<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, 1999.
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, 47,688,647 shares 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, 1999 and 1998 3
Consolidated Balance Sheets --
August 31, 1999 and November 30, 1998 4
Consolidated Statements of Cash Flows --
Nine Months ended August 31, 1999 and 1998 5
Notes to Consolidated Financial Statements 6-10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 11-21
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION 22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 22
SIGNATURES 23
INDEX OF EXHIBITS 24
</TABLE>
<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,
----------------------------- -------------------------
1999 1998 1999 1998
------------ ------------ ----------- ---------
<S> <C> <C> <C> <C>
TOTAL REVENUES $ 2,613,526 $ 1,622,718 $ 1,057,113 $ 659,014
============ ============ =========== =========
CONSTRUCTION:
Revenues $ 2,570,145 $ 1,591,064 $ 1,040,413 $ 647,038
Construction and land costs (2,085,016) (1,300,126) (836,497) (526,254)
Selling, general and administrative
expenses (326,636) (204,659) (122,713) (77,608)
------------ ------------ ----------- ---------
Operating income 158,493 86,279 81,203 43,176
Interest income 5,613 4,127 1,831 1,278
Interest expense, net of amounts
capitalized (20,167) (19,331) (7,141) (4,532)
Minority interests (21,075) (2,831) (8,605) (2,409)
Equity in pretax income of unconsolidated
joint ventures 585 405 638 73
------------ ------------ ----------- ---------
Construction pretax income 123,449 68,649 67,926 37,586
------------ ------------ ----------- ---------
MORTGAGE BANKING:
Revenues:
Interest income 13,369 11,173 5,079 3,871
Other 30,012 20,481 11,621 8,105
------------ ------------ ----------- ---------
43,381 31,654 16,700 11,976
Expenses:
Interest (12,109) (10,936) (4,543) (3,800)
General and administrative (8,924) (7,149) (3,147) (2,464)
Secondary marketing trading loss (18,155) -- (18,155) --
------------ ------------ ----------- ---------
Mortgage banking pretax income 4,193 13,569 (9,145) 5,712
------------ ------------ ----------- ---------
TOTAL PRETAX INCOME 127,642 82,218 58,781 43,298
Income taxes (44,700) (28,800) (20,600) (15,200)
------------ ------------ ----------- ---------
NET INCOME $ 82,942 $ 53,418 $ 38,181 $ 28,098
============ ============ =========== =========
BASIC EARNINGS PER SHARE $ 1.77 $ 1.35 $ .80 $ .70
============ ============ =========== =========
DILUTED EARNINGS PER SHARE $ 1.73 $ 1.30 $ .78 $ .68
============ ============ =========== =========
BASIC AVERAGE SHARES OUTSTANDING 46,838 39,431 47,911 39,887
============ ============ =========== =========
DILUTED AVERAGE SHARES OUTSTANDING 47,996 41,080 48,891 41,373
============ ============ =========== =========
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,
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
CONSTRUCTION:
Cash and cash equivalents $ 14,974 $ 56,602
Trade and other receivables 228,439 140,771
Mortgages and notes receivable 64,305 54,070
Inventories 1,716,163 1,134,402
Investments in unconsolidated joint ventures 20,311 5,608
Deferred income taxes 67,755 24,094
Goodwill 213,271 45,533
Other assets 96,883 81,464
----------- -----------
2,422,101 1,542,544
----------- -----------
MORTGAGE BANKING:
Cash and cash equivalents 24,803 6,751
Receivables:
First mortgages and mortgage-backed securities 48,381 58,262
First mortgages held under commitment of sale
and other receivables 319,676 249,702
Other assets 3,982 2,945
----------- -----------
396,842 317,660
----------- -----------
TOTAL ASSETS $ 2,818,943 $ 1,860,204
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CONSTRUCTION:
Accounts payable $ 308,767 $ 211,380
Accrued expenses and other liabilities 230,758 148,508
Mortgages and notes payable 1,002,520 529,846
----------- -----------
1,542,045 889,734
----------- -----------
MORTGAGE BANKING:
Accounts payable and accrued expenses 18,340 8,924
Notes payable 320,468 239,413
Collateralized mortgage obligations secured by
mortgage-backed securities 38,510 49,264
----------- -----------
377,318 297,601
----------- -----------
Minority interests:
Consolidated subsidiaries and joint ventures 23,529 8,608
Company obligated mandatorily redeemable preferred securities
of subsidiary trust holding solely debentures of the
Company 189,750 189,750
----------- -----------
213,279 198,358
----------- -----------
Common stock 48,071 39,992
Paid-in capital 334,661 193,520
Retained earnings 315,508 243,356
Accumulated other comprehensive income (3,935) (2,357)
Grantor stock ownership trust (8,004) --
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 686,301 474,511
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,818,943 $ 1,860,204
=========== ===========
</TABLE>
See accompanying notes
4
<PAGE> 5
KAUFMAN AND BROAD HOME CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands -- Unaudited)
<TABLE>
<CAPTION>
Nine Months
Ended August 31,
-----------------------
1999 1998
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 82,942 $ 53,418
Adjustments to reconcile net income to net cash used by
operating activities:
Equity in pretax income of unconsolidated joint
ventures (585) (405)
Minority interests 21,075 2,831
Amortization of discounts and issuance costs 1,279 1,437
Depreciation and amortization 27,682 11,324
Provision for deferred income taxes 5,851 4,006
Change in assets and liabilities, net of effects
from acquisitions:
Receivables (145,898) 18,247
Inventories (258,826) (132,072)
Accounts payable, accrued expenses and other
liabilities 127,028 2,822
Other, net (5,209) (10,442)
--------- ---------
Net cash used by operating activities (144,661) (48,834)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash acquired (11,646) (162,818)
Investments in unconsolidated joint ventures (13,682) 1,102
Net sales (originations) of mortgages held for long-term investment (1,860) 2,193
Payments received on first mortgages and mortgage-backed securities 12,367 10,255
Purchases of property and equipment, net (15,355) (13,081)
--------- ---------
Net cash used by investing activities (30,176) (162,349)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from credit agreements and other short-term borrowings 260,831 32,685
Proceeds from Company obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely debentures of
the Company -- 183,057
Payments on collateralized mortgage obligations (11,780) (9,669)
Payments on mortgages, land contracts and other loans (57,620) (41,580)
Payments to minority interests (21,376) (2,848)
Payments of cash dividends (10,790) (8,879)
Repurchases of common stock (8,004) --
--------- ---------
Net cash provided by financing activities 151,261 152,766
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (23,576) (58,417)
Cash and cash equivalents at beginning of period 63,353 68,242
--------- ---------
Cash and cash equivalents at end of period $ 39,777 $ 9,825
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid, net of amounts capitalized $ 19,577 $ 19,907
========= =========
Income taxes paid $ 49,089 $ 31,025
========= =========
SUPPLEMENTAL DISCLOSURES OF NONCASH ACTIVITIES:
Cost of inventories acquired through seller financing $ 18,362 $ 24,484
========= =========
Issuance of common stock related to an acquisition $ 146,005 $ --
========= =========
Debt assumed related to an acquisition $ 303,239 $ --
========= =========
</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, 1998 contained in the Company's 1998 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, 1999, the results of its consolidated operations
for the nine months and three months ended August 31, 1999 and 1998, and
its consolidated cash flows for the nine months ended August 31, 1999 and
1998. The results of operations for the nine months and three months ended
August 31, 1999 are not necessarily indicative of the results to be
expected for the full year. The consolidated balance sheet at November 30,
1998 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,
1999 1998
---------- ----------
<S> <C> <C>
Homes, lots and improvements in production $1,249,516 $ 835,300
Land under development 466,647 299,102
---------- ----------
Total inventories $1,716,163 $1,134,402
========== ==========
</TABLE>
The impact of capitalizing interest costs on consolidated pretax income is
as follows (in thousands):
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
August 31, August 31,
---------------------- ----------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Interest incurred $ 55,606 $ 40,976 $ 20,887 $ 13,986
Interest expensed (20,167) (19,331) (7,141) (4,532)
------- ------- ------ ------
Interest capitalized 35,439 21,645 13,746 9,454
Interest amortized (27,924) (20,163) (9,124) (8,599)
------- ------- ------ ------
Net impact on pretax income $ 7,515 $ 1,482 $ 4,622 $ 855
========= ========= ========== ========
</TABLE>
3. Earnings Per Share
Basic earnings per share is calculated by dividing net income by the
average number of common shares outstanding for the period. Diluted
earnings per share is calculated by dividing net income by the average
number of common shares outstanding including all dilutive potentially
issuable shares under various stock option plans and stock purchase
contracts.
6
<PAGE> 7
KAUFMAN AND BROAD HOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. Earnings Per Share (continued)
The following table presents the effects of dilutive common stock options
(in thousands):
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
August 31, August 31,
-------------------- ------------------
1999 1998 1999 1998
------- ------ ------ ------
<S> <C> <C> <C> <C>
Basic average shares outstanding 46,838 39,431 47,911 39,887
Net effect of stock options assumed to
be exercised 1,158 1,649 980 1,486
------ ------ ------ ------
Diluted average shares outstanding 47,996 41,080 48,891 41,373
====== ====== ====== ======
</TABLE>
4. Comprehensive Income
During the quarter ended February 28, 1999, the Company adopted Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income." Comprehensive income consists of net income and foreign currency
translation adjustments and totaled $41.3 million and $27.6 million for the
three months ended August 31, 1999 and 1998, respectively, and $81.4
million and $51.5 million for the nine months ended August 31, 1999 and
1998, respectively.
5. Acquisitions
During the second quarter of 1998, the Company acquired three privately
held homebuilders with regional operations in certain key markets. On March
19, 1998, the Company acquired all of the issued and outstanding capital
stock of Houston-based Hallmark Residential Group ("Hallmark") for
approximately $54 million, including the assumption of debt. Hallmark built
single-family homes primarily in Houston (with additional operations in San
Antonio and Austin, Texas) under the trade names of Dover Homes and Ideal
Builders. The Company acquired substantially all of the assets of
Denver-based PrideMark Homebuilding Group ("PrideMark") on March 23, 1998
for approximately $65 million, including the assumption of trade
liabilities and debt. PrideMark built single-family homes in Denver,
Colorado. On April 9, 1998, the Company acquired all of the issued and
outstanding capital stock of Estes Homebuilding Co. ("Estes") for
approximately $48 million, including the assumption of debt. Estes built
single-family homes in Phoenix and Tucson, Arizona.
On August 18, 1998, the Company acquired a majority ownership investment in
General Homes Corporation ("General Homes"), a builder of single-family
homes primarily in Houston, Texas. The Company invested approximately $32
million, including the assumption of debt, to acquire 50.3% of the
outstanding stock of General Homes, pursuant to a completed plan of
reorganization. Effective January 4, 1999, the Company invested
approximately $14.5 million to acquire the remaining 49.7% of the
outstanding stock of General Homes, bringing its ownership interest to
100%.
The acquisitions of Hallmark, PrideMark, Estes and General Homes were
financed by borrowings under the Company's $500 million 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 excess of the purchase prices over the fair value of net
assets acquired was $23.5 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.
7
<PAGE> 8
KAUFMAN AND BROAD HOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. Acquisitions (continued)
Effective January 7, 1999, the Company acquired substantially all of the
homebuilding assets of the Lewis Homes group of companies ("Lewis Homes").
Lewis Homes is engaged in the acquisition, development and sale of
residential real estate in California and Nevada. Prior to the acquisition,
Lewis Homes, based in Upland, California, was one of the largest privately
held single-family homebuilders in the United States based on units
delivered, with revenues for the year ended December 31, 1998 of $715
million on 3,631 unit deliveries. Lewis Homes also owned or controlled
approximately 24,000 lots and had a backlog of approximately 900 homes at
December 31, 1998. Lewis Homes' principal markets were Las Vegas and
Northern Nevada, Southern California, and the greater Sacramento area in
Northern California.
The purchase price for Lewis Homes was approximately $449 million,
comprised of the assumption of approximately $303 million in debt and the
issuance of 7,886,686 shares of the Company's common stock valued at
approximately $146 million. The purchase price was based on the December
31, 1998 net book values of the entities purchased. The excess of the
purchase price over the estimated fair value of net assets acquired was
$177.6 million and was allocated to goodwill. The Company is amortizing the
goodwill on a straight-line basis over a period of ten years. The shares of
Company common stock issued in the acquisition are "restricted" shares and
may not be resold without a registration statement or compliance with
Securities and Exchange Commission regulations that limit the number of
shares that may be resold in a given period. The Company has agreed to file
a registration statement for those shares in three increments at the Lewis
family's request from July 1, 2000 to July 1, 2002. Under the terms of the
purchase agreement, a Lewis family member has also been appointed to the
Company's board of directors.
In connection with the acquisition of Lewis Homes, the Company obtained a
$200 million unsecured term loan agreement with various banks (the "Term
Loan Agreement") to refinance certain debt assumed. The Term Loan Agreement
dated January 7, 1999 provides for payments of $25 million due on January
31, 2000, April 30, 2000 and July 31, 2000, with the remaining principal
balance due on April 30, 2001. Interest is payable monthly at the London
Interbank Offered Rate plus an applicable spread. Under the terms of the
Term Loan Agreement, the Company is required, among other things, to
maintain certain financial statement ratios and a minimum net worth and is
subject to limitations on acquisitions and indebtedness. The financing
obtained under the Term Loan Agreement did not impact the amounts available
under the Company's pre-existing borrowing arrangements. The Company used
borrowings under its $500 million domestic unsecured revolving credit
facility to refinance certain other debt assumed in the Lewis Homes
acquisition.
The acquisition consideration for Lewis Homes was determined by arms-length
negotiations between the parties. The acquisition was accounted for as a
purchase, with the results of Lewis Homes included in the Company's
consolidated financial statements as of January 7, 1999.
The following unaudited pro forma information presents a summary of the
consolidated results of operations of the Company as if the acquisitions of
Hallmark, PrideMark, Estes, General Homes and Lewis Homes had occurred as
of December 1, 1997 with pro forma adjustments to give effect to
amortization of goodwill, interest expense on acquisition debt and certain
other adjustments, together with related income tax effects (in thousands,
except per share amounts):
<TABLE>
<CAPTION>
Nine Months Ended August 31,
-----------------------------
1999 1998
---------- -----------
<S> <C> <C>
Total revenues $2,696,478 $ 2,203,786
Total pretax income 132,157 99,756
Net income 85,857 64,856
Basic earnings per share 1.79 1.37
Diluted earnings per share 1.75 1.32
</TABLE>
8
<PAGE> 9
KAUFMAN AND BROAD HOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. Acquisitions (continued)
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 acquisitions been consummated as of December 1, 1997,
nor are they necessarily indicative of future operating results.
On August 28, 1999, the Company completed the acquisition of a majority
ownership investment in a France-based builder of apartments. The Company
acquired 75% of the outstanding shares of the builder for a total price of
$12.0 million. The acquisition was financed by a three-year bank loan that
provides for interest at the Euro Interbank Offered Rate plus 1.45%.
Accounted for under the purchase method, the results of operations of the
builder are included in the Company's consolidated financial statements as
of the date of acquisition. The excess of the purchase price over the
estimated fair value of net assets acquired was $10.0 million and was
allocated to goodwill. The Company is amortizing goodwill related to the
acquisition on a straight-line basis over a period of ten years. The pro
forma results for 1999 and 1998, assuming this acquisition had been made at
the beginning of the year, would not be materially different from reported
results.
6. Mortgages and Notes Payable
On May 25, 1999, the Company's mortgage banking subsidiary entered into a
$150 million Master Loan and Security Agreement. The agreement, which
expires on May 25, 2000, provides for a facility fee based on the $150
million maximum amount available and provides for interest to be paid
monthly at the Eurodollar Rate plus an applicable spread on amounts
borrowed. The amount outstanding under the agreement is secured by a
borrowing base, which includes certain mortgage loans held under commitment
of sale and is repayable from proceeds on the sales of first mortgages.
There are no compensating balance requirements under the agreement. The
terms of the agreement include financial covenants and restrictions which,
among other things, require the maintenance of certain financial statement
ratios and a minimum tangible net worth.
7. Secondary Marketing Trading Loss
On August 31, 1999, the Company disclosed that it had discovered
unauthorized mortgage loan trading activity by an employee of its mortgage
banking subsidiary resulting in a pretax trading loss of $18.2 million
($11.8 million, or $.24 per diluted share, on an after tax basis). It is
normal practice for the Company's mortgage banking subsidiary to sell loans
into the market that approximately match loan commitments to the Company's
homebuyers. This practice is intended to hedge exposure to changes in
interest rates that may occur until loans are sold to secondary market
investors in the ordinary course of business. The loss was the result of a
single employee engaging in unauthorized mortgage loan trading largely
unrelated to mortgage originations. The employee who conducted the
unauthorized trading was terminated.
8. Grantor Stock Ownership Trust
On July 1, 1999, the Company's Board of Directors authorized a share
repurchase program which allows the Company to purchase up to 2,500,000
shares of the Company's common stock at prices not to exceed $28 per share.
In connection with this repurchase program, on August 27, 1999, the Company
established a grantor stock ownership trust (the "Trust") into which the
repurchased shares are being transferred. The Trust, administered by an
independent trustee, acquires, holds and distributes shares of common stock
for
9
<PAGE> 10
KAUFMAN AND BROAD HOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
8. Grantor Stock Ownership Trust (continued)
the purpose of funding certain compensation and benefit obligations of the
Company under its existing stock option, stock purchase and other employee
benefit plans. The Trust will not increase or otherwise alter the amount of
benefits or compensation that will be paid under these plans.
For financial reporting purposes, the Trust is consolidated with the
Company. Any dividend transactions between the Company and the Trust are
eliminated. Acquired shares held by the Trust remain valued at the market
price at the date of purchase and are shown as a reduction to stockholders'
equity in the Company's consolidated balance sheet. The difference between
the Trust share value and the fair market value on the date shares are
released from the Trust will be included in additional paid-in capital.
Common stock held in the Trust is not considered outstanding in the
computation of earnings per share. The Trust held 381,900 shares of common
stock at August 31, 1999. The trustee votes shares held by the Trust in
accordance with voting directions from eligible employees, as specified in
a trust agreement with the trustee.
9. Reclassifications
Certain amounts in the consolidated financial statements of prior years
have been reclassified to conform to the 1999 presentation.
10
<PAGE> 11
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 August 31, 1999 increased 60.4% to
$1.06 billion from $659.0 million for the three months ended August 31, 1998.
For the nine months ended August 31, 1999, total revenues increased 61.1 % to
$2.61 billion from $1.62 billion in the year-earlier period. The increase in
total revenues for the three and nine month periods of 1999 was primarily due to
higher housing and land revenues and increased revenues from mortgage banking
operations. Net income for the third quarter of 1999 rose to $38.2 million or
$.78 per diluted share from $28.1 million or $.68 per diluted share for the same
period a year ago. For the nine months ended August 31, 1999, net income
increased to $82.9 million or $1.73 per diluted share from $53.4 million or
$1.30 per diluted share for the nine months ended August 31, 1998. Net income
and diluted earnings per share for the three months and nine months ended August
31, 1999 include the impact of a third quarter secondary marketing trading loss
at the Company's mortgage banking subsidiary. This loss, which resulted from
unauthorized mortgage loan trading activity by an employee of the Company's
mortgage banking subsidiary, totaled $11.8 million, or $.24 per diluted share,
on an after tax basis. Excluding the impact of the trading loss, diluted
earnings per share for the third quarter and first nine months of 1999 were
$1.02 and $1.97, respectively. The growth in diluted earnings per share occurred
despite the trading loss and increases of 18.2% and 16.8% in the diluted average
number of common shares outstanding for the third quarter and first nine months
of 1999, respectively, as a result of the Lewis Homes acquisition which closed
on January 7, 1999.
The increase in net income in the three and nine month periods was principally
driven by significantly higher unit deliveries and an improved construction
gross margin. The Company's operating results for three months and nine months
ended August 31, 1999 include the results of Lewis Homes as of the acquisition
date and results from the acquisitions of Hallmark, PrideMark and Estes which
the Company completed during the second quarter of 1998. The Company's operating
results for 1999 also reflect results of General Homes, the acquisition of which
was completed on January 4, 1999. The Company's mortgage banking operations
generated a pretax loss of $9.2 million for the three months ended August 31,
1999, due to the pretax secondary marketing trading loss of $18.2 million ($11.8
million on an after tax basis). Excluding the secondary marketing trading loss,
the Company's mortgage banking operations generated pretax income of $9.0
million in the third quarter of 1999 compared to $5.7 million in the same
quarter of 1998. For the nine months ended August 31, 1999, mortgage banking
pretax income totaled $4.2 million. Excluding the secondary marketing trading
loss, the Company's mortgage banking operations generated pretax income of $22.3
million for the nine months ended August 31, 1999 compared to $13.6 million
generated for the nine months ended August 31, 1998. The increases in 1999
mortgage banking pretax results, excluding the secondary marketing trading loss,
resulted from a higher volume of loan closings and increased premiums generated
from the higher volume of servicing rights sold compared to the previous year.
CONSTRUCTION
Revenues increased by $393.4 million, or 60.8%, to $1.04 billion in the third
quarter of 1999 from $647.0 million in the third quarter of 1998 due to an
increase in housing revenues. Housing revenues for the period increased by
61.7%, or $389.1 million, to $1.02 billion from $630.9 million in the
year-earlier period as a result of a 46.5% increase in unit deliveries and a
10.4% rise in the average selling price. Housing revenues in the United States
rose 51.8% to $866.8 million on 5,155 unit deliveries in the third quarter of
1999 from $570.9 million on 3,792 units in the corresponding quarter of 1998 as
a result of increased housing revenues from both California and Other U.S.
operations. Excluding the impact of acquisitions within the trailing twelve
month period, domestic housing revenues and unit deliveries rose 16.0% and 5.8%,
respectively, in the third quarter of 1999. Housing revenues from California
operations for the third quarter of 1999 totaled $405.6 million, up 51.7% from
$267.4 million in the year-earlier period. California deliveries in the third
quarter of 1999 increased 33.0% to 1,629 units from 1,225 units in the third
quarter of 1998 reflecting a 30.9% rise in the average number of active
communities. Housing revenues from Other U.S. operations totaled $461.2 million
in the third quarter compared to $303.5 million in the same quarter a year ago,
an increase of 52.0%. Other U.S. deliveries increased 37.4% to 3,526 units in
the third quarter of 1999 from 2,567 units in the third quarter of 1998 as the
average number of active communities in the Company's Other U.S. operations
increased 42.4%, to 178 from 125, during the period. Revenues from French
housing operations during the three months
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ended August 31, 1999 rose to $151.9 million on 944 units from $57.0 million on
363 units in the year-earlier period.
During the third quarter of 1999, the Company's overall average selling price
increased 10.4% to $167,100 from $151,400 in the same quarter a year ago,
reflecting an increase in the average selling price in both domestic and French
operations. The Company's domestic average selling price rose 11.6% to $168,100
in the third quarter of 1999 from $150,600 in the same period of 1998 mainly as
a result of the inclusion of somewhat higher-priced deliveries from the Lewis
Homes operations in California and Nevada, partially offset by a greater
proportion of lower-priced domestic unit deliveries generated from the Company's
Other U.S. operations. Other U.S. deliveries, which typically have lower selling
prices than the Company's California and French units, comprised 68.4% of total
U.S. deliveries in the third quarter of 1999 compared to 67.7% for the same
quarter a year ago. This reflected growth in the Company's domestic operations
outside of California due to acquisitions completed in recent years as well as
maturation of existing businesses. For the three months ended August 31, 1999,
the average selling price in the Company's California operations increased 14.1%
to $249,000 from $218,300 for the same period a year ago and the average selling
price in Other U.S. operations rose 10.7% to $130,800 from $118,200. Increases
in all domestic categories occurred as a result of the inclusion of
higher-priced deliveries from the Lewis Homes operations in California and
Nevada, and selected increases in sales prices in certain markets due to
positive market conditions. In France, the average selling price in the third
quarter of 1999 rose 2.5% to $160,900 from $157,000 in the year-earlier quarter.
Revenues from land sales totaled $19.9 million in the third quarter of 1999
compared to $15.3 million in the third quarter of 1998.
For the first nine months of 1999, construction revenues increased by $979.1
million, or 61.5%, to $2.57 billion, from $1.59 billion for the same period a
year ago primarily as a result of higher housing revenues. Housing revenues
totaled $2.54 billion on 15,521 units in the first nine months of 1999 compared
to $1.57 billion on 10,205 units for the same period a year ago. Housing
operations in the United States produced revenues of $2.26 billion on 13,762
units in the first nine months of 1999 and $1.43 billion on 9,217 units in the
comparable period of 1998. During the first nine months of 1999, California
housing revenues increased 41.9% to $1.03 billion from $728.5 million in the
first nine months of 1998, reflecting a 26.3% rise in unit deliveries during the
period. Housing revenues from Other U.S. operations increased 75.5% to $1.22
billion in the first nine months of 1999 from $697.2 million in the prior year's
period as unit deliveries in the region rose 62.6%. Deliveries in California
increased to 4,258 units for the first nine months of 1999 from 3,371 for the
first nine months of 1998, while deliveries from Other U.S. operations increased
to 9,504 units from 5,846 units during the same period. French housing revenues
totaled $283.3 million on 1,745 units in the first nine months of 1999 and
$137.6 million on 963 units in the corresponding period of 1998.
The Company-wide average new home price increased 6.5% to $163,900 in the first
nine months of 1999 from $153,900 in the year-earlier period reflecting the
inclusion of somewhat higher-priced deliveries in California, Nevada and France
and the impact of improved market conditions in several of the Company's major
markets, partially offset by a higher proportion of lower-priced deliveries from
Other U.S. markets. For the first nine months of 1999, the average selling price
in California increased 12.3% to $242,700 from $216,100 for the first nine
months of 1998 and the average selling price in Other U.S. operations increased
8.0% to $128,800 from $119,300. Increases occurred in all domestic categories as
a result of the inclusion of higher-priced deliveries from the Lewis Homes
operations in California and Nevada, and selected increases in sales prices in
certain markets due to favorable market conditions. In France, the average
selling price for the nine month period rose 13.7% to $162,400 in 1999 from
$142,900 in 1998, primarily due to a change in the mix of deliveries and price
appreciation in the French housing market.
Company-wide revenues from land sales totaled $24.9 million and $20.2 million in
the first nine months of 1999 and 1998, respectively.
Operating income increased by $38.0 million or 88.1% to $81.2 million in the
third quarter of 1999 from $43.2 million in the third quarter of 1998. As a
percentage of construction revenues, operating income increased by 1.1
percentage points to 7.8% in the third quarter of 1999 compared to 6.7% in the
third quarter of 1998. Gross profits increased by $83.1 million, or 68.8%, to
$203.9 million in the third quarter of 1999 from $120.8 million in the prior
year's period. During this same period, housing gross profits increased by $82.1
million or 67.1% to $204.4 million from $122.3 million. Gross profits as a
percentage of construction revenues increased to 19.6% in the third quarter of
1999 from 18.7% in the year-earlier quarter as housing gross margin rose to
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20.0% in the third quarter of 1999 from 19.4% in the same quarter of 1998.
Housing gross margin for the three months ended August 31, 1999 improved
primarily due to operating efficiencies derived from implementing the KB2000
business model and price increases in a number of the Company's major markets.
During the third quarter of 1999, land sales generated a loss of $.4 million
compared to a loss of $1.5 million generated in the third quarter of 1998.
Selling, general and administrative expenses increased by $45.1 million to
$122.7 million in the three months ended August 31, 1999 from $77.6 million in
the corresponding 1998 period. As a percentage of housing revenues, selling,
general and administrative expenses decreased .3 percentage points to 12.0% in
the third quarter of 1999 from 12.3% for the year-earlier period. The quarterly
year-over-year improvement in the selling, general and administrative expense
ratio reflects the Company's commitment to obtaining operating efficiencies as
it grows its businesses pursuant to its KB2000 operational business model. The
favorable impact of the Company's higher volumes on the selling, general and
administrative expense ratio was partially offset by goodwill amortization and
other expenses related to the Lewis Homes transaction, as well as increased
expenditures on information systems in support of the KB2000 business model and
completion of the Company's year 2000 compliance plan.
For the first nine months of 1999, operating income increased by $72.2 million
or 83.7% to $158.5 million from $86.3 million in the corresponding period of
1998 as higher gross profits were partially offset by increased selling, general
and administrative expenses. Gross profits increased by $194.2 million, or
66.7%, to $485.1 million in the first nine months of 1999 from $290.9 million in
the first nine months of 1998 with housing gross profits increasing by $192.3
million to $485.6 million from $293.3 million during this same period. Gross
profits as a percentage of construction revenues increased to 18.9% in the first
nine months of 1999 from 18.3% in the year-earlier period primarily due to an
increase in the Company's housing gross margin to 19.1% from 18.7% for the same
periods. The increase in the Company's housing gross margin for the nine months
ended August 31, 1999 resulted from a higher housing gross margin on new KB2000
deliveries entering the mix as well as market driven price increases in selected
communities, particularly in California. Partially offsetting these improvements
was the negative impact of purchase accounting associated with the Lewis Homes
transaction. Company-wide land sales generated a loss of $.5 million for the
first nine months of 1999 compared to a loss of $2.3 million for the first nine
months of 1998.
Selling, general and administrative expenses increased by $121.9 million to
$326.6 million for the first nine months of 1999 from $204.7 million for the
same period of 1998; however, as a percentage of housing revenues, selling,
general and administrative expenses decreased by .2 percentage points to 12.8%
for the first nine months of 1999 from 13.0% in the corresponding period of
1998. This improvement was due to the strong increase in unit volume, partially
offset by increased expenditures for information systems in support of the
KB2000 operational business model and the Company's year 2000 compliance plan,
and by goodwill amortization and other expenses related to the Lewis Homes
transaction.
Interest income totaled $1.8 million in the third quarter of 1999 compared to
$1.3 million in the third quarter of 1998. For the first nine months, interest
income totaled $5.6 million in 1999 and $4.1 million in 1998. The rise in
interest income in the third quarter and first nine months of 1999 reflected an
increase in the interest bearing average balances of short-term investments and
mortgages receivable compared to the same periods a year ago.
Interest expense (net of amounts capitalized) increased by $2.6 million to $7.1
million in the third quarter of 1999 from $4.5 million in the third quarter of
1998. For the nine months ended August 31, 1999, interest expense increased by
$.9 million to $20.2 million from $19.3 million for the nine months ended August
31, 1998. Gross interest incurred in the three months and nine months ended
August 31, 1999 was higher than that incurred in the corresponding year ago
periods by $6.9 million and $14.6 million, respectively, reflecting an increase
in average indebtedness, primarily as a result of the Lewis Homes acquisition
and new community growth in 1999. The percentage of interest capitalized during
the three months ended August 31, 1999 and 1998 was 65.8% and 67.6%,
respectively. For the nine month period ended August 31, this percentage was
63.7% in 1999 and 52.8% in 1998. The higher capitalization rate in the first
nine months of 1999 resulted from the effects of the issuance of the Feline
Prides in the third quarter of 1998 and a higher proportion of land under
development in 1999, compared to the previous year. The amount of interest
capitalized as a percentage of gross interest incurred and distributions
associated with the Feline Prides was 55.7% and 58.1%, respectively, for the
three months ended August 31, 1999 and 1998 and 52.9% and 50.0% for the nine
months ended August 31, 1999 and 1998, respectively.
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Minority interests totaled $8.6 million in the third quarter of 1999 and $2.4
million in the third quarter of 1998. For the first nine months of 1999,
minority interests totaled $21.1 million compared to $2.8 million for the same
period a year ago. Minority interests for the three months and nine months ended
August 31, 1999 are comprised of two major components: pretax income of
consolidated subsidiaries and joint ventures related to residential and
commercial activities and distributions associated with the Company's Feline
Prides issued in July 1998. Minority interests for the third quarter and first
nine months of 1999 increased from the corresponding periods of 1998 due to an
increase in joint venture activity and the inclusion of distributions of $3.8
million and $11.4 million, respectively, related to the Feline Prides. The three
months and nine months ended August 31, 1998 included distributions of $2.3
million related to the Feline Prides. Minority interests are expected to be at
higher levels for the remainder of 1999.
Equity in pretax income of unconsolidated joint ventures in the third quarter of
1999 totaled $.6 million compared to $.1 million recorded in the third quarter
of 1998. The Company's unconsolidated joint ventures generated no revenues
during the three months ended August 31, 1999 compared to $2.0 million generated
in the corresponding period of 1998. For the first nine months of 1999, the
Company's equity in pretax income of unconsolidated joint ventures totaled $.6
million compared to $.4 million for the same period of 1998. Combined revenues
from these joint ventures totaled $.7 million in the first nine months of 1999
and $9.5 million in the first nine months of 1998. All of the unconsolidated
joint venture revenues in the 1999 and 1998 periods were generated from
residential properties.
MORTGAGE BANKING
Interest income and interest expense increased by $1.2 million and $.7 million,
respectively in the third quarter of 1999 compared to the same quarter a year
ago. For the first nine months of 1999, interest income from mortgage banking
activities rose by $2.2 million and related interest expense increased by $1.2
million from the same period of 1998. 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 1999 periods.
The increase in interest expense resulted from the higher amount of notes
payable outstanding during the third quarter and first nine months of 1999
compared to the same periods of 1998.
Other mortgage banking revenues increased by $3.5 million to $11.6 million in
the third quarter of 1999 from $8.1 million in the prior year's third quarter.
For the first nine months of 1999, other mortgage banking revenues totaled $30.0
million, an increase of $9.5 million from $20.5 million in the first nine months
of 1998. These increases were primarily the result of higher gains on the sale
of servicing rights due to a higher level of mortgage originations associated
with increases in the Company's unit volume in the United States.
General and administrative expenses associated with mortgage banking activities
increased by $.6 million to $3.1 million in the third quarter of 1999 from $2.5
million for the same period a year ago. For the nine month periods, these
expenses totaled $8.9 million in 1999 and $7.1 million in 1998. The increase in
general and administrative expenses in 1999 was primarily due to higher mortgage
production volume.
Secondary marketing trading loss in the quarter ended August 31, 1999 resulted
from unauthorized mortgage loan trading activity by an employee of the Company's
mortgage banking subsidiary. On August 31, 1999, the Company disclosed that it
had discovered a pretax trading loss of $18.2 million ($11.8 million, or $.24
per diluted share, on an after tax basis). It is normal practice for the
Company's mortgage banking subsidiary to sell loans into the market that
approximately match loan commitments to the Company's homebuyers. This practice
is intended to hedge exposure to changes in interest rates that may occur until
loans are sold to secondary market investors in the ordinary course of business.
The loss was the result of a single employee engaging in unauthorized mortgage
loan trading largely unrelated to mortgage originations. The employee who
conducted the unauthorized trading was terminated.
INCOME TAXES
Income tax expense totaled $20.6 million and $15.2 million in the third quarter
of 1999 and 1998, respectively. For the first nine months of 1999, income tax
expense totaled $44.7 million compared to $28.8 million in the same period of
1998. The income tax amounts represented effective income tax rates of
approximately 35% in both periods of 1999 and 1998.
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<PAGE> 15
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, 1999, net cash used by operating, investing and
financing activities totaled $23.6 million compared to $58.4 million used in the
nine months ended August 31, 1998.
Operating activities for the first nine months of 1999 used $144.7 million of
cash compared to $48.8 million used during the same period of 1998. The
Company's uses of operating cash in the first nine months of 1999 included an
increase in receivables of $145.9 million and net investments in inventories of
$258.8 million (excluding the effect of acquisitions and $18.4 million of
inventories acquired through seller financing). Sources of operating cash in the
first nine months of 1999 included nine months' earnings of $82.9 million, an
increase in accounts payable, accrued expenses and other liabilities of $127.0
million, and various noncash items deducted from net income.
Operating activities for the first nine months of 1998 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 purchase of a 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 cash used was partially offset by nine months'
earnings of $53.4 million, a reduction in receivables of $18.2 million and
various noncash items deducted from net income. 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 third quarter of 1998 compared
to the fourth quarter of 1997.
Cash used by investing activities totaled $30.2 million in the nine months ended
August 31, 1999 compared to $162.3 million used in the year-earlier period. In
the first nine months of 1999, $11.6 million of cash, net of cash acquired, was
used for acquisitions, $15.4 million was used for net purchases of property and
equipment, $13.7 million was used for distributions related to investments in
unconsolidated joint ventures and $1.9 million was used for originations of
mortgages held for long-term investment. Partially offsetting these uses was
$12.4 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 have served as collateral. 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 net purchases of property and equipment. Among
amounts partially offsetting these 1998 nine month uses were $10.3 million of
proceeds received from mortgage-backed securities and $2.2 million from the net
sales of mortgages held for long-term investment.
Financing activities provided $151.3 million of cash in the first nine months of
1999 compared to $152.8 million provided in the first nine months of 1998. In
the first nine months of 1999, cash was provided from net proceeds from
borrowings of $203.2 million. Partially offsetting the cash provided were
payments to minority interests of $21.3 million, payments on collateralized
mortgage obligations of $11.8 million, cash dividend payments of $10.8 million
and repurchases of common stock of $8.0 million. Financing activities in the
first nine months of 1998 resulted in net cash inflows due mainly to proceeds of
$183.1 million from the issuance of the Feline Prides in July 1998, partially
offset by 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.
The Company acquired the remaining equity interest in Houston-based General
Homes effective January 4, 1999. The Company invested approximately $14.5
million to acquire the remaining 49.7% of the outstanding stock of General
Homes, bringing its ownership interest to 100%.
Effective January 7, 1999, the Company acquired substantially all of the
homebuilding assets of Lewis Homes. Lewis Homes is engaged in the acquisition,
development and sale of residential real estate in California and Nevada. Prior
to the acquisition, Lewis Homes, based in Upland, California, was one of the
largest privately held single-family homebuilders in the United States based on
units delivered, with revenues for the year ended
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December 31, 1998 of $715 million on 3,631 unit deliveries. Lewis Homes also
owned or controlled approximately 24,000 lots and had a backlog of approximately
900 homes at December 31, 1998. Lewis Homes' principal markets were Las Vegas
and Northern Nevada, Southern California, and the greater Sacramento area in
Northern California.
The purchase price for Lewis Homes was approximately $449 million, comprised of
the assumption of approximately $303 million in debt and the issuance of
7,886,686 shares of the Company's common stock valued at approximately $146
million. The purchase price was based on the December 31, 1998 net book values
of the entities purchased. The excess of the purchase price over the estimated
fair value of net assets acquired was $177.6 million and was allocated to
goodwill. The Company is amortizing the goodwill on a straight-line basis over a
period of ten years. The shares of Company common stock issued in the
acquisition are "restricted" shares and may not be resold without a registration
statement or compliance with Securities and Exchange Commission regulations that
limit the number of shares that may be resold in a given period. The Company has
agreed to file a registration statement for those shares in three increments at
the Lewis family's request from July 1, 2000 to July 1, 2002. Under the terms of
the purchase agreement, a Lewis family member has also been appointed to the
Company's board of directors.
In connection with the acquisition of Lewis Homes, the Company obtained a $200
million unsecured Term Loan Agreement with various banks to refinance certain
debt assumed. The Term Loan Agreement dated January 7, 1999 provides for payment
of $25 million due on January 31, 2000, April 30, 2000 and July 31, 2000, with
the remaining principal balance due on April 30, 2001. Interest is payable
monthly at the London Interbank Offered Rate plus an applicable spread. Under
the terms of the Term Loan Agreement, the Company is required, among other
things, to maintain certain financial statement ratios and a minimum net worth
and is subject to limitations on acquisitions and indebtedness. The financing
obtained under the Term Loan Agreement did not impact the amounts available
under the Company's pre-existing borrowing arrangements. The Company used
borrowings under its $500 million domestic unsecured revolving credit facility
to refinance certain other debt assumed in the Lewis Homes acquisition.
The acquisition consideration for Lewis Homes was determined by arms-length
negotiations between the parties. The acquisition was accounted for as a
purchase, with the results of Lewis Homes included in the Company's consolidated
financial statements as of January 7, 1999.
On August 28, 1999, the Company completed the acquisition of a majority
ownership investment in a France-based builder of apartments. The Company
acquired 75% of the outstanding shares of the builder for a total price of $12.0
million. The acquisition was financed by a three-year bank loan that provides
for interest at the Euro Interbank Offered Rate plus 1.45%. Accounted for under
the purchase method, the results of operations of the builder are included in
the Company's consolidated financial statements as of the date of acquisition.
The excess of the purchase price over the estimated fair value of net assets
acquired was $10.0 million and was allocated to goodwill. The Company is
amortizing goodwill related to the acquisition on a straight-line basis over a
period of ten years.
On July 1, 1999, the Company's Board of Directors authorized a share repurchase
program which allows the Company to purchase up to 2,500,000 shares of the
Company's common stock at prices not to exceed $28 per share. In connection with
this repurchase program, on August 27, 1999, the Company established a grantor
stock ownership trust (the "Trust") into which the repurchased shares are being
transferred. The Trust, administered by an independent trustee, acquires, holds
and distributes shares of common stock for the purpose of funding certain
compensation and benefit obligations of the Company under its existing stock
option, stock purchase and other employee benefit plans. The Trust will not
increase or otherwise alter the amount of benefits or compensation that will be
paid under these plans.
For financial reporting purposes, the Trust is consolidated with the Company.
Any dividend transactions between the Company and the Trust are eliminated.
Acquired shares held by the Trust remain valued at the market price at the date
of purchase and are shown as a reduction to stockholders' equity in the
Company's consolidated balance sheet. The difference between the Trust share
value and the fair market value on the date shares are released from the Trust
will be included in additional paid-in capital. Common stock held in the Trust
is not considered outstanding in the computation of earnings per share. The
Trust held 381,900 shares of common stock at August 31, 1999. The trustee votes
shares held by the Trust in accordance with voting directions from eligible
employees, as specified in a trust agreement with the trustee.
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On May 25, 1999, the Company's mortgage banking subsidiary entered into a $150
million Master Loan and Security Agreement. The agreement, which expires on May
25, 2000, provides for a facility fee based on the $150 million maximum amount
available and provides for interest to be paid monthly at the Eurodollar Rate
plus an applicable spread on amounts borrowed. The amount outstanding under the
agreement is secured by a borrowing base, which includes certain mortgage loans
held under commitment of sale and is repayable from proceeds on the sales of
first mortgages. There are no compensating balance requirements under the
agreement. The terms of the agreement include financial covenants and
restrictions which, among other things, require the maintenance of certain
financial statement ratios and a minimum tangible net worth.
As of August 31, 1999 the Company had $276.2 million available under its $500
million domestic unsecured revolving credit facility. The Company's French
unsecured financing agreements, totaling $197.1 million, had in the aggregate
$105.8 million available at August 31, 1999. The Company's mortgage banking
operations had borrowed the maximum amount available under its $250 million
secured revolving mortgage warehouse facility at August 31, 1999 and had $79.5
million available under its $150 million Master Loan and Security Agreement. The
Company's financial leverage, as measured by the ratio of debt to total capital
was 53.4% at the end of the 1999 third quarter compared to 46.6% at the end of
the 1998 third quarter, primarily due to the impact of the Lewis Homes
acquisition. Despite the Company's share repurchase program and the impact of
the secondary marketing trading loss, the Company's debt to total capital at
August 31, 1999 was down slightly from 53.5% at May 31, 1999.
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 arise from the use of existing computer hardware and software designed
by applicable manufacturers without consideration for the upcoming change in the
century. If not corrected, software programs with this embedded problem may
cause computer systems to fail or to miscalculate data.
The Company has invested in information systems required to support its KB2000
operational business model and effectively manage and control growth. In
conjunction with its investment in technology, with respect to the year 2000
issue, the Company has undertaken a project to modify or replace portions of its
existing computer operating systems to ensure they will function properly with
respect to dates in the year 2000 and thereafter. The Company has a "Year 2000
Project Office" that directs the Company-wide efforts encompassed by this
project. The Year 2000 Project Office is responsible to assure proper planning,
sufficient resources, contemporaneous monitoring, proper certification and
timely completion of the year 2000 projects. The Company's year 2000 projects
encompass its information technology systems as well as its non-information
technology systems, such as systems embedded in its office equipment and
facilities.
State of Year 2000 Readiness. The scope of the Company's year 2000 compliance
effort has been defined to include 13 distinct projects. Four of the 13 projects
addressed areas of greatest business risk and required the greatest technical
effort and, therefore, were given the highest priority. These four high priority
projects were: 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 were not previously
associated with the JD Edwards Programs; conversion and upgrade of the operating
systems for the Company's mortgage banking operations which were not associated
with the JD Edwards Programs; and the upgrade of the Company's primary computer
network and personal computers. As of September 30, 1999, these four high
priority projects were substantially and timely completed and certified as year
2000 compliant by key management participants.
The remaining nine projects that comprise the balance of the Company's year 2000
compliance effort present a lower business risk and require less technical
effort to complete. Eight of these remaining nine projects were comprised of the
following: conversion of business unit personal computer applications and
templates that are not associated with the JD Edwards Programs; upgrade of the
Company's telephone and voice mail systems; certification of year 2000 readiness
or upgrade of the Company's fax machines, copiers, miscellaneous equipment and
office facilities; verification, involving three projects, that material
third-party suppliers to the
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<PAGE> 18
Company are year 2000 compliant; upgrade and/or certification of the systems
used by the Company's operations in France; and certification and/or upgrade of
the systems used by the Company's operations in Mexico. All required remediation
had been substantially completed on these eight of the remaining nine projects
as of September 30, 1999 and testing had been performed to validate the success.
Subject to completion of a limited number of follow-up actions, the key
management participants certified these projects as year 2000 compliant. The
Company's final remaining project consists of the Company's contingency plan in
the event problems are encountered beyond the Company's control as the year 2000
begins ("Project 13"). Project 13 is currently in the assessment stage and is
expected to be completed by October 31, 1999 in order to substantially mitigate
the potential impact of problems arising beyond the Company's control.
As noted, three of the 13 projects that comprise the Company's year 2000
compliance effort involve verification that the third parties with which the
Company has a material relationship are year 2000 compliant. The Company has
substantially completed this assessment with respect to these third-party
verification projects although certain follow-up verification remains to be
completed. As part of these projects, the Company's relationships with
suppliers, subcontractors, financial institutions, vendors and other third
parties have been and continue to be examined to determine the status of the
year 2000 issue efforts as related to the Company's operations. As a general
matter, the Company is vulnerable to the inability of vendors and other third
parties 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. Even when the Company successfully completes
Project 13, 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 or results of operations.
Cost 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 exposure. The total cost of all of the Company's
projects associated with its year 2000 plan is currently estimated to be
approximately $4.1 million; however, because such projects involve conversions
and upgrades that were not necessitated to meet year 2000 concerns, it is not
possible to determine the portion of that amount which is specifically
attributable to year 2000 compliance efforts. The total amount expended on all
projects related to year 2000 compliance was $3.8 million as of August 31, 1999.
The Company believes that the total costs incurred to specifically address the
year 2000 issue will not have a material impact on the Company's liquidity,
financial condition or results of operations, for any year in the reasonably
foreseeable 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 costs of such resources.
Risks Presented by Year 2000 Issues. The Company's 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
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 (and will
be unable to determine with certainty even upon the completion of Project 13)
the consequences of a year 2000 failure. 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 mortgage lending, 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, its vulnerability to 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 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 effort calls for a year 2000-specific
contingency plan to be developed as Project 13. The Project 13 plan is expected
to be completed by October 31, 1999. 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 pre-existing contingency plans should assist in mitigating any adverse
effect because of the interruption of support provided by third parties
resulting from their failure to be year 2000 ready.
18
<PAGE> 19
Management currently believes that its operating systems are substantially year
2000 compliant at this time, subject to certain minor follow-up actions, and
that its third-party verification and overall contingency plans (including
Project 13) should enable it to mitigate third-party disruptions to its business
which are of short duration or geographically localized. At the present time,
management believes that the year 2000 issue will not have a material adverse
effect on the Company's liquidity, financial condition or results of operations.
OUTLOOK
The Company's residential backlog as of August 31, 1999 consisted of 10,809
units, representing aggregate future revenues of approximately $1.75 billion, up
41.7% and 54.6%, respectively, from 7,630 units, representing aggregate future
revenues of approximately $1.13 billion, a year earlier. The backlog units at
August 31, 1999 included 2,105 units from the Lewis Homes operations.
Company-wide net orders for the third quarter of 1999 totaled 5,347, up 37.7%
compared to the 3,883 net orders generated in the third quarter of 1998.
Excluding the impact of acquisitions within the trailing twelve month period,
the unit net orders in the third quarter of 1999 increased 3.4% over the year
ago quarter reflecting growth and maturation in the Company's existing
businesses and generally favorable market conditions in the Company's major
markets.
The Company's domestic operations accounted for approximately $1.51 billion of
backlog value on 9,353 units at August 31, 1999, up from $983.6 million on 6,683
units at August 31, 1998, reflecting higher backlogs from both California and
Other U.S. operations. Backlog in California increased to approximately $631.8
million on 2,630 units at August 31, 1999 from $389.0 million on 1,722 units at
August 31, 1998 as net orders increased 48.6% to 1,660 in the third quarter of
1999 from 1,117 for the same quarter a year ago. Other U.S. operations also
demonstrated significant year-over-year growth in backlog levels with the
backlog value at August 31, 1999 increasing to approximately $882.5 million on
6,723 units from $594.6 million on 4,961 units at August 31, 1998, reflecting a
33.1% increase in Other U.S. net orders to 3,177 in the third quarter of 1999
from 2,387 in the year-earlier quarter. The year-over-year growth in total
United States backlog units and value resulted from the Lewis Homes acquisition
completed during the first quarter of 1999, improved order rates reflecting
generally good market conditions throughout the United States and the Company's
emphasis on pre-sales. Excluding backlog related to the Lewis Homes acquisition,
the Company's domestic unit backlog as of August 31, 1999 rose 10.9% from the
previous year. 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 total United States backlog levels. The average
number of active communities in the Company's domestic operations for the third
quarter of 1999 increased 38.3% from the same quarter a year ago, to 267 from
193, representing a 30.9% increase in California and a 42.4% increase in Other
U.S operations.
In France, the value of residential backlog at August 31, 1999 was approximately
$231.0 million on 1,442 units, up from $138.8 million on 909 units a year
earlier. The Company's net orders in France increased by 38.1% to 511 units in
the third quarter of 1999 from 370 units in the third quarter of 1998. The value
of backlog associated with the Company's French commercial development
activities totaled approximately $1.4 million at August 31, 1999 and $.7 million
at August 31, 1998.
In Mexico, the value of residential backlog at August 31, 1999 was approximately
$4.6 million on 14 units compared to $9.7 million on 38 units at August 31,
1998. Mexico's economy has shown signs of recovering from the country's deep
recession brought about by the 1994 devaluation of its currency. Nevertheless,
economic conditions remain unsettled and the Company has decided to deliver its
current backlog and sell the remaining lots at its sole Mexico project while it
reassesses its strategy with regard to operating in Mexico.
Substantially all of the homes included in 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.
Company-wide net orders for the month of September 1999 increased 7.8% from the
comparable period of 1998. During this same period, domestic net orders were up
15.1%, reflecting a 56.9% increase in California net orders, due largely to the
inclusion of the Lewis Homes operations, and a 1.1% increase in net orders from
Other U.S. operations. In France, net orders for September 1999 decreased 32.5%
compared with the same period of 1998 primarily due to existing communities
selling out more quickly than expected. The Company expects French net orders to
improve with the opening of 40 new communities planned for October and November
of 1999. Despite the overall improvement in domestic net orders, current global
market
19
<PAGE> 20
uncertainties, mortgage interest rate volatility, declines in consumer
confidence and/or other factors could have mitigating effects on full year
results.
For the balance of 1999, the Company plans to remain focused on the two primary
initiatives it originally established in 1997: deepening the implementation of
its KB2000 operational business model throughout the Company's operations and
continued growth. To advance these initiatives, the Company will continue to
concentrate on its two complementary strategies consisting of establishing
sizable local market positions and maintaining its focus on selected strategic
acquisitions.
The Company is also in the process of reviewing all of its assets and businesses
for the purpose of monetizing non-strategic or marginal positions, and has
instituted more stringent criteria for prospective land acquisitions. These
initiatives are intended to result in making higher near term cash flows
available to reduce debt and/or repurchase additional stock. The Company
believes that the improvement in its debt ratio at August 31, 1999 compared to
the ratio established at the end of the preceding quarter which occurred despite
the stock buyback program and mortgage banking trading loss, reflects the early
benefits of this review.
Notwithstanding the asset review, the Company hopes to continue to increase
overall unit deliveries in future years. Subject to various risk factors, the
Company's growth strategies include expanding existing operations to sizable
market volume levels, as well as entering new markets at high volume levels,
principally through acquisitions. Growth in existing markets will be driven by
the Company's ability to increase the average number of active communities in
its major markets through the successful implementation of its KB2000
operational business model.
In January 1999, the Company continued its growth through acquiring the
remaining minority interest in General Homes and completing its purchase of
Lewis Homes; each acquisition greatly supplemented growth in the Company's
existing Houston, California and Nevada markets. On August 13, 1999, the Company
expanded its foreign operations by acquiring a France-based builder of
apartments. Including the Lewis Homes operations, which are expected to deliver
approximately 3,500 homes in 1999, the Company believes it will be the largest
homebuilder in the United States in 1999, as measured by the total number of
units delivered during the year. The Company continues to explore opportunities
to enter new markets and plans to grow in its existing markets with growth in
both new and existing markets expected to be supplemented by strategic
acquisitions.
As part of its strategic asset review, the Company is currently studying
alternatives with regard to its French operations. To the extent the Company
elects to sell all or a portion of its interest in its French operations,
proceeds would be available to reduce domestic debt or repurchase Company stock.
Further, the Company announced in August, 1999, its agreement to joint venture
its interest in "City Ranch", a master planned community in north Los Angeles
County, California, a step which is also reflective of its asset review process.
In the aggregate, the Company expects to meet its previously-announced goal of
delivering approximately 21,500 units Company-wide in 1999. The Company
believes, as it previously disclosed on August 31, 1999, that its outlook for
fourth quarter and full-year earnings per share remains unchanged, other than
the impact on full-year earnings resulting from the unauthorized trading.
Further, based on its current projections, the Company expects to establish
record earnings in fiscal 2000 although this goal could be materially affected
by various risk factors such as changes in general economic conditions either
nationally or in the regions in which the Company operates or may commence
operations, job growth and employment levels, home mortgage interest rates or
consumer confidence and the extent of its internal asset review, among other
things. In particular, interest rates have risen since the beginning of the
Company's 1999 fiscal year. Recent increases in short-term interest rates
instituted by the Federal Reserve Board may give rise to further increases in
mortgage interest rates. Nevertheless, the Company is confident of its ability
to achieve record earnings in 1999, despite the Company's mortgage banking
operations' unauthorized trading loss and is confident in its outlook for
another record year of earnings in 2000. With the addition of the companies
acquired in 1998 and 1999, including Lewis Homes, and high current backlog
levels, the Company believes it is well positioned to achieve record earnings in
2000.
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
20
<PAGE> 21
stockholders during presentations about the Company are "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 (the "Act"). Statements which are predictive in nature, which depend
upon or refer to future events or conditions, or which include words such as
"expects", "anticipates", "intends", "plans", "believes", "estimates", "hopes",
and similar expressions constitute forward-looking statements. In addition, any
statements concerning future financial performance (including future revenues,
earnings or growth rates), ongoing business strategies or prospects, and
possible future Company actions, which may be provided by management are also
forward-looking statements as defined by the Act. Forward-looking statements are
based on current expectations and projections about future events and are
subject to risks, uncertainties, and assumptions about the Company, economic and
market factors and the homebuilding industry, among other things. These
statements are not guaranties of future performance, and the Company has no
specific intention to update these statements.
Actual events and results may differ materially from those expressed or
forecasted in the forward-looking statements made by the Company or Company
officials due to a number of factors. The principal important risk factors that
could cause the Company's actual performance and future events and actions to
differ materially from such forward-looking statements include, but are not
limited to, national or regional changes in general economic conditions,
employment levels, costs of homebuilding material and labor, home mortgage and
other interest rates, the secondary market for mortgage loans, competition,
currency exchange rates as they affect the Company's operations in France,
consumer confidence, government regulation or restrictions on real estate
development, capital or credit market conditions affecting the Company's cost of
capital, the availability and cost of land in desirable areas, environmental
factors, governmental regulations, unanticipated violations of Company policy,
the success of the Company and its significant suppliers in identifying and
addressing operating systems and programs that are not year 2000 ready, 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, 1998 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.
21
<PAGE> 22
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
Geographical 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, 1999 and 1998, together with backlog data in
terms of units and value by geographical market as of August 31, 1999 and 1998.
<TABLE>
<CAPTION>
Three Months Ended August 31,
------------------------------------------------
Deliveries Net Orders
------------------ -------------------
Market 1999 1998 1999 1998
- ------ ----- ----- ----- ------
<S> <C> <C> <C> <C>
California 1,629 1,225 1,660 1,117
Other U.S. 3,526 2,567 3,177 2,387
Foreign 948 375 510 379
----- ----- ----- -----
Total 6,103 4,167 5,347 3,883
===== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended August 31,
----------------------------------------------------
Backlog - Value
Deliveries Net Orders Backlog - Units In Thousands
------------------------ ------------------------ ------------------------- ------------------------
Market 1999 1998 1999 1998 1999 1998 1999 1998
- ------ ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
California 4,258 3,371 5,336 3,777 2,630* 1,722 $ 631,823 $ 388,998
Other U.S. 9,504 5,846 10,889 7,356 6,723* 4,961* 882,538 594,575
Foreign 1,759 988 1,962 1,327 1,456* 947 235,544 148,464
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total 15,521 10,205 18,187 12,460 10,809* 7,630* $1,749,905 $1,132,037
========== ========== ========== ========== ========== ========== ========== ==========
</TABLE>
* Backlog amounts for 1999 have been adjusted to reflect the acquisitions
of Lewis Homes and a France-based builder. Therefore, backlog amounts at
November 30, 1998 combined with net order and delivery activity for the
first nine months of 1999 will not equal ending backlog at August 31,
1999. Similarly, backlog amounts for 1998 were adjusted to reflect the
acquisitions of Hallmark, PrideMark and Estes, as well as acquisition of
a majority interest in General Homes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Report on Form 8-K
No reports on Form 8-K were filed during the quarter ended August 31, 1999.
Exhibits
24 The consent of Ernst & Young LLP, independent auditors, filed as an
exhibit to the Company's 1998 Annual Report on Form 10-K, is
incorporated by reference herein.
27 Financial Data Schedule.
22
<PAGE> 23
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, 1999 /s/ BRUCE KARATZ
----------------------- ----------------------------------------
Bruce Karatz
Chairman, President and Chief Executive
Officer
(Principal Executive Officer)
Dated October 15, 1999 /s/ MICHAEL F. HENN
----------------------- ----------------------------------------
Michael F. Henn
Senior Vice President and Chief
Financial Officer
(Principal Financial Officer)
23
<PAGE> 24
<TABLE>
<CAPTION>
Page of
Sequentially
Numbered Pages
----------------
<S> <C>
INDEX OF EXHIBITS
27 Financial Data Schedule 25
</TABLE>
24
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> NOV-30-1999
<PERIOD-START> DEC-01-1998
<PERIOD-END> AUG-31-1999
<CASH> 39,777
<SECURITIES> 48,381<F1>
<RECEIVABLES> 612,420
<ALLOWANCES> 0
<INVENTORY> 1,716,163
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,818,943
<CURRENT-LIABILITIES> 0
<BONDS> 473,851<F2>
0
0
<COMMON> 48,071
<OTHER-SE> 638,230
<TOTAL-LIABILITY-AND-EQUITY> 2,818,943
<SALES> 2,570,145
<TOTAL-REVENUES> 2,613,526
<CGS> 2,085,016
<TOTAL-COSTS> 2,097,125<F3>
<OTHER-EXPENSES> 353,715<F4>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20,167
<INCOME-PRETAX> 127,642
<INCOME-TAX> 44,700
<INCOME-CONTINUING> 82,942
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 82,942
<EPS-BASIC> 1.77
<EPS-DILUTED> 1.73
<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
and a secondary marketing trading loss.
</FN>
</TABLE>
