<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended August 31, 1998.
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from ___________ to ___________.
Commission File No. 1-9195
KAUFMAN AND BROAD HOME CORPORATION
(Exact name of registrant as specified in charter)
Delaware 95-3666267
(State of incorporation) (IRS employer identification number)
10990 Wilshire Boulevard
Los Angeles, California 90024
(310) 231-4000
(Address and telephone number of principal and executive offices)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
Yes [X] No [ ]
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S CLASSES OF
COMMON STOCK AS OF THE CLOSE OF THE PERIOD COVERED BY THIS REPORT.
Common stock, par value $1.00 per share, 39,902,887 outstanding
<PAGE> 2
KAUFMAN AND BROAD HOME CORPORATION
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER(S)
---------
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Statements of Income -
Nine Months and Three Months ended August 31, 1998 and 1997 3
Consolidated Balance Sheets -
August 31, 1998 and November 30, 1997 4
Consolidated Statements of Cash Flows -
Nine Months ended August 31, 1998 and 1997 5
Notes to Consolidated Financial Statements 6-9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 10-19
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 20-21
SIGNATURES 22
INDEX OF EXHIBITS 23
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
KAUFMAN AND BROAD HOME CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands Except Per Share Amounts - Unaudited)
<TABLE>
<CAPTION>
Nine Months Three Months
Ended August 31, Ended August 31,
--------------------------------- ---------------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
TOTAL REVENUES $ 1,622,718 $ 1,231,417 $ 659,014 $ 469,171
=========== =========== =========== ===========
CONSTRUCTION:
Revenues $ 1,591,064 $ 1,207,220 $ 647,038 $ 460,544
Construction and land costs (1,300,126) (994,489) (526,254) (379,963)
Selling, general and administrative
expenses (204,659) (154,707) (77,608) (54,893)
----------- ----------- ----------- -----------
Operating income 86,279 58,024 43,176 25,688
Interest income 4,127 3,294 1,278 1,043
Interest expense, net of amounts
capitalized (19,331) (23,108) (4,532) (6,664)
Minority interests (2,831) (150) (2,409) (36)
Equity in pretax income (loss) of
unconsolidated joint ventures 405 (114) 73 (175)
----------- ----------- ----------- -----------
Construction pretax income 68,649 37,946 37,586 19,856
----------- ----------- ----------- -----------
MORTGAGE BANKING:
Revenues:
Interest income 11,173 9,697 3,871 3,060
Other 20,481 14,500 8,105 5,567
----------- ----------- ----------- -----------
31,654 24,197 11,976 8,627
Expenses:
Interest (10,936) (9,010) (3,800) (2,788)
General and administrative (7,149) (5,721) (2,464) (1,932)
----------- ----------- ----------- -----------
Mortgage banking pretax income 13,569 9,466 5,712 3,907
----------- ----------- ----------- -----------
TOTAL PRETAX INCOME 82,218 47,412 43,298 23,763
Income taxes (28,800) (17,100) (15,200) (8,600)
----------- ----------- ----------- -----------
NET INCOME $ 53,418 $ 30,312 $ 28,098 $ 15,163
=========== =========== =========== ===========
BASIC EARNINGS PER SHARE $ 1.35 $ .78 $ .70 $ .39
=========== =========== =========== ===========
DILUTED EARNINGS PER SHARE $ 1.30 $ .76 $ .68 $ .38
=========== =========== =========== ===========
BASIC AVERAGE SHARES OUTSTANDING 39,431 38,857 39,887 38,907
=========== =========== =========== ===========
DILUTED AVERAGE SHARES OUTSTANDING 41,080 39,853 41,373 40,199
=========== =========== =========== ===========
CASH DIVIDENDS PER COMMON SHARE $ .225 $ .225 $ .075 $ .075
=========== =========== =========== ===========
</TABLE>
See accompanying notes.
3
<PAGE> 4
KAUFMAN AND BROAD HOME CORPORATION
CONSOLIDATED BALANCE SHEETS
(In Thousands - Unaudited)
<TABLE>
<CAPTION>
August 31, November 30,
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
CONSTRUCTION:
Cash and cash equivalents $ 7,155 $ 66,343
Trade and other receivables 172,888 169,988
Inventories 1,135,328 790,243
Investments in unconsolidated joint ventures 5,974 6,338
Goodwill 47,994 31,283
Other assets 96,492 69,666
----------- -----------
1,465,831 1,133,861
----------- -----------
MORTGAGE BANKING:
Cash and cash equivalents 2,670 1,899
Receivables:
First mortgages and mortgage-backed securities 60,222 71,976
First mortgages held under commitment of sale and other
receivables 203,426 208,254
Other assets 2,480 3,001
----------- -----------
268,798 285,130
----------- -----------
TOTAL ASSETS $ 1,734,629 $ 1,418,991
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CONSTRUCTION:
Accounts payable $ 176,499 $ 163,646
Accrued expenses and other liabilities 135,329 105,376
Mortgages and notes payable 538,661 496,869
----------- -----------
850,489 765,891
----------- -----------
MORTGAGE BANKING:
Accounts payable and accrued expenses 8,523 7,300
Notes payable 198,282 200,828
Collateralized mortgage obligations secured by mortgage-backed
securities 51,565 60,058
----------- -----------
258,370 268,186
----------- -----------
Minority interests:
Consolidated subsidiaries and joint ventures 8,595 1,858
Company obligated mandatorily redeemable preferred securities
of subsidiary trust holding solely debentures of the Company 189,750 --
----------- -----------
198,345 1,858
----------- -----------
Common stock 39,903 38,997
Paid-in capital 186,915 186,086
Retained earnings 204,499 159,960
Cumulative foreign currency translation adjustments (3,892) (1,987)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 427,425 383,056
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,734,629 $ 1,418,991
=========== ===========
See accompanying notes.
</TABLE>
4
<PAGE> 5
KAUFMAN AND BROAD HOME CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands - Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended August 31,
-----------------------------
1998 1997
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 53,418 $ 30,312
Adjustments to reconcile net income to net cash used by operating
activities:
Equity in pretax (income) loss of unconsolidated joint ventures (405) 114
Minority interests 2,831 150
Amortization of discounts and issuance costs 1,437 1,235
Depreciation and amortization 11,324 8,789
Provision for deferred income taxes 4,006 (2,291)
Change in assets and liabilities, net of effects from acquisitions:
Receivables 18,247 (14,295)
Inventories (132,072) (65,427)
Accounts payable, accrued expenses and other liabilities 2,822 2,470
Other, net (10,442) (13,764)
--------- ---------
Net cash used by operating activities (48,834) (52,707)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash acquired (162,818) --
Investments in unconsolidated joint ventures 1,102 2,381
Net sales of mortgages held for long-term investment 2,193 180
Payments received on first mortgages and mortgage-backed securities 10,255 7,416
Other, net (13,081) (3,100)
--------- ---------
Net cash provided (used) by investing activities (162,349) 6,877
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from credit agreements and other short-term borrowings 32,685 67,567
Proceeds from Company obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely debentures of the 183,057 --
Company
Payments on collateralized mortgage obligations (9,669) (6,852)
Payments on mortgages, land contracts and other loans (41,580) (5,244)
Payments from (to) minority interests (2,848) 118
Payments of cash dividends (8,879) (8,745)
--------- ---------
Net cash provided by financing activities 152,766 46,844
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (58,417) 1,014
Cash and cash equivalents at beginning of period 68,242 9,781
--------- ---------
Cash and cash equivalents at end of period $ 9,825 $ 10,795
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid, net of amounts capitalized $ 19,907 $ 27,718
========= =========
Income taxes paid $ 31,025 $ 11,852
========= =========
SUPPLEMENTAL DISCLOSURES OF NONCASH ACTIVITIES:
Cost of inventories acquired through seller financing $ 24,484 $ 7,064
========= =========
</TABLE>
See accompanying notes.
5
<PAGE> 6
KAUFMAN AND BROAD HOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in the annual financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted.
These unaudited consolidated financial statements should be read in
conjunction with the consolidated financial statements for the year ended
November 30, 1997 contained in the Company's 1997 Annual Report to
Stockholders.
In the opinion of the Company, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of only normal
recurring accruals) necessary to present fairly the Company's financial
position as of August 31, 1998, the results of its consolidated operations
for the nine months and three months ended August 31, 1998 and 1997, and its
consolidated cash flows for the nine months ended August 31, 1998 and 1997.
The results of operations for the nine months and three months ended August
31, 1998 are not necessarily indicative of the results to be expected for
the full year. The consolidated balance sheet at November 30, 1997 has been
taken from the audited financial statements as of that date.
2. Inventories
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
August 31, November 30,
1998 1997
----------------- -----------------
<S> <C> <C>
Homes, lots and improvements in production $ 855,083 $ 605,227
Land under development 280,245 185,016
----------------- -----------------
Total inventories $ 1,135,328 $ 790,243
================= =================
</TABLE>
The impact of capitalizing interest costs on consolidated pretax income is
as follows (in thousands):
<TABLE>
<CAPTION>
Nine Months Three Months
Ended August 31, Ended August 31,
--------------------------- ---------------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Interest incurred $ 40,976 $ 39,763 $ 13,986 $ 13,240
Interest expensed (19,331) (23,108) (4,532) (6,664)
-------- -------- -------- --------
Interest capitalized 21,645 16,655 9,454 6,576
Interest amortized (20,163) (16,485) (8,599) (5,985)
======== ======== ======== ========
Net impact on pretax income $ 1,482 $ 170 $ 855 $ 591
======== ======== ======== ========
</TABLE>
3. Earnings Per Share
During the quarter ended February 28, 1998, the Company adopted Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No.
128"), which simplifies existing computational guidelines, revises
disclosure requirements and increases the comparability of earnings per
share on an
6
<PAGE> 7
KAUFMAN AND BROAD HOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. Earnings Per Share (continued)
international basis. Basic earnings per share is calculated by dividing net
income by the average common shares outstanding for the period. Diluted
earnings per share is calculated by dividing net income by the average
number of shares outstanding including dilutive stock options using the
treasury stock method. All earnings per share amounts for all periods have
been presented and, where necessary, restated to conform to the SFAS No. 128
requirements. The following table presents the effects of dilutive common
stock options (in thousands):
<TABLE>
<CAPTION>
Nine Months Three Months
Ended August 31, Ended August 31,
---------------------- ----------------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Basic average shares outstanding 39,431 38,857 39,887 38,907
Net effect of stock options assumed
to be exercised 1,649 996 1,486 1,292
------ ------ ------ ------
Diluted average shares outstanding 41,080 39,853 41,373 40,199
====== ====== ====== ======
</TABLE>
4. Shelf Registration
On December 5, 1997, the Company filed a universal shelf registration
statement with the Securities and Exchange Commission for up to $500 million
of the Company's debt and equity securities. This universal shelf
registration provides that securities may be offered from time to time in
one or more series and in the form of senior, senior subordinated or
subordinated debt, preferred stock, common stock, and/or warrants to
purchase such securities. The registration was declared effective on
December 16, 1997, and no securities have been issued thereunder.
5. Acquisitions
During the second quarter of 1998, the Company acquired three privately held
home builders with regional operations in certain key markets. On March 19,
1998, the Company acquired all of the issued and outstanding capital stock
of Houston-based Hallmark Residential Group ("Hallmark") for approximately
$54 million, including the assumption of debt. Hallmark builds single family
homes in Houston, San Antonio and Austin, Texas under the trade names of
Dover Homes and Ideal Builders. The Company acquired substantially all of
the assets of Denver-based PrideMark Homebuilding Group ("PrideMark") on
March 23, 1998 for approximately $65 million, including the assumption of
trade liabilities and debt. PrideMark builds single family homes in Denver,
Colorado. On April 9, 1998, the Company acquired all of the issued and
outstanding capital stock of Estes Homebuilding Co. ("Estes") for
approximately $48 million, including the assumption of debt. Estes builds
single family homes in Phoenix and Tucson, Arizona.
On August 18, 1998, the Company acquired a majority ownership investment in
General Homes Corporation ("General Homes"), a builder of single family
homes primarily in Houston, Texas. The Company invested approximately $30
million, including the assumption of debt, to acquire 50.3% of the
outstanding stock of General Homes, pursuant to a recently completed plan of
reorganization.
These acquisitions were financed by borrowings under the Company's domestic
unsecured revolving credit facility. Accounted for under the purchase
method, the results of operations of the acquired entities are included in
the Company's consolidated financial statements as of their respective dates
of acquisition. The
7
<PAGE> 8
KAUFMAN AND BROAD HOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. Acquisitions (continued)
purchase prices were allocated to the assets acquired and liabilities
assumed based upon their estimated fair market values at the date of
acquisition. The excess of the purchase prices over the fair value of net
assets acquired was $23.4 million on an aggregate basis and was allocated to
goodwill. The Company is amortizing goodwill related to the acquisitions on
a straight line basis over a period of ten years.
The following unaudited pro forma information presents a summary of the
consolidated results of operations of the Company as if the acquisitions had
occurred as of December 1, 1996 with pro forma adjustments to give effect to
amortization of goodwill, interest expense on acquisition debt and certain
other adjustments, together with related income tax effects (in thousands,
except per share amounts):
<TABLE>
<CAPTION>
Nine Months
Ended August 31,
------------------------------
1998 1997
---------- ----------
<S> <C> <C>
Total revenues $1,737,526 $1,459,854
Total pretax income 80,299 39,877
Net income 52,199 25,577
Basic earnings per share 1.32 .66
Diluted earnings per share 1.27 .64
</TABLE>
The pro forma financial information is presented for informational purposes
only and is not necessarily indicative of the operating results that would
have occurred had the four acquisitions been consummated as of December 1,
1996, nor are they necessarily indicative of future operating results.
6. Company Obligated Mandatorily Redeemable Preferred Securities of Subsidiary
Trust Holding Solely Debentures of the Company (FELINE PRIDES)
On July 7, 1998, the Company, together with KBHC Financing I, a Delaware
statutory business trust (the "KBHC Trust"), of which all the common
securities are owned by the Company, issued an aggregate of (a) 18,975,000
FELINE PRIDES, and (b) 1,000,000 KBHC Trust capital securities, with a $10
stated liquidation amount. The FELINE PRIDES consist of (a) 17,975,000
Income PRIDES with a stated amount per Income PRIDES of $10 (the "Stated
Amount"), which are units comprised of a capital security and a stock
purchase contract under which the holders will purchase common stock from
the Company not later than August 16, 2001 and the Company will pay to the
holder certain unsecured contract adjustment payments and (b)1,000,000
Growth PRIDES with a face amount per Growth PRIDES equal to the Stated
Amount, which are units consisting of a 1/100th beneficial interest in a
zero-coupon U.S. treasury security and a stock purchase contract under which
the holders will purchase common stock from the Company not later than
August 16, 2001 and the Company will pay to the holder certain unsecured
contract adjustment payments.
The distribution rate on the Income PRIDES is 8.25% per annum, and the
distribution rate on the Growth PRIDES is .75% per annum. Under the stock
purchase contracts, investors will be required to purchase shares of common
stock of the Company for an effective price ranging between a minimum of
$31.75 per share and a maximum of $38.10 per share, and the Company will
issue approximately 5.0 million to 6.0 million common shares by August 16,
2001, depending upon the price of the Company's common stock upon settlement
of the purchase contracts (subject to adjustment under certain
circumstances). The capital securities associated with the Income PRIDES and
the U.S. treasury securities associated with the Growth PRIDES have
8
<PAGE> 9
KAUFMAN AND BROAD HOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
6. Company Obligated Mandatorily Redeemable Preferred Securities of Subsidiary
Trust Holding Solely Debentures of the Company (FELINE PRIDES) (continued)
been pledged as collateral to secure the holders' obligations in respect of
the common stock purchase contracts. The capital securities issued by the
KBHC Trust are entitled to a distribution rate of 8% per annum of their $10
stated liquidation amount.
The KBHC Trust utilized the proceeds from the issuance of the FELINE PRIDES
and capital securities to purchase an equivalent principal amount of the
Company's 8% Debentures due August 16, 2003 (the "8% Debentures"). The 8%
Debentures are the sole asset of the KBHC Trust. The Company's obligations
under the Debentures and related agreements, taken together constitute a
firm and unconditional guarantee by the Company of the KBHC Trust's
obligations under the capital securities. The interest rate on the 8%
Debentures and the distribution rate on the capital securities of the KBHC
Trust are to be reset, subject to certain limitations, effective August 16,
2001. The Company has recorded the present value of the contract adjustment
payments on the FELINE PRIDES, totaling $1.6 million, as a liability and a
reduction of stockholders' equity. The liability will be reduced as the
contract adjustment payments are made. The Company has the right to defer
the contract adjustment payments and the payment of interest on the 8%
Debentures, but any such election will subject the Company to restrictions
on the payment of dividends on, and redemption of, its outstanding shares of
common stock, and on the payment of interest on, or redemption of, debt
securities of the Company junior in rank to the 8% Debentures, none of which
are currently outstanding.
The proceeds from the issuance of FELINE PRIDES will be used for general
corporate purposes, including support of the Company's growth strategies and
potential future acquisitions; however, the immediate use of proceeds was to
pay down outstanding debt under the Company's $500 million domestic
unsecured revolving credit facility. The Company incurred costs of
approximately $6.7 million in connection with the issuance of the FELINE
PRIDES and the capital securities.
7. Reclassifications
Certain amounts in the consolidated financial statements of prior years have
been reclassified to conform to the 1998 presentation.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
OVERVIEW
Total Company revenues for the three months ended August 31, 1998 increased
40.5% to $659.0 million from $469.2 million for the three months ended
August 31, 1997. For the nine months ended August 31, 1998, total revenues
increased 31.8% to $1,622.7 million from $1,231.4 million for the first nine
months of 1997. The increases in total revenues for the three and nine month
periods were due to higher housing revenues and land sales. Net income for
the third quarter of 1998 rose to $28.1 million or $.68 diluted earnings per
share from $15.2 million or $.38 diluted earnings per share for the same
period a year ago. For the nine months ended August 31, 1998, net income
increased to $53.4 million or $1.30 diluted earnings per share from $30.3
million or $.76 diluted earnings per share for the nine months ended August
31, 1997. The 78.9% increase in diluted earnings per share for the three
months ended August 31, 1998 was primarily driven by an increase in unit
deliveries and construction gross margin. For the nine months ended August
31, 1998, diluted earnings per share increased 71.1% primarily as a result
of higher unit deliveries and construction gross margins along with
increased mortgage banking income. Included in the Company's operating
results for the three and nine month periods of 1998 are the results from
the three acquisitions in the Houston, Denver and Phoenix/Tucson markets,
which the Company completed during the quarter ended May 31, 1998. Results
for the 1998 periods also reflect the Company's acquisition of a majority
ownership investment in General Homes as of August 18, 1998.
CONSTRUCTION
Revenues increased by $186.5 million or 40.5% to $647.0 million in the third
quarter of 1998 from $460.5 million in the third quarter of 1997 due to
increases in housing revenues and land sales. Residential revenues for the
three months ended August 31, 1998 increased by 37.6%, or $172.3 million to
$630.9 million from $458.6 million in the year-earlier period as a result of
a 38.2% increase in unit deliveries to 4,167 units from 3,016 units, partly
offset by a .4% decrease in the average selling price per unit delivery.
Housing revenues in the United States rose to $570.9 million on 3,792 unit
deliveries in the third quarter of 1998 from $418.0 million on 2,717 units
in the corresponding quarter of 1997 as a result of increased housing
revenues from both California and Other U.S. operations. (The Company's
housing operations in Arizona, Colorado, Nevada, New Mexico, Texas and Utah
are collectively referred to "Other U.S."). California housing revenues for
the third quarter of 1998 increased to $267.4 million on 1,225 unit
deliveries from $239.8 million on 1,204 unit deliveries in the same quarter
a year ago. California deliveries in the three months ended August 31, 1998
increased 1.7% from the same period of 1997 despite a decline of 15.0% in
the average number of active communities. Other U.S. operations generated
$303.5 million of housing revenues in the third quarter of 1998, increasing
$125.2 million from $178.3 million for the same period a year ago. Other
U.S. deliveries increased 69.7% to 2,567 units in the third quarter of 1998
from 1,513 units in the same quarter of 1997 and included a total of 563
unit deliveries from the Company's three 1998 acquisitions in Houston,
Denver and Phoenix/Tucson and its recently acquired majority ownership
investment in General Homes. Excluding these incremental deliveries, Other
U.S. deliveries were up 32.5% from the third quarter of 1997. Revenues from
French housing operations during the three months ended August 31, 1998
increased to $57.0 million on 363 unit deliveries from $39.2 million on 295
units in the prior year's period.
For the third quarter of 1998, the Company's overall average selling price
decreased .4% to $151,400 from $152,000 in the same quarter a year ago,
primarily reflecting a decrease in the domestic average selling price. The
Company's domestic average selling price declined 2.1% to $150,600 in the
third quarter of 1998 from $153,900 in the corresponding period of 1997 as a
result of a greater proportion of lower priced domestic unit deliveries
generated from the Company's Other U.S. operations. Other U.S. operations
accounted for 67.7% of total U.S. deliveries in the third quarter of 1998
compared to 55.7% in the third quarter of 1997. The Company's average
selling price in California increased 9.6% to $218,300 in the third quarter
of 1998 compared to $199,100 in the third quarter of 1997. During this same
period, the average selling price for Other U.S. operations rose .3% to
$118,200 from $117,800. These increases occurred as result of selected
increases in sales prices in certain markets, a change in the number of
higher priced urban in-fill locations and first time move up sales, as well
as improvements in overall market conditions. In France, the Company's
average selling price for the three months ended August 31, 1998 increased
18.1% to $157,000 from $133,000 in the year-earlier quarter, primarily due
to a change in product mix.
10
<PAGE> 11
Revenues from land sales totaled $15.3 million in the third quarter of 1998
compared to $1.7 million in the same period of 1997.
For the nine months ended August 31, 1998, construction revenues totaled
$1,591.1 million, increasing $383.9 million from $1,207.2 million for the
same period a year ago mainly as a result of higher housing revenues.
Housing revenues totaled $1,570.1 million on 10,205 units in the first nine
months of 1998 compared to $1,192.8 million on 7,589 units for the same
period a year ago. Housing operations in the United States produced revenues
of $1,425.7 million on 9,217 units in the first nine months of 1998 and
$1,101.7 million on 7,039 units in the comparable period of 1997. During the
first nine months of 1998, California housing revenues increased 11.9% to
$728.5 million from $650.8 million in the same period of 1997, reflecting a
rise in unit deliveries during the period and higher average sales prices.
Housing revenues from Other U.S. operations increased 54.6% to $697.2
million in the first nine months of 1998 from $450.9 million in the prior
year's period as unit deliveries in the region rose 52.8%. Deliveries in
California increased to 3,371 units for the nine months ended August 31,
1998 from 3,213 for the nine months ended August 31, 1997, while deliveries
from Other U.S. operations increased to 5,846 from 3,826 units during the
same period. Included in Other U.S. results for the nine months ended August
31,1998 were an aggregate 990 unit deliveries related to the operations in
Houston, Denver and Phoenix/Tucson purchased during the second quarter of
1998 and the recently acquired majority ownership investment in General
Homes. French housing revenues totaled $137.6 million on 963 units in the
first nine months of 1998, up from $85.1 million on 529 units in the
corresponding period of 1997.
The Company-wide average new home price decreased 2.1% to $153,900 in the
first nine months of 1998 from $157,200 in the year-earlier period
reflecting a higher proportion of lower priced deliveries from domestic
operations outside of California in the first nine months of 1998 and a
lower average selling price from the Company's operations in France. Other
U.S. deliveries comprised 63.4% of domestic deliveries during the first nine
months of 1998 compared to 54.4% in the same period of 1997. For the first
nine months of 1998, the average selling price in California increased 6.7%
to $216,100 from $202,500 while the average selling price in Other U.S.
operations increased 1.2% to $119,300 from $117,900 for the first nine
months of 1998. These increases occurred as a result of strategic increases
in sales prices in certain markets, as well as a change in product mix
modestly favoring a greater number of higher priced urban in-fill locations
and first time move up sales. In France, the average selling price for the
nine month period decreased 11.2% to $142,900 in 1998 from $160,900 in 1997
primarily because the 1998 period included a full nine months of deliveries
from lower priced SMCI developments in France, acquired in the third quarter
of 1997.
Company-wide revenues from land sales totaled $20.2 million for the first
three quarters of 1998 compared to $11.9 million for the same period a year
ago.
Operating income increased by $17.5 million to $43.2 million in the third
quarter of 1998 from $25.7 million in the third quarter of 1997 as a result
of higher gross profits, partially offset by increased selling, general and
administrative expenses. As a percentage of construction revenues, operating
income increased by 1.1 percentage points to 6.7% in the third quarter of
1998 compared to 5.6% in the third quarter of 1997. Gross profits increased
by $40.2 million to $120.8 million in the three months ended August 31, 1998
from $80.6 million in the three months ended August 31, 1997 due to both
higher unit volume and higher gross margin. During this same period, the
Company's housing gross profits increased by $40.9 million to $122.3 million
from $81.4 million. As a percentage of construction revenues, gross profits
rose to 18.7% in the current quarter from 17.5% in the year-earlier quarter.
This increase primarily reflected a rise in the third quarter housing gross
margin to 19.4% in 1998 from 17.7% in 1997. The 1.7 percentage point
increase in housing gross margin reflected continuing increases in the
proportion of higher margin deliveries resulting from the Company's KB2000
operational business model entering the mix, as well as price increases in
certain fast-selling, hard to replace communities especially in certain
California markets. During the third quarter of 1998, land sales generated a
loss of $1.5 million compared to a loss of $.8 million generated in the same
quarter a year ago.
Selling, general and administrative expenses increased by $22.7 million to
$77.6 million in the third quarter of 1998 from $54.9 million in the third
quarter of 1997, partly due to the inclusion of selling, general and
administrative expenses of Hallmark, PrideMark, Estes and General Homes,
including goodwill amortization. As a percentage of housing revenues,
selling, general and administrative expenses increased .3 percentage points
to
11
<PAGE> 12
12.3% in the third quarter of 1998 from 12.0% in the same quarter a year ago
and decreased 1.0 percentage points from the second quarter of 1998. The
quarterly year-over-year increase in the selling, general and administrative
expense ratio was primarily due to new market entries in Texas, increased
goodwill amortization and expenditures incurred in connection with extensive
information systems revisions in support of the Company's KB2000 operational
business model and year 2000 compliance.
For the first nine months of 1998, operating income increased by $28.3
million to $86.3 million from $58.0 million in the corresponding period of
1997 as higher gross profits were partially offset by increased selling,
general and administrative expenses. For the nine month period, total gross
profits increased by $78.2 million or 36.8% to $290.9 million in 1998 from
$212.7 million in 1997 with housing gross profits increasing by $81.4
million to $293.3 million from $211.9 million during this same period. Gross
profits as a percentage of construction revenues increased to 18.3% in the
first nine months of 1998 from 17.6% in the year-earlier period as the
housing gross margin increased .9 percentage points to 18.7% from 17.8%.
Company-wide land sales generated a loss of $2.3 million during the first
nine months of 1998 compared to a profit of $.5 million for the
corresponding period of 1997.
Selling, general and administrative expenses increased by $50.0 million to
$204.7 million for the first nine months of 1998 from $154.7 million for the
same period of 1997. However, as a percentage of housing revenues, these
expenses remained unchanged from 1997 at 13.0%. This reflected the higher
volume of deliveries, partially offset by higher sales commissions, higher
expenditures incurred in connection with extensive information systems
revisions in support of the KB2000 operational business model and year 2000
compliance, new market entries in Texas, and the expenses and goodwill
amortization related to the acquisitions which occurred during 1998.
Interest income totaled $1.3 million in the third quarter of 1998 compared
to $1.0 million in the prior year's third quarter. For the nine months ended
August 31, 1998, interest income totaled $4.1 million compared to $3.3
million in the same period of 1997. The higher interest income for the third
quarter and first nine months of 1998 reflected an increase in the interest
bearing average balances of mortgages receivable compared to the same
periods a year ago.
Interest expense (net of amounts capitalized) decreased to $4.5 million in
the third quarter of 1998 from $6.7 million in the third quarter of 1997.
For the nine month period ended August 31,1998, interest expense totaled
$19.3 million compared to $23.1 million for the same period of 1997. Gross
interest incurred in the three months and nine months ended August 31, 1998
was higher than that incurred in the corresponding year ago periods by $.7
million and $1.2 million, respectively, reflecting an increase in average
indebtedness in 1998, partially offset by a lower average interest rate as a
result of more favorable financing terms obtained by the Company due to the
redemption of its $100 million 10-3/8% senior notes and the issuance of $175
million of 7-3/4% senior notes in the fourth quarter of 1997. During the
third quarter of 1998, the Company obtained financing from the issuance of
$189.8 million of FELINE PRIDES and used the proceeds to pay down
outstanding debt under the Company's domestic unsecured revolving credit
facility. The distributions associated with the FELINE PRIDES are included
in minority interests; therefore, interest expense in future periods will
generally be lower than it would be without this financing. The percentage
of interest capitalized during the three months ended August 31, 1998 and
1997 was 67.6% and 49.7%, respectively. For the nine months ended August 31,
this percentage was 52.8% in 1998 and 41.9% in 1997. The higher 1998
capitalization rates reflected the issuance of the FELINE PRIDES in the
third quarter of 1998 and a higher proportion of land under development in
1998 compared to 1997.
Minority interests totaled $2.4 million in the third quarter of 1998 and
less than $.1 million in the third quarter of 1997. For the first nine
months of 1998, minority interests totaled $2.8 million compared to $.2
million for the same period a year ago. Minority interests are comprised of
two major components: pretax income of consolidated subsidiaries and joint
ventures related to residential and commercial activities in France as well
as the Company's majority ownership investment in General Homes, and
distributions on the capital securities issued by the KBHC Trust in
connection with the FELINE PRIDES offering in July 1998. In the aggregate,
minority interests are expected to increase in future periods primarily due
to the inclusion of distributions on the capital securities, while minority
interests related to French joint ventures are expected to remain at
relatively low levels. These low levels principally reflect the limited
opportunities currently available, and reasonably expected to be available,
in the French commercial market as well as the Company's strategic focus on
its residential development business.
12
<PAGE> 13
Equity in pretax income of unconsolidated joint ventures totaled $.1 million
in the third quarter of 1998 compared to a $.2 million loss in the third
quarter of 1997. The Company's unconsolidated joint ventures recorded
combined revenues of $2.0 million in the third quarter of 1998 compared to
$82.3 million for the corresponding period of 1997. Of the joint venture
revenues in the third quarter of 1998, all were generated from residential
properties, while in the third quarter of 1997 $11.0 million were generated
from residential properties. For the first nine months of 1998, the
Company's equity in pretax income of unconsolidated joint ventures totaled
$.4 million compared to a $.1 million loss in the same period of 1997.
Combined revenues from these joint ventures totaled $9.5 million in the
first nine months of 1998 compared with $91.0 million in the first nine
months of 1997, mainly due to the sale of a French commercial project in
1997. During the nine month period of 1998, all revenues from unconsolidated
joint ventures were generated from residential properties. In the same
period of 1997, residential revenues from unconsolidated joint ventures
totaled $19.7 million.
MORTGAGE BANKING
Interest income and interest expense increased by $.8 million and $1.0
million, respectively, in the third quarter of 1998 compared to the same
quarter a year ago. For the nine months ended August 31, 1998, interest
income from mortgage banking rose by $1.5 million and related interest
expense increased by $1.9 million from the same period of 1997. Interest
income for the three and nine month periods increased due to the higher
balance of first mortgages held under commitment of sale and other
receivables outstanding during the 1998 periods. The increase in interest
expense resulted from the higher amount of notes payable outstanding during
the third quarter and first nine months of 1998 compared to the same periods
of 1997.
Other mortgage banking revenues increased by $2.5 million to $8.1 million in
the third quarter of 1998 from $5.6 million in the prior year's third
quarter. For the first nine months of 1998, other mortgage banking revenues
totaled $20.5 million, an increase of $6.0 million from $14.5 million in the
prior year's period. These increases were primarily the result of higher
gains on the sale of mortgages and servicing rights due to a higher level of
mortgage originations resulting from a higher unit volume in the United
States. In addition, in the third quarter of 1998 the loan mix was favorable
with fixed rate loans representing 82% of closings compared with 61% in the
third quarter of 1997.
General and administrative expenses associated with mortgage banking
increased by $.6 million to $2.5 million in the third quarter of 1998 from
$1.9 million for the same quarter a year ago. For the nine month period,
these expenses totaled $7.1 million in 1998 compared to $5.7 million in
1997. The increase in general and administrative expenses in 1998 was
primarily due to higher mortgage production volume.
INCOME TAXES
Income taxes totaled $15.2 million and $8.6 million in the third quarters of
1998 and 1997, respectively. For the first nine months of 1998, income tax
expense totaled $28.8 million compared to $17.1 million in the same period
of 1997. The income tax amounts represented effective income tax rates of
approximately 35% and 36% in both periods of 1998 and 1997, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company assesses its liquidity in terms of its ability to generate cash
to fund its operating and investing activities. Historically, the Company
has funded its construction and mortgage banking concerns with internally
generated operating results and external sources of debt and equity
financing. For the nine months ended August 31, 1998, net cash used by
operating, investing and financing activities totaled $58.4 million compared
to $1.0 million provided in the first nine months of 1997.
The Company's operating activities for the first nine months of 1998 used
cash of $48.8 million compared to $52.7 million used during the same period
of 1997. For the nine months ended August 31, 1998, the Company primarily
used cash to fund an investment of $132.1 million in inventories (excluding
$24.5 million of inventories acquired through seller financing). Excluding
the Company's acquisitions of Hallmark, PrideMark and Estes, and its
recently acquired majority ownership investment in General Homes,
inventories increased, primarily in the Company's domestic operations,
reflecting the Company's continued growth throughout its U.S. markets. The
use
13
<PAGE> 14
of cash was partially offset by nine month earnings of $53.4 million and a
reduction in receivables of $18.2 million, as well as various non-cash items
deducted from net income. The reduction in receivables mainly related to a
lower balance of mortgages held under commitment of sale due to lower
mortgage origination volume in the third quarter of 1998 compared to the
fourth quarter of 1997.
Operating activities for the first nine months of 1997 used cash for an
investment of $65.4 million in inventories (excluding $7.1 million of
inventories acquired through seller financing), an increase in receivables
of $14.3 million and a change in deferred taxes of $2.3 million. The cash
used was partially offset by nine month earnings of $30.3 million, an
increase in accounts payable, accrued expenses and other liabilities of $2.5
million, and various non-cash items deducted from net income.
Cash used by investing activities totaled $162.3 million in the nine months
ended August 31, 1998 compared to $6.9 million provided in the year-earlier
period. In the first nine months of 1998, a total of $162.8 million of cash,
net of cash acquired, was used for the acquisitions of Hallmark, PrideMark
and Estes and the acquisition of a majority ownership investment in General
Homes. During this same period, $13.1 million was used for other investing
activities. Among amounts partially offsetting these 1998 nine month uses
were $10.3 million of proceeds 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 $2.2 million from the net sales of mortgages held for
long-term investment. In the first nine months of 1997, cash was provided by
$7.4 million in proceeds received from mortgage-backed securities and $2.4
million in distributions related to investments in unconsolidated joint
ventures. Partially offsetting these 1997 nine month sources was $3.1
million used for other investing activities
Financing activities provided $152.8 million of cash in the first nine
months of 1998 compared to $46.8 million provided in the same period of
1997. In the first nine months of 1998, sources of cash included proceeds of
$183.1 million from the issuance of the FELINE PRIDES in July 1998.
Partially offsetting these proceeds in the first nine months of 1998 were
net payments on borrowings of $8.9 million, payments to minority interests
in consolidated joint ventures of $2.8 million, payments on collateralized
mortgage obligations of $9.7 million and cash dividend payments of $8.9
million. Financing activities for the nine months ended August 31, 1997
resulted in net cash inflows due mainly to net proceeds from borrowings of
$62.3 million, partially offset by cash dividend payments of $8.7 million
and payments on collateralized mortgage obligations of $6.9 million.
During the second quarter of 1998, the Company acquired three privately held
home builders with regional operations in certain key markets. On March
19,1998, the Company acquired all of the issued and outstanding capital
stock of Houston-based Hallmark for approximately $54 million, including the
assumption of debt. Hallmark builds single family homes in Houston, San
Antonio and Austin, Texas under the trade names of Dover Homes and Ideal
Builders. The acquisition of Hallmark marks the Company's entry into the
Houston market and will form the core of those operations, while
strengthening the Company's position in San Antonio and Austin. The Company
acquired substantially all of the assets of Denver-based PrideMark on March
23,1998 for approximately $65 million, including the assumption of trade
liabilities and debt. PrideMark builds single family homes in Denver,
Colorado, and its acquisition significantly increased the Company's already
substantial market presence in Denver. On April 9, 1998, the Company
acquired all of the issued and outstanding capital stock of Estes for
approximately $48 million, including the assumption of debt. Estes builds
single family homes in Phoenix and Tucson, Arizona. Estes provided the
Company's entry into Tucson and significantly increased the Company's
already substantial market presence in Phoenix.
On August 18, 1998, the Company acquired a majority ownership investment in
General Homes, a builder of single family homes primarily in Houston, Texas.
The Company invested approximately $30 million, including the assumption of
debt, to acquire 50.3% of the outstanding stock of General Homes, pursuant
to a recently completed plan of reorganization.
Accounted for under the purchase method, the results of operations of the
acquired entities are included in the Company's consolidated financial
statements from the respective dates of acquisition. These acquisitions were
financed by borrowings under the Company's domestic unsecured revolving
credit facility.
14
<PAGE> 15
As of August 31, 1998, borrowings of $15.0 million were outstanding under
the Company's $500 million domestic unsecured revolving credit facility with
$485.0 million remaining available. The Company's French unsecured financing
agreements, totaling $84.3 million, had in the aggregate $46.7 million
available at August 31, 1998. In addition, the Company's mortgage banking
operations had $51.7 million available under its $250 million secured
revolving mortgage warehouse facility at quarter-end. The Company's
financial leverage, as measured by the ratio of debt to total capital, was
46.6% at the end of the 1998 third quarter compared to 59.4% at the end of
the 1997 third quarter. The sharply improved debt ratio as of August 31,
1998 was due primarily to debt reduction associated with the Company's
offering of $189.8 million of FELINE PRIDES in the 1998 third quarter.
On December 5, 1997, the Company filed a universal shelf registration
statement with the Securities and Exchange Commission for up to $500 million
of the Company's debt and equity securities. The universal shelf
registration provides that securities may be offered from time to time in
one or more series and in the form of senior, senior subordinated or
subordinated debt, preferred stock, common stock, and/or warrants to
purchase such securities. The registration was declared effective on
December 16, 1997, and no securities have been issued thereunder.
On July 7, 1998, the Company, together with the KBHC Trust, of which all the
common securities are owned by the Company, issued an aggregate of (a)
18,975,000 FELINE PRIDES, and (b)1,000,000 KBHC Trust capital securities,
with a $10 stated liquidation amount. The FELINE PRIDES consist of (a)
17,975,000 Income PRIDES with the Stated Amount per Income PRIDES, which are
units comprised of a capital security and a stock purchase contract under
which the holders will purchase common stock from the Company not later than
August 16, 2001 and the Company will pay to the holder certain unsecured
contract adjustment payments and (b)1,000,000 Growth PRIDES with a face
amount per Growth PRIDES equal to the Stated Amount, which are units
consisting of a 1/100th beneficial interest in a zero-coupon U.S. treasury
security and a stock purchase contract under which the holders will purchase
common stock from the Company not later than August 16, 2001 and the Company
will pay to the holder certain unsecured contract adjustment payments.
The distribution rate on the Income PRIDES is 8.25% per annum, and the
distribution rate on the Growth PRIDES is .75% per annum. Under the stock
purchase contracts, investors will be required to purchase shares of common
stock of the Company for an effective price ranging between a minimum of
$31.75 per share and a maximum of $38.10 per share, and the Company will
issue approximately 5.0 million to 6.0 million common shares by August 16,
2001, depending upon the price of the Company's common stock upon settlement
of the purchase contracts (subject to adjustment under certain
circumstances). The capital securities associated with the Income PRIDES and
the U.S. treasury securities associated with the Growth PRIDES have been
pledged as collateral to secure the holders' obligations in respect of the
common stock purchase contracts. The capital securities issued by the KBHC
Trust are entitled to a distribution rate of 8% per annum of their $10
stated liquidation amount.
The proceeds from the issuance of FELINE PRIDES will be used for general
corporate purposes, including support of the Company's growth strategies and
potential future acquisitions; however, the immediate use of proceeds was to
pay down outstanding debt under the Company's $500 million domestic
unsecured revolving credit facility.
The Company believes it has adequate resources and sufficient credit line
facilities to satisfy its current and reasonably anticipated future
requirements for funds to acquire capital assets and land, to construct
homes, to fund its mortgage banking operations and to meet any other needs
of its business, both on a short and long-term basis.
YEAR 2000 ISSUE
The term "year 2000 issue" is a general term used to describe the
complications that may be caused by existing computer hardware and software
that were designed by applicable manufacturers without consideration for the
upcoming change in the century. If not corrected, such programs may cause
computer systems to fail or to miscalculate data. Due to the year 2000
issue, the Company has undertaken a project to modify or replace portions of
its existing computer operating systems so that they will function properly
with respect to dates in the year 2000 and thereafter. The Company's year
2000 project encompasses the Company's information technology systems, as
well as its non-information technology systems, such as systems embedded in
its office equipment and facilities.
15
<PAGE> 16
State of Year 2000 Readiness. The scope of the Company's year 2000
compliance effort has been defined to include 12 distinct projects. Four of
the 12 projects address areas of greatest business risk and require the
greatest technical effort and, therefore, have been given the highest
priority. These four high priority projects are the following: conversion
and upgrade of the Company's JD Edwards primary accounting programs (the "JD
Edwards Programs"); conversion and upgrade of the operating systems for the
Company's Texas operations which are not associated with the JD Edwards
Programs; conversion and upgrade of the operating systems for the Company's
mortgage banking operations which are not associated with the JD Edwards
Programs; and the upgrade of the Company's primary computer network and
personal computers. Of these four high priority projects, as of October 15,
1998, the upgrade of the Company's primary computer network and personal
computers is 95% fully implemented, the remediation of the JD Edwards
Programs is complete and is being tested, and the conversion and upgrade of
the operating systems for the Company's Texas operations and the Company's
mortgage banking operations are in the process of being remediated.
These four projects are substantially underway and are on schedule for
completion between December 1998 and June 1999.
The remaining eight projects comprise the balance of the Company's year 2000
compliance effort, present a lower business risk and require less technical
effort to complete. These eight projects are currently scheduled to be
completed by June 1999 and are comprised of the following: conversion of
business templates and forms that are not associated with the JD Edwards
Programs; upgrade to the Company's telephone and voice mail systems; upgrade
of the Company's fax machines, copiers and other systems integrated into
office facilities; verification that material third party suppliers to the
Company are year 2000 compliant; verification that material third party
suppliers to the Company's mortgage banking operations are year 2000
compliant; verification that material third party suppliers to the Company's
multi-housing operations are year 2000 compliant; upgrade of the systems
used by the Company's operations in France; and upgrade of the systems used
by the Company's operations in Mexico. These eight projects are in various
stages of assessment, and remediation work on each of the eight projects is
currently expected to commence in the 1999 first quarter.
As noted, three of the 12 projects that comprise the Company's year 2000
compliance effort involve verification that the third parties with which the
Company, and its operating subsidiaries, have a material relationship are
year 2000 compliant. The Company is currently in various stages of
assessment with respect to the three third party verification projects.
These assessments are currently expected to be substantively completed by
the first quarter of 1999. As part of these projects, the Company's
relationships with suppliers, subcontractors, financial institutions and
other third parties will be examined to determine the status of their year
2000 issue efforts as related to the Company. As a general matter, the
Company is vulnerable to significant suppliers' inability to remedy their
own year 2000 issues. Furthermore, the Company relies both domestically and
internationally on financial institutions, government agencies (particularly
for zoning, building permits and related matters), utility companies,
telecommunication service companies and other service providers outside of
its control. There is no assurance that such third parties will not suffer a
year 2000 business disruption and it is conceivable that such failures
could, in turn, have a material adverse effect on the Company's liquidity,
financial condition and results of operations.
Costs of Addressing Year 2000 Issues. Several of the projects included in
the Company's year 2000 plan are projects which were necessary to support
the Company's KB2000 operational business model, and would have been
undertaken regardless of year 2000 exposures. The total cost of all of the
Company's projects associated with its year 2000 plan is currently estimated
to be approximately $4 million; however, it is not possible to determine the
portion of that amount which is specifically attributable to year 2000
compliance work. The total amount expended on all projects related to year
2000 compliance was $1.4 million as of August 31, 1998. The Company believes
that the costs to specifically address the year 2000 issue will not have a
material impact on the Company's financial condition or results of
operations, liquidity or cash flows for any year in the reasonably
forseeable future. The schedule for the successful completion of the
Company's year 2000 project and the estimated costs are based upon certain
assumptions by management regarding future events, including the continued
availability of qualified resources to implement the program and the cost of
such resources.
Risks Presented by Year 2000 Issues. The Company acknowledges that its
failure to resolve a material year 2000 issue could result in the
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the
Company's results of operations. Although the Company
16
<PAGE> 17
considers its exposure to the year 2000 issue risks from third party
suppliers as generally low, due to the uncertainty of the year 2000
readiness of third-party suppliers, the Company is unable to determine at
this time whether the consequences of year 2000 failures will have a
material impact on the Company's results of operations, liquidity or
financial condition. In addition, the Company could be materially impacted
by the widespread economic or financial market disruption by year 2000
computer system failures at government agencies on which the Company is
dependent for zoning, building permits and related matters. Possible risks
of year 2000 failure could include, among other things, delays or errors
with respect to payments, third party delivery of materials and government
approvals. The Company's year 2000 project is expected to significantly
reduce the Company's level of uncertainty and exposure to the year 2000
issue and, in particular, about the year 2000 compliance of material third
parties. To date, the Company has not identified any operating systems,
either of its own or of a material third party supplier, that present a
material risk of not being year 2000 ready or for which a suitable
alternative cannot be implemented.
Contingency Plan. The Company's year 2000 project calls for a year
2000-specific contingency plan to be developed. This plan is expected to be
completed by the end of the Company's 1999 first quarter. As a normal course
of business, the Company maintains contingency plans designed to address
various other potential business interruptions. In addition to the Company's
year 2000-specific contingency plan, these preexisting contingency plans
should assist in mitigating any adverse affect because of the interruption
of support provided by third parties resulting from their failure to be year
2000 ready.
Management currently anticipates that its operating systems will be year
2000 ready well before January 1, 2000, and that the year 2000 issue will
not have a material adverse effect upon the Company's liquidity, financial
position or results of operations.
OUTLOOK
The Company's residential backlog as of August 31, 1998 consisted of 7,630
units, representing aggregate future revenues of approximately $1,132.0
million, up 51.4% and 45.6%, respectively from 5,040 units, representing
aggregate future revenues of $777.7 million a year earlier. The backlog
units and value at August 31, 1998 were the highest of any quarter-end
backlog in the Company's history. Company-wide net orders for the third
quarter of 1998 totaled 3,883, up 17.3% compared to the third quarter of
1997, including a total of 499 net orders generated from the Company's three
1998 acquisitions in Houston, Denver and Phoenix/Tucson and its recently
acquired majority ownership investment in General Homes. Excluding the net
orders related to the companies in which the Company invested or which the
Company acquired in 1998, Company-wide net orders rose 2.2% in the third
quarter of 1998 compared to the year-earlier quarter.
The Company's domestic operations accounted for approximately $983.6
million of backlog value on 6,683 units at August 31, 1998, up from $698.3
million on 4,438 units at August 31, 1997, reflecting higher backlogs from
both California and Other U.S. operations. Backlog in California increased
to approximately $389.0 million on 1,722 units at August 31, 1998 from
$377.3 million on 1,700 units at August 31, 1997. Nonetheless, net orders in
California declined 25.8% in the third quarter of 1998 due primarily to a
15.0% decline in the average number of active communities in the state
compared to a year ago. The Company's Other U.S. operations also
demonstrated year-over-year growth in backlog levels with the backlog value
at August 31, 1998 increasing to approximately $594.6 million on 4,961 units
compared to $321.0 million on 2,738 units at August 31, 1997, reflecting a
49.3% increase in Other U.S. net orders. Excluding 499 net orders
attributable to the Company's investment in General Homes and its
acquisition of three other companies earlier in the year, Other U.S. net
orders in the third quarter of 1998 increased 18.1% from the same period a
year ago.
In France, the value of residential backlog at August 31, 1998 was
approximately $138.8 million on 909 units compared to $71.0 million on 576
units a year earlier. The Company's net orders in France increased 93.7% to
370 in the third quarter of 1998 from 191 net orders for the same period a
year ago. Backlog associated with consolidated commercial development
activities in France totaled $.7 million at August 31, 1998 compared to $.2
million at August 31, 1997.
17
<PAGE> 18
In Mexico, the value of residential backlog at August 31, 1998 was
approximately $9.7 million on 38 units compared to $8.3 million on 26 units
at August 31, 1997. Operations in Mexico generated 9 net orders in the third
quarter of 1998 compared to 14 net orders recorded in the same period a year
ago.
Substantially all of the homes included in the Company's third quarter
residential backlog are expected to be delivered; however, cancellations
could occur, particularly if market conditions deteriorate or mortgage
interest rates increase, thereby decreasing backlog and related future
revenues. As of the end of the third quarter of 1998, there had not been any
material change in the Company's cancellation rates.
Company-wide net orders for the first six weeks of the Company's 1998 fourth
quarter increased 50.5% from the net orders for the comparable period of
1998. Excluding net orders from the 1998 acquisitions and investments,
Company-wide net orders increased 31.8%. During this same period, domestic
net orders were up 48.1%, reflecting a 60.0% increase in net orders from
Other U.S. operations, excluding net orders from the Company's acquisitions
of Hallmark, Pridemark and Estes and its recently acquired majority
ownership investment in General Homes, partially offset by a 11.8% decrease
in California net orders, primarily attributable to fewer active
communities. In France, net orders for the first six weeks of the Company's
1998 fourth quarter increased 68.1% compared to the same period a year ago.
However, current global market uncertainties, mortgage interest rate
volatility, an appreciable decline in consumer confidence and/or other
factors could have mitigating effects.
The Company continues to focus on the two primary strategic initiatives it
established for 1997: further implementation of its KB2000 operational
business model and acceleration of the Company's growth. In addition, the
Company also intends to concentrate on two complementary strategies
consisting of establishing optimum dominant local market presence and
maintaining its focus on acquisitions.
In order to leverage the benefits of the KB2000 operational business model,
the Company has been implementing a strategy designed to achieve a dominant
market position in its major markets. The Company's use of the term
"dominant" is not intended to imply that the Company will become the largest
builder in a market in terms of unit deliveries or revenues; nor is it the
Company's intent to attempt to control the pricing of homes in any market,
which the Company believes is not possible in any event. Rather, the
Company's goal is to achieve a sufficiently optimum market position that
will enable its local business unit to maximize the benefits of its KB2000
operational business model, including lower land acquisition costs, improved
terms with suppliers and subcontractors, the offering of maximum choice and
the best value to customers and retention of the best management talent. The
Company believes that by operating at large volume levels, it can better
execute its KB2000 operational business model and use economies of scale to
increase profits in fewer but larger markets.
Furthermore, the Company intends to increase the overall growth of its
deliveries in future years. The Company's strategy involves growing existing
operations to optimal market volume levels, as well as entering new markets
at high volume levels, principally through acquisitions. In the aggregate,
growth in existing markets will be driven by the Company's ability to
increase the average number of active communities in its major markets
through the successful implementation of its KB2000 operational business
model. In addition, the Company's ongoing acquisition strategy is expected
to supplement growth in both existing and new markets. Under its acquisition
strategy, the Company seeks to acquire home builders which possess a number
of the following characteristics: a business model similar to KB2000, access
to or control of land to support growth, a strong management team and a
financial condition positioned to be accretive to earnings in the first full
year following acquisition. The Company believes this acquisition strategy
will enable it to identify and pursue appropriate targets for expanding its
operations in the remainder of 1998 and beyond in a focused and disciplined
manner; however, this strategy could be impacted by several factors,
including, among other things, conditions in U.S. securities markets, the
general availability of applicable acquisition candidates, pricing for such
transactions, competition among other national or regional builders for such
target companies, changes in general and economic conditions nationally and
in target markets and capital or credit market conditions. Consideration for
such acquisitions may be paid in cash, assumption of debt, notes or common
stock of the Company or any combination thereof.
The Company's current goals are to achieve 15,000 deliveries in 1998 and
18,000 in 1999. These unit delivery goals could be materially affected by
various risk factors such as changes in general economic conditions either
nationally or in the regions in which the Company operates or may commence
operations, job growth and employment levels, home mortgage interest rates
or consumer confidence, among other things.
18
<PAGE> 19
SAFE HARBOR STATEMENT
Investors are cautioned that certain statements contained in this document,
as well as some statements by the Company in periodic press releases and
some oral statements by Company officials to securities analysts and
stockholders during presentations about the Company are "forward-looking
statements" within the meaning of the Private Securities Litigation Reform
Act of 1995 (the "Act"). Statements which are predictive in nature, which
depend upon or refer to future events or conditions, or which include words
such as "expects", "anticipates", "intends", "plans", "believes",
"estimates", "hopes", and similar expressions constitute forward-looking
statements. In addition, any statements concerning future financial
performance (including future revenues, earnings or growth rates), ongoing
business strategies or prospects, and possible future Company actions, which
may be provided by management are also forward-looking statements as defined
by the Act. Forward-looking statements are based on current expectations and
projections about future events and are subject to risks, uncertainties, and
assumptions about the Company, economic and market factors and the
homebuilding industry, among other things. These statements are not
guaranties of future performance, and the Company has no specific intention
to update these statements.
Actual events and results may differ materially from those expressed or
forecasted in the forward-looking statements made by the Company or Company
officials due to a number of factors. The principal important risk factors
that could cause the Company's actual performance and future events and
actions to differ materially from such forward-looking statements include,
but are not limited to, changes in general economic conditions either
nationally or in regions where the Company operates or may commence
operations, employment growth or unemployment rates, lumber or other
homebuilding material prices, labor costs, home mortgage interest rates,
competition, currency exchange rates as they affect the Company's operations
in France and Mexico, consumer confidence, and government regulation or
restrictions on real estate development, costs and effects of unanticipated
legal or administrative proceeding and capital or credit market conditions
affecting the Company's cost of capital; the availability and cost of land
in desirable areas, and conditions in the overall homebuilding market in the
Company's geographic markets (including the historic cyclicality of the
industry); the success of the Company and its significant suppliers in
identifying and addressing operating systems and programs that are not year
2000 ready; as well as seasonality, competition, population growth, property
taxes, and unanticipated delays in the Company's operations. See the
Company's Annual Report on Form 10-K for the year ended November 30, 1997
and other Company filings with the Securities and Exchange Commission for a
further discussion of risks and uncertainties applicable to the Company's
business.
The Company undertakes no obligation to update any forward-looking
statements in this Report on Form 10-Q or elsewhere.
19
<PAGE> 20
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
The following table presents residential information in terms of unit
deliveries to home buyers and net orders taken by geographical market for
the three months and nine months ended August 31, 1998 and 1997, together
with backlog data in terms of units and value by geographical market as of
August 31, 1998 and 1997.
<TABLE>
<CAPTION>
Three Months Ended August 31,
--------------------------------------------------
Deliveries Net Orders
-------------------- --------------------
Market 1998 1997 1998 1997
---------- ----- ----- ----- -----
<S> <C> <C> <C> <C>
California 1,225 1,204 1,117 1,506
Other U.S. 2,567 1,513 2,387 1,599
France 363 295 370 191
Other 12 4 9 14
----- ----- ----- -----
Total 4,167 3,016 3,883 3,310
===== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended August 31,
---------------------------------------------------- Backlog - Value
Deliveries Net Orders Backlog - Units In Thousands
------------------------ ------------------------ ------------------------- -------------------------
Market 1998 1997 1998 1997 1998 1997 1998 1997
- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
California 3,371 3,213 3,777 4,059 1,722 1,700 $ 388,998 $ 377,332
Other U.S. 5,846 3,826 7,356 4,808 4,961* 2,738 594,575* 321,007
France 963 529 1,286 561 909 576* 138,812 71,041*
Other 25 21 41 33 38 26 9,652 8,320
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total 10,205 7,589 12,460 9,461 7,630* 5,040* 1,132,037* $ 777,700*
========== ========== ========== ========== ========== ========== ========== ==========
</TABLE>
* Backlog amounts for 1998 have been adjusted to reflect the acquisitions
of Hallmark, PrideMark and Estes, as well as the acquisition of a
majority interest in General Homes. Therefore, backlog amounts at
November 30, 1997 combined with net order and delivery activity for the
first nine months of 1998 will not equal ending backlog at August 31,
1998. Backlog amounts for 1997 were adjusted to reflect the acquired
developments in France. Therefore, backlog amounts at November 30, 1996
combined with sales and delivery activity for the first nine months of
1997 will not equal ending backlog at August 31,1997.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
24 The consent of Ernst & Young LLP, independent auditors, filed as an
exhibit to the Company's 1997 Annual Report on Form 10-K, is
incorporated by reference herein.
27 Financial Data Schedule.
20
<PAGE> 21
Report on Form 8-K
On June 24, 1998, the Company filed a Current Report on Form 8-K (Item 5),
which included its June 23, 1998 press release announcing results for the
1998 second quarter, as well as its consolidated statements of income for
the three months and six months ended May 31, 1998 and 1997 and consolidated
balance sheets as of May 31, 1998 and 1997 and November 30, 1997. The Form
8-K also included supplemental information for the three months and six
months ended May 31, 1998 and 1997.
On August 14, 1998, the Company filed a Current Report on Form 8-K (Item 7)
which included certain exhibits in connection with the issuance of its
FELINE PRIDES pursuant to Registration Statement Nos. 333-51825 and
333-51825-01.
21
<PAGE> 22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KAUFMAN AND BROAD HOME CORPORATION
------------------------------------
Registrant
Dated October 15, 1998 /s/ BRUCE KARATZ
---------------- ------------------------------------
Bruce Karatz
Chairman, President and Chief
Executive Officer
(Principal Executive Officer)
Dated October 15, 1998 /s/ MICHAEL F. HENN
---------------- ------------------------------------
Michael F. Henn
Senior Vice President and Chief
Financial Officer
(Principal Financial Officer)
22
<PAGE> 23
<TABLE>
<CAPTION>
Page of Sequentially
INDEX OF EXHIBITS Numbered Pages
----------------------
<S> <C>
27 Financial Data Schedule 24
</TABLE>
23
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> NOV-30-1998
<PERIOD-START> DEC-01-1997
<PERIOD-END> AUG-31-1998
<CASH> 9,825
<SECURITIES> 60,222<F1>
<RECEIVABLES> 376,314
<ALLOWANCES> 0
<INVENTORY> 1,135,328
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,734,629
<CURRENT-LIABILITIES> 0
<BONDS> 525,226<F2>
0
0
<COMMON> 39,903
<OTHER-SE> 387,522
<TOTAL-LIABILITY-AND-EQUITY> 1,734,629
<SALES> 1,591,064
<TOTAL-REVENUES> 1,622,718
<CGS> 1,504,785
<TOTAL-COSTS> 1,311,062<F3>
<OTHER-EXPENSES> 211,808<F4>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19,331
<INCOME-PRETAX> 82,218
<INCOME-TAX> 28,800
<INCOME-CONTINUING> 53,418
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 53,418
<EPS-PRIMARY> 1.35
<EPS-DILUTED> 1.30
<FN>
<F1>MARKETABLE SECURITIES ARE COMPRISED OF FIRST MORTGAGES AND MORTGAGE-BACKED
SECURITIES WHICH ARE HELD FOR LONG-TERM INVESTMENT. THE MORTGAGE-BACKED
SECURITIES SERVE AS COLLATERAL FOR RELATED COLLATERALIZED MORTGAGE OBLIGATIONS.
<F2>BONDS ARE COMPRISED OF SENIOR AND SENIOR SUBORDINATED NOTES AND
COLLATERALIZED MORTGAGE OBLIGATIONS.
<F3>TOTAL COSTS INCLUDE INTEREST EXPENSE ON THE COLLATERALIZED MORTGAGE
OBLIGATIONS AS THE ASSOCIATED INTEREST INCOME GENERATED FROM THE
MORTGAGE-BACKED SECURITIES IS INCLUDED IN TOTAL REVENUES.
<F4>OTHER EXPENSES ARE COMPRISED OF SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES.
</FN>
</TABLE>
