<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 February 28, 1998.
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from [ ] to [ ].
Commission File No. 1-9195
KAUFMAN AND BROAD HOME CORPORATION
(Exact name of registrant as specified in its charter)
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, 39,228,777 shares outstanding
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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 -
Three Months ended February 28, 1998 and 1997 3
Consolidated Balance Sheets -
February 28, 1998 and November 30, 1997 4
Consolidated Statements of Cash Flows -
Three Months ended February 28, 1998 and 1997 5
Notes to Consolidated Financial Statements 6-7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 8-13
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 14
ITEM 5. OTHER INFORMATION 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 14
SIGNATURES 15
INDEX OF EXHIBITS 16
</TABLE>
2
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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>
Three Months Ended February 28,
-------------------------------
1998 1997
--------- ---------
<S> <C> <C>
TOTAL REVENUES $ 426,245 $ 347,246
========= =========
CONSTRUCTION:
Revenues $ 417,309 $ 339,635
Construction and land costs (344,879) (279,588)
Selling, general and administrative expenses (57,243) (48,301)
--------- ---------
Operating income 15,187 11,746
Interest income 1,522 1,087
Interest expense, net of amounts capitalized (7,137) (8,396)
Minority interests in pretax income of
consolidated joint ventures (259) (53)
Equity in pretax income of
unconsolidated joint ventures 249 40
--------- ---------
Construction pretax income 9,562 4,424
--------- ---------
MORTGAGE BANKING:
Revenues:
Interest income 3,662 3,609
Other 5,274 4,002
--------- ---------
8,936 7,611
Expenses:
Interest (3,579) (3,246)
General and administrative (2,221) (1,845)
--------- ---------
Mortgage banking pretax income 3,136 2,520
--------- ---------
TOTAL PRETAX INCOME 12,698 6,944
Income taxes (4,600) (2,500)
--------- ---------
NET INCOME $ 8,098 $ 4,444
========= =========
BASIC EARNINGS PER SHARE $ .21 $ .11
========= =========
DILUTED EARNINGS PER SHARE $ .20 $ .11
========= =========
BASIC AVERAGE SHARES OUTSTANDING 39,074 38,829
========= =========
DILUTED AVERAGE SHARES OUTSTANDING 40,589 39,692
========= =========
CASH DIVIDENDS PER COMMON SHARE $ .075 $ .075
========= =========
</TABLE>
See accompanying notes.
3
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KAUFMAN AND BROAD HOME CORPORATION
CONSOLIDATED BALANCE SHEETS
(In Thousands - Unaudited)
<TABLE>
<CAPTION>
February 28, November 30,
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
CONSTRUCTION:
Cash and cash equivalents $ 33,968 $ 66,343
Trade and other receivables 153,944 169,988
Inventories 838,270 790,243
Investments in unconsolidated joint ventures 5,629 6,338
Goodwill 29,300 31,283
Other assets 77,914 69,666
----------- -----------
1,139,025 1,133,861
----------- -----------
MORTGAGE BANKING:
Cash and cash equivalents 7,243 1,899
Receivables:
First mortgages and mortgage-backed securities 69,561 71,976
First mortgages held under commitment of
sale and other receivables 153,326 208,254
Other assets 3,056 3,001
----------- -----------
233,186 285,130
----------- -----------
TOTAL ASSETS $ 1,372,211 $ 1,418,991
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CONSTRUCTION:
Accounts payable $ 144,983 $ 163,646
Accrued expenses and other liabilities 111,151 105,376
Mortgages and notes payable 513,313 496,869
----------- -----------
769,447 765,891
----------- -----------
MORTGAGE BANKING:
Accounts payable and accrued expenses 5,487 7,300
Notes payable 148,426 200,828
Collateralized mortgage obligations secured
by mortgage-backed securities 58,489 60,058
----------- -----------
212,402 268,186
----------- -----------
Minority interests in consolidated joint ventures 2,021 1,858
----------- -----------
Common stock 39,229 38,997
Paid-in capital 187,711 186,086
Retained earnings 165,117 159,960
Cumulative foreign currency translation adjustments (3,716) (1,987)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 388,341 383,056
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,372,211 $ 1,418,991
=========== ===========
</TABLE>
See accompanying notes.
4
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KAUFMAN AND BROAD HOME CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands - Unaudited)
<TABLE>
<CAPTION>
Three Months Ended February 28,
-------------------------------
1998 1997
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 8,098 $ 4,444
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in pretax income of
unconsolidated joint ventures (249) (40)
Minority interests in pretax income of
consolidated joint ventures 259 53
Amortization of discounts and issuance costs 483 443
Depreciation and amortization 3,217 2,934
Provision for deferred income taxes (1,235) (3,435)
Change in:
Receivables 70,896 49,596
Inventories (43,303) 20,405
Accounts payable, accrued expenses
and other liabilities (14,701) (57,694)
Other, net (4,765) (4,938)
-------- --------
Net cash provided by investing activities 18,700 11,768
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in unconsolidated joint ventures 958 647
Net sales (originations) of mortgages held
for long-term investment 501 (91)
Payments received on first mortgages
and mortgage-backed securities 2,152 2,127
Other, net (3,610) (10)
-------- --------
Net cash provided by investing activities 1 2,673
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments on credit agreements and other
short-term borrowings (33,020) (6,170)
Payments on collateralized mortgage obligations (1,969) (1,815)
Payments on mortgages, land contracts and other loans (7,706) (2,101)
Payments to minority interests in
consolidated joint ventures (96) (147)
Payments of cash dividends (2,941) (2,911)
-------- --------
(45,732) (13,144)
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (27,031) 1,297
Cash and cash equivalents at beginning of period 68,242 9,781
-------- --------
Cash and cash equivalents at end of period $ 41,211 $ 11,078
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Interest paid, net of amounts capitalized $ 448 $ 2,713
======== ========
Income taxes paid $ 379 $ 1,034
======== ========
SUPPLEMENTAL DISCLOSURES OF NONCASH ACTIVITIES:
Cost of inventories acquired through seller financing $ 4,724 $ 0
======== ========
</TABLE>
See accompanying notes.
5
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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 February 28, 1998, the results of its consolidated operations
for the three months ended February 28, 1998 and 1997, and its consolidated
cash flows for the three months ended February 28, 1998 and 1997. The results
of operations for the three months ended February 28, 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>
February 28, November 30,
1998 1997
-------- --------
<S> <C> <C>
Homes, lots and improvements in production $603,728 $605,227
Land under development 234,542 185,016
-------- --------
Total inventories $838,270 $790,243
======== ========
</TABLE>
The impact of capitalizing interest costs on consolidated pretax income is as
follows (in thousands):
<TABLE>
<CAPTION>
Three months ended February 28,
-------------------------------
1998 1997
-------- --------
<S> <C> <C>
Interest incurred $ 12,353 $ 13,173
Interest expensed (7,137) (8,396)
-------- --------
Interest capitalized 5,216 4,777
Interest amortized (6,925) (5,742)
-------- --------
Net impact on consolidated pretax income $ (1,709) $ (965)
======== ========
</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
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
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KAUFMAN AND BROAD HOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. Earnings Per Share (continued)
the SFAS No. 128 requirements. The following table presents the effects of
dilutive common stock options (in thousands):
<TABLE>
<CAPTION>
Three months ended February 28,
-------------------------------
1998 1997
------ ------
<S> <C> <C>
Basic average shares outstanding 39,074 38,829
Net effect of stock options assumed to be exercised 1,515 863
------ ------
Diluted average shares outstanding 40,589 39,692
====== ======
</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. Subsequent Events
During the second quarter of 1998, the Company acquired three privately held
home builders with regional operations in certain key Southwestern markets.
On March 19, 1998, the Company acquired all of the issued and outstanding
capital stock of Houston-based Hallmark Residential Group, Inc. ("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.
The acquisitions of Hallmark, PrideMark and Estes were financed by borrowings
under the Company's domestic unsecured revolving credit facility. These
acquisitions will be accounted for under the purchase method and the results
of their operations will be included in the Company's consolidated financial
statements from the date of acquisition. The purchase prices will be
allocated to the assets acquired and liabilities assumed based upon their
estimated fair market values at the date of acquisition. Any excess of the
purchase prices over the net assets acquired will be allocated to goodwill.
6. Reclassification
Certain amounts in the consolidated financial statements of prior years have
been reclassified to conform to the 1998 presentation.
7
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
OVERVIEW
Total revenues for the three months ended February 28, 1998 increased 22.8%
to $426.2 million from $347.2 million for the quarter ended February 28, 1997
due to higher housing and mortgage banking revenues, partially offset by
lower land revenues. Net income for the first quarter of 1998 increased to
$8.1 million or $.20 per share from $4.4 million or $.11 per share for the
same period a year ago. The increase in net income was principally driven by
significantly higher unit deliveries, an improved operating income margin and
lower interest expense, as well as an increase in mortgage banking pretax
income. Despite a modest adverse impact on first quarter California
deliveries related to severe rains, Company-wide housing revenues for the
first quarter of 1998 increased 24.1% from the year-earlier period reflecting
a 24.7% increase in unit deliveries, partially offset by a .5% decline in
average selling price. Mortgage banking pretax income increased 24.4% in the
first three months of 1998 compared to the first three months of 1997
primarily due to a higher volume of loan closings.
CONSTRUCTION
Revenues increased by $77.7 million, or 22.9%, to $417.3 million in the first
quarter of 1998 from $339.6 million in the first quarter of 1997 due to an
increase in housing revenues, partially offset by lower land revenues.
Housing revenues for the period increased by $80.3 million to $414.2 million
from $333.9 million in the year-earlier period as a result of a 24.7%
increase in unit deliveries, partly offset by a .5% decline in average
selling price. Housing revenues in the United States rose to $379.6 million
on 2,363 unit deliveries in the first three months of 1998, compared to
$313.8 million on 2,016 units in the first three months of 1997, reflecting
increased housing revenues from both California and Other U.S. operations.
California housing revenues for the first quarter of 1998 rose 18.9% to
$218.6 million on 1,022 unit deliveries from $183.8 million on 914 unit
deliveries in the year-earlier period. California unit deliveries increased
11.8% in the first quarter of 1998 from the first quarter of 1997 despite a
16.9% decrease in the average number of active communities and severe "El
Nino" rains during the quarter. While the impact of El Nino rains on the
Company's California deliveries in the first quarter of 1998 was only modest,
these weather conditions are expected to continue to affect deliveries in the
second quarter of 1998. Housing revenues from Other U.S. operations rose
23.8% to $161.0 million in the first quarter of 1998 from $130.0 million in
the first quarter of 1997. Other U.S. deliveries increased 21.7% to 1,341
units in the first quarter of 1998 from 1,102 units in the first quarter of
1997 as a result of a 38.5% increase in the average number of active
communities. Revenues from French housing operations during the first quarter
of 1998 increased to $32.8 million on 260 unit deliveries from $17.4 million
on 83 units in the prior year's quarter primarily due to the inclusion of
operations of Paris-based SMCI, acquired in the third quarter of 1997.
During the first quarter of 1998, the Company's overall average selling price
decreased .5% to $157,600 from $158,400 in the prior year's period. This
slight decrease primarily resulted from a lower average selling price in
France. The domestic average selling price rose 3.2% to $160,600 in the first
quarter of 1998, reflecting a 6.4% increase in the Company's California
average selling price to $213,900 from $201,100 and a 1.8% increase in the
average selling price in Other U.S. operations to $120,100 from $118,000.
These increases occurred as a result of selected increases in sales prices in
certain markets, as well as a change in product mix favoring a greater number
of higher priced urban in-fill locations and first time move up sales. In
France, the average selling price in the first quarter of 1998 fell 39.9% to
$126,300 from $210,000 in the year-earlier quarter primarily due to the lower
priced unit deliveries from the SMCI developments.
Revenues from land sales totaled $3.1 million in the first quarter of 1998
compared to $5.8 million in the first quarter of 1997.
Operating income increased by $3.4 million to $15.2 million in the first
quarter of 1998 from $11.8 million in the first quarter of 1997. As a
percentage of construction revenues, operating income increased by .1
percentage point to 3.6% in the first quarter of 1998 compared to 3.5% in the
first quarter of 1997. Gross
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profits increased by $12.4 million, or 20.6%, to $72.4 million in the first
quarter of 1998 from $60.0 million in the prior year's period. During this
same period, housing gross profits increased by $13.8 million to $72.1
million from $58.3 million. Gross profits as a percentage of construction
revenues decreased to 17.4% in the first quarter of 1998 from 17.7% in the
year-earlier quarter primarily due to a decrease in the Company's housing
gross margin to 17.4% from 17.5%. The decrease in the Company's housing gross
margin resulted from a lower housing gross margin in California due to the
continued sell-through of older, non KB2000 communities, partially offset by
an improved gross margin on new KB2000 deliveries. Company-wide land sales
generated gross profits of $.3 million and $1.8 million in the first quarter
of 1998 and 1997, respectively.
Selling, general and administrative expenses increased by $8.9 million, or
18.5 %, to $57.2 million in the three months ended February 28, 1998 from
$48.3 million in the corresponding 1997 period. As a percentage of housing
revenues, selling, general and administrative expenses improved .7 percentage
points to 13.8% in the first quarter of 1998 from 14.5% for the year-earlier
period. This improvement was due to the higher volume of deliveries, as well
as lower advertising and sales incentives, partially offset by higher sales
commissions.
Interest income totaled $1.5 million in the first quarter of 1998 compared to
$1.1 million in the first quarter of 1997, reflecting increases in the
interest bearing average balances of short-term investments and mortgages
receivable compared to the same period a year ago.
Interest expense (net of amounts capitalized) decreased by $1.3 million to
$7.1 million in the first quarter of 1998 from $8.4 million in the first
quarter of 1997. Gross interest incurred in the three months ended February
28, 1998 was $.8 million lower than the year ago period, reflecting 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. The percentage of interest capitalized during the three months ended
February 28, 1998 and 1997 was 42.2% and 36.3%, respectively. These
capitalization rates reflect the timing and proportion of land in production
during the periods.
Minority interests in pretax income of consolidated joint ventures totaled
$.3 million in the first quarter of 1998 and $.1 million in the first quarter
of 1997. Minority interests relate to residential and commercial activities
in France. In the first quarters of 1998 and 1997, minority interests related
only to residential activities. Minority interests are expected to remain at
relatively low levels reflecting the limited opportunities currently
available and reasonably expected to be available in the French commercial
market as well as the Company's strategy to focus on its French residential
development business.
Equity in pretax income of unconsolidated joint ventures totaled $.2 million
in the first quarter of 1998 compared to the essentially break-even results
recorded in the first quarter of 1997. The Company's joint ventures recorded
combined revenues of $4.6 million in the first three months of 1998 compared
to $2.5 million in the corresponding period of 1997. All of the joint venture
revenues in the first quarter of 1998 and 1997 were generated from
residential properties.
MORTGAGE BANKING
Interest income and interest expense increased by $.1 million and $.3
million, respectively, in the first quarter of 1998 compared to the same
quarter a year ago. Interest income increased as a result of the higher
balance of first mortgages held under commitment of sale and other
receivables outstanding during the first quarter of 1998 compared to the
prior year's first quarter, while interest expense rose due to the higher
balance of notes payable outstanding during the period.
Other mortgage banking revenues increased by $1.3 million to $5.3 million in
the first three months of 1998 from $4.0 million in the first three months of
1997. This increase was primarily the result of higher gains on the sale of
servicing rights due to an increased level of mortgage originations resulting
from higher unit volume in the United States.
General and administrative expenses increased by $.4 million to $2.2 million
for the quarter ended February 28, 1998 from $1.8 million for the same period
a year ago. The increase in general and administrative expenses was primarily
due to increased mortgage production volume.
9
<PAGE> 10
INCOME TAXES
Income tax expense totaled $4.6 million in the first quarter of 1998 and $2.5
million in the prior year's first quarter. These amounts represented an
effective income tax rate of approximately 36% in both 1998 and 1997.
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. In the first quarter of 1998, net cash used by operating,
investing and financing activities totaled $27.0 million compared to $1.3
million provided in the prior year's first quarter.
Operating activities provided $18.7 million of cash during the first three
months of 1998 compared to $11.8 million provided during the same period of
1997. The Company's sources of operating cash in the first quarter of 1998
included a reduction in receivables of $70.9 million and first quarter
earnings of $8.1 million. Uses of cash during the first three months of 1998
included net investments of $43.3 million in inventories (excluding $4.7
million of inventories acquired through seller financing) and a $14.7 million
decrease in accounts payable, accrued expenses and other liabilities.
Inventories increased, primarily in California and Other U.S. operations, as
the Company continued its accelerated growth strategy in certain markets. The
reduction in receivables related primarily to a lower balance of mortgages
held under commitment of sale due to lower mortgage origination volume in the
first quarter of 1998 compared to the fourth quarter of 1997.
Operating activities for the first quarter of 1997 provided $49.6 million
from a reduction in receivables, $20.4 million from a reduction in
inventories and $4.4 million from first quarter earnings. The cash provided
was partially offset by cash used to pay down $57.7 million in accounts
payable, accrued expenses and other liabilities. The reduction in receivables
related primarily to a decrease in mortgage origination volume in the first
quarter of 1997 compared to the fourth quarter of 1996. Inventories
decreased, primarily in California, where the Company benefited by remaining
selective with regard to new investment in its home state.
Cash provided by investing activities was essentially zero in the first
quarter of 1998 compared to $2.7 million provided in the year-earlier period.
In the first quarter of 1998, cash was provided from $2.1 million in proceeds
received from mortgage-backed securities, which were principally used to pay
down the collateralized mortgage obligations for which the mortgage-backed
securities have served as collateral, $1.0 million in distributions related
to investments in unconsolidated joint ventures and $.5 million from net
sales of mortgages held for long-term investment. The cash provided was
offset by $3.6 million used for other investing activities. In the first
quarter of 1997, cash was provided from $2.1 million in proceeds received
from mortgage-backed securities and $.6 million in distributions related to
investments in unconsolidated joint ventures.
Financing activities in the first three months of 1998 used $45.7 million of
cash, while first quarter 1997 financing activities used $13.1 million. In
the first quarter of 1998, cash was used for net payments on borrowings of
$40.7 million, payments on collateralized mortgage obligations of $2.0
million and cash dividend payments of $2.9 million. Financing activities in
1997's first quarter resulted in net cash outflows due mainly to net payments
on borrowings of $8.3 million, payments on collateralized mortgage
obligations of $1.8 million and cash dividend payments of $2.9 million.
As of February 28, 1998, no borrowings were outstanding under the Company's
$500 million domestic unsecured revolving credit facility. The Company's
French unsecured financing agreements totaling $52.1 million had in the
aggregate $23.6 million available at February 28, 1998. In addition, the
Company's mortgage banking operation had $101.6 million available under its
$250 million mortgage warehouse facility at quarter-end. The Company's
financial leverage, as measured by the ratio of debt to total capital, was
56.9% at the end of the 1998 first quarter compared to 58.6% at the end of
the 1997 first quarter. Adjusted to reflect the $31.6 million of invested
cash at February 28, 1998, the Company's ratio of debt to total capital at
the end of the 1998 first quarter was 55.4%. Subsequent to the end of the
first quarter of 1998, the Company acquired
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<PAGE> 11
three homebuilding companies for purchase prices aggregating to approximately
$167 million, including the assumption of debt. These acquisitions were
financed by the Company's domestic unsecured revolving credit facility.
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.
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.
OUTLOOK
The Company's residential backlog as of February 28, 1998 consisted of 5,301
units, representing aggregate future revenues of approximately $799.1
million, up 52.1% and 50.8%, respectively, from 3,486 units, representing
aggregate future revenues of approximately $529.8 million, a year ago. The
backlog units and value at February 28, 1998 were the highest of any
quarter-end backlog in the Company's history. Company-wide net orders for the
first three months of 1998 totaled 3,716, up 34.9% compared to the 2,755 net
orders in the first three months of 1997.
The Company's domestic operations accounted for approximately $700.8 million
of backlog value on 4,574 units at February 28, 1998, up from approximately
$468.7 million on 3,199 units at February 28, 1997, reflecting higher
backlogs from both California and Other U.S. operations. Backlog in
California increased to approximately $337.4 million on 1,563 units at
February 28, 1998 from $219.9 million on 1,017 units at February 28, 1997 as
net orders increased 17.8% to 1,269 in the first quarter from 1,077 for the
same quarter a year ago. The Company's Other U.S. operations also
demonstrated year-over-year growth in backlog levels with approximately
$363.3 million in backlog, based on 3,011 units at February 28, 1998, up from
$248.8 million on 2,182 units at February 28, 1997, reflecting a 34.9%
increase in Other U.S. net orders to 2,062 in the first quarter of 1998 from
1,528 in the year-earlier quarter. The year-over-year growth in total
domestic backlog units and value resulted primarily from improved absorption
rates and the Company's emphasis on pre-sales. Improved market conditions in
California and the success of the Company's communities designed under its
KB2000 operational business model also contributed to the increase in backlog
levels in the United States. The average number of active communities in the
Company's domestic operations for the first quarter of 1998 was up 5.4% from
the same quarter a year ago, as a decrease of 16.9% in California was more
than offset by an increase of 38.5% in Other U.S operations.
In France, the value of residential backlog at February 28, 1998 was
approximately $89.3 million on 696 units, up from $56.8 million on 272 units
a year earlier. The Company's net orders in France increased by 164.3% to 370
in the first quarter of 1998 from 140 net orders in the first quarter of 1997
primarily due to the acquisition of Paris-based SMCI in the third quarter of
1997. The value of backlog associated with the Company's French commercial
development activities declined to approximately $4.1 million at February 28,
1998 from $10.6 million at February 28, 1997, reflecting a reduced level of
activity.
In Mexico, the value of residential backlog at February 28, 1998 was
approximately $9.1 million on 31 units compared to $4.3 million on 15 units
at February 28, 1997. Operations in Mexico generated 15 net orders in the
first quarter of 1998, an increase from the 10 net orders generated in the
same period a year ago. Mexico's economy has shown signs of recovering from
the country's recent deep recession brought about by the devaluation of the
peso. Consequently, the Company is considering additional investment
opportunities in Mexico.
11
<PAGE> 12
Substantially all of the homes included in residential backlog are expected
to be delivered in 1998; however, cancellations could occur, particularly if
market conditions deteriorate or mortgage interest rates increase, thereby
decreasing backlog and related future revenues.
In the remainder of 1998, the Company plans to continue to focus on the two
primary strategic initiatives it established for 1997: further
implementation of its KB2000 business model and acceleration of the
Company's growth. In addition, the Company also intends to concentrate on
two complementary strategies in 1998 consisting of establishing optimum
local market dominance and increasing its focus on acquisitions.
The Company is continuing to concentrate on its KB2000 operational business
model in 1998 and intends to further the Company-wide implementation of
KB2000 during the remainder of the year. Through its intense focus on the
KB2000 strategy, the Company seeks to achieve a leading market presence in
each of its key markets. As expected, implementation of the KB2000 principles
such as emphasizing pre-selling of homes over speculative starts, resulted in
higher backlog levels at the end of the first quarter of 1998 compared to
year ago levels, as well as an increase in the percentage of sold inventory
in production at February 28, 1998 to 75% compared to 55% at February 28,
1997. In addition, the Company's backlog ratio rose to 160.3% at the end of
the 1998 first quarter from 134.7% at the end of the year ago quarter
(backlog ratio is defined as the ratio of beginning backlog to actual
deliveries in the succeeding quarter).
In order to leverage the benefits of the KB2000 operational business model,
the Company is implementing a strategy designed to achieve a dominant market
position in its major markets. The Company believes that "dominant" does not
require that it become the largest builder in a market in terms of unit
deliveries or revenues; rather the Company's goal is to achieve the optimum
market position that will enable its local business unit to maximize the
benefits of its KB2000 operationsl 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,
optimal volume levels, it can better execute its KB2000 business model and
use economies of scale to maximize profits in fewer but larger markets. The
Company's strategy involves entering new markets at high volume levels,
principally through acquisitions, as well as rapidly growing existing
operations to optimal market dominant volume levels through both organic
growth and acquisitions.
During the second quarter of 1998, the Company acquired three privately-held
home builders with regional operations in certain key Southwestern markets.
On March 19, 1998, the Company acquired all of the issued and outstanding
capital stock of 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 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 will significantly increase the Company's 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 provides the Company's entry into Tucson and will
significantly increase the Company's market presence in Phoenix. The
acquisitions of Hallmark, PrideMark and Estes will be accounted for under the
purchase method and the results of their operations will be included in the
Company's consolidated financial statements from the date of acquisition.
The Company intends to actively consider additional stategic acquisitions in
1998 to enter new markets and/or rapidly increase volume in existing markets.
The acquisitions of Hallmark, PrideMark and Estes were executed in accordance
with the Company's acquisition strategy. Under its strategy, the Company
seeks to acquire home builders which have a business model close to KB2000,
have access to land to support growth, possess a strong management team and
will be accretive to earnings in the first full year following acquisition.
The Company believes its acquisition strategy will enable it to identify and
pursue appropriate targets for expanding its operations in 1998 and beyond,
in a focused and disciplined manner; however, this strategy can be impacted
by several factors, including, among other things, the general availability
of applicable acquisition candidates, pricing for such transactions,
competition among other national or regional builders for such target
12
<PAGE> 13
companies, changes in general and economic conditions nationally and in
target markets and capital or credit market conditions.
Company-wide net orders for the first seven weeks of the second quarter of
1998 increased 42.7% from the same period a year ago. During this same
period, domestic net orders were up 39.4% from the prior year's period,
reflecting a 4.7% increase in California net orders. The impact of El Nino
rains on California, which the Company experienced in the first quarter of
1998, is expected to carry into the second quarter. Net orders from Other
U.S. operations for the first seven weeks of the second quarter of 1998
increased 67.8% from the corresponding period of 1997. In France, net orders
for this same period were up 81.9%. Assuming stable or improving business
conditions, employment levels, interest rates, weather conditions and
consumer confidence in its major markets, among other risk factors, the
Company continues to believe that ongoing progress on its primary strategic
initiatives and the acquisitions of Hallmark, PrideMark and Estes should
result in rising delivery volumes from a higher average number of active
communities, and improved operating income in 1998 compared to 1997. In the
aggregate, the Company has established a goal of achieving Company-wide
deliveries in excess of 15,000 units in 1998. Further, based upon its
recently-completed acquisitions, the Company has also increased its aggregate
Company-wide delivery goal to 18,000 units for 1999. Both of 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. The Company believes that the benefits of the continued
implementation of its strategic initiatives will provide long-term
sustainable improvement throughout the Company's operations, boosting
earnings per share and return on investment in 1998 and beyond.
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,
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); 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.
13
<PAGE> 14
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 2, 1998, at the Company's 1998 Annual Meeting of Stockholders, the
following matters were submitted for stockholder vote:
Election of Directors. Messrs. Ronald W. Burkle, Ray R. Irani, Guy Nafilyan,
and Luis G. Nogales were re-elected as directors until the 2001 Annual
Meeting of Stockholders, with 99% of the votes cast voting in favor. Mr.
Burkle received 36,083,022 affirmative votes with 257,954 votes withheld; Dr.
Irani received 36,075,026 affirmative votes with 265,950 votes withheld; Mr.
Nogales received 36,082,379 affirmative votes with 258,597 votes withheld;
and Mr. Nafilyan received 36,083,463 affirmative votes with 257,513 votes
withheld.
Messrs. James A. Johnson and Sanford C. Sigoloff and Ms. Jane Evans continue
as directors and, if nominated, will next stand for re-election at the 1999
Annual Meeting of Stockholders; Messrs. Steve Bartlett, Bruce Karatz and
Charles R. Rinehart also continue as directors and, if nominated, will next
stand for re-election at the 2000 Annual Meeting of Stockholders.
1998 Stock Incentive Plan. The Kaufman and Broad Home Corporation 1998 Stock
Incentive Plan was approved, with 69.7% of the votes cast, or 25,318,969
shares, having voted in favor of the plan, 10,767,940 shares voting against
and 254,067 shares abstaining.
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-month periods ended February 28, 1998 and 1997, together with backlog
data in terms of units and value by geographical market as of February 28,
1998 and 1997.
<TABLE>
<CAPTION>
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 1,022 914 1,269 1,077 1,563 1,017 $337,424 $219,908
Other U.S. 1,341 1,102 2,062 1,528 3,011 2,182 363,340 248,835
France 260 83 370 140 696 272 89,295 56,783
Other 6 9 15 10 31 15 9,083 4,290
----- ----- ----- ----- ----- ----- -------- --------
Total 2,629 2,108 3,716 2,755 5,301 3,486 $799,142 $529,816
===== ===== ===== ===== ===== ===== ======== ========
</TABLE>
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.
Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended February 28, 1998.
14
<PAGE> 15
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 April 15, 1998 /s/ BRUCE KARATZ
------------------------- --------------------------------------------
Bruce Karatz
Chairman, President and
Chief Executive Officer
Dated April 15, 1998 /s/ MICHAEL F. HENN
------------------------- --------------------------------------------
Michael F. Henn
Senior Vice President and
Chief Financial Officer
15
<PAGE> 16
<TABLE>
<CAPTION>
Page of
Sequentially
INDEX OF EXHIBITS Numbered Pages
--------------
<S> <C>
27 Financial Data Schedule
</TABLE>
16
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> NOV-30-1998
<PERIOD-START> DEC-01-1997
<PERIOD-END> FEB-28-1998
<CASH> 41,211
<SECURITIES> 69,561<F1>
<RECEIVABLES> 307,270
<ALLOWANCES> 0
<INVENTORY> 838,270
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,372,211
<CURRENT-LIABILITIES> 0
<BONDS> 532,062<F2>
0
0
<COMMON> 39,229
<OTHER-SE> 349,112
<TOTAL-LIABILITY-AND-EQUITY> 1,372,211
<SALES> 417,309
<TOTAL-REVENUES> 426,245
<CGS> 344,879
<TOTAL-COSTS> 348,458<F3>
<OTHER-EXPENSES> 59,464<F4>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,137
<INCOME-PRETAX> 12,698
<INCOME-TAX> 4,600
<INCOME-CONTINUING> 8,098
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,098
<EPS-PRIMARY> 0.21
<EPS-DILUTED> 0.20
<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>
