Can a homebuilder deliver
consistent and predictable
earnings growth,
kb home annual report 2oo3
build a wide variety of homes
for a highly diverse set of
customers,
create a national brand that
reflects operations spanning
from coast to coast,
and sustain that performance
year after year after year?
Yes.
With this single word we
turn our customers’ best hopes
into a dream come true.
k b h o m e
6
Bruce Karatz
chairman and chief executive officer
a n n u a l r e p o r t 2o o3
7
Dear KB Home Shareholder:
If you’re reading this annual report, “yes” is something you’ve
said to KB Home. Because you believed KB Home could deliver
superior returns on your investment dollar. I thank you for your
confidence.
(cid:127) Deliveries increased to a record 27,331, a 7% increase
from last year.
(cid:127) Debt to total capitalization is at a comfortable 44%,
and has improved three years running.
This past year, rating agencies affirmed their belief in KB Home
by upgrading our credit ratings. The investment community as
a whole said yes to our stock, producing record performance.
And what about homebuyers? More than 27,ooo people said yes
to a new KB home in 2oo3. Nearly half were move-up buyers,
while others were looking to achieve the American Dream for
the very first time.
As a careful investor, you want to know what’s next. Is KB Home
following the right strategy? Can we continue executing at
such high levels? Do we have a strong management team? Does
the future of the homebuilding industry look as bright as the
recent past?
To all these questions, we can firmly answer “yes.”
Before I get to that, let’s first go over our 2oo3 numbers:
(cid:127) Earnings per diluted share reached a record $8.8o, up
23% over 2oo2.
(cid:127) Return on average stockholder’s equity reached 25.9%.
(cid:127) Total revenues grew to $5.85 billion, up 16% from 2oo2.
(cid:127) Net income rose 18% to a record $37o.8 million.
(cid:127) Backlog at the end of the year stood at $3.07 billion, up
31% from 2oo2.
While these year-over-year results are impressive enough,
when you pull back and look at our performance over the past
1o years, you’ll find the results are even more remarkable. Our
compound annual growth rate (CAGR) among key performance
metrics over that time ranges from 15% (unit deliveries) to
25% (EPS).
And, of course, the stock price. Recent years have taught me to
take share values at any particular moment with a grain of salt.
However, it’s hard not to be proud about what we’ve done for
our shareholders in 2oo3. If you invested in KBH in January
and cashed out at the end of December you would have realized
a return of approximately 7o%.
“…as the time approached to select this year’s top stock…every
publicly traded builder had a stellar year… But we wanted to
select one company that stood just a whisker above the rest of
the field, both in terms of its 2oo3 performance and 2oo4
potential. KB fit the bill.”
–smartmoney.com, “Home is Where the Money Is,” December 31, 2oo3
While I’m proud of what we’ve accomplished in 2oo3, our
financial results today are a snapshot in time of what we started
long ago. We’ve been building a company with sustainable
competitive advantages based on our KBnxt operating model
that can deliver excellent results year after year.
k b h o m e
8
Financial Scorecard
($ millions, except per share amounts)
years en ded n ovember 3o,
1993
1998
2oo3
5 yr. cagr
1o yr. cagr
units
6,764
15,213
27,331
total revenues
$ 1,238
$ 2,449
$ 5,85o
net income
eps
closing stock price
$
$
$
4o
.96
2o
$
95
$
371
$ 2.32
$ 8.8o
$
25
$
69
13%
19%
31%
31%
22%
15%
17%
25%
25%
13%
It was a good year for the industry as a whole. Some builders
executed at an especially high level and produced terrific returns
for their shareholders, and I salute them. I’m glad to be part of
an industry where the leading companies genuinely respect and
speak well of one another.
Recently it was brought to my attention that the median year-
over-year EPS growth for 1o large public builders has outpaced
the S&P 5oo for the last eight years, and 1o of the last 11. The
large, public homebuilders have proven that our industry has
been far less volatile, consistently generated superior results and
outperformed the overall market.
But when I look at my friends and competitors in the industry,
I think it’s clear KB Home has assets and capabilities that, over
the long term, will increasingly set us apart from other builders.
And at the core of this is our ability to say yes to the important
questions posed by our customers and shareholders alike.
Do we have diverse buyers and homes? Yes.
KB Home has traditionally been considered a builder of homes
designed and priced for first-time homebuyers. But in 2oo3,
nearly half our homes were sold to buyers moving from another
home they owned. More than 2o% were sold to customers
over 5o years of age. And about half our buyers came from
ethnically diverse communities, including first- and second-
generation immigrants.
Clearly, KB Home’s customer profile is becoming increasingly
diverse, and our homes reflect it.
In the following pages you’ll see examples of the kind of homes
today’s KB Home builds. Some may surprise you. The same
company that produces small, comfortable homes in Albuquerque
for a little over $8o,ooo also builds upscale residences for the
tech set in Pleasanton, California, with price points approaching
$8oo,ooo. And sophisticated condominiums in Denver that are
being snapped up by urban professionals. And single-story villas
in Las Vegas, appealing to retirees and empty nesters.
Executing a proven and dynamic operating model? Yes.
Our KBnxt operating model continues to work. First developed
in the mid-199os, integrating best practices from across the
industry, KBnxt has been the engine behind our success. And
it has remained remarkably stable, even as we have grown our
deliveries by almost 25o%.
There are 1o key principles to KBnxt, but it really boils down
to understanding the buyer, using efficiencies of scale to build
homes at a lower cost, and offering superior customer service
and maximum choice.
The core of this choice message is the KB Home Studio,
which creates greater perceived value through individual home
customization. Buyers benefit by paying only for the options
they want and can afford.
We also offer choice through KB Home Mortgage Company
by offering financing solutions for our customers’ needs.
a n n u a l r e p o r t 2o o3
9
Leadership makes the difference.
There are so many other aspects to the model, I could spend
the rest of this letter simply describing it. Like our even-flow
construction system that enables us to plan well in advance
how many homes we can deliver on any particular day, and
capitalizes on our size to achieve terrific economies of scale.
Or building large backlogs through pre-sales, in order to
minimize capital investment while increasing cash flow and
predictability.
Led by a stable, successful management team? Yes.
The key to so much of our success isn’t simply the operating
model we’ve chosen—as durable as that model has proven to
be—it’s the people who are executing it.
In an era where job-hopping has become the de facto corporate
norm, we have a remarkably stable group of senior managers
guiding the business. The average tenure of our senior corporate
officers (including our corporate vice presidents and regional
general managers) is more than 14 years. The loyalty and
service they’ve shown KB Home over the years is something
I’m especially grateful for.
This pays dividends. Not only do our senior leaders have a
wealth of experience, they have worked together year in and
year out. Through attending strategy meetings together, working
on acquisitions, launching promotional campaigns, finding
ways to resolve principled disagreements and so much more,
our senior leaders have naturally formed what companies often
spend millions on HR and leadership consultants to artificially
create—a team.
At the division management level—where the KBnxt
operating model must prove itself every day amidst the fire
of fierce competition —we’ve also got a powerful group of
KB Home veterans. Through years of experience, these leaders
have seen what works and know how to avoid the pitfalls,
while still bringing fresh ideas to the table.
This solid leadership resulted in more than 1,ooo promotions
or transfers from within our ranks over the last year. Today,
another 15% of our talent pipeline is ready for promotion, helping
to fuel and support our continued expansion.
The employees of KB Home are the real story behind our
success. I thank them for their dedication and commitment.
Let me also take this opportunity to thank our Board of
Directors, who understand this business well and provide
superb direction. I especially want to remember Jane Evans, who
served as a distinguished member of the Board for more than 10 years,
and who passed away in 2003. During her tenure she was generous
with her business acumen, wit and remarkable intellect. She also was
a tireless advocate for women in business and served as a role model
for many of our brightest women leaders. Most importantly, she was a
dear friend. We will deeply miss her.
Growing smarter while reducing risk? Yes.
The more regional markets you’re in, the less exposed you
are to regional economic downturns. That’s why our national
footprint will continue expanding through targeted acquisitions
and organic growth, as we continue mitigating risk through
national diversification.
6o %
4o %
2o %
o %
-2o %
-4o %
1993
1994
1995
1996
1997
1998
1999
hom eb uilding in dus try’s eps gro w th ha s b eaten
the s&p 5oo in 10 out o f the last 11 years
S&P 5oo EPS Growth (1)
Median Homebuilder EPS Growth (2)
( 1 ) s & p 5o o r e p o r t e d o p e r a t i n g e a r n i n g s . 2 o o 3 e s t i m a t e d a s o f f e b r u a r y 3 , 2 o o 4 .
( 2 ) b a s e d o n r e p o r t e d e a r n i n g s o f 1 o l a r g e p u b l i c l y t r a d e d h o m e b u i l d e r s .
2ooo
2oo1
2oo2
2oo3
EPS Growth
k b h o m e
12
Risk Profile is Investment Grade
geographic mix
Diversified into 34 Major U.S. Growth Markets
land acquisition & development
2o% Internal Rate of Return
assets—land inventory
production of homes
cost structure
pension costs exposure
mortgage banking risk
pricing risk
accounting practice
7o% of Dollars Now Turn in 5-6 Quarters
“Build to Order” from a $3.1 Billion Backlog
9o% Variable Costs
None
Mortgages Sold in 45 Days
Priced to Median Income of Buyers
Conservative Policies Controlled by
Regional Finance Centers
In 2oo3, two acquisition targets met our stringent business
and financial criteria. In the Southeast, we purchased Colony
Homes, which builds homes in the key growth markets of
Atlanta, Charlotte and Raleigh/Durham. The acquisition of
Colony, together with our moves into the Florida market over
the last two years, makes us a player to be reckoned with in
the fast-growing Southeast.
We also purchased Chicago-based Zale Homes, which builds
in Illinois. This purchase in some respects takes us back to
our roots— after all, KB Home was founded in the industrial
Midwest (in Michigan, to be precise). More importantly, this
particular transaction enables us to test our business model in
a very different part of the country, and Chicago happens to be
the largest new home market in the Midwest.
Acquisitions take work. There’s a tremendous amount of time
involved in performing due diligence, integrating systems,
transitioning the brand, and most important of all, meshing
corporate cultures. If you do it wrong, you risk confusing
customers and alienating new employees—undermining your
objectives. However, over the years, we’ve become very adept at
making and integrating acquisitions. I’d go so far as to say that
it’s become a core competency of KB Home. This capability
will be a significant asset as we go forward.
As much as we talk about acquisitions, we recognize the
importance of organic growth. Our belief in expansion can be
seen in our establishment of two new start-up Florida divisions
in 2oo3, Treasure Coast, which spans from Port St. Lucie
through Melbourne, and another in the Fort Myers area. Both
offer great potential with a high demand for housing.
Do we know what’s hot— and what’s not? Yes.
Looking at our national diversification, it’s hard to believe that
as recently as 1993 KB Home built fewer than 7,ooo homes
in primarily two places— California and France. Without
question, our tremendous growth can be traced to our ability
to identify and establish divisions serving the nation’s hottest
housing markets.
Overall, homeownership continues to grow at a pace that
exceeds available supply. Homeownership rates have reached
record levels and household formation growth continues to fuel
demand, with another 1.2 million net new households forming
each year since 1999. For 2oo3, the Joint Center for Housing
Studies of Harvard University wrote, “As many as 11.o million
more households will join the homeowner ranks between
2ooo and 2o1o.”
Implementing smart, targeted stock buybacks? Yes.
As managers, we continually decide how to invest the capital
available to us to get the best returns for our shareholders. In
many cases, acquisitions fit the bill. However, in 2oo3, we also
used our capital to purchase two million shares of KB Home
stock, at an average price of just over $54 per share. These
share buybacks not only help support the value of your KBH
shares, they also represent our growing confidence that there’s
significant unrecognized value in the stock. I believe our stock
is being valued at a rate that consistently lags behind our actual
business performance. I’m confident that it will catch up.
a n n u a l r e p o r t 2o o3
13
One Brand Strategy
23%
6% 38%
2oo3 u na i d e d b ra n d awa r e n e s s s t u d y
By creating one powerful brand nationwide, KB Home has captured the minds of more consumers
in our markets than any other builder, with significant potential to increase this advantage.
KB Home awareness
Average awareness of next top 5 builders
No brand awareness
It should be noted that while we use our tremendous free cash
flow to reinvest in our business, make acquisitions and buy back
shares, we are also improving our leverage ratios. Our stated
goal is to become investment grade. Over the last decade our
share count has remained relatively unchanged, which reflects
the company’s ability to expand our business with free cash flow
while maintaining a strong balance sheet.
Does the economy favor homeownership? Yes.
Many analysts see interest rates as far more critical to our
performance and growth prospects than we do. Some points
to bear in mind:
Interest rates remain at a historical low. Many of us can remember
when a mortgage rate of 12% or more was common. Regardless
of whether rates go up or drift down, we’re still a long way from
seeing those rates again. And if we do see a rise in interest rates,
it’s likely to signify a surge in employment and economic growth.
There are more mortgage products than ever before. Today, buyers
have more options than ever to find a loan product that matches
their own financial circumstances. For example, our own KB
KB Home Mortgage Company now offers 86 fixed and adjustable
rate products, compared to 38 just five years ago. This kind of
flexibility helps keep homes within reach of the average buyer,
and softens the impact of any rate upticks.
The key is affordability. In the mid-198o s, the percentage of income
needed to service a monthly mortgage fell below the percentage
needed to pay rent. That gap has only widened over time.
People recognize that home equity is the key to household wealth.
The net worth of the lowest income band of homeowners is
$68,ooo; the same for the lowest income band of renters is $5oo.
The American dream of homeownership is alive and well.
Virtually every economic indicator suggests that it would take
a fundamental shift in the U.S. economy to alter the current
interplay of interest rates and affordability, which is so favorable
to the new home market. That kind of tectonic shift is nowhere to
be seen—and indeed if it occurred, it won’t just be homebuilders
that’ll feel the impact.
Promoting a single, powerful brand? Yes.
Historically, homebuilders have not focused on building
national brands, letting them become so decentralized that
the same company comes to represent contradictory things to
buyers depending on the market. We take a different approach
by building a national KB Home brand. We’ve focused on
creating a single brand identity, supported through efficient
advertising, signage, sales collateral and high-profile national
marketing and promotional partnerships.
Creating one national brand has a measurable impact. In
2oo3, an independent research study found that 23% of new
homebuyers in our markets had brand awareness of KB Home.
The average of the next top five most recognized builders
trailed at 6%.
2oo3 de li v er ie s
27,331
u n i t s
19 93 de l i ve rie s
6,764
u n i t s
Tremendous Growth
Geographic Expansion and Diversification
2o % west coast
25% southwest
28% central
13% southeast
14 % france
california
85%
nevada
france
3 %
12 %
1993
2oo3
k b h o m e
16
2oo3 Construction Revenues by Region
west c oast
34%
sou thwest
central
sou theast
f rance
21%
2o %
9%
16 %
$5,775,429,ooo
t o ta l
A trusted, recognizable brand name is a must for any twenty-first
century homebuilder. This year we made homebuilding history
by partnering with the top-rated LIVE with Regis and Kelly
daytime television show. To highlight the promotion, we built
a new KB home on the ABC Studios lot in New York City.
If you can picture a free-standing, 3,ooo sq. ft. home in plain
sight from the West Side Highway in the heart of Manhattan,
you can understand just how distinctive this promotion was.
And one lucky winner walked away with a brand new KB home.
It was a truly national campaign, supporting our increasingly
national brand.
Dedicated to customer satisfaction? Yes.
I’m proud of the dramatic improvement in our customer
satisfaction ratings. Our externally audited customer satisfaction
index showed a satisfaction rate of more than 94%, with some
divisions seeing increases of three percentage points or more.
And according to J.D. Power and Associates, our 2oo3 customer
satisfaction ratings are on the rise. This year they recognized
KB Home as a Top 3 builder in our Austin and Las Vegas markets
for customer satisfaction with new home builders.
We can do even better. There’s no reason why KB Home
shouldn’t aspire to set the industry standard for customer
satisfaction. A commitment to customers is deeply embedded
in our corporate culture, as well as in our most basic building
and business processes.
Building quality homes with quality materials? Yes.
Satisfied customers begin with quality homes. And quality
homes begin with quality materials and products. Our homes
feature some of the industry’s finest components, including
Sherwin-Williams paint, Delta faucets, Shaw carpeting,
Whirlpool appliances and more.
During the construction process, there are a number of quality
checkpoints, beginning with the foundation, through framing,
electrical and plumbing installation, laying the flooring—
everything up to and including the final walk-through. At any
stage, our construction superintendents have the obligation and
the power to stop the process until a quality issue is resolved.
And we’re continuing to raise the bar. KB Home has teamed
up with the National Association of Home Builders (NAHB)
Research Center to launch a first-of-its-kind, nationwide trade
contractor certification program. This was established after
completing a highly successful pilot program in our Las Vegas
division. Designed to train and certify trade contractors on quality
assurance standards, this rigorous program involves classroom
training, a customized quality assurance program and manual,
random site evaluations by NAHB Research Center’s QA experts
and an annual audit. We are presently rolling out this program
nationwide and we hope the confidence it will inspire in
consumers will benefit the entire homebuilding industry. By
creating a single set of quality standards for all our contractors,
we’ll create a single, national “language” of quality for the job
site. Whether a home is built in Phoenix or Orlando, we’re
increasingly confident the product will be of the highest standard.
a n n u a l r e p o r t 2o o3
17
Accepting the challenge.
Are we off to a great start in 2oo4? Yes.
The progress we’ve made in 2oo3 has carried over into the
early months of 2oo4. In December, our Board of Directors
more than tripled our common stock dividend, from $o.3o per
share to $1.oo per share. We believed it was time to reward
shareholders for showing so much confidence in KB Home. We
remain committed to our objective of becoming an investment
grade company.
Then in early January 2oo4, we announced our acquisition
of South Carolina-based Palmetto Traditional Homes. We
believe the Southeast will be an increasingly important market
for KB Home, and this gives us a great foothold in the region.
Palmetto is a terrific builder with an outstanding reputation,
and we look forward to working with our new colleagues.
I’m not a fortune teller. I’m simply part of the culture of a
company that’s been in business for almost 5o years, with a
history of high performance, strong management and a passion
for our customers. I’ve been privileged to be part of that story
for more than 3o years. Others in the industry are still building
well-earned reputations, but nobody has done it as well for as
long as we have.
So when you look at KB Home, remember this: The promises
we’ve made, we’ve kept. The goals we’ve established, we’ve
exceeded. The vision we’ve sketched, we’re realizing.
On behalf of over 5,ooo KB Home employees, thank you
for your support in 2oo3. As for 2oo4 and beyond, continue
asking us to surpass your highest expectations. After all, it’s
what we always ask of ourselves.
Yes.
Sincerely,
Before I wrote this letter, I looked at some of our previous
annual reports. I was struck by something I wrote five years
ago, in our 1998 report, which was appropriately enough titled,
Think Big. After estimating we could deliver 21,5oo homes in
1999 (which we beat by a thousand deliveries), I wrote:
“We’ll continually raise our sights, and in light of our consistent
record-breaking accomplishments, I challenge anybody to say
that we’re not capable of achieving any goal we set for ourselves.”
Bruce Karatz
chairman and chief executive officer
february 6, 2oo4
Coast to coast. Door to
door. Day to day. How do
we address the needs of
our diverse customer base?
We bring them home.
And the result is another
record-breaking year.
a n n u a l r e p o r t 2o o3
41
Financial Highlights
ye ar s en de d nov emb er 3o,
in thousands, except per share and unit amounts
net orders, deliveries and backlog
(number of homes)
Net orders
Deliveries
Unit backlog
revenues and income
Revenues
Operating income
Pretax income
Net income
Basic earnings per share
Diluted earnings per share
assets, debt and equity
Total assets
2oo3
2oo2
2oo1
2ooo
1999
28,894
27,331
14,675
25,785
25,452
12,o23
24,715
24,538
11,127
23,831
22,392
1o,559
23,o56
22,422
8,558
$5,85o,554
$5,o3o,816
$4,574,184
$3,93o,858
$3,836,295
598,676
553,464
37o,764
9.41
8.8o
51o,423
469,25o
314,35o
7.57
7.15
386,o87
324,517
214,217
5.72
5.5o
312,441
297,66o
2o9,96o
5.39
5.24
276,571
226,869
147,469
3.16
3.o8
$4,235,859
$4,o25,54o
$3,692,866
$2,828,921
$2,664,235
Mortgages and notes payable
1,386,157
1,674,627
1,683,65o
1,373,274
1,191,o9o
Mandatorily redeemable preferred securities
Stockholders’ equity
1,592,851
1,274,351
1,o92,481
Return on average stockholders’ equity
25.9%
26.6%
24.5%
189,75o
654,759
25.6%
189,75o
676,583
25.6%
k b h o m e
42
c a g r
+17%
c a g r
+25%
2o o3
+26 %
d i l u t e d
e ar n i n g s p e r s h a r e
t o t a l r e v e n u e s
(in billions)
r e t u r n o n e q u i t y
$9.oo
$7.5o
$6.oo
$4.5o
$3.oo
$1.5o
$o
$6.oo
$5.oo
$4.oo
$3.oo
$2.oo
$1.oo
$o
3o%
25%
2o%
15%
1o%
5%
o%
93
95
97
99
o1
o3
93
95
97
99
o1
o3
93
95
97
99
o1
o3
6
9
.
$
8
5
.
$
5
4
.
1
$
8
o
.
3
$
o
5
.
5
$
o
8
.
8
$
4
2
.
1
$
o
4
.
1
$
8
8
.
1
$
4
8
.
3
$
7
5
.
4
$
5
8
.
5
$
%
5
.
o
1
%
1
.
7
%
1
.
6
1
%
6
.
5
2
%
5
.
4
2
%
9
.
5
2
a n n u a l r e p o r t 2o o3
43
c a g r
+15%
c a g r
+3o %
u n i t d e l i v e r i e s
y e a r - e n d u n i t b a c k l o g
3o,ooo
25,ooo
2o,ooo
15,ooo
1o,ooo
5,ooo
o
15,ooo
12,5oo
1o,ooo
7,5oo
5,ooo
2,5oo
o
93
95
97
99
o1
o3
4
6
7
,
6
7
5
8
,
7
3
4
4
,
1
1
2
2
4
,
2
2
8
3
5
,
4
2
1
3
3
,
7
2
93
95
97
99
o1
o3
9
5
o
,
1
2
1
4
,
1
4
1
2
,
4
8
5
5
,
8
7
2
1
,
1
1
5
7
6
,
4
1
k b h o m e
44
Financial Review
years ended novemb er 3 0 ,
in thousands, except per share amounts
Construction:
Revenues
Operating income
Total assets
Mortgages and notes payable
Mortgage banking:
Revenues
Operating income
Total assets
Notes payable
Collateralized mortgage obligations
Consolidated:
Revenues
Operating income
Net income
Total assets
Mortgages and notes payable
Collateralized mortgage obligations
Mandatorily redeemable preferred
securities (Feline Prides)
an n ual re p o rt 2oo3
45
Selected Financial Information
2003
2002
2001
2000
1999
$5,775,429
562,899
3,982,746
1,253,932
$
75,125
35,777
253,113
132,225
6,848
$5,850,554
598,676
370,764
4,235,859
1,386,157
6,848
$4,938,894
452,917
3,391,434
1,167,053
$
91,922
57,506
634,106
507,574
14,079
$5,030,816
510,423
314,350
4,025,540
1,674,627
14,079
$4,501,715
352,316
2,983,522
1,088,615
$
72,469
33,771
709,344
595,035
22,359
$4,574,184
386,087
214,217
3,692,866
1,683,650
22,359
$3,870,488
288,609
2,361,768
987,980
$
60,370
23,832
467,153
385,294
29,928
$3,930,858
312,441
209,960
2,828,921
1,373,274
29,928
189,750
654,759
5.39
5.24
.30
$
$3,772,121
259,107
2,214,076
813,424
$
64,174
17,464
450,159
377,666
36,219
$3,836,295
276,571
147,469
2,664,235
1,191,090
36,219
189,750
676,583
3.16
3.08
.30
$
Stockholders’ equity
1,592,851
1,274,351
1,092,481
Basic earnings per share
Diluted earnings per share
Cash dividends per common share
$
9.41
8.80
.30
$
7.57
7.15
.30
$
5.72
5.50
.30
kb hom e
46
Selected Operating Information
West Coast
Southwest
Central
Southeast
France
Total
Unconsolidated
Joint Ventures
1,161
1,263
1,339
1,786
5,549
863
1,152
1,469
1,860
5,344
1,355
1,898
1,410
1,147
5,810
1,697
1,892
1,386
1,106
6,081
2,574
3,209
3,280
2,641
2,477
3,217
3,134
2,380
1,375
1,579
1,731
2,010
6,695
1,246
1,412
1,574
1,805
6,037
1,954
2,015
1,912
1,882
7,763
1,512
1,522
1,680
1,567
6,281
3,374
3,810
3,991
3,863
2,817
2,927
3,033
2,795
1,600
1,624
1,851
2,584
7,659
2,066
2,413
2,381
2,745
9,605
1,953
2,023
1,913
1,470
7,359
2,301
2,467
2,236
1,665
8,669
4,012
4,411
4,473
3,571
4,830
4,884
4,739
3,659
341
954
1,017
1,192
3,504
116
152
130
281
679
424
1,346
1,130
944
3,844
117
196
202
299
814
1,107
2,240
2,353
2,105
327
371
443
1,024
786
924
912
1,302
3,924
734
876
936
1,241
3,787
863
1,115
954
1,186
4,118
814
1,117
815
1,194
3,940
2,242
2,433
2,475
2,495
2,092
2,333
2,212
2,165
5,263
6,344
6,850
8,874
27,331
5,025
6,005
6,490
7,932
25,452
6,549
8,397
7,319
6,629
28,894
6,441
7,194
6,319
5,831
25,785
13,309
16,103
16,572
14,675
12,543
13,732
13,561
12,023
47
38
59
87
231
93
104
97
62
356
63
195
136
76
470
35
77
54
22
188
61
218
295
521
155
128
85
45
Unit deliveries
2003
First
Second
Third
Fourth
Total
2002
First
Second
Third
Fourth
Total
Net orders
2003
First
Second
Third
Fourth
Total
2002
First
Second
Third
Fourth
Total
Ending backlog–units
2003
First
Second
Third
Fourth
2002
First
Second
Third
Fourth
Ending backlog–value, in thousands
2003
First
Second
Third
Fourth
2002
First
Second
Third
Fourth
$ 873,999
1,117,856
1,142,247
941,825
$ 767,836
977,628
989,927
789,719
$571,920
685,870
729,195
710,725
$479,822
512,544
512,872
475,208
$600,933
659,443
643,354
554,336
$689,910
720,447
700,280
539,428
$185,365
364,279
389,373
347,040
$ 56,571
61,586
71,766
168,561
$397,871
571,755
497,475
513,970
$293,776
365,147
366,733
373,750
$2,630,088
3,399,203
3,401,644
3,067,896
$2,287,915
2,637,352
2,641,578
2,346,666
$ 8,174
38,150
47,726
90,716
$23,080
15,732
8,447
9,000
an n ual re p o rt 2oo3
47
Management’s Discussion and Analysis of Financial Condition and Results of Operations
r e s u l t s o f o p e r a t i o n s
Overview 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 four regional groups: “West
Coast” – California; “Southwest” – Arizona, Nevada and New Mexico;
“Central” – Colorado, Illinois and Texas; and “Southeast” – Florida,
Georgia and North Carolina. In 2002 and 2001, the Company grouped
its domestic operating divisions into three regions: West Coast,
Southwest and Central; the Company added the “Southeast” regional
group in 2003 in view of its expansion in that area of the country. All
year-over-year comparisons have been accomplished by restating appli-
cable prior years’ results in a manner consistent with the new regional
groupings. Internationally, the Company operates in France through a
majority-owned subsidiary, Kaufman & Broad S.A. (“KBSA”).
The Company has expanded and geographically diversified its
operations in recent years by executing a strategy that includes both
organic growth and acquisitions. On March 6, 2003, the Company
acquired Atlanta, Georgia-based Colony Homes (“Colony”), marking
its entry into the Atlanta, Georgia and Charlotte and Raleigh, North
Carolina markets and strengthening its foothold in the southeastern
United States. On September 4, 2003, the Company also acquired sub-
stantially all of the homebuilding assets of Chicago, Illinois-based Zale
Homes (“Zale”). The Zale acquisition marked the Company’s entry
into the greater Chicago market, the fifth largest single-family home-
building market in the United States. On September 30, 2002, the
Company acquired Orlando, Florida-based American Heritage Homes
(“American Heritage”), expanding the Company’s presence to Orlando,
Florida and supplementing the start-up business it had established in
the Tampa market earlier in the year. The Company expanded into the
Florida market in July of 2001 with the acquisition of Trademark
Home Builders, Inc. (“Trademark”), a builder of single-family homes
in Jacksonville, Florida.
The Company achieved substantial growth in unit deliveries, rev-
enues and diluted earnings per share in 2003. During the year ended
November 30, 2003, the Company’s unit deliveries rose 7.4% to
27,331, increasing from 25,452 unit deliveries posted in 2002. Total
Company revenues reached $5.85 billion in 2003, up 16.3% from
$5.03 billion in 2002, which had increased 10.0% from $4.57 billion
in 2001. The Company’s double-digit revenue growth in 2003 and
2002 was primarily driven by an increase in housing revenues stem-
ming from increased unit delivery volume and a higher average selling
price. Included in total Company revenues were mortgage banking
revenues of $75.1 million in 2003, $91.9 million in 2002 and $72.5
million in 2001.
Net income for the year ended November 30, 2003 increased
17.9% to $370.8 million, or $8.80 per diluted share, from $314.4 mil-
lion, or $7.15 per diluted share, for the year ended November 30,
2002. Net income growth in 2003 was driven by the combined effects
of higher unit delivery volume, expanded housing gross margins and
lower interest expense, partially offset by lower income from mortgage
banking operations. Diluted earnings per share for 2003 was favorably
impacted by a 4.2% year-over-year decrease in the average number of
diluted shares outstanding resulting from the Company’s share repur-
chase activity.
Net income of $314.4 million in 2002 was higher than the
$214.2 million, or $5.50 per diluted share, recorded in 2001. Net
income in 2002 rose on higher unit delivery volume, expanded 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.
kb hom e
48
c o n s t r u c t i o n
Revenues Construction revenues totaled $5.78 billion in 2003,
increasing 16.9% from $4.94 billion in 2002, which had increased
from $4.50 billion in 2001. The increases in both 2003 and 2002
resulted primarily from higher housing revenues driven by increased
unit delivery volume and a higher average selling price.
The following table presents information concerning the Com-
pany’s housing revenues and unit deliveries by geographic region:
years ended novemb er 3 0 ,
in thousands, except unit amounts
Housing
revenues
% of total
housing revenues
2003
West Coast
Southwest
Central
Southeast
Total United States
France
Total
2002
West Coast
Southwest
Central
Southeast
Total United States
France
Total
2001
West Coast
Southwest
Central
Southeast
Total United States
France
Total
$1,963,563
1,192,380
1,144,248
547,471
4,847,662
795,108
$5,642,770
$1,700,770
1,022,666
1,411,944
110,839
4,246,219
609,635
$4,855,854
$1,570,964
983,141
1,289,523
28,537
3,872,165
494,836
$4,367,001
34.8%
21.1
20.3
9.7
85.9
14.1
100.0%
35.0%
21.1
29.1
2.3
87.5
12.5
100.0%
36.0%
22.5
29.5
.7
88.7
11.3
100.0%
Unit
deliveries
5,549
6,695
7,659
3,504
23,407
3,924
27,331
5,344
6,037
9,605
679
21,665
3,787
25,452
5,550
6,238
9,181
187
21,156
3,382
24,538
% of total unit
deliveries
20.3%
24.5
28.0
12.8
85.6
14.4
100.0%
21.0%
23.7
37.7
2.7
85.1
14.9
100.0%
22.6%
25.4
37.4
.8
86.2
13.8
100.0%
Housing revenues totaled $5.64 billion in 2003, $4.86 billion in
2002 and $4.37 billion in 2001. In 2003, housing revenues rose
16.2% over the previous year due to a 7.4% increase in unit volume
and an 8.2% increase in the average selling price. In 2002, housing
revenues rose 11.2% above 2001 results due to a 3.7% increase in unit
volume and a 7.2% increase in the average selling price.
Housing revenues from operations in the Company’s West Coast
region rose 15.5% to $1.96 billion in 2003, from $1.70 billion in
2002, due primarily to an 11.2% increase in the average selling price
and a 3.8% increase in unit delivery volume during the year. West
Coast region operations generated 34.8% of the Company’s housing
revenues in 2003, virtually flat when compared to 35.0% in 2002 and
36.0% in 2001, while contributing 20.3% of the Company’s deliver-
ies in 2003, 21.0% in 2002 and 22.6% in 2001. In the Company’s
Southwest region, housing revenues rose 16.6% to $1.19 billion in
2003 from $1.02 billion in 2002 due to a 10.9% increase in unit deliv-
eries and a 5.1% increase in the average selling price. Southwest region
housing revenues accounted for 21.1% of total housing revenues in
both 2003 and 2002, down from 22.5% in 2001. The Company’s
Central region operations generated housing revenues of $1.14 billion
in 2003, down 19.0% from $1.41 billion in 2002, reflecting a year-
over-year decrease of 20.3% in unit deliveries partly offset by a 1.6%
increase in the average selling price. Central region housing revenues
accounted for 20.3% of total housing revenues in 2003, compared
to 29.1% in 2002 and 29.5% in 2001. Housing revenues from the
Southeast region rose 393.9% to $547.5 million in 2003, from $110.8
million in 2002, due to an increase of 416.1% in unit delivery volume,
partially offset by a 4.3% decline in the average selling price. Southeast
region operations produced 9.7% of the Company’s housing revenues
in 2003, compared to 2.3% in 2002 and .7% in 2001. The increased
proportion of revenues generated by the Company’s Southeast region
operations resulted from the Company’s recent expansion in the south-
an n ual re p o rt 2oo3
49
eastern United States, including its acquisition of Colony, a single-
family homebuilder in Atlanta, Georgia and Charlotte and Raleigh,
North Carolina, in 2003 and its acquisition of American Heritage,
with operations in Orlando and Tampa, Florida, in 2002.
In France, housing revenues of $795.1 million in 2003 rose
30.4% from $609.6 million in 2002, reflecting a 3.6% increase in unit
delivery volume and a 25.8% increase in the average selling price pri-
marily related to the strength in the euro. French housing revenues
accounted for 14.1% of the Company’s total housing revenues in 2003,
compared to 12.5% in 2002 and 11.3% in 2001.
In 2002, West Coast region housing revenues increased 8.3%,
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 deliv-
eries during the year. Housing revenues in the Southwest region rose
4.0% 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. In the Central region, housing revenues in 2002 rose
9.5% from $1.29 billion in 2001, the result of a 4.6% increase in both
unit delivery volume and average selling price. The Southeast region
housing revenues in 2002 increased by $82.3 million from $28.5 mil-
lion in 2001, reflecting two months of results from the American
Heritage acquisition, which expanded the Company’s operations into
the Orlando market and supplemented its Tampa start-up business,
established in 2001. The increase in Southeast region housing revenues
in 2002 resulted from a 263.1% increase in unit deliveries and a 6.9%
increase in the average selling price.
In France, housing revenues rose 23.2% in 2002 from $494.8 mil-
lion in 2001, reflecting a 12.0% increase in unit volume and a 10.0%
increase in the average selling price.
Company-wide housing deliveries increased 7.4% to 27,331 units
in 2003 from 25,452 units in 2002, reflecting growth in United States
and French deliveries of 8.0% and 3.6%, respectively. The increase
in the Company’s domestic unit deliveries reflected year-over-year
increases of 3.8%, 10.9% and 416.1% in unit deliveries from its West
Coast, Southwest and Southeast regions, respectively, partially offset by
a decrease of 20.3% in unit deliveries from the Central region. West
Coast region deliveries increased to 5,549 units in 2003 from 5,344
units in 2002, while the number of active communities operated in the
region remained nearly flat with 2002. Southwest region operations
delivered 6,695 units in 2003, up from 6,037 units in 2002, reflecting
an increase of approximately 18% in the average number of active
communities in this region compared to 2002. In the Central region,
deliveries decreased to 7,659 units in 2003 from 9,605 units in 2002,
despite an increase of approximately 7% in the average number of
active communities in the region. Southeast region deliveries increased
to 3,504 units in 2003 from 679 units in 2002, primarily due to the
Company’s expansion activity in the region, including the 2003 acqui-
sition of Colony and the 2002 acquisition of American Heritage.
French deliveries increased to 3,924 units in 2003 from 3,787 units in
2002, with the average number of active communities remaining con-
stant from year to year.
In 2002, Company-wide housing deliveries increased 3.7% to
25,452 units from 24,538 units delivered in 2001. The growth in
domestic deliveries reflected a 4.6% increase in the Central region and
a 263.1% increase in the Southeast region, partially offset by decreases
of 3.7% and 3.2% in the West Coast and Southwest regions, respec-
tively. West Coast region deliveries decreased to 5,344 units in 2002
from 5,550 units in 2001, as the Company operated from approxi-
mately 22% fewer active communities in the region during 2002.
Southwest operations delivered 6,037 units in 2002, down from 6,238
units in 2001, reflecting a decrease of approximately 10% in the aver-
age number of active communities operated in the region. Deliveries
from Central region operations increased to 9,605 units in 2002 from
9,181 units in 2001, as the average number of active communities in
the Central region rose approximately 5% from the prior year.
Deliveries from the Southeast region increased to 679 units in 2002
from 187 units in 2001 due to the Company’s expansion into Florida
through a start-up business established in 2002 and acquisitions com-
pleted in 2002 and 2001. French deliveries increased 12.0% to 3,787
units in 2002 from 3,382 units in 2001, with the average number of
active communities increasing approximately 16% from year to year.
The Company-wide average new home price rose 8.2% in 2003,
to $206,500 from $190,800 in 2002, reflecting generally favorable
market conditions with increases in the average selling price in the
Company’s West Coast, Southwest, Central and France regions, partly
offset by a decrease in the Southeast region. The 2002 average new
home price had advanced 7.2% from $178,000 in 2001, due to
increases in the average selling price in each domestic region and
in France.
In the West Coast region, the average selling price rose 11.2%
in 2003 to $353,900 from $318,300 in 2002, which had increased
12.4% from $283,100 in 2001. The average selling price in the
Southwest region increased 5.1% to $178,100 in 2003, compared with
$169,400 in 2002, which had increased 7.5% from $157,600 in 2001.
The Central region average selling price rose 1.6% to $149,400 in
2003 compared with $147,000 in 2002, which had increased 4.6%
from $140,500 in 2001. The Southeast region average selling price
declined 4.3% in 2003 to $156,200 from $163,200 in 2002, which
had increased 6.9% from $152,600 in 2001. The higher average sell-
ing price in most of the Company’s domestic regions in 2003 and
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, partially offset by the softening of general market conditions
in certain submarkets in the regions; and increases in lot premiums and
options sold through the KB Home design studios in each of the
Company’s domestic regions. In contrast, the decline in the Southeast
region’s average selling price resulted from a change in product mix, as
the Company expanded into additional markets in the region, as well
as the relatively small number of deliveries and communities in 2002.
kb hom e
50
The Company’s average selling price in France increased 25.8%
to $202,600 in 2003 from $161,000 in 2002, which had increased
10.0% from $146,300 in 2001. The increases in 2003 and 2002
resulted primarily from favorable foreign exchange rates.
Revenues from the development of commercial buildings, all
located in metropolitan Paris, totaled $107.0 million in 2003, up from
$43.8 million in 2002, which had decreased from $69.9 million in
2001. The increase in French commercial revenues in 2003 versus
2002 reflected the expansion of the Company’s commercial activity as
market conditions for this type of development improved. In 2002, the
Company’s French commercial revenues decreased from 2001 due to
the completion of certain projects and a lack of new commercial con-
struction contracts in 2002.
Land sale revenues totaled $25.6 million in 2003, $39.2 million
in 2002 and $64.8 million in 2001. 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 holdings, the strength and number of competing devel-
opers entering particular markets at given points in time, the avail-
ability of land in markets served by the Company and prevailing
market conditions.
Operating income Operating income increased to $562.9 million in
2003, up 24.3% from $452.9 million in 2002. As a percentage of con-
struction revenues, operating income rose to 9.7% in 2003 from 9.2%
in 2002, reflecting an improved housing gross margin, partially offset
by a higher selling, general and administrative expense ratio. Housing
gross profits in 2003 increased 22.8%, or $236.4 million, to $1.27 bil-
lion from $1.04 billion in 2002. As a percentage of related revenues,
the housing gross profit margin was 22.5% in 2003, up from 21.3%
in the prior year, primarily due to a higher average selling price.
Commercial activities in France generated profits of $22.5 million in
2003, compared to $10.3 million in 2002. Company-wide land sales
generated profits of $2.4 million in 2003 and $3.2 million in 2002.
Selling, general and administrative expenses totaled $733.5 mil-
lion in 2003 compared with $595.7 million in 2002. As a percentage
of housing revenues, to which these expenses are most closely corre-
lated, selling, general and administrative expenses increased by .7 per-
centage points to 13.0% in 2003 from 12.3% in 2002. The increase in
selling, general and administrative expenses in 2003 resulted from
additional up-front expenditures related to new community openings
and the initial investments required to expand the Company’s market
presence and build brand awareness in the Southeast region. Selling,
general and administrative expenses as a percentage of housing rev-
enues are expected to improve in 2004, once the Company’s Southeast
businesses are more fully integrated and deliver additional revenues,
and Central region costs are resized to align with the region’s lower
unit delivery volume.
Operating income increased 28.6% to $452.9 million in 2002
from $352.3 million in 2001. As a percentage of revenues, operating
income rose to 9.2% in 2002 from 7.8% in 2001. Housing gross prof-
its 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 hous-
ing gross profit margin was 21.3% in 2002, up from 20.1% in 2001,
primarily due to a higher average selling price. 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 increased to $595.7
million in 2002 from $536.5 million in 2001. As a percentage of hous-
ing revenues, selling, general and administrative expenses in 2002
remained unchanged from 2001 at 12.3%.
Interest income and expense
Interest income, which is generated from
short-term investments and mortgages receivable, amounted to $3.0
million in 2003, $4.2 million in 2002 and $3.6 million in 2001.
Generally, increases and decreases in interest income are attributable to
changes in the interest-bearing average balances of short-term invest-
ments 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 2003, interest expense, net of amounts capitalized, decreased
by $8.9 million to $23.8 million from $32.7 million in 2002. Gross
interest incurred in 2003 was $17.7 million higher than that incurred
in 2002, mainly due to higher debt levels in 2003. Gross interest
incurred in 2003 also included a pretax charge in the first quarter
of $4.3 million associated with the early extinguishment of the
Company’s 95/8% senior subordinated notes, which were due in 2006.
The percentage of interest capitalized in 2003 and 2002 was 80.0%
and 67.6%, respectively. The increase in the percentage of interest cap-
italized in 2003 primarily resulted from a higher proportion of land
under development in 2003 compared to 2002.
In 2002, interest expense, net of amounts capitalized, decreased 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, reflecting
lower interest rates in 2002. The percentage of interest capitalized in
2002 increased from the 60.1% capitalized in 2001 due to a higher
proportion of land under development compared to 2001.
Minority interests Operating income was reduced by minority inter-
ests of $26.9 million in 2003, $17.0 million in 2002 and $27.9 million
in 2001. Minority interests for 2003 and 2002 were comprised solely
of the minority ownership portion of income from consolidated sub-
sidiaries and joint ventures related to residential and commercial activ-
ities. Minority interests related to consolidated subsidiaries and joint
ventures in 2002 were essentially flat compared with 2001. In 2001,
minority interests also included distributions of $11.4 million associ-
ated 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.
an n ual re p o rt 2oo3
51
Equity in pretax income of unconsolidated joint ventures The
Company’s unconsolidated joint venture activities were located in
California, Florida, Nevada, New Mexico and France in 2003 and
2002; and Nevada, New Mexico and France in 2001. These unconsol-
idated joint ventures posted combined revenues of $47.5 million in
2003, $65.9 million in 2002 and $82.1 million in 2001. Revenues
from unconsolidated joint ventures in 2003 were lower than in 2002
and 2001 due to a decrease in joint venture unit deliveries in 2003. All
unconsolidated joint venture revenues in 2003, 2002 and 2001 were
generated from residential properties. Unconsolidated joint ventures
generated combined pretax income of $6.9 million in 2003, $9.7 mil-
lion in 2002 and $6.5 million in 2001. The Company’s share of pretax
income from unconsolidated joint ventures totaled $2.5 million in
2003, $4.4 million in 2002 and $3.9 million in 2001.
m o r t g a g e b a n k i n g
Interest income and expense The Company’s mortgage banking oper-
ations 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
mortgages and mortgage-backed securities held for long-term invest-
ment as collateral, while interest expense results from notes payable
and the collateralized mortgage obligations. Interest income decreased
to $14.2 million in 2003 from $22.6 million in 2002, which had
increased from $21.9 million in 2001. Interest expense decreased to
$6.4 million in 2003 from $11.5 million in 2002, which had decreased
from $18.4 million in 2001. Interest income decreased in 2003 pri-
marily due to a lower average balance of first mortgages held under
commitments of sale and other receivables outstanding as well as lower
interest rates compared to 2002. In 2002, interest income increased
from the previous year primarily due to a higher average balance of first
mortgages held under commitments of sale and other receivables out-
standing compared to the previous year.
Interest expense decreased in both 2003 and 2002 due to lower
average balances of notes payable outstanding and lower interest rates
compared to the previous years. Combined interest income and expense
resulted in net interest income of $7.8 million in 2003, $11.1 million
in 2002 and $3.5 million in 2001. These differences reflect variations in
mortgage production mix; movements in short-term versus long-term
interest rates; and the amount, timing and rates of return on interim
reinvestments of monthly principal amortization and prepayments.
Other mortgage banking revenues The following table presents mort-
gage loan origination and sales data, including loans brokered to
wholesale mortgage bankers, for the Company’s mortgage banking
operations:
yea rs ended novembe r 30,
in thousands
Total originations:
Loans
Principal
Retention rate
Loans sold to third parties:
Loans
Principal
2003
2002
2001
23,618
20,713
20,605
$3,443,326 $3,705,667 $3,063,816
83%
89%
73%
22,607
18,889
$3,786,086 $3,776,674 $2,804,024
24,042
Other mortgage banking revenues, which principally consist of
gains on sales of mortgages and servicing rights and, to a lesser extent,
mortgage loan origination fees and mortgage servicing income, totaled
$60.9 million in 2003, $69.3 million in 2002 and $50.5 million in
2001. The decrease in 2003 was mainly due to lower retention (the
percentage of the Company’s domestic homebuyers using its mort-
gage banking subsidiary as a loan originator) as well as the adoption
of 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”), in the first quarter of 2003.
The mortgage banking subsidiary’s retention decreased to 73% in
2003 from 89% in 2002 partly due to the regulatory approval process
required to establish mortgage banking operations to assist homebuy-
ers in the Company’s recently expanded Southeast region. Other factors
impacting retention were increased competition in the mortgage bank-
ing marketplace and consumer demand for more diverse loan products
such as interest only payment loans. In 2002, the increase in other
mortgage banking revenues from 2001 reflected higher gains on the
sales of mortgages and servicing rights primarily due to a higher vol-
ume of mortgage originations associated with both increases in under-
lying housing unit delivery volume and higher retention.
General and administrative expenses General and administrative
expenses associated with mortgage banking operations increased to
$32.9 million in 2003 from $22.9 million in 2002 and $20.3 million
in 2001. The increases in general and administrative expenses in 2003
and 2002 resulted from higher staff levels needed to support the
Company’s increasing backlog and the expansion of the Company’s
operations into new markets.
i n c o m e t a x e s
The Company recorded income tax expense of $182.7 million in 2003,
$154.9 million in 2002 and $110.3 million in 2001. These amounts
represented effective income tax rates of approximately 33.0% in 2003
and 2002 and 34.0% in 2001. 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
kb hom e
52
of foreign-related income, intercompany dividends and investments in
tax credit partnerships.
l i q u i d i t y a n d c a p i t a l r e s o u r c e s
The Company assesses its liquidity in terms of its ability to generate
cash to fund its operating and investing activities. Historically, the
Company has funded its construction and mortgage banking activities
with internally generated cash flows and external sources of debt and
equity financing. Operating, investing and financing activities used
net cash of $191.9 million in 2003; in 2002, these activities provided
cash of $48.7 million.
Operating activities provided $462.1 million of cash in 2003 and
$357.0 million in 2002. The Company’s sources of operating cash in
2003 included earnings of $370.8 million, a decrease in receivables of
$340.4 million, an increase in accounts payable, accrued expenses and
other liabilities of $122.0 million, various noncash items deducted from
net income, and other operating sources of $33.7 million. Partially off-
setting these sources were investments in inventories of $464.5 million
(excluding the effect of the Colony and Zale acquisitions, $43.7 million
of inventories acquired through seller financing and $27.4 million of
inventory of consolidated variable interest entities).
In 2002, the Company’s sources of operating cash included earn-
ings of $314.4 million, an increase in accounts payable, accrued
expenses and other liabilities of $149.5 million, a decrease in receiv-
ables 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 American
Heritage acquisition and $32.6 million of inventories acquired
through seller financing) and other operating uses of $6.7 million.
Investing activities used $114.7 million of cash in 2003 and
$52.8 million in 2002. In 2003, $105.6 million, net of cash acquired,
was used for the acquisitions of Colony and Zale, $13.1 million was
used for net purchases of property and equipment, and $9.3 million
was used for investments in unconsolidated joint ventures. The cash
used was partially offset by proceeds of $7.8 million received from
mortgage-backed securities, which were principally used to pay down
the collateralized mortgage obligations for which the mortgage-backed
securities had served as collateral and net sales of $5.5 million of mort-
gages held for long term investment.
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 acqui-
sition of American Heritage 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 and
net sales of $1.2 million of mortgages held for long-term investment.
Financing activities in 2003 used $539.3 million of cash compared
to $255.5 million used in 2002. In 2003, cash was used for net pay-
ments on borrowings of $603.1 million, redemption of the Company’s
95/8% senior subordinated notes of $129.0 million, repurchases of com-
mon stock of $108.3 million, payments to minority interests of $12.0
million, cash dividend payments of $11.8 million and payments on col-
lateralized mortgage obligations of $7.2 million. Partially offsetting
these uses were $295.3 million in proceeds from the sale of 73/4% senior
subordinated notes and $36.8 million from the issuance of common
stock under employee stock plans. Pursuant to its current universal shelf
registration, on January 27, 2003, 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 of 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 Company used $129.0 million of the net proceeds
from the issuance of the notes to redeem all of its outstanding $125.0
million 95/8% senior subordinated notes, which were due in 2006. The
remaining net proceeds were used for general corporate purposes.
In 2002, financing activities used $262.5 million for net pay-
ments on borrowings, $175.0 million for the redemption of the Com-
pany’s 93/8% senior subordinated notes, $190.8 million for repur-
chases of common stock, $12.4 million for cash dividend payments,
$8.3 million for payments on collateralized mortgage obligations and
$6.4 million for payments to minority interests. Partially offsetting
these uses were $198.4 million in proceeds from the sale of 85/8% sen-
ior 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 Com-
pany and are subordinated to all existing and future senior indebted-
ness 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 redeem-
able 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, which were due in 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 obli-
gations of KBSA and rank pari passu in right of payment with all other
senior unsecured indebtedness of KBSA. The Company does not guar-
antee 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
an n ual re p o rt 2oo3
53
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. 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.
On December 5, 2003, the Company’s board of directors increased
the annual cash dividend on the Company’s common stock to $1.00
per share from $.30 per share. The first quarterly cash dividend at the
increased rate of $.25 per share will be paid on February 25, 2004 to
shareholders of record on February 11, 2004. The Company believes
the decision to increase the dividend reflects the Company’s strong bal-
ance sheet, sustainable operating earnings, free cash flow and the over-
all growth prospects for its business, without limiting its ability to
profitably grow and reinvest in the business.
The Company’s financial leverage, as measured by the ratio of con-
struction debt to total capital, was 44.0% at the end of 2003, the low-
est level for the Company in the past five years, compared to 47.8% at
the end of 2002. Construction debt to total capital is not a financial
measure in accordance with generally accepted accounting principles
(“GAAP”). However, the Company believes this ratio is preferable to
total debt to total capital, the most comparable GAAP measure, in
order to maintain comparability with other publicly traded home-
builders for stockholders, investors and analysts. A reconciliation of the
non-GAAP measure, construction debt to total capital, to the most
comparable GAAP measure, total debt to total capital, follows:
nov em ber 30,
in thousands
Debt:
Construction
Mortgage banking
Total debt
Total debt
Stockholders’ equity
Total capital
Ratio
2003
2002
Total debt
to total
capital
$1,253,932
132,225
$1,386,157
$1,386,157
1,592,851
$2,979,008
46.5%
Construction
debt to total
capital
$1,253,932
$1,253,932
$1,253,932
1,592,851
$2,846,783
44.0%
Total debt
to total
capital
$1,167,053
507,574
$1,674,627
$1,674,627
1,274,351
$2,948,978
56.8%
Construction
debt to total
capital
$1,167,053
$1,167,053
$1,167,053
1,274,351
$2,441,404
47.8%
During 2003, the Company acquired Atlanta, Georgia-based
Colony, which expanded the Company’s operations into Atlanta,
Georgia and Charlotte and Raleigh, North Carolina, strengthening
the Company’s position in its Southeast region. The Company also
acquired substantially all of the homebuilding assets of Chicago,
Illinois-based Zale. The Zale acquisition marked the Company’s entry
into the greater Chicago market. Total consideration, including debt
assumed, associated with the two acquisitions was $174.9 million.
Both acquisitions were accounted for under the purchase method of
accounting. The excess of the purchase price over the estimated fair
value of net assets acquired was allocated to goodwill and assigned to
the Company’s construction segment. The results of the two acquired
companies were included in the Company’s consolidated financial
statements as of their respective acquisition dates.
During 2002, the Company acquired Orlando, Florida-based
American Heritage for approximately $74.0 million, including the
assumption of debt. The American Heritage acquisition strengthened
the Company’s market position in Florida, marking its entry into the
Orlando market and supplementing its Tampa start-up business. The
acquisition was accounted for under the purchase method of account-
ing and was assigned to the Company’s construction segment. No
goodwill was recorded in connection with the acquisition. The results
of American Heritage were included in the Company’s consolidated
financial statements as of the date of acquisition.
In 2001, the Company acquired Trademark, a builder of single-
family homes in Jacksonville, Florida. The acquisition marked the
Company’s entry into Florida. In addition, KBSA completed the acqui-
sition of Résidences Bernard Teillaud, a France-based builder of condo-
miniums. Total consideration, including debt assumed, associated with
the two acquisitions was $58.8 million. Both acquisitions were
accounted for under the purchase method of accounting. The excess of
the purchase price over the estimated fair value of net assets acquired
was allocated to goodwill and assigned to the Company’s construction
segment. The results of the two acquired companies were included in
the Company’s consolidated financial statements as of their respective
acquisition dates.
During 2003 and 2002, the Company repurchased 2.0 million
and 4.0 million shares of its common stock at aggregate prices of
$108.3 million and $190.8 million, respectively, under stock repur-
chase programs authorized by its board of directors. On July 10, 2003,
the Company’s board of directors approved an increase in the Com-
pany’s previously authorized stock repurchase program to permit
future repurchases of up to 2.0 million shares of the Company’s com-
mon stock. No shares were repurchased under this authorization as
of November 30, 2003.
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
kb hom e
54
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 24, 2003,
the Company entered into a four-year, $1.00 billion unsecured revolv-
ing credit facility (the “$1 Billion Credit Facility”) with a consortium
of banks, which replaced its previously existing $644.0 million revolv-
ing credit facility scheduled to expire in 2004 and its $183.0 million
five-year term loan, scheduled to expire in 2005. Interest on the $1
Billion Credit Facility is payable monthly at the London Interbank
Offered Rate plus an applicable spread on amounts borrowed. At
November 30, 2003, the Company had $803.2 million available for its
future use under the $1 Billion Credit Facility, net of $89.7 million of
outstanding letters of credit. In addition, the Company’s French sub-
sidiaries had lines of credit with various banks which totaled $181.8
million at November 30, 2003 and have various committed expiration
dates through May 2006. Under these unsecured financing agree-
ments, $160.2 million was available to the Company’s French sub-
sidiaries at November 30, 2003.
Depending upon available terms and its negotiating leverage
related to specific market conditions, the Company also finances cer-
tain land acquisitions with purchase-money financing from land sellers
and other third parties. At November 30, 2003, the Company had
outstanding seller-financed notes payable of $24.6 million secured
primarily by the underlying property which had a carrying value
of $84.8 million.
The Company’s primary contractual financing obligations at
November 30, 2003 were comprised of senior and senior subordinated
notes, mortgages, land contracts and other loans with principal pay-
ments due as follows: 2004: $197.4 million; 2005: $1.4 million; 2006:
$.2 million; 2007: $.2 million; 2008: $.2 million; and thereafter:
$925.8 million.
In addition, the Company leases certain property and equipment
under noncancelable operating leases. Office and equipment leases are
typically for terms of three to five years and generally provide renewal
options for terms up to an additional five years. The future minimum
rental payments under the Company’s operating leases, which prima-
rily consist of office leases, having initial or remaining noncancelable
lease terms in excess of one year are as follows: 2004: $18.9 million;
2005: $12.8 million; 2006: $9.5 million; 2007: $8.2 million; 2008:
$5.3 million; and thereafter: $15.9 million.
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 $750.0 million 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, com-
mon stock, stock purchase contracts, stock purchase units and/or
warrants to purchase such securities. The Company issued the $300.0
Million Senior Subordinated Notes in the first quarter of 2003,
pursuant to its 2001 Shelf Registration. 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. As of November 30, 2003, the Company had $450.0 million
of remaining capacity available under the 2001 Shelf Registration.
On January 28, 2004, the Company issued $250.0 million of
53/4% senior notes (the “$250.0 Million Senior Notes”) at 99.474% of
the principal amount of the notes in a private placement. The notes,
which are due February 1, 2014, with interest payable semi-annually,
represent senior unsecured obligations of the Company and rank
equally in right of payment with all of the Company’s existing and
future senior unsecured indebtedness. The $250.0 Million Senior
Notes may be redeemed, in whole at any time or from time to time in
part, at a price equal to 100% of their principal amount, plus a pre-
mium, plus accrued and unpaid interest to the applicable redemption
date. The $250.0 Million Senior Notes are unconditionally guaranteed
jointly and severally by certain of the Company’s domestic operating
subsidiaries on a senior unsecured basis. The Company used all of the
net proceeds from the issuance of the $250.0 Million Senior Notes to
repay borrowings outstanding under the $1 Billion Credit Facility.
The Company has agreed to file a registration statement with the SEC
relating to an offer to exchange the $250.0 Million Senior Notes for
registered notes issued by the Company on substantially identical
terms, except that they will be fully transferable.
The Company uses its capital resources primarily for land pur-
chases, land development and housing construction. The Company
typically manages its investments in land by purchasing property
under options and other types of conditional contracts whenever possi-
ble, and similarly controls its investment in housing inventories by
strongly emphasizing the pre-sale of homes over speculative construc-
tion and carefully managing the timing of the production process.
The Company’s backlog ratio (beginning backlog as a percentage of
unit deliveries in the quarter) was 186.7% for the fourth quarter of
2003, increasing from 171.0% for the fourth quarter of 2002. The
Company’s inventories have become significantly more geographically
diverse in the last decade, primarily as a result of the Company’s exten-
sive domestic expansion outside of the West Coast region. As of
November 30, 2003, 17.3% of the lots owned or controlled by the
Company were located in the West Coast region, 20.6% were in the
Southwest region, 32.9% were in the Central region, 21.2% were in
the Southeast region and 8.0% were in France. The Company contin-
ues to concentrate its housing operations in desirable areas within
targeted growth markets, oriented toward entry-level, move-up and
active adult purchasers.
an n ual re p o rt 2oo3
55
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 mar-
ket within 45 days of their funding date. The Company’s mortgage
banking subsidiary obtains external sources of financing for these
operations, including a $180.0 million revolving mortgage warehouse
agreement (the “$180.0 Million Mortgage Warehouse Facility”) and a
$400.0 million master loan and security agreement (the “$400.0
Million Master Loan and Security Agreement”). On July 1, 2003, the
Company’s mortgage banking subsidiary entered into the $180.0
Million Mortgage Warehouse Facility with a bank syndicate. The
agreement, which expires on June 30, 2005, provides for an annual
fee based on the committed balance and provides for interest to be
paid monthly at the London Interbank Offered Rate plus an applic-
able spread on amounts borrowed. The $180.0 Million Mortgage
Warehouse Facility replaced the mortgage banking subsidiary’s $200.0
million master loan and security agreement, which expired on June 30,
2003. The Company’s mortgage banking subsidiary’s $400.0 Million
Master Loan and Security Agreement was renewed on October 6, 2003.
The renewed agreement, which expires on October 6, 2004, provides
for interest to be paid monthly at the London Interbank Offered Rate
plus an applicable spread on amounts borrowed.
The amounts outstanding under the $180.0 Million Mortgage
Warehouse Facility and the $400.0 Million Master Loan and Security
Agreement are secured by separate borrowing bases, which include cer-
tain 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
restrictions 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, 2003 the Company’s mort-
gage banking subsidiary had $133.1 million available under its $180.0
Million Mortgage Warehouse Facility and $314.7 million available
under its $400.0 Million Master Loan and Security Agreement. The
Company believes its sources of financing are adequate to fund its
mortgage banking operations.
In addition to the $180.0 Million Mortgage Warehouse Facility
and the $400.0 Million Master Loan and Security Agreement, the
Company’s mortgage banking subsidiary entered into a $300.0 mil-
lion purchase and sale agreement with a bank on November 19, 2003.
This agreement allows the Company’s mortgage banking subsidiary
to accelerate the sale of its mortgage loan inventory resulting in a
more effective use of the warehouse facilities. This agreement is not a
committed facility and may be terminated at the discretion of the
counterparties.
Debt service on the Company’s collateralized mortgage obliga-
tions is funded by receipts from mortgage-backed securities. Such
funds are expected to be adequate to meet future debt-payment sched-
ules for the collateralized mortgage obligations and therefore these
securities have virtually no impact on the capital resources and liquid-
ity 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 over-
all profitability 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 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 opera-
tions, and meet other needs of its business, both on a short and long-
term basis.
c r i t i c a l a c c o u n t i n g p o l i c i e s
Construction revenue recognition As discussed in Note 1 to the Com-
pany’s consolidated financial statements, housing and other real estate
sales are recognized when title passes to the buyer and all of the fol-
lowing conditions are met: a sale is consummated, a significant down
payment is received, the earnings process is complete and the collec-
tion of any remaining receivables is reasonably assured. In France, rev-
enues 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 percentage of completion method, which is generally based
on costs incurred as a percentage of estimated total costs of individual
projects. The percentage of completion method is applied since the
Company meets applicable requirements under Statement of Financial
Accounting Standards No. 66, “Accounting for Sales of Real Estate.”
Actual revenues and costs to complete in the future, related to long-
term contracts, could differ from the Company’s current estimates. If
estimates of revenues and costs to complete in the future differ from
actual amounts, the Company’s revenues, related cumulative profits
and costs of sales may be revised in the period that estimates change.
Inventories and cost of sales As discussed in Note 1 to the Com-
pany’s consolidated financial statements, land to be developed and
projects under development are stated at cost, unless they are deter-
mined to be impaired, in which case these inventories are measured at
fair value. Fair value is determined by management estimate and incor-
porates anticipated future revenues and costs. Due to uncertainties in
the estimation process, it is possible that actual results could differ
from those estimates. The Company’s inventories typically do not con-
sist of completed projects.
The Company relies on certain estimates to determine construction
and land costs and resulting gross margins associated with revenues rec-
ognized. The Company’s construction and land costs are comprised of
direct and allocated costs, including estimated future costs for war-
ranties and amenities. Land, land improvements and other common
costs are allocated on a relative fair value basis to units within a parcel
kb hom e
56
or subdivision. Land and land development costs generally include
related interest and property taxes incurred until development is sub-
stantially 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, includ-
ing construction delays, increases in costs that have not yet been com-
mitted, changes in governmental requirements, unforeseen environ-
mental 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 accu-
rately 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 construction gross margins in a spe-
cific reporting period. To reduce the potential for such distortion, the
Company has set forth procedures that collectively comprise a “critical
accounting policy.” These procedures, which have been applied by the
Company on a consistent basis, include updating, assessing and revis-
ing 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 expe-
rience, 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 policies provide
for reasonably dependable estimates to be used in the calculation and
reporting of construction and land costs.
Warranty costs As discussed in Note 9 to the Company’s consoli-
dated financial statements, the Company provides a limited warranty
on all of its homes. The specific terms and conditions of warranties vary
depending upon the market in which the Company does business. For
homes sold in the United States, the Company generally provides a
structural warranty of 10 years, a warranty on electrical, heating, cool-
ing and plumbing and other building systems each varying from two
to five years based on geographic market and state law, and a warranty
of one year for other components of the home such as appliances. The
Company estimates the costs that may be incurred under each limited
warranty and records a liability in the amount of such costs at the time
the revenue associated with the sale of each home is recognized. Factors
that affect the Company’s warranty liability include the number of
homes, historical and anticipated rates of warranty claims, and cost per
claim. The Company periodically assesses the adequacy of its recorded
warranty liabilities and adjusts the amounts as necessary. While man-
agement believes the warranty accrual reflected in the consolidated
balance sheet to be adequate, actual warranty costs in the future could
differ from the Company’s current estimates.
Business combinations The Company accounts for acquisitions of
other companies under the purchase method of accounting in accor-
dance with Statement of Financial Accounting Standards No. 141,
“Business Combinations.” Under the purchase method of accounting,
the assets acquired and liabilities assumed are recorded at their esti-
mated fair values. The excess of the purchase price over the estimated
fair value of net assets acquired, if any, is recorded as goodwill. The
estimation of fair values of assets and liabilities, and the allocation of
purchase price requires judgment by management, especially with
respect to valuations of real estate inventories, which at the time of
acquisition are in various stages of development. Actual revenues, costs
and time to complete a community could vary from estimates impact-
ing the allocation of purchase price between tangible and intangible
assets. A variation in allocation of purchase price between asset groups,
including inventories and goodwill, could have an impact on the
timing and ultimate recognition of current and future results of
operations. The Company’s reported income includes the results of
operations of acquired companies from the dates of their acquisition.
Goodwill As disclosed in the consolidated financial statements, the
Company had goodwill in the amount of $229.0 million at November
30, 2003 and $194.6 million at November 30, 2002. In accordance
with Statement of Financial Accounting Standards No. 142, “Goodwill
and Other Intangible Assets,” the Company performed impairment
tests of goodwill as of November 30, 2003 and 2002, and identified no
impairment. However, the process of evaluating goodwill for impair-
ment 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 valuations, and assumptions about
the Company’s strategic plans with regard to its operations. To the
extent additional information arises, market conditions change or the
Company’s strategies change, it is possible that the Company’s conclu-
sion regarding goodwill impairment could change and result in a
material effect on its financial position or results of operations.
r e c e n t a c 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 SOP 01-6, which 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 require-
ments. SOP 01-6 requires the carrying amounts of loans and servicing
rights to be allocated using relative fair values in a manner consis-
tent with Statement of Financial Accounting Standards No. 140,
“Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities.” Such allocation was not previously
required. SOP 01-6 also requires that income from the sale of loan
servicing rights be recognized when the related loan is sold, rather than
upon the loan closing as was permitted under previous accounting
an n ual re p o rt 2oo3
57
guidance. This has the effect of deferring the mortgage banking oper-
ations’ recognition of servicing rights income for loans that it origi-
nates until the following month when loan settlement typically occurs.
The adoption of SOP 01-6 did not have a material impact on the
Company’s results for 2003.
In April 2002, the Financial Accounting Standards Board
(“FASB”) issued Statement of Financial Accounting Standards No.
145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment
of FASB Statement No. 13, and Technical Corrections,” which, among
other things, addresses the income statement classification of gains and
losses from the extinguishment of debt. The provisions of SFAS No.
145 related to the rescission of Statement of Financial Accounting
Standards No. 4, “Reporting Gains and Losses from Extinguishment of
Debt,” are effective for fiscal years beginning after May 15, 2002. The
Company recognized a charge of $4.3 million ($2.9 million, net of tax)
in the first quarter of 2003 related to the extinguishment of its 95/8%
senior subordinated notes, which were due in 2006. Due to the Com-
pany’s adoption of SFAS No. 145, this early extinguishment charge,
which previously would have been accounted for as an extraordinary
item, was reflected as interest expense in results from continuing oper-
ations in 2003.
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 guarantor in its interim and annual financial statements about its
obligations under guarantees. FASB Interpretation No. 45 also clarifies
the requirements related to the recognition of a liability by a guaran-
tor 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 periods ending after December 15, 2002 and
initial recognition and initial measurement provisions are applicable
to guarantees issued or modified after December 31, 2002. The adop-
tion of the initial recognition and initial measurement provisions of
FASB Interpretation No. 45 did not have a material impact on the
Company’s financial position or results of operations. The disclosures
required by FASB Interpretation No. 45 have been provided in the
notes to consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148, “Accounting
for Stock-Based Compensation – Transition and Disclosure” (“SFAS
No. 148”), which amends SFAS No. 123, “Accounting for Stock-Based
Compensation.” SFAS No. 148 provides alternative methods of transi-
tion for a voluntary change to the fair value based method of account-
ing for stock-based employee compensation. It also requires prominent
disclosure in both the annual and interim financial statements about
the method of accounting for stock-based employee compensation and
the effect of the method used on reported results. The Company has
not elected to change to the fair value based method of accounting for
stock-based compensation. The disclosures required by SFAS No. 148
have been provided in the notes to consolidated financial statements.
In January 2003, the FASB issued FASB Interpretation No. 46,
“Consolidation of Variable Interest Entities” (“FASB Interpretation
No. 46”). FASB Interpretation No. 46 is intended to clarify the appli-
cation of Accounting Research Bulletin No. 51, “Consolidated Finan-
cial Statements,” to certain entities (referred to as “variable interest
entities” or “VIEs”) in which equity investors do not have the charac-
teristics 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. Pursuant to FASB Interpretation
No. 46, an enterprise that absorbs a majority of the VIE’s expected
losses, receives a majority of the VIE’s expected residual returns, or
both, is determined to be the primary beneficiary of the VIE and must
consolidate the entity. FASB Interpretation No. 46 applied immedi-
ately to VIEs created after January 31, 2003. For VIEs created on or
before January 31, 2003, FASB Interpretation No. 46 is effective no
later than the first interim or annual period ending after March 15,
2004 (the Company’s quarter ending May 31, 2004). Certain of the
disclosure requirements of FASB Interpretation No. 46 apply in all
financial statements filed after January 31, 2003.
In the ordinary course of its business, the Company enters into
land option contracts in order to procure land for the construction of
homes. Under such land option contracts, the Company will fund a
specified option deposit or earnest money deposit in consideration for
the right to purchase land in the future, usually at a predetermined
price. Under the requirements of FASB Interpretation No. 46, certain
of the Company’s land option contracts may create a variable interest
for the Company, with the land seller being identified as a VIE.
In compliance with FASB Interpretation No. 46, the Company
analyzed its land option contracts and other contractual arrangements
entered into after January 31, 2003 and has consolidated the fair value
of certain VIEs from which the Company is purchasing land under
option contracts. The consolidation of these VIEs, where the Company
was determined to be the primary beneficiary, added $27.4 million to
inventory and other liabilities in the Company’s consolidated balance
sheet at November 30, 2003. The Company’s cash deposits related to
these land option contracts totaled $6.1 million at November 30,
2003. Creditors, if any, of these VIEs have no recourse against the
Company. As of November 30, 2003, excluding consolidated VIEs, the
Company had cash deposits and/or letters of credit totaling $97.3
million which were associated with land option contracts having an
aggregate purchase price of $1.54 billion. The Company is in the
process of reviewing contracts entered into on or before January 31,
2003 in order to assess the extent of its interests. Depending upon
the specific terms or conditions of such entities, the Company may be
required to consolidate other VIEs in subsequent periods.
In April 2003, the FASB issued Statement of Financial
Accounting Standards No. 149, “Amendment of Statement 133 on
Derivative Instruments and Hedging Activities” (“SFAS No. 149”).
SFAS No. 149 amends and clarifies financial accounting and reporting
for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities that fall within
the scope of SFAS No. 133, “Accounting for Derivative Instruments
and Hedging Activities.” SFAS No. 149 is effective for contracts
kb hom e
58
entered into or modified after June 30, 2003. The adoption of SFAS
No. 149 did not have a material effect on the Company’s financial posi-
tion or results of operations.
In May 2003, the FASB issued Statement of Financial Accounting
Standards No. 150, “Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity” (“SFAS No. 150”),
which establishes standards regarding the classification and measure-
ment of certain financial instruments with characteristics of both lia-
bilities and equity. SFAS No. 150 is effective for financial instruments
entered into or modified after May 31, 2003 and otherwise is effective
at the beginning of the first interim period beginning after June 15,
2003. The adoption of SFAS No. 150 did not have a material impact
on the Company’s financial statements.
o u t l o o k
The value of the Company’s residential backlog at November 30, 2003
reached $3.07 billion, increasing 30.7% from the backlog value of
$2.35 billion at November 30, 2002. Backlog units at November 30,
2003 increased 22.1% to 14,675 from 12,023 units at November 30,
2002. Company-wide net orders of 6,629 units for the quarter ended
November 30, 2003 increased 13.7% from the 5,831 net orders
reported in the corresponding quarter of 2002.
The Company’s domestic residential backlog at November 30,
2003 rose 29.4% to $2.55 billion, from $1.97 billion at year-end
2002. The growth in domestic backlog value at year-end 2003
reflected increases in all of the Company’s geographic regions. On a
unit basis, domestic backlog stood at 12,180 units at year-end 2003,
up 23.6% from 9,858 units at year-end 2002. The West Coast region
backlog value totaled $941.8 million on 2,641 units at November 30,
2003, up from $789.7 million on 2,380 units at November 30, 2002.
West Coast region net orders increased 3.7% in the fourth quarter of
2003, to 1,147 units, from 1,106 units in the fourth quarter of 2002.
In the Southwest region, backlog value increased to $710.7 million
on 3,863 units at November 30, 2003, up from $475.2 million on
2,795 units at November 30, 2002. Fourth quarter net orders in the
Southwest region increased 20.1% to 1,882 units in 2003 from 1,567
units in 2002. In the Central region, backlog value rose to $554.3 mil-
lion on 3,571 units at November 30, 2003 from $539.4 million on
3,659 units at November 30, 2002. Fourth quarter net orders in the
Central region decreased 11.7% to 1,470 units in 2003 from 1,665
units in the year-earlier period. In the Company’s Southeast region, the
backlog value totaled $347.0 million on 2,105 units at November 30,
2003 compared to $168.6 million on 1,024 units at November 30,
2002. The region’s net orders rose 215.7% to 944 units in 2003 from
299 for the same period a year ago, reflecting the Company’s contin-
ued expansion in Florida and its entry into Georgia and North Carolina
through the acquisition of Colony.
In France, residential backlog at November 30, 2003 totaled
$514.0 million on 2,495 units, up 37.5% and 15.2%, respectively,
from $373.8 million on 2,165 units at year-end 2002. French net
orders remained essentially flat at 1,186 units in the fourth quarter of
2003 compared to 1,194 units in the year-earlier period. The value of
the backlog associated with French commercial development activities
totaled approximately $19.7 million at November 30, 2003 compared
to $54.2 million at year-end 2002.
Substantially all homes included in the year-end 2003 backlog are
expected to be delivered during 2004. However, cancellation rates
could increase, particularly if market conditions deteriorate, or mort-
gage interest rates increase, thereby decreasing backlog and related
future revenues.
The Company ended its 2003 fiscal year with a solid backlog and
an expanded platform to facilitate future growth. During 2003, the
Company expanded its geographic reach through both acquisitions and
de novo growth and now has significant positions in dynamic markets
across the country. 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. A key component of the
Company’s overall growth strategy is to balance the expansion of exist-
ing operations to achieve optimal market volume levels while entering
into new geographic markets through de novo entry or acquisitions.
Whether the Company achieves its growth objectives will be deter-
mined by its ability to increase the average number of active commu-
nities it operates in new and existing markets, with this expansion
enhanced or tempered by changes in the United States and French
political and economic environments.
Since 2001, the Company has steadily diversified its operations
through expansion into new geographic markets. In addition to enter-
ing Florida in 2001 with the acquisition of Trademark and improving
its position in Florida in 2002 with the acquisition of American
Heritage, the Company entered into three new high growth markets,
Atlanta, Charlotte and Raleigh, through the acquisition of Colony in
the second quarter of 2003. The Company believes this recent expan-
sion provides a strong platform for future growth throughout the
region and is optimistic about its future prospects. The Company is
continuing to expand its presence in Florida and recently announced
its de novo entry into the Fort Myers and “Treasure Coast” markets.
The Treasure Coast is an area that spans from Port St. Lucie through
Melbourne.
In the fourth quarter of 2003, the Company extended its reach
beyond the Sunbelt with the acquisition of Chicago, Illinois-based
Zale. This acquisition strategically positioned the Company in one of
the largest markets in the United States as well as in the Midwest,
where the potential for growth is strong. The Company hopes to lever-
age this entry into an expanded position in other Midwest markets in
the future.
On January 6, 2004, the Company acquired South Carolina-based
Palmetto Traditional Homes (“Palmetto”), a privately-held builder
of single-family homes, for $45.3 million, including the assumption
of debt. Palmetto generated revenues of approximately $90.0 million
and delivered 570 homes in Charleston and Columbia, South Carolina
in 2003. The Palmetto acquisition marks the Company’s entry into
South Carolina. The results of Palmetto will be included in the
Company’s Southeast region operations.
an n ual re p o rt 2oo3
59
*
*
*
*
*
*
*
Investors are cautioned that certain statements contained in this docu-
ment, as well as some statements by the Company in periodic press
releases and some oral statements by Company officials to securities
analysts and stockholders during presentations about the Company are
“forward-looking statements” within the meaning of the Private
Securities Litigation Reform Act of 1995 (the “Act”). Statements
which are predictive in nature, which depend upon or refer to future
events or conditions, or which include words such as “expects,” “anti-
cipates,” “intends,” “plans,” “believes,” “estimates,” “hopes,” and simi-
lar 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 pro-
vided by management, are also forward-looking statements as defined
by the Act. Forward-looking statements are based on current expecta-
tions 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 princi-
pal important risk factors that could cause the Company’s actual per-
formance and future events and actions to differ materially from such
forward-looking statements include, but are not limited to, changes in
general economic conditions, material prices, labor costs, interest rates,
the continued impact of terrorist activities and United States response,
accelerating recessionary trends and other adverse changes in general
economic conditions, the secondary market for loans, consumer confi-
dence, 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.
In addition to achieving geographic diversification, the Company
has focused on diversifying its product offerings. The Company is
developing a broader array of attached products to address rising land
costs and infill opportunities where there is a shortage of housing sup-
ply. In addition, the Company is expanding its product breadth and
price points to better reach active adults and first-time and second-
time move-up buyers.
While the Company expects to continue to explore acquisition
opportunities that meet both its business and financial criteria for prof-
itable expansion, it also plans to maintain a balanced approach in the
use of cash with a focus on becoming an investment grade company.
The Company believes its current strong financial position and credit
ratios, which are within investment grade levels, support its goal of
achieving investment grade status.
The Company currently expects to achieve strong financial results
in fiscal 2004. However, this expectation could be materially affected
by various risk factors, such as the impact of future domestic and inter-
national terrorist activities; the United States military commitment in
the Middle East; accelerating recessionary trends and other adverse
changes in general economic conditions either nationally, in the
United States or France, or in the localized regions in which the
Company operates; diminution in domestic jobs or employment levels;
increases in home mortgage interest rates; decreases in consumer con-
fidence; the upcoming national election; or a continued downturn in
the economy’s pace; among other things. With such risk factors as
background, the Company currently expects its 2004 unit deliveries to
increase by 12% over 2003, mainly due to growth in the average num-
ber of active communities planned for 2004 as a result of organic
expansion and the Colony, Zale and Palmetto acquisitions as well as
other potential acquisitions. The Company anticipates its projected
earnings growth for 2004 to result from increased unit delivery vol-
ume, a slightly higher housing gross margin and improvement in its
selling, general and administrative expense ratio. The Company cur-
rently believes that it is well-positioned to meet its financial goals for
2004 due to the performance it achieved in 2003, its excellent cash
and borrowing capacity positions, the backlog of homes in place at
the beginning of fiscal year 2004 and its commitment to adhere to
the disciplines of its operational business model. The Company plans
to maintain its balanced approach to cash management to create
shareholder value by expanding organically, entering new attractive
markets through acquisitions, repurchasing its shares and paying a
higher cash dividend.
In 2004, the Company expects the rate at which the prices of
homes have been increasing to moderate, particularly in the West
Coast and France regions. Nonetheless, the Company believes it will
benefit from the expansion within its Southeast region, and lower sell-
ing, general and administrative expenses as a percentage of construc-
tion revenues. Assuming an improving economy and a flat to moderate
rise in interest rates, the Company expects to achieve record diluted
earnings per share in 2004.
kb hom e
60
Consolidated Statements of Income
years ended novemb er 3 0 ,
in thousands, except per share amounts
t o t a l r e v e n u e s
Construction:
Revenues
Construction and land costs
Selling, general and administrative expenses
Operating income
Interest income
Interest expense, net of amounts capitalized
Minority interests
Equity in pretax income of unconsolidated joint ventures
Construction pretax income
Mortgage banking:
Revenues:
Interest income
Other
Expenses:
Interest
General and administrative
Mortgage banking pretax income
Total pretax income
Income taxes
n e t i n c o m e
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
See accompanying notes.
2003
2002
2001
$ 5,850,554
$ 5,030,816
$ 4,574,184
$ 5,775,429
(4,479,019)
(733,511)
$ 4,938,894
(3,890,243)
(595,734)
$ 4,501,715
(3,612,936)
(536,463)
562,899
3,000
(23,780)
(26,889)
2,457
517,687
14,232
60,893
75,125
(6,445)
(32,903)
35,777
553,464
(182,700)
370,764
9.41
8.80
$
$
$
452,917
4,173
(32,730)
(16,994)
4,378
411,744
22,578
69,344
91,922
(11,467)
(22,949)
57,506
469,250
(154,900)
352,316
3,559
(41,072)
(27,932)
3,875
290,746
21,935
50,534
72,469
(18,436)
(20,262)
33,771
324,517
(110,300)
$
$
$
314,350
$ 214,217
7.57
7.15
$
$
5.72
5.50
an n ual re p o rt 2oo3
61
Consolidated Balance Sheets
nov em ber 30,
in thousands, except shares
a s s e t s
Construction:
Cash and cash equivalents
Trade and other receivables
Inventories
Investments in unconsolidated joint ventures
Deferred income taxes
Goodwill
Other assets
Mortgage banking:
Cash and cash equivalents
Receivables:
First mortgages and mortgage-backed securities
First mortgages held under commitments of sale and other receivables
Other assets
t o t a l a s s e t s
l i a b i l i t i e s a n d s t o c k h o l d e r s ’ e q u i t y
Construction:
Accounts payable
Accrued expenses and other liabilities
Mortgages and notes payable
Mortgage banking:
Accounts payable and accrued expenses
Notes payable
Collateralized mortgage obligations secured by mortgage-backed securities
Minority interests:
Consolidated subsidiaries and joint ventures
Stockholders’ equity:
Preferred stock – $1.00 par value; authorized, 10,000,000 shares: none outstanding
Common stock – $1.00 par value; authorized, 100,000,000 shares; 54,076,960 and
53,422,339 shares outstanding at November 30, 2003 and 2002, respectively
Paid-in capital
Retained earnings
Accumulated other comprehensive income
Deferred compensation
Grantor stock ownership trust, at cost: 7,606,995 shares and 7,900,140 shares at
November 30, 2003 and 2002, respectively
Treasury stock, at cost: 7,448,100 and 5,448,100 shares at
November 30, 2003 and 2002, respectively
t o t a l s t o c k h o l d e r s ’ e q u i t y
t o t a l l i a b i l i t i e s a n d s t o c k h o l d e r s ’ e q u i t y
See accompanying notes.
2003
2002
$ 116,555
430,266
2,883,482
32,797
165,896
228,999
124,751
$ 309,434
403,957
2,173,497
21,023
178,022
194,614
110,887
3,982,746
3,391,434
21,564
20,551
7,707
211,825
12,017
253,113
21,020
578,549
13,986
634,106
$4,235,859
$4,025,540
$ 554,387
574,527
1,253,932
$ 487,237
466,876
1,167,053
2,382,846
2,121,166
31,858
132,225
6,848
170,931
34,104
507,574
14,079
555,757
89,231
74,266
54,077
538,241
1,462,342
38,488
(7,512)
53,422
508,448
1,103,387
8,895
(8,978)
(165,332)
(171,702)
(327,453)
(219,121)
1,592,851
1,274,351
$4,235,859
$4,025,540
kb hom e
62
Consolidated Statements of Stockholders’ Equity
Number of Shares
years ended novemb er 3 0 ,
in thousands
Grantor
Stock
Common Ownership
Trust
Stock
Treasury
Stock
Common
Stock
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Deferred
Income (Loss) Compensation
Grantor
Stock
Ownership
Trust
Treasury
Stock
Total
Stockholders’
Equity
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
5,977
27,365
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
Treasury stock
(4,000)
314,350
(12,371)
14,535
(2,556)
314,350
14,535
(2,556)
326,329
(12,371)
47,480
1,466
9,750
(190,784)
(190,784)
1,466
5,274
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
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
655
655
22,661
Grantor stock ownership trust
293
7,132
Treasury stock
(2,000)
370,764
(11,809)
30,923
(1,330)
370,764
30,923
(1,330)
400,357
(11,809)
23,316
1,466
13,502
(108,332)
(108,332)
1,466
6,370
Balance at November 30, 2003
54,077
(7,607)
(7,448) $54,077 $538,241 $1,462,342
$38,488
$ (7,512) $(165,332) $(327,453) $1,592,851
See accompanying notes.
an n ual re p o rt 2oo3
63
Consolidated Statements of Cash Flows
years ended novemb er 3 0 ,
in thousands
Cash flows from operating activities:
2003
2002
2001
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
$ 370,764
$ 314,350
$ 214,217
Equity in pretax income of unconsolidated joint ventures
Minority interests
Amortization of discounts and issuance costs
Depreciation and amortization
Provision for deferred income taxes
Change in assets and liabilities, net of effects from acquisitions:
Receivables
Inventories
Accounts payable, accrued expenses and other liabilities
Other, net
Net cash provided by operating activities
Cash flows from investing activities:
Acquisitions, net of cash acquired
Investments in unconsolidated joint ventures
Net sales 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
Cash flows from financing activities:
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
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 (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental disclosures of cash flow information:
Interest paid, net of amounts capitalized
Income taxes paid
Supplemental disclosures of noncash activities:
Cost of inventories acquired through seller financing
Inventory of consolidated variable interest entities
Conversion of Feline Prides
See accompanying notes.
(2,457)
26,889
1,769
21,509
12,126
340,424
(464,494)
121,966
33,662
462,158
(105,622)
(9,317)
5,470
7,843
(13,052)
(114,678)
(516,277)
295,332
(129,016)
(7,231)
(86,848)
36,818
(11,983)
(11,809)
(108,332)
(539,346)
(191,866)
329,985
(4,378)
16,994
2,155
17,173
(59,438)
113,956
(186,588)
149,513
(6,747)
356,990
(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
(3,875)
27,932
1,284
43,858
(44,742)
(372,852)
(137,103)
295,856
21,345
45,920
(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
$ 138,119
$ 329,985
$ 281,333
$ 23,534
108,335
$ 36,555
121,283
$ 54,128
61,033
$ 43,717
27,390
$ 32,637
$ 54,550
189,750
kb hom e
64
Notes to Consolidated Financial Statements
n o t e 1 : s u m m a r y o f s i g n i f i c a n t
a c c o u n t i n g p o l i c i e s
Operations 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,
Georgia, Illinois, Nevada, New Mexico, North Carolina and Texas.
In France, the Company operates through a 57% majority-owned
subsidiary which also develops commercial and high-density residen-
tial 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.
Basis of presentation The consolidated financial statements include
the accounts of the Company and all significant subsidiaries and joint
ventures in which a controlling interest is held. All intercompany
transactions have been eliminated. Investments in unconsolidated joint
ventures in which the Company has less than a controlling interest are
accounted for using the equity method.
Use of estimates The financial statements have been prepared in con-
formity with generally accepted accounting principles and, as such,
include amounts based on informed estimates and judgments of man-
agement. Actual results could differ from these estimates.
Cash and cash equivalents The Company considers all highly liquid
debt instruments and other short-term investments, purchased with
a maturity of three months or less, to be cash equivalents. As of
November 30, 2003 and 2002, the Company’s cash equivalents totaled
$40.6 million and $264.4 million, respectively.
Foreign currency translation Results of operations for French enti-
ties are translated to United States 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
adjustments are recorded in stockholders’ equity as foreign currency
translation adjustments.
Construction operations Housing and other real estate sales are rec-
ognized when title passes to the buyer and all of the following condi-
tions 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, con-
dominiums and commercial buildings, under long-term contracts with
individual investors who own the land, are recognized using the
percentage of completion method, which is generally based on costs
incurred as a percentage of estimated total costs of individual projects.
Revenues recognized in excess of amounts 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 development 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 deter-
mined 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 Com-
pany’s inventories typically do not consist of completed projects.
Mortgage banking operations The Company’s mortgage banking
subsidiary generates revenues primarily from the following sources:
sales of mortgage loans; sales of mortgage servicing rights; mortgage
loan origination fees; mortgage servicing income; and interest income.
Revenues from these various sources, except for interest income which
is presented separately, are included in other mortgage banking
revenues in the consolidated statements of income. Gains or losses on
the sales of mortgage loans and related servicing rights are recog-
nized when the loans are sold and delivered to third-party investors.
Mortgage loan origination fees are earned when the loans associated
with the homes financed are closed and funded. Earned origination
fees, net of direct origination costs, are deferred and recognized as
revenues, along with the associated gains or losses on the sales of the
mortgage loans and related servicing rights, when the mortgage loans
are sold to third-party investors. The mortgage banking operations
earn mortgage servicing income by servicing mortgage loans on behalf
of investors in accordance with individual servicing agreements or on
its own behalf during the interim period before mortgage loans are
sold. Mortgage loan servicing income, which is generally based on a
percentage of the outstanding principal balances of the serviced mort-
gage loans, is recorded as income as the installment collections on the
mortgage loans are received. Interest income is accrued as earned.
First mortgages and mortgage-backed securities consist of securi-
ties 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 principally based on pub-
lic market quotations or outstanding commitments obtained from
investors to purchase first mortgages receivable.
Principal and interest payments received on mortgage-backed
securities are invested in short-term securities maturing on the next
debt service date of the collateralized mortgage obligations for which
the securities are held as collateral. Such payments are restricted
to the payment of the debt service on the collateralized mortgage
obligations.
Accounting for derivative instruments and hedging activities
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 instru-
ments, including derivative instruments embedded in other contracts,
an n ual re p o rt 2oo3
65
and hedging activities. SFAS No. 133 requires the Company to recog-
nize 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 connection with the adoption of SFAS No. 133, at December
1, 2000, the Company’s mortgage banking subsidiary recognized a
pretax cumulative effect transition adjustment which reduced other
comprehensive income by $2.4 million. 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 comprehen-
sive income of $2.4 million 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 $3.9 million were recorded in other
comprehensive income at November 30, 2001 and were recognized in
earnings, generally within three months or less, concurrent with the
recognition in earnings of the hedged forecasted loan sales.
To meet the financing needs of its customers, the Company’s mort-
gage banking subsidiary is party to interest rate lock commitments
(“IRLCs”) which are extended to borrowers who have applied for loan
funding and meet certain defined credit and underwriting criteria. In
accordance with SFAS No. 133, the Company’s mortgage banking sub-
sidiary classifies and accounts for IRLCs as non-designated derivative
instruments at fair value with gains and losses recorded to earnings.
In the normal course of business and pursuant to its risk manage-
ment policy, the Company’s mortgage banking subsidiary uses deriv-
ative financial instruments to reduce its exposure to fluctuations in
interest rates. When interest rates rise, loans held for sale and any
applications in process with locked-in interest rates decline in value.
To preserve the value of such loans, the mortgage banking operations
enter into mortgage forward delivery contracts and non-mandatory
commitments to minimize the impact of movements in market inter-
est rates on the mortgage loans held for sale and IRLCs.
Through May 31, 2003, the mortgage forward delivery contracts
and non-mandatory commitments were designated as cash flow
hedges. Changes in the value of these instruments were recognized
in other comprehensive income until such time that earnings were
affected by the underlying hedged item. Earnings were affected when
the loans were sold, typically within 45 days of funding. The entire
amount of the hedge in other comprehensive income at November 30,
2002 was reclassified into earnings within the subsequent 12 months.
On May 31, 2003 the Company’s mortgage banking subsidiary elected
to discontinue its accounting for derivative instruments as cash flow
hedges. Accordingly, all derivative instruments as of June 1, 2003 were
carried in the consolidated balance sheet at fair value, with changes
in the value recorded directly to earnings. As of November 30, 2003,
there were no amounts remaining in other comprehensive income
related to cash flow derivative instruments. In addition, the mortgage
banking operations did not recognize any gain or loss in earnings
during the years ended November 30, 2003 and November 30, 2002
resulting from hedge ineffectiveness. The Company’s mortgage bank-
ing subsidiary continues to evaluate the appropriate accounting treat-
ment of its derivative instruments and intends to remain in a no-
hedge position pending the result of recent Securities and Exchange
Commission (“SEC”) guidance regarding the valuation of IRLCs.
The mortgage forward delivery contracts carried a weighted aver-
age interest rate of 55/9% and 53/5% as of November 30, 2003 and
November 30, 2002, respectively. The derivative instruments as of
the end of each period included various termination dates extending
through February 19, 2004 for the year ended November 30, 2003 and
February 20, 2003 for the year ended November 30, 2002.
The following table summarizes the interest rate sensitive instru-
ments of the mortgage banking operations:
nove mb er 3 0,
in thousands
Instruments:
Loans held for sale
Forward delivery contracts
IRLCs
2003
2002
Notional
Amount
Fair
Value
Notional
Amount
Fair
Value
$197,627 $197,605 $549,113 $549,113
1,330
290,915
1,238
60,282
625,226
147,485
152
78
Fair value estimates are made as of a specific point in time based
on estimates using present value or other valuation techniques. These
techniques involve uncertainties and are significantly affected by the
assumptions used and the judgments made regarding risk characteristics
of various financial instruments, discount rates, estimates of future cash
flows, and other factors.
The following describes the methods and assumptions the Com-
pany’s mortgage banking subsidiary uses in estimating fair values of
loans held for sale, forward delivery contracts and IRLCs:
Loans held for sale These loans are stated at the lower of cost or
market. Market is estimated using the quoted market prices for
securities backed by similar types of loans and current investor or
dealer commitments to purchase loans.
Forward delivery contracts The fair value of these instruments
is estimated using current market prices for dealer or investor
commitments relative to the existing positions of the mortgage
banking operations.
IRLCs The fair value of these instruments is estimated using the
fees and rates currently charged to enter into similar agreements,
taking into account the remaining terms of the agreements and the
present creditworthiness of the counterparties. For fixed rate loan
commitments, fair value also considers the difference between cur-
rent market interest rates and the existing committed rates.
kb hom e
66
Stock-based compensation The Company has elected to account for
stock-based compensation using the intrinsic value method as pre-
scribed by Accounting Principles Board Opinion No. 25, “Accounting
for Stock Issued to Employees” (“APB Opinion No. 25”) and related
interpretations. The Company adopted the disclosure-only provisions
of Statement of Financial Accounting Standards No. 123, “Accounting
for Stock-Based Compensation” (“SFAS No. 123”), as amended by
Statement of Financial Accounting Standards No. 148, “Accounting
for Stock-Based Compensation – Transition and Disclosure” (“SFAS
No. 148”). As the exercise price of the Company’s employee stock
options equals the market price of the underlying common stock on
the date of grant, no compensation costs related to these awards are
reflected in net income. The following table illustrates the effect on net
income and earnings per share if the fair value recognition provisions
of SFAS No. 123 had been applied to all outstanding and unvested
awards in the years ending November 30, 2003, 2002 and 2001.
years ended novemb er 3 0 ,
in thousands, except per share amounts
Net income – as reported
Deduct stock-based compensation
expense determined using the
fair value method, net of related
tax effects
2003
2002
2001
$370,764 $314,350 $214,217
(13,486)
(12,416)
(6,963)
Pro forma net income
$357,278 $301,934 $207,254
Earnings per share:
Basic – as reported
Basic – pro forma
Diluted – as reported
Diluted – pro forma
$
9.41 $
9.07
8.80
8.69
7.57 $
7.27
7.15
7.00
5.72
5.53
5.50
5.35
Income taxes
Income taxes are provided for at rates applicable in the
countries in which the income is earned. Provision is made currently
for United States federal income taxes on earnings of foreign sub-
sidiaries that are not expected to be reinvested indefinitely.
Other comprehensive income The accumulated balances related to
each component of other comprehensive income are as follows:
and stock purchase contracts. The following table presents a reconcili-
ation of average shares outstanding:
yea rs ended novembe r 30,
in thousands
Basic average shares outstanding
Net effect of stock options assumed
2003
2002
2001
39,389
41,511
37,465
to be exercised
2,734
2,443
1,454
Diluted average shares outstanding
42,123
43,954
38,919
Goodwill 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. 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 circumstances, and
written off when impaired, rather than amortized as previous standards
required. The Company adopted SFAS No. 142 on December 1, 2001
and as a result is no longer recording amortization expense related to
goodwill. Since adopting SFAS No. 142, the Company tests goodwill
for impairment using the two-step process prescribed in the pro-
nouncement. 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, 2003 and 2002 indicated no impairment. 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.
Results reported for the year ended November 30, 2001 included after
tax goodwill amortization expense of $18.5 million. Elimination of
this amortization expense for the year ended November 30, 2001
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.
The changes in the carrying amount of goodwill for the years
ended November 30, 2003 and 2002, by segment, are as follows:
nov em ber 30,
in thousands
Cumulative foreign currency
translation adjustments
Net derivative gains
Total
2003
2002
$38,488
$7,565
1,330
$38,488
$8,895
in thousands
Balance as of November 30, 2001
Foreign currency translation
Balance as of November 30, 2002
Goodwill acquired
Foreign currency translation
Construction
$190,785
3,829
194,614
26,366
8,019
Mortgage
Banking
$
Total
$190,785
3,829
194,614
26,366
8,019
Earnings per share Basic earnings per share is calculated by dividing
net income by the average number of common shares outstanding for
the period. Diluted earnings per share is calculated by dividing net
income by the average number of shares outstanding including all
dilutive potentially issuable shares under various stock option plans
Balance as of November 30, 2003
$228,999
$
$228,999
an n ual re p o rt 2oo3
67
Segment information
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
operations are engaged in the acquisition and development of land
primarily for residential purposes and offer a wide variety of homes
that are designed to appeal to first-time and first move-up home-
buyers. Domestically, the Company currently sells homes in Arizona,
California, Colorado, Florida, Georgia, Illinois, Nevada, New Mexico,
North Carolina and Texas. Internationally, the Company operates in
France through a majority-owned subsidiary. In addition to construct-
ing homes, the Company’s French subsidiary builds commercial proj-
ects 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 domes-
tic homebuyers. The mortgage banking segment originates, processes
and sells mortgages to third-party investors. The Company generally
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 is 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
statements as described in the summary of significant accounting poli-
cies. Management evaluates a segment’s performance based upon a
number of factors including pretax results.
Recent accounting pronouncements
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 require-
ments, including disclosures about regulatory capital and net worth
requirements. SOP 01-6 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.” Such allocation was not previously
required. SOP 01-6 also requires that income from the sale of loan
servicing rights be recognized when the related loan is sold, rather than
upon the loan closing as was permitted under previous accounting
guidance. This has the effect of deferring the mortgage banking
operations’ recognition of servicing rights income for loans that it
originates until the following month when loan settlement typically
occurs. The adoption of SOP 01-6 did not have a material impact on
the Company’s results for 2003.
In April 2002, the FASB issued Statement of Financial Accounting
Standards No. 145, “Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections,”
which, among other things, addresses the income statement classifica-
tion of gains and losses from the extinguishment of debt. The provisions
of SFAS No. 145 related to the rescission of Statement of Financial
Accounting Standards No. 4, “Reporting Gains and Losses from
Extinguishment of Debt,” are effective for fiscal years beginning after
May 15, 2002. The Company recognized a charge of $4.3 million ($2.9
million, net of tax) in the first quarter of 2003 related to the extin-
guishment of its 95/8% senior subordinated notes, which were due in
2006. Due to the Company’s adoption of SFAS No. 145, this early
extinguishment charge, which previously would have been accounted
for as an extraordinary item, was reflected as interest expense in results
from continuing operations in 2003.
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 guarantor in its interim and annual financial statements
about its obligations under guarantees. FASB Interpretation No. 45
also clarifies the requirements 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 periods ending after December 15,
2002 and initial recognition and initial measurement provisions are
applicable to guarantees issued or modified after December 31, 2002.
The adoption of the initial recognition and initial measurement pro-
visions of FASB Interpretation No. 45 did not have a material effect
on the Company’s financial position or results of operations. The
disclosures required by FASB Interpretation No. 45 have been pro-
vided herein.
In December 2002, the FASB issued SFAS No. 148, which amends
SFAS No. 123. SFAS No. 148 provides alternative methods of transition
for a voluntary change to the fair value based method of accounting for
stock-based employee compensation. It also requires prominent disclo-
sure in both the annual and interim financial statements about the
method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The Company has not
elected to change to the fair value based method of accounting for stock-
based compensation. The disclosures required by SFAS No. 148 have
been provided herein.
In January 2003, the FASB issued FASB Interpretation No. 46,
“Consolidation of Variable Interest Entities” (“FASB Interpretation
No. 46”). FASB Interpretation No. 46 is intended to clarify the
application of Accounting Research Bulletin No. 51, “Consolidated
Financial Statements,” to certain entities (referred to as “variable inter-
est entities” or “VIEs”) 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 sub-
kb hom e
68
ordinated financial support from other parties. Pursuant to FASB
Interpretation No. 46, an enterprise that absorbs a majority of the VIE’s
expected losses, receives a majority of the VIE’s expected residual
returns, or both, is determined to be the primary beneficiary of the VIE
and must consolidate the entity. FASB Interpretation No. 46 applied
immediately to VIEs created after January 31, 2003. For VIEs created
on or before January 31, 2003, FASB Interpretation No. 46 is effective
no later than the first interim or annual period ending after March 15,
2004 (the Company’s quarter ending May 31, 2004). Certain of the
disclosure requirements of FASB Interpretation No. 46 apply in all
financial statements filed after January 31, 2003.
In the ordinary course of its business, the Company enters into
land option contracts in order to procure land for the construction of
homes. Under such land option contracts, the Company will fund a
specified option deposit or earnest money deposit in consideration for
the right to purchase land in the future, usually at a predetermined
price. Under the requirements of FASB Interpretation No. 46, certain
of the Company’s land option contracts may create a variable interest
for the Company, with the land seller being identified as a VIE.
In compliance with FASB Interpretation No. 46, the Company
analyzed its land option contracts and other contractual arrangements
entered into after January 31, 2003 and has consolidated the fair value
of certain VIEs from which the Company is purchasing land under
option contracts. The consolidation of these VIEs, where the Company
was determined to be the primary beneficiary, added $27.4 million to
inventory and other liabilities in the Company’s consolidated balance
sheet at November 30, 2003. The Company’s cash deposits related to
these land option contracts totaled $6.1 million at November 30,
2003. Creditors, if any, of these VIEs have no recourse against the
Company. As of November 30, 2003, excluding consolidated VIEs,
the Company had cash deposits and/or letters of credit totaling $97.3
million which were associated with land option contracts having an
aggregate purchase price of $1.54 billion. The Company is in the
process of reviewing contracts entered into on or before January 31,
2003 in order to assess the extent of its interests. Depending upon the
specific terms or conditions of such entities, the Company may be
required to consolidate other VIEs in subsequent periods.
In April 2003, the FASB issued Statement of Financial Account-
ing Standards No. 149, “Amendment of Statement 133 on Derivative
Instruments and Hedging Activities” (“SFAS No. 149”). SFAS No.
149 amends and clarifies financial accounting and reporting for deriv-
ative instruments, including certain derivative instruments embedded
in other contracts and for hedging activities that fall within the scope
of SFAS No. 133. SFAS No. 149 is effective for contracts entered into
or modified after June 30, 2003. The adoption of SFAS No. 149 did
not have a material effect on the Company’s financial position or results
of operations.
In May 2003, the FASB issued Statement of Financial Account-
ing Standards No. 150, “Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity” (“SFAS No. 150”),
which establishes standards regarding the classification and measure-
ment of certain financial instruments with characteristics of both
liabilities and equity. SFAS No. 150 was effective for financial instru-
ments entered into or modified after May 31, 2003 and otherwise is
effective at the beginning of the first interim period beginning after
June 15, 2003. The adoption of SFAS No. 150 did not have a material
impact on the Company’s financial statements.
Reclassifications Certain amounts in the consolidated financial
statements of prior years have been reclassified to conform to the 2003
presentation.
n o t e 2 : a c q u i s i t i o n s
In 2001, the Company acquired Trademark Home Builders, Inc., a
builder of single-family homes in Jacksonville, Florida. The acquisi-
tion marked the Company’s entry into Florida. In addition, KBSA
completed the acquisition of Résidences Bernard Teillaud, a France-
based builder of condominiums. Total consideration, including debt
assumed, associated with the two acquisitions was $58.8 million. Both
acquisitions were accounted for under the purchase method of account-
ing. The excess of the purchase price over the estimated fair value
of net assets acquired was allocated to goodwill and assigned to the
Company’s construction segment. The results of the two acquired com-
panies were included in the Company’s consolidated financial state-
ments 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.
During 2002, the Company acquired Orlando, Florida-based
American Heritage Homes (“American Heritage”) for approximately
$74.0 million, including the assumption of debt. The American
Heritage acquisition strengthened the Company’s market position in
Florida, marking its entry into the Orlando market and supplement-
ing its Tampa start-up business. The acquisition was accounted for
under the purchase method of accounting and was assigned to the
Company’s construction segment. No goodwill was recorded in con-
nection with the acquisition. The results of American Heritage 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.
During 2003, the Company acquired Atlanta, Georgia-based
Colony Homes, which expanded the Company’s operations into
Atlanta, Georgia and Charlotte and Raleigh, North Carolina, strength-
ening the Company’s position in its Southeast region. The Company
also acquired substantially all of the homebuilding assets of Chicago,
Illinois-based Zale Homes (“Zale”). The Zale acquisition marked the
Company’s entry into the greater Chicago market. Total consideration,
including debt assumed, associated with the two acquisitions was
$174.9 million. Both acquisitions were accounted for under the pur-
an n ual re p o rt 2oo3
69
chase method of accounting. The excess of the purchase price over the
estimated fair value of net assets acquired was allocated to goodwill and
assigned to the Company’s construction segment. The results of the
two acquired companies were included in the Company’s consolidated
financial statements as of their respective acquisition dates. The pro
forma results of the Company for 2003 and 2002, assuming these
acquisitions had been made at the beginning of each year, would not
be materially different from reported results.
n o t e 3 : r e c e i v a b l e s
Construction Trade receivables amounted to $296.3 million and
$293.5 million at November 30, 2003 and 2002, respectively.
Included in these amounts at November 30, 2003 and 2002 are
unbilled receivables of $268.4 million and $270.7 million, respec-
tively, and billed receivables of $27.9 million and $22.4 million,
respectively, due from buyers on sales of French single-family detached
homes, condominiums and commercial buildings under long-term
contracts accounted for using the percentage of completion method.
The buyers are contractually obligated to remit payments against
their unbilled balances. Amounts are billed under long-term contracts
according to the terms of the individual contracts, which provide for
an initial billing upon execution of the contract and subsequent
billings upon the completion of specific construction phases defined
under French law. The final billing occurs upon delivery of the home,
condominium or commercial building to the buyer. All of the unbilled
and billed receivables related to long-term contracts are expected
to be collected within one year. Other receivables of $134.0 million
at November 30, 2003 and $110.5 million at November 30, 2002
included mortgages and notes receivable, escrow deposits and amounts
due from municipalities and utility companies. At November 30,
2003 and 2002, trade and other receivables were net of allowances for
doubtful accounts of $18.7 million and $22.9 million, respectively.
Mortgage banking
First mortgages and mortgage-backed securities
consisted of loans of $.8 million at November 30, 2003 and $6.2 mil-
lion at November 30, 2002 and mortgage-backed securities of $6.9
million and $14.8 million at November 30, 2003 and 2002, respec-
tively. 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 81/2% and 83⁄8% at November 30, 2003 and 2002, respectively
(with rates ranging from 7% to 115/8% in 2003 and 7% to 113⁄4%
in 2002).
The 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 $.6 million and $0, respectively, at November 30, 2003
and $1.0 million and $0, respectively, at November 30, 2002.
First mortgages held under commitments of sale and other receiv-
ables consisted of first mortgages held under commitments of sale
of $197.6 million at November 30, 2003 and $549.1 million at
November 30, 2002 and other receivables of $14.2 million and $29.4
million at November 30, 2003 and 2002, respectively. The first mort-
gages held under commitments of sale, which are generally sold to
third-party investors within 45 days of their funding date, bore inter-
est at average rates of 61/10% and 61/2% at November 30, 2003 and
2002, respectively. The balance in first mortgages held under commit-
ments of sale and other receivables fluctuates significantly during the
year and typically reaches its highest level at quarter-ends, corre-
sponding to the Company’s home and mortgage delivery activity. The
Company’s mortgage banking subsidiary has established valuation
allowances for loans held for investment and first mortgages held
under commitments of sale. These valuation allowances totaled $.3
million and $1.8 million, respectively, as of November 30, 2003 and
$2.3 million and $2.5 million, respectively, as of November 30, 2002.
The Company’s mortgage banking subsidiary may be required to
repurchase an individual loan sold to an investor if it breaches the rep-
resentations or warranties that it makes in connection with the sale of
the loan, in the event of an early payment default, or if the loan does
not comply with the underwriting standards or other requirements of
the ultimate investor.
n o t e 4 : i n v e n t o r i e s
Inventories consisted of the following:
nove mb er 3 0,
in thousands
2003
2002
Homes, lots and improvements in production
Land under development
$2,325,136 $1,776,430
397,067
558,346
Total inventories
$2,883,482 $2,173,497
Land under development primarily consists of parcels on which
50% or less of estimated development costs have been incurred.
Included in inventories as of November 30, 2003 and 2002 were
$249.2 million and $239.0 million, respectively, of inventories related
to long-term contracts of the Company’s French subsidiary. Inventories
relating to long-term contracts are stated at actual costs incurred to
date, reduced by amounts identified with sales recognized on units
delivered or progress completed.
The Company’s interest costs are as follows:
yea rs ended novembe r 30,
in thousands
2003
2002
2001
Capitalized interest, beginning of year
Interest incurred
Interest expensed
Interest amortized
$ 97,096 $ 97,534 $ 99,585
103,046
101,100
118,824
(41,072)
(32,730)
(23,780)
(64,025)
(68,808)
(69,399)
Capitalized interest, end of year
$122,741 $ 97,096 $ 97,534
kb hom e
70
n o t e 5 : i n v e s t m e n t s i n
u n c o n s o l i d a t e d j o i n t v e n t u r e s
The Company participates in a number of joint ventures in which it
has less than a controlling interest. These joint ventures, which oper-
ate in certain markets in the United States and France where the
Company’s consolidated construction operations are located, are typi-
cally engaged in the development, construction and sale of residential
properties and commercial projects. Combined condensed financial
information concerning the Company’s unconsolidated joint venture
activities follows:
n o t e 6 : m o r t g a g e s a n d n o t e s p a y a b l e
Construction Mortgages and notes payable consisted of the following
(interest rates are as of November 30):
nove mb er 3 0,
in thousands
Unsecured domestic borrowings under a
revolving credit facility (22⁄5% in 2003)
Term loan borrowings (3% in 2002)
Unsecured French borrowings (24⁄5% to
2003
2002
$ 107,100
$ 182,950
41⁄5% in 2003 and 4% to 53⁄8% in 2002)
21,601
17,515
nov em ber 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
2003
2002
$ 16,702 $ 13,627
27,608
86,949
1,006
25,476
139,569
746
$182,493 $129,190
$ 55,869 $ 41,490
32,145
48,152
32,797
45,675
21,023
34,532
$182,493 $129,190
The joint ventures finance land and inventory investments of
the Company’s operating subsidiaries through a variety of borrow-
ing arrangements. The Company typically does not guarantee these
financing arrangements.
years ended novemb er 3 0 ,
in thousands
Revenues
Cost of sales
Other expenses, net
2003
2002
2001
$ 47,454
(32,469)
(8,129)
$ 65,884
(45,490)
(10,715)
$ 82,122
(56,969)
(18,668)
Total pretax income
$ 6,856
$ 9,679
$ 6,485
The Company’s share of
pretax income
$ 2,457
$ 4,378
$ 3,875
The Company’s share of pretax income includes management fees
earned from the unconsolidated joint ventures.
Mortgages and land contracts due to
land sellers and other loans (33⁄5% to 10%
in 2003 and 51⁄2% to 12% in 2002)
Senior notes due 2004 at 73⁄4%
French senior notes due 2009 at 83⁄4%
Senior subordinated notes due 2006 at 95⁄8%
Senior subordinated notes due 2008 at 85⁄8%
Senior subordinated notes due 2010 at 73⁄4%
Senior subordinated notes due 2011 at 91⁄2%
24,602
175,000
179,865
200,000
295,764
250,000
67,733
175,000
149,160
124,695
200,000
250,000
Total mortgages and notes payable
$1,253,932 $1,167,053
On October 24, 2003, the Company entered into a four-year $1.00
billion unsecured revolving credit facility (the “$1 Billion Credit
Facility”) with a consortium of banks. The $1 Billion Credit Facility
replaced the Company’s $644.0 million revolving credit facility, which
was scheduled to expire in 2004 and its $183.0 million five-year term
loan, scheduled to expire in 2005. Interest on the $1 Billion Credit
Facility is payable monthly at the London Interbank Offered Rate plus
an applicable spread on amounts borrowed.
The Company’s French subsidiaries have lines of credit with vari-
ous banks which totaled $181.8 million at November 30, 2003 and
have various committed expiration dates through May 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
23/5% and 33⁄8% at November 30, 2003 and 2002, respectively.
The $175.0 million 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 150.0 million 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 obliga-
tions of KBSA and rank pari passu in right of payment with all other
an n ual re p o rt 2oo3
71
senior unsecured indebtedness of KBSA. The Company does not guar-
antee 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. 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.
On December 14, 2001, pursuant to its universal shelf registra-
tion statement filed with the 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 inter-
est payable semi-annually, represent unsecured obligations of the
Company and are subordinated to all existing and future senior indebt-
edness 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 other-
wise 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, which
were due in 2003. The remaining net proceeds were used for general
corporate purposes.
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 $750.0 million 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. Pursuant to the 2001 Shelf
Registration, on January 27, 2003, the Company issued $250.0 mil-
lion 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 of 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 indebt-
edness 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. As of
November 30, 2003, the Company had $450.0 million of remaining
capacity under the 2001 Shelf Registration.
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
which were due in 2006. The remaining net proceeds were used for
general corporate purposes.
On February 8, 2001, 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 73⁄4% senior notes and 85⁄8%, 73⁄4% and 91⁄2% senior subordi-
nated notes contain certain restrictive covenants that, among other
things, limit the ability of the Company to incur additional indebted-
ness, pay dividends, make certain investments, create certain liens,
engage in mergers, consolidations, or sales of assets, or engage in cer-
tain 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 subject to limitations on acquisitions,
inventories and indebtedness. Based on the terms of the Company’s
$1 Billion Credit Facility, senior notes and senior subordinated notes,
retained earnings of $354.5 million were available for payment of cash
dividends or stock repurchases at November 30, 2003.
Principal payments on senior and senior subordinated notes,
mortgages, land contracts and other loans are due as follows: 2004:
$197.4 million; 2005: $1.4 million; 2006: $.2 million; 2007: $.2
million; 2008: $.2 million; and thereafter: $925.8 million.
Assets (primarily inventories) having a carrying value of approxi-
mately $84.8 million are pledged to collateralize mortgages, land con-
tracts and other secured loans.
kb hom e
72
Mortgage banking Notes payable included the following (interest
rates are as of November 30):
nov em ber 30,
in thousands
2003
2002
$180,000 Mortgage Warehouse Facility
(19⁄10% in 2003)
$ 46,924
$400,000 Master Loan and Security Agreement
(19⁄10% in 2003 and 2% in 2002)
85,301 $450,629
$200,000 Master Loan and Security Agreement
(2% in 2002)
Total notes payable
56,945
$132,225 $507,574
tive use of the warehouse facilities. This agreement is not a committed
facility and may be terminated at the discretion of the counterparties.
Collateralized mortgage obligations represent bonds issued to
third parties which are collateralized by mortgage-backed securities
with substantially the same terms. At November 30, 2003 and 2002,
the collateralized mortgage obligations bore interest at rates ranging
from 8% to 121/4% and 83⁄4% to 113⁄4%, respectively, with stated orig-
inal 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.
On July 1, 2003, the Company’s mortgage banking subsidi-
ary entered into a $180.0 million revolving mortgage warehouse
agreement with a bank syndicate, (the “$180.0 Million Mortgage
Warehouse Facility”). The agreement, which expires on June 30, 2005,
provides for an annual fee based on the committed balance and pro-
vides for interest to be paid monthly at the London Interbank Offered
Rate plus an applicable spread on amounts borrowed. The $180.0
Million Mortgage Warehouse Facility replaced the mortgage banking
subsidiary’s $200.0 million master loan and security agreement, which
expired on June 30, 2003.
On October 6, 2003, the Company’s mortgage banking subsidiary
renewed its existing $400.0 million master loan and security agree-
ment (the “$400.0 Million Master Loan and Security Agreement”)
with an investment bank. The renewed agreement, which expires on
October 6, 2004, 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 mort-
gage banking subsidiary had negotiated a temporary increase in the
maximum credit amount available under the $400.0 Million Master
Loan and Security Agreement to $550.0 million through February 13,
2003. The temporary increase was obtained to meet the Company’s
increased volume of loan originations.
The amounts outstanding under the $180.0 Million Mortgage
Warehouse Facility and the $400.0 Million Master Loan and Security
Agreement are secured by separate borrowing bases, which include cer-
tain 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
restrictions which, among other things, require the maintenance of
certain financial statement ratios, a minimum tangible net worth and
a minimum net income.
In addition to the $180.0 Million Mortgage Warehouse Facility
and the $400.0 Million Master Loan and Security Agreement, the
Company’s mortgage banking subsidiary entered into a $300.0 million
purchase and sale agreement with a bank on November 19, 2003. This
agreement allows the Company’s mortgage banking subsidiary to accel-
erate the sale of its mortgage loan inventory resulting in a more effec
n o t e 7 : c o m p a n y o b l i g a t e d
m a n d a t o r i l y r e d e e m a b l e p r e f e r r e d
s e c u r i t i e s o f s u b s i d i a r y t r u s t h o l d i n g
s o l e l y d e b e n t u r e s o f t h e c o m p a n y
( f e l i n e p r i d e s )
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 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, and (ii) 1,000,000 Growth Prides with a face amount
per Growth Prides equal to the Stated Amount, which were units con-
sisting of a 1/100th beneficial interest in a zero-coupon United States
Treasury security and a stock purchase contract under which the hold-
ers 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 $11.4 million
were included as minority interests in the Company’s results of opera-
tions for the year ended November 30, 2001. On August 16, 2001, all
of the Company’s Feline Prides mandatorily converted into 5,977,109
shares of the Company’s common stock.
n o t e 8 : f a i r v a l u e s o f f i n a n c i a l
i n s t r u m e n t s
The estimated fair values of financial instruments have been deter-
mined based on available market information and appropriate valua-
tion methodologies. 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 indi-
cative of the amounts that the Company could realize in a current
market exchange.
an n ual re p o rt 2oo3
73
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:
nov em ber 30,
in thousands
Construction:
Financial liabilities
73/4% Senior notes
83/4% French
senior notes
95/8% Senior
subordinated notes
85/8% Senior
2003
2002
Carrying
Value
Estimated
Fair Value
Carrying
Value
Estimated
Fair Value
$175,000 $180,968 $175,000 $179,060
179,865
196,053
149,160
149,906
124,695
129,600
subordinated notes
200,000
223,666
200,000
209,750
73/4% Senior
subordinated notes
295,764
316,740
91/2% Senior
subordinated notes
250,000
281,563
250,000
272,300
FASB Interpretation No. 45 includes disclosure requirements for
product warranties. These requirements are applicable to the Company
since it provides a limited warranty on all of its homes. The specific
terms and conditions of warranties vary depending upon the market in
which the Company does business. For homes sold in the United
States, the Company generally provides a structural warranty of 10
years, a warranty on electrical, heating, cooling, plumbing and other
building systems each varying from two to five years based on geo-
graphic market and state law, and a warranty of one year for other com-
ponents of the home such as appliances. The Company estimates the
costs that may be incurred under each limited warranty and records
a liability in the amount of such costs at the time the revenue associ-
ated with the sale of each home is recognized. Factors that affect the
Company’s warranty liability include the number of homes sold, his-
torical and anticipated rates of warranty claims, and cost per claim. The
Company periodically assesses the adequacy of its recorded warranty
liabilities and adjusts the amounts as necessary.
Changes in the Company’s warranty liability are as follows:
Mortgage banking:
Financial assets
Mortgage-backed
securities
Financial liabilities
Collateralized mortgage
obligations secured
by mortgage-backed
securities
6,933
7,529
14,776
15,799
6,848
7,182
14,079
14,973
The Company used the following methods and assumptions in
estimating fair values:
Cash and cash equivalents; first mortgages held under commit-
ments 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 obliga-
tions 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.
n o t e 9 : c o m m i t m e n t s a n d c o n t i n g e n c i e s
Commitments and contingencies include the usual obligations of
homebuilders for the completion of contracts and those incurred in
the ordinary course of business. The Company is also involved in litiga-
tion incidental to its business, the disposition of which should have
no material effect on the Company’s financial position or results of
operations.
yea r ende d nove mb er 30,
in thousands
Balance at November 30, 2002
Warranties issued
Payments and adjustments
Balance at November 30, 2003
2003
$ 58,048
55,499
(36,599)
$ 76,948
In the normal course of its business, the Company issues certain
representations, warranties and guarantees related to its home sales,
land sales, commercial construction and mortgage loan originations
that may be affected by FASB Interpretation No. 45. Based on histor-
ical evidence, the Company does not believe any of these representa-
tions, warranties or guarantees would result in a material effect on its
financial condition or results of operations.
The Company is often required to obtain bonds and letters of
credit in support of its related obligations with respect to subdivision
improvement, homeowners association dues, start-up expenses, war-
ranty work, contractors license fees and earnest money deposits, among
other things. At November 30, 2003, the Company had outstanding
approximately $698.7 million and $92.4 million of performance bonds
and letters of credit, respectively. In the event any such bonds or let-
ters of credit are called, the Company would be obligated to reimburse
the issuer of the bond or letter of credit. However, the Company does
not believe that any currently outstanding bonds or letters of credit
will be called.
The Company conducts a portion of its land acquisition, develop-
ment and other activities through its participation in joint ventures in
which the Company holds less than a majority interest. The Company’s
investment in these unconsolidated joint ventures was $32.8 mil-
lion at November 30, 2003. These joint ventures had outstanding
secured construction debt of approximately $55.9 million at Novem-
ber 30, 2003. The Company does not typically guarantee the debt of
joint ventures.
kb hom e
74
n o t e 1 1 : e m p l o y e e b e n e f i t
a n d s t o c k p l a n s
Benefits are provided to most employees under the Company’s 401(k)
Savings Plan under which contributions by employees are partially
matched by the Company. The aggregate cost of this plan to the
Company was $6.8 million in 2003, $5.4 million in 2002 and $4.3
million in 2001. The assets of the Company’s 401(k) Savings Plan are
held by a third party trustee. Plan participants may direct the invest-
ment 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 invest-
ment choices available to participants. As of November 30, 2003,
approximately 10% of the plan’s net assets were invested in the
Company’s common stock. As of November 30, 2002 and 2001, less
than 5% of the plan’s net assets were invested in the Company’s com-
mon 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 compensa-
tion in excess of $1.0 million 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.
The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model with the follow-
ing assumptions used for grants in 2003, 2002 and 2001, respectively:
a risk-free interest rate of 2.38%, 2.89% and 3.68%; an expected
volatility factor for the market price of the Company’s common stock
of 46.91%, 50.86% and 48.88%; a dividend yield of 1.33%, .67% and
.90%; and an expected life of 4 years, 4 years and 4 years. The weighted
average fair value of options granted in 2003, 2002 and 2001 was
$18.73, $14.54 and $9.09, respectively.
Borrowings outstanding and letters of credit issued under the
Company’s $1 Billion Credit Facility are guaranteed by certain of the
Company’s domestic operating subsidiaries. As of November 30, 2003,
such outstanding borrowings and letters of credit totaled $107.1 mil-
lion and $89.7 million, respectively.
The Company leases certain property and equipment under non-
cancelable operating leases. Office and equipment leases are typically for
terms of three to five years and generally provide renewal options for
terms up to an additional five years. In most cases, the Company expects
that in the normal course of business, leases that expire will be renewed
or replaced by other leases. The future minimum rental payments under
operating leases, which primarily consist of office leases, having initial
or remaining noncancelable lease terms in excess of one year are as fol-
lows: 2004: $18.9 million; 2005: $12.8 million; 2006: $9.5 million;
2007: $8.2 million; 2008: $5.3 million; and thereafter: $15.9 million.
Rental expense for the years ended November 30, 2003, 2002 and 2001
was $16.5 million, $12.2 million and $14.0 million, respectively.
n o t e 1 0 : s t o c k h o l d e r s ’ e q u i t y
Preferred stock 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 divi-
dend distribution of one preferred share purchase right for each out-
standing 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, sub-
ject to certain antidilution provisions. The rights are not exercisable
until the earlier to occur of (i) 10 days following a public announce-
ment that a person or group has acquired Company stock representing
15% or more of the aggregate votes entitled to be cast by all shares of
common stock or (ii) 10 days following the commencement of a tender
offer for Company stock representing 15% or more of the 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 com-
pany 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.
an n ual re p o rt 2oo3
75
Stock option transactions are summarized as follows:
Options outstanding at beginning of year
Granted
Exercised
Cancelled
Options outstanding at end of year
Options exercisable at end of year
Options available for grant at end of year
2003
2002
2001
Weighted
Average
Exercise
Price
$30.08
63.91
25.13
34.02
$36.28
$27.85
Options
6,447,463
1,167,496
(664,621)
(136,615)
6,813,723
4,053,983
3,439,296
Options
6,245,092
1,960,177
(1,597,069)
(160,737)
6,447,463
3,168,539
4,109,608
Weighted
Average
Exercise
Price
$23.78
43.03
21.80
25.15
$30.08
$24.98
Options
5,738,732
2,138,700
(1,456,188)
(176,152)
6,245,092
2,843,650
3,909,248
Stock options outstanding at November 30, 2003 are as follows:
Options Outstanding
Options Exercisable
Range of Exercise Price
$12.88 to $25.00
$25.45 to $33.38
$33.56 to $45.75
$47.14 to $66.47
$12.88 to $66.47
Weighted
Average
Remaining
Contractual
Life
10.85
12.85
13.73
14.72
12.79
Weighted
Average
Exercise
Price
$22.01
28.05
42.57
63.78
$36.28
Options
2,119,280
1,720,825
1,759,917
1,213,701
6,813,723
Options
2,119,280
1,120,992
713,865
99,846
4,053,983
Weighted
Average
Exercise
Price
$19.13
28.24
11.90
24.74
$23.78
$21.51
Weighted
Average
Exercise
Price
$22.01
28.00
41.79
50.80
$27.85
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 .6 million shares of common stock
to certain officers and key employees. Restrictions lapse each year
through May 10, 2005 on specified portions of the shares awarded to
each participant so long as the participant has remained in the con-
tinuous employ of the Company. Restricted shares under this grant
outstanding at the end of the year totaled 43 thousand in 2003, 65
thousand in 2002 and 87 thousand in 2001.
Effective July 11, 2001, the Company awarded .4 million 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 execu-
tive is entitled to vote and receive dividends on such shares. Upon
issuance of the .4 million 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 restric-
tion period. The compensation expense associated with the restricted
shares totaled $1.5 million, $1.5 million and $.6 million for the years
ended November 30, 2003, 2002 and 2001, respectively.
During 2003 and 2002, the Company repurchased 2.0 million
and 4.0 million shares of its common stock at an aggregate price of
$108.3 million and $190.8 million, respectively, under stock repur-
chase programs authorized by its board of directors. On July 10, 2003,
the Company’s board of directors approved an increase in the Com-
pany’s previously authorized stock repurchase program to permit
future purchases of up to 2.0 million additional shares of the Com-
pany’s common stock. No shares were repurchased under this authori-
zation as of November 30, 2003.
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 obliga-
tions 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 val-
ued at the market price at the date of purchase and are shown as a
reduction to stockholders’ 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 7.6 million, 7.9 million and 8.1
kb hom e
76
ended November 30, 2003 totaled $.3 million and were comprised of
service costs of $.2 million and interest costs of $45 thousand. For the
year ended November 30, 2002, these costs totaled $.5 million and
were comprised of service costs of $.5 million and interest costs of $40
thousand. The projected benefit obligations at November 30, 2003
and 2002 of $.8 million and $.5 million, respectively, were equal to the
net liabilities recognized in the balance sheet at those dates. For the
years ended November 30, 2003 and 2002, the weighted average dis-
count rate used for the KB Home Death Benefit Only Plan was 8%.
n o t e 1 3 : i n c o m e t a x e s
The components of pretax income are as follows:
yea rs ended novembe r 30,
in thousands
United States
France
2003
2002
2001
$492,070 $430,450 $286,629
37,888
38,800
61,394
Total pretax income
$553,464 $469,250 $324,517
The components of income taxes are as follows:
in thousands
Total
Federal
State
France
2003
Currently payable
Deferred
$192,506 $149,736
(15,370)
(9,806)
$24,500
$18,270
5,564
Total
$182,700 $134,366
$24,500
$23,834
2002
Currently payable
Deferred
$206,283 $168,063
(50,955)
(51,383)
$23,000
$15,220
(428)
Total
$154,900 $117,108
$23,000
$14,792
2001
Currently payable
Deferred
$156,051 $134,755
(57,321)
(45,751)
$17,500
$ 3,796
11,570
Total
$110,300 $ 77,434
$17,500
$15,366
million shares of common stock at November 30, 2003, 2002 and
2001, respectively. The trustee votes shares held by the Trust in accor-
dance with voting directions from eligible employees, as specified in a
trust agreement with the trustee.
n o t e 1 2 : p o s t r e t i r e m e n t b e n e f i t s
The Company has two supplemental non-qualified, unfunded retire-
ment 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 supplemental 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 expe-
rience, policy earnings and other factors are realized. As of November
30, 2003 and 2002, the cash surrender value of these insurance con-
tracts was $16.6 million and $8.2 million, respectively. Net periodic
benefit costs for the Company’s supplemental retirement plans for the
year ended November 30, 2003 totaled $.8 million and were com-
prised of service costs of $.7 million and interest costs of $.2 million.
Net periodic benefit costs for the year ended November 30, 2002 of
$2.5 million were comprised of service costs of $2.4 million and inter-
est costs of $.1 million. The projected benefit obligations of $3.4 mil-
lion and $2.5 million as of November 30, 2003 and 2002, respectively,
were equal to the net liabilities recognized in the balance sheet at those
dates. For the years ended November 30, 2003 and 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 cer-
tain 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, 2003 and 2002, the cash surrender value under these
policies was $8.7 million and $6.0 million, respectively. Net periodic
benefit costs for the KB Home Death Benefit Only Plan for the year
an n ual re p o rt 2oo3
77
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:
n o t e 1 4 : g e o g r a p h i c a l i n f o r m a t i o n
The following table presents information about the Company by geo-
graphic area.
in thousands
2003
Construction:
West Coast
Southwest
Central
Southeast
France
Total construction
Mortgage banking
Total
2002
Construction:
West Coast
Southwest
Central
Southeast
France
Total construction
Mortgage banking
2001
Construction:
West Coast
Southwest
Central
France
Total construction
Mortgage banking
Total
nov em ber 30,
in thousands
Deferred tax liabilities:
Installment sales
Bad debt and other reserves
Capitalized expenses
Repatriation of French subsidiaries
Depreciation and amortization
Other
2003
2002
$ 57,933 $ 34,045
286
16,917
9,927
403
21,448
19,093
7,664
1,687
935
Total deferred tax liabilities
108,228
62,110
Deferred tax assets:
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
66,677
21,904
63,312
27,309
6,715
8,325
53,232
19,064
7,586
55,765
20,687
24,663
61,420
18,661
8,756
9,201
22,845
9,880
8,254
274,124
240,132
Total
$165,896 $178,022
Income taxes computed at the statutory United States federal
income tax rate and income tax expense provided in the financial state-
ments differ as follows:
years ended novemb er 3 0 ,
in thousands
Amount computed at statutory rate
Increase (decrease) resulting from:
State taxes, net of federal
income tax benefit
Difference in French tax rate
Intercompany dividends
Tax credits
Other, net
2003
2002
2001
$193,712 $164,238 $113,581
15,925
389
2,540
(22,199)
(7,667)
14,950
59
(14)
(22,155)
(2,178)
11,375
640
5,019
(26,314)
5,999
Total
$182,700 $154,900 $110,300
The Company has commitments to invest $.6 million over two
years in affordable housing partnerships which are scheduled to pro-
vide tax credits.
Revenues
Identifiable
Assets
$1,971,487
1,195,683
1,155,359
547,993
904,907
$1,077,003
796,950
851,793
368,844
888,156
5,775,429
75,125
3,982,746
253,113
$5,850,554
$4,235,859
$1,716,078
1,022,746
1,413,173
111,143
675,754
$1,028,564
661,758
724,980
120,730
855,402
4,938,894
91,922
3,391,434
634,106
$5,030,816
$4,025,540
$1,605,917
992,949
1,326,133
576,716
$ 995,826
494,519
697,692
795,485
4,501,715
72,469
2,983,522
709,344
$4,574,184
$3,692,866
kb hom e
78
n o t e 1 6 : s u p p l e m e n t a l g u a r a n t o r
i n f o r m a t i o n
The Company’s obligations to pay principal, premium, if any, and
interest under certain debt instruments are guaranteed on a joint and
several basis by certain of the Company’s domestic operating subsid-
iaries (“Guarantor Subsidiaries”). The guarantees are full and uncondi-
tional and the guarantor subsidiaries are 100% owned by KB Home.
The Company has determined that separate, full financial statements
of the Guarantor Subsidiaries would not be material to investors and,
accordingly, supplemental financial information for the Guarantor
Subsidiaries is presented.
n o t e 1 5 : q u a r t e r l y r e s u l t s ( u n a u d i t e d )
Quarterly results for the years ended November 30, 2003 and 2002
follow:
in thousands,
except per share amounts
2003
Revenues
Operating income
Pretax income
Net income
Basic earnings
per share
Diluted earnings
per share
2002
Revenues
Operating income
Pretax income
Net income
Basic earnings
per share
Diluted earnings
per share
First
Second
Third
Fourth
$1,094,950 $1,440,104 $1,442,259 $1,873,241
224,754
207,136
138,736
132,410
121,474
81,374
151,078
146,015
97,815
90,434
78,839
52,839
1.32
1.25
2.05
1.94
2.51
2.33
3.57
3.31
$ 915,665 $1,139,654 $1,292,969 $1,682,528
201,648
184,732
123,732
135,402
125,192
83,892
102,108
95,662
64,062
71,265
63,664
42,664
1.00
.95
1.50
1.42
2.06
1.95
3.09
2.92
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.
an n ual re p o rt 2oo3
79
c o n d e n s e d c o n s o l i d a t i n g s t a t e m e n t s o f i n c o m e
year ended n ov em ber 30, 2 0 03
in thousands
Revenues
Construction:
Revenues
Construction and land costs
Selling, general and administrative expenses
Operating income
Interest expense, net of amounts capitalized
Minority interests
Other income
Construction pretax income (loss)
Mortgage banking pretax income
Total pretax income (loss)
Income taxes
Equity in earnings of subsidiaries
Net income
year ended n ov em ber 30, 2 0 02
in thousands
Revenues
Construction:
Revenues
Construction and land costs
Selling, general and administrative expenses
Operating income
Interest expense, net of amounts capitalized
Minority interests
Other income
Construction pretax income (loss)
Mortgage banking pretax income
Total pretax income (loss)
Income taxes
Equity in earnings of subsidiaries
Net income
KB Home
Corporate
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
Consolidating
Adjustments
$4,023,339
$1,827,215
4,023,339
(3,067,398)
(417,812)
1,752,090
(1,411,621)
(233,948)
$ (81,751)
(81,751)
95,451
(16,878)
600
538,129
(75,422)
(4,258)
1,202
(2,578)
459,651
(2,578)
800
540,517
459,651
(151,700)
106,521
(43,809)
(5,753)
3,655
60,614
35,777
96,391
(31,800)
$(540,517)
Total
$ 5,850,554
5,775,429
(4,479,019)
(733,511)
562,899
(23,780)
(26,889)
5,457
517,687
35,777
553,464
(182,700)
$538,739
$ 307,951
$
64,591
$(540,517)
$
370,764
KB Home
Corporate
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
Consolidating
Adjustments
$3,956,193
$1,074,623
3,956,193
(3,102,531)
(406,254)
447,408
(73,026)
1
4,415
$ (64,735)
(64,735)
68,612
(10,800)
1,247
(5,676)
378,798
(5,676)
1,800
482,243
378,798
(125,000)
982,701
(787,712)
(124,745)
70,244
(28,316)
(6,195)
2,889
38,622
57,506
96,128
(31,700)
$(482,243)
Total
$ 5,030,816
4,938,894
(3,890,243)
(595,734)
452,917
(32,730)
(16,994)
8,551
411,744
57,506
469,250
(154,900)
$478,367
$ 253,798
$
64,428
$(482,243)
$ 314,350
kb hom e
80
year ended n ov em ber 30, 2 0 01
in thousands
Revenues
Construction:
Revenues
Construction and land costs
Selling, general and administrative expenses
Operating income
Interest expense, net of amounts capitalized
Minority interests
Other income (expense)
Construction pretax income (loss)
Mortgage banking pretax income
Total pretax income (loss)
Income taxes
Equity in earnings of subsidiaries
Net income
KB Home
Corporate
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
Consolidating
Adjustments
$3,727,725
$846,459
3,727,725
(3,000,549)
(357,150)
370,026
(101,608)
85
6,042
274,545
274,545
(93,300)
773,990
(612,387)
(101,085)
60,518
(18,763)
(6,506)
2,101
37,350
33,771
71,121
(24,200)
$ (78,228)
(78,228)
79,299
(21,511)
(709)
(21,149)
(21,149)
7,200
349,917
$(349,917)
Total
$ 4,574,184
4,501,715
(3,612,936)
(536,463)
352,316
(41,072)
(27,932)
7,434
290,746
33,771
324,517
(110,300)
$335,968
$ 181,245
$ 46,921
$(349,917)
$
214,217
c o n d e n s e d c o n s o l i d a t i n g b a l a n c e s h e e t s
nov em ber 30, 2003
in thousands
Assets
Construction:
Cash and cash equivalents
Trade and other receivables
Inventories
Other assets
Mortgage banking
Investment in subsidiaries
Total assets
Liabilities and stockholders’ equity
Construction:
KB Home
Corporate
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
Consolidating
Adjustments
Total
$
28,386
2,032
443,076
473,494
284,283
$ (49,061)
60,663
2,131,061
23,877
2,166,540
$ 137,230
367,571
752,421
85,490
1,342,712
253,113
$ 116,555
430,266
2,883,482
552,443
3,982,746
253,113
$(284,283)
$ 757,777
$2,166,540
$1,595,825
$(284,283)
$4,235,859
Accounts payable, accrued expenses and other liabilities
Mortgages and notes payable
Minority interests in consolidated subsidiaries and joint ventures
Mortgage banking
Intercompany
Stockholders’ equity
$ 145,049
1,027,864
1,172,913
68,673
(2,076,660)
1,592,851
$ 469,159
21,301
$ 514,706
204,767
490,460
4,889
1,671,191
719,473
15,669
170,931
405,469
284,283
$1,128,914
1,253,932
2,382,846
89,231
170,931
$(284,283)
1,592,851
Total liabilities and stockholders’ equity
$ 757,777
$2,166,540
$1,595,825
$(284,283)
$4,235,859
an n ual re p o rt 2oo3
81
nov em ber 30, 2002
in thousands
Assets
Construction:
Cash and cash equivalents
Trade and other receivables
Inventories
Other assets
Mortgage banking
Investment in subsidiaries
Total assets
Liabilities and stockholders’ equity
Construction:
KB Home
Corporate
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
Consolidating
Adjustments
Total
$ 269,209
5,567
412,956
687,732
223,731
$ (65,965)
62,681
1,700,276
17,284
1,714,276
$ 106,190
335,709
473,221
74,306
989,426
634,106
$ 309,434
403,957
2,173,497
504,546
3,391,434
634,106
$(223,731)
$ 911,463
$1,714,276
$1,623,532
$(223,731)
$4,025,540
Accounts payable, accrued expenses and other liabilities
Mortgages and notes payable
Minority interests in consolidated subsidiaries and joint ventures
Mortgage banking
Intercompany
Stockholders’ equity
$ 144,569
932,646
1,077,215
58,078
(1,498,184)
1,274,354
$ 396,584
2,959
$ 412,960
231,448
399,543
125
1,314,608
644,408
16,063
555,757
183,576
223,728
$ 954,113
1,167,053
2,121,166
74,266
555,757
$(223,731)
1,274,351
Total liabilities and stockholders’ equity
$ 911,463
$1,714,276
$1,623,532
$(223,731)
$4,025,540
c o n d e n s e d c o n s o l i d a t i n g s t a t e m e n t s o f c a s h f l o w s
year ended n ov em ber 30, 2 0 03
in thousands
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to cash provided (used)
by operating activities
Net cash provided (used) by operating activities
KB Home
Corporate
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
Consolidating
Adjustments
Total
$ 538,739
$ 307,951
$ 64,591
$(540,517)
$ 370,764
(2,570)
(313,233)
536,169
(5,282)
407,197
471,788
91,394
(540,517)
462,158
Cash flows from investing activities:
Acquisitions, net of cash acquired
Other, net
Net cash used by investing activities
Cash flows from financing activities:
Net payments on credit agreements and other
short-term borrowings
Proceeds from issuance of notes
Redemption of notes
Repurchases of common stock
Other, net
Intercompany
Net cash provided (used) by financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
(1,768)
(1,768)
(11,851)
(11,851)
(105,622)
4,563
(101,059)
(440,427)
(75,850)
295,332
(129,016)
(108,332)
18,726
(776,084)
(775,224)
(240,823)
269,209
(14,594)
48,632
(85,185)
186,935
34,038
(338,677)
16,905
(65,965)
32,052
126,741
540,517
540,517
(105,622)
(9,056)
(114,678)
(516,277)
295,332
(129,016)
(108,332)
(81,053)
(539,346)
(191,866)
329,985
Cash and cash equivalents at end of year
$ 28,386
$ (49,060)
$ 158,793
$
$ 138,119
year ended n ov em ber 30, 2 0 02
in thousands
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to cash provided (used)
by operating activities
Net cash provided (used) by operating activities
Cash flows from investing activities:
Acquisitions, net of cash acquired
Other, net
Net cash provided (used) by investing activities
Cash flows from financing activities:
Net proceeds from (payments on) credit agreements and
other short-term borrowings
Proceeds from issuance of notes
Redemption of notes
Repurchases of common stock
Other, net
Intercompany
year ended n ov em ber 30, 2 0 01
in thousands
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to cash provided (used)
by operating activities
Net cash provided (used) by operating activities
Cash flows from investing activities:
Acquisitions, net of cash acquired
Other, net
Net cash provided (used) by investing activities
Cash flows from financing activities:
Net proceeds from (payments on) credit agreements and
other short-term borrowings
Proceeds from issuance of notes
Other, net
Intercompany
kb hom e
82
KB Home
Corporate
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
Consolidating
Adjustments
Total
$ 478,367
$253,798
$ 64,428
$(482,243)
$314,350
26,413
504,780
(87,331)
166,467
(35,627)
(35,627)
1,437
1,437
103,558
167,986
(27,548)
8,927
(18,621)
(254,076)
144,302
15,000
198,412
(175,000)
(190,784)
39,768
(380,100)
(25,540)
(147,107)
(7,609)
44,964
42,640
(482,243)
356,990
(27,548)
(25,263)
(52,811)
(239,076)
342,714
(175,000)
(190,784)
6,619
(255,527)
48,652
281,333
482,243
482,243
KB Home
Corporate
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
Consolidating
Adjustments
Total
$ 335,968
$ 181,245
$ 46,921
$(349,917)
$214,217
46,722
382,690
(6,125)
(208,894)
(168,297)
175,120
(161,973)
(349,917)
45,920
(5,307)
(5,307)
(572)
(572)
(191,000)
247,500
(3,858)
(147,567)
(16,294)
(199,926)
(53,724)
11,353
(42,371)
222,336
(8,102)
(2,424)
(53,724)
5,474
(48,250)
31,336
247,500
(28,254)
250,582
248,252
33,081
349,917
349,917
Net cash provided (used) by financing activities
(492,704)
(172,647)
(72,419)
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
(23,551)
292,760
(4,743)
(61,222)
76,946
49,795
Cash and cash equivalents at end of year
$ 269,209
$ (65,965)
$126,741
$ 000,000
$ 329,985
Net cash provided (used) by financing activities
(94,925)
(216,220)
211,810
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
282,458
10,302
(41,672)
(19,550)
7,466
42,329
Cash and cash equivalents at end of year
$ 292,760
$ (61,222)
$ 49,795
$ 000,000
$281,333
an n ual re p o rt 2oo3
83
n o t e 1 7 : s u b s e q u e n t e v e n t s ( u n a u d i t e d )
On December 5, 2003, the Company’s board of directors increased the
annual cash dividend on the Company’s common stock to $1.00 per
share from $.30 per share. The first quarterly cash dividend at the
increased rate of $.25 per share will be paid on February 25, 2004 to
shareholders of record on February 11, 2004.
On January 6, 2004, the Company acquired South Carolina-based
Palmetto Traditional Homes (“Palmetto”), a privately-held builder of
single-family homes, for $45.3 million, including the assumption of
debt. Palmetto generated revenues of approximately $90.0 million and
delivered 570 homes in Charleston and Columbia, South Carolina in
2003. The Palmetto acquisition marks the Company’s entry into South
Carolina. The results of Palmetto will be reflected as part of the
Company’s Southeast region operations.
On January 28, 2004, the Company issued $250.0 million of
53/4% senior notes (the “$250.0 Million Senior Notes”) at 99.474% of
the principal amount of the notes in a private placement. The notes,
which are due February 1, 2014, with interest payable semi-annually,
represent senior unsecured obligations of the Company and rank
equally in right of payment with all of the Company’s existing and
future senior unsecured indebtedness. The $250.0 Million Senior
Notes may be redeemed, in whole at any time or from time to time in
part, at a price equal to 100% of their principal amount, plus a pre-
mium, plus accrued and unpaid interest to the applicable redemption
date. The $250.0 Million Senior Notes are unconditionally guaranteed
jointly and severally by the Guarantor Subsidiaries on a senior unse-
cured basis. The Company used all of the net proceeds from the
issuance of the $250.0 Million Senior Notes to repay borrowings
outstanding under the $1 Billion Credit Facility. The Company has
agreed to file a registration statement with the SEC relating to an offer
to exchange the $250.0 Million Senior Notes for registered notes
issued by the Company on substantially identical terms, except that
they will be fully transferable.
kb hom e
84
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, 2003 and 2002, and the related
consolidated statements of income, stockholders’ equity, and cash flows
for each of the three years in the period ended November 30, 2003.
These financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with 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 assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall finan-
cial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
KB Home at November 30, 2003 and 2002, and the consolidated
results of their operations and their cash flows for each of the three
years in the period ended November 30, 2003, in conformity with
accounting principles generally accepted in the United States.
Los Angeles, California
December 17, 2003
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 regularly 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 compliance committee, without the presence of
management, to discuss any appropriate items.
Domenico Cecere
Senior Vice President and Chief Financial Officer
December 17, 2003
an n ual re p o rt 2oo3
85
Board of Directors
Ron Burkle 1,4
Managing Partner,
The Yucaipa Companies
Los Angeles
Dr. Ray R. Irani 2†,3†
Chairman and Chief Executive Officer,
Occidental Petroleum Corporation
Los Angeles
Kenneth M. Jastrow, II 4
Chairman and Chief Executive Officer,
Temple-Inland Inc.
Austin
James A. Johnson 4†,5
Vice Chairman,
Perseus, LLC
Former Chairman and Chief Executive Officer,
Fannie Mae
Washington, D.C.
Bruce Karatz 2
Chairman and Chief Executive Officer,
KB Home
Los Angeles
J. Terrence Lanni 3
Chairman and Chief Executive Officer,
MGM MIRAGE
Las Vegas
Michael G. McCaffery 1
President and Chief Executive Officer,
Stanford Management Company
Menlo Park
Dr. Barry Munitz 1†,3
President,
The J. Paul Getty Trust
Los Angeles
Luis G. Nogales 2,3,4
Managing Partner,
Nogales Investors, LLC
Los Angeles
Committees of the Board of Directors
1Audit and Compliance Committee
2Executive Committee
3Management Development and Compensation Committee
4Nominating and Corporate Governance Committee
5Presiding Director
†Committee Chair
All directors, except Mr. Karatz, are independent as
defined under listing standards of the New York Stock Exchange
and KB Home’s Corporate Governance Principles, which are
available at kbhome.com/investor/main.
kb hom e
86
Management
c o r p o r at e o f f i c e r s
o p e r at i o n s m a n a g e m e n t
Domenico Cecere
Senior Vice President and
Chief Financial Officer
Cory F. Cohen
Senior Vice President, Tax
Ken Gancarczyk
Senior Vice President, Builder Services
William R. Hollinger
Senior Vice President and Controller
Lisa G. Kalmbach
Senior Vice President, Studios
Bruce Karatz
Chairman and Chief Executive Officer
Kimberly N. King
Vice President, Corporate Secretary
Wendy L. Marlett
Senior Vice President, Marketing
Kelly Masuda
Vice President,
Capital Markets and Treasurer
Jeffrey T. Mezger
Executive Vice President and
Chief Operating Officer
Barton P. Pachino
Senior Vice President and
General Counsel
Albert Z. Praw
Senior Vice President,
Asset Management
Gary A. Ray
Senior Vice President,
Human Resources
Charles O. Schetter
Senior Vice President,
Business Development
vice presidents
Kelly M. Allred
Julia Ambrose
Daniel Bridleman
Brian Bruce
Lawrence B. Gotlieb
John A. Hughes
Ross A. Kay
Kathleen L. Knoblauch
Stan Koyanagi
Catherine Lee
Joseph M. Manisco
Jeanne Parker
Christopher Reid
Joseph C. Santoro
Nancy S. Schwappach
David B. Simons
Victor Toledo
Glen Barnard
Regional General Manager, Central
Leah S. W. Bryant
Regional General Manager, Southwest
Steven M. Davis
Regional General Manager, Southeast
Robert Freed
Regional General Manager, Northern California
John “Buddy” E. Goodwin
Regional General Manager, Florida
Jay L. Moss
Regional General Manager, Southern California
Larry E. Oglesby
Regional General Manager, Texas
d i v i s i o n m a n a g e m e n t
northern california
Jefferey Fautt
President, Sacramento Division
Drew Kusnick
President, South Bay Division
southern california
Thomas C. DiPrima
President, Los Angeles-Ventura Division
Martin Lighterink
President, San Diego Division
Stephen Ruffner
President, Riverside Division
southwest
John H. Bremond
President, Tucson Division
James Widner
President, Las Vegas Division
Greg Williams
President, Phoenix Division
central
Barry Grant
President, Colorado Division
Mark Kinsley
President, New Mexico Division
te xas
David Christian
President, Fort Worth Division
Kyle Davison
President, Houston and Texas Valley Divisions
Jeffrey L. Dworkin
President, Dallas Division
Joseph D. Reese
President, Austin Division
Craig Westmoreland
President, San Antonio Division
southeast
Lawrence E. Lippincott
President, Raleigh Division
Ronald Peiffer
President, Atlanta Division
Jerry Perillo
President, Charlotte Division
Andy White
President, South Carolina Division
florida
Rick Carruthers
President, Orlando Division
Charles Cook
President, Fort Myers Division
Marshall Gray
President, Tampa Division
William “Brad” Jones
President, Treasure Coast Division
John Molyneaux
President, Jacksonville Division
france
Joel Monribot
President,
Kaufman & Broad S.A., France
Guy Nafilyan
Chairman and
Chief Executive Officer,
Kaufman & Broad S.A., France
kb home mort gage company
Richard Powers
President, KB Home Mortgage Company
an n ual re p o rt 2oo3
87
Office Locations
San Diego Division
12235 El Camino Real, Suite 100
San Diego, California 92130
(858) 259-6000
(858) 259-5108 Fax
South Bay Division
6700 Koll Center Parkway, Suite 200
Pleasanton, California 94566
(925) 750-1700
(925) 750-1800 Fax
Colorado
Colorado Division
5975 South Quebec Street, Suite 300
Centennial, Colorado 80111
(303) 323-1100
(720) 488-3860 Fax
Florida
Fort Myers Division
12535 New Brittany Blvd., Building 28
Fort Myers, Florida 33907
(239) 274-5675
(239) 418-1424 Fax
Jacksonville Division
10475 Fortune Parkway, Suite 100
Jacksonville, Florida 32256
(904) 596-6626
(904) 519-5012 Fax
Orlando Division
8403 South Park Circle, Suite 670
Orlando, Florida 32819
(321) 354-2500
(407) 351-1082 Fax
Tampa Division
3450 Buschwood Park Dr., Suite 250
Tampa, Florida 33618
(813) 775-7800
(813) 932-6470 Fax
Treasure Coast Division
901 SW Martin Downs Boulevard
Palm City, Florida 34990
(772) 426-9956
(772) 221-1960 Fax
Georgia
Atlanta Division
110 Londonderry Court, Suite 136
Woodstock, Georgia 30188
(770) 928-0092
(678) 486-4584 Fax
Illinois
Chicago Division
100 Lexington Drive, Suite 100
Buffalo Grove, Illinois 60089
(847) 537-9191
(847) 537-8514 Fax
Nevada
Las Vegas Division
750 Pilot Road, Suite F
Las Vegas, Nevada 89119
(702) 614-2500
(702) 614-2614 Fax
c o r p o r at e
Headquarters
10990 Wilshire Boulevard
Los Angeles, California 90024
(310) 231-4000
(310) 231-4222 Fax
Builder Services
3330 Harbor Boulevard, Suite 300
Costa Mesa, California 92626
(714) 689-4502
(714) 556-3753 Fax
houseCALL Center
3037 Independence Drive, Suite I
Livermore, California 94551
(888) KB-HOMES
(925) 245-6506 Fax
KB Home Mortgage Company
10990 Wilshire Boulevard, Ninth Floor
Los Angeles, California 90024
(310) 893-7300
(310) 444-9519 Fax
d o m e s t i c d i v i s i o n s
Arizona
Phoenix Division
Two Gateway
432 North 44th Street, Suite 200
Phoenix, Arizona 85008
(602) 306-1000
(602) 306-1010 Fax
Tucson Division
250 South Craycroft, Suite 300
Tucson, Arizona 85711
(520) 918-6400
(520) 299-2725 Fax
California
Los Angeles-Ventura Division
25115 Avenue Stanford, Suite B250
Valencia, California 91355
(661) 295-3600
(661) 775-4911 Fax
Inland Valley 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
Riverside Division
12235 El Camino Real, Suite 100
San Diego, California 92130
(858) 259-6000
(858) 259-5108 Fax
New Mexico
New Mexico Division
4921 Alexander, NE, Suite B
Albuquerque, New Mexico 87107
(505) 344-9400
(505) 344-5700 Fax
North Carolina
Charlotte Division
10925 David Taylor Drive, Suite 190
Charlotte, North Carolina 28262
(704) 887-3400
(704) 887-3410 Fax
Raleigh Division
1100 Navaho Drive, Suite GL-3
Raleigh, North Carolina 27609
(919) 871-0092
(919) 871-0442 Fax
South Carolina
South Carolina Division
1213 Lady Street, Suite 204
Columbia, South Carolina 29211
(803) 256-1667
(803) 256-1784 Fax
Texas
Austin Division
11911 Burnet Road
Austin, Texas 78758
(512) 833-8880
(512) 795-6291 Fax
Dallas Division
2711 LBJ Freeway, Suite 600
Dallas, Texas 75234
(972) 232-6020
(972) 232-6161 Fax
Fort Worth Division
2711 LBJ Freeway, Suite 600
Dallas, Texas 75234
(972) 232-6020
(972) 232-6161 Fax
Houston Division
11320 Richmond Avenue
Houston, Texas 77082
(281) 668-3800
(281) 493-4174 Fax
San Antonio Division
4800 Fredericksburg Road
San Antonio, Texas 78229
(210) 349-1111
(210) 375-1015 Fax
Texas Valley Division
1800 S. Main Street, Suite 850
McAllen, Texas 78503
(956) 661-6500
(956) 664-9348 Fax
i n t e r n at i o n a l d i v i s i o n
Kaufman & Broad S.A.
Tour Maine Montparnasse
33 avenue du Maine
75755 Paris, Cedex 15
011-331-4-538-2000
011-331-4-538-2250 Fax
kb hom e
88
Stockholder Information
c o m m o n s t o c k p r i c e s
f o r m 1 0 - k
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2003
2002
High
Low
High
Low
$49.00
62.70
71.55
71.85
$39.64
42.41
54.82
53.87
$44.34
53.60
54.39
53.00
$32.80
39.31
40.07
41.20
The Company’s 2003 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
at investorrelations@kbhome.com or by visiting the Company’s web
site at kbhome.com.
d i v i d e n d d a t a
KB Home paid a quarterly cash dividend of $.075 per common share
in 2003 and 2002. In December 2003, the Company increased its
quarterly cash dividend to $.25 per common share.
a n n u a l s t o c k h o l d e r s ’ m e e t i n g
The 2004 Annual Stockholders’ meeting will be held at the W
Los Angeles hotel, 930 Hilgard Avenue, in Los Angeles, California, at
9:00 a.m. on Thursday, April 1, 2004.
s t o c k e x c h a n g e l i s t i n g s
KB Home’s common stock is listed on the New York Stock Exchange
and is also traded on the Boston, Chicago, National, Pacific and
Philadelphia Exchanges. The ticker symbol is KBH.
Kaufman & Broad S.A., the Company’s French subsidiary, is listed on
the Paris Bourse. The ticker symbol is KOF. Kaufman & Broad S.A.’s
web site address is ketb.com.
t r a n s f e r a g e n t
Mellon Investor Services LLC
P.O. Box 3315
South Hackensack, New Jersey 07606
(800) 356-2017
melloninvestor.com
i n d e p e n d e n t a u d i t o r s
Ernst & Young LLP
Los Angeles, California
s t o c k h o l d e r i n f o r m a t i o n
The Company’s common stock is traded on the New York Stock
Exchange under the symbol KBH. There were 54,137,110 shares of
common stock outstanding as of January 31, 2004.
h e a d q u a r t e r s
KB Home
10990 Wilshire Boulevard
Los Angeles, California 90024
(310) 231-4000
(310) 231-4222 Fax
Location and community information:
kbhome.com
(888) KB-HOMES
i n v e s t o r c o n t a c t
Kelly Masuda
Vice President, Capital Markets and Treasurer
KB Home
10990 Wilshire Boulevard
Los Angeles, California 90024
(310) 231-4000
kmasuda@kbhome.com
b o n d h o l d e r s e r v i c e s a d d r e s s &
p h o n e n u m b e r
73⁄4% $175.0 million Senior Notes – Due 10/15/04
85⁄8% $200.0 million Senior Subordinated Notes – Due 12/15/08
73⁄4% $300.0 million Senior Subordinated Notes – Due 2/1/10
91⁄2% $250.0 million Senior Subordinated Notes – Due 2/15/11
53/4% $250.0 million Senior Notes – Due 2/1/14
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
Printing: Lithographix, Inc.
two thousand three
Corporate Performance Awards
kb home received the following honors:
bar ron’s 5oo best performing companies
business week s&p 5oo: the best performers
forbes ame rica’s best big companies
forbes ame rica’s top 5oo companies
fortune ame rica’s most admired companies
fortune 5oo largest american companies
cover pr inted on 100lb. m ccoy uncoated cover
pp 1-4 printed on 100lb. m ccoy uncoated text
pp 5-44 printed on 100lb. opus gloss text
1o99o wilshire boulevard, los angeles, ca 9oo24
kbhome.com