSHIRE BOULEVARD, LOS ANGELES, CA 90024

KBHOME.COM