<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 May 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, 47,913,469 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 --
Six Months and Three Months ended May 31, 1999 and 1998 3
Consolidated Balance Sheets --
May 31, 1999 and November 30, 1998 4
Consolidated Statements of Cash Flows --
Six Months ended May 31, 1999 and 1998 5
Notes to Consolidated Financial Statements 6-9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 10-19
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 20
ITEM 5. OTHER INFORMATION 20-21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 21
SIGNATURES 22
INDEX OF EXHIBITS 23
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
KAUFMAN AND BROAD HOME CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands Except Per Share Amounts -- Unaudited)
<TABLE>
<CAPTION>
Six Months Ended May 31, Three Months Ended May 31,
------------------------ --------------------------
1999 1998 1999 1998
----------- --------- --------- ---------
<S> <C> <C> <C> <C>
TOTAL REVENUES $ 1,556,413 $ 963,704 $ 862,270 $ 537,459
=========== ========= ========= =========
CONSTRUCTION:
Revenues $ 1,529,732 $ 944,026 $ 847,523 $ 526,717
Construction and land costs (1,248,519) (773,872) (688,574) (428,993)
Selling, general and administrative expenses (203,923) (127,051) (110,561) (69,808)
----------- --------- --------- ---------
Operating income 77,290 43,103 48,388 27,916
Interest income 3,782 2,849 1,872 1,327
Interest expense, net of amounts capitalized (13,026) (14,799) (6,944) (7,662)
Minority interests (12,470) (422) (7,288) (163)
Equity in pretax income (loss) of
unconsolidated joint ventures (53) 332 (159) 83
----------- --------- --------- ---------
Construction pretax income 55,523 31,063 35,869 21,501
----------- --------- --------- ---------
MORTGAGE BANKING:
Revenues:
Interest income 8,290 7,302 4,293 3,640
Other 18,391 12,376 10,454 7,102
----------- --------- --------- ---------
26,681 19,678 14,747 10,742
Expenses:
Interest (7,566) (7,136) (3,810) (3,557)
General and administrative (5,777) (4,685) (2,831) (2,464)
----------- --------- --------- ---------
Mortgage banking pretax income 13,338 7,857 8,106 4,721
----------- --------- --------- ---------
TOTAL PRETAX INCOME 68,861 38,920 43,975 26,222
Income taxes (24,100) (13,600) (15,400) (9,000)
----------- --------- --------- ---------
NET INCOME $ 44,761 $ 25,320 $ 28,575 $ 17,222
=========== ========= ========= =========
BASIC EARNINGS PER SHARE $ .97 $ .65 $ .60 $ .44
=========== ========= ========= =========
DILUTED EARNINGS PER SHARE $ .94 $ .62 $ .58 $ .42
=========== ========= ========= =========
BASIC AVERAGE SHARES OUTSTANDING 46,295 39,201 47,907 39,324
=========== ========= ========= =========
DILUTED AVERAGE SHARES OUTSTANDING 47,606 40,862 49,052 41,141
=========== ========= ========= =========
CASH DIVIDENDS PER COMMON SHARE $ .150 $ .150 $ .075 $ .075
=========== ========= ========= =========
</TABLE>
See accompanying notes.
3
<PAGE> 4
KAUFMAN AND BROAD HOME CORPORATION
CONSOLIDATED BALANCE SHEETS
(In Thousands -- Unaudited)
<TABLE>
<CAPTION>
May 31, November 30,
1999 1998
------------ -------------
<S> <C> <C>
ASSETS
CONSTRUCTION:
Cash and cash equivalents $ 1,055 $ 56,602
Trade and other receivables 236,843 194,841
Inventories 1,596,695 1,134,402
Investments in unconsolidated joint ventures 4,217 5,608
Deferred income taxes 73,096 24,094
Goodwill 210,583 45,533
Other assets 89,617 81,464
----------- -----------
2,212,106 1,542,544
----------- -----------
MORTGAGE BANKING:
Cash and cash equivalents 3,079 6,751
Receivables:
First mortgages and mortgage-backed
securities 53,056 58,262
First mortgages held under commitment
of sale and other receivables 248,059 249,702
Other assets 3,861 2,945
----------- -----------
308,055 317,660
----------- -----------
TOTAL ASSETS $ 2,520,161 $ 1,860,204
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CONSTRUCTION:
Accounts payable $ 226,385 $ 211,380
Accrued expenses and other liabilities 172,766 148,508
Mortgages and notes payable 969,475 529,846
----------- -----------
1,368,626 889,734
----------- -----------
MORTGAGE BANKING:
Accounts payable and accrued expenses 7,496 8,924
Notes payable 238,912 239,413
Collateralized mortgage obligations
secured by mortgage-backed securities 41,475 49,264
----------- -----------
287,883 297,601
----------- -----------
Minority interests:
Consolidated subsidiaries and
joint ventures 19,855 8,608
Company obligated mandatorily redeemable
preferred securities of subsidiary trust
holding solely debentures of the Company 189,750 189,750
----------- -----------
209,605 198,358
----------- -----------
Common stock 47,913 39,992
Paid-in capital 332,225 193,520
Retained earnings 280,932 243,356
Accumulated other comprehensive income (7,023) (2,357)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 654,047 474,511
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,520,161 $ 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>
Six Months Ended May 31,
--------------------------
1999 1998
---------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 44,761 $ 25,320
Adjustments to reconcile net income to net cash used by operating
activities:
Equity in pretax (income) loss of unconsolidated joint ventures 53 (332)
Minority interests 12,470 422
Amortization of discounts and issuance costs 852 967
Depreciation and amortization 17,368 7,241
Provision for deferred income taxes 510 2,367
Change in assets and liabilities, net of effects from acquisitions:
Receivables (26,567) 44,442
Inventories (160,220) (93,322)
Accounts payable, accrued expenses and other liabilities (3,410) (10,081)
Other, net (5,483) (9,015)
---------- ---------
Net Cash used by operating activities (119,666) (31,991)
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash acquired (8,568) (148,933)
Investments in unconsolidated joint ventures 1,697 964
Net sales (originations) of mortgages held for long-term investment (3,273) 2,533)
Payments received on first mortgages and mortgage-backed securities 8,900 5,956
Purchases of property and equipment, net (10,388) (9,656)
---------- ---------
Net cash used by investing activities (11,632) (149,136)
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from credit agreements and other short-term borrowings 139,267 153,852
Payments on collateralized mortgage obligations (8,476) (5,661)
Payments on mortgages, land contracts and other loans (36,237) (11,438)
Payments to minority interests (15,290) (295)
Payments of cash dividends (7,185) (5,887)
---------- ---------
Net cash provided by financing activities 72,079 130,571
---------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (59,219) (50,556)
Cash and cash equivalents at beginning of period 63,353 68,242
---------- ---------
Cash and cash equivalents at end of period $ 4,134 $ 17,686
========== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid, net of amounts capitalized $ 19,033 $ 21,464
========== =========
Income taxes paid $ 29,979 $ 9,857
========== =========
SUPPLEMENTAL DISCLOSURES OF NONCASH ACTIVITIES:
Cost of inventories acquired through seller financing $ 14,559 $ 14,367
========== =========
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 May 31, 1999, the results of its consolidated operations for
the six months and three months ended May 31, 1999 and 1998, and its
consolidated cash flows for the six months ended May 31, 1999 and 1998. The
results of operations for the six months and three months ended May 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>
May 31, November 30,
1999 1998
----------- ------------
<S> <C> <C>
Homes, lots and improvements in production $1,155,357 $ 835,300
Land under development 441,338 299,102
---------- ----------
Total inventories $1,596,695 $1,134,402
=========== ==========
</TABLE>
The impact of capitalizing interest costs on consolidated pretax income is
as follows (in thousands):
<TABLE>
<CAPTION>
Six Months Ended May 31, Three Months Ended May 31,
----------------------- -------------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Interest incurred $ 34,719 $ 26,990 $ 18,948 $ 14,637
Interest expensed (13,026) (14,799) (6,944) (7,662)
-------- -------- -------- --------
Interest capitalized 21,693 12,191 12,004 6,975
Interest amortized (18,800) (11,564) (7,872) (4,639)
-------- -------- -------- --------
Net impact on pretax income $ 2,893 $ 627 $ 4,132 $ 2,336
======== ======== ======== ========
</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>
Six Months Ended May 31, Three Months Ended May 31,
------------------------ -------------------------
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Basic average shares outstanding 46,295 39,201 47,907 39,324
Net effect of stock options assumed to
be exercised 1,311 1,661 1,145 1,817
------ ------ ------ ------
Diluted average shares outstanding 47,606 40,862 49,052 41,141
====== ====== ====== ======
</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 $26.0 million and $17.5 million for the
three months ended May 31, 1999 and 1998, respectively and $40.1 million
and $23.9 million for the six months ended May 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.
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
7
<PAGE> 8
KAUFMAN AND BROAD HOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. Acquisitions (continued)
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 are 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>
Six Months Ended May 31,
-----------------------
1998 1997
---------- ----------
<S> <C> <C>
Total revenues $1,639,365 $1,369,888
Total pretax income 73,376 48,570
Net income 47,676 31,570
Basic earnings per share 1.00 .67
Diluted earnings per share .97 .65
</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.
6. Reclassifications
Certain amounts in the consolidated financial statements of prior years
have been reclassified to conform to the 1999 presentation.
9
<PAGE> 10
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 May 31, 1999 increased 60.4% to $862.3
million from $537.5 million for the three months ended May 31, 1998. For the six
months ended May 31, 1999, total revenues increased 61.5 % to $1.56 billion from
$963.7 million in the year-earlier period. The increase in total revenues for
the three and six month periods of 1999 was primarily due to higher housing
revenues and mortgage banking revenues. Net income for the second quarter of
1999 rose to $28.6 million or $.58 per diluted share from $17.2 million or $.42
per diluted share for the same period a year ago. For the six months ended May
31, 1999, net income increased to $44.8 million or $.94 per diluted share from
$25.3 million or $.62 per diluted share for the six months ended May 31, 1998.
The growth in diluted earnings per share occurred despite increases in the
diluted average number of common shares outstanding of 19.2% and 16.5% for the
second quarter and first half 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 six month periods was principally driven by significantly higher
unit deliveries, an improved construction gross margin and increased mortgage
banking pretax income. The Company's operating results for three months and six
months ended May 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. Mortgage banking pretax
income for the three months and six months ended May 31, 1999 rose 71.7% and
69.8%, respectively, primarily due to a higher volume of loan closings and
increased premiums generated from the higher volume of servicing rights sold.
CONSTRUCTION
Revenues increased by $320.8 million, or 60.9%, to $847.5 million in the second
quarter of 1999 from $526.7 million in the second quarter of 1998 due to an
increase in housing revenues. Housing revenues for the period increased by
61.3%, or $321.6 million, to $846.5 million from $524.9 million in the
year-earlier period as a result of a 50.7% increase in unit deliveries and a
7.0% rise in the average selling price. Housing revenues in the United States
rose 61.1% to $765.3 million on 4,651 unit deliveries in the second quarter of
1999 from $475.2 million on 3,062 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 19.9% and
15.3%, respectively, in the second quarter of 1999. Housing revenues from
California operations for the second quarter of 1999 totaled $346.6 million, up
42.9% from $242.5 million in the year-earlier period. California deliveries in
the second quarter of 1999 increased 27.2% to 1,430 units from 1,124 units in
the second quarter of 1998 reflecting a 33.3% rise in the average number of
active communities. Housing revenues from Other U.S. operations totaled $418.7
million in the second quarter compared to $232.6 million in the same quarter a
year ago, an increase of 80.0%. Other U.S. deliveries increased 66.2% to 3,221
units in the second quarter of 1999 from 1,938 units in the second quarter of
1998 as the average number of active communities in the Company's Other U.S.
operations increased 52.1%, to 178 from 117, during the period. Revenues from
French housing operations during the three months ended May 31, 1999 rose to
$79.1 million on 480 units from $47.8 million on 340 units in the year-earlier
period.
During the second quarter of 1999, the Company's overall average selling price
increased 6.9% to $164,700 from $154,000 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 6.0% to $164,500
in the second quarter of 1999 from $155,200 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 69.3% of total
U.S. deliveries in the second quarter of 1999 compared to 63.3% 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 May 31, 1999, the
average selling price in the Company's California operations increased 12.3% to
10
<PAGE> 11
$242,400 from $215,800 for the same period a year ago and the average selling
price in Other U.S. operations rose 8.3% to $130,000 from $120,000. 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, selected
increases in sales prices in certain markets due to positive market conditions,
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 second quarter of 1999 rose 17.4% to $164,900 from $140,500
in the year-earlier quarter primarily due to a change in the mix of deliveries
and price appreciation in the French housing market.
Revenues from land sales totaled $1.0 million in the second quarter of 1999
compared to $1.8 million in the second quarter of 1998.
For the first six months of 1999, construction revenues increased by $585.7
million, or 62.0%, to $1.53 billion, from $944.0 million for the same period a
year ago primarily as a result of higher housing revenues. Housing revenues
totaled $1.52 billion on 9,418 units in the first half of 1999 compared to
$939.1 million on 6,038 units for the same period a year ago. Housing operations
in the United States produced revenues of $1.39 billion on 8,607 units in the
first six months of 1999 and $854.8 million on 5,425 units in the comparable
period of 1998. During the first half of 1999, California housing revenues
increased 36.2% to $628.0 million from $461.1 million in the first half of 1998,
reflecting a 22.5% rise in unit deliveries during the period. Housing revenues
from Other U.S. operations increased 93.7% to $762.6 million in the first six
months of 1999 from $393.7 million in the prior year's period as unit deliveries
in the region rose 82.3%. Deliveries in California increased to 2,629 units for
the first six months of 1999 from 2,146 for the first six months of 1998, while
deliveries from Other U.S. operations increased to 5,978 units from 3,279 units
during the same period. French housing revenues totaled $131.4 million on 801
units in the first half of 1999 and $80.6 million on 600 units in the
corresponding period of 1998.
The Company-wide average new home price increased 4.1% to $161,900 in the first
six months of 1999 from $155,500 in the year-earlier period reflecting the
inclusion of somewhat higher-priced deliveries in California, Nevada and France,
partially offset by a higher proportion of lower-priced deliveries from Other
U.S. markets. For the first half of 1999, the average selling price in
California increased 11.2% to $238,900 from $214,900 for the first half of 1998
and the average selling price in Other U.S. operations increased 6.2% to
$127,600 from $120,100. 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, selected increases in sales prices in
certain markets due to favorable market conditions, 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 for the six
month period rose 22.0% to $164,000 in 1999 from $134,400 in 1998.
Company-wide revenues from land sales were essentially unchanged from year to
year, totaling $5.0 million and $4.9 million in the first half of 1999 and 1998,
respectively.
Operating income increased by $20.5 million to $48.4 million in the second
quarter of 1999 from $27.9 million in the second quarter of 1998. As a
percentage of construction revenues, operating income increased by .4 percentage
points to 5.7% in the second quarter of 1999 compared to 5.3% in the second
quarter of 1998. Gross profits increased by $61.2 million, or 62.7%, to $158.9
million in the second quarter of 1999 from $97.7 million in the prior year's
period. During this same period, housing gross profits increased by $60.1
million to $159.0 million from $98.9 million. Gross profits as a percentage of
construction revenues increased to 18.8% in the second quarter of 1999 from
18.6% in the year-earlier quarter despite the housing gross margin remaining
flat at 18.8% in the second quarter of 1999 and 1998. Housing gross margin for
the three months ended May 31, 1999 was negatively impacted by purchase
accounting associated with the Lewis Homes transaction. During the second
quarter of 1999, land sales generated break-even results compared to a loss of
$1.2 million generated in the second quarter of 1998.
Selling, general and administrative expenses increased by $40.8 million to
$110.6 million in the three months ended May 31, 1999 from $69.8 million in the
corresponding 1998 period. As a percentage of housing revenues, selling, general
and administrative expenses decreased .2 percentage points to 13.1% in the
second quarter of 1999 from 13.3% 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. 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
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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 six months of 1999, operating income increased by $34.2 million to
$77.3 million from $43.1 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 $111.0 million, or 65.3%, to
$281.2 million in the first half of 1999 from $170.2 million in the first half
of 1998 with housing gross profits increasing by $110.2 million to $281.2
million from $171.0 million during this same period. Gross profits as a
percentage of construction revenues increased to 18.4% in the first half of 1999
from 18.0% in the year-earlier period primarily due to an increase in the
Company's housing gross margin to 18.4% from 18.2% for the same periods. The
increase in the Company's housing gross margin for the six months ended May 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 essentially break-even results
for the first six months of 1999 compared to a loss of $.8 million for the first
six months of 1998.
Selling, general and administrative expenses increased by $76.9 million to
$203.9 million for the first six months of 1999 from $127.0 million for the same
period of 1998. As a percentage of housing revenues, selling, general and
administrative expenses decreased by .1 percentage point to 13.4% for the first
six months of 1999 from 13.5% 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 $1.9 million in the second quarter of 1999 compared to
$1.3 million in the second quarter of 1998. For the first six months, interest
income totaled $3.8 million in 1999 and $2.8 million in 1998. The rise in
interest income in the second quarter and first half 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) decreased by $.8 million to $6.9
million in the second quarter of 1999 from $7.7 million in the second quarter of
1998. For the six months ended May 31, 1999, interest expense decreased by $1.8
million to $13.0 million from $14.8 million for the six months ended May 31,
1998. The decrease in interest expense in the second quarter and first half of
1999 was primarily due to the impact of the Company's issuance of Feline Prides
in the third quarter of 1998, since distributions associated with the Feline
Prides are included in minority interests rather than interest expense. Gross
interest incurred in the three months and six months ended May 31, 1999 was
higher than that incurred in the corresponding year ago periods by $4.3 million
and $7.7 million, respectively, reflecting an increase in average indebtedness.
The percentage of interest capitalized during the three months ended May 31,
1999 and 1998 was 63.3% and 47.7%, respectively. For the six month period ended
May 31, this percentage was 62.5% in 1999 and 45.2% in 1998. The higher
capitalization rates in the 1999 periods 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 52.8% for the three months
ended May 31, 1999 and 51.3% for the six months ended May 31, 1999.
Minority interests totaled $7.3 million in the second quarter of 1999 and $.2
million in the second quarter of 1998. For the first half of 1999, minority
interests totaled $12.5 million compared to $.4 million for the same period a
year ago. Minority interests for three months and six months ended May 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. In the three months and six months ended May 31, 1998, minority interests
related only to residential joint venture activities. Minority interests for the
second quarter and first half of 1999 increased from the corresponding periods
of 1998 due to the inclusion of distributions of $3.8 million and $7.6 million,
respectively, related to the Feline Prides and an increase in joint venture
activity. Minority interests are expected to be at this higher level for the
remainder of the year.
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Equity in pretax loss of unconsolidated joint ventures in the second quarter of
1999 totaled $.1 million compared to the essentially break-even results recorded
in the second quarter of 1998. The Company's unconsolidated joint ventures
generated no revenues during the three months ended May 31, 1999 compared to
$2.9 million generated in the corresponding period of 1998. For the first half
of 1999, the Company's equity in pretax loss of unconsolidated joint ventures
totaled $.1 million compared to income of $.3 million for the same period of
1998. Combined revenues from these joint ventures totaled $.7 million in the
first half of 1999 and $7.5 million in the first half 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 $.7 million and $.3 million,
respectively in the second quarter of 1999 compared to the same quarter a year
ago. For the first six months of 1999, interest income from mortgage banking
activities rose by $1.0 million and related interest expense increased by $.4
million from the same period of 1998. Interest income for the three and six
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 second quarter and first half of 1999 compared to
the same periods of 1998.
Other mortgage banking revenues increased by $3.4 million to $10.5 million in
the second quarter of 1999 from $7.1 million in the prior year's second quarter.
For the first half of 1999, other mortgage banking revenues totaled $18.4
million, an increase of $6.0 million from $12.4 million in the first half 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 housing unit volume in the United States.
General and administrative expenses associated with mortgage banking activities
increased by $.3 million to $2.8 million in the second quarter of 1999 from $2.5
million for the same period a year ago. For the six month period, these expenses
totaled $5.8 million in 1999 and $4.7 million in 1998. The increase in general
and administrative expenses in 1999 was primarily due to higher mortgage
production volume.
INCOME TAXES
Income tax expense totaled $15.4 million and $9.0 million in the second quarter
of 1999 and 1998, respectively. For the first six months of 1999, income tax
expense totaled $24.1 million compared to $13.6 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.
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 six
months ended May 31, 1999, net cash used by operating, investing and financing
activities totaled $59.2 million compared to $50.6 million used in the six
months ended May 31, 1998.
Operating activities for the first six months of 1999 used $119.7 million of
cash compared to $32.0 million used during the same period of 1998. The
Company's uses of operating cash in the first half of 1999 included an increase
in receivables of $26.6 million, net investments in inventories of $160.2
million (excluding the effect of acquisitions and $14.6 million of inventories
acquired through seller financing) and a decrease in accounts payable, accrued
expenses and other liabilities of $3.4 million. Sources of operating cash in the
first six months of 1999 included six months' earnings of $44.8 million, and
various noncash items deducted from net income.
Operating activities for the first six months of 1998 used cash to fund an
investment of $93.3 million in inventories (excluding $14.4 million of
inventories acquired through seller financing) and to pay down $10.0 million in
accounts payable, accrued expenses and other liabilities. Excluding the
acquisitions of Hallmark, PrideMark and Estes, 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 six months'
earnings of $25.3 million, a reduction in receivables of $44.4 million and
various noncash items deducted from net income. The reduction in receivables
related primarily to a lower balance of mortgages held under
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commitment of sale due to lower mortgage origination volume in the second
quarter of 1998 compared to the fourth quarter of 1997.
Cash used by investing activities totaled $11.6 million in the first half of
1999 compared to $149.1 million used in the year-earlier period. In the first
six months of 1999, $8.6 million of cash, net of cash acquired, was used for
acquisitions, $10.4 million was used for net purchases of property and
equipment, and $3.3 million was used for originations of mortgages held for
long-term investment. Partially offsetting these uses was $8.9 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, and $1.7 million in
distributions related to investments in unconsolidated joint ventures. In the
first six months of 1998, cash of $148.9 million, net of cash acquired, was used
for the acquisitions of Hallmark, PrideMark and Estes, and $9.7 million was used
for net purchases of property and equipment. Among amounts partially offsetting
these uses were $6.0 million of proceeds received from mortgage-backed
securities and $2.5 million from the net sales of mortgages held for long-term
investment.
Financing activities provided $72.1 million of cash in the first half of 1999
compared to $130.6 million provided in the first half of 1998. In the first six
months of 1999, cash was provided from net proceeds from borrowings of $103.1
million. Partially offsetting the cash provided were payments to minority
interests of $15.3 million, payments on collateralized mortgage obligations of
$8.5 million and cash dividend payments of $7.2 million. Financing activities in
the first six months of 1998 resulted in net cash inflows due mainly to net
proceeds from borrowings of $142.4 million, partially offset by cash dividend
payments of $5.9 million and payments on collateralized mortgage obligations of
$5.7 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 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 are 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.
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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.
As of May 31, 1999 the Company had $290.5 million available under its $500
million domestic unsecured revolving credit facility. The Company's French
unsecured financing agreements, totaling $166.9 million, had in the aggregate
$89.6 million available at May 31, 1999. In addition, the Company's mortgage
banking operations had $11.1 million available under its $250 million secured
revolving mortgage warehouse facility at quarter-end. The Company's financial
leverage, as measured by the ratio of net debt to total capital, was 53.5% at
the end of the 1999 second quarter compared to 62.7% at the end of the 1998
second quarter.
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
address areas of greatest business risk and required the greatest technical
effort and, therefore, were given the highest priority. These four high priority
projects are the following: conversion and upgrade of the Company's JD Edwards
primary accounting programs (the "JD Edwards Programs"); conversion and upgrade
of the operating systems for the Company's Texas operations which 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 June 30, 1999, the 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 are 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 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. As of June 30, 1999 all required remediation had been substantially
completed on these eight of the remaining nine projects 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 September
1999 in order to substantially mitigate the potential impact of problems arising
beyond the Company's control.
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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 $3.7 million as of June 30, 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 certainly 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 September 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.
Management currently anticipates 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.
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OUTLOOK
The Company's residential backlog as of May 31, 1999 consisted of 11,296 units,
representing aggregate future revenues of approximately $1.80 billion, up 49.0%
and 60.5%, respectively, from 7,581 units, representing aggregate future
revenues of approximately $1.12 billion, a year earlier. The backlog units and
value at May 31, 1999 were the highest of any quarter-end backlog in the
Company's history and included 1,717 units from the Lewis Homes operations.
Company-wide net orders for the second quarter of 1999 totaled 7,219, up 48.5%
compared to the 4,861 net orders in the second quarter of 1998. Excluding the
impact of acquisitions within the trailing twelve month period, the unit net
orders in the second quarter of 1999 increased 12.9% over the year ago quarter
reflecting growth and maturation in the Company's existing businesses.
The Company's domestic operations accounted for approximately $1.53 billion of
backlog value on 9,671 units at May 31, 1999, up from $983.0 million on 6,638
units at May 31, 1998, reflecting higher backlogs from both California and Other
U.S. operations. Backlog in California increased to approximately $613.5 million
on 2,599 units at May 31, 1999 from $394.1 million on 1,830 units at May 31,
1998 as net orders increased 51.3% to 2,104 in the second quarter of 1999 from
1,391 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
May 31, 1999 increasing to approximately $913.5 million on 7,072 units from
$588.8 million on 4,808 units at May 31, 1998, reflecting a 44.4% increase in
Other U.S. net orders to 4,198 in the second quarter of 1999 from 2,907 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 May 31, 1999 rose 19.8% 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 United States backlog levels. The average number
of active communities in the Company's domestic operations for the second
quarter of 1999 increased 45.6% from the same quarter a year ago, to 262 from
180, representing a 33.3% increase in California and a 52.1% increase in Other
U.S operations.
In France, the value of residential backlog at May 31, 1999 was approximately
$265.3 million on 1,606 units, up from $125.4 million on 902 units a year
earlier. The Company's net orders in France increased by 67.4% to 914 units in
the second quarter of 1999 from 546 units in the second quarter of 1998. The
value of backlog associated with the company's French commercial development
activities declined to approximately $1.6 million at May 31, 1999 from $4.2
million at May 31, 1998, reflecting a reduced level of activity due to the
Company's continued strategy to focus primarily on the expansion of its
residential development business.
In Mexico, the value of residential backlog at May 31, 1999 was approximately
$5.0 million on 19 units compared to $11.5 million on 41 units at May 31, 1998.
Operations in Mexico generated 3 net orders in the second quarter of 1999,
compared to 17 net orders generated in the same period a year ago. 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. As a result, the Company has decided to deliver its current
backlog and sell the remaining lots at its 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 in 1999; 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 June 1999 increased 25.1% from the
comparable period of 1998. During this same period, domestic net orders were up
20.7%, reflecting a 72.2% increase in California net orders, due largely to the
inclusion of the Lewis Homes operations, and a 2.6% increase in net orders from
Other U.S. operations. In France, net orders for the first four weeks of the
Company's 1999 third quarter increased 62.6% compared with the same period a
year ago. Despite the overall improvement in net orders Company-wide, current
global market uncertainties, mortgage interest rate volatility, declines in
consumer confidence and/or other factors could have mitigating effects on full
year results.
During 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
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operations and continued acceleration of the Company's growth. To advance these
initiatives, the Company also continues to concentrate on its two complementary
strategies consisting of establishing sizable local market positions and
maintaining its focus on acquisitions.
The Company hopes to continue to increase overall unit delivery growth in future
years. 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. The Company's ongoing acquisition strategy is
expected to supplement growth in existing markets and facilitate expansion into
new markets.
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. 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.
In the aggregate, the Company has established a goal of delivering approximately
21,500 units Company-wide in 1999. 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, among other things. Mortgage 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
remains optimistic about its ability to continue to grow its business during the
balance of 1999. The Company believes that recent net order trends reflect
strong housing demand in all of its major domestic and international markets.
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 1999.
SAFE HARBOR STATEMENT
Investors are cautioned that certain statements contained in this document, as
well as some statements by the Company in periodic press releases and some oral
statements by Company officials to securities analysts and stockholders during
presentations about the Company are "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995 (the "Act").
Statements which are predictive in nature, which depend upon or refer to future
events or conditions, or which include words such as "expects", "anticipates",
"intends", "plans", "believes", "estimates", "hopes", and similar expressions
constitute forward-looking statements. In addition, any statements concerning
future financial performance (including future revenues, earnings or growth
rates), ongoing business strategies or prospects, and possible future Company
actions, which may be provided by management are also forward-looking statements
as defined by the Act. Forward-looking statements are based on current
expectations and projections about future events and are subject to risks,
uncertainties, and assumptions about the Company, economic and market factors
and the homebuilding industry, among other things. These statements are not
guaranties of future performance, and the Company has no specific intention to
update these statements.
Actual events and results may differ materially from those expressed or
forecasted in the forward-looking statements made by the Company or Company
officials due to a number of factors. The principal important risk factors that
could cause the Company's actual performance and future events and actions to
differ materially from such forward-looking statements include, but are not
limited to, changes in general economic conditions either nationally or in
regions where the Company operates or may commence operations, employment growth
or unemployment rates, lumber or other homebuilding material prices, labor
costs, home mortgage interest rates, competition, currency exchange rates as
they affect the Company's operations in France, consumer confidence, and
government regulation or restrictions on real estate development, costs and
effects of unanticipated legal or administrative proceedings and capital or
credit market conditions affecting the Company's cost of capital; the
availability and cost of land in desirable areas, and conditions in the overall
homebuilding market in the Company's geographic markets (including the historic
cyclicality of the industry); the success of the Company and its significant
suppliers in identifying and addressing operating systems and
18
<PAGE> 19
programs that are not year 2000 ready; as well as seasonality, competition,
population growth, property taxes, and unanticipated delays in the Company's
operations. See the Company's Annual Report on Form 10-K for the year ended
November 30, 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.
19
<PAGE> 20
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 1999 Annual Meeting of Stockholders of the Company was held on April 1,
1999, at which the two matters described below were submitted to a vote of
stockholders with the voting results as indicated.
(1) Election of directors for a three-year term expiring at the 2002 Annual
Meeting of Stockholders:
<TABLE>
<CAPTION>
Nominee For Authority Withheld
------------------- ---------- ------------------
<S> <C> <C>
Jane Evans 39,527,673 5,350,681
James A. Johnson 39,522,172 5,356,182
Sanford C. Sigoloff 39,516,175 5,362,179
</TABLE>
Messrs. Steve Barlett, Bruce Karatz, Randall W. Lewis and Charles R.
Rinehart continue as directors and, if nominated, will next stand for
re-election at the 2000 Annual Meeting of Stockholders; Messrs. Ronald W.
Burkle, Ray R. Irani, Guy Nafilyan and Luis G. Nogales also continue as
directors and, if nominated, will next stand for re-election at the 2001
Annual Meeting of Stockholders.
(2) A stockholder resolution concerning the elimination of the classification
of the board of directors:
<TABLE>
<CAPTION>
For Against Abstain Broker Non-Vote
---------- ---------- ------- ---------------
<S> <C> <C> <C>
21,155,613 19,896,257 156,976 3,668,508
</TABLE>
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 six months ended May 31, 1999 and 1998, together with backlog data in terms
of units and value by geographical market as of May 31, 1999 and 1998.
<TABLE>
<CAPTION>
Three Months Ended May 31,
------------------------------------
Deliveries Net Orders
--------------- ---------------
Market 1999 1998 1999 1998
- ------ ----- ----- ----- -----
<S> <C> <C> <C> <C>
California 1,430 1,124 2,104 1,391
Other U.S. 3,221 1,938 4,198 2,907
Foreign 488 347 917 563
===== ===== ===== =====
Total 5,139 3,409 7,219 4,861
===== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended May 31,
------------------------------------- Backlog - Value
Deliveries Net Orders Backlog - Units In Thousands
--------------- ---------------- ---------------- ------------------------
1999 1998 1999 1998 1999 1998 1999 1998
------ ----- ------ ----- ------ ------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
California 2,629 2,146 3,676 2,660 2,599 1,830 $ 613,466 $ 394,144
Other U.S. 5,978 3,279 7,712 4,969 7,072* 4,808 913,523* 588,820
Foreign 811 613 1,452 948 1,625 943 270,229 136,929
----- ----- ------ ----- ------ ----- ---------- ----------
Total 9,418 6,038 12,840 8,577 11,296* 7,581 $1,797,218* $1,119,893
===== ===== ====== ===== ====== ===== ========== ==========
</TABLE>
20
<PAGE> 21
- ----------
* Backlog amounts for 1999 have been adjusted to reflect the acquisition of
Lewis Homes. Therefore, backlog amounts at November 30, 1998 combined with
net order and delivery activity for the first six months of 1999 will not
equal ending backlog at May 31, 1999. Similarly, backlog amounts for 1998
were adjusted to reflect the acquisitions of Hallmark, PrideMark and Estes.
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 1998 Annual Report on Form 10-K, is incorporated by
reference herein.
27 Financial Data Schedule.
Report on Form 8-K
On March 22, 1999, the Company filed a Current Report on Form 8-K/A (Item 5),
amending the Current Report on Form 8-K filed on January 22, 1999 which reported
the acquisition of Lewis Homes. The filing included the audited combined
statements of assets and liabilities of Lewis Homes as of December 31, 1998 and
1997, and the related combined statements of operations, changes in equity and
cash flows for each of the three years in the period ended December 31, 1998. In
addition, the Form 8-K/A included unaudited pro forma combined financial
statements and related notes of the Company, giving effect to the acquisition of
Lewis Homes.
21
<PAGE> 22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KAUFMAN AND BROAD HOME CORPORATION
----------------------------------------
Registrant
Dated July 15, 1999 /s/ BRUCE KARATZ
--------------------------- ----------------------------------------
Bruce Karatz
Chairman, President and
Chief Executive Officer
(Principal Executive Officer)
Dated July 15, 1999 /s/ MICHAEL F. HENN
--------------------------- ----------------------------------------
Michael F. Henn
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
22
<PAGE> 23
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
Page of
Sequentially
Numbered Pages
--------------
<S> <C> <C>
27 Financial Data Schedule, 24
</TABLE>
23
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> NOV-30-1999
<PERIOD-START> DEC-01-1998
<PERIOD-END> MAY-31-1999
<CASH> 4,134
<SECURITIES> 53,056<F1>
<RECEIVABLES> 484,902
<ALLOWANCES> 0
<INVENTORY> 1,596,695
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,520,161
<CURRENT-LIABILITIES> 0
<BONDS> 473,802<F2>
0
0
<COMMON> 47,913
<OTHER-SE> 606,134
<TOTAL-LIABILITY-AND-EQUITY> 2,520,161
<SALES> 1,529,732
<TOTAL-REVENUES> 1,556,413
<CGS> 1,248,519
<TOTAL-COSTS> 1,256,085<F3>
<OTHER-EXPENSES> 209,700<F4>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,026
<INCOME-PRETAX> 68,861
<INCOME-TAX> 24,100
<INCOME-CONTINUING> 44,761
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 44,761
<EPS-BASIC> 0.97
<EPS-DILUTED> 0.94
<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>
