Table of Contents

 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
þ   Annual Report Pursuant to Section 13 or 15(d) of     
the Securities Exchange Act of 1934
For the fiscal year ended November 30, 2008
or
o   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. 001-09195
KB HOME
(Exact name of registrant as specified in its charter)
     
Delaware
(State or other jurisdiction of
incorporation or organization)
  95-3666267
(I.R.S. Employer
Identification No.)
 
10990 Wilshire Boulevard, Los Angeles, California 90024
(Address of principal executive offices)
Registrant’s telephone number, including area code:  (310) 231-4000
 
Securities Registered Pursuant to Section 12(b) of the Act:
 
     
    Name of each exchange
                      Title of each class   on which registered
 
Common Stock (par value $1.00 per share)
  New York Stock Exchange
Rights to Purchase Series A Participating Cumulative Preferred Stock
  New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act: None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   Yes  þ  No  o   
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.   Yes  o   No  þ  
 
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  þ   No  o   
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   þ
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer   þ Accelerated filer   o Non-accelerated filer   o Smaller reporting company   o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o   No  þ
 
The aggregate market value of voting stock held by non-affiliates of the registrant on May 31, 2008 was $1,837,819,039, including 12,091,182 shares held by the registrant’s grantor stock ownership trust and excluding 25,483,921 shares held in treasury.
 
The number of shares outstanding of each of the registrant’s classes of common stock on December 31, 2008 was as follows: Common Stock (par value $1.00 per share) 89,607,919 shares, including 11,891,482 shares held by the registrant’s grantor stock ownership trust and excluding 25,512,386 shares held in treasury.
 
Documents Incorporated by Reference
 
Portions of the registrant’s definitive Proxy Statement for the 2009 Annual Meeting of Stockholders (incorporated into Part III).
 
 


 

 
KB HOME
FORM 10-K
FOR THE YEAR ENDED NOVEMBER 30, 2008
 
TABLE OF CONTENTS
 
             
        Page
 
        Number  
 
 
  Business     1  
  Risk Factors     12  
  Unresolved Staff Comments     20  
  Properties     20  
  Legal Proceedings     20  
  Submission of Matters to a Vote of Security Holders     21  
 
  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities     23  
  Selected Financial Data     25  
  Management’s Discussion and Analysis of Financial Condition and Results of Operations     26  
  Quantitative and Qualitative Disclosures About Market Risk     54  
  Financial Statements and Supplementary Data     55  
  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure     96  
  Controls and Procedures     96  
  Other Information     97  
 
  Directors, Executive Officers and Corporate Governance     98  
  Executive Compensation     98  
  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters     98  
  Certain Relationships and Related Transactions, and Director Independence     99  
  Principal Accountant Fees and Services     99  
 
  Exhibits and Financial Statement Schedules     100  
    105  
  EX-10.3
  EX-10.4
  EX-10.5
  EX-10.8
  EX-10.11
  EX-10.14
  EX-10.22
  EX-10.26
  EX-10.27
  EX-10.29
  EX-10.30
  EX-10.31
  EX-10.39
  EX-12.1
  EX-21
  EX-23
  EX-31.1
  EX-31.2
  EX-32.1
  EX-32.2


Table of Contents

 
PART I
 
Item 1. BUSINESS
 
General
 
KB Home is a Fortune 500 company listed on the New York Stock Exchange under the ticker symbol “KBH.” We are one of the nation’s largest homebuilders and have been building quality homes for families for more than 50 years. We construct and sell homes through our operating divisions across the United States under the name KB Home. Unless the context indicates otherwise, the terms “the Company,” “we,” “our” and “us” used herein refer to KB Home, a Delaware corporation, and its predecessors and subsidiaries.
 
Beginning in 1957 and continuing until 1986, our business was operated through various subsidiaries of Kaufman and Broad, Inc. (“KBI”) and its predecessors. In 1986, KBI transferred to us the outstanding capital stock of its subsidiaries conducting KBI’s homebuilding and mortgage banking business. Shortly thereafter, we completed an initial public offering of 8% of our common stock and began operating under the name Kaufman and Broad Home Corporation. In 1989, we were spun-off from KBI, which then changed its name to Broad Inc., and operated as an independent company, primarily in California and France. In 2001, we changed our name to KB Home. Since 1989, we have expanded our business in both our existing markets and into new markets through capital investments and acquisitions of other homebuilders. Today, we operate a geographically diverse homebuilding and financial services business serving homebuyers in markets nationwide. We believe our geographic diversity helps to mitigate the effects of local and regional economic cycles, enhancing our long-term growth potential.
 
Our four homebuilding segments offer a variety of homes designed primarily for first-time, first move-up and active adult buyers, including attached and detached single-family homes, townhomes and condominiums. We offer homes in development communities, at urban in-fill locations and as part of mixed-use projects. We use the term “home” to refer to a single-family residence, whether it is a single-family home or other type of residential property, and we use the term “community” to refer to a single development in which homes are constructed as part of an integrated plan.
 
We delivered 12,438 homes in 2008 and 23,743 homes in 2007. In 2008, our average selling price of $236,400 decreased from $261,600 in 2007. We generated total revenues of $3.03 billion and a net loss of $976.1 million in 2008, compared to total revenues of $6.42 billion and a loss from continuing operations of $1.41 billion in 2007. Our homebuilding revenues, which include revenues from land sales, accounted for 99.6% of our total revenues in 2008 and 99.8% of our total revenues in 2007. Our results in 2008 and 2007 reflect the significant downturn in housing markets that began in 2006, as well as our resulting actions to align the size of our operations with diminished home sales activity and to maintain a strong balance sheet. In 2008, the housing market downturn was exacerbated by a severe decline in the overall economy in the second half of the year.
 
Our financial services segment derives income from mortgage banking, title and insurance services offered to our homebuyers. Mortgage banking services are provided to our homebuyers indirectly through Countrywide KB Home Loans, LLC (“Countrywide KB Home Loans”), a joint venture between us and CWB Venture Management Corporation, a subsidiary of Bank of America, N.A. Countrywide KB Home Loans, which is operated by our joint venture partner, offers a variety of loan programs to serve the financing needs of our homebuyers. Our financial services segment accounted for .4% of our total revenues in 2008 and .2% of our total revenues in 2007.
 
Our principal executive offices are located at 10990 Wilshire Boulevard, Los Angeles, California 90024. The telephone number of our corporate headquarters is (310) 231-4000 and our website address is http://www.kbhome.com. Our Spanish-language website is http://www.kbcasa.com. In addition, location and community information is available at (888) KB-HOMES.


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Markets
 
We have four homebuilding segments based on the markets in which we construct homes — West Coast, Southwest, Central and Southeast — which together reflect the wide geographic reach of our homebuilding business. As of the date of this report, we operate in the eight states and 29 major markets shown below:
 
         
Segment   State(s)   Major Market(s)
 
West Coast
  California   Fresno, Los Angeles/Ventura, Orange County, Riverside, Sacramento, San Bernardino, San Diego, San Jose/Oakland and Stockton
Southwest
  Arizona   Phoenix and Tucson
    Nevada   Las Vegas and Reno
Central
  Colorado   Denver
    Texas   Austin, Dallas/Fort Worth, Houston and San Antonio
Southeast
  Florida   Daytona Beach, Jacksonville, Lakeland, Orlando, Sarasota and Tampa
    North Carolina   Charlotte and Raleigh
    South Carolina   Bluffton/Hilton Head, Charleston and Columbia
 
Segment Operating Information.   The following table presents specific operating information for our homebuilding segments for the years ended November 30, 2008, 2007 and 2006:
 
                         
    Years Ended November 30,  
    2008     2007     2006  
West Coast:
                       
Homes delivered
    2,972       4,957       7,213  
Percent of total homes delivered
    24 %     21 %     22 %
Average selling price
  $ 354,700     $ 433,600     $ 489,500  
Total revenues (in millions) (a)
  $ 1,055.1     $ 2,203.3     $ 3,531.3  
Southwest:
                       
Homes delivered
    2,393       4,855       7,011  
Percent of total homes delivered
    19 %     20 %     22 %
Average selling price
  $ 229,200     $ 258,500     $ 306,900  
Total revenues (in millions) (a)
  $ 618.0     $ 1,349.6     $ 2,183.8  
Central:
                       
Homes delivered
    3,348       6,310       9,613  
Percent of total homes delivered
    27 %     27 %     30 %
Average selling price
  $ 175,000     $ 167,800     $ 159,800  
Total revenues (in millions) (a)
  $ 594.3     $ 1,077.3     $ 1,553.3  
Southeast:
                       
Homes delivered
    3,725       7,621       8,287  
Percent of total homes delivered
    30 %     32 %     26 %
Average selling price
  $ 201,800     $ 229,400     $ 244,300  
Total revenues (in millions) (a)
  $ 755.8     $ 1,770.4     $ 2,091.4  
Total:
                       
Homes delivered
    12,438       23,743       32,124  
Average selling price
  $ 236,400     $ 261,600     $ 287,700  
Total revenues (in millions) (a)
  $ 3,023.2     $ 6,400.6     $ 9,359.8  
 
 
(a)  Total revenues include revenues from housing and land sales.
 
Unconsolidated Joint Ventures.   The above table does not include homes delivered from our unconsolidated joint ventures. From time to time, we participate in the acquisition, development, construction and sale of residential properties through unconsolidated joint ventures. Our unconsolidated joint ventures delivered 262 homes in 2008, 127 homes in 2007 and 4 homes in 2006.


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Strategy
 
Major housing markets across the United States began declining in mid-2006. Most of our served markets have progressively weakened since then. Over the two-and-a-half year period, an increasing oversupply of new and resale homes, exacerbated more recently by rising foreclosure activity, drove home prices steadily lower. In 2008, weakening economic activity and rising job losses prompted a historic decline in consumer confidence that further discouraged home purchases. In this environment, our business has confronted fierce competition from heightened homebuilder, financial institution and investor efforts to sell homes and land, declining demand for new homes, and tighter lending standards due to turmoil in mortgage finance and credit markets. We expect housing market and general economic conditions to remain difficult and possibly worsen in 2009. And, while we believe that long-term fundamentals for the housing sector remain strong, and that current negative conditions will stabilize over time, we cannot predict when a meaningful recovery in the housing market will occur.
 
We recognized early in 2006 that housing markets were slowing after several years of record growth. In response, we shifted our strategic focus from expansion to an emphasis on capital preservation, inventory, overhead and debt reduction, and cash generation. Entering fiscal 2009, with housing markets still in turmoil, we continue to emphasize three priorities: maintaining a strong financial position; restoring the profitability of our homebuilding operations; and positioning our business for an eventual housing market recovery, while adhering to the disciplines of our core operational business model, KBnxt.
 
KBnxt Operational Business Model.   We began operating under the principles of our KBnxt operational business model in 1997. The KBnxt operational business model seeks to generate greater operating efficiencies and return on investment through a disciplined, fact-based and process-driven approach to homebuilding that is founded on a constant and systematic assessment of consumer preferences and market opportunities. The key principles of our KBnxt operational business model include:
 
  •  gaining a detailed understanding of consumer location and product preferences through regular surveys;
 
  •  managing our working capital and reducing our operating risks by acquiring developed and entitled land at reasonable prices in markets with high growth potential and disposing of land and interests in land that no longer meet our strategic or investment goals;
 
  •  using our knowledge of consumer preferences to design, construct and deliver the products homebuyers desire;
 
  •  in general, commencing construction of a home only after a purchase contract has been signed;
 
  •  building a backlog of net orders and reducing the time from initial construction to final delivery of homes to customers;
 
  •  establishing an even flow of production of high quality homes at the lowest possible cost; and
 
  •  offering customers affordable base prices and the opportunity to customize their homes through choice of location, floor plans and interior design options.
 
Our KBnxt operational business model is designed to help us accomplish several objectives in a disciplined manner: build and maintain a leading position in our existing markets; expand our business into attractive new markets; exit investments that no longer meet our return standards or marketing strategy; calibrate our product lines to consumer preferences in both our existing and new markets; and achieve lower costs and economies of scale in acquiring and developing land, purchasing building materials, subcontracting trade labor, and providing options to customers.
 
Our expansion into new markets will depend on our assessment of a potential new market’s viability and our ability to develop sustainable operations in that new market. We will also continue to consider potential asset acquisitions, as market conditions may produce attractive opportunities. However, expansion into new markets and large acquisitions are not a strategic priority for us in the near term.


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Strategic Objectives.   Guided by the disciplines of our KBnxt operational business model and building on the initiatives we have implemented in response to increasingly challenging market conditions, our primary strategic objectives include:
 
  •  Maintaining a balanced geographic footprint and focusing on potential growth opportunities in our existing served markets. We believe this will allow us to efficiently capitalize on the different rates at which we expect our served markets to stabilize. We also believe that our existing served markets offer the most attractive long-term growth prospects.
 
  •  Providing the best value and choice in homes and options for the first-time, first move-up and active adult homebuyer. By promoting value and choice through an affordable base price and product customization, we believe we can stand out from other homebuilders among our core customer base.
 
  •  Generating high levels of customer satisfaction and producing high quality homes. Achieving high customer satisfaction levels is a key driver to our long-term success and delivering quality homes is critical to achieving high customer satisfaction.
 
  •  Maintaining ownership or control over a forecasted three-to-four-year supply of developable land. Keeping our inventory in line with our future sales expectations maximizes the use of our working capital, enhances our liquidity and helps us maintain a strong balance sheet to support long-term strategic investments.
 
  •  Improving the affordability of our homes and lowering our production costs by redesigning and reengineering our products, building smaller homes, reducing production cycle times and direct construction costs, and targeting our pricing to median income levels in our served markets. We believe making our homes more affordable to our core customer base, with corresponding decreases in our production costs, will help us compete with resales and foreclosures, generate revenues and maintain our margins during the current housing market downturn and position us for longer-term profit growth.
 
  •  Restoring the profitability of our homebuilding operations by continuing to align our cost structure with the expected size and growth of our business, generating and preserving free cash flow and maximizing the performance of our invested capital.
 
Marketing Strategy.   Our marketing strategy focuses on differentiating the KB Home brand from resale homes and from homes sold through foreclosures and by other builders. We believe that our Built to Order TM message generates a high perceived value for our products and our company among consumers. Built to Order emphasizes our unique process of partnering with our homebuyers to create a home built to their individual preferences as to a home design, layout, square footage and homesite location, and to personalize their home interiors with features and amenities that meet their needs and interests. Built to Order serves as the consumer face of core elements of our KBnxt operational business model and ensures that our marketing strategy and advertising campaigns are closely aligned with our overall operational focus.
 
Our KB Home Studios are integral to our Built to Order approach to homebuying. These large showrooms allow our homebuyers to select from thousands of product and design options available for purchase as part of the original construction of their homes. The coordinated efforts of our sales representatives and KB Home Studio consultants are intended to provide high levels of customer satisfaction and lead to enhanced customer retention and referrals.
 
We are further differentiating the KB Home brand with an industry-leading environmental commitment. In 2008, we launched our My Home. My Earth. ® environmental initiative that is focused on the challenge of becoming a leading environmentally friendly national company and issued our first sustainability report. In 2008, we were the first national homebuilder to commit to installing exclusively ENERGY STAR TM appliances in all of our new homes. We also offer our homebuyers an extensive line of high-value, low-cost products through our KB Home Studios that can help minimize the environmental impact of the homes they purchase.
 
During 2008, we continued to focus our marketing initiatives on first-time, first move-up and active adult homebuyers. These historically have been our core customers and it is among these groups that we see the greatest potential for future home sales.


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In 2009, our efforts to differentiate the value proposition of the KB Home Built to Order homebuying experience will continue with the introduction of new home designs that meet evolving market trends. We also will continue to develop and promote our environmental sustainability initiatives.
 
Sales Strategy.   To ensure the consistency of our message and adherence to our Built to Order approach, sales of our homes are carried out by in-house teams of sales representatives who work personally with each homebuyer to create a one-of-a-kind home that meets the homebuyer’s style and budget.
 
Customer Service and Quality Control
 
Customer satisfaction is a high priority for us. We are committed to building and delivering quality homes. Our on-site construction supervisors perform regular pre-closing quality checks during the construction process to ensure our homes meet our quality standards and our homebuyers’ expectations. We have personnel who are responsible for responding to homebuyers’ post-closing needs, including warranty claims. We believe prompt and courteous responses to homebuyers’ needs throughout the homebuying process reduces post-closing repair costs, enhances our reputation for quality and service, and helps encourage repeat and referral business from homebuyers and the real estate community. Our goal is for our customers to be 100% satisfied with their new homes.
 
We provide a limited warranty on all of our homes. The specific terms and conditions vary depending on the market where we do business. We generally provide a structural warranty of 10 years, a warranty on electrical, heating, cooling, plumbing and other building systems each varying from two to five years based on geographic market and state law, and a warranty of one year for other components of a home.
 
Local Expertise
 
To maximize our KBnxt operational business model’s effectiveness and help ensure its consistent execution, our employees are continuously trained on KBnxt operational principles and evaluated based on their achievement of relevant KBnxt operational objectives. We also believe that our business requires in-depth knowledge of local markets in order to acquire land in desirable locations and on favorable terms, to engage subcontractors, to plan communities that meet local demand, to anticipate consumer tastes in specific markets and to assess local regulatory environments. Accordingly, we operate our business through local divisions with trained personnel who have local market expertise. We have experienced management teams in each of our divisions. Although we have centralized certain functions (such as marketing, advertising, legal, materials purchasing, purchasing administration, product development, architecture and accounting) to benefit from economies of scale, our local management exercises considerable autonomy in identifying land acquisition opportunities, developing product and sales strategies, conducting product operations and controlling costs.
 
Community Development and Land Inventory Management
 
Our community development process generally consists of four phases: land acquisition, land development, home construction and sale. Historically, the completion time of our community development process has ranged from six to 24 months in our West Coast segment to a somewhat shorter duration in our other homebuilding segments. The length of the community development process varies based on, among other things, the extent of government approvals required, the overall size of the community, necessary site preparation activities, weather conditions and marketing results.
 
Although they vary significantly, our communities typically consist of 50 to 250 lots ranging in size from 1,300 to 20,000 square feet. Depending on the community, we offer from two to five model home designs and premium lots often containing more square footage, better views or location benefits. Our goal is to own or control enough lots to meet our forecasted production goals over the next three to four years.
 
Land Acquisition and Land Development.   We are currently focused on maintaining a strong balance sheet and positioning ourselves for future growth. Significant land acquisitions are not currently a strategic priority, but we will consider attractive opportunities as they arise. When we do acquire and develop land, we do so consistent with our KBnxt operational business model, which focuses on obtaining land containing fewer than 250 lots that are entitled and either physically developed (referred to as “finished lots”) or partially finished. Acquiring finished or partially finished lots enables us to construct and deliver homes shortly after the land is acquired with minimal additional development


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expenditures. This is a more efficient way to use our working capital and reduces the operating risks associated with having to develop and/or entitle land, such as unforeseen improvement costs and/or changes in market conditions. However, depending on market conditions, we may acquire undeveloped and/or unentitled land. We expect that the overall balance of undeveloped, unentitled, entitled and finished lots in our inventory will vary over time.
 
Consistent with our KBnxt operational business model, we target geographic areas for potential land acquisitions and assess the viability of our current inventory based on the results of periodic surveys of both new and resale homebuyers in particular markets. Local, in-house land acquisition specialists conduct site selection research and analysis in targeted geographic areas to identify desirable land or to evaluate whether an existing interest we hold is consistent with our marketing strategy. We also use studies performed by third-party marketing specialists. Some of the factors we consider in evaluating land acquisition targets and assessing current inventory are: consumer preferences; general economic conditions; specific market conditions, with an emphasis on the prices of comparable new and resale homes in the market; expected sales rates; proximity to metropolitan areas and employment centers; population and commercial growth patterns; estimated costs of completing lot development; and environmental matters.
 
We generally structure our land purchases and development activities to minimize or to defer the timing of cash and capital expenditures, which enhances returns associated with new land investments. While we use a variety of techniques to accomplish this, as further described below, we typically use agreements that give us an option right to purchase land at a future date at a fixed price for a small or no initial deposit payment. Our decision to exercise a particular option right is based on the results of due diligence and continued market viability analysis we conduct after entering into an agreement. In some cases, our decision to exercise an option may be conditioned on the land seller obtaining necessary entitlements, such as zoning rights and environmental approvals, and/or physically developing the land by a pre-determined date to allow us to build homes relatively quickly. Depending on the circumstances, our initial deposit payment for an option right may or may not be refundable to us if we do not purchase the underlying land.
 
In addition to acquiring land under option agreements, we may acquire land under agreements that condition our purchase obligation on our satisfaction with the feasibility of developing the land and selling homes on the land by a certain future date, consistent with our investment standards. Our option and other purchase agreements may also allow us to phase our land purchases and/or lot development over a period of time and/or upon the satisfaction of certain conditions. We may also acquire land with seller financing that is non-recourse to us, or by working in conjunction with third-party land developers. Our land option contracts generally do not contain provisions requiring our specific performance.
 
As previously noted, under our KBnxt operational business model, we generally attempt to minimize our land development costs by focusing on acquiring finished or partially finished lots. Where we purchase unentitled and unimproved land, we typically use option agreements as described above and during the option period perform technical, environmental, engineering and entitlement feasibility studies, while we seek to obtain necessary governmental approvals and permits. These activities are sometimes done with the seller’s assistance and/or at the seller’s cost. The use of option arrangements in this context allows us to conduct these development-related activities while minimizing our inventory levels and overall financial commitments, including interest and other carrying costs. It also improves our ability to accurately estimate development costs prior to incurring them, an important element in planning communities and pricing homes.
 
Before we commit to any land purchase or dispose of any interest in land we hold, our senior corporate management carefully evaluates each asset based on the results of our local specialists’ due diligence and a set of strict financial measures, including, but not limited to, gross margin analyses and specific discounted, after-tax cash flow internal rate of return requirements. Potential land acquisition or disposal transactions are subject to review and approval by our corporate land committee, which is composed of senior corporate and regional management. The stringent criteria guiding our land acquisition and disposition decisions have resulted in our maintaining inventory in areas that we believe generally offer better returns for lower risk, and lower cash and capital investment.
 
In light of difficult market conditions, we have sold some of our land and interests in land and have abandoned a portion of our options to acquire land. Consistent with our KBnxt operational business model, we determined that these properties no longer met our strategic needs or our internal investment standards. If market conditions remain challenging, as we expect, we may sell more of our land and interests in land, and we may abandon or try to sell more options to acquire land.


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The following table shows the number of inventory lots we owned, in various stages of development, or controlled under option contracts in our homebuilding segments as of November 30, 2008 and 2007. The table does not include approximately 316 acres optioned as of November 30, 2008 and 376 acres optioned as of November 30, 2007 that had not yet been approved for subdivision into lots.
 
                                                                 
                      Total Lots
 
    Homes/Lots in
    Land Under
    Lots Under
    Owned or
 
    Production     Development     Option     Under Option  
    2008     2007     2008     2007     2008     2007     2008     2007  
 
West Coast
    7,257       8,174       1,826       2,961       1,018       3,598       10,101       14,733  
Southwest
    4,853       7,059       1,784       2,866       3,551       5,743       10,188       15,668  
Central
    7,643       9,944       2,454       3,257       1,840       2,472       11,937       15,673  
Southeast
    5,326       7,916       4,369       2,888       5,102       8,830       14,797       19,634  
                                                                 
Total
    25,079       33,093       10,433       11,972       11,511       20,643       47,023       65,708  
                                                                 
 
Reflecting our geographic diversity and balanced operations, as of November 30, 2008, 22% of the lots we owned or controlled were located in the West Coast reporting segment, 22% were in the Southwest reporting segment, 25% were in the Central reporting segment, and 31% were in the Southeast reporting segment.
 
The following table shows the dollar value of inventory we owned in various stages of development or controlled under option contracts in our homebuilding segments as of November 30, 2008 and 2007 (in thousands):
 
                                                                 
                      Total Lots
 
    Homes/Lots in
    Land Under
    Lots Under
    Owned or
 
    Production     Development     Option     Under Option  
    2008     2007     2008     2007     2008     2007     2008     2007  
 
West Coast
  $ 854,522     $ 1,020,637     $ 52,339     $ 192,790     $ 68,600     $ 199,396     $ 975,461     $ 1,412,823  
Southwest
    192,530       491,098       96,073       161,820       24,673       34,357       313,276       687,275  
Central
    300,454       420,811       38,688       59,802       53,358       53,248       392,500       533,861  
Southeast
    252,541       464,922       127,241       131,009       45,697       82,530       425,479       678,461  
                                                                 
Total
  $ 1,600,047     $ 2,397,468     $ 314,341     $ 545,421     $ 192,328     $ 369,531     $ 2,106,716     $ 3,312,420  
                                                                 
 
Home Construction and Sale.   Following the purchase of land and, if necessary, the completion of the entitlement process, we typically begin marketing homes for sale and constructing model homes. The time required for construction of our homes depends on the weather, time of year, local labor supply, availability of materials and supplies and other factors. To minimize the costs and risks of standing inventory, we generally begin construction of a home only when we have signed a purchase contract with a homebuyer. However, cancellations of home purchase contracts prior to the delivery of the underlying homes may cause us to have standing inventory of completed or partially completed homes.
 
We act as the general contractor for the majority of our communities and hire subcontractors for all production activities. The use of subcontractors enables us to reduce our investment in direct labor costs, equipment and facilities. Where practical, we use mass production techniques and pre-made, standardized components and materials to streamline the on-site production process. We have also developed programs for national and regional purchasing of certain building materials, appliances and other items to take advantage of economies of scale and to reduce costs through improved pricing and, where available, participation in manufacturers’ or suppliers’ rebate programs. As part of our My Home. My Earth. environmental initiative, we have begun to integrate products, materials and construction practices into our home building process in certain areas to reduce the environmental impact of our operations and the homes we build. At all stages of production, our administrative and on-site supervisory personnel coordinate the activities of subcontractors and subject their work to quality and cost controls. As part of our KBnxt operational business model, we also emphasize even-flow production methods to enhance the quality of our homes and minimize production costs.
 
Backlog
 
We sell our homes under standard purchase contracts, which generally require a customer deposit at the time of signing. The amount of the deposit required varies among markets and communities. Homebuyers are also generally


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required to pay additional deposits when they select options or upgrades for their homes. Most of our home purchase contracts stipulate that if a homebuyer cancels a contract with us, we have the right to retain the homebuyer’s deposits. However, we generally permit homebuyers to cancel their obligations and obtain refunds of all or a portion of their deposits in the event mortgage financing cannot be obtained within a period of time, as specified in their contract.
 
“Backlog” consists of homes that are under contract but have not yet been delivered. Ending backlog represents the number of homes in backlog from the previous period plus the number of net orders (new orders for homes less cancellations) taken during the current period minus the number of homes delivered during the current period. The backlog at any given time will be affected by cancellations. In addition, deliveries of new homes typically increase from the first to the fourth quarter in any year.
 
Our backlog at November 30, 2008, excluding unconsolidated joint ventures, consisted of 2,269 homes, down 64% from the 6,322 homes in backlog at year-end 2007. Our backlog represented future housing revenues of approximately $521.4 million at November 30, 2008 and $1.50 billion at November 30, 2007. Our backlog ratio was 82% for the fourth quarter of 2008 and 68% for the fourth quarter of 2007, as we experienced fewer cancellations in the fourth quarter of 2008. (Backlog ratio is defined as homes delivered as a percentage of beginning backlog in the quarter.)
 
The significant decrease in backlog levels in 2008 reflects the aggregate impact over the past several quarters of successive negative year-over-year net order results, lower average selling prices, and our strategic initiatives to reduce our inventory and active community counts to align with reduced housing market activity. Our net orders declined 58% to 8,274 in 2008 from 19,490 in 2007. Our average cancellation rate based on net orders in 2008 was 41%, compared to an average of 42% in 2007. During the fourth quarter of 2008, our net orders decreased 50% from the fourth quarter of 2007, with decreases occurring in each of our homebuilding segments. The lower level of net orders reflects our reduced active community counts compared to the year-earlier fourth quarter, as well as our strategic decisions to wind down or exit certain communities as backlog is delivered and to discontinue product in particular communities as part of a product transition initiative.


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The following table shows homes delivered, net orders, cancellation rates (based on gross orders) and ending backlog by reporting segment and with respect to our unconsolidated joint ventures for each quarter during the years ended November 30, 2008 and 2007:
 
                                                 
                                  Unconsolidated
 
    West Coast     Southwest     Central     Southeast     Total     Joint Ventures  
Homes delivered
                                               
2008
                                               
First
    614       740       899       675       2,928       75  
Second
    603       534       863       810       2,810       74  
Third
    731       425       745       887       2,788       45  
Fourth
    1,024       694       841       1,353       3,912       68  
                                                 
Total
    2,972       2,393       3,348       3,725       12,438       262  
                                                 
2007
                                               
First
    895       1,185       1,427       1,629       5,136       8  
Second
    950       1,061       1,236       1,529       4,776       11  
Third
    1,252       1,133       1,433       1,881       5,699       13  
Fourth
    1,860       1,476       2,214       2,582       8,132       95  
                                                 
Total
    4,957       4,855       6,310       7,621       23,743       127  
                                                 
Net orders
                                               
2008
                                               
First
    539       186       231       493       1,449       48  
Second
    977       760       964       1,499       4,200       131  
Third
    361       282       506       180       1,329       39  
Fourth
    375       207       353       361       1,296       17  
                                                 
Total
    2,252       1,435       2,054       2,533       8,274       235  
                                                 
2007
                                               
First
    1,467       1,108       1,333       1,836       5,744       85  
Second
    1,673       1,437       1,903       2,252       7,265       109  
Third
    713       604       1,370       1,220       3,907       79  
Fourth
    679       482       660       753       2,574       9  
                                                 
Total
    4,532       3,631       5,266       6,061       19,490       282  
                                                 
Cancellation Rates
                                               
2008
                                               
First
    41%       56%       70%       50%       53%       45%  
Second
    29%       21%       31%       26%       27%       24%  
Third
    48%       37%       43%       74%       51%       57%  
Fourth
    42%       40%       48%       50%       46%       71%  
                                                 
Total
    38%       34%       45%       43%       41%       43%  
                                                 
2007
                                               
First
    28%       34%       40%       34%       34%       19%  
Second
    30%       30%       39%       33%       34%       25%  
Third
    57%       51%       47%       49%       50%       43%  
Fourth
    58%       55%       61%       57%       58%       92%  
                                                 
Total
    41%       40%       45%       41%       42%       44%  
                                                 
Ending backlog — homes
                                               
2008
                                               
First
    1,115       752       1,343       1,633       4,843       182  
Second
    1,489       978       1,444       2,322       6,233       239  
Third
    1,119       835       1,205       1,615       4,774       233  
Fourth (a)
    581       348       717       623       2,269       71  
                                                 
2007
                                               
First
    2,187       2,453       2,961       3,582       11,183       131  
Second
    2,910       2,829       3,628       4,305       13,672       229  
Third
    2,371       2,300       3,565       3,644       11,880       295  
Fourth
    1,190       1,306       2,011       1,815       6,322       209  
                                                 


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                                  Unconsolidated
 
    West Coast     Southwest     Central     Southeast     Total     Joint Ventures  
Ending backlog — value, in thousands
                                       
2008
                                               
First
  $ 438,505     $ 179,114     $ 236,725     $ 376,872     $ 1,231,216     $ 77,196  
Second
    516,073       222,279       260,404       467,141       1,465,897          101,748  
Third
    391,525       190,279       230,154       321,321       1,133,279       136,918  
Fourth (a)
    211,713       74,488       120,954       114,231       521,386       33,192  
                                                 
2007
                                               
First
  $ 1,054,825     $ 640,856     $ 494,429     $ 846,070     $ 3,036,180     $ 42,401  
Second
    1,357,973       733,211       633,775       1,012,098       3,737,057       84,773  
Third
    1,042,194       590,711       599,400       834,588       3,066,893       108,821  
Fourth
    466,726       313,120       312,952       406,037       1,498,835       80,523  
                                                 
 
 
(a) Ending backlog amounts have been adjusted to reflect the consolidation of previously unconsolidated joint ventures during the fourth quarter of 2008.
 
Land and Raw Materials
 
We currently own or control enough land to meet our forecasted production goals for approximately the next three to four years, and believe that we will be able to acquire land on acceptable terms for our anticipated future needs. However, as discussed above, we have recently sold some of our land and abandoned options to purchase land in order to balance our holdings with current and forecasted market conditions and we may sell additional land or land interests in 2009. In 2008, our land sales generated $82.9 million of revenues and $82.8 million of pretax losses, including $86.2 million of impairments. Our land option contract abandonments resulted in pretax, noncash charges of $40.9 million in 2008.
 
The principal raw materials used in the construction of our homes are concrete and forest products. In addition, we use a variety of other construction materials in the homebuilding process, including sheetrock, plumbing and electrical items. We attempt to maintain efficient operations by using pre-made, standardized materials that are commercially available on competitive terms from a variety of sources. In addition, our centralized or regionalized purchasing of certain building materials, appliances and fixtures allows us to benefit from large quantity purchase discounts and, in some cases, manufacturer or supplier rebates. When possible, we make bulk purchases of these products at favorable prices from manufacturers and suppliers and often instruct subcontractors to submit bids based on these prices.
 
Customer Financing
 
On-site representatives at our communities facilitate sales by offering to arrange mortgage financing for prospective homebuyers through our Countrywide KB Home Loans retail mortgage banking joint venture. Although our homebuyers may obtain financing from any qualified lender, we believe that the ability of Countrywide KB Home Loans to offer customers a variety of financing options on competitive terms as a part of the on-site sales process is an important factor in completing sales. This includes both fixed and adjustable rate mortgages under conventional, FHA-insured and VA-guaranteed mortgages, and mortgages through revenue bond programs sponsored by states and municipalities. Countrywide KB Home Loans originated loans for 80% of our customers who obtained mortgage financing in 2008 and 72% in 2007.
 
Discontinued Operations
 
In July 2007, we sold our 49% interest in our publicly traded French subsidiary, Kaufman and Broad, S.A. (“KBSA”). The disposition of the French operations enabled us to invest additional resources in our domestic homebuilding operations and we have since operated exclusively in the United States. The sale generated total gross proceeds of $807.2 million and a pretax gain of $706.7 million ($438.1 million net of income taxes). As a result of the sale, the French operations are presented as discontinued operations in our consolidated financial statements in 2007 and 2006.


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Employees
 
We employ a trained staff of land acquisition specialists, architects, planners, engineers, construction supervisors, marketing and sales personnel, and finance and accounting personnel, supplemented as necessary by outside consultants, who guide the development of our communities from their conception through the marketing and sale of completed homes.
 
At December 31, 2008, we had approximately 1,600 full-time employees in our operations, compared to approximately 3,100 at December 31, 2007. None of our employees are represented by a collective bargaining agreement.
 
Competition and Other Factors
 
We believe the use of our KBnxt operational business model, particularly the aspects that involve gaining a deeper understanding of customer interests and needs and offering a wide range of choices to homebuyers, provides us with long-term competitive advantages. The housing industry is highly competitive, and we compete with numerous homebuilders ranging from regional and national firms to small local builders primarily on the basis of price, location, financing, design, reputation, quality and amenities. In addition, we compete with housing alternatives other than new homes, including resale homes, foreclosed homes and rental housing. In certain markets and at times when housing demand is high, we also compete with other builders to hire subcontractors.
 
During 2008, difficult operating conditions prevailed across most U.S. housing markets. The supply of unsold homes in the marketplace increased substantially, exacerbated by record-high mortgage defaults and foreclosures. Many consumers were no longer able to afford their mortgage payments or were unable to refinance homes when their principal payments became due. Meanwhile, demand for new homes was constrained by weak consumer confidence, a downturn in the general economy and job markets, and tightening consumer mortgage lending standards. This protracted supply/demand imbalance intensified competition among homebuilders for orders throughout the year and produced relentless downward pressure on home prices. We expect this tough market environment to continue, and possibly worsen, in 2009.
 
Financing
 
We do not generally finance the development of our communities with project financing. By “project financing,” we mean proceeds of loans specifically obtained for, or secured by, particular communities. Instead, our operations have been primarily funded by results of operations, public debt and equity financing, and borrowings under our unsecured revolving credit facility with various banks (the “Credit Facility”).
 
Regulation and Environmental Matters
 
As part of our due diligence process for all land acquisitions, our policy is to use third-party environmental consultants to investigate for environmental risks and to require disclosure from land sellers of known environmental risks. Despite these precautions, there can be no assurance that we will avoid material liabilities relating to the removal of toxic wastes, site restoration, monitoring or other environmental matters affecting properties currently or previously owned by us. No estimate of any potential liabilities can be made although we may, from time to time, purchase property that requires modest environmental clean-up costs after appropriate due diligence. In such instances, we take steps prior to acquisition to gain assurance as to the precise scope of work required and the costs associated with removal, site restoration and/or monitoring, using detailed investigations performed by environmental consultants. To the extent contamination or other environmental issues have occurred in the past, we will attempt to recover restoration costs from third parties, such as the generators of hazardous waste, land sellers or others in the prior chain of title and/or their insurers. Based on these practices, we anticipate that it is unlikely that environmental clean-up costs will have a material effect on our future consolidated financial position or results of operations. We have not been notified by any governmental agency of any claim that any of the properties owned or formerly owned by us are identified by the U.S. Environmental Protection Agency (“EPA”) as being a “Superfund” clean-up site requiring remediation, which could have a material effect on our future consolidated financial position or results of operations. Costs associated with the use of environmental consultants are not material to our consolidated financial position or results of operations.


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Access to Our Information
 
We file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission (“SEC”). We make our public SEC filings available, at no cost, through our website http://www.kbhome.com, as soon as reasonably practicable after the report is electronically filed with, or furnished to, the SEC. We will also provide these reports in electronic or paper format free of charge upon request made to our investor relations department at investorrelations@kbhome.com or at our principal executive offices. Our SEC filings are also available to the public over the Internet at the SEC’s website at http://www.sec.gov. The public may also read and copy any document we file at the SEC’s public reference room located at 100 F Street N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference room.
 
Item 1A.  RISK FACTORS  
 
The following important factors could adversely impact our business. These factors could cause our actual results to differ materially from the forward-looking and other statements (i) we make in registration statements, periodic reports and other filings with the SEC and from time to time in our news releases, annual reports and other written reports or communications, and (ii) made orally from time to time by our representatives.
 
The homebuilding industry is experiencing a prolonged and severe downturn that may continue for an indefinite period and adversely affect our business and results of operations compared to prior periods.
 
In 2008 and 2007, many of our served markets and the U.S. homebuilding industry as a whole continued to experience a significant and sustained decrease in demand for new homes and an oversupply of new and existing homes available for sale, conditions that generally began in 2006. In many markets, a rapid increase in new and existing home prices in the years leading up to and including 2006 reduced housing affordability relative to consumer incomes and tempered buyer demand. At the same time, investors and speculators reduced their purchasing activity and instead stepped up their efforts to sell residential property they had earlier acquired. These trends, which were more pronounced in markets that had experienced the greatest levels of price appreciation, resulted in overall fewer home sales, greater cancellations of home purchase agreements by buyers, higher inventories of unsold homes and the increased use by homebuilders, speculators, investors and others of discounts, incentives, price concessions and other marketing efforts to close home sales in 2008 and 2007 compared to the past several years. In 2008 and 2007, these negative supply and demand trends were exacerbated by increasing foreclosure activity that reached successive record highs, a severe downturn in general economic conditions, weakening employment trends, turmoil in credit and consumer lending markets and tighter lending standards.
 
Reflecting the impact of this difficult environment, we, like many other homebuilders, experienced a large drop in net orders, a decline in the average selling price of new homes sold and a reduction in our margins in 2008 and 2007 relative to prior years, and generated operating losses. We can provide no assurances that the homebuilding market will improve in the near future. In fact, we expect the weakness to continue, and possibly worsen, in 2009 and have a corresponding adverse effect on our business and our results of operations, including, but not limited to, lower home sales and revenues.
 
Further tightening of mortgage lending or mortgage financing requirements or further turmoil in credit and mortgage lending markets could adversely affect the availability of credit for some potential purchasers of our homes and thereby reduce our sales.
 
During 2008 and 2007, the mortgage lending and mortgage finance industries experienced significant instability due to, among other things, delinquencies, defaults and foreclosures on home loans and a resulting decline in their market value, particularly subprime and adjustable-rate loans. A number of providers, purchasers and insurers of such loans have gone out of business or exited the market. In light of these developments, lenders, investors, regulators and others questioned the adequacy of lending standards and other credit requirements for several loan programs made available to borrowers in recent years. This has led to reduced investor demand for mortgage loans and mortgage-backed securities, tightened credit requirements, reduced liquidity, increased credit risk premiums and regulatory actions. Deterioration in credit quality among subprime, adjustable-rate and other nonconforming loans has caused most lenders to stop offering such loan products. Fewer loan products and providers and tighter loan qualifications in turn make it more difficult for some categories of borrowers to finance the purchase of our homes or the purchase of existing homes from potential move-up buyers who wish to purchase one of our homes. In general, these developments have resulted in a reduction in


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demand for our homes and slowed any general improvement in the housing market. Furthermore, they have resulted in a reduction in demand for the mortgage loans originated through our Countrywide KB Home Loans joint venture. These reductions in demand have had, and are expected to continue to have, a materially adverse effect on our business and results of operations in 2009.
 
Many of our homebuyers obtain financing for their home purchases from Countrywide KB Home Loans. Our partner, a Bank of America, N.A. subsidiary, provides the loan products that the joint venture offers to our homebuyers. If our partner refuses or is unable to make loan products available to the joint venture to provide to our homebuyers, our results of operations may be adversely affected.
 
Our strategies in responding to the adverse conditions in the homebuilding industry have had limited success, and the continued implementation of these and other strategies may not be successful.
 
While we have been successful in generating positive operating cash flow and reducing our inventories in 2008 and 2007, we have done so at significantly reduced gross profit levels and have incurred significant asset impairment charges. Moreover, many of our strategic initiatives to generate cash and reduce our inventories have involved lowering overhead through workforce reductions, for which we incurred significant costs, and reducing our active community counts through strategic wind downs or market exits, curbs in development and sales of land interests. These strategic steps have resulted in our generating successively fewer net orders, homes delivered and revenues compared to prior periods, and contributed to the net losses we recognized in 2008 and 2007. Also, in 2008, notwithstanding our sales strategies, we continued to experience volatility in cancellations of home purchase contracts. We believe that the volatile cancellation rates largely reflected a decrease in homebuyer confidence based on sustained home price declines, increased offerings of sales incentives in the marketplace for both new and existing homes and generally poor economic conditions, all of which prompted homebuyers to forgo or delay home purchases. The more restrictive mortgage lending environment and the inability of some buyers to sell their existing homes have also led to lower demand for new homes and higher cancellations. Many of these factors affecting new orders and cancellation rates are beyond our control. It is uncertain how long these factors, and the reduced sales levels and volatility in cancellations we have experienced will continue. To the extent that they do, we expect that they will have a negative effect on our business and our results of operations.
 
Our business is cyclical and is significantly affected by changes in general and local economic conditions.
 
Our business can be substantially affected by adverse changes in general economic or business conditions that are outside of our control, including changes in:
 
  •  short- and long-term interest rates;
 
  •  the availability of financing for homebuyers;
 
  •  consumer confidence generally and the confidence of potential homebuyers in particular;
 
  •  U.S. and global financial system and credit market stability;
 
  •  private and federal mortgage financing programs and federal and state regulation of lending practices;
 
  •  federal and state income tax provisions, including provisions for the deduction of mortgage interest payments;
 
  •  housing demand from population growth and demographic changes, among other factors;
 
  •  the supply of available new or existing homes and other housing alternatives, such as apartments and other residential rental property;
 
  •  employment levels and job and personal income growth; and
 
  •  real estate taxes.
 
Adverse changes in these conditions may affect our business nationally or may be more prevalent or concentrated in particular regions or localities in which we operate. In 2008 and 2007, unfavorable changes in many of these factors negatively affected all of our served markets, and we expect the widespread nature of the downturn in the housing market to continue in 2009. A continued downturn in the economy would likely worsen the unfavorable trends the housing market experienced in 2008 and 2007.
 
Weather conditions and natural disasters, such as earthquakes, hurricanes, tornadoes, floods, droughts, fires and other environmental conditions, can also impair our homebuilding business on a local or regional basis. Civil unrest or acts of terrorism can also have a negative effect on our business.


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Fluctuating lumber prices and shortages, as well as shortages or price fluctuations in other building materials or commodities, can have an adverse effect on our business. Similarly, labor shortages or unrest among key trades, such as carpenters, roofers, electricians and plumbers, can delay the delivery of our homes and increase our costs.
 
The potential difficulties described above can cause demand and prices for our homes to diminish or cause us to take longer and incur more costs to build our homes. We may not be able to recover these increased costs by raising prices because of market conditions and because the price of each home we sell is usually set several months before the home is delivered, as our customers typically sign their home purchase contracts before construction begins. The potential difficulties described above could cause some homebuyers to cancel or refuse to honor their home purchase contracts altogether. In fact, reflecting the difficult conditions in our served markets, we continued to experience volatile home purchase contract cancellation rates in 2008 and we may experience similar volatility in 2009.
 
Supply shortages and other risks related to demand for building materials and/or skilled labor could increase costs and delay deliveries.
 
There is a high level of competition in the homebuilding industry for skilled labor and building materials. Increased costs or shortages in building materials or skilled labor could cause increases in construction costs and construction delays. We generally are unable to pass on increases in construction costs to customers who have already entered into home purchase contracts, as the purchase contracts generally fix the price of the home at the time the contract is signed, and may be signed well in advance of when construction commences. Further, we may not be able to pass on increases in construction costs because of market conditions. Sustained increases in construction costs due, among other things, to pricing competition for materials and skilled labor may, over time, decrease our margins.
 
Inflation may adversely affect us by increasing costs that we may not be able to recover, particularly if sales prices decrease.
 
Inflation can have a long-term impact on us because increasing costs of land, materials and skilled labor may call for us to increase sales prices of homes in order to maintain satisfactory margins. However, if the current challenging and highly competitive conditions in the homebuilding market persist, we may further decrease prices in an attempt to stimulate sales volume. Our lowering of sales prices, in addition to impacting our margins on new homes, may also reduce the value of our land inventory and make it more difficult for us to recover the full cost of previously purchased land with new home sales prices or, if we choose, in disposing of land assets. In addition, depressed land values may cause us to forfeit deposits on land option contracts if we cannot satisfactorily renegotiate the purchase price of the optioned land. We may incur noncash charges for inventory impairments if the value of our owned inventory is reduced or for land option contract abandonments if we choose not to exercise land option contracts.
 
Reduced home sales may impair our ability to recoup development costs or force us to absorb additional costs.
 
We incur many costs even before we begin to build homes in a community. Depending on the stage of development, these include costs of preparing land, finishing and entitling lots, and installing roads, sewage and other utilities, as well as taxes and other costs related to ownership of the land on which we plan to build homes. Reducing the rate at which we build homes extends the length of time it takes us to recover these costs. Also, we frequently acquire options to purchase land and make deposits that may be forfeited if we do not exercise the options within specified periods. Because of current market conditions, we have strategically terminated some of these options, resulting in the forfeiture of deposits and unrecoverable due diligence and development costs.
 
The value of the land and housing inventory we own or control may fall significantly and our profits may decrease.
 
The value of the land and housing inventory we currently own or control depends on market conditions, including estimates of future demand for, and the revenues that can be generated from, such inventory. The market value of our land inventory can vary considerably because there is often a significant amount of time between our initial acquisition or optioning of land and the delivery of homes on that land. The downturn in the housing market has caused the fair value of certain of our owned or controlled inventory to fall, in some cases well below the estimated fair value at the time we acquired it. Because of our assessments of fair value, we have been required to write down the carrying value of certain of our inventory, including certain inventory that we have previously written down, and take corresponding noncash charges against our earnings to reflect the impaired value. We have also abandoned our interests in certain land inventory that no longer meets our internal investment standards, which also required us to take noncash charges. If the current downturn in the housing market continues, we may need to take additional charges against our earnings for inventory


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impairments or land option contract abandonments, or both. Any such noncash charges would have an adverse effect on our consolidated results of operations.
 
Some homebuyers may cancel their home purchases because the required deposits are small and generally refundable.
 
Our backlog numbers reflect the number of homes for which we have entered into a purchase contract with a customer but not yet delivered the home. Our home purchase contracts typically require only a small deposit, and in many states, the deposit is fully refundable at any time prior to closing. If the prices for new homes decline, competitors increase their use of sales incentives, interest rates increase, the availability of mortgage financing diminishes or there is a further downturn in local or regional economies or the national economy, homebuyers may terminate their existing home purchase contracts with us in order to negotiate for a lower price, explore other options or because they cannot, or become reluctant to, complete the purchase. In 2008, 2007 and 2006, we experienced elevated and volatile cancellation rates, in part because of these reasons. Continued elevated and volatile cancellation rates due to these conditions, or otherwise, could have an adverse effect on our business and our results of operations.
 
Our long-term success depends on the availability of improved lots and undeveloped land that meet our land investment criteria.
 
The availability of finished and partially developed lots, and undeveloped land for purchase that meet our internal investment standards depends on a number of factors outside of our control, including land availability in general, competition with other homebuilders and land buyers for desirable property, inflation in land prices, zoning, allowable housing density and other regulatory requirements. Should suitable lots or land become less available, the number of homes we may be able to build and sell could be reduced, and the cost of attractive land could increase, perhaps substantially, which could adversely impact our results of operations including, but not limited to, our margins.
 
Home prices and sales activity in the particular markets and regions in which we do business affect our results of operations because our business is concentrated in these markets.
 
Home prices and sales activity in some of our key served markets have declined from time to time for market-specific reasons, including adverse weather, lack of affordability or economic contraction due to, among other things, the failure or decline of key industries and employers. If home prices or sales activity decline in one or more of our key served markets, particularly in Arizona, California, Florida, Nevada or Texas, our costs may not decline at all or at the same rate and, as a result, our overall results of operations may be adversely affected.
 
Interest rate increases or changes in federal lending programs or regulation could lower demand for our homes.
 
Nearly all of our customers finance the purchase of their homes. Prior to 2006, historically low interest rates and the increased availability of specialized mortgage products, including mortgage products requiring no or low down payments, and interest-only and adjustable rate mortgages, had made homebuying more affordable for a number of customers and more available to customers with lower credit scores. Increases in interest rates or decreases in the availability of mortgage financing or of certain mortgage programs, as discussed above, may lead to fewer mortgage loans being provided, higher down payment requirements or monthly mortgage costs, or a combination of the foregoing, and, as a result, reduce demand for our homes.
 
Increased interest rates can also hinder our ability to realize our backlog because our home purchase contracts provide our customers with a financing contingency. Financing contingencies allow customers to cancel their home purchase contracts in the event they cannot arrange for adequate financing.
 
Because the availability of Fannie Mae, Freddie Mac, FHA- and VA-backed mortgage financing is an important factor in marketing and selling many of our homes, any limitations or restrictions in the availability of such government-backed financing could reduce our home sales and adversely affect our results of operations. This may occur as a result of the federal government’s conservatorship of Fannie Mae and Freddie Mac in 2008.
 
Tax law changes could make home ownership more expensive or less attractive.
 
Significant expenses of owning a home, including mortgage interest expense and real estate taxes, generally are deductible expenses for the purpose of calculating an individual’s federal, and in some cases state, taxable income, subject to various limitations, under current tax law and policy. If the federal government or a state government changes income tax laws, as some policy makers have discussed recently, by eliminating or substantially reducing these income tax


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benefits, the after-tax cost of owning a new home would increase substantially. This could adversely impact demand for and/or sales prices of new homes.
 
We are subject to substantial legal and regulatory requirements regarding the development of land, the homebuilding process and protection of the environment, which can cause us to suffer delays and incur costs associated with compliance and which can prohibit or restrict homebuilding activity in some regions or areas.
 
Our homebuilding business is heavily regulated and subject to an increasing amount of local, state and federal regulation concerning zoning, resource protection and other environmental impacts, building design, construction and similar matters. These regulations often provide broad discretion to governmental authorities that oversee these matters, which can result in unanticipated delays or increases in the cost of a specified project or a number of projects in particular markets. We may also experience periodic delays in homebuilding projects due to building moratoria and permitting requirements in any of the areas in which we operate.
 
We are also subject to a variety of local, state and federal statutes, ordinances, rules and regulations concerning the environment, and recently entered into a consent decree with the EPA and certain states concerning our storm water pollution prevention practices. These laws and regulations and the consent decree may cause delays in construction and delivery of new homes, may cause us to incur substantial compliance and other costs, and can prohibit or severely restrict homebuilding activity in certain environmentally sensitive regions or areas. In addition, environmental laws may impose liability for the costs of removal or remediation of hazardous or toxic substances whether or not the developer or owner of the property knew of, or was responsible for, the presence of those substances. The presence of those substances on our properties may prevent us from selling our homes and we may also be liable, under applicable laws and regulations or lawsuits brought by private parties, for hazardous or toxic substances on properties and lots that we have sold in the past.
 
Further, a significant portion of our business is conducted in California, one of the most highly regulated and litigious states in the country. Therefore, our potential exposure to losses and expenses due to new laws, regulations or litigation may be greater than other homebuilders with a less significant California presence.
 
The mortgage banking operations of Countrywide KB Home Loans are heavily regulated and subject to the rules and regulations promulgated by a number of governmental and quasi-governmental agencies. There are a number of federal and state statutes and regulations which, among other things, prohibit discrimination, establish underwriting guidelines that include obtaining inspections and appraisals, require credit reports on prospective borrowers and fix maximum loan amounts. A finding that we or Countrywide KB Home Loans materially violated any of the foregoing laws could have an adverse effect on our results of operations.
 
We are subject to a Consent Order that we entered into with the Federal Trade Commission in 1979 and related Consent Decrees that were entered into in 1991 and 2005. Pursuant to the Consent Order and the related Consent Decrees, we provide explicit warranties on the quality of our homes, follow certain guidelines in advertising and provide certain disclosures to prospective purchasers of our homes. A finding that we have significantly violated the Consent Order and/or the related Consent Decrees could result in substantial liabilities or penalties and could limit our ability to sell homes in certain markets.
 
Homebuilding and financial services are very competitive, and competitive conditions could adversely affect our business or our financial results.
 
The homebuilding industry is highly competitive. Homebuilders compete not only for homebuyers, but also for desirable land, financing, building materials, skilled management and trade labor. We compete in each of our served markets with other local, regional and national homebuilders, including those with a sales presence on the Internet, often within larger subdivisions containing portions designed, planned and developed by such homebuilders. These homebuilders may also have long-standing relationships with local labor, materials suppliers or land sellers, which may provide an advantage in their respective regions or local markets. We also compete with other housing alternatives, such as existing home sales (including existing homes sold through foreclosures) and rental housing. The competitive conditions in the homebuilding industry can result in:
 
  •  our delivering fewer homes;
 
  •  our selling homes at lower selling prices;
 
  •  our offering or increasing sales incentives, discounts or price concessions;


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  •  our experiencing lower profit margins;
 
  •  declining new home sales or increasing cancellations by homebuyers of their home purchase contracts with us;
 
  •  impairments in the value of our inventory and other assets;
 
  •  difficulty in acquiring desirable land that meets our investment return criteria, and in selling our interests in land that no longer meet such criteria on favorable terms;
 
  •  difficulty in our acquiring raw materials and skilled management and labor at acceptable prices; or
 
  •  delays in construction of our homes.
 
These competitive conditions may adversely affect our business and financial results by decreasing our revenues, increasing our costs and/or diminishing growth in our local or regional homebuilding business. In the current downturn in the homebuilding industry, the reactions of our new home and housing alternative competitors are reducing the effectiveness of our efforts to achieve pricing stability, generate home sales, and reduce our inventory levels.
 
Homebuilding is subject to warranty and liability claims in the ordinary course of business that can be significant.
 
In the ordinary course of our homebuilding business, we are subject to home warranty and construction defect claims. We record warranty and other reserves for the homes we sell based on historical experience in our served markets and our judgment of the risks associated with the types of homes we build. We have, and require the majority of our subcontractors to have, general liability, property, errors and omissions, workers compensation and other business insurance. These insurance policies protect us against a portion of our risk of loss from claims, subject to certain self-insured retentions, deductibles, and other coverage limits. Through our captive insurance subsidiary, we reserve for costs to cover our self-insured and deductible amounts under these policies and for any costs of claims and lawsuits, based on an analysis of our historical claims, which includes an estimate of claims incurred but not yet reported. Because of the uncertainties inherent to these matters, we cannot provide assurance that our insurance coverage, our subcontractor arrangements and our reserves will be adequate to address all our warranty and construction defect claims in the future, or that any potential inadequacies will not have an adverse affect on our results of operations. Additionally, the coverage offered by and the availability of general liability insurance for construction defects are currently limited and costly. There can be no assurance that coverage will not be further restricted, increasing our risks, and become more costly.
 
Because of the seasonal nature of our business, our quarterly operating results fluctuate.
 
We have experienced seasonal fluctuations in our quarterly operating results. We typically do not commence significant construction on a home before a home purchase contract has been signed with a homebuyer. Historically, a significant percentage of our home purchase contracts are entered into in the spring and summer months, and a corresponding significant percentage of our deliveries occur in the fall and winter months. Construction of our homes typically requires approximately four months and weather delays that often occur in late winter and early spring may extend this period. As a result of these combined factors, we historically have experienced uneven quarterly results, with lower revenues and operating income generally during the first and second quarters of the year. However, the increasingly challenging market conditions we experienced in 2008 resulted in lower sales in the spring and summer months and correspondingly lower deliveries in the fall and winter months as compared to 2007. With the current difficult market conditions expected to continue into 2009, we can make no assurances that our normal seasonal patterns will occur in the near future.
 
Failure to comply with the covenants and conditions imposed by the agreements governing our indebtedness could restrict future borrowing or cause our debt to become immediately due and payable.
 
Our Credit Facility and the indenture governing our outstanding public notes impose restrictions on our operations and activities. The restrictions primarily relate to cash dividends, stock repurchases, incurrence of indebtedness, creation of liens and asset dispositions, defaults with respect to other debt obligations and require maintenance of a maximum debt to equity (or leverage) ratio, a minimum interest coverage ratio, and a minimum level of tangible net worth. If we fail to comply with these restrictions or covenants, the holders of those debt instruments or the banks, as appropriate, could cause our debt to become due and payable prior to maturity or could demand that we compensate them for waiving instances of noncompliance. In addition, a default under the indenture for any of our notes or our Credit Facility could cause a default with respect to our other notes or the Credit Facility, as the case may be, and result in the acceleration of the maturity of all such defaulted indebtedness and our inability to borrow under the Credit Facility, which would have a


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significant adverse effect on our ability to invest in and grow our business. Moreover, we may curtail our investment activities and other uses of cash to maintain compliance with these restrictions and covenants.
 
We participate in certain unconsolidated joint ventures where we may be adversely impacted by the failure of the unconsolidated joint venture or the other partners in the unconsolidated joint venture to fulfill their obligations.
 
We have investments in and commitments to certain unconsolidated joint ventures with unrelated strategic partners to acquire and develop land and, in some cases, build and deliver homes. To finance these activities, our unconsolidated joint ventures often obtain loans from third-party lenders that are secured by the unconsolidated joint venture’s assets. In certain instances, we and the other partners in an unconsolidated joint venture provide guarantees and indemnities to lenders with respect to the unconsolidated joint venture’s debt, which may be triggered under certain conditions when the unconsolidated joint venture fails to fulfill its obligations under its loan agreements. Because we do not have a controlling interest in these unconsolidated joint ventures, we depend heavily on the other partners in each unconsolidated joint venture to both (i) cooperate and make mutually acceptable decisions regarding the conduct of the business and affairs of the unconsolidated joint venture and (ii) ensure that they, and the unconsolidated joint venture, fulfill their respective obligations to us and to third parties. If the other partners in our unconsolidated joint ventures do not provide such cooperation or fulfill these obligations due to their financial condition, strategic business interests (which may be contrary to ours), or otherwise, we may be required to spend additional resources (including payments under the guarantees we have provided to the unconsolidated joint ventures’ lenders) and suffer losses, each of which could be significant. Moreover, our ability to recoup such expenditures and losses by exercising remedies against such partners may be limited due to potential legal defenses they may have, their respective financial condition and other circumstances.
 
The downturn in the housing market and the continuation of the disruptions in the credit markets could limit our ability to access capital and increase our costs of capital or stockholder dilution.
 
We have historically funded our homebuilding and financial services operations with internally generated cash flows and external sources of debt and equity financing. However, during this downturn in the housing market, we have relied primarily on the positive operating cash flow we have generated to meet our working capital needs and repay outstanding indebtedness. While we anticipate generating positive operating cash flow in 2009, principally through the receipt of federal income tax refunds and from home and land sales, the prolonged downturn in the housing markets and the disruption in the credit markets have reduced the availability to us of other sources of liquidity.
 
As of November 30, 2008, we had $200.0 million of 8 5 / 8 % senior subordinated notes (the “$200 Million Senior Subordinated Notes”) outstanding, which matured on December 15, 2008. We had sufficient cash on hand and redeemed these notes upon their scheduled maturity. However, current market conditions would significantly limit our ability to replace this indebtedness if we chose to do so, particularly due to the lowering of our senior debt ratings by three rating agencies during 2008. Pricing in the public debt markets has increased substantially, and the indenture terms available in these markets are generally more restrictive than those in our current indentures. Moreover, due to the deterioration in the credit markets and the uncertainties that exist in the general economy and for homebuilders in particular, we cannot be certain that we would be able to replace existing financing or secure additional sources of financing. In addition, the significant decline in our stock price, the ongoing volatility in the stock markets and the reduction in our stockholders’ equity relative to our debt could also impede our access to the equity markets or increase the amount of dilution our stockholders would experience should we seek or need to raise capital through issuance of equity.
 
While we believe we can meet our forecasted capital requirements from our cash resources, future cash flow and the sources of financing that we anticipate will be available to us, we can provide no assurance that we will be able to do so, particularly if current difficult housing or credit market or economic conditions continue or deteriorate further. The effects on our business, liquidity and financial results of these conditions could be material and adverse to us.
 
Our net operating loss carryforwards could be substantially limited if we experience an ownership change as defined in the Internal Revenue Code.
 
Since the end of our 2007 fiscal year, we have generated significant net operating losses, (“NOLs”), and we may generate additional NOLs in 2009. Under federal tax laws, we can use our NOLs (and certain related tax credits) to offset ordinary income tax on our future taxable income for up to 20 years, after which they expire for such purposes. Until they expire, we can carry forward our NOLs (and certain related tax credits) that we do not use in any particular year to offset income tax in future years.


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The benefits of our NOLs would be reduced or eliminated if we experience an “ownership change,” as determined under Section 382 of the Internal Revenue Code. A Section 382 “ownership change” occurs if a stockholder or a group of stockholders who are deemed to own at least 5% of our common stock increase their ownership by more than 50 percentage points over their lowest ownership percentage within a rolling three-year period. If an “ownership change” occurs, Section 382 would impose an annual limit on the amount of NOLs we can use to offset income tax equal to the product of the total value of our outstanding equity immediately prior to the “ownership change” (reduced by certain items specified in Section 382) and the federal long-term tax-exempt interest rate in effect for the month of the “ownership change.” A number of special rules apply to calculating this annual limit.
 
While the complexity of Section 382’s provisions and the limited knowledge any public company has about the ownership of its publicly-traded stock make it difficult to determine whether an “ownership change” has occurred, we currently believe that an “ownership change” has not occurred. However, if an “ownership change” were to occur, the annual limit Section 382 may impose could result in a material amount of our NOLs expiring unused. This would significantly impair the value of our NOL assets and, as a result, have a negative impact on our financial position and results of operations.
 
A decline in our tangible net worth and the resulting increase in our leverage ratio may place burdens on our ability to comply with the terms of our indebtedness, may restrict our ability to operate and may prevent us from fulfilling our obligations.
 
The amount of our debt could have important consequences. For example, it could:
 
  •  limit our ability to obtain future financing for working capital, capital expenditures, acquisitions, debt service requirements or other requirements;
 
  •  require us to dedicate a substantial portion of our cash flow from operations to the payment of our debt and reduce our ability to use our cash flow for other purposes;
 
  •  impact our flexibility in planning for, or reacting to, changes in our business;
 
  •  place us at a competitive disadvantage because we have more debt than some of our competitors; and
 
  •  make us more vulnerable in the event of a further downturn in our business or in general economic conditions.
 
Our ability to meet our debt service and other obligations will depend upon our future performance. Our business is substantially affected by changes in economic cycles. Our revenues, earnings and cash flows vary with the level of general economic activity and competition in the markets in which we operate. Our business could also be affected by financial, political and other factors, many of which are beyond our control. Changes in prevailing interest rates may also affect our ability to meet our debt service obligations because borrowings under our Credit Facility bear interest at floating rates. A higher interest rate on our debt could adversely affect our operating results.
 
Our business may not generate sufficient cash flow from operations and borrowings may not be available to us under our Credit Facility in an amount sufficient to pay our debt service obligations, fulfill financial or operational guarantees we have provided for certain unconsolidated joint venture transactions, or to fund our other liquidity needs. In fact, the total commitment available under our Credit Facility was reduced in 2008. Should we not generate sufficient cash flow from operations or have borrowings available to us under our Credit Facility, we may need to refinance all or a portion of our debt on or before maturity, which we may not be able to do on favorable terms or at all, or through equity issuances that would dilute existing stockholders’ interests. However, we currently do not anticipate a need to borrow under the Credit Facility through its November 2010 maturity.
 
We may have difficulty in continuing to obtain the additional financing required to operate and develop our business.
 
Our homebuilding operations require significant amounts of cash and/or available credit. It is not possible to predict the future terms or availability of additional capital. Moreover, our outstanding public debt and the Credit Facility contain provisions that may restrict the amount and nature of debt we may incur in the future. The Credit Facility limits our ability to borrow additional funds by placing a maximum cap on our leverage ratio. Under the most restrictive of these provisions, at November 30, 2008, we would have been permitted to incur up to $1.55 billion of consolidated total indebtedness, as defined in the Credit Facility. This maximum amount exceeded our actual consolidated total indebtedness at November 30, 2008 by $814.5 million. In addition, the Credit Facility limits our ability to borrow senior indebtedness, as defined in the Credit Facility, subject to a specified borrowing base. At November 30, 2008, we would have been permitted to incur up to


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$2.47 billion of senior indebtedness under the Credit Facility. This maximum amount exceeded our actual total senior indebtedness at November 30, 2008 by $825.0 million. There can be no assurance that we can actually borrow up to these maximum amounts of total consolidated indebtedness or senior indebtedness at any time, as our ability to borrow additional funds, and to raise additional capital through other means, also depends on conditions in the capital markets and our perceived credit worthiness, as discussed above. If conditions in the capital markets change significantly, it could reduce our ability to generate sales and may hinder our future growth and results of operations.
 
Item 1B.  UNRESOLVED STAFF COMMENTS  
 
None.
 
Item 2.  PROPERTIES  
 
We lease our corporate headquarters in Los Angeles, California. Our homebuilding division offices, except for our San Antonio, Texas office, and our KB Home Studios are located in leased space in the markets where we conduct business. We own the premises for our San Antonio, Texas office.
 
We believe that such properties, including the equipment located therein, are suitable and adequate to meet the needs of our businesses.
 
Item 3.  LEGAL PROCEEDINGS  
 
Derivative Litigation
 
In the summer of 2006, four shareholder derivative lawsuits were filed, ostensibly on our behalf, alleging, among other things, that the defendants (various of our current and former directors and officers) breached their fiduciary duties to us by, among other things, backdating grants of stock options to various current and former executives in violation of our stockholder-approved stock option plans. Two of the lawsuits were state court actions filed in Los Angeles County Superior Court, and two were federal actions filed in the United States District Court for the Central District of California. The two federal lawsuits also included substantive claims under the federal securities laws.
 
We recently reached a tentative global settlement with the parties in the four actions. The settlement also includes a resolution of all issues with our former Chairman and Chief Executive Officer, Bruce Karatz. On December 9, 2008, the parties to the federal court actions submitted the proposed settlement to the court, and the plaintiffs in those actions concurrently filed an unopposed motion seeking preliminary approval of the proposed settlement. On December 15, 2008, the court granted preliminary approval of the proposed settlement and scheduled a hearing for February 9, 2009 to determine whether the settlement should be finally approved by the court. If it is finally approved, the federal litigation will be dismissed, and all parties have agreed that the state court litigation will be dismissed as well. If the settlement is not approved, the federal and state court litigation will continue.
 
ERISA Litigation
 
On March 16, 2007, plaintiffs Reba Bagley and Scott Silver filed an action brought under Section 502 of the Employee Retirement Income Security Act (“ERISA”), 29 U.S.C. § 1132, Bagley et al., v. KB Home, et al., in the United States District Court for the Central District of California. The action was brought against us, our directors, and certain of our current and former officers. After the court allowed leave to file an amended complaint, on April 3, 2008, plaintiffs filed an amended complaint adding Tolan Beck and Rod Hughes as additional plaintiffs and dismissing certain individuals as defendants. All four plaintiffs claim to be former employees of KB Home who participated in the KB Home 401(k) Savings Plan (the “Plan”). Plaintiffs allege on behalf of themselves and on behalf of all others similarly situated that all defendants breached fiduciary duties owed to plaintiffs and purported class members under ERISA by failing to disclose information to and providing misleading information to participants in the Plan about our alleged prior stock option backdating practices and by failing to remove our stock as an investment option under the Plan. Plaintiffs allege that this breach of fiduciary duties caused plaintiffs to earn less on their Plan accounts than they would have earned but for defendants’ alleged breach of duties. Plaintiffs seek unspecified money damages and injunctive and other equitable relief. On May 16, 2008, we filed a motion to dismiss on the ground that plaintiffs’ allegations fail to state a claim against us. Plaintiffs filed an opposition to the motion on June 20, 2008. The hearing on the motion was held on September 8, 2008. On October 6, 2008, the court issued its order. The court denied our motion to dismiss the plaintiffs’ claims for breach of fiduciary duty and breach of the duty to monitor and granted our motion to dismiss the plaintiffs’ claims for breach of the fiduciary duty of disclosure. The court also denied a separate motion to dismiss filed by the


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individual defendants based on the standing of plaintiffs to sue. We filed our answer to the first amended complaint on November 5, 2008. On November 24, 2008, the court approved a stipulation to stay all discovery and other proceedings through February 6, 2009, in order to allow the parties time to attempt to settle the plaintiffs’ claims through mediation.
 
Other Matters
 
We are also involved in litigation and governmental proceedings incidental to our business. These cases are in various procedural stages and, based on reports of counsel, we believe that provisions or reserves made for potential losses are adequate and any liabilities or costs arising out of currently pending litigation should not have a materially adverse effect on our consolidated financial position or results of operations.
 
Item 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
No matters were submitted during the fourth quarter of 2008 to a vote of security holders, through the solicitation of proxies or otherwise.


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EXECUTIVE OFFICERS OF THE REGISTRANT
 
The following sets forth certain information regarding our executive officers as of January 22, 2009:  
 
                                     
              Year
    Years
       
              Assumed
    at
  Other Positions and Other
   
              Present
    KB
  Business Experience within the
   
Name  
Age
    Present Position  
Position
   
Home
  Last Five Years (a)  
From – To
 
Jeffrey T. Mezger
    53    
President and Chief
Executive Officer (b)
    2006       15    
Executive Vice President and Chief Operating Officer
  1999-2006
                                   
Wendy C. Shiba
    58    
Executive Vice President, General Counsel and Secretary
    2007       1    
Senior Vice President, Chief Legal Officer and Secretary, Polyone Corporation (a global provider of specialized polymer materials, services and solutions)
  2006-2007
                               
Vice President, Chief Legal Officer and Secretary, Polyone Corporation
  2001-2006
                                   
Glen Barnard
    64    
Senior Vice President, KBnxt Group
    2006       10    
Regional General Manager (c)
  2004-2006
                               
Chief Executive Officer, Constellation Real Technologies (real estate consortium)
  2001-2003
                                     
                                   
William R. Hollinger
    50    
Senior Vice President and
    2007       21    
Senior Vice President and Controller
  2001-2006
           
  Chief Accounting Officer
                       
                                     
                                   
Kelly Masuda
    41    
Senior Vice President and
Treasurer
    2005       5    
Senior Vice President, Capital Markets and Treasurer
  2005
                               
Vice President, Capital Markets and Treasurer
  2003-2005
                                   
Thomas F. Norton
    38    
Senior Vice President, Human Resources
    2009          
Chief Human Resources Officer, BJ’s Restaurants, Inc. (owner and operator of restaurants)
  2006-2009
                               
Senior Vice President of Human Resources, American Golf Corporation (golf course management firm)
  2003-2006
                                     
(a)   All positions described were with us, unless otherwise indicated.
 
(b)   Mr. Mezger has served as a director since 2006.
 
(c)   Mr. Barnard was a senior executive with us from 1996-2001, and rejoined us in 2004.
 
There is no family relationship between any of our executive officers or between any of our executive officers and any of our directors.


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PART II
 
Item 5.   MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
As of December 31, 2008, there were 843 holders of record of our common stock. Our common stock is traded on the New York Stock Exchange under the ticker symbol “KBH.” The following table sets forth, for the periods indicated, the price ranges of our common stock, and cash dividends declared and paid per share:
 
                                                                 
    2008     2007  
                Dividends
    Dividends
                Dividends
    Dividends
 
    High     Low     Declared     Paid     High     Low     Declared     Paid  
 
First Quarter
  $ 28.99     $ 15.76     $ .25     $ .25     $ 56.08     $ 47.69     $   .25     $   .25  
Second Quarter
    28.93       19.62       .50       .25       50.90       40.89       .25       .25  
Third Quarter
    21.93       13.16             .25       47.57       28.00       .25       .25  
Fourth Quarter
    25.43       6.90       .0625       .0625       31.69       18.44       .25       .25  
 
 
The declaration and payment of cash dividends on shares of our common stock, whether at current levels or at all, are at the discretion of our board of directors, and depend upon, among other things, our expected future earnings, cash flows, capital requirements, operational investment strategy, and our general financial condition and general business conditions as well as compliance with covenants contained in our Credit Facility. In November 2008, our board of directors reduced the quarterly cash dividend on our common stock to $.0625 per share from $.25 per share.
 
The description of our equity compensation plans required by Item 201(d) of Regulation S-K is incorporated herein by reference to Part III, Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters of this Form 10-K.
 
The following table summarizes our purchases of our own equity securities during the three months ended November 30, 2008:
 
                                 
                      Maximum
 
                      Number of Shares
 
                Total Number of
    That May Yet be
 
                Shares Purchased as
    Purchased
 
    Total Number
    Average
    Part of Publicly
    Under the
 
    of Shares
    Price Paid
    Announced
    Plans or
 
Period
  Purchased     per Share     Plans or Programs     Programs  
 
September 1 - 30
        $             4,000,000  
October 1 - 31
    28,465       14.37             4,000,000  
November 1 - 30
                      4,000,000  
                                 
Total
    28,465     $   14.37                
                                 
 
On December 8, 2005, our board of directors authorized a share repurchase program under which we may repurchase up to 10 million shares of our common stock. Acquisitions under the share repurchase program may be made in open market or private transactions and will be made strategically from time to time at management’s discretion based on its assessment of market conditions and buying opportunities. At November 30, 2008, we were authorized to repurchase four million shares under this share repurchase program. During the three months ended November 30, 2008, no shares were repurchased pursuant to this share repurchase program. The 28,465 shares purchased during the three months ended November 30, 2008 were previously issued shares delivered to us by employees to satisfy withholding taxes on the vesting of restricted stock awards. These transactions are not considered repurchases pursuant to the share repurchase program.


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Stock Performance Graph
 
The graph below compares the cumulative total return of KB Home common stock, the S&P 500 Index, the S&P Homebuilding Index and the Dow Jones Home Construction Index for the last five year-end periods ended November 30.
 
Comparison of Five-Year Cumulative Total Return
Among KB Home, S&P 500 Index, S&P Homebuilding
Index and Dow Jones Home Construction Index
 
(PERFORMANCE GRAPH)
 
The above graph is based on the KB Home common stock and index prices calculated as of the last trading day before December 1 st of the year-end periods presented. As of November 30, 2008, the closing common stock price on the New York Stock Exchange was $11.63 per share. On December 31, 2008, our common stock closed at $13.62 per share. The performance of our common stock depicted in the graphs above represents past performance only and is not indicative of future performance. Total return assumes $100 invested at market close on November 30, 2003 in KB Home common stock, the S&P 500 Index, the S&P Homebuilding Index and the Dow Jones Home Construction Index including reinvestment of dividends.


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Item 6.  SELECTED FINANCIAL DATA
 
The data in this table should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and our Consolidated Financial Statements and the Notes thereto. Both are included later in this report.
 
KB HOME
SELECTED FINANCIAL INFORMATION
(In Thousands, Except Per Share Amounts)
 
                                         
    Years Ended November 30,  
    2008     2007     2006     2005     2004  
 
Homebuilding:
                                       
Revenues
  $ 3,023,169     $ 6,400,591     $ 9,359,843     $ 8,123,313     $ 5,974,496  
Operating income (loss)
    (860,643 )     (1,358,335 )     570,316       1,188,935       637,229  
Total assets
    3,992,148       5,661,564       7,825,339       6,881,486       4,760,288  
Mortgages and notes payable
    1,941,537       2,161,794       2,920,334       2,211,935       1,771,962  
                                         
Financial services:
                                       
Revenues
  $ 10,767     $ 15,935     $ 20,240     $ 31,368     $ 44,417  
Operating income
    6,278       11,139       14,317       10,968       8,688  
Total assets
    52,152       44,392       44,024       29,933       210,460  
Notes payable
                            71,629  
                                         
Discontinued operations:
                                       
Total assets
  $     $     $ 1,394,375     $ 1,102,898     $ 1,020,082  
                                         
Consolidated:
                                       
Revenues
  $ 3,033,936     $ 6,416,526     $ 9,380,083     $ 8,154,681     $ 6,018,913  
Operating income (loss)
    (854,365 )     (1,347,196 )     584,633       1,199,903       645,917  
Income (loss) from continuing operations
    (976,131 )     (1,414,770 )     392,947       754,534       430,384  
Income from discontinued operations, net of income taxes (a)
          485,356       89,404       69,178       43,652  
Net income (loss)
    (976,131 )     (929,414 )     482,351       823,712       474,036  
Total assets
    4,044,300       5,705,956       9,263,738       8,014,317       5,990,830  
Mortgages and notes payable
    1,941,537       2,161,794       2,920,334       2,211,935       1,843,591  
Stockholders’ equity
    830,605       1,850,687       2,922,748       2,773,797       2,039,390  
                                         
                                         
Basic earnings (loss) per share:
                                       
Continuing operations
  $ (12.59 )   $ (18.33 )   $ 4.99     $ 9.21     $ 5.49  
Discontinued operations
          6.29       1.13       .85       .56  
                                         
Basic earnings (loss) per share
  $ (12.59 )   $ (12.04 )   $ 6.12     $ 10.06     $ 6.05  
                                         
Diluted earnings (loss) per share:
                                       
Continuing operations
  $ (12.59 )   $ (18.33 )   $ 4.74     $ 8.54     $ 5.10  
Discontinued operations
          6.29       1.08       .78       .52  
                                         
Diluted earnings (loss) per share
  $ (12.59 )   $ (12.04 )   $ 5.82     $ 9.32     $ 5.62  
                                         
                                         
Cash dividends declared per common share
  $ .8125     $ 1.00     $ 1.00     $ .75     $ .50  
                                         
 
(a)  Discontinued operations consist only of our French operations, which have been presented as discontinued operations for all periods presented. Income from discontinued operations, net of income taxes, in 2007 includes a gain of $438.1 million realized on the sale of our French operations.


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Item 7.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
 
RESULTS OF OPERATIONS
 
Overview.   Revenues are generated from our homebuilding operations and our financial services operations. On July 10, 2007, we sold our 49% equity interest in KBSA. Accordingly, our French operations are presented as discontinued operations in this report. The following table presents a summary of our consolidated results of operations for the years ended November 30, 2008, 2007 and 2006 (in thousands, except per share amounts):
 
                         
    Years ended November 30,  
    2008     2007     2006  
 
Revenues:
                       
Homebuilding
  $ 3,023,169     $ 6,400,591     $ 9,359,843  
Financial services
    10,767       15,935       20,240  
                         
Total
  $ 3,033,936     $ 6,416,526     $ 9,380,083  
                         
Pretax income (loss):
                       
Homebuilding
  $ (991,749 )   $ (1,494,606 )   $ 538,311  
Financial services
    23,818       33,836       33,536  
                         
Income (loss) from continuing operations before income taxes
    (967,931 )     (1,460,770 )     571,847  
Income tax benefit (expense)
    (8,200 )     46,000       (178,900 )
                         
Income (loss) from continuing operations
    (976,131 )     (1,414,770 )     392,947  
Income from discontinued operations, net of income taxes
          47,252       89,404  
Gain on sale of discontinued operations, net of income taxes
          438,104        
                         
Net income (loss)
  $ (976,131 )   $ (929,414 )   $ 482,351  
                         
Basic earnings (loss) per share:
                       
Continuing operations
  $ (12.59 )   $ (18.33 )   $ 4.99  
Discontinued operations
          6.29       1.13  
                         
Basic earnings (loss) per share
  $ (12.59 )   $ (12.04 )   $ 6.12  
                         
Diluted earnings (loss) per share:
                       
Continuing operations
  $ (12.59 )   $ (18.33 )   $ 4.74  
Discontinued operations
          6.29       1.08  
                         
Diluted earnings (loss) per share
  $ (12.59 )   $ (12.04 )   $ 5.82  
                         
 
Extreme negative conditions continued to confront the homebuilding industry throughout 2008, deepening the downturn that began in the second half of 2006. Record-high foreclosure activity during the year worsened the oversupply of unsold homes existing in several housing markets when the year began, and put sustained downward pressure on home prices. At the same time, tepid demand for new homes weakened further as deteriorating conditions in the overall economy and rising unemployment precipitated historic declines in consumer confidence, discouraging home purchases. Demand also suffered as consumer mortgage financing became progressively less available due to credit market turmoil and tightening lending standards. Our results for the year ended November 30, 2008 reflect the impact of these conditions, which show no signs of abating in the year ahead.
 
In 2008, we posted year-over-year declines in net orders, homes delivered and revenues across all of our homebuilding reporting segments. These decreases reflected the impact of the prolonged housing market downturn as well as the strategic actions we have taken to reduce our inventory levels and community count in line with current housing market activity. We operated from 38% fewer active communities in 2008 than in 2007. In addition, our inventory of lots owned or controlled as of November 30, 2008 was down 28% from a year ago.
 
We recorded a net loss for the year, largely due to pretax, noncash charges for inventory and joint venture impairments, land option contract abandonments and goodwill impairments, and noncash charges for net deferred tax


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asset valuation allowances. Our year-over-year results for 2008 were also affected by our providing targeted price reductions and sales incentives in certain communities in response to competitive conditions, or to facilitate our exit from specific markets, projects or product types.
 
Despite the difficult housing market conditions and our year-over-year declines in homes delivered and revenues generated, our net loss in 2008 was smaller than our loss from continuing operations in 2007. This improvement was principally due to the substantially lower asset impairment and abandonment charges we incurred in 2008 compared to the previous year. Our financial results in 2008 were also helped by strategic adjustments we have made in response to the changing operating environment. Since 2006, we have implemented a series of aggressive actions focused on generating and preserving cash, lowering our direct building costs, gaining operational efficiencies, lowering overhead, developing new product to compete with resales and foreclosures, and restoring profitability. Specific strategic actions taken during 2008 included calibrating our business to market conditions by consolidating certain operating divisions, reducing our workforce by 57%, and transitioning to new, value-engineered homes that are less expensive to build and can be offered to homebuyers at more affordable prices and with greater design choices. These actions had a positive impact on our results for the year, particularly in the fourth quarter, creating a foundation we intend to build on as we enter 2009.
 
Our total revenues of $3.03 billion for the year ended November 30, 2008 decreased 53% from $6.42 billion in 2007, which had decreased 32% from $9.38 billion in 2006. Revenues declined in 2008 and 2007 primarily due to decreases in our housing revenues corresponding to fewer homes delivered and lower average selling prices. Included in our total revenues were financial services revenues of $10.8 million in 2008, $15.9 million in 2007 and $20.2 million in 2006. Financial services revenues decreased in both 2008 and 2007 primarily due to our delivering fewer homes and the termination of our escrow coordination business in 2007.
 
We incurred a net loss of $976.1 million, or $12.59 per diluted share in 2008, largely due to pretax, noncash charges of $748.6 million for inventory and joint venture impairments and the abandonment of land option contracts, and $68.0 million for goodwill impairments. These charges reflected the deterioriating housing market conditions, which exerted downward pressure on asset values. The bulk of these charges were associated with our West Coast, Southwest and Southeast reporting segments. The goodwill impairment charges in 2008 related to our Central and Southeast reporting segments, and resulted in our having no remaining goodwill company-wide at November 30, 2008. The net loss in 2008 also reflected a $355.9 million valuation allowance charge taken against net deferred tax assets to fully reserve the tax benefits generated from our pretax loss for the year in accordance with Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes” (“SFAS No. 109”). In 2007, our continuing operations generated an after-tax loss of $1.41 billion, or $18.33 per diluted share, due to pretax, noncash charges of $1.41 billion for inventory and joint venture impairments and the abandonment of land option contracts, and $107.9 million for goodwill impairments recognized during the year. The majority of the inventory-related charges in 2007 related to our West Coast and Southwest reporting segments, and the goodwill impairments related solely to our Southwest reporting segment. Our 2007 loss from continuing operations also reflected a noncash charge of $514.2 million to establish a valuation allowance for our net deferred tax assets. In 2006, we reported after-tax income from continuing operations of $392.9 million or $4.74 per diluted share.
 
Income from our French discontinued operations, net of income taxes, totaled $485.4 million in 2007, including a $438.1 million after-tax gain on the sale of these operations. Income from our French discontinued operations, net of income taxes, totaled $89.4 million in 2006.
 
Overall, we posted a net loss of $929.4 million, or $12.04 per diluted share (including the discontinued operations) in 2007. This compares to net income of $482.4 million, or $5.82 per diluted share, in 2006.
 
Our backlog at November 30, 2008 was comprised of 2,269 homes, representing future housing revenues of approximately $521.4 million. These backlog measures decreased 64% and 65%, respectively, from the 6,322 homes in backlog, representing approximately $1.50 billion in future housing revenues, at November 30, 2007. These decreases were due to the combined impact over the past several quarters of negative year-over-year net order results, lower average selling prices, and our strategic initiatives to reduce our inventory and community count to better align with reduced housing market activity. Our homebuilding operations generated 8,274 net orders in 2008, down 58% from 19,490 net orders in 2007. The decrease in net orders in 2008 reflected our year-over-year reduction in community counts, the gradual winding down of certain communities as backlog was delivered, and our discontinuation of product in particular communities as part of our product transition strategy. Order cancellations as a percentage of gross orders improved slightly to 41% in 2008 from 42% in 2007.


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We generated $341.3 million of positive cash flow from operating activities in 2008 and ended the year with cash and cash equivalents and restricted cash totaling $1.25 billion. Our total debt at year-end stood at $1.94 billion, down $220.3 million from $2.16 billion at November 30, 2007, mainly due to the early redemption of our $300.0 million of 7 3 / 4 % senior subordinated notes due in 2010 (the “$300 Million Senior Subordinated Notes”) partially offset by increased mortgages and land contracts due to land sellers. We ended 2008 with no cash borrowings outstanding under our Credit Facility. As of November 30, 2008, our ratio of debt to total capital, net of cash and cash equivalents and restricted cash, was 45.4%, within our targeted range of 40%-50%. Restricted cash consists of an interest reserve account established with the Credit Facility’s administrative agent (the “Interest Reserve Account”), as discussed below. Our liquidity, including the available capacity under our Credit Facility, was approximately $1.84 billion at November 30, 2008. Our inventory balance of $2.10 billion at November 30, 2008 was 36% lower than the $3.31 billion balance at November 30, 2007. We ended 2008 with what we believe is an attractive, geographically diverse land portfolio of approximately 47,000 lots owned or controlled. We ended 2007 with approximately 66,000 lots owned or controlled. We believe our solid financial position and fewer, well-situated lot positions give us a distinct competitive advantage relative to other homebuilding companies and should allow us to capitalize on opportunities as housing markets stabilize. However, it is uncertain when meaningful stabilization will occur.
 
HOMEBUILDING
 
We have grouped our homebuilding activities into four reportable segments, which we refer to as West Coast, Southwest, Central and Southeast. As of November 30, 2008, our reportable homebuilding segments consisted of ongoing operations located in the following states: West Coast — California; Southwest — Arizona and Nevada; Central — Colorado and Texas; Southeast — Florida, North Carolina and South Carolina.
 
The following table presents a summary of certain financial and operational data for our homebuilding operations (dollars in thousands, except average selling price):
 
                         
    Years ended November 30,  
    2008     2007     2006  
 
Revenues:
                       
Housing
  $ 2,940,241     $ 6,211,563     $ 9,243,236  
Land
    82,928       189,028       116,607  
                         
Total
    3,023,169       6,400,591       9,359,843  
                         
                         
Costs and expenses:
                       
Construction and land costs
                       
Housing
    (3,149,083 )     (6,563,082 )     (7,456,003 )
Land
    (165,732 )     (263,297 )     (210,016 )
                         
Total
    (3,314,815 )     (6,826,379 )     (7,666,019 )
Selling, general and administrative expenses
    (501,027 )     (824,621 )     (1,123,508 )
Goodwill impairment
    (67,970 )     (107,926 )      
                         
                         
Total
    (3,883,812 )     (7,758,926 )     (8,789,527 )
                         
                         
Operating income (loss)
  $ (860,643 )   $ (1,358,335 )   $ 570,316  
                         
                         
Homes delivered
    12,438       23,743       32,124  
                         
Average selling price
  $ 236,400     $ 261,600     $ 287,700  
                         
Housing gross margin
    (7.1 )%     (5.7 )%     19.3 %
                         
Selling, general and administrative expenses as a percent of housing revenues
    17.0 %     13.3 %     12.2 %
                         
Operating income (loss) as a percent of homebuilding revenues
    (28.5 )%     (21.2 )%     6.1 %


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Revenues.   Homebuilding revenues totaled $3.02 billion in 2008, decreasing 53% from $6.40 billion in 2007, which had decreased 32% from $9.36 billion in 2006. The year-over-year decreases in both 2008 and 2007 primarily reflected declines in housing revenues driven by fewer homes delivered and lower average selling prices.
 
Housing revenues decreased to $2.94 billion in 2008 from $6.21 billion in 2007 and $9.24 billion in 2006. In 2008, housing revenues fell 53% from the previous year due to a 48% decrease in homes delivered and a 10% decline in the average selling price. In 2007, housing revenues fell 33% from 2006 due to a 26% decrease in homes delivered and a 9% decline in the average selling price.
 
We delivered 12,438 homes in 2008, down from 23,743 homes in 2007, mainly due to a 38% year-over-year reduction in the number of our active communities and poor demand for new homes. Over the past several quarters, we progressively reduced our community counts in line with diminished housing market activity in the wake of the persistent housing market downturn. Each of our reporting segments delivered fewer homes in 2008 compared to 2007, with decreases ranging from 40% to 51%.
 
In 2007, we delivered 23,743 homes, down from 32,124 homes delivered in 2006, reflecting year-over-year decreases in each of our reporting segments. The lower delivery volume in 2007 compared to 2006 was due, in part, to a 14% year-over-year reduction in our active community count.
 
Our average new home selling price decreased to $236,400 in 2008 from $261,600 in 2007. Year-over-year average selling prices declined 18% in our West Coast segment, 11% in our Southwest segment and 12% in our Southeast segment as a result of downward pricing pressures. These pressures were driven by difficult market conditions, intense competition from homebuilders and sellers of existing and foreclosed homes, and our introducing product at lower price points, in line with median income levels, to meet consumer demand for more affordable homes. The average selling price in our Central segment increased 4% in 2008 from the previous year, reflecting changes in product mix.
 
Our 2007 average new home selling price had decreased 9% from $287,700 in 2006. Year-over-year, average selling prices declined 11% in our West Coast segment, 16% in our Southwest segment and 6% in our Southeast segment due to weak consumer demand and heightened competition from homebuilders and other sellers, which put downward pressure on home prices. The average selling price in our Central segment increased 5% in 2007 from 2006, solely due to changes in product mix.
 
Land sale revenues totaled $82.9 million in 2008, $189.0 million in 2007 and $116.6 million in 2006. Generally, land sale revenues fluctuate with our decisions to maintain or decrease our land ownership position in certain markets based upon the volume of our holdings, our marketing strategy, the strength and number of competing developers entering particular markets at given points in time, the availability of land in markets we serve and prevailing market conditions. Land sale revenues were more significant in 2007 and 2006 compared to 2008 as we sold a higher volume of land that no longer fit our marketing strategy or met our investment standards, rather than hold it for future development.
 
Operating Income (Loss).   Our homebuilding operations generated operating losses of $860.6 million in 2008 and $1.36 billion in 2007 due to losses from both housing operations and land sales. In 2006, our homebuilding operations posted operating income of $570.3 million. Our homebuilding operating losses represented negative 28.5% of homebuilding revenues in 2008 and negative 21.2% of homebuilding revenues in 2007. The losses increased on a percentage basis in 2008 due to a decrease in our housing gross margin and an increase in our selling, general and administrative expenses as a percentage of housing revenues.
 
Within housing operations, the 2008 operating loss was largely due to pretax, noncash charges of $520.5 million for inventory impairments and land option contract abandonments and $68.0 million for goodwill impairments, as well as lower margins achieved amid fiercely competitive market conditions and higher overhead costs relative to the volume of homes delivered. Inventory impairment charges in 2008 were necessitated by declining asset values in certain markets, the result of persistent increases in housing supply and decreases in demand, both of which reduced achievable sales prices. In 2007, the operating loss within housing operations was driven by pretax, noncash charges of $1.18 billion for inventory impairments and land option contract abandonments and $107.9 million for goodwill impairments. The inventory-related charges in 2007 resulted from declining market conditions, which depressed new home values and sales rates in certain housing markets across the country. Poor market conditions also depressed land values and led us to terminate our land option contracts on projects that no longer met our investment standards.


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Our housing gross margin decreased to negative 7.1% in 2008 from negative 5.7% in 2007. Our housing gross margin in 2008 was adversely impacted by pretax, noncash charges for inventory impairments and land option contract abandonments, lower average selling prices and our providing targeted price reductions and sales incentives in response to competitive conditions or to facilitate strategic project or product exits. Excluding the inventory-related noncash charges ($520.5 million in 2008 and $1.18 billion in 2007), our housing gross margin would have been 10.6% in 2008 and 13.3% in 2007.
 
In 2007, the homebuilding operating loss was $1.36 billion compared to operating income of $570.3 million in 2006. The operating loss in 2007 represented negative 21.2% of homebuilding revenues. In 2006, operating income as a percentage of homebuilding revenues was 6.1%. The operating loss in 2007 resulted from a decrease in our housing gross margin, which fell to a negative 5.7% from 19.3% in 2006. The change in our housing gross margin was largely the result of higher pretax, noncash charges for inventory impairments and land option contract abandonments in 2007, primarily in our West Coast and Southwest segments. Excluding the inventory-related noncash charges ($1.18 billion in 2007 and $309.5 million in 2006), our housing gross margin would have been 13.3% in 2007 and 22.7% in 2006.
 
In 2008, our land sales generated losses of $82.8 million, including impairment charges of $86.2 million relating to future land sales. Our land sales generated losses of $74.3 million in 2007 and $93.4 million in 2006, including impairment charges relating to future land sales of $74.8 million in 2007 and $63.1 million in 2006.
 
We evaluate our land and housing inventory for recoverability in accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”), whenever indicators of potential impairment exist. Based on our evaluations, we recognized pretax, noncash charges for inventory impairments of $565.9 million in 2008, $1.11 billion in 2007 and $228.7 million in 2006.
 
The impairment charges in 2008 and 2007 reflected the deteriorating housing market conditions that we experienced during those years, which lowered the value of certain assets compared to prior periods. These conditions included a significant oversupply of homes available for sale, reduced housing affordability and tighter credit conditions that kept prospective buyers from trading up or entering the market, higher foreclosure activity, and heightened competition. As a result, our order rates, selling prices and gross margins declined in 2008 and 2007, lowering the fair value of certain inventory positions and resulting in the impairment of that inventory. Further deterioration in housing market conditions may lead to additional noncash impairment charges or cause us to reevaluate our strategy concerning certain assets that could result in future charges associated with land sales or the abandonment of land option contracts. In 2006, most of our inventory impairment and abandonment charges were incurred in the fourth quarter, as conditions became more challenging in certain markets, mainly as a result of a growing imbalance between new home supply and demand. These market dynamics caused a decline in the fair value of certain inventory positions and led us to reassess our strategy concerning certain inventory positions.
 
When we decide not to exercise certain land purchase option contracts due to market conditions and/or changes in our market strategy, we write off the costs, including non-refundable deposits and pre-acquisition costs, related to the abandoned projects. We recognized abandonment charges associated with land option contracts of $40.9 million in 2008, $144.0 million in 2007 and $143.9 million in 2006. The inventory impairment charges and land option contract abandonments are included in construction and land costs in our consolidated statements of operations.
 
Selling, general and administrative expenses totaled $501.0 million in 2008, down from $824.6 million in 2007, which had decreased from $1.12 billion in 2006. The year-over-year decreases in 2008 and 2007 reflected the results of our ongoing efforts to rescale the size of our operations to the lower volume of homes we were delivering and to our future sales expectations. During 2008, we took aggressive actions to streamline our organizational structure by consolidating certain homebuilding operations, strategically exiting or winding down activity in certain markets, and reducing our workforce. Since the beginning of 2008, we have reduced our workforce by 57%. The full impact of these actions in reducing our selling, general and administrative expenses is not reflected in our 2008 results due to the costs we incurred to implement them. As a percentage of housing revenues, to which these expenses are most closely correlated, selling, general and administrative expenses increased to 17.0% in 2008 from 13.3% in 2007, which had increased from 12.2% in 2006. The percentages increased in 2008 and 2007 because our expense reductions have been exceeded by the significant year-over-year declines in our housing revenues and the costs of implementing these reductions.


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Goodwill Impairment.   We have recorded goodwill in connection with various acquisitions in prior years. Goodwill represents the excess of the purchase price over the fair value of net assets acquired. In accordance with Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”), we test goodwill for potential impairment annually as of November 30 and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. During 2008 and 2007, we determined that it was necessary to evaluate goodwill for impairment between annual tests due to deteriorating conditions in certain housing markets and the significant inventory impairments we identified and recognized in those years, in accordance with SFAS No. 144.
 
Based on the results of our impairment evaluation performed in the second quarter of 2008, we recorded an impairment charge of $24.6 million in that quarter related to our Central reporting segment, where all of the goodwill previously recorded was determined to be impaired. The annual goodwill impairment test we performed as of November 30, 2008 resulted in an impairment charge of $43.4 million in the fourth quarter of 2008 related to our Southeast reporting segment, where all of the goodwill previously recorded was determined to be impaired. Based on the results of our impairment evaluation performed in the third quarter of 2007, we recorded an impairment charge of $107.9 million in that quarter related to our Southwest reporting segment, where all of the goodwill previously recorded was determined to be impaired. The annual goodwill impairment test we performed as of November 30, 2007 indicated no additional impairment. The goodwill impairment charges in 2008 and 2007 were recorded at our corporate level because all goodwill is carried at that level. As a result of these impairment charges, we have no remaining goodwill company-wide at November 30, 2008.
 
The process of evaluating goodwill for impairment involves the determination of the fair value of our reporting units. Inherent in such fair value determinations are certain judgments and estimates relating to future cash flows, including our interpretation of current economic indicators and market valuations, and assumptions about our strategic plans with regard to our operations. Due to the uncertainties associated with such estimates, actual results could differ from such estimates.
 
Interest Income.   Interest income, which is generated from short-term investments and mortgages receivable, totaled $34.6 million in 2008, $28.6 million in 2007 and $5.5 million in 2006. Generally, increases and decreases in interest income are attributable to changes in the interest-bearing average balances of short-term investments and mortgages receivable, as well as fluctuations in interest rates. Mortgages receivable are primarily related to land sales. The year-over-year increases in interest income in 2008 and 2007 reflected the higher levels of cash and cash equivalents on our balance sheet stemming from the July 2007 sale of our French discontinued operations and other assets, the cash generated from our operations, and our reduction in land purchases.
 
Loss on Early Redemption/Interest Expense, Net of Amounts Capitalized.   On July 14, 2008, we completed the early redemption of the $300 Million Senior Subordinated Notes at a price of 101.938% of the principal amount plus accrued interest to the date of redemption. We incurred a loss of $7.1 million in 2008 related to the early redemption of debt, as a result of the call premium and the unamortized original issue discount. On August 28, 2008, we entered into the fifth amendment (the “Fifth Amendment”) to our Credit Facility, which reduced the aggregate commitment under the Credit Facility from $1.30 billion to $800.0 million. In light of this reduction in the aggregate commitment, we wrote off $3.3 million of unamortized fees associated with the Credit Facility.
 
On July 27, 2007, we redeemed all $250.0 million of our 9 1 / 2 % senior subordinated notes due in 2011 (the “$250 Million Senior Subordinated Notes”) at a price of 103.167% of the principal amount of the notes, plus accrued interest to the date of redemption. In addition, on July 31, 2007, we repaid in full an unsecured $400.0 million term loan due 2011 (the “$400 Million Term Loan”), together with accrued interest to the date of repayment. The $400 Million Term Loan was scheduled to mature on April 11, 2011. We incurred a loss of $13.0 million in the third quarter of 2007 related to the early redemption of debt, mainly due to the call premium on the senior subordinated notes and the write-off of unamortized debt issuance costs.
 
Interest expense results principally from borrowings to finance land purchases, housing inventory and other operating and capital needs. In 2008, interest expense, net of amounts capitalized, totaled $2.6 million. In 2007, all of our interest was capitalized and, consequently, we had no interest expense, net of amounts capitalized. The percentage of interest capitalized decreased to 98% in 2008 as the amount of inventory qualifying for interest capitalization fell below our debt level in the fourth quarter, reflecting our inventory reduction strategies and our suspension of land development


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in certain communities. In 2006, interest expense, net of amounts capitalized, totaled $16.7 million. Gross interest incurred during 2008 decreased by $43.2 million, to $156.4 million, from $199.6 million incurred in 2007, due to lower debt levels in 2008. Gross interest incurred in 2007 decreased $38.2 million from the amount incurred in 2006, reflecting lower debt levels in 2007.
 
Equity in Loss of Unconsolidated Joint Ventures.   Our unconsolidated joint ventures operate in various markets, typically where our consolidated homebuilding operations are located. These unconsolidated joint ventures posted combined revenues of $112.8 million in 2008, $662.7 million in 2007 and $167.5 million in 2006. The year-over-year decrease in unconsolidated joint venture revenues in 2008 primarily reflected fewer land sales by the unconsolidated joint ventures than in 2007. The increase in revenues in 2007 over the prior year was primarily due to an increase in the number of lots sold by these unconsolidated joint ventures. Activities performed by our unconsolidated joint ventures generally include buying, developing and selling land, and, in some cases, constructing and delivering homes. Our unconsolidated joint ventures delivered 262 homes in 2008, 127 homes in 2007 and 4 homes in 2006. Unconsolidated joint ventures generated combined losses of $383.6 million in 2008, $51.6 million in 2007 and $48.6 million in 2006. Our equity in loss of unconsolidated joint ventures of $152.8 million in 2008 included a charge of $141.9 million to recognize the impairment of certain unconsolidated joint ventures primarily in our West Coast, Southwest and Southeast reporting segments. In 2007, our equity in loss of unconsolidated joint ventures of $151.9 million included a similar charge of $156.4 million also mainly related to our West Coast, Southwest and Southeast reporting segments. In 2006, our equity in loss of unconsolidated joint ventures of $20.8 million included a charge of $58.6 million for unconsolidated joint venture impairments in our West Coast and Southeast reporting segments, and a gain of $27.6 million related to the sale of our ownership interest in an unconsolidated joint venture.
 
HOMEBUILDING SEGMENTS
 
The following table presents financial information related to our homebuilding reporting segments for the years indicated (in thousands):
 
                         
    Years Ended November 30,  
    2008     2007     2006  
 
West Coast:
                       
Revenues
  $ 1,055,021     $ 2,203,303     $ 3,531,279  
Construction and land costs
    (1,202,054 )     (2,635,415 )     (2,879,509 )
Selling, general and administrative expenses
    (120,446 )     (213,133 )     (299,464 )
                         
Operating income (loss)
    (267,479 )     (645,245 )     352,306  
Other, net
    (30,568 )     (20,600 )     7,558  
                         
Pretax income (loss)
  $ (298,047 )   $ (665,845 )   $ 359,864  
                         
Southwest:
                       
Revenues
  $ 618,014     $ 1,349,570     $ 2,183,830  
Construction and land costs
    (722,643 )     (1,492,933 )     (1,616,458 )
Selling, general and administrative expenses
    (69,865 )     (124,462 )     (193,472 )
                         
Operating income (loss)
    (174,494 )     (267,825 )     373,900  
Other, net
    (37,700 )     (19,514 )     (8,802 )
                         
Pretax income (loss)
  $ (212,194 )   $ (287,339 )   $ 365,098  
                         
Central:
                       
Revenues
  $ 594,317     $ 1,077,304     $ 1,553,309  
Construction and land costs
    (570,512 )     (970,912 )     (1,368,530 )
Selling, general and administrative expenses
    (96,306 )     (163,689 )     (223,452 )
                         
Operating loss
    (72,501 )     (57,297 )     (38,673 )
Other, net
    (10,288 )     (6,913 )     (16,076 )
                         
Pretax loss
  $ (82,789 )   $ (64,210 )   $ (54,749 )
                         


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    Years Ended November 30,  
    2008     2007     2006  
 
Southeast:
                       
Revenues
  $ 755,817     $ 1,770,414     $ 2,091,425  
Construction and land costs
    (808,354 )     (1,718,548 )     (1,794,326 )
Selling, general and administrative expenses
    (125,798 )     (213,536 )     (241,674 )
                         
Operating income (loss)
    (178,335 )     (161,670 )     55,425  
Other, net
    (80,233 )     (68,750 )     (16,492 )
                         
Pretax income (loss)
  $ (258,568 )   $ (230,420 )   $ 38,933  
                         
 
The following table presents information concerning our housing revenues, homes delivered and average selling price by homebuilding reporting segment:
 
                                         
          Percent
          Percent
       
          of
          of
       
          Total
          Total
    Average
 
    Housing
    Housing
    Homes
    Homes
    Selling
 
Years Ended November 30,
  Revenues     Revenues     Delivered     Delivered     Price  
    (in thousands)                          
 
2008
                                       
West Coast
  $ 1,054,256       36%       2,972       24%     $ 354,700  
Southwest
    548,544       19          2,393       19          229,200  
Central
    585,826       20          3,348       27          175,000  
Southeast
    751,615       25          3,725       30          201,800  
                                         
Total
  $ 2,940,241       100%       12,438       100%     $ 236,400  
                                         
2007
                                       
West Coast
  $ 2,149,547       35%       4,957       21%     $ 433,600  
Southwest
    1,254,932       20          4,855       20          258,500  
Central
    1,058,985       17          6,310       27          167,800  
Southeast
    1,748,099       28          7,621       32          229,400  
                                         
Total
  $ 6,211,563       100%       23,743       100%     $ 261,600  
                                         
2006
                                       
West Coast
  $ 3,530,679       38%       7,213       22%     $ 489,500  
Southwest
    2,151,908       23          7,011       22          306,900  
Central
    1,536,075       17          9,613       30          159,800  
Southeast
    2,024,574       22          8,287       26          244,300  
                                         
Total
  $ 9,243,236        100%       32,124        100%     $ 287,700  
                                         
 
West Coast  — Our West Coast segment generated total revenues of $1.06 billion in 2008, down 52% from $2.20 billion in 2007 due to lower housing and land sale revenues. Housing revenues decreased to $1.05 billion in 2008 from $2.15 billion in 2007 due to a 40% decrease in homes delivered and an 18% decrease in the average selling price. We delivered 2,972 homes at an average selling price of $354,700 in 2008 and 4,957 homes at an average selling price of $433,600 in 2007. The year-over-year decrease in the number of homes delivered was largely due to a 34% decrease in the number of active communities we operated in the segment. The lower average selling price in 2008 resulted from highly competitive conditions and rising foreclosures as well as from our introduction of new product at lower price points. Revenues from land sales totaled $.8 million in 2008 and $53.8 million in 2007.
 
Our West Coast segment posted pretax losses of $298.0 million in 2008 and $665.8 million in 2007. Pretax results improved in 2008 compared to 2007 due to lower inventory impairment and land option contract abandonment charges and lower selling, general and administrative expenses. Inventory impairment and land option contract abandonment charges totaled $246.5 million in 2008 and $659.4 million in 2007. As a percentage of revenues, these charges were 23% in 2008 and 30% in 2007. The gross margin was negative 13.9% in 2008 compared to negative 19.6% in 2007, reflecting a decrease in inventory-related charges as a percent of revenues, partly offset by lower average selling prices and greater use of targeted sales price reductions and sales incentives. Selling, general and administrative expenses decreased by $92.7 million, or 43%, to $120.4 million in 2008 from $213.1 million in 2007 due to our actions to align overhead

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with the reduced volume of homes delivered and our future sales expectations. Included in other, net expenses were unconsolidated joint venture impairments of $43.1 million in 2008 and $57.0 million in 2007.
 
Revenues from our West Coast segment decreased 38% to $2.20 billion in 2007, from $3.53 billion in 2006, due to lower housing revenues. Housing revenues were down 39%, from $3.53 billion in 2006, reflecting a 31% decrease in homes delivered and an 11% decrease in the average selling price. We delivered 4,957 homes in 2007 compared with 7,213 homes in 2006 due primarily to our reducing the number of active communities by 10% to match reduced levels of demand in this segment compared to 2006. Our average selling price declined to $433,600 in 2007 from $489,500 in 2006 due to highly competitive conditions and weak demand. Our lower average selling price in 2007 versus 2006 also reflected our efforts to redesign and reengineer our products to improve their affordability, particularly in light of tighter mortgage financing standards applicable to loans above conforming limits. Land sale revenues totaled $53.8 million in 2007 compared with $.6 million in 2006.
 
Our West Coast segment generated a pretax loss of $665.8 million in 2007, down from pretax income of $359.9 million in 2006. This decrease was principally due to increased inventory impairment and land option contract abandonment charges in 2007 that reflected deteriorating market conditions. These charges totaled $659.4 million in 2007 compared to $178.8 million in 2006. As a percentage of revenues, inventory impairments and land option contract abandonment charges were 30% in 2007 and 5% in 2006. The gross margin decreased to negative 19.6% in 2007 from 18.5% in 2006 as a result of higher inventory-related charges as a percent of revenues, a lower average selling price and more frequent use of price concessions and sales incentives. Selling, general and administrative expenses decreased by $86.3 million, or 29%, to $213.1 million in 2007 from $299.5 million in 2006. Included in other, net expenses were unconsolidated joint venture impairments of $57.0 million in 2007 and $34.4 million in 2006.
 
Southwest  — Total revenues from our Southwest segment declined 54% to $618.0 million in 2008 from $1.35 billion in 2007, reflecting decreases in housing and land sale revenues. Housing revenues fell 56% to $548.5 million in 2008 from $1.25 billion in 2007 due to a 51% decrease in the number of homes delivered and an 11% decrease in the average selling price. We delivered 2,393 homes in this segment for 2008 compared with 4,855 homes in 2007, largely due to a 32% reduction in the number of our active communities. Our average selling price of $229,200 in 2008 decreased from $258,500 in 2007, reflecting highly competitive conditions driven by an excess supply of new and resale homes, rising foreclosures and lower demand, as well as our introduction of new, value-engineered product at lower price points. Revenues from land sales totaled $69.5 million in 2008 compared to $94.6 million in 2007.
 
Our Southwest segment generated pretax losses of $212.2 million in 2008 and $287.3 million in 2007. The decrease in the pretax loss in 2008 reflected a decrease in inventory-related charges and lower selling, general and administrative expenses. Inventory impairment and land option contract abandonment charges totaled $160.8 million in 2008 compared with $354.4 million in 2007. These charges represented 26% of revenues in both 2008 and 2007. The gross margin was negative 16.9% in 2008 compared to negative 10.6% in 2007 primarily due to the decline in average selling prices. Selling, general and administrative expenses decreased by $54.6 million, or 44%, to $69.9 million in 2008 from $124.5 million in 2007, largely as a result of our cost reduction efforts. Included in other, net expenses were unconsolidated joint venture impairments of $30.4 million in 2008 and $31.0 million in 2007.
 
In 2007, our Southwest segment’s total revenues decreased 38% to $1.35 billion from $2.18 billion in 2006 due to lower housing revenues. Housing revenues decreased 42% to $1.25 billion in 2007 from $2.15 billion in 2006, due to a 31% decrease in homes delivered and a 16% decrease in the average selling price. We delivered 4,855 homes in 2007, down from 7,011 homes in 2006, primarily due to a 24% decrease in the number of our active communities, principally in Las Vegas, reflecting our efforts to align our operations with lower levels of demand. The average selling price decreased to $258,500 in 2007 from $306,900 in 2006 due to a persistent oversupply of new and resale homes in certain markets coupled with declining demand. Land sale revenues totaled $94.6 million in 2007 and $31.9 million in 2006.
 
Our Southwest segment posted a pretax loss of $287.3 million in 2007 and pretax income of $365.1 million in 2006. The pretax results decreased in 2007 principally due to increased inventory impairment and land option contract abandonment charges. Inventory impairment and land option contract abandonment charges totaled $354.4 million in 2007 and $39.4 million in 2006. As a percentage of revenues, these charges were 26% in 2007 and 2% in 2006. The gross margin in our Southwest segment fell to negative 10.6% in 2007 compared to 26.0% in 2006, reflecting an increase in inventory-related charges as a percent of revenues, weakness in market conditions, greater competition, and the increased use of price concessions and sales incentives to stimulate sales. Selling, general and administrative expenses in our


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Southwest segment decreased by $69.0 million, or 36%, to $124.5 million in 2007 from $193.5 million in 2006 due to our actions to rescale the size of our operations to the reduced number of homes we delivered and our future sales expectations. Included in other, net expenses were unconsolidated joint venture impairment charges of $31.0 million in 2007. In 2006, there were no unconsolidated joint venture impairment charges in the Southwest segment.
 
Central  — Our Central segment generated total revenues of $594.3 million in 2008, down 45% from $1.08 billion in 2007, reflecting lower revenues from housing and land sales. Housing revenues decreased 45% to $585.8 million in 2008 from $1.06 billion in 2007, due to a 47% decrease in the number of homes we delivered, partly offset by a 4% increase in our average selling price. In 2008, we delivered 3,348 homes at an average price of $175,000 compared to 6,310 homes delivered at an average price of $167,800 in 2007. The decrease in homes delivered reflected a 38% reduction in the number of active communities we operated. The increase in the average selling price was due to a change in product mix. Land sale revenues totaled $8.5 million in 2008 and $18.3 million in 2007.
 
Our Central segment generated pretax losses of $82.8 million in 2008 and $64.2 million in 2007. The loss increased in 2008 principally due to higher inventory-related charges driven by deteriorating market conditions. These charges totaled $51.5 million in 2008 compared to $34.4 million in 2007. As a percentage of revenues, inventory impairments and land option contract abandonment charges were 9% in 2008 and 3% in 2007. The gross margin decreased to 4.0% in 2008 from 9.9% in 2007 as a result of an increase in inventory-related charges as a percent of revenues, partly offset by a higher average selling price. Selling, general and administrative expenses decreased by $67.4 million, or 41%, to $96.3 million in 2008 from $163.7 million in 2007, reflecting our efforts to calibrate our operations with reduced housing market activity. Included in other, net expenses were unconsolidated joint venture impairments of $2.6 million in 2008 and $4.5 million in 2007.
 
In 2007, total revenues from our Central segment fell 31% from $1.55 billion in 2006, primarily due to lower housing revenues. Housing revenues of $1.06 billion in 2007 decreased 31% from $1.54 billion in 2006, reflecting a year-over-year decrease of 34% in homes delivered, partially offset by a 5% increase in the average selling price. Homes delivered decreased to 6,310 in 2007 from 9,613 in 2006 primarily due to a 26% decrease in the number of our active communities, principally in Texas and Indiana, due to our exiting smaller submarkets and adjusting our operations to our reduced sales expectations in these states. The average selling price increased to $167,800 in 2007 from $159,800 in 2006 due to a change in product mix.
 
Our Central segment posted pretax losses of $64.2 million in 2007 and $54.7 million in 2006. The pretax results decreased in 2007 mainly due to a decrease in gross margin. Inventory-related impairment and land option contract abandonment charges totaled $34.4 million in 2007 and $48.8 million in 2006. As a percentage of revenues, these charges were 3% in both 2007 and 2006. The gross margin decreased to 9.9% in 2007 from 11.9% in 2006. Selling, general and administrative expenses decreased by $59.8 million, or 27%, to $163.7 million in 2007 from $223.5 million in 2006 due to our actions to reduce overhead. Included in other, net expenses were unconsolidated joint venture impairment charges of $4.5 million in 2007. There were no unconsolidated joint venture impairment charges in the Central segment in 2006.
 
Southeast  — Our Southeast segment generated total revenues of $755.8 million in 2008 compared to $1.77 billion in 2007 due to lower housing and land sale revenues. Housing revenues decreased 57% to $751.6 million in 2008 from $1.75 billion in 2007 as a result of a 51% decrease in homes delivered and a 12% decline in the average selling price. Homes delivered fell to 3,725 in 2008 from 7,621 in 2007, while the average selling price decreased to $201,800 in 2008 from $229,400 in 2007. The decrease in homes delivered was principally due to a 44% reduction in the number of our active communities. The lower average selling price mainly reflected highly competitive conditions and rising foreclosures as well as our introduction of value-engineered product at lower price points. Revenues from land sales totaled $4.2 million in 2008 and $22.3 million in 2007.
 
Our Southeast segment posted pretax losses of $258.6 million in 2008 and $230.4 million in 2007. The increased loss was principally due to a decline in the gross margin, partly offset by a decrease in selling, general and administrative expenses. The gross margin decreased to negative 7.0% in 2008 from 2.9% in 2007, reflecting the impact of lower average selling prices. Inventory impairment and land option contract abandonment charges totaled $148.0 million in 2008 compared to $205.8 million in 2007. As a percentage of revenues, inventory impairments and land option contract abandonment charges were 20% in 2008 and 12% in 2007. Selling, general and administrative expenses decreased by $87.7 million, or 41%, to $125.8 million in 2008 from $213.5 million in 2007, reflecting our actions to reduce costs in


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line with the reduced volume of homes delivered and our future sales expectations. Included in other, net expenses were unconsolidated joint venture impairments of $65.7 million in 2008 and $63.8 million in 2007.
 
In 2007, total revenues from the Southeast segment declined 15% from $2.09 billion in 2006, reflecting decreases in housing and land sale revenues. Housing revenues decreased 14% to $1.75 billion in 2007 from $2.02 billion in 2006 due to decreases of 8% in homes delivered and 6% in the average selling price. Homes delivered decreased to 7,621 in 2007 from 8,287 in 2006, reflecting difficult conditions in many Southeast markets. The average selling price decreased to $229,400 in 2007 from $244,300 in 2006 as highly competitive conditions exerted downward pressure on home prices, primarily in Florida. In 2007, revenues from land sales totaled $22.3 million, down from $66.9 million in 2006.
 
Our Southeast segment generated a pretax loss of $230.4 million in 2007 compared to pretax income of $38.9 million in 2006. This decrease was mainly due to increased inventory-related charges in 2007 resulting from challenging market conditions. These inventory-related charges totaled $205.8 million in 2007 compared to $105.7 million in 2006. The inventory impairment and land option contract abandonment charges in 2007 were principally in Florida. As a percentage of revenues, inventory impairments and land option contract abandonment charges were 12% in 2007 and 5% in 2006. The gross margin decreased to 2.9% in 2007 from 14.2% in 2006 as a result of an increase in inventory-related charges as a percent of revenues. Selling, general and administrative expenses decreased by $28.2 million, or 12%, to $213.5 million in 2007 from $241.7 million in 2006, reflecting our efforts to calibrate operations with reduced housing market activity. Included in other, net expenses were unconsolidated joint venture impairments of $63.8 million in 2007 and $24.2 million in 2006.
 
FINANCIAL SERVICES SEGMENT
 
Our financial services segment provides title and insurance services to our homebuyers and provided escrow coordination services until 2007, when we terminated our escrow coordination business. This segment also provides mortgage banking services to our homebuyers indirectly through Countrywide KB Home Loans. We and CWB Venture Management Corporation, a subsidiary of Bank of America, N.A., each have a 50% ownership interest in Countrywide KB Home Loans. Countrywide KB Home Loans is operated by our joint venture partner. Countrywide KB Home Loans is accounted for as an unconsolidated joint venture in the financial services reporting segment of our consolidated financial statements.
 
The following table presents a summary of selected financial and operational data for our financial services segment (dollars in thousands):
 
                         
    Years Ended November 30,  
    2008     2007     2006  
 
Revenues
  $ 10,767     $ 15,935     $   20,240  
Expenses
    (4,489 )     (4,796 )     (5,923 )
Equity in income of unconsolidated joint venture
    17,540       22,697       19,219  
                         
Pretax income
  $ 23,818     $ 33,836     $ 33,536  
                         
                         
Total originations (a):
                       
Loans
    10,141       16,869       15,740  
Principal
  $ 2,073,382     $ 3,934,336     $ 3,843,793  
Retention rate
    80 %     72 %     57 %
Loans sold to third parties (a):
                       
Loans
    11,289       16,909       15,613  
Principal
  $ 2,328,702     $ 3,969,827     $ 3,787,597  
 
 
(a)  Loan originations and sales are within Countrywide KB Home Loans.
 
Revenues.   In 2008, 2007 and 2006, our financial services operations generated revenues primarily from the following sources: interest income, title services, and insurance commissions. In 2007 and 2006, financial services revenues also included escrow coordination fees. Financial services revenues totaled $10.8 million in 2008, $15.9 million in 2007 and $20.2 million in 2006. The decrease in financial services revenues in 2008 versus 2007 resulted primarily from lower revenues from title and insurance services, reflecting fewer homes delivered from our homebuilding


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operations. The lower financial services revenues in 2007 compared to 2006 was mainly due to the decreased number of homes delivered by our homebuilding operations and the reduction in escrow coordination fee revenues due to the termination of our escrow coordination business in the second quarter of 2007.
 
Financial services revenues in 2008, 2007 and 2006 included interest income of $.2 million, which was earned in each year primarily from money market deposits and first mortgages held for sale. Financial services revenues also included revenues from title services and insurance commissions of $10.6 million in 2008, $15.1 million in 2007 and $16.6 million in 2006, and escrow coordination fees of $.6 million in 2007 and $3.4 million in 2006.
 
Expenses.   General and administrative expenses totaled $4.5 million in 2008, $4.8 million in 2007 and $5.9 million in 2006. The decreases in general and administrative expenses in 2008 and 2007 were primarily due to the termination of our escrow coordination business in the second quarter of 2007.
 
Equity in Income of Unconsolidated Joint Venture.   The equity in income of unconsolidated joint venture of $17.5 million in 2008, $22.7 million in 2007 and $19.2 million in 2006 relates to our 50% interest in the Countrywide KB Home Loans joint venture. The decrease in unconsolidated joint venture income in 2008 compared to 2007 was largely due to a 40% decline in the number of loans originated by Countrywide KB Home Loans, reflecting the lower volume of homes we delivered, partly offset by an increase in Countrywide KB Home Loans’ retention rate (the percentage of our homebuyers using Countrywide KB Home Loans as a loan originator). Countrywide KB Home Loans’ retention rate increased to 80% in 2008 from 72% in 2007. The higher retention rate primarily reflected the diminished availability of alternative consumer mortgage lenders in the marketplace. In 2007, unconsolidated joint venture income increased from the previous year due to a 7% increase in the number of loans originated by the Countrywide KB Home Loans joint venture reflecting a higher retention rate. The overall retention rate rose to 72% in 2007 from 57% in 2006 reflecting the maturation of the joint venture’s operations, which began in late 2005.
 
The equity in income of unconsolidated joint venture in 2008 was affected by Countrywide KB Home Loans’ adoption of Staff Accounting Bulletin No. 109, “Written Loan Commitments Recorded at Fair Value Through Earnings” (“SAB No. 109”) and Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115” (“SFAS No. 159”). SAB No. 109 revises and rescinds portions of Staff Accounting Bulletin No. 105, “Application of Accounting Principles to Loan Commitments” (“SAB No. 105”), and expresses the current view of the SEC that, consistent with the guidance in Statement of Financial Accounting Standards No. 156, “Accounting for Servicing of Financial Assets — an amendment of FASB Statement No. 140” (“SFAS No. 156”) and SFAS No. 159, the expected net future cash flows related to the associated servicing of loans should be included in the measurement of the fair value of all written loan commitments that are accounted for at fair value through earnings. SFAS No. 159 permits entities to choose to measure various financial instruments and certain other items at fair value on a contract-by-contract basis. Under SFAS No. 159, Countrywide KB Home Loans elected the fair value option for residential mortgage loans held for sale that were originated subsequent to February 29, 2008. As a result of Countrywide KB Home Loans’ adoption of SAB No. 109 and SFAS No. 159, our equity in income of unconsolidated joint venture of the financial services segment increased by $1.7 million in 2008.
 
INCOME TAXES
 
We recognized income tax expense of $8.2 million in 2008, an income tax benefit from continuing operations of $46.0 million in 2007, and income tax expense from continuing operations of $178.9 million in 2006. These amounts represent effective income tax rates of approximately .8% for 2008, 3% for 2007 and 31% for 2006. The change in our effective tax rate in 2008 from 2007 was primarily due to the disallowance of tax benefits related to our current year loss as a result of a full valuation allowance. The decrease in our effective tax rate in 2007 from 2006 was primarily due to a noncash valuation allowance recorded as a reserve against net deferred tax assets.
 
In accordance with SFAS No. 109, we evaluate our deferred tax assets quarterly to determine if valuation allowances are required. SFAS No. 109 requires that companies assess whether valuation allowances should be established based on the consideration of all available evidence using a “more likely than not” standard. For 2008, we recorded a valuation allowance of $355.9 million against our net deferred tax assets. The valuation allowance was reflected as a noncash charge of $358.2 million to income tax expense and a noncash benefit of $2.3 million to accumulated other comprehensive loss (as a result of an adjustment made in accordance with Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87,


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88, 106 and 132(R)” (“SFAS No. 158”)). For 2007, we recorded a valuation allowance totaling approximately $522.9 million against our deferred tax assets. The valuation allowance was reflected as a noncash charge of $514.2 million to income tax expense and $8.7 million to accumulated other comprehensive loss. The majority of the tax benefits associated with our net deferred tax assets can be carried forward for 20 years and applied to offset future taxable income. Our deferred tax assets for which we did not establish a valuation allowance relate to amounts that can be realized through future reversals of existing taxable temporary differences or through carrybacks to the 2007 and 2006 years. To the extent we generate sufficient taxable income in the future to fully utilize the tax benefits of the related deferred tax assets, we expect our effective tax rate to decrease as the valuation allowance is reversed.
 
DISCONTINUED OPERATIONS
 
Discontinued operations consist solely of our French operations which were sold on July 10, 2007. We sold our 49% equity interest in KBSA for total gross proceeds of $807.2 million and we recognized a pretax gain of $706.7 million ($438.1 million, net of income taxes) in the third quarter of 2007 related to the transaction. The sale was made pursuant to a share purchase agreement (the “Share Purchase Agreement”), among us, Financière Gaillon 8 SAS (the “Purchaser”), an affiliate of PAI partners, a European private equity firm, and three of our wholly owned subsidiaries: Kaufman and Broad Development Group, International Mortgage Acceptance Corporation, and Kaufman and Broad International, Inc. (collectively, the “Selling Subsidiaries”). Under the Share Purchase Agreement, the Purchaser agreed to acquire our 49% equity interest (representing 10,921,954 shares held collectively by the Selling Subsidiaries) at a price of 55.00 euros per share. The purchase price consisted of 50.17 euros per share paid by the Purchaser in cash, and a cash dividend of 4.83 euros per share paid by KBSA.
 
In 2007, income from discontinued operations, net of income taxes, totaled $485.4 million, or $6.29 per diluted share, including the gain realized on the sale of these operations. Income from discontinued operations, net of income taxes, totaled $89.4 million, or $1.08 per diluted share, in 2006.
 
LIQUIDITY AND CAPITAL RESOURCES
 
Overview.   Historically, we have funded our homebuilding and financial services operations with internally generated cash flows and external sources of debt and equity financing. We may also borrow funds from time to time under our Credit Facility.
 
In light of the prolonged downturn in the housing market, we remain focused on maintaining a strong balance sheet. We took several decisive actions in 2007 that resulted in substantial cash flow generation and debt reductions, including selling our French operations and other assets, reducing inventory and our active community counts, reducing our workforce, consolidating operations, and selectively exiting or winding down operations in underperforming markets. During 2008, we remained committed to our balance sheet initiatives and, as a result, generated positive operating cash flows and ended the year with $1.25 billion of cash and cash equivalents and restricted cash and $1.94 billion of debt.
 
Capital Resources.   At November 30, 2008, we had $1.94 billion of mortgages and notes payable outstanding compared to $2.16 billion outstanding at November 30, 2007. The decrease in our debt balance was mainly due to the early redemption of debt during the third quarter of 2008. On July 14, 2008, we completed the early redemption of the $300 Million Senior Subordinated Notes at a price of 101.938% of the principal amount plus accrued interest to the date of redemption. We incurred a loss of $7.1 million in 2008 related to the early redemption of debt, as a result of the call premium and the unamortized original issue discount.
 
In managing our investments in unconsolidated joint ventures, we expect in some cases, as occurred in 2008, to opportunistically purchase our partners’ interests and consolidate the joint venture, which would result in an increase in our consolidated mortgages and notes payable. We do not believe that such consolidations should have a material effect on our consolidated financial position, our results of operations, or our ability to comply with the terms governing our Credit Facility or public debt. In the first fiscal quarter of 2009, we redeemed the $200 Million Senior Subordinated Notes upon their December 15, 2008 scheduled maturity. Our next bond maturity does not occur until August 15, 2011, when $350.0 million of 6 3 / 8 % senior notes (the “$350 Million Senior Notes”) become due.


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Our financial leverage, as measured by the ratio of debt to total capital, was 70.0% at November 30, 2008 compared to 53.9% at November 30, 2007. The increase in this ratio reflected lower retained earnings at November 30, 2008, primarily due to the pretax, noncash charges recorded during 2008 for the impairment of inventory, joint ventures and goodwill, and the abandonment of land option contracts, as well as a noncash charge to record a valuation allowance against the net deferred tax assets generated during the period. Our ratio of net debt to net total capital at November 30, 2008 was 45.4%, compared to 31.1% at November 30, 2007. Net debt to net total capital is calculated by dividing mortgages and notes payable, net of homebuilding cash and cash equivalents and restricted cash, by net total capital (mortgages and notes payable, net of homebuilding cash and cash equivalents and restricted cash, plus stockholders’ equity). We believe the ratio of net debt to net total capital is useful in understanding the leverage employed in our operations and in comparing us with other companies in the homebuilding industry.
 
As of November 30, 2008, we had no cash borrowings outstanding and $211.8 million in letters of credit outstanding under our Credit Facility, leaving us with $588.2 million available for future borrowings.
 
On August 28, 2008, we entered into the Fifth Amendment to the Credit Facility. The Fifth Amendment, among other things, reduced the aggregate commitment under the Credit Facility from $1.30 billion to $800.0 million and provided that the aggregate commitment may be permanently reduced to: (a) $650.0 million, if at the end of any fiscal quarter our consolidated tangible net worth is less than or equal to $800.0 million but greater than $500.0 million, and (b) $500.0 million, if at the end of any fiscal quarter our consolidated tangible net worth is less than or equal to $500.0 million. In addition, the Fifth Amendment reduced the sublimit for swing line loans from $100.0 million to $60.0 million; reduced the sublimit for the issuance of letters of credit from $1.00 billion to $600.0 million; and reduced the amount of unrestricted cash applied to the borrowing base calculation by the amount of outstanding borrowings under the Credit Facility as of the measurement date.
 
Under the terms of the Credit Facility, we are required, among other things, to maintain a minimum consolidated tangible net worth and certain financial statement ratios, and are subject to limitations on acquisitions, inventories and indebtedness. Specifically, the Credit Facility, requires us to maintain a minimum consolidated tangible net worth of $1.00 billion, reduced by the cumulative deferred tax valuation allowances not to exceed $721.8 million (“Permissible Deferred Tax Valuation Allowances”). The minimum consolidated tangible net worth requirement is increased by the amount of the proceeds from any issuance of capital stock and 50% of our cumulative consolidated net income, before the effect of deferred tax valuation allowances, for each quarter after May 31, 2008 where we have cumulative consolidated net income. There is no decrease when we have cumulative consolidated net losses. At November 30, 2008, our applicable minimum consolidated tangible net worth requirement was $278.2 million.
 
Other financial statement ratios required under the Credit Facility consist of maintaining at the end of each fiscal quarter a Coverage Ratio greater than 1.00 to 1.00 and a Leverage Ratio less than 2.00 to 1.00, 1.25 to 1.00, or 1.00 to 1.00, depending on our Coverage Ratio. The Coverage Ratio is the ratio of our consolidated adjusted EBITDA to consolidated interest expense (as defined under the Credit Facility) over the previous 12 months. The Leverage Ratio is the ratio of our consolidated total indebtedness (as defined under the Credit Facility) to the sum of consolidated tangible net worth and Permissible Deferred Tax Valuation Allowances (“Adjusted Consolidated Tangible Net Worth”).
 
If our Coverage Ratio is less than 1.00 to 1.00, we will not be in default under the Credit Facility if our Leverage Ratio is less than 1.00 to 1.00 and we establish the Interest Reserve Account equal to the amount of interest we incurred on a consolidated basis during the most recent completed quarter, multiplied by the number of quarters remaining until the Credit Facility maturity date of November 2010, not to exceed a maximum of four. We may withdraw all amounts deposited in the Interest Reserve Account when our Coverage Ratio at the end of a fiscal quarter is greater than or equal to 1.00 to 1.00, provided that there is no default under the Credit Facility at the time the amounts are withdrawn. An Interest Reserve Account is not required when our actual Coverage Ratio is greater than or equal to 1.00 to 1.00.


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The following table summarizes certain key financial metrics we are required to maintain under our Credit Facility at November 30, 2008 and our actual ratios:
 
                 
    November 30, 2008  
    Covenant
       
Financial Covenant
  Requirement     Actual  
 
Minimum consolidated tangible net worth
  $ 278.2 million     $ 827.9 million  
Coverage Ratio
    (a)       (a)  
Leverage Ratio (b)
    ≤1.00       .47  
Investment in subsidiaries and joint ventures as a percent of Adjusted Consolidated Tangible Net Worth
    <35 %     15 %
Borrowing base in excess of senior indebtedness (as defined)
    Greater than zero     $ 825.0 million  
 
 
(a) Our Coverage Ratio of negative .27 was less than 1.00 to 1.00 as of November 30, 2008. Because our Leverage Ratio as of August 31, 2008 was below 1.00 to 1.00, we established an Interest Reserve Account of $115.4 million in the fourth quarter of 2008 to remain in compliance with the terms of the Credit Facility. The Interest Reserve Account had a balance of $115.4 million at November 30, 2008. Because our Leverage Ratio as of November 30, 2008 was below 1.00 to 1.00, we will continue to maintain the Interest Reserve Account, but the balance will be reduced to $111.2 million in the first quarter of 2009.
 
(b) The Leverage Ratio requirement varies based on our Coverage Ratio. If our Coverage Ratio is greater than or equal to 1.50 to 1.00, the Leverage Ratio requirement is less than 2.00 to 1.00. If our Coverage Ratio is between 1.00 and 1.50 to 1.00, the Leverage Ratio requirement is less than 1.25 to 1.00. If our Coverage Ratio is less than 1.00 to 1.00, the Leverage Ratio requirement is less than or equal to 1.00 to 1.00.
 
The Credit Facility also contains limitations on the total consideration paid for exchanges of capital stock with our employees, unimproved land book value, investments in subsidiaries and joint ventures, speculative home deliveries and borrowing base requirements. Transactions with employees for exchanges of capital stock, such as payments for incentive and employee benefit plans or cashless exercises of stock options, cannot exceed $5.0 million in any fiscal year. In addition to the financial covenants summarized in the above table, other covenants provide that: (a) the unimproved land book value cannot exceed consolidated tangible net worth; and (b) speculative home deliveries within a given quarter cannot exceed 40% of the previous 12 months’ total deliveries.
 
If our Coverage Ratio is less than 2.00 to 1.00, we are restricted from optional payment or prepayment of principal, interest or any other amount for subordinated obligations before their maturity; payments to retire, redeem, purchase or acquire for value shares of capital stock from or with non-employees; and investments in a holder of 5% or more of our capital stock if the purpose of the investment is to avoid default. These restrictions do not apply if (a) our unrestricted cash equals or exceeds the aggregate commitment; (b) there are no outstanding borrowings against the Credit Facility; and (c) there is no default under the Credit Facility.
 
The indenture governing our senior notes does not contain any financial covenants. Subject to specified exceptions, the senior notes indenture contains certain restrictive covenants that, among other things, limit our ability to incur secured indebtedness; engage in sale-leaseback transactions involving property or assets above a certain specified value; or engage in mergers, consolidations, or sales of assets.
 
As of November 30, 2008, we were in compliance with the terms of our senior notes indenture and our Credit Facility. However, our ability to continue to borrow funds depends in part on our ability to remain in such compliance. Our inability to do so could make it more difficult and expensive to maintain our current level of external debt financing or to obtain additional financing.
 
During the quarter ended February 29, 2008, our board of directors declared a cash dividend of $.25 per share of common stock, which was paid on February 21, 2008 to stockholders of record on February 7, 2008. During the quarter ended May 31, 2008, our board of directors declared a cash dividend of $.25 per share of common stock, which was paid on May 22, 2008 to stockholders of record on May 8, 2008, and declared a cash dividend of $.25 per share of common stock, which was paid on July 24, 2008 to stockholders of record on July 10, 2008. During the quarter ended November 30, 2008, our board of directors declared a cash dividend of $.0625 per share of common stock, which was paid


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on November 25, 2008 to shareholders of record on November 14, 2008. During 2008, we have declared and paid total cash dividends of $.8125 per share of common stock.
 
Depending on available terms and our negotiating leverage related to specific market conditions, we also finance certain land acquisitions with purchase-money financing from land sellers or with other forms of financing from third parties. At November 30, 2008, we had outstanding notes payable of $96.4 million secured primarily by the underlying property, which had a carrying value of $169.8 million.
 
Consolidated Cash Flows.   Operating, investing and financing activities used net cash of $202.2 million in 2008. These activities provided net cash of $539.6 million in 2007 and $479.2 million in 2006.
 
Operating Activities.   Operating activities provided net cash flows of $341.3 million in 2008 and $1.05 billion in 2007. The year-over-year change in operating cash flow was primarily due to the $297.4 million of cash provided by the French discontinued operations in 2007 and fewer year-over-year homes delivered and lower average selling prices in 2008. Our sources of operating cash in 2008 included a net decrease in inventories of $545.9 million (excluding inventory impairments and land option contract abandonments, $90.0 million of inventories acquired through seller financing and a decrease of $143.1 million in consolidated inventories not owned), other operating sources of $32.6 million and various noncash items added to the net loss. Partially offsetting the cash provided in 2008 was a net loss of $976.1 million, a decrease in accounts payable, accrued expenses and other liabilities of $282.8 million and an increase in receivables of $60.6 million.
 
In 2007, operating cash provided by our continuing operations included a net decrease in inventories of $779.9 million (excluding inventory impairments and land option contract abandonments, $4.1 million of inventories acquired through seller financing and a decrease of $409.5 million in consolidated inventories not owned), other operating sources of $13.4 million and various noncash items added to the loss from continuing operations. Partially offsetting the cash provided in 2007 was a net loss of $929.4 million, a decrease in accounts payable, accrued expenses and other liabilities of $340.6 million and an increase in receivables of $71.4 million. Our French discontinued operations provided net cash from operating activities of $297.4 million in 2007.
 
In 2006, sources of operating cash from our continuing operations included earnings of $482.4 million, an increase in accounts payable, accrued expenses and other liabilities of $205.7 million, other operating sources of $7.2 million and various noncash items deducted from net income. Our sources of operating cash in 2006 were partially offset by an increase in inventories of $356.3 million (excluding inventory impairments and land option contract abandonments, $128.7 million of inventories acquired through seller financing and a decrease of $18.1 million in consolidated inventories not owned) and an increase in receivables of $23.5 million. Our French discontinued operations provided net cash from operating activities of $229.5 million in 2006.
 
Investing Activities.   Investing activities used net cash of $167.9 million in 2008 and provided net cash of $643.1 million in 2007. In 2008, $115.4 million of cash was used to establish the Interest Reserve Account as required under the terms of our Credit Facility (making it restricted cash), and $59.6 million was used for investments in unconsolidated joint ventures. The cash used in 2008 was partially offset by $7.1 million provided from net sales of property and equipment. In 2007, continuing operations provided cash of $739.8 million from the sale of our French discontinued operations, net of cash divested, and $.6 million was provided from net sales of property and equipment. Partially offsetting the cash provided in the period was $85.2 million used for investments in unconsolidated joint ventures. Our French discontinued operations used net cash of $12.1 million for investing activities in 2007.
 
In 2006, our continuing operations used cash for investing activities, including $179.2 million for investments in unconsolidated joint ventures and $17.6 million for net purchases of property and equipment. The cash used was partially offset by proceeds of $57.8 million from the sale of our investment in an unconsolidated joint venture and $.7 million from other investing activities. In 2006, our French discontinued operations used net cash of $4.5 million for investing activities.
 
Financing Activities.   Net cash used for financing activities totaled $375.6 million in 2008 and $1.15 billion in 2007. In 2008, cash was used for the redemption of the $300 Million Senior Subordinated Notes, dividend payments of $63.0 million, net payments on short-term borrowings of $12.8 million and repurchases of common stock of $1.0 million in connection with the satisfaction of employee withholding taxes on vested restricted stock. These uses of cash in 2008 were partly offset by $7.0 million provided from the issuance of common stock under our employee stock plans.


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In 2007, our continuing operations used cash for the redemption of the $400 Million Term Loan, which was scheduled to mature on April 11, 2011, the redemption of the $250 Million Senior Subordinated Notes, net payments on short-term borrowings of $114.1 million, dividend payments of $77.2 million, and repurchases of common stock of $6.9 million in connection with the satisfaction of employee withholding taxes on vested restricted stock. These uses of cash were partly offset in 2007 by $12.3 million provided from the issuance of common stock under our employee stock plans and $.9 million of excess tax benefit associated with the exercise of stock options. Our French discontinued operations used net cash of $306.5 million for financing activities in 2007.
 
In 2006, sources of cash from our continuing operations included proceeds from the $400 Million Term Loan, $298.5 million in total proceeds from the issuance of $300.0 million of 7 1 / 4 % senior notes due 2018 (the “$300 Million 7 1 / 4 % Senior Notes”), $65.1 million from the issuance of common stock under employee stock plans and $15.4 million of excess tax benefits associated with the exercise of stock options. Partially offsetting the sources of cash were $394.1 million used for repurchases of common stock, net payments on short-term borrowings of $120.7 million and dividend payments of $78.3 million. In 2006, our French discontinued operations used net cash of $215.0 million for financing activities.
 
Shelf Registration Statement.   On October 17, 2008, we filed an automatically effective universal shelf registration statement (the “2008 Shelf Registration”) with the SEC, registering debt and equity securities that we may issue from time to time in amounts to be determined. Our previously outstanding universal shelf registration filed with the SEC on November 12, 2004 (the “2004 Shelf Registration”) was subsumed within the 2008 Shelf Registration. As of the date of this Form 10-K, we have not issued any securities under our 2008 Shelf Registration.
 
Share Repurchase Program.   At November 30, 2008, we were authorized to repurchase four million shares of our common stock under a board-approved share repurchase program. We did not repurchase any shares of our common stock under this program in 2008.
 
In the present environment, we are carefully managing our use of cash, including internal capital investments, investments to grow our business and additional debt reductions. Based on our current capital position, we believe we have adequate resources and sufficient credit facilities to satisfy our current and reasonably anticipated future requirements for funds to acquire capital assets and land, consistent with our marketing strategies and investment standards, to construct homes, to finance our financial services operations, and to meet any other needs in the ordinary course of our business, both on a short- and long-term basis. Although we anticipate that our asset acquisition and development activities will remain limited in the near term until markets stabilize, we are analyzing potential asset acquisitions and will use our present financial strength to acquire assets in good, long-term markets when the prices, timing and strategic fit are compelling.
 
OFF-BALANCE SHEET ARRANGEMENTS
 
We participate in unconsolidated joint ventures that conduct land acquisition, development and/or other homebuilding activities in various markets, typically where our homebuilding operations are located. Our partners in these unconsolidated joint ventures are unrelated homebuilders, land developers and other real estate entities, or commercial enterprises. Through unconsolidated joint ventures, we seek to reduce and share market and development risks and to reduce our investment in land inventory, while potentially increasing the number of homesites we own or control. In some instances, participating in unconsolidated joint ventures enables us to acquire and develop land that we might not otherwise have access to due to a project’s size, financing needs, duration of development or other circumstances. While we view our participation in unconsolidated joint ventures as beneficial to our homebuilding activities, we do not view such participation as essential.
 
We and/or our unconsolidated joint venture partners typically obtain options or enter into other arrangements to purchase portions of the land held by the unconsolidated joint ventures. The prices for these land options are generally negotiated prices that approximate fair value. When an unconsolidated joint venture sells land to our homebuilding operations, we defer recognition of our share of such unconsolidated joint venture earnings until a home sale is closed and title passes to a homebuyer, at which time we account for those earnings as a reduction of the cost of purchasing the land from the unconsolidated joint venture.


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We and our unconsolidated joint venture partners make initial or ongoing capital contributions to these unconsolidated joint ventures, typically on a pro rata basis. The obligation to make capital contributions is governed by each unconsolidated joint venture’s respective operating agreement.
 
Each unconsolidated joint venture maintains financial statements in accordance with U.S. generally accepted accounting principles. We share in profits and losses of these unconsolidated joint ventures generally in accordance with our respective equity interests. Our investment in these unconsolidated joint ventures totaled $177.6 million at November 30, 2008 and $297.0 million at November 30, 2007. These unconsolidated joint ventures had total assets of $1.26 billion at November 30, 2008 and $2.51 billion at November 30, 2007. We expect our investments in unconsolidated joint ventures to continue to decrease over time and are reviewing each investment to ensure it fits into our current overall strategic plans and business objectives.
 
The unconsolidated joint ventures finance land and inventory investments through a variety of arrangements. To finance their respective land acquisition and development activities, many of our unconsolidated joint ventures have obtained loans from third-party lenders that are secured by the underlying property and related project assets. Unconsolidated joint ventures had outstanding debt, substantially all of which was secured, of approximately $871.3 million at November 30, 2008 and $1.54 billion at November 30, 2007. The unconsolidated joint ventures are subject to various financial and non-financial covenants in conjunction with their debt, primarily related to equity maintenance, fair value of collateral and minimum land purchase or sale requirements within a specified period. In a few instances, the financial covenants are based on our financial position.
 
In certain instances, we and/or our partner(s) in an unconsolidated joint venture provide guarantees and indemnities to the unconsolidated joint venture’s lenders that may include one or more of the following: (a) a completion guaranty; (b) a loan-to-value maintenance guaranty; and/or (c) a carve-out guaranty. A completion guaranty refers to the physical completion of improvements for a project and/or the obligation to contribute equity to an unconsolidated joint venture to enable it to fund its completion obligations. A loan-to-value maintenance guaranty refers to the payment of funds to maintain the applicable loan balance at or below a specific percentage of the value of an unconsolidated joint venture’s secured collateral (generally land and improvements). A carve-out guaranty refers to the payment of (i) losses a lender suffers due to certain bad acts or omissions by an unconsolidated joint venture or its partners, such as fraud or misappropriation, or due to environmental liabilities arising with respect to the relevant project, or (ii) outstanding principal and interest and certain other amounts owed to lenders upon the filing by an unconsolidated joint venture of a voluntary bankruptcy petition or the filing of an involuntary bankruptcy petition by creditors of the unconsolidated joint venture in which an unconsolidated joint venture or its partners collude or which the unconsolidated joint venture fails to contest.
 
In most cases, our maximum potential responsibility under these guarantees and indemnities is limited to either a specified maximum dollar amount or an amount equal to our pro rata interest in the relevant unconsolidated joint venture. In a few cases, we have entered into agreements with our unconsolidated joint venture partners to be reimbursed or indemnified with respect to the guarantees we have provided to an unconsolidated joint venture’s lenders for any amounts we may pay pursuant to such guarantees above our pro rata interest in the unconsolidated joint venture. If our unconsolidated joint venture partners are unable to fulfill their reimbursement or indemnity obligations, or otherwise fail to do so, we could incur more than our allocable share under the relevant guaranty. Should there be indications that advances (if made) will not be voluntarily repaid by an unconsolidated joint venture partner under any such reimbursement arrangements, we vigorously pursue all rights and remedies available to us under the applicable agreements, at law or in equity to enforce our reimbursement rights.
 
Our potential responsibility under our completion guarantees, if triggered, is highly dependent on the facts of a particular case. In any event, we believe our actual responsibility under these guarantees is limited to the amount, if any, by which an unconsolidated joint venture’s outstanding borrowings exceed the value of its assets, but may be substantially less than this amount.
 
At November 30, 2008, our potential responsibility under our loan-to-value maintenance guarantees totaled approximately $45.4 million, if any liability were determined to be due thereunder. This amount represents our maximum responsibility under such loan-to-value maintenance guarantees assuming the underlying collateral has no value and without regard to defenses that could be available to us against attempted enforcement of such guarantees.


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Notwithstanding these potential responsibilities, at this time we do not believe that our exposure under our existing completion, loan-to-value and carve-out guarantees and indemnities related to unconsolidated joint venture debt is material to our consolidated financial position or results of operations.
 
Recently, the lenders for two of our unconsolidated joint ventures filed lawsuits against some of the unconsolidated joint ventures’ members, and certain of those members’ parent companies, seeking to recover damages under completion guarantees, among other claims. We and the other parent companies, together with the members, are defending the lawsuits in which they have been named. We do not believe that these lawsuits will have a material impact on our consolidated financial position or results of operations.
 
In addition to the above-described guarantees and indemnities, we have also provided a several guaranty to the lenders of one of our unconsolidated joint ventures. By its terms, the guaranty purports to guarantee the repayment of principal and interest and certain other amounts owed to the unconsolidated joint venture’s lenders when an involuntary bankruptcy proceeding is filed against the unconsolidated joint venture that is not dismissed within 60 days or for which an order approving relief under bankruptcy law is entered, even if the unconsolidated joint venture or its partners do not collude in the filing and the unconsolidated joint venture contests the filing. Our potential responsibility under this several guaranty fluctuates with the outstanding borrowings against the unconsolidated joint venture’s debt and with us and our partners’ respective land purchases from the unconsolidated joint venture. At November 30, 2008, this unconsolidated joint venture had total outstanding indebtedness of approximately $373.9 million and, if this guaranty were then enforced, our maximum potential responsibility under the guaranty would have been approximately $182.7 million, which amount does not account for any offsets or defenses that could be available to us. This unconsolidated joint venture has received notices from its lenders’ administrative agent alleging a number of defaults under its loan agreement. We are currently exploring resolutions with the lenders, the lenders’ administrative agent and our unconsolidated joint venture partners, but there is no assurance that we will reach a satisfactory resolution with all of the parties involved.
 
Certain of our other unconsolidated joint ventures operating in difficult market conditions are in default of their debt agreements with their lenders or are at risk of defaulting. In addition, certain of our unconsolidated joint venture partners have curtailed funding of their allocable joint venture obligations. We are carefully managing our investments in these particular unconsolidated joint ventures and are working with the relevant lenders and unconsolidated joint venture partners to reach satisfactory resolutions. In some instances, we may decide to opportunistically purchase our partners’ interests and would consolidate the joint venture, which would result in an increase in our consolidated mortgages and notes payable. However, such purchases may not resolve a claimed default by the joint venture under its debt agreements. Additionally, we may seek new equity partners to participate in our unconsolidated joint ventures or, based on market conditions and other strategic considerations, may decide to withdraw from an unconsolidated joint venture and allow the unconsolidated joint venture’s lenders to exercise their remedies with respect to the underlying collateral (subject to any relevant defenses available to us). Based on the terms and amounts of the debt involved for these particular unconsolidated joint ventures and the terms of the applicable joint venture operating agreements, we do not believe that our exposure related to any defaults by or with respect to these particular unconsolidated joint ventures is material to our consolidated financial position or results of operations.
 
In the ordinary course of our business, we enter into land option contracts to procure land for the construction of homes. The use of such land option contracts generally allows us to reduce the risks associated with direct land ownership and development, reduces our capital and financial commitments, including interest and other carrying costs, and minimizes the amount of our land inventories on our consolidated balance sheet. Under such land option contracts, we will pay a specified option deposit or earnest money deposit in consideration for the right to purchase land in the future, usually at a predetermined price. Under the requirements of FASB Interpretation No. 46(R), “Consolidation of Variable Interest Entities” (“FASB Interpretation No. 46(R)”), certain of our land option contracts may create a variable interest for us, with the land seller being identified as a variable interest entity (“VIE”).
 
In compliance with FASB Interpretation No. 46(R), we analyze our land option contracts and other contractual arrangements when they are entered into or upon a reconsideration event, and as a result have consolidated the fair value of certain VIEs from which we are purchasing land under option contracts. Although we do not have legal title to the optioned land, FASB Interpretation No. 46(R) requires us to consolidate the VIE if we are determined to be the primary beneficiary. The consolidation of VIEs in which we were determined to be the primary beneficiary increased our


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inventories, with a corresponding increase to accrued expenses and other liabilities, on our consolidated balance sheets by $15.5 million at November 30, 2008 and $19.0 million at November 30, 2007. The liabilities related to our consolidation of VIEs from which we are purchasing land under option contracts represent the difference between the purchase price of optioned land not yet purchased and our cash deposits. Our cash deposits related to these land option contracts totaled $3.4 million at November 30, 2008 and $4.7 million at November 30, 2007. Creditors, if any, of these VIEs have no recourse against us. As of November 30, 2008, excluding consolidated VIEs, we had cash deposits totaling $29.7 million, which were associated with land option contracts having an aggregate purchase price of $533.2 million.
 
We also evaluate land option contracts in accordance with Statement of Financial Accounting Standards No. 49, “Accounting for Product Financing Arrangements” (“SFAS No. 49”), and, as a result of our evaluations, increased inventories, with a corresponding increase to accrued expenses and other liabilities, on our consolidated balance sheets by $81.5 million at November 30, 2008 and $221.1 million at November 30, 2007.
 
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
 
The following table summarizes our future cash requirements under contractual obligations as of November 30, 2008 (in thousands):
 
                                         
    Payments due by Period  
    Total     2009     2010-2011     2012-2013     Thereafter  
 
Contractual obligations:
                                       
Long-term debt
  $ 1,941,537     $ 279,522     $ 365,754     $     $ 1,296,261  
Interest
    643,579       112,813       201,867       163,750       165,149  
Operating lease obligations
    61,743       18,957       26,317       11,712       4,757  
                                         
Total
  $ 2,646,859     $ 411,292     $ 593,938     $ 175,462     $ 1,466,167  
                                         
 
We are often required to obtain performance bonds and letters of credit in support of our obligations to various municipalities and other government agencies in connection with subdivision improvements such as roads, sewers and water. At November 30, 2008, we had $761.1 million of performance bonds and $211.8 million of letters of credit outstanding. At November 30, 2007, we had $1.08 billion of performance bonds and $296.8 million of letters of credit outstanding. In the event any such performance bonds or letters of credit are called, we would be obligated to reimburse the issuer of the performance bond or letter of credit. At this time, we do not believe that a material amount of any currently outstanding performance bonds or letters of credit will be called. Performance bonds do not have stated expiration dates. Rather, we are released from the performance bonds as the contractual performance is completed. The expiration dates of letters of credit issued in connection with subdivision improvements coincide with the expected completion dates of the related projects. If the obligations related to a project are ongoing, annual extensions of the letters of credit are typically granted on a year-to-year basis.
 
CRITICAL ACCOUNTING POLICIES
 
Discussed below are accounting policies that we believe are critical because of the significance of the activity to which they relate or because they require the use of significant judgment in their application.
 
Homebuilding Revenue Recognition.   As discussed in Note 1. Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements in this Form 10-K, revenues from housing and other real estate sales are recognized in accordance with Statement of Financial Accounting Standards No. 66, “Accounting for Sales of Real Estate” (“SFAS No. 66”), when sales are closed and title passes to the buyer. Sales are closed when all of the following conditions are met: a sale is consummated, a significant down payment is received, the earnings process is complete and the collection of any remaining receivables is reasonably assured.
 
Inventories and Cost of Sales.   As discussed in Note 1. Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements in this Form 10-K, land and housing inventories are stated at cost, unless the carrying amount is determined not to be recoverable, in which case the inventories are written down to fair value in accordance with SFAS No. 144. Fair value is determined based on estimated future cash flows discounted for inherent risks associated with the real estate assets, or other valuation techniques. Due to uncertainties in the estimation process, it is possible that actual


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results could differ from those estimates. Our inventories typically do not consist of completed projects. However, order cancellations may result in our having a relatively small amount of inventory of constructed or partially constructed unsold homes.
 
We rely on certain estimates to determine our construction and land costs and resulting gross margins associated with revenues recognized. Construction and land costs are comprised of direct and allocated costs, including estimated future costs for warranties and amenities. Land, land improvements and other common costs are generally allocated on a relative fair value basis to homes within a parcel or community. Land and land development costs include related interest and real estate taxes.
 
In determining a portion of the construction and land costs for each period, we rely on project budgets that are based on a variety of assumptions, including future construction schedules and costs to be incurred. It is possible that actual results could differ from budgeted amounts for various reasons, including construction delays, labor or materials shortages, increases in costs that have not yet been committed, changes in governmental requirements, unforeseen environmental hazard discoveries or other unanticipated issues encountered during construction. While the actual results for a particular construction project are accurately reported over time, variances between the budgeted and actual costs of a project could result in the understatement or overstatement of construction and land costs and homebuilding gross margins in a specific reporting period. To reduce the potential for such distortion, we have set forth procedures that collectively comprise a “critical accounting policy.” These procedures, which we have applied on a consistent basis, include updating, assessing and revising project budgets on a monthly basis, obtaining commitments from subcontractors and vendors for future costs to be incurred, reviewing the adequacy of warranty accruals and historical warranty claims experience, and utilizing the most current information available to estimate construction and land costs to be charged to expense. The variances between budgeted and actual costs have historically not had a material impact on our consolidated results of operations. We believe that our policies provide for reasonably dependable estimates to be used in the calculation and reporting of construction and land costs.
 
Inventory Impairments and Abandonments.   As discussed in Note 6. Inventory Impairments and Abandonments in the Notes to Consolidated Financial Statements in this Form 10-K, each parcel or community in our owned inventory is assessed to determine if indicators of potential impairment exist. If indicators of potential impairment exist for a parcel or community, the identified inventory is evaluated for recoverability in accordance with SFAS No. 144. Impairment indicators are assessed separately for each parcel or community on a quarterly basis and include, but are not limited to: significant decreases in sales rates, average selling prices, volume of homes delivered or gross margins; significant increases in budgeted land development and construction costs or cancellation rates; or projected losses on expected future housing or land sales. When an indicator of potential impairment is identified, we test the asset for recoverability by comparing the carrying amount of the asset to the undiscounted future net cash flows expected to be generated by the asset. The undiscounted future net cash flows are impacted by our expectations related to: market supply and demand, including estimates concerning average selling prices; sales incentives; sales and cancellation rates; and anticipated land development, construction and overhead costs to be incurred. These estimates are specific to each community and may vary among communities.
 
A real estate asset is considered impaired when its carrying amount is greater than the undiscounted future net cash flows the asset is expected to generate. Impaired real estate assets are written down to fair value, which is primarily based on the estimated future cash flows discounted for inherent risk associated with each asset. These discounted cash flows are impacted by: the risk-free rate of return; expected risk premium based on estimated land development, construction and delivery timelines; market risk from potential future price erosion; cost uncertainty due to development or construction cost increases; and other risks specific to the asset or conditions in the market in which the asset is located at the time the assessment is made. These factors are specific to each community and may vary among communities.
 
Our optioned inventory is assessed to determine whether it continues to meet our internal investment standards. Assessments are made separately for each optioned parcel on a quarterly basis and are affected by, among other factors: current and/or anticipated sales rates, average selling prices, home delivery volume and gross margins; estimated land development and construction costs; and projected profitability on expected future housing or land sales. When a decision is made not to exercise certain land option contracts due to market conditions and/or changes in market strategy, we write off the costs, including non-refundable deposits and pre-acquisition costs, related to the abandoned projects.
 
The value of the land and housing inventory we currently own or control depends on market conditions, including estimates of future demand for, and the revenues that can be generated from, such inventory. We have analyzed trends and


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other information related to each of the markets where we do business and have incorporated this information as well as our current outlook into the assumptions we use in our impairment analyses. Due to the judgment and assumptions applied in the estimation process with respect to impairments and land option contract abandonments, it is possible that actual results could differ substantially from those estimated.
 
We believe the carrying value of our remaining inventory is currently recoverable. However, if conditions in the housing market worsen in the future beyond our current expectations, or if future changes in our marketing strategy significantly affect any key assumptions used in our fair value calculations, we may need to take additional charges in future periods for inventory impairments or land option contract abandonments, or both, related to existing assets. Any such noncash charges would have an adverse effect on our consolidated financial position and results of operations and may be material.
 
Warranty Costs.   As discussed in Note 12. Commitments and Contingencies in the Notes to Consolidated Financial Statements in this Form 10-K, we provide a limited warranty on all of our homes. The specific terms and conditions of warranties vary depending upon the market in which we do business. We generally provide a structural warranty of 10 years, a warranty on electrical, heating, cooling, plumbing and other building systems each varying from two to five years based on geographic market and state law, and a warranty of one year for other components of the home. We estimate the costs that may be incurred under each limited warranty and record a liability in the amount of such costs at the time the revenue associated with the sale of each home is recognized. Factors that affect our warranty liability include the number of homes delivered, historical and anticipated rates of warranty claims, and cost per claim. We periodically assess the adequacy of our recorded warranty liabilities, which are included in accrued expenses and other liabilities in the consolidated balance sheets, and adjust the amounts as necessary based on our assessment. While we believe the warranty accrual reflected in the consolidated balance sheets to be adequate, actual warranty costs in the future could differ from our current estimates.
 
Stock-Based Compensation.   As discussed in Note 1. Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements in this Form 10-K, effective December 1, 2005, we adopted the fair value recognition provisions of Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment” (“SFAS No. 123(R)”), which requires that companies measure and recognize compensation expense at an amount equal to the fair value of share-based payments granted under compensation arrangements. We provide compensation benefits by issuing stock options, restricted stock, phantom shares and stock appreciation rights (“SARs”). Determining the fair value of share-based awards at the grant date requires judgment to identify the appropriate valuation model and develop the assumptions, including the expected term of the stock options, expected stock-price volatility and dividend yield, to be used in the calculation. Judgment is also required in estimating the percentage of share-based awards that are expected to be forfeited. We estimated the fair value of stock options granted using the Black-Scholes option-pricing model with assumptions based primarily on historical data. In addition, we estimated the fair value of certain restricted common stock that is subject to a market condition (“Performance Shares”) using a Monte Carlo simulation model. If actual results differ significantly from these estimates, stock-based compensation expense and our consolidated results of operations could be materially impacted.
 
Insurance.    As disclosed in Note 1. Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements in this Form 10-K, we have, and require the majority of our subcontractors to have, general liability insurance (including construction defect coverage) and workers’ compensation insurance. These insurance policies protect us against a portion of our risk of loss from claims related to our homebuilding activities, subject to certain self-insured retentions, deductibles and other coverage limits. We self-insure a portion of our overall risk through the use of a captive insurance subsidiary. We record expenses and liabilities based on the costs required to cover our self-insured retention and deductible amounts under our insurance policies, and on the estimated costs of potential claims and claim adjustment expenses above our coverage limits or not covered by our policies. These estimated costs are based on an analysis of our historical claims and include an estimate of construction defect claims incurred but not yet reported. We engage a third-party actuary that uses our historical claim data to estimate our unpaid claims, claim adjustment expenses and incurred but not reported claims reserves for the risks that we are assuming under the self-insured portion of our general liability insurance. Projection of losses related to these liabilities is subject to a high degree of variability due to uncertainties such as trends in construction defect claims relative to our markets and the types of product we build, claim settlement patterns, insurance industry practices and legal interpretations, among others. Because of the high degree of judgment required in determining these estimated liability amounts, actual future costs could differ significantly from our currently estimated amounts.


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Goodwill.   As disclosed in Note 1. Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements in this Form 10-K, we have recorded goodwill in connection with various acquisitions in prior years. Goodwill represents the excess of the purchase price over the fair value of net assets acquired. In accordance with SFAS No. 142, we test goodwill for potential impairment annually as of November 30 and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. We evaluate goodwill for impairment using the two-step process prescribed in SFAS No. 142. The first step is to identify potential impairment by comparing the fair value of a reporting unit to the book value, including goodwill. If the fair value of a reporting unit exceeds the book value, goodwill is not considered impaired. If the book value exceeds the fair value, the second step of the process is performed to measure the amount of impairment. In accordance with SFAS No. 142, we have determined that our reporting units are the same as our reporting segments. Accordingly, we have four homebuilding reporting units (West Coast, Southwest, Central and Southeast) and one financial services reporting unit.
 
The process of evaluating goodwill for impairment involves the determination of the fair value of our reporting units. Inherent in such fair value determinations are certain judgments and estimates relating to future cash flows, including our interpretation of current economic indicators and market valuations, and assumptions about our strategic plans with regard to our operations. To the extent additional information arises, market conditions change or our strategies change, it is possible that our conclusion regarding whether existing goodwill is impaired could change and result in a material effect on our consolidated financial position or results of operations.
 
In performing our impairment analysis, we developed a range of fair values for our homebuilding and financial services reporting units using a discounted cash flow methodology and a market multiple methodology. For the financial services reporting unit, we also used a comparable transaction methodology.
 
The discounted cash flow methodology establishes fair value by estimating the present value of the projected future cash flows to be generated from the reporting unit. The discount rate applied to the projected future cash flows to arrive at the present value is intended to reflect all risks of ownership and the associated risks of realizing the stream of projected future cash flows. The discounted cash flow methodology uses our projections of financial performance for a five-year period. The most significant assumptions used in the discounted cash flow methodology are the discount rate, the terminal value and expected future revenues, gross margins and operating margins, which vary among reporting units.
 
The market multiple methodology establishes fair value by comparing us to other publicly traded companies that are similar to us from an operational and economic standpoint. The market multiple methodology compares us to the comparable companies on the basis of risk characteristics in order to determine our risk profile relative to the comparable companies as a group. This analysis generally focuses on quantitative considerations, which include financial performance and other quantifiable data, and qualitative considerations, which include any factors which are expected to impact future financial performance. The most significant assumptions affecting the market multiple methodology are the market multiples and control premium. The market multiples we use are: a) price to net book value and b) enterprise value to revenue (for each of the homebuilding reporting units). A control premium represents the value an investor would pay above minority interest transaction prices in order to obtain a controlling interest in the respective company. The comparable transaction methodology establishes fair value similar to the market multiple methodology, utilizing recent transactions within the industry as the market multiple. However, no control premium is applied when using the comparable transaction methodology because these transactions represent control transactions.
 
Based on the results of our impairment evaluation performed in the second quarter of 2008, we recorded an impairment charge of $24.6 million in that quarter related to our Central reporting segment, where all of the goodwill previously recorded was determined to be impaired. The annual goodwill impairment test we performed as of November 30, 2008 resulted in an impairment charge of $43.4 million in the fourth quarter of 2008 related to our Southeast reporting segment, where all of the goodwill previously recorded was determined to be impaired. Based on the results of our impairment evaluation performed in the third quarter of 2007, we recorded an impairment charge of $107.9 million in that quarter related to our Southwest reporting segment, where all of the goodwill previously recorded was determined to be impaired. The annual goodwill impairment test we performed as of November 30, 2007 indicated no additional impairment. The goodwill impairment charges in 2008 and 2007 were recorded at our corporate level because all goodwill is carried at that level. As a result of these impairment charges, we have no remaining goodwill company-wide at November 30, 2008.


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Income Taxes.   As discussed in Note 1. Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements in this Form 10-K, we account for income taxes in accordance with SFAS No. 109. The provision for, or benefit from, income taxes is calculated using the asset and liability method, under which deferred tax assets and liabilities are recorded based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred tax assets are evaluated on a quarterly basis to determine whether a valuation allowance is required. In accordance with SFAS No. 109, we assess whether a valuation allowance should be established based on our determination of whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets depends primarily on the generation of future taxable income during the periods in which those temporary differences become deductible. Judgment is required in determining the future tax consequences of events that have been recognized in our consolidated financial statements and/or tax returns. Differences between anticipated and actual outcomes of these future tax consequences could have a material impact on our consolidated financial position or results of operations.
 
As discussed in Note 17. Income Taxes in the Notes to Consolidated Financial Statements in this Form 10-K, we implemented the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (“FASB Interpretation No. 48”), effective December 1, 2007. The cumulative effect of the adoption of FASB Interpretation No. 48 was recorded in 2008 as a $2.5 million reduction to beginning retained earnings. In accordance with the provisions of FASB Interpretation No. 48, we recognized, in our consolidated financial statements, the impact of a tax position if a tax return’s position or future tax position is “more likely than not” to prevail (defined as a likelihood of more than 50% of being sustained upon audit, based on the technical merits of the tax position).
 
We recognize accrued interest and penalties related to unrecognized tax benefits in our consolidated financial statements as a component of the income tax provision consistent with our historical accounting policy. Our liability for unrecognized tax benefits, combined with accrued interest and penalties, is reflected as a component of accrued expenses and other liabilities in our consolidated balance sheets.
 
Prior to the adoption of FASB Interpretation No. 48, we applied Statement of Financial Accounting Standards No. 5, “Accounting for Contingencies,” (“SFAS No. 5”), to assess and provide for potential income tax exposures. In accordance with SFAS No. 5, we maintained reserves for tax contingencies based on reasonable estimates of the tax liabilities, interest, and penalties (if any) that may result from such audits. FASB Interpretation No. 48 substantially changes the applicable accounting model and is likely to cause greater volatility in our consolidated statements of operations and effective tax rates as more items are specifically recognized and/or derecognized within income tax expense.
 
RECENT ACCOUNTING PRONOUNCEMENTS
 
In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS No. 157”), which provides guidance for using fair value to measure assets and liabilities, defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007 and for interim periods within those years. In February 2008, the FASB issued FASB Staff Position No. FAS 157-2, “Effective Date of FASB Statement No. 157” (“FSP No. FAS 157-2”), which delayed for one year the applicability of SFAS No. 157’s fair value measurements to certain nonfinancial assets and liabilities. We adopted SFAS No. 157 in 2008, except as it applies to those nonfinancial assets and liabilities affected by the one-year delay. The partial adoption of SFAS No. 157 did not have a material impact on our consolidated financial position or results of operations. While we are currently evaluating the impact of adopting the remaining provisions of SFAS No. 157, we do not expect SFAS No. 157 to have a material impact on our consolidated financial position or results of operations.
 
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised 2007), “Business Combinations” (“SFAS No. 141(R)”). SFAS No. 141(R) amends Statement of Financial Accounting Standards No. 141, “Business Combinations” (“SFAS No. 141”), and provides revised guidance for recognizing and measuring identifiable assets and goodwill acquired, liabilities assumed, and any noncontrolling interest in the acquiree. It also provides disclosure requirements to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS No. 141(R) is effective for fiscal years beginning after December 15, 2008 and


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is to be applied prospectively. We are currently evaluating the potential impact of adopting SFAS No. 141(R) on our consolidated financial position and results of operations.
 
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, “Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51” (“SFAS No. 160”). SFAS No. 160 establishes accounting and reporting standards pertaining to ownership interests in subsidiaries held by parties other than the parent, the amount of net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest, and the valuation of any retained noncontrolling equity investment when a subsidiary is deconsolidated. SFAS No. 160 also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS No. 160 is effective for fiscal years beginning on or after December 15, 2008. We are currently evaluating the potential impact of adopting SFAS No. 160 on our consolidated financial position and results of operations.
 
In May 2008, the FASB issued Statement of Financial Accounting Standards No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS No. 162”). SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States. We do not expect the adoption of SFAS No. 162 to have a material impact on our consolidated financial position or results of operations.
 
In May 2008, the FASB issued Statement of Financial Accounting Standards No. 163, “Accounting for Financial Guarantee Insurance Contracts — an interpretation of FASB Statement No. 60” (“SFAS No. 163”). SFAS No. 163 clarifies how Statement of Financial Accounting Standards No. 60, “Accounting and Reporting by Insurance Enterprises” (“SFAS No. 60”) applies to financial guarantee insurance contracts, including the recognition and measurement of premium revenue and claim liabilities. SFAS No. 163 also requires expanded disclosures about financial guarantee insurance contracts. SFAS No. 163 is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008. We are currently evaluating the potential impact of adopting SFAS No. 163 on our consolidated financial position and results of operations.
 
In June 2008, the FASB issued FASB Staff Position No. EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (“FSP No. EITF 03-6-1”). Under FSP No. EITF 03-6-1, unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. FSP No. EITF 03-6-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years and requires retrospective application. We are currently evaluating the impact of adopting FSP No. EITF 03-6-1 on our earnings per share.
 
In October 2008, the FASB issued FASB Staff Position No. FAS 157-3, “Determining the Fair Value of a Financial Asset When the Market For That Asset Is Not Active” (“FSP No. FAS 157-3”). FSP No. FAS 157-3 clarifies the application of SFAS No. 157 in a market that is not active. FSP No. FAS 157-3 became effective upon issuance, including prior periods for which financial statements have not been issued. Our adoption of FSP No. FAS 157-3 did not have a material impact on our consolidated financial position or results of operations.
 
In December 2008, the FASB issued FASB Staff Position No. FAS 140-4 and FIN 46-(R)-8, “Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities” (“FSP No. FAS 140-4 and FIN 46(R)-8”). FSP No. FAS 140-4 and FIN 46(R)-8 amends FASB Statement No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities” (“SFAS No. 140”), to require public entities to provide additional disclosures about transfers of financial assets. It also amends FASB Interpretation No. 46(R) , to require public enterprises, including sponsors that have a variable interest in a VIE, to provide additional disclosures about their involvement with VIEs. FSP No. FAS 140-4 and FIN 46(R)-8 is related to disclosure only and will not have an impact on our consolidated financial position or results of operations.
 
OUTLOOK
 
At November 30, 2008, our backlog of new home orders totaled 2,269 homes, a decrease of 64% from the 6,322 homes in backlog at November 30, 2007. Our backlog at November 30, 2008 represented projected future housing revenues of approximately $521.4 million, down 65% from approximately $1.50 billion at November 30, 2007. The


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substantially lower backlog of homes and projected future housing revenues at the end of our 2008 fiscal year compared to the prior year-end was due to the combined impact over the past several quarters of negative year-over-year net order results, lower average selling prices, and our strategic initiatives to reduce our inventory and active community counts to better align with diminished housing market activity. In 2008, our average active community count was 38% lower than in 2007.
 
Our lower active community count also reduced our operating results in the fourth quarter of 2008 compared to the year-earlier quarter. Our homebuilding operations generated 1,296 net orders in the fourth quarter of 2008, down 50% from the 2,574 net orders generated in the corresponding quarter of 2007. Our net orders in the fourth quarter of 2008 were also reduced by our transition to new, value-engineered product, which disrupted sales activity as some communities were temporarily shut down and other communities experienced a lag in orders while discontinuing current product offerings, and by continued weakness in demand for new housing.
 
Conditions in the housing sector continued to decline throughout 2008, accelerating in the second half of the year with the sharp decline in the general economy. A deteriorating economy and turbulent financial and credit markets further eroded consumer confidence, increased unemployment and foreclosures and caused credit standards for homebuyers to tighten further. As a result, although home prices and mortgage rates fell substantially during 2008, improving affordability, many potential homebuyers remain reluctant or are unable to commit to a new home purchase. There are several reasons for their reluctance, including an inability to obtain adequate financing; an inability to sell their existing home at a perceived fair price or at a price that covers their existing mortgage; anxiety about current economic conditions or employment prospects; or expectations that home prices will fall further or that greater incentives will be offered by home sellers given the persistent oversupply in many markets.
 
As we enter 2009, the U.S. economy remains in a severe recession and the homebuilding industry faces even greater adverse pressures than at the beginning of 2008. Affordability, wavering buyer confidence and significantly tighter mortgage lending standards, coupled with a considerable oversupply of new and existing homes for sale (boosted by foreclosures), continue to weigh on the housing market and may cause further deterioration in operating conditions and sales results. Meanwhile, it remains uncertain when the housing market or the broader economy will experience a meaningful recovery.
 
Recent actions taken or under consideration by the federal government designed to boost housing demand could soften the impact of the recession. Nonetheless, it is very likely that key housing metrics, including starts, new home sales and existing home sales, will continue to weaken in 2009. We therefore expect fierce price competition to persist well into 2009 and margins to remain under pressure throughout the year. This could lead to more inventory impairments and land option contract abandonments, though potentially smaller in magnitude.
 
Given the volatile trends and uncertain economic conditions clouding the housing markets, and our current backlog levels, we have limited ability to forecast our 2009 consolidated operating and financial results. As of the date of this Form 10-K, we expect poor demand for, and the substantial oversupply of, housing to continue, sustaining the sharply reduced home sales volumes and severe downward pricing pressures that we and our industry have experienced since the second half of 2006, compared to the first half of this decade.
 
While there are many significant factors that we cannot control, we intend to navigate the present housing market and general economic downturn by remaining focused on improving areas within our control and on achieving further progress on three primary goals: maintaining a strong cash position and balance sheet; restoring our homebuilding operations to profitability; and positioning our business to capitalize on a housing market recovery when it occurs. Consistent with these goals, in the past two years we have: (i) built up and conserved our cash, ending 2008 with a substantial cash balance of $1.25 billion, including $115.4 million of restricted cash in the Interest Reserve Account, and no cash borrowings under our Credit Facility; (ii) reduced our inventory and active community counts, consolidated operations and cut overhead costs in many markets, while selectively exiting or winding down activity in others; and (iii) introduced new products designed to meet consumers’ needs, tastes and affordability concerns. Our key business strategies and plans for 2009 will continue to reflect these priorities, and we expect to be cash flow positive and to have no outstanding cash borrowings under our Credit Facility during the year.
 
Our highest priority as we move ahead is to increase our margins and restore the profitability of our homebuilding operations. In the near term, our focus on margins and profitability will mean selling the right product at the right price, with the right marketing strategy, for each individual served market, and maintaining our presence in those markets that


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we believe will provide the best operating platform to drive future growth. It also means continuing to reduce our costs and to operate more efficiently in accordance with the principles of our KBnxt operational business model.
 
Consistent with our near-term focus on offering the right product at the right price, we accelerated a product transition strategy in the second half of 2008, introducing in particular communities new, value-engineered product with more affordable standard features that are more cost-effective to build and can be offered at lower base selling prices compared to prior product offerings. The reengineered product, which we refer to as The Open Series tm , is designed to meet the demands of our core first-time homebuyers in the current market environment by offering greater design choices than the product it is replacing and price points for consumers at or near median income levels. At the same time, it gives homebuyers more flexibility and options to customize a home to meet their own tastes and budget. We are continuing to roll out the reengineered product and expect to have more communities fully transitioned to The Open Series in 2009. We believe our product transition strategy, when fully implemented, will have a positive impact on our margins and net orders in future periods. However, we expect that the implementation process will temporarily depress our sales and margins for transitioning communities in 2009, reflecting a lag between discontinuing prior product and bringing the new product online, and will reduce our year-over-year results of operations for that period.
 
During 2008, we continued our aggressive steps to streamline our organizational structure to reduce costs in proportion to our revenues. We expect these changes to produce tangible benefits, in the form of selling, general and administrative expense reductions, in future quarters. In making these adjustments, we have selectively maintained operations in key served markets and have made investments that we believe will enable us to prudently and effectively expand our operations when market conditions improve. In 2009, we will maintain our focus on bringing our costs in line with our revenues and preserving a solid foundation for growth as market conditions become more favorable.
 
We will continue to assess and re-assess our geographic footprint, seeking optimal volume levels at which to operate, and adjusting our community counts and product mix to maximize financial performance. We expect to continue to operate with fewer active communities and to remain conservative in our asset acquisition and development activities until we see reasonable signs of a housing market recovery, though we remain alert to potential new opportunities. As a result, we expect our delivery volume and corresponding revenues to remain at reduced levels in 2009 and, if market conditions decline further, we may need to take additional noncash charges for inventory and joint venture impairments and land option contract abandonments. In addition, our 2009 results could be adversely affected if general economic conditions continue to deteriorate, if job losses accelerate, if foreclosures increase, if consumer mortgage lending becomes less available or more expensive, or if consumer confidence remains weak or declines further, any or all of which could further delay a recovery in housing markets or result in further deterioration of operating conditions and our financial results.
 
In light of the current recession, conditions in the housing market and the overall economy are likely to deteriorate further before they improve. We continue to believe that a meaningful improvement in housing market conditions will require a sustained decrease in unsold homes, price stabilization, reduced foreclosure rates, and the restoration of consumer and credit market confidence that will support a decision to buy a home. While we cannot predict when these events will occur, based in large part on the aggressive actions we have taken over the past two years, we believe we are well-positioned financially and strategically to weather the current downturn and to capitalize on potential future opportunities for growth in the expected near-term housing market environment. Longer term, we believe favorable demographics, population growth and the continuing desire for home ownership will drive demand for new homes in our served markets, and that our operating approach and financial resources will allow us to capitalize on opportunities in those markets as they emerge.
 
FORWARD-LOOKING STATEMENTS
 
Investors are cautioned that certain statements contained in this document, as well as some statements by us in periodic press releases and other public disclosures and some oral statements by us to securities analysts and stockholders during presentations, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Act”). Statements that are predictive in nature, that depend upon or refer to future events or conditions, or that 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 or operating performance (including future revenues, homes delivered, selling prices, expenses, expense ratios, margins, earnings or


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earnings per share, or growth or growth rates), future market conditions, future interest rates, and other economic conditions, ongoing business strategies or prospects, future dividends and changes in dividend levels, the value of backlog (including amounts that we expect to realize upon delivery of homes included in backlog and the timing of those deliveries), potential future acquisitions and the impact of completed acquisitions, future share repurchases and possible future actions, which may be provided by us, 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 our operations, economic and market factors, and the homebuilding industry, among other things. These statements are not guarantees of future performance, and we have no specific policy or intention to update these statements.
 
Actual events and results may differ materially from those expressed or forecasted in the forward-looking statements due to a number of factors. The most important risk factors that could cause our actual performance and future events and actions to differ materially from such forward-looking statements include, but are not limited to: general economic and business conditions; adverse market conditions that could result in additional impairments or abandonment charges and operating losses, including an oversupply of unsold homes and declining home prices, among other things; conditions in the capital and credit markets (including consumer mortgage lending standards, the availability of consumer mortgage financing and mortgage foreclosure rates); material prices and availability; labor costs and availability; changes in interest rates; inflation; our debt level; declines in consumer confidence; increases in competition; weather conditions, significant natural disasters and other environmental factors; government actions and regulations directed at or affecting the housing market, the homebuilding industry, or construction activities; the availability and cost of land in desirable areas; legal or regulatory proceedings or claims; the ability and/or willingness of participants in our unconsolidated joint ventures to fulfill their obligations; our ability to access capital, including our capacity under our Credit Facility; our ability to use the net deferred tax assets we have generated; our ability to successfully implement our planned product transition, geographic and market repositioning and cost reduction strategies; consumer interest in our new product designs; and the other risks discussed above in Item 1A. Risk Factors.


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Item 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
We primarily enter into debt obligations to support general corporate purposes, including the operations of our subsidiaries. We are subject to interest rate risk on our senior notes. For fixed rate debt, changes in interest rates generally affect the fair value of the debt instrument, but not our earnings or cash flows. Under our current policies, we do not use interest rate derivative instruments to manage our exposure to interest rate changes.
 
The following tables set forth principal cash flows by scheduled maturity, weighted average interest rates and the estimated fair value of our long-term debt obligations as of November 30, 2008 and November 30, 2007 (dollars in thousands):
 
                                                                 
                                              Fair Value at
 
    As of November 30, 2008 for the Years Ended November 30,     November 30,
 
    2009     2010     2011     2012     2013     Thereafter     Total     2008  
 
Long-term debt (a)
                                                               
Fixed Rate
  $ 200,000     $     —     $ 348,908     $     —     $     —     $ 1,296,261     $ 1,845,169     $      1,270,979  
Weighted Average Interest Rate
    8.6 %     %     6.4 %     %     %     6.3 %                
(a)The fixed rate debt expected to mature in our 2009 fiscal year matured on December 15, 2008 and was redeemed by us.
 
                                                                 
                                              Fair Value at
 
    As of November 30, 2007 for the Years Ended November 30,     November 30,
 
    2008     2009     2010     2011     2012     Thereafter     Total     2007  
 
Long-term debt
                                                               
Fixed Rate
  $   —     $ 200,000     $ 298,273     $ 348,549     $   —     $ 1,295,832     $ 2,142,654     $      1,921,042  
Weighted Average Interest Rate
    %     8.6 %     7.8 %     6.4 %     %     6.3 %                


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Item 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
KB HOME
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
         
    Page
   
Number
 
    56  
    57  
    58  
    59  
    60  
    95  
 
 
Separate combined financial statements of our unconsolidated joint venture activities have been omitted because, if considered in the aggregate, they would not constitute a significant subsidiary as defined by Rule 3-09 of Regulation S-X.


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KB HOME
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts)
 
                         
    Years Ended November 30,  
    2008     2007     2006  
 
Total revenues
  $ 3,033,936     $ 6,416,526     $ 9,380,083  
                         
Homebuilding:
                       
Revenues
  $ 3,023,169     $ 6,400,591     $ 9,359,843  
Construction and land costs
    (3,314,815 )     (6,826,379 )     (7,666,019 )
Selling, general and administrative expenses
    (501,027 )     (824,621 )     (1,123,508 )
Goodwill impairment
    (67,970 )     (107,926 )      
                         
Operating income (loss)
    (860,643 )     (1,358,335 )     570,316  
Interest income
    34,610       28,636       5,503  
Loss on early redemption/interest expense, net of amounts capitalized
    (12,966 )     (12,990 )     (16,678 )
Equity in loss of unconsolidated joint ventures
    (152,750 )     (151,917 )     (20,830 )
                         
Homebuilding pretax income (loss)
    (991,749 )     (1,494,606 )     538,311  
                         
Financial services:
                       
Revenues
    10,767       15,935       20,240  
Expenses
    (4,489 )     (4,796 )     (5,923 )
Equity in income of unconsolidated joint venture
    17,540       22,697       19,219  
                         
Financial services pretax income
    23,818       33,836       33,536  
                         
Income (loss) from continuing operations before income taxes
    (967,931 )     (1,460,770 )     571,847  
Income tax benefit (expense)
    (8,200 )     46,000       (178,900 )
                         
Income (loss) from continuing operations
    (976,131 )     (1,414,770 )     392,947  
Income from discontinued operations, net of income taxes
          47,252       89,404  
Gain on sale of discontinued operations, net of income taxes
          438,104        
                         
Net income (loss)
  $ (976,131 )   $ (929,414 )   $ 482,351  
                         
Basic earnings (loss) per share:
                       
Continuing operations
  $ (12.59 )   $ (18.33 )   $ 4.99  
Discontinued operations
          6.29       1.13  
                         
Basic earnings (loss) per share
  $ (12.59 )   $ (12.04 )   $ 6.12  
                         
Diluted earnings (loss) per share:
                       
Continuing operations
  $ (12.59 )   $ (18.33 )   $ 4.74  
Discontinued operations
          6.29       1.08  
                         
Diluted earnings (loss) per share
  $ (12.59 )   $ (12.04 )   $ 5.82  
                         
 
See accompanying notes.


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KB HOME
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Shares)
 
                 
    November 30,  
    2008     2007  
 
Assets
               
Homebuilding:
               
Cash and cash equivalents
  $ 1,135,399     $ 1,325,255  
Restricted cash
    115,404        
Receivables
    357,719       295,739  
Inventories
    2,106,716       3,312,420  
Investments in unconsolidated joint ventures
    177,649       297,010  
Deferred income taxes
    1,152       222,458  
Goodwill
          67,970  
Other assets
    98,109       140,712  
                 
      3,992,148       5,661,564  
Financial services
    52,152       44,392  
                 
Total assets
  $ 4,044,300     $ 5,705,956  
                 
                 
Liabilities and stockholders’ equity
               
Homebuilding:
               
Accounts payable
  $ 541,294     $ 699,851  
Accrued expenses and other liabilities
    721,397       975,828  
Mortgages and notes payable
    1,941,537       2,161,794  
                 
      3,204,228       3,837,473  
                 
Financial services
    9,467       17,796  
Stockholders’ equity:
               
Preferred stock — $1.00 par value; authorized, 10,000,000 shares; none issued
           
Common stock — $1.00 par value; authorized, 290,000,000 shares at November 30, 2008 and 2007; 115,120,305 and 114,976,285 shares issued at November 30, 2008 and 2007, respectively
    115,120       114,976  
Paid-in capital
    865,123       851,628  
Retained earnings
    927,324       1,968,881  
Accumulated other comprehensive loss
    (17,402 )     (22,923 )
Grantor stock ownership trust, at cost: 11,901,382 and 12,203,282 shares at November 30, 2008 and 2007, respectively
    (129,326 )     (132,608 )
Treasury stock, at cost: 25,512,386 and 25,451,107 shares at November 30, 2008 and 2007, respectively
    (930,234 )     (929,267 )
                 
Total stockholders’ equity
    830,605       1,850,687  
                 
Total liabilities and stockholders’ equity
  $ 4,044,300     $ 5,705,956  
                 
 
See accompanying notes.


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KB HOME
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In Thousands)
 
                                                                                         
    Years Ended November 30, 2008, 2007 and 2006  
    Number of Shares                       Accumulated
                         
          Grantor
                            Other
          Grantor
             
          Stock
                            Comprehensive
          Stock
          Total
 
    Common
    Ownership
    Treasury
    Common
    Paid-in
    Retained
    Income
    Deferred
    Ownership
    Treasury
    Stockholders’
 
    Stock     Trust     Stock     Stock     Capital     Earnings     (Loss)     Compensation     Trust     Stock     Equity  
 
Balance at November 30, 2005
    113,905       (13,000 )     (19,021 )   $ 113,905     $ 742,978     $ 2,571,372     $ 28,704     $ (13,605 )   $ (141,266 )   $ (528,291 )   $ 2,773,797  
Comprehensive income:
                                                                                       
Net income
                                  482,351                               482,351  
Foreign currency translation
                                        34,493                         34,493  
                                                                                         
Total comprehensive income
                                                                516,844  
Dividends on common stock 
                                  (78,258 )                             (78,258 )
Exercise of employee stock options
    744                   744       34,723                                     35,467  
Restricted stock awards
          537                   32,726                         5,839             38,565  
Restricted stock amortization
                            4,649                                     4,649  
Stock-based compensation
                            19,358                                     19,358  
Grantor stock ownership trust
          118                   5,129                         1,277             6,406  
Treasury stock
                (6,253 )                                         (394,080 )     (394,080 )
Reclass due to SFAS No. 123(R) implementation
                            (13,605 )                 13,605                    
                                                                                         
Balance at November 30, 2006
    114,649       (12,345 )     (25,274 )     114,649       825,958       2,975,465       63,197             (134,150 )     (922,371 )     2,922,748  
Comprehensive loss:
                                                                                       
Net loss
                                  (929,414 )                             (929,414 )
Foreign currency translation
                                        (63,197 )                       (63,197 )
                                                                                         
Total comprehensive loss
                                                                (992,611 )
Postretirement benefits adjustment
                                        (22,923 )                       (22,923 )
Dividends on common stock 
                                  (77,170 )                             (77,170 )
Exercise of employee stock options
    327                   327       9,718                                     10,045  
Restricted stock amortization
                            4,993                                     4,993  
Stock-based compensation
                            9,354                                     9,354  
Grantor stock ownership trust
          142                   1,605                         1,542             3,147  
Treasury stock
                (177 )                                         (6,896 )     (6,896 )
                                                                                         
Balance at November 30, 2007
    114,976       (12,203 )     (25,451 )     114,976       851,628       1,968,881       (22,923 )           (132,608 )     (929,267 )     1,850,687  
Comprehensive loss:
                                                                                       
Net loss
                                  (976,131 )                             (976,131 )
Postretirement benefits adjustment
                                        5,521                         5,521  
                                                                                         
Total comprehensive loss
                                                                (970,610 )
Dividends on common stock 
                                  (62,967 )                             (62,967 )
FASB Interpretation No. 48 adjustment
                                  (2,459 )                             (2,459 )
Exercise of employee stock options
    144                   144       1,443                                     1,587  
Restricted stock amortization
                            4,946                                     4,946  
Stock-based compensation
                            5,018                                     5,018  
Grantor stock ownership trust
          302                   2,088                         3,282             5,370  
Treasury stock
                (61 )                                         (967 )     (967 )
                                                                                         
Balance at November 30, 2008
    115,120       (11,901 )     (25,512 )   $ 115,120     $ 865,123     $ 927,324     $ (17,402 )   $     $ (129,326 )   $ (930,234 )   $ 830,605  
                                                                                         
 
See accompanying notes.


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KB HOME
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
 
                         
    Years Ended November 30,  
    2008     2007     2006  
Cash flows from operating activities:
                       
Net income (loss)
  $ (976,131 )   $ (929,414 )   $ 482,351  
Income from discontinued operations, net of income taxes
          (47,252 )     (89,404 )
Gain on sale of discontinued operations, net of income taxes
          (438,104 )      
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
                       
Equity in loss of unconsolidated joint ventures
    135,210       129,220       1,611  
Distributions of earnings from unconsolidated joint ventures
    22,183       42,356       13,553  
Gain on sale of investment in unconsolidated joint venture
                (27,612 )
Amortization of discounts and issuance costs
    2,062       2,478       2,441  
Depreciation and amortization
    9,317       17,274       18,091  
Loss on early redemption of debt
    10,388       12,990        
Deferred income taxes
    221,306       208,348       (189,047 )
Tax benefit associated with exercise of stock options
    2,097       (882 )     (15,384 )
Stock-based compensation expense
    5,018       9,354       19,358  
Inventory impairments and land option contract abandonments
    606,791       1,253,982       372,637  
Goodwill impairment
    67,970       107,926        
Changes in assets and liabilities:
                       
Receivables
    (60,565 )     (71,406 )     (23,529 )
Inventories
    545,850       779,875       (356,342 )
Accounts payable, accrued expenses and other liabilities
    (282,781 )     (340,630 )     205,707  
Other, net
    32,607       13,387       7,182  
                         
Net cash provided by operating activities — continuing operations
    341,322       749,502       421,613  
Net cash provided by operating activities — discontinued operations
          297,397       229,505  
                         
Net cash provided by operating activities
    341,322       1,046,899       651,118  
                         
Cash flows from investing activities:
                       
Sale of discontinued operations, net of cash divested
          739,764        
Sale of investment in unconsolidated joint venture
                57,767  
Change in restricted cash
    (115,404 )            
Investments in unconsolidated joint ventures
    (59,625 )     (85,188 )     (179,184 )
Sales (purchases) of property and equipment, net
    7,073       685       (17,638 )
Other, net
                772  
                         
Net cash provided (used) by investing activities — continuing operations
    (167,956 )     655,261       (138,283 )
Net cash used by investing activities — discontinued operations
          (12,112 )     (4,477 )
                         
Net cash provided (used) by investing activities
    (167,956 )     643,149       (142,760 )
                         
Cash flows from financing activities:
                       
Net payments on credit agreements and other short-term borrowings
                (84,100 )
Proceeds from (redemption of) term loan
          (400,000 )     400,000  
Redemption of senior subordinated notes
    (305,814 )     (258,968 )      
Proceeds from issuance of senior notes
                298,458  
Payments on mortgages, land contracts and other loans
    (12,800 )     (114,119 )     (36,595 )
Issuance of common stock under employee stock plans
    6,958       12,310       65,052  
Excess tax benefit associated with exercise of stock options
          882       15,384  
Payments of cash dividends
    (62,967 )     (77,170 )     (78,258 )
Repurchases of common stock
    (967 )     (6,896 )     (394,080 )
                         
Net cash provided (used) by financing activities — continuing operations
    (375,590 )     (843,961 )     185,861  
Net cash used by financing activities — discontinued operations
          (306,527 )     (215,010 )
                         
Net cash used by financing activities
    (375,590 )     (1,150,488 )     (29,149 )
                         
Net increase (decrease) in cash and cash equivalents
    (202,224 )     539,560       479,209  
Cash and cash equivalents at beginning of year
    1,343,742       804,182       324,973  
                         
Cash and cash equivalents at end of year
  $ 1,141,518     $ 1,343,742     $ 804,182  
                         
See accompanying notes.


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KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Note 1.   Summary of Significant Accounting Policies
 
Operations.   KB Home is a builder of single-family homes, townhomes and condominiums. The Company has ongoing operations in Arizona, California, Colorado, Florida, Nevada, North Carolina, South Carolina and Texas. The Company also offers mortgage services through Countrywide KB Home Loans, a joint venture with a subsidiary of Bank of America N.A. Countrywide KB Home Loans is accounted for as an unconsolidated joint venture within the Company’s financial services reporting segment. Through its financial services subsidiary, KB Home Mortgage Company (“KBHMC”), the Company provides title and insurance services to its homebuyers.
 
Basis of Presentation.   The consolidated financial statements include the accounts of the Company and all significant subsidiaries and joint ventures in which a controlling interest is held, as well as certain VIEs required to be consolidated pursuant to FASB Interpretation No. 46(R). All intercompany transactions have been eliminated. Investments in unconsolidated joint ventures in which the Company has less than a controlling interest are accounted for using the equity method.
 
In July 2007, the Company sold its 49% equity interest in its publicly traded French subsidiary, KBSA. Therefore, for the years ended November 30, 2007 and 2006, the French operations have been presented as discontinued operations in the consolidated financial statements.
 
Use of Estimates.   The consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles and, as such, include amounts based on informed estimates and judgments of management. Actual results could differ from these estimates.
 
Cash and Cash Equivalents, and Restricted Cash.   The Company considers all highly liquid debt instruments and other short-term investments, purchased with an original maturity of three months or less, to be cash equivalents. The Company’s cash equivalents totaled $1.05 billion at November 30, 2008 and $1.11 billion at November 30, 2007. The majority of the Company’s cash and cash equivalents were invested in high-quality money market accounts that are covered by the U.S. Treasury’s Temporary Guarantee Program, currently set to expire on April 30, 2009, and U.S. government securities. Restricted cash at November 30, 2008 consisted solely of $115.4 million maintained in an Interest Reserve Account with the administrative agent of the Company’s Credit Facility. The Company may withdraw the amounts deposited in the Interest Reserve Account when its Coverage Ratio at the end of a fiscal quarter is greater than or equal to 1.00 to 1.00, provided there is no default under the Credit Facility at the time amounts are withdrawn.
 
Goodwill.   The Company has recorded goodwill in connection with various acquisitions in prior years. Goodwill represents the excess of the purchase price over the fair value of net assets acquired. In accordance with SFAS No. 142, the Company tests goodwill for potential impairment annually as of November 30 and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The Company evaluates goodwill for impairment using the two-step process prescribed in SFAS No. 142. The first step is to identify potential impairment by comparing the fair value of a reporting unit to the book value, including goodwill. If the fair value of a reporting unit exceeds the book value, goodwill is not considered impaired. If the book value exceeds the fair value, the second step of the process is performed to measure the amount of impairment. In accordance with SFAS No. 142, the Company has determined that its reporting units are the same as its reporting segments. Accordingly, the Company has four homebuilding reporting units (West Coast, Southwest, Central and Southeast) and one financial services reporting unit.
 
Property and Equipment and Depreciation.   Property and equipment are recorded at cost and are depreciated over their estimated useful lives, which generally range from two to 10 years, using the straight-line method. Repair and maintenance costs are charged to earnings as incurred. Property and equipment are included in other assets on the consolidated balance sheets and totaled $16.3 million, net of accumulated depreciation of $36.9 million, at November 30, 2008, and $32.7 million, net of accumulated depreciation of $61.3 million, at November 30, 2007. Depreciation expense totaled $9.4 million in 2008, $17.3 million in 2007, and $17.2 million in 2006.
 
Foreign Currency Translation.   Results of operations for KBSA were translated to U.S. dollars using the average exchange rates during the period. Assets and liabilities were translated using the exchange rates in effect at the balance sheet date. Resulting translation adjustments were recorded in stockholders’ equity as foreign currency translation adjustments. Cumulative translation adjustments of $63.2 million related to the Company’s French operations were recognized in 2007 in connection with the sale of those operations.


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Homebuilding Operations.   Revenues from housing and other real estate sales are recognized in accordance with SFAS No. 66 when sales are closed and title passes to the buyer. Sales are closed when all of the following conditions are met: a sale is consummated, a significant down payment is received, the earnings process is complete and the collection of any remaining receivables is reasonably assured.
 
Construction and land costs are comprised of direct and allocated costs, including estimated future costs for warranties and amenities. Land, land improvements and other common costs are generally allocated on a relative fair value basis to homes within a parcel or community. Land and land development costs include related interest and real estate taxes.
 
Housing and land inventories are stated at cost, unless the carrying amount is determined not to be recoverable, in which case the inventories are written down to fair value in accordance with SFAS No. 144. SFAS No. 144 requires that real estate assets be tested for recoverability whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. Recoverability of assets is measured by comparing the carrying amount of an asset to the undiscounted future net cash flows expected to be generated by the asset. These evaluations for impairment are significantly impacted by estimates of revenues, costs and expenses, and other factors. If real estate assets are considered to be impaired, the impairment to be recognized is measured by the amount which the carrying value of the assets exceeds the fair value of the assets. Fair value is determined based on estimated future cash flows discounted for inherent risks associated with the real estate assets, or other valuation techniques.
 
Financial Services Operations.   Revenues are generated primarily from the following sources: interest income; title services; and insurance commissions. Interest income is accrued as earned. Title services revenues are recognized as closing services are rendered and title insurance policies are issued, both of which generally occur simultaneously at the time each home is closed. Insurance commissions are recognized when policies are issued. The financial services segment also generated revenues from escrow coordination services until the escrow coordination business was terminated in 2007. Escrow coordination fees were recognized at the time the home was closed.
 
Stock-Based Compensation.   With the approval of the management development and compensation committee, consisting of independent members of the Company’s board of directors, the Company provides compensation benefits by issuing stock options, restricted stock, phantom shares and SARs.
 
Effective December 1, 2005, the Company adopted the fair value recognition provisions of SFAS No. 123(R), which requires that companies measure and recognize compensation expense at an amount equal to the fair value of share-based payments granted under compensation arrangements. The Company adopted SFAS No. 123(R) using the modified prospective transition method. Under that transition method, the provisions of SFAS No. 123(R) apply to all awards granted or modified after the date of adoption. In addition, compensation expense must be recognized for any unvested stock option awards outstanding as of the date of adoption on a straight-line basis over the remaining vesting period. The fair value of stock options granted is estimated on the date of grant using the Black-Scholes option-pricing model. SFAS No. 123(R) also requires the tax benefit resulting from tax deductions in excess of the compensation expense recognized for those options to be reported in the statement of cash flows as an operating cash outflow and a financing cash inflow rather than as an operating cash inflow as previously reported.
 
Advertising Costs.   The Company expenses advertising costs as incurred. The Company incurred advertising costs of $34.6 million in 2008, $68.0 million in 2007 and $107.0 million in 2006.
 
Insurance.   The Company has, and requires the majority of its subcontractors to have, general liability insurance (including construction defect coverage) and workers compensation insurance. These insurance policies protect the Company against a portion of its risk of loss from claims related to its homebuilding activities, subject to certain self-insured retentions, deductibles and other coverage limits. The Company self-insures a portion of its overall risk through the use of a captive insurance subsidiary. The Company records expenses and liabilities based on the costs required to cover its self-insured retention and deductible amounts under its insurance policies, and on the estimated costs of potential claims and claim adjustment expenses above its coverage limits or not covered by its policies. These estimated costs are based on an analysis of the Company’s historical claims and include an estimate of construction defect claims incurred but not yet reported. The Company engages a third-party actuary that uses the Company’s historical claim data to estimate its unpaid claims, claim adjustment expenses and incurred but not reported claims reserves for the risks that the Company is assuming under the self-insured portion of its general liability insurance. Projection of losses related to these liabilities is subject to a high degree of variability due to uncertainties such as trends in construction defect claims relative to the Company’s markets and the types of product it builds, claim settlement patterns, insurance industry practices and legal interpretations, among others. Because of the high degree of judgment required in determining these


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estimated liability amounts, actual future costs could differ significantly from the Company’s currently estimated amounts.
 
Income Taxes.   Income taxes are accounted for in accordance with SFAS No. 109. The provision for, or benefit from, income taxes is calculated using the asset and liability method, under which deferred tax assets and liabilities are recorded based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred tax assets are evaluated on a quarterly basis to determine whether a valuation allowance is required. In accordance with SFAS No. 109, the Company assesses whether a valuation allowance should be established based on its determination of whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets depends primarily on the generation of future taxable income during the periods in which those temporary differences become deductible. Judgment is required in determining the future tax consequences of events that have been recognized in the Company’s consolidated financial statements and/or tax returns. Differences between anticipated and actual outcomes of these future tax consequences could have a material impact on the Company’s consolidated financial position or results of operations.
 
Accumulated Other Comprehensive Income (Loss).   The accumulated balances of other comprehensive loss in the consolidated balance sheets as of November 30, 2008 and 2007 are comprised solely of adjustments recorded directly to accumulated other comprehensive loss in accordance with SFAS No. 158. SFAS No. 158 requires an employer to recognize the funded status of a defined postretirement benefit plan as an asset or liability on the balance sheet and requires any unrecognized prior service costs and actuarial gains/losses to be recognized in accumulated other comprehensive income (loss). The Company initially applied the provisions of SFAS No. 158, as required, in 2007.
 
Earnings (Loss) Per Share.   Basic earnings (loss) per share is calculated by dividing net income (loss) by the average number of common shares outstanding for the period. Diluted earnings (loss) per share is calculated by dividing net income (loss) by the average number of common shares outstanding including all potentially dilutive shares issuable under outstanding stock options. All outstanding stock options were excluded from the diluted earnings (loss) per share calculations for the years ended November 30, 2008 and 2007 because the effect of their inclusion would be antidilutive, or would decrease the reported loss per share. For the year ended November 30, 2006, options to purchase 597,100 shares were excluded from the diluted earnings per share calculation because the exercise price was greater than the average market price of the common stock and their effect would have been antidilutive. The following table presents a reconciliation of average shares outstanding (in thousands):
 
                         
    Years Ended November 30,  
    2008     2007     2006  
 
Basic average shares outstanding
    77,509       77,172       78,829  
Net effect of stock options assumed to be exercised
                4,027  
                         
Diluted average shares outstanding
    77,509       77,172       82,856  
                         
 
Recent Accounting Pronouncements.   In September 2006, the FASB issued SFAS No. 157, which provides guidance for using fair value to measure assets and liabilities, defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007 and for interim periods within those years. In February 2008, the FASB issued FSP No. FAS 157-2, which delayed for one year the applicability of SFAS No. 157’s fair-value measurements to certain nonfinancial assets and liabilities. The Company adopted SFAS No. 157 in 2008, except as it applies to those nonfinancial assets and liabilities affected by the one-year delay. The partial adoption of SFAS No. 157 did not have a material impact on the Company’s consolidated financial position or results of operations. While it is currently evaluating the impact of adopting the remaining provisions of SFAS No. 157, the Company does not expect SFAS No. 157 to have a material impact on its consolidated financial position or results of operations.
 
In December 2007, the FASB issued SFAS No. 141(R), which amends SFAS No. 141, and provides revised guidance for recognizing and measuring identifiable assets and goodwill acquired, liabilities assumed, and any noncontrolling interest in the acquiree. It also provides disclosure requirements to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS No. 141(R) is effective for fiscal years beginning after December 15, 2008 and is to be applied prospectively. The Company is currently evaluating the potential impact of adopting SFAS No. 141(R) on its consolidated financial position and results of operations.


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In December 2007, the FASB issued SFAS No. 160, which establishes accounting and reporting standards pertaining to ownership interests in subsidiaries held by parties other than the parent, the amount of net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest, and the valuation of any retained noncontrolling equity investment when a subsidiary is deconsolidated. SFAS No. 160 also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS No. 160 is effective for fiscal years beginning on or after December 15, 2008. The Company is currently evaluating the potential impact of adopting SFAS No. 160 on its consolidated financial position and results of operations.
 
In May 2008, the FASB issued SFAS No. 162, which identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States. The Company does not expect the adoption of SFAS No. 162 to have a material impact on its consolidated financial position or results of operations.
 
In May 2008, the FASB also issued SFAS No. 163, which clarifies how SFAS No. 60 applies to financial guarantee insurance contracts, including the recognition and measurement of premium revenue and claim liabilities. SFAS No. 163 also requires expanded disclosures about financial guarantee insurance contracts. SFAS No. 163 is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008. The Company is currently evaluating the potential impact of adopting SFAS No. 163 on its consolidated financial position and results of operations.
 
In June 2008, the FASB issued FSP No. EITF 03-6-1. Under FSP No. EITF 03-6-1, unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. FSP No. EITF 03-6-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years and requires retrospective application. The Company is currently evaluating the impact of adopting FSP No. EITF 03-6-1 on its earnings per share.
 
In October 2008, the FASB issued FSP No. FAS 157-3, which clarifies the application of SFAS No. 157 in a market that is not active. FSP No. FAS 157-3 became effective upon issuance, including prior periods for which financial statements have not been issued. The Company’s adoption of FSP No. FAS 157-3 did not have a material impact on its consolidated financial position or results of operations.
 
In December 2008, the FASB issued FSP No. FAS 140-4 and FIN 46(R)-8, which amends SFAS No. 140, to require public entities to provide additional disclosures about transfers of financial assets. It also amends FASB Interpretation No. 46(R), to require public enterprises, including sponsors that have a variable interest in a VIE, to provide additional disclosures about their involvement with VIEs. FSP No. FAS 140-4 and FIN 46(R)-8 is related to disclosure only and will not have a impact on the Company’s consolidated financial position or results of operations.
 
Reclassifications.   Certain amounts in the consolidated financial statements of prior years have been reclassified to conform to the 2008 presentation.
 
Note 2.   Segment Information
 
As of November 30, 2008, the Company has identified five reporting segments, comprised of four homebuilding reporting segments and one financial services reporting segment, within its consolidated operations in accordance with Statement of Financial Accounting Standards No. 131, “Disclosures about Segments of an Enterprise and Related Information.” As of November 30, 2008, the Company’s homebuilding reporting segments conducted ongoing operations in the following states:
 
West Coast: California
Southwest: Arizona and Nevada
Central: Colorado and Texas
Southeast: Florida, North Carolina and South Carolina.
 
The Company’s homebuilding reporting segments are engaged in the acquisition and development of land primarily for residential purposes and offer a wide variety of homes that are designed to appeal to first-time, first move-up and active adult buyers.
 
The Company’s homebuilding reporting segments were identified based primarily on similarities in economic and geographic characteristics, as well as similar product type, regulatory environments, methods used to sell and construct homes and land acquisition characteristics. The Company evaluates segment performance primarily based on segment pretax income.


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The Company’s financial services reporting segment provides title and insurance services to the Company’s homebuyers and provided escrow coordination services until the second quarter of 2007, when the Company terminated the escrow coordination business. The segment also provides mortgage banking services to the Company’s homebuyers indirectly through Countrywide KB Home Loans, a joint venture between a Company subsidiary and CWB Venture Management Corporation, a subsidiary of Bank of America N.A. The Company’s financial services reporting segment conducts operations in the same markets as the Company’s homebuilding reporting segments.
 
The Company’s reporting segments follow the same accounting policies used for the Company’s consolidated financial statements as described in Note 1. Summary of Significant Accounting Policies. Operational results of each segment are not necessarily indicative of the results that would have occurred had the segment been an independent, stand-alone entity during the periods presented.
 
The following tables present financial information relating to the Company’s reporting segments (in thousands):
 
                         
    Years Ended November 30,  
    2008     2007     2006  
Revenues:
                       
West Coast
  $ 1,055,021     $ 2,203,303     $ 3,531,279  
Southwest
    618,014       1,349,570       2,183,830  
Central
    594,317       1,077,304       1,553,309  
Southeast
    755,817       1,770,414       2,091,425  
                         
Total homebuilding revenues
    3,023,169       6,400,591       9,359,843  
Financial services
    10,767       15,935       20,240  
                         
Total revenues
  $ 3,033,936     $ 6,416,526     $ 9,380,083  
                         
Income (loss) from continuing operations before income taxes:
                       
West Coast
  $ (298,047 )   $ (665,845 )   $ 359,864  
Southwest
    (212,194 )     (287,339 )     365,098  
Central
    (82,789 )     (64,210 )     (54,749 )
Southeast
    (258,568 )     (230,420 )     38,933  
Corporate and other (a)
    (140,151 )     (246,792 )     (170,835 )
                         
Total homebuilding income (loss) from continuing operations before income taxes
    (991,749 )     (1,494,606 )     538,311  
Financial services
    23,818       33,836       33,536  
                         
Total income (loss) from continuing operations before income taxes
  $ (967,931 )   $ (1,460,770 )   $ 571,847  
                         
Interest cost:
                       
West Coast
  $ 43,140     $ 63,902     $      20,160  
Southwest
    32,953       45,827       49,622  
Central
    23,836       21,184       37,518  
Southeast
    38,955       44,364       31,850  
Corporate and other
    3,983       9,209       20,777  
                         
Total (b)
  $ 142,867     $ 184,486     $ 159,927  
                         


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    Years Ended November 30,  
    2008     2007     2006  
Equity in income (loss) of unconsolidated joint ventures:
                       
West Coast
  $ (45,180 )   $ (64,886 )   $ (25,732 )
Southwest
    (35,633 )     (15,734 )     (26 )
Central
    (4,515 )     (6,916 )     (3,829 )
Southeast
    (67,422 )     (64,381 )     (12,290 )
Corporate and other
                21,047  
                         
Total
  $ (152,750 )   $ (151,917 )   $ (20,830 )
                         
Inventory impairments:
                       
West Coast
  $ 229,059     $ 631,399     $ 113,022  
Southwest
    160,574       337,889       17,343  
Central
    51,518       24,662       30,592  
Southeast
    124,726       116,023       67,808  
                         
Total
  $ 565,877     $ 1,109,973     $ 228,765  
                         
Inventory abandonments:
                       
West Coast
  $ 17,475     $ 28,011     $ 65,740  
Southwest
    187       16,479       22,069  
Central
          9,783       18,198  
Southeast
    23,252       89,736       37,865  
                         
Total
  $ 40,914     $ 144,009     $ 143,872  
                         
Joint venture impairments:
                       
West Coast
  $ 43,116     $ 57,030     $ 34,401  
Southwest
    30,434       31,049        
Central
    2,629       4,483        
Southeast
    65,671       63,801       24,201  
                         
Total
  $ 141,850     $ 156,363     $ 58,602  
                         
 
 
(a) Corporate and other includes corporate general and administrative expenses and goodwill impairment.
 
(b) Interest cost for 2008 included $129.9 million of interest amortized in construction and land costs, $2.6 million of interest expense, $7.1 million related to the loss on early redemption of debt and $3.3 million of unamortized fees that were written off in connection with an amendment of the Credit Facility. Interest cost for 2007 included $171.5 million of interest amortized in construction and land costs and $13.0 million related to the loss on early redemption of debt. Interest cost for 2006 included $143.2 million of interest amortized in construction and land costs and $16.7 million of interest expense.
 
                 
    November 30,  
    2008     2007  
Assets:
               
West Coast
  $ 1,086,503     $ 1,542,948  
Southwest
    497,034       887,361  
Central
    443,168       643,599  
Southeast
    453,771       845,679  
Corporate and other
    1,511,672       1,741,977  
                 
Total homebuilding assets
    3,992,148       5,661,564  
Financial services
    52,152       44,392  
                 
Total assets
  $ 4,044,300     $ 5,705,956  
                 

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    November 30,  
    2008     2007  
Investments in unconsolidated joint ventures:
               
West Coast
  $ 55,856     $ 63,450  
Southwest
    113,564       134,082  
Central
    3,339       7,230  
Southeast
    4,890       92,248  
                 
Total
  $ 177,649     $ 297,010  
                 
 
Note 3.  Financial Services
 
Financial information related to the Company’s financial services segment is as follows (in thousands):
 
 
                         
    Years Ended November 30,  
    2008     2007     2006  
 
Revenues
                       
Interest income
  $ 209     $ 158     $ 230  
Title services
    2,369       5,977       7,205  
Insurance commissions
    8,189       9,193       9,410  
Escrow coordination fees
          607       3,395  
                         
Total
    10,767       15,935       20,240  
Expenses
                       
Interest
                (49 )
General and administrative
    (4,489 )     (4,796 )     (5,874 )
                         
Operating income
    6,278       11,139       14,317  
Equity in income of unconsolidated joint venture
    17,540       22,697       19,219  
                         
Pretax income
  $ 23,818     $ 33,836     $ 33,536  
                         
 
                 
    November 30,  
    2008     2007  
 
Assets
               
Cash and cash equivalents
  $ 6,119     $ 18,487  
Receivables
    1,240       2,655  
Investment in unconsolidated joint venture
    44,733       23,140  
Other assets
    60       110  
                 
Total assets
  $ 52,152     $ 44,392  
                 
Liabilities
               
Accounts payable and accrued expenses
  $ 9,467     $ 17,796  
                 
Total liabilities
  $ 9,467     $ 17,796  
                 
 
KBHMC may be required to repurchase an individual loan that it funded on or before August 31, 2005 and sold to an investor if the representations or warranties that it made in connection with the sale of the loan are breached, in the event of an early payment default, or if the loan does not comply with the underwriting standards or other requirements of the ultimate investor. KBHMC ceased originating and selling loans on September 1, 2005.
 
Note 4.   Receivables
 
Mortgages and notes receivable totaled $53.5 million at November 30, 2008 and $46.8 million at November 30, 2007. Mortgages receivable are primarily related to land sales. Interest rates on mortgages and notes receivable ranged from 5% to 8% at November 30, 2008. The interest rate on mortgages and notes receivable at November 30, 2007 ranged from 5% to 8 1 / 4 %. Principal amounts at November 30, 2008 are due during the following years: 2009 — $9.8 million; 2010 — $3.3 million; 2011 — $0; 2012 — $40.0 million; and 2013 — $.4 million. Federal and state

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income taxes receivable totaled $211.3 million at November 30, 2008 and $124.0 million at November 30, 2007. Other receivables of $92.9 million at November 30, 2008 and $124.9 million at November 30, 2007 included amounts due from municipalities and utility companies, and escrow deposits. Other receivables were net of allowances for doubtful accounts of $72.5 million in 2008 and $76.9 million in 2007.
 
Note 5.   Inventories
 
Inventories consisted of the following (in thousands):
 
                 
    November 30,  
    2008     2007  
 
Homes, lots and improvements in production
  $ 1,649,838     $ 2,473,980  
Land under development
    456,878       838,440  
                 
Total
  $ 2,106,716     $ 3,312,420  
                 
 
Inventories include land and land development costs, direct construction costs, capitalized interest and real estate taxes. Land under development primarily consists of parcels on which 50% or less of estimated development costs have been incurred.
 
Interest is capitalized to inventories while the related communities are being actively developed. Capitalized interest is amortized in construction and land costs as the related inventories are delivered to homebuyers. The Company’s interest costs are as follows (in thousands):
 
                         
    Years Ended November 30,  
    2008     2007     2006  
 
Capitalized interest at beginning of year
  $ 348,084     $ 333,020     $ 255,195  
Interest incurred
    156,402       199,550       237,752  
Loss on early redemption/interest expensed
    (12,966 )     (12,990 )     (16,678 )
Interest amortized to construction and land costs
    (129,901 )     (171,496 )     (143,249 )
                         
Capitalized interest at end of year (a)
  $ 361,619     $ 348,084     $ 333,020  
                         
 
 
(a) Inventory impairment charges are recognized against all inventory costs of a community, such as land, land improvements, cost of home construction and capitalized interest. Capitalized interest amounts presented in the table reflect the gross amount of capitalized interest as impairment charges recognized are not generally allocated to specific components of inventory.
 
Note 6.   Inventory Impairments and Abandonments
 
Each parcel or community in the Company’s owned inventory is assessed to determine if indicators of potential impairment exist. If indicators of potential impairment exist for a parcel or community, the identified inventory is evaluated for recoverability in accordance with SFAS No. 144. Impairment indicators are assessed separately for each parcel or community on a quarterly basis and include, but are not limited to: significant decreases in sales rates, average selling prices, volume of homes delivered or gross margins; significant increases in budgeted land development and construction costs or cancellation rates; or projected losses on expected future housing or land sales. When an indicator of potential impairment is identified, the Company tests the asset for recoverability by comparing the carrying amount of the asset to the undiscounted future net cash flows expected to be generated by the asset. The undiscounted future net cash flows are impacted by the Company’s expectations related to: market supply and demand, including estimates concerning average selling prices; sales incentives; sales and cancellation rates; and anticipated land development, construction and overhead costs to be incurred. These estimates are specific to each community and may vary among communities.
 
A real estate asset is considered impaired when its carrying amount is greater than the undiscounted future net cash flows the asset is expected to generate. Impaired real estate assets are written down to fair value, which is primarily based on the estimated future cash flows discounted for inherent risk associated with each asset. These discounted cash flows are


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impacted by: the risk-free rate of return; expected risk premium based on estimated land development, construction and delivery timelines; market risk from potential future price erosion; cost uncertainty due to development or construction cost increases; and other risks specific to the asset or conditions in the market in which the asset is located at the time the assessment is made. These factors are specific to each community and may vary among communities.
 
Based on the results of its evaluations, the Company recognized pretax, noncash inventory impairment charges of $565.9 million in 2008, $1.11 billion in 2007 and $228.7 million in 2006. As of November 30, 2008, the aggregate carrying value of inventory impacted by pretax, noncash impairment charges was $1.01 billion, representing 163 communities and various other land parcels. As of November 30, 2007, the aggregate carrying value of inventory impacted by pretax, noncash impairment charges was $1.35 billion, representing 145 communities and various other land parcels.
 
The Company’s optioned inventory is assessed to determine whether it continues to meet the Company’s internal investment standards. Assessments are made separately for each optioned parcel on a quarterly basis and are affected by, among other factors: current and/or anticipated sales rates, average selling prices, home delivery volume and gross margins; estimated land development and construction costs; and projected profitability on expected future housing or land sales. When a decision is made not to exercise certain land option contracts due to market conditions and/or changes in market strategy, the Company writes off the costs, including non-refundable deposits and pre-acquisition costs, related to the abandoned projects.
 
The Company recognized abandonment charges associated with land option contracts of $40.9 million in 2008, $144.0 million in 2007 and $143.9 million in 2006.
 
The inventory impairment charges and land option contract abandonment charges are included in construction and land costs in the Company’s consolidated statements of operations.
 
Due to the judgment and assumptions applied in the estimation process with respect to impairments and land option contract abandonments, it is possible that actual results could differ substantially from those estimated.
 
Note 7.   Consolidation of Variable Interest Entities
 
In December 2003, FASB Interpretation No. 46(R) was issued by the FASB to clarify the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” to certain entities, VIEs, in which equity investors do not have the characteristics of a controlling interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. Under FASB Interpretation No. 46(R), an enterprise that absorbs a majority of the VIE’s expected losses, receives a majority of the VIE’s expected residual returns, or both, is considered to be the primary beneficiary of the VIE and must consolidate the entity in its financial statements.
 
The Company participates in joint ventures from time to time for the purpose of conducting land acquisition, development and/or other homebuilding activities. Its investments in these joint ventures may create a variable interest in a VIE, depending on the contractual terms of the arrangement. The Company analyzes its joint ventures in accordance with FASB Interpretation No. 46(R) when they are entered into or upon a reconsideration event. All of the Company’s joint ventures at November 30, 2008 and 2007 were determined to be unconsolidated joint ventures either because they were not VIEs or, if they were VIEs, the Company was not the primary beneficiary of the VIEs.
 
In the ordinary course of its business, the Company enters into land option contracts to procure land for the construction of homes. The use of such land option contracts generally allows the Company to reduce the risks associated with direct land ownership and development, reduces the Company’s capital and financial commitments, including interest and other carrying costs, and minimizes the amount of the Company’s land inventories on its consolidated balance sheet. Under such land option contracts, the Company will pay a specified option deposit or earnest money deposit in consideration for the right to purchase land in the future, usually at a predetermined price. Under the requirements of FASB Interpretation No. 46(R), certain of the Company’s land option contracts may create a variable interest for the Company, with the land seller being identified as a VIE.
 
In compliance with FASB Interpretation No. 46(R), the Company analyzes its land option contracts and other contractual arrangements when they are entered into or upon a reconsideration event, and as a result has consolidated the fair value of certain VIEs from which the Company is purchasing land under option contracts. Although the Company does not


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have legal title to the optioned land, FASB Interpretation No. 46(R) requires the Company to consolidate the VIE if the Company is determined to be the primary beneficiary. The consolidation of VIEs in which the Company was determined to be the primary beneficiary increased inventories, with a corresponding increase to accrued expenses and other liabilities, on the Company’s consolidated balance sheets by $15.5 million at November 30, 2008 and $19.0 million at November 30, 2007. The liabilities related to the Company’s consolidation of VIEs from which it is purchasing land under option contracts represent the difference between the purchase price of optioned land not yet purchased and the Company’s cash deposits. The Company’s cash deposits related to these land option contracts totaled $3.4 million at November 30, 2008 and $4.7 million at November 30, 2007. Creditors, if any, of these VIEs have no recourse against the Company. As of November 30, 2008, excluding consolidated VIEs, the Company had cash deposits totaling $29.7 million, which were associated with land option contracts having an aggregate purchase price of $533.2 million.
 
The Company’s exposure to loss related to its option contracts with third parties and unconsolidated entities consisted of its non-refundable option deposits totaling $33.1 million at November 30, 2008 and $59.3 million at November 30, 2007. In addition, the Company posted letters of credit of $32.5 million at November 30, 2008 and $103.7 million at November 30, 2007 in lieu of cash deposits under certain option contracts.
 
The Company also evaluates land option contracts in accordance with SFAS No. 49, and, as a result of its evaluations, increased inventories, with a corresponding increase to accrued expenses and other liabilities, on its consolidated balance sheets by $81.5 million at November 30, 2008 and $221.1 million at November 30, 2007.
 
Note 8.   Investments in Unconsolidated Joint Ventures
 
The Company participates in unconsolidated joint ventures that conduct land acquisition, development and/or other homebuilding activities in various markets, typically where the Company’s homebuilding operations are located. The Company’s partners in these unconsolidated joint ventures are unrelated homebuilders, land developers and other real estate entities, or commercial enterprises. Through these unconsolidated joint ventures, the Company seeks to reduce and share market and development risks and to reduce its investment in land inventory, while potentially increasing the number of homesites it owns or controls. In some instances, participating in unconsolidated joint ventures enables the Company to acquire and develop land that it might not otherwise have access to due to a project’s size, financing needs, duration of development or other circumstances. While the Company views its participation in unconsolidated joint ventures as beneficial to its homebuilding activities, it does not view such participation as essential.
 
The Company and/or its unconsolidated joint venture partners typically obtain options or enter into other arrangements to purchase portions of the land held by the unconsolidated joint ventures. The prices for these land options are generally negotiated prices that approximate fair value. When an unconsolidated joint venture sells land to the Company’s homebuilding operations, the Company defers recognition of its share of such unconsolidated joint venture earnings until a home sale is closed and title passes to a homebuyer, at which time the Company accounts for those earnings as a reduction of the cost of purchasing the land from the unconsolidated joint venture.
 
The Company and its unconsolidated joint venture partners make initial or ongoing capital contributions to these unconsolidated joint ventures, typically on a pro rata basis. The obligation to make capital contributions is governed by each unconsolidated joint venture’s respective operating agreement.
 
Each unconsolidated joint venture maintains financial statements in accordance with U.S. generally accepted accounting principles. The Company shares in profits and losses of these unconsolidated joint ventures generally in accordance with its respective equity interests.
 
The following table presents combined condensed statement of operations information for the Company’s unconsolidated joint ventures (in thousands):
 
                         
    Years Ended November 30,  
    2008     2007     2006  
 
Revenues
  $ 112,767     $ 662,705     $ 167,536  
Construction and land costs
    (458,168 )     (670,133 )     (189,507 )
Other expenses, net
    (38,170 )     (44,126 )     (26,598 )
                         
Loss
  $ (383,571 )   $ (51,554 )   $ (48,569 )
                         


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With respect to the Company’s investment in unconsolidated joint ventures, its equity in loss of unconsolidated joint ventures in 2008 included pretax, noncash impairment charges of $141.9 million in 2008 and $156.4 million in 2007. In 2006, the Company’s equity in income of unconsolidated joint ventures included pretax, noncash impairment charges of $58.6 million associated with certain unconsolidated joint ventures and a gain of $27.6 million related to the sale of the Company’s ownership interest in an unconsolidated joint venture.
 
The following table presents combined condensed balance sheet information for the Company’s unconsolidated joint ventures (in thousands):
 
                 
    November 30,  
    2008     2007  
 
Assets
               
Cash
  $ 29,194     $ 51,249  
Receivables
    143,926       234,265  
Inventories
    1,029,306       2,209,907  
Other assets
    55,289       15,513  
                 
Total assets
  $ 1,257,715     $ 2,510,934  
                 
Liabilities and equity
               
Accounts payable and other liabilities
  $ 85,064     $ 68,217  
Mortgages and notes payable
    871,279       1,540,931  
Equity
    301,372       901,786  
                 
Total liabilities and equity
  $ 1,257,715     $ 2,510,934  
                 
 
The following table presents information relating to the Company’s investments in unconsolidated joint ventures and the aggregate outstanding debt of unconsolidated joint ventures as of the dates specified, categorized by the nature of the Company’s potential responsibility under a guaranty, if any, for such debt (dollars in thousands):
 
                 
    November 30,  
    2008     2007  
 
Number of investments in unconsolidated joint ventures:
               
With recourse debt (a)
            1       1  
With limited recourse debt (b)
    4       7  
With non-recourse debt (c)
    10       14  
Other (d)
    10       13  
                 
Total
    25       35  
                 
Investments in unconsolidated joint ventures:
               
With recourse debt
  $ 3,339     $ 1,855  
With limited recourse debt
    1,360       17,342  
With non-recourse debt
    24,590       161,721  
Other
    148,360       116,092  
                 
Total
  $ 177,649     $ 297,010  
                 
Aggregate outstanding debt of unconsolidated joint ventures:
               
With recourse debt
  $ 3,249     $ 6,317  
With limited recourse debt
    112,700       276,553  
With non-recourse debt
    381,393       894,115  
Other
    373,937       363,946  
                 
Total (e)
  $ 871,279     $ 1,540,931  
                 


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(a) This category consists of an unconsolidated joint venture as to which the Company has entered into a several guaranty with respect to the repayment of a portion of the unconsolidated joint venture’s outstanding debt.
 
(b) This category consists of unconsolidated joint ventures as to which the Company has entered into a loan-to-value maintenance guaranty with respect to a portion of each such unconsolidated joint venture’s outstanding secured debt.
 
(c) This category consists of unconsolidated joint ventures as to which the Company does not have a guaranty or any other obligation to repay or to support the value of the collateral (including letters of credit) underlying such unconsolidated joint ventures’ respective outstanding secured debt (excluding any potential responsibility under a carve-out guaranty).
 
(d) This category consists of unconsolidated joint ventures with no outstanding debt and an unconsolidated joint venture as to which the Company has entered into a several guaranty that, by its terms, purports to require the Company to guarantee the repayment of a portion of the unconsolidated joint venture’s outstanding debt in the event an involuntary bankruptcy proceeding is filed against the unconsolidated joint venture that is not dismissed within 60 days or for which an order approving relief under bankruptcy law is entered, even if the unconsolidated joint venture or its partners do not collude in the filing and the unconsolidated joint venture contests the filing, as further described below.
 
In some cases, the Company may have also entered into a completion guaranty and/or a carve-out guaranty with the lenders for the unconsolidated joint ventures identified in categories (a) through (d).
 
(e) The “Total” amounts represent the aggregate outstanding debt of the unconsolidated joint ventures in which the Company participates. The amounts do not represent the Company’s potential responsibility for such debt, if any. The Company’s maximum potential responsibility for any portion of such debt, if any, is limited to either a specified maximum amount or an amount equal to its pro rata interest in the relevant unconsolidated joint venture, as further described below.
 
The unconsolidated joint ventures finance land and inventory investments through a variety of arrangements. To finance their respective land acquisition and development activities, many of the Company’s unconsolidated joint ventures have obtained loans from third-party lenders that are secured by the underlying property and related project assets. Unconsolidated joint ventures had outstanding debt, substantially all of which was secured, of approximately $871.3 million at November 30, 2008 and $1.54 billion at November 30, 2007. The unconsolidated joint ventures are subject to various financial and non-financial covenants in conjunction with their debt, primarily related to equity maintenance, fair value of collateral and minimum land purchase or sale requirements within a specified period. In a few instances, the financial covenants are based on the Company’s financial position.
 
In certain instances, the Company and/or its partner(s) in an unconsolidated joint venture provide guarantees and indemnities to the unconsolidated joint venture’s lenders that may include one or more of the following: (a) a completion guaranty; (b) a loan-to-value maintenance guaranty; and/or (c) a carve-out guaranty. A completion guaranty refers to the physical completion of improvements for a project and/or the obligation to contribute equity to an unconsolidated joint venture to enable it to fund its completion obligations. A loan-to-value maintenance guaranty refers to the payment of funds to maintain the applicable loan balance at or below a specific percentage of the value of an unconsolidated joint venture’s secured collateral (generally land and improvements). A carve-out guaranty refers to the payment of (i) losses a lender suffers due to certain bad acts or omissions by an unconsolidated joint venture or its partners, such as fraud or misappropriation, or due to environmental liabilities arising with respect to the relevant project, or (ii) outstanding principal and interest and certain other amounts owed to lenders upon the filing by an unconsolidated joint venture of a voluntary bankruptcy petition or the filing of an involuntary bankruptcy petition by creditors of the unconsolidated joint venture in which an unconsolidated joint venture or its partners collude or which the unconsolidated joint venture fails to contest.
 
In most cases, the Company’s maximum potential responsibility under these guarantees and indemnities is limited to either a specified maximum dollar amount or an amount equal to its pro rata interest in the relevant unconsolidated joint venture. In a few cases, the Company has entered into agreements with its unconsolidated joint venture partners to be reimbursed or indemnified with respect to the guarantees the Company has provided to an unconsolidated joint venture’s lenders for any amounts the Company may pay pursuant to such guarantees above its pro rata interest in the


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unconsolidated joint venture. If the Company’s unconsolidated joint venture partners are unable to fulfill their reimbursement or indemnity obligations, or otherwise fail to do so, the Company could incur more than its allocable share under the relevant guaranty. Should there be indications that advances (if made) will not be voluntarily repaid by an unconsolidated joint venture partner under any such reimbursement arrangements, the Company vigorously pursues all rights and remedies available to it under the applicable agreements, at law or in equity to enforce its reimbursement rights.
 
The Company’s potential responsibility under its completion guarantees, if triggered, is highly dependent on the facts of a particular case. In any event, the Company believes its actual responsibility under these guarantees is limited to the amount, if any, by which an unconsolidated joint venture’s outstanding borrowings exceed the value of its assets, but may be substantially less than this amount.
 
At November 30, 2008, the Company’s potential responsibility under its loan-to-value maintenance guarantees totaled approximately $45.4 million, if any liability were determined to be due thereunder. This amount represents the Company’s maximum responsibility under such loan-to-value maintenance guarantees assuming the underlying collateral has no value and without regard to defenses that could be available to the Company against attempted enforcement of such guarantees.
 
Notwithstanding these potential responsibilities, at this time the Company does not believe that its exposure under its existing completion, loan-to-value and carve-out guarantees and indemnities related to unconsolidated joint venture debt is material to the Company’s consolidated financial position or results of operations.
 
Recently, the lenders for two of the Company’s unconsolidated joint ventures filed lawsuits against some of the unconsolidated joint ventures’ members, and certain of those members’ parent companies, seeking to recover damages under completion guarantees, among other claims. The Company and the other parent companies, together with the members, are defending the lawsuits in which they have been named. The Company does not believe that these lawsuits will have a material impact on the Company’s consolidated financial position or results of operations.
 
In addition to the above-described guarantees and indemnities, the Company has also provided a several guaranty to the lenders of one of the Company’s unconsolidated joint ventures. By its terms, the guaranty purports to guarantee the repayment of principal and interest and certain other amounts owed to the unconsolidated joint venture’s lenders when an involuntary bankruptcy proceeding is filed against the unconsolidated joint venture that is not dismissed within 60 days or for which an order approving relief under bankruptcy law is entered, even if the unconsolidated joint venture or its partners do not collude in the filing and the unconsolidated joint venture contests the filing. The Company’s potential responsibility under this several guaranty fluctuates with the outstanding borrowings against the unconsolidated joint venture’s debt and with the Company’s and its partners’ respective land purchases from the unconsolidated joint venture. At November 30, 2008, this unconsolidated joint venture had total outstanding indebtedness of approximately $373.9 million and, if this guaranty were then enforced, the Company’s maximum potential responsibility under the guaranty would have been approximately $182.7 million, which amount does not account for any offsets or defenses that could be available to the Company. This unconsolidated joint venture has received notices from its lenders’ administrative agent alleging a number of defaults under its loan agreement. The Company is currently exploring resolutions with the lenders, the lenders’ administrative agent and the Company’s unconsolidated joint venture partners, but there is no assurance that the Company will reach a satisfactory resolution with all of the parties involved.
 
Certain of the Company’s other unconsolidated joint ventures operating in difficult market conditions are in default of their debt agreements with their lenders or are at risk of defaulting. In addition, certain of the Company’s unconsolidated joint venture partners have curtailed funding of their allocable joint venture obligations. The Company is carefully managing its investments in these particular unconsolidated joint ventures and is working with the relevant lenders and unconsolidated joint venture partners to reach satisfactory resolutions. In some instances, the Company may decide to opportunistically purchase its partners’ interests and would consolidate the joint venture, which would result in an increase in the Company’s consolidated mortgages and notes payable. However, such purchases may not resolve a claimed default by the joint venture under its debt agreements. Additionally, the Company may seek new equity partners to participate in its unconsolidated joint ventures or, based on market conditions and other strategic considerations, may decide to withdraw from an unconsolidated joint venture and allow the unconsolidated joint venture’s lenders to exercise their remedies with respect to the underlying collateral (subject to any relevant defenses available to the Company). Based on the terms and amounts of the debt involved for these particular unconsolidated joint ventures and the terms of the


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applicable joint venture operating agreements, the Company does not believe that its exposure related to any defaults by or with respect to these particular unconsolidated joint ventures is material to the Company’s consolidated financial position or results of operations.
 
Note 9.   Goodwill
 
The changes in the carrying amount of goodwill are as follows (in thousands):
 
                 
    Years Ended November 30,  
    2008     2007  
 
Balance at beginning of year
  $ 67,970     $ 177,333  
Impairments
    (67,970 )     (107,926 )
Other
          (1,437 )
                 
Balance at end of year
  $     $ 67,970  
                 
 
The Company’s goodwill balance at November 30, 2007 consisted of $24.6 million and $43.4 million related to the Central and Southeast reporting segments, respectively.
 
In accordance with SFAS No. 142, the Company tests goodwill for potential impairment annually as of November 30 and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. During 2008 and 2007, the Company determined that it was necessary to evaluate goodwill for impairment between annual tests due to deteriorating conditions in certain housing markets and the significant inventory impairments the Company identified and recognized during those years in accordance with SFAS No. 144.
 
Based on the results of its impairment evaluation performed in the second quarter of 2008, the Company recorded an impairment charge of $24.6 million in that quarter related to its Central reporting segment, where all of the goodwill previously recorded was determined to be impaired. The annual goodwill impairment test performed by the Company as of November 30, 2008 resulted in an impairment charge of $43.4 million in the fourth quarter of 2008 related to its Southeast reporting segment, where all of the goodwill previously recorded was determined to be impaired. Based on the results of its impairment evaluation performed in the third quarter of 2007, the Company recorded an impairment charge of $107.9 million in that quarter related to its Southwest reporting segment, where all of the goodwill previously recorded was determined to be impaired. The annual goodwill impairment test performed by the Company as of November 30, 2007 indicated no additional impairment. The goodwill impairment charges in 2008 and 2007 were recorded at the Company’s corporate level because all goodwill is carried at that level. As a result of these impairment charges, the Company has no remaining goodwill company-wide at November 30, 2008.
 
The process of evaluating goodwill for impairment involves the determination of the fair value of the Company’s reporting units. Inherent in such fair value determinations are certain judgments and estimates relating to future cash flows, including the Company’s interpretation of current economic indicators and market valuations, and assumptions about the Company’s strategic plans with regard to its operations. Due to the uncertainties associated with such estimates, actual results could differ from such estimates.
 
In performing its impairment analysis, the Company developed a range of fair values for its homebuilding and financial services reporting units using a discounted cash flow methodology and a market multiple methodology. For the financial services reporting unit, the Company also used a comparable transaction methodology.
 
The discounted cash flow methodology establishes fair value by estimating the present value of the projected future cash flows to be generated from the reporting unit. The discount rate applied to the projected future cash flows to arrive at the present value is intended to reflect all risks of ownership and the associated risks of realizing the stream of projected future cash flows. The discounted cash flow methodology uses the Company’s projections of financial performance for a five-year period. The most significant assumptions used in the discounted cash flow methodology are the discount rate, the terminal value and expected future revenues, gross margins and operating margins, which vary among reporting units.


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The market multiple methodology establishes fair value by comparing the Company to other publicly traded companies that are similar to it from an operational and economic standpoint. The market multiple methodology compares the Company to the comparable companies on the basis of risk characteristics in order to determine its risk profile relative to the comparable companies as a group. This analysis generally focuses on quantitative considerations, which include financial performance and other quantifiable data, and qualitative considerations, which include any factors which are expected to impact future financial performance. The most significant assumptions affecting the market multiple methodology are the market multiples and control premium. The market multiples the Company uses are: (a) price to net book value and (b) enterprise value to revenue (for each of the homebuilding reporting units). A control premium represents the value an investor would pay above minority interest transaction prices in order to obtain a controlling interest in the respective company. The comparable transaction methodology establishes fair value similar to the market multiple methodology, utilizing recent transactions within the industry as the market multiple. However, no control premium is applied when using the comparable transaction methodology because these transactions represent control transactions.
 
Note 10.   Mortgages and Notes Payable
 
Mortgages and notes payable consisted of the following (in thousands, interest rates are as of November 30):
 
                 
    November 30,  
    2008     2007  
 
Mortgages and land contracts due to land sellers and other loans (4 1 / 4 % to 8% in 2008 and 4% to 10% in 2007)
  $ 96,368     $ 19,140  
Senior subordinated notes due December 15, 2008 at 8 5 / 8 %
    200,000       200,000  
Senior subordinated notes due 2010 at 7 3 / 4 %
          298,273  
Senior notes due 2011 at 6 3 / 8 %
    348,908       348,549  
Senior notes due 2014 at 5 3 / 4 %
    249,227       249,102  
Senior notes due 2015 at 5 7 / 8 %
    298,692       298,521  
Senior notes due 2015 at 6 1 / 4 %
    449,653       449,612  
Senior notes due 2018 at 7 1 / 4 %
    298,689       298,597  
                 
Total
  $ 1,941,537     $ 2,161,794  
                 
 
On July 14, 2008, the Company completed the early redemption of the $300 Million Senior Subordinated Notes at a price of 101.938% of the principal amount plus accrued interest to the date of redemption. The Company incurred a loss of $7.1 million in 2008 related to the early redemption of debt, as a result of the call premium and the unamortized original issue discount. This loss is included in the loss on early redemption of debt in the consolidated statements of operations.
 
The Company has a Credit Facility with a syndicate of lenders that matures in November 2010. Interest on the Credit Facility is payable monthly at the London Interbank Offered Rate plus an applicable spread on amounts borrowed. At November 30, 2008 and 2007, the Company had no cash borrowings outstanding and $211.8 million and $296.8 million, respectively, in letters of credit outstanding under the Credit Facility.
 
On August 28, 2008, the Company entered into the Fifth Amendment to the Credit Facility. The Fifth Amendment, among other things, reduced the aggregate commitment under the Credit Facility from $1.30 billion to $800.0 million and provided that the aggregate commitment may be permanently reduced to: (a) $650.0 million, if at the end of any fiscal quarter the Company’s consolidated tangible net worth is less than or equal to $800.0 million but greater than $500.0 million, or (b) $500.0 million, if at the end of any fiscal quarter the Company’s consolidated tangible net worth is less than or equal to $500.0 million. In addition, the Fifth Amendment reduced the sublimit for swing line loans from $100.0 million to $60.0 million; reduced the sublimit for the issuance of letters of credit from $1.00 billion to $600.0 million; and reduced the amount of unrestricted cash applied to the borrowing base calculation by subtracting the amount of outstanding borrowings under the Credit Facility as of the measurement date.
 
The Fifth Amendment also (a) made permanent certain prior amendments to covenant requirements regarding the minimum Coverage Ratio, the maximum consolidated Leverage Ratio, and distributions in respect of capital stock; (b) amended covenants regarding payment of subordinated obligations, investments in subsidiaries and joint ventures,


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and the minimum level of consolidated tangible net worth; and (c) increased the applicable rates for Eurodollar borrowings, the letter of credit fees, and unused commitment fee. The maturity date of the Credit Facility remains unchanged. The Company paid a fee to lenders party to the Fifth Amendment. In light of the reduction in the aggregate commitment, the Company wrote off $3.3 million of unamortized fees associated with the Credit Facility during 2008. This write-off is included in the loss on early redemption of debt in the consolidated statements of operations.
 
In addition to the financial covenants affected by the Fifth Amendment, the Credit Facility also contains covenants limiting the Company’s unimproved land book value, speculative unit deliveries within a given fiscal quarter and borrowing base requirements.
 
On October 17, 2008, the Company filed the 2008 Shelf Registration with the SEC, registering debt and equity securities that it may issue from time to time in amounts to be determined. The Company’s previously outstanding 2004 Shelf Registration was subsumed within the 2008 Shelf Registration. As of the date of this Annual Report on Form 10-K, the Company has not issued any securities under its 2008 Shelf Registration.
 
On December 14, 2001, pursuant to its universal shelf registration statement filed with the SEC on December 5, 1997 (the “1997 Shelf Registration”), the Company issued the $200 Million Senior Subordinated Notes at 100% of the principal amount of the notes. The notes, which matured on December 15, 2008, represented unsecured obligations of the Company and were subordinated to all existing and future senior indebtedness of the Company. The notes were not redeemable at the option of the Company. The Company used $175.0 million of the net proceeds from the issuance of the notes to redeem all of its then-outstanding $175.0 million of 9 3 / 8 % senior subordinated notes, which were due in 2003. The remaining net proceeds were used for general corporate purposes.
 
The Company issued the $350 Million Senior Notes on June 30, 2004 at 99.3% of the principal amount of the notes in a private placement. The notes, which are due August 15, 2011, with interest payable semi-annually, represent senior unsecured obligations of the Company and rank equally in right of payment with all of the Company’s existing and future senior unsecured indebtedness. The $350 Million Senior Notes may be redeemed, in whole at any time or from time to time in part, at a price equal to 100% of their principal amount, plus a premium, plus accrued and unpaid interest to the applicable redemption date. The notes are unconditionally guaranteed jointly and severally by certain of the Company’s subsidiaries (“Guarantor Subsidiaries”) on a senior unsecured basis. The Company used all of the net proceeds from the issuance of the $350 Million Senior Notes to repay bank borrowings. On December 3, 2004, the Company exchanged all of the privately placed $350 Million Senior Notes for notes that are substantially identical except that the new notes are registered under the Securities Act of 1933.
 
On January 28, 2004, the Company issued $250.0 million of 5 3 / 4 % senior notes due 2014 (the “$250 Million Senior Notes”) at 99.474% of the principal amount of the notes in a private placement. The notes, which are due February 1, 2014, with interest payable semi-annually, represent senior unsecured obligations of the Company and rank equally in right of payment with all of the Company’s existing and future senior unsecured indebtedness. The $250 Million Senior Notes may be redeemed, in whole at any time or from time to time in part, at a price equal to 100% of their principal amount, plus a premium, plus accrued and unpaid interest to the applicable redemption date. The notes are unconditionally guaranteed jointly and severally by the Guarantor Subsidiaries on a senior unsecured basis. The Company used all of the net proceeds from the issuance of the $250 Million Senior Notes to repay bank borrowings. On June 16, 2004, the Company exchanged all of the privately placed $250 Million Senior Notes for notes that are substantially identical except that the new notes are registered under the Securities Act of 1933.
 
On December 15, 2004, pursuant to the 2004 Shelf Registration, the Company issued $300.0 million of 5 7 / 8 % senior notes due 2015 (the “$300 Million 5 7 / 8 % Senior Notes”) at 99.357% of the principal amount of the notes. The $300 Million 5 7 / 8 % Senior Notes, which are due January 15, 2015, with interest payable semi-annually, represent senior unsecured obligations of the Company and rank equally in right of payment with all of the Company’s existing and future senior unsecured indebtedness. The $300 Million 5 7 / 8 % Senior Notes may be redeemed, in whole at any time or from time to time in part, at a price equal to the greater of: (a) 100% of their principal amount and (b) the sum of the present values of the remaining scheduled payments discounted to the date of redemption at a defined rate, plus, in each case accrued and unpaid interest to the applicable redemption date. The notes are unconditionally guaranteed jointly and severally by the Guarantor Subsidiaries on a senior unsecured basis. The Company used all of the net proceeds from the issuance of the $300 Million 5 7 / 8 % Senior Notes to pay down bank borrowings.


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Pursuant to the 2004 Shelf Registration, on June 2, 2005, the Company issued $450.0 million of 6 1 / 4 % senior notes due 2015 (the “$450 Million Senior Notes”) at 100.614% of the principal amount of the notes plus accrued interest from June 2, 2005. The $450 Million Senior Notes, which are due June 15, 2015, with interest payable semi-annually, represent senior unsecured obligations of the Company and rank equally in right of payment with all of the Company’s existing and future senior unsecured indebtedness. The $450 Million Senior Notes may be redeemed, in whole at any time or from time to time in part, at a price equal to the greater of: (a) 100% of their principal amount and (b) the sum of the present values of the remaining scheduled payments discounted to the date of redemption at a defined rate, plus, in each case, accrued and unpaid interest to the applicable redemption date. The notes are unconditionally guaranteed jointly and severally by the Guarantor Subsidiaries on a senior unsecured basis. The Company used all of the net proceeds from the issuance of the $450 Million Senior Notes to pay down bank borrowings.
 
On April 3, 2006, pursuant to the 2004 Shelf Registration, the Company issued the $300 Million 7 1 / 4 % Senior Notes. The notes, which are due June 15, 2018 with interest payable semi-annually, represent senior unsecured obligations and rank equally in right of payment with all of the Company’s existing and future senior unsecured indebtedness and are guaranteed jointly and severally by the Guarantor Subsidiaries on a senior unsecured basis. The $300 Million 7 1 / 4 % Senior Notes may be redeemed, in whole at any time or from time to time in part, at a price equal to the greater of: (a) 100% of their principal amount and (b) the sum of the present values of the remaining scheduled payments of principal and interest on the notes to be redeemed discounted at a defined rate, plus, in each case, accrued and unpaid interest to the applicable redemption date. The Company used all of the proceeds from the $300 Million 7 1 / 4 % Senior Notes to repay borrowings under its Credit Facility.
 
The Company’s senior notes indenture does not contain any financial covenants. Subject to specified exceptions, the senior notes indenture contains certain restrictive covenants that, among other things, limit the Company’s ability to incur secured indebtedness; engage in sale-leaseback transactions involving property or assets above a certain specified value; or engage in mergers, consolidations, or sales of assets.
 
As of November 30, 2008, the Company was in compliance with the terms of its Credit Facility and senior notes indenture. However, the Company’s ability to continue to borrow funds depends in part on its ability to remain in such compliance. The Company’s inability to do so could make it more difficult and expensive to maintain its current level of external debt financing or to obtain additional financing. Based on the applicable terms of the Credit Facility and the senior notes indenture, $549.6 million of retained earnings would have been available for the payment of dividends at November 30, 2008.
 
Principal payments on notes, mortgages, land contracts and other loans are due as follows: 2009 — $279.5 million; 2010 — $16.8 million; 2011 — $348.9 million; 2012 — $0; 2013 — $0; and thereafter — $1.30 billion.
 
Assets (primarily inventories) having a carrying value of approximately $169.8 million as of November 30, 2008 are pledged to collateralize mortgages, land contracts and other secured loans.
 
Note 11.   Fair Values of Financial Instruments
 
The estimated fair values of financial instruments have been determined based on available market information and appropriate valuation methodologies. However, judgment is required in interpreting market data to develop the estimates of fair value. In that regard, the estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange.


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The carrying values and estimated fair values of the Company’s financial instruments, except for those for which the carrying values approximate fair values, are summarized as follows (in thousands):
 
                                 
    November 30,  
    2008     2007  
          Estimated Fair
          Estimated Fair
 
    Carrying Value     Value     Carrying Value     Value  
 
Financial liabilities
                               
8 5 / 8 % Senior subordinated notes
  $      200,000     $      199,500     $      200,000     $      194,750  
7 3 / 4 % Senior subordinated notes
                298,273       277,394  
6 3 / 8 % Senior notes
    348,908       274,765       348,549       319,358  
5 3 / 4 % Senior notes
    249,227       165,113       249,102       216,096  
5 7 / 8 % Senior notes
    298,692       182,949       298,521       256,728  
6 1 / 4 % Senior notes
    449,653       275,412       449,612       388,352  
7 1 / 4 % Senior notes
    298,689       173,240       298,597       268,364  
 
The Company used the following methods and assumptions in estimating fair values:
 
The fair values of the Company’s senior subordinated and senior notes are estimated based on quoted market prices.
 
The carrying amounts reported for cash and cash equivalents and restricted cash approximate fair values.
 
Note 12.   Commitments and Contingencies
 
Commitments and contingencies include the usual obligations of homebuilders for the completion of contracts and those incurred in the ordinary course of business.
 
The Company provides a limited warranty on all of its homes. The specific terms and conditions of warranties vary depending upon the market in which the Company does business. The Company generally provides a structural warranty of 10 years, a warranty on electrical, heating, cooling, plumbing and other building systems each varying from two to five years based on geographic market and state law, and a warranty of one year for other components of the home. The Company estimates the costs that may be incurred under each limited warranty and records a liability in the amount of such costs at the time the revenue associated with the sale of each home is recognized. Factors that affect the Company’s warranty liability include the number of homes delivered, historical and anticipated rates of warranty claims, and cost per claim. The Company periodically assesses the adequacy of its recorded warranty liabilities, which are included in accrued expenses and other liabilities in the consolidated balance sheets, and adjusts the amounts as necessary based on its assessment.
 
The changes in the Company’s warranty liability are as follows (in thousands):
 
                         
    Years Ended November 30,  
    2008     2007     2006  
 
Balance at beginning of year
  $ 151,525     $ 141,060     $ 122,503  
Warranties issued
    25,324       60,620       78,527  
Payments and adjustments
    (31,480 )     (50,155 )     (59,970 )
                         
Balance at end of year
  $ 145,369     $ 151,525     $ 141,060  
                         
 
In the normal course of its business, the Company issues certain representations, warranties and guarantees related to its home sales and land sales that may be affected by FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” Based on historical evidence, the Company does not believe any of these representations, warranties or guarantees would result in a material effect on its consolidated financial position or results of operations.
 
The Company has, and requires the majority of its subcontractors to have, general liability insurance (including construction defect coverage) and workers’ compensation insurance. These insurance policies protect the Company against a portion of its risk of loss from claims related to its homebuilding activities, subject to certain self-insured retentions, deductibles and other coverage limits. The Company self-insures a portion of its overall risk through the use of a captive insurance subsidiary. The Company records expenses and liabilities based on the costs required to cover its self-insured


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retention and deductible amounts under its insurance policies, and on the estimated costs of potential claims and claim adjustment expenses above its coverage limits or not covered by its policies. These estimated costs are based on an analysis of the Company’s historical claims and include an estimate of construction defect claims incurred but not yet reported. The Company’s estimated liabilities for such items were $101.5 million at November 30, 2008 and $95.6 million at November 30, 2007, and are included in accrued expenses and other liabilities in the consolidated balance sheets.
 
The Company is often required to obtain performance bonds and letters of credit in support of its obligations to various municipalities and other government agencies in connection with subdivision improvements such as roads, sewers and water. At November 30, 2008, the Company had $761.1 million of performance bonds and $211.8 million of letters of credit outstanding. At November 30, 2007, the Company had $1.08 billion of performance bonds and $296.8 million of letters of credit outstanding. In the event any such performance bonds or letters of credit are called, the Company would be obligated to reimburse the issuer of the performance bond or letter of credit. At this time, the Company does not believe that a material amount of any currently outstanding performance bonds or letters of credit will be called. Performance bonds do not have stated expiration dates. Rather, the Company is released from the performance bonds as the contractual performance is completed. The expiration dates of letters of credit issued in connection with subdivision improvements coincide with the expected completion dates of the related projects. If the obligations related to a project are ongoing, annual extensions of the letters of credit are typically granted on a year-to-year basis.
 
Borrowings outstanding and letters of credit issued under the Credit Facility are guaranteed by the Guarantor Subsidiaries.
 
In the ordinary course of business, the Company enters into land option contracts to procure land for the construction of homes. At November 30, 2008, the Company had total deposits of $65.6 million, comprised of cash deposits of $33.1 million and letters of credit of $32.5 million, to purchase land with a total remaining purchase price of $548.7 million. The Company’s land option contracts generally do not contain provisions requiring its specific performance.
 
The Company leases certain property and equipment under noncancelable operating leases. Office and equipment leases are typically for terms of three to five years and generally provide renewal options for terms up to an additional five years. In most cases, the Company expects that, in the normal course of business, leases that expire will be renewed or replaced by other leases. The future minimum rental payments under operating leases, which primarily consist of office leases having initial or remaining noncancelable lease terms in excess of one year are as follows: 2009 — $19.0 million; 2010 — $16.5 million; 2011 — $9.8 million; 2012 — $6.8 million; 2013 — $4.9 million; and thereafter — $4.8 million. Rental expense on these operating leases was $17.3 million in 2008, $21.7 million in 2007 and $22.8 million in 2006.
 
Note 13.   Legal Matters
 
Derivative Litigation.   In the summer of 2006, four shareholder derivative lawsuits were filed, ostensibly on behalf of the Company, alleging, among other things, that the defendants (various current and former directors and officers of the Company) breached their fiduciary duties to the Company by, among other things, backdating grants of stock options to various current and former executives in violation of the Company’s stockholder-approved stock option plans. Two of the lawsuits were state court actions filed in Los Angeles County Superior Court, and two were federal actions filed in the United States District Court for the Central District of California. The two federal lawsuits also included substantive claims under the federal securities laws.
 
The Company recently reached a tentative global settlement with the parties in the four actions. The settlement also includes a resolution of all issues with the Company’s former Chairman and Chief Executive Officer, Bruce Karatz. On December 9, 2008, the parties to the federal court actions submitted the proposed settlement to the court, and the plaintiffs in those actions concurrently filed an unopposed motion seeking preliminary approval of the proposed settlement. On December 15, 2008, the court granted preliminary approval of the proposed settlement and scheduled a hearing for February 9, 2009 to determine whether the settlement should be finally approved by the court. If it is finally approved, the federal litigation will be dismissed, and all parties have agreed that the state court litigation will be dismissed as well. If the settlement is not approved, the federal and state court litigation will continue. At this time, the Company does not believe that the shareholder derivative litigation or the resolution of issues with the Company’s former Chairman and Chief Executive Officer should have a material impact on the Company’s consolidated financial position or results of operations.


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ERISA Litigation.   On March 16, 2007, plaintiffs Reba Bagley and Scott Silver filed an action brought under Section 502 of the ERISA, 29 U.S.C. § 1132, Bagley et al., v. KB Home, et al. , in the United States District Court for the Central District of California. The action was brought against the Company, its directors, and certain of its current and former officers. After the court allowed leave to file an amended complaint, on April 3, 2008, plaintiffs filed an amended complaint adding Tolan Beck and Rod Hughes as additional plaintiffs and dismissing certain individuals as defendants. All four plaintiffs claim to be former employees of the Company who participated in the Plan. Plaintiffs allege on behalf of themselves and on behalf of all others similarly situated that all defendants breached fiduciary duties owed to plaintiffs and purported class members under ERISA by failing to disclose information to and providing misleading information to participants in the Plan about alleged prior stock option backdating practices of the Company and by failing to remove the Company’s stock as an investment option under the Plan. Plaintiffs allege that this breach of fiduciary duties caused plaintiffs to earn less on their Plan accounts than they would have earned but for defendants’ alleged breach of duties. Plaintiffs seek unspecified money damages and injunctive and other equitable relief. On May 16, 2008, the Company filed a motion to dismiss on the ground that plaintiffs’ allegations fail to state a claim against the Company. Plaintiffs filed an opposition to the motion on June 20, 2008. The hearing on the motion was held on September 8, 2008. On October 6, 2008, the court issued its order. The court denied the Company’s motion to dismiss the plaintiffs’ claims for breach of fiduciary duty and breach of the duty to monitor and granted the Company’s motion to dismiss the plaintiffs’ claims for breach of the fiduciary duty of disclosure. The court also denied a separate motion to dismiss filed by the individual defendants based on the standing of plaintiffs to sue. The Company filed its answer to the first amended complaint on November 5, 2008. On November 24, 2008, the court approved a stipulation to stay all discovery and other proceedings through February 6, 2009, in order to allow the parties time to attempt to settle the plaintiffs’ claims through mediation. While the Company believes it has strong defenses to the ERISA claims, it has not concluded whether an unfavorable outcome is likely to be material to its consolidated financial position or results of operations.
 
Other Matters.   The Company is also involved in litigation and governmental proceedings incidental to its business. These cases are in various procedural stages and, based on reports of counsel, the Company believes that provisions or reserves made for potential losses are adequate and any liabilities or costs arising out of currently pending litigation should not have a materially adverse effect on its consolidated financial position or results of operations.
 
Note 14.   Stockholders’ Equity
 
Preferred Stock.   On February 4, 1999, the Company adopted a stockholder rights plan to replace the shareholder rights plan it adopted in 1989 (the “1989 Rights Plan”) and declared a dividend distribution of one preferred share purchase right for each outstanding share of common stock; such rights were issued on March 5, 1999, immediately after the expiration of the rights issued under the 1989 Rights Plan. On January 22, 2009, the Company adopted an amendment to the rights plan designed to preserve the value of certain of the Company’s net deferred tax assets. Under the plan as amended, under certain circumstances, each right will entitle the holder to purchase 1/100th of a share of the Company’s Series A Participating Cumulative Preferred Stock at an exercise price of $270.00, subject to adjustment. The rights are not exercisable until the earlier to occur of (a) 10 days following a public announcement that a person or group has acquired Company common stock representing 4.9% or more of the then-outstanding shares of common stock, or (b) 10 business days following the commencement of a tender or exchange offer for Company common stock representing 4.9% or more of the then-outstanding shares of common stock. If the Company is acquired in a merger or other business combination transaction, or 50% or more of the Company’s assets or earning power is sold, each right will entitle its holder to receive, upon exercise, common stock of the acquiring company having a market value of twice the exercise price of the right; and if, without approval of the board of directors, any person or group acquires Company stock representing 4.9% or more of the outstanding shares of common stock, each right will entitle its holder to receive, upon exercise, common stock of the Company having a market value of twice the exercise price of the right. At the option of the Company, the rights may be redeemed prior to becoming exercisable at a redemption price of $.005 per right. Unless previously redeemed or exchanged, the rights will expire on March 5, 2009. Until a right is exercised, the holder will have no rights as a stockholder of the Company, including the right to vote or receive dividends. Further, on January 22, 2009, the Company adopted a successor rights plan, dated as of that date, and declared a dividend distribution of one preferred share purchase right for each outstanding share of common stock. The terms of the successor rights plan are substantially similar to the Company’s current rights plan, as amended. The successor rights plan will take effect upon the expiration of the rights issued pursuant to the existing rights plan. Unless the rights issued pursuant to the successor


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rights plan are earlier exchanged or redeemed, they will expire on March 5, 2019, or on March 5, 2010 if the successor rights plan has not been approved by the Company’s stockholders prior to that date.
 
Common Stock.   As of November 30, 2008, the Company was authorized to repurchase four million shares of its common stock under a board-approved stock repurchase program. The Company did not repurchase any of its common stock under this program in 2008 or 2007. The Company repurchased six million shares of its common stock in 2006 at an aggregate price of $377.4 million under stock repurchase programs authorized by its board of directors. In addition to the repurchases in 2006, which consisted of open market transactions, the Company acquired $1.0 million in 2008, $6.9 million in 2007 and $16.7 million in 2006, of common stock, which were previously issued shares delivered to the Company by employees to satisfy withholding taxes on the vesting of restricted stock awards. These transactions are not considered repurchases under the share repurchase program.
 
On April 6, 2006, the Company’s stockholders approved an amendment to the Company’s certificate of incorporation reducing the number of authorized shares of the Company’s common stock from 300 million to 290 million.
 
In November 2008, the Company’s board of directors reduced the quarterly cash dividend on the Company’s common stock to $.0625 per share from $.25 per share.
 
Note 15.   Employee Benefit and Stock Plans
 
Most employees are eligible to participate in the Company’s 401(k) Savings Plan under which contributions by employees are partially matched by the Company. The aggregate cost of this plan to the Company was $4.1 million in 2008, $6.2 million in 2007 and $10.8 million in 2006. The assets of the Company’s 401(k) Savings Plan are held by a third-party trustee. Plan participants may direct the investment of their funds among one or more of the several fund options offered by the plan. A fund consisting of the Company’s common stock is one of the investment choices available to participants. As of November 30, 2008, 2007 and 2006, approximately 5%, 5% and 11%, respectively, of the plan’s net assets were invested in the fund consisting of the Company’s common stock.
 
The Company’s Amended and Restated 1999 Incentive Plan (the “1999 Plan”) provides that stock options, performance stock, restricted stock and stock units may be awarded to any employee of the Company for periods of up to 10 years. The 1999 Plan also enables the Company to grant cash bonuses, SARs and other stock-based awards. The Company also has awards outstanding under its 2001 Stock Incentive Plan, 1998 Stock Incentive Plan, 1988 Employee Stock Plan and its Performance-Based Incentive Plan for Senior Management, each of which provides for generally the same types of awards as the 1999 Plan, but with periods of up to 15 years. The 1999 Plan and the 2001 Stock Incentive Plan are the Company’s primary employee stock plans. New awards may not be issued under the 1999 Plan after April 2, 2009.
 
Stock Options.   Stock option transactions are summarized as follows:
 
                                                 
    Years Ended November 30,  
    2008     2007     2006  
          Weighted
          Weighted
          Weighted
 
          Average
          Average
          Average
 
          Exercise
          Exercise
          Exercise
 
    Options     Price     Options     Price     Options     Price  
 
Options outstanding at beginning of year
    8,173,464     $ 30.17       8,354,276     $ 28.71       9,176,253     $ 28.16  
Granted
                787,600       34.78       85,569       67.53  
Exercised
    (144,020 )     18.31       (327,681 )     24.27       (743,481 )     24.19  
Cancelled
    (182,042 )     42.33       (640,731 )     37.04       (164,065 )     38.63  
                                                 
Options outstanding at end of year
    7,847,402     $ 30.11       8,173,464     $ 30.17       8,354,276     $ 28.71  
                                                 
Options exercisable at end of year
    7,321,170     $ 29.77       7,238,598     $ 28.98       7,428,952     $ 26.46  
                                                 
Options available for grant at end of year
    593,897               501,892               1,016,199          
                                                 
 
The total intrinsic value of options exercised during the years ended November 30, 2008, 2007 and 2006 was $1.0 million, $5.5 million and $29.5 million, respectively. The aggregate intrinsic value of options outstanding was


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$.1 million, $9.9 million and $199.1 million at November 30, 2008, 2007 and 2006, respectively. The aggregate intrinsic value of options exercisable at November 30, 2008, 2007 and 2006 was $.1 million, $9.9 million and $190.8 million, respectively. The intrinsic value of a stock option is the amount by which the market value of the underlying stock exceeds the price of the option. The total amount of options cancelled in 2007 includes 371,399 options that were cancelled as a result of the irrevocable election of each of the Company’s non-employee directors to receive payouts in cash of all outstanding stock-based awards granted to them under the Company’s Non-Employee Directors Stock Plan.
 
In 2007, the Company performed a review of past equity grants under its employee stock plans in compliance with an Equity-Based Award Grant Policy that was adopted on February 1, 2007 by the management development and compensation committee of the Company’s board of directors. Based on that review, the Company determined that as of November 30, 2006, the Company should have counted 2,890,260 shares of restricted stock against the limits stated in its employee stock plans based on the terms of those plans and recent changes in New York Stock Exchange rules. In addition, because of the irrevocable cash payout election of each of the Company’s non-employee directors, the Company has no intention of issuing any shares under the Non-Employee Directors Stock Plan. Therefore, the Company considers the plan as having no available capacity to issue shares of common stock, rather than the 566,061 shares of available capacity previously reported as of November 30, 2006. The options available for grant at November 30, 2006 have been adjusted to reflect the results of the review and the elimination of the Non-Employee Directors Stock Plan’s capacity.
 
Stock options outstanding at November 30, 2008 are as follows:
 
                                                 
    Options Outstanding     Options Exercisable  
                Weighted
                Weighted
 
          Weighted
    Average
          Weighted
    Average
 
          Average
    Remaining
          Average
    Remaining
 
          Exercise
    Contractual
          Exercise
    Contractual
 
Range of Exercise Price
  Options     Price     Life     Options     Price     Life  
 
$ 8.88 to $15.64
    1,519,401     $ 14.76       7.83       1,519,401     $ 14.76          
$15.65 to $21.51
    1,863,452       21.36       8.79       1,863,452       21.36          
$21.52 to $34.05
    1,943,963       31.80       9.66       1,852,297       31.98          
$34.06 to $40.90
    1,674,766       39.01       9.87       1,241,366       40.00          
$40.91 to $69.63
    845,820       55.47       8.79       844,654       55.47          
                                                 
$ 8.88 to $69.63
    7,847,402     $ 30.11       9.05       7,321,170     $ 29.77       9.10  
                                                 
 
The Company granted no stock options in 2008. The weighted average fair value of options granted in 2007 and 2006 was $11.42 and $24.76, respectively. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used for grants in 2007 and 2006, respectively: a risk-free interest rate of 4.8% and 4.8%; an expected volatility factor for the market price of the Company’s common stock of 41.1% and 41.0%; a dividend yield of 2.9% and 1.9%; and an expected life of 5 years and 5 years.
 
The Company’s stock-based compensation expense related to stock option grants was $5.0 million in 2008, $9.4 million in 2007 and $19.4 million in 2006. As of November 30, 2008, there was $2.2 million of total unrecognized stock-based compensation expense related to unvested stock option awards. This expense is expected to be recognized over a weighted average period of 1.1 years.
 
The Company records proceeds from the exercise of stock options as additions to common stock and paid-in capital. Actual tax shortfall realized for the tax deduction from stock option exercises of $1.1 million in 2008, and actual tax benefits realized for the tax deduction from stock option exercises of $2.1 million and $17.5 million in 2007 and 2006, respectively, were recorded as paid-in capital. In 2008, 2007 and 2006, the consolidated statement of cash flows reflects $0, $.9 million and $15.4 million, respectively, of excess tax benefit associated with the exercise of stock options since December 1, 2005, in accordance with the cash flow classification requirements of SFAS No. 123(R).
 
Other Stock-Based Awards.   From time to time, the Company grants restricted common stock to key executives. During the restriction periods, the executives are entitled to vote and receive dividends on such shares. The restrictions imposed with respect to the shares granted lapse over periods of three or eight years if certain conditions are met. The shares of restricted stock outstanding totaled 700,000 at November 30, 2008 and 830,750 at November 30, 2007.
 
On July 12, 2007, the Company awarded 54,000 Performance Shares to its President and Chief Executive Officer subject to the terms of the 1999 Plan, the President and Chief Executive Officer’s Performance Stock Agreement dated


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July 12, 2007 and his Employment Agreement dated February 28, 2007. Depending on the Company’s total shareholder return over the three-year period ending on November 30, 2009 relative to a group of peer companies, zero to 150% of the Performance Shares will vest and become unrestricted. In accordance with SFAS No. 123(R), the Company used a Monte Carlo simulation model to estimate the grant-date fair value of the Performance Shares. The total grant-date fair value of $2.0 million will be recognized over the requisite service period.
 
During 2008 and 2007, the Company granted phantom shares and SARs to various employees. These awards are accounted for as liabilities in the Company’s consolidated financial statements because such awards provide for settlement in cash. Each phantom share represents the right to receive a cash payment equal to the closing price of the Company’s common stock on the applicable vesting date. Each SAR represents a right to receive a cash payment equal to the positive difference, if any, between the grant price and the market value of a share of the Company’s common stock on the date of exercise. The phantom shares vest in full at the end of three years while the SARs vest in equal annual installments over three years. There were 1,099,722 phantom shares and 2,424,507 SARs outstanding as of November 30, 2008, and 892,926 phantom shares and 1,100,519 SARs outstanding as of November 30, 2007.
 
The Company recognized total compensation expense of $7.1 million in 2008, $7.4 million in 2007 and $4.7 million in 2006 related to restricted common stock, Performance Shares, phantom shares and SARs.
 
Grantor Stock Ownership Trust.   In connection with a share repurchase program, on August 27, 1999, the Company established a grantor stock ownership trust (the “Trust”) into which certain shares repurchased in 2000 and 1999 were transferred. The Trust, administered by a third-party trustee, holds and distributes the shares of common stock acquired to support certain employee compensation and employee benefit obligations of the Company under its existing stock option, 401(k) Savings Plan and other employee benefit plans. The existence of the Trust has no impact on the amount of benefits or compensation that is paid under these plans.
 
For financial reporting purposes, the Trust is consolidated with the Company. Any dividend transactions between the Company and the Trust are eliminated. Acquired shares held by the Trust remain valued at the market price at the date of purchase and are shown as a reduction to stockholders’ equity in the consolidated balance sheets. The difference between the Trust share value and the market value on the date shares are released from the Trust is included in paid-in capital. Common stock held in the Trust is not considered outstanding in the computations of earnings (loss) per share. The Trust held 11,901,382 and 12,203,282 shares of common stock at November 30, 2008 and 2007, respectively. 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.
 
Note 16.   Postretirement Benefits
 
The Company has two supplemental non-qualified, unfunded retirement plans, the KB Home Supplemental Executive Retirement Plan, restated effective as of July 12, 2001, and the KB Home Retirement Plan, effective as of July 11, 2002, pursuant to which the Company pays supplemental pension benefits to certain key employees upon retirement. In connection with the plans, the Company has purchased cost recovery life insurance on the lives of certain employees. Insurance contracts associated with each plan are held by a trust, established as part of the plans to implement and carry out the provisions of the plans and to finance the benefits offered under the plans. The trust is the owner and beneficiary of such contracts. The amount of the insurance coverage is designed to provide sufficient revenues to cover all costs of the plans if assumptions made as to employment term, mortality experience, policy earnings and other factors are realized. The cash surrender value of these insurance contracts was $43.5 million at November 30, 2008 and $53.6 million at November 30, 2007.
 
On November 1, 2001, the Company implemented an unfunded death benefit plan, the KB Home Death Benefit Only Plan, for certain key management employees. In connection with the plan, the Company has purchased cost recovery life insurance on the lives of certain employees. Insurance contracts associated with the plan are held by a trust, established as part of the plan to implement and carry out the provisions of the plan and to finance the benefits offered under the plan. The trust is the owner and beneficiary of such contracts. The amount of the coverage is designed to provide sufficient revenues to cover all costs of the plan if assumptions made as to employment term, mortality experience, policy earnings and other factors are realized. The cash surrender value of these insurance contracts was $15.0 million at November 30, 2008 and $19.6 million at November 30, 2007.


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The net periodic benefit cost of the Company’s postretirement benefit plans for the year ended November 30, 2008 was $6.5 million, which included service costs of $1.3 million, interest costs of $2.9 million, amortization of prior service costs of $1.6 million and other costs of $.7 million. The net periodic benefit cost of these plans for the year ended November 30, 2007 was $5.6 million, which included service costs of $1.4 million, interest costs of $2.6 million and amortization of prior service costs of $1.6 million, and for the year ended November 30, 2006 was $6.8 million, which included service costs of $2.7 million, interest costs of $2.5 million and amortization of prior service costs of $1.6 million. The liabilities related to the postretirement benefit plans were $50.1 million at November 30, 2008 and $49.1 million at November 30, 2007, and are included in accrued expenses and other liabilities in the consolidated balance sheets. For the years ended November 30, 2008 and 2007, the discount rate used for the plans was 6% and the rate of compensation increase was 4%.
 
Effective November 30, 2007, the Company adopted SFAS No. 158, which requires an employer to recognize the funded status of defined postretirement benefit plans as an asset or liability on the balance sheet and requires any unrecognized prior service cost and actuarial gains/losses to be recognized in other comprehensive income (loss). The postretirement benefit liability at November 30, 2007 reflects the Company’s adoption of SFAS No. 158, which increased the liability by $22.9 million with a corresponding charge to accumulated other comprehensive loss in stockholders’ equity in the consolidated balance sheet. The $8.7 million deferred tax asset resulting from the adoption of SFAS No. 158 was offset by a valuation allowance established in accordance with SFAS No. 109. The adoption of SFAS No. 158 did not affect the Company’s consolidated results of operations or cash flows. The Company uses November 30 as the measurement date for its postretirement benefit plans.
 
Note 17.   Income Taxes
 
The components of income tax benefit (expense) in the consolidated statements of operations are as follows (in thousands):
 
                         
    Federal     State     Total  
 
2008
                       
Current
  $ (18,704 )   $ 10,504     $ (8,200 )
Deferred
                 
                         
Income tax benefit (expense)
  $ (18,704 )   $ 10,504     $ (8,200 )
                         
2007
                       
Current
  $ 236,961     $ 27,195     $ 264,156  
Deferred
    (156,772 )     (61,384 )     (218,156 )
                         
Income tax benefit (expense)
  $ 80,189     $ (34,189 )   $ 46,000  
                         
2006
                       
Current
  $ (277,960 )   $ (9,476 )   $ (287,436 )
Deferred
    80,555       27,981       108,536  
                         
Income tax benefit (expense)
  $ (197,405 )   $ 18,505     $ (178,900 )
                         
 
Deferred income taxes result from temporary differences in the financial and tax basis of assets and liabilities. Significant components of the Company’s deferred tax liabilities and assets are as follows (in thousands):
 
                 
    November 30,  
    2008     2007  
 
Deferred tax liabilities:
               
Capitalized expenses
  $ 137,975     $ 131,147  
State taxes
    36,699       56,751  
Other
    398       647  
                 
Total
  $ 175,072     $ 188,545  
                 


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    November 30,  
    2008     2007  
 
Deferred tax assets:
               
Inventory impairments and land option contract abandonments
  $ 483,199     $ 479,716  
2008 net operating loss
    52,841        
Warranty, legal and other accruals
    191,209       198,118  
Employee benefits
    90,521       103,525  
Partnerships and joint ventures
    107,838       59,035  
Depreciation and amortization
    49,909       41,558  
Capitalized expenses
    9,039       19,530  
Tax credits
    59,676       18,823  
Deferred income
    2,741       9,411  
Other
    8,029       4,140  
                 
Total
    1,055,002       933,856  
Valuation allowance
    (878,778 )     (522,853 )
                 
Total
    176,224       411,003  
                 
Net deferred tax assets
  $ 1,152     $ 222,458  
                 
 
Income tax benefit (expense) computed at the statutory U.S. federal income tax rate and income tax benefit (expense) provided in the consolidated statements of operations differ as follows (in thousands):
 
                         
    Years Ended November 30,  
    2008     2007     2006  
 
Income tax benefit (expense) computed at statutory rate
  $ 338,776     $ 511,270     $ (200,148 )
Increase (decrease) resulting from:
                       
State taxes, net of federal income tax benefit
    25,142       46,116       12,028  
Non-deductible stock-based and other compensation and related expenses
          (3,574 )     (3,871 )
Internal Revenue Code Section 199 manufacturing deduction
                6,265  
Tax credits
    (3,984 )     (3,594 )     4,625  
Valuation allowance for deferred tax assets
    (358,159 )     (514,234 )      
Other, net
    (9,975 )     10,016       2,201  
                         
Income tax benefit (expense)
  $ (8,200 )   $ 46,000     $ (178,900 )
                         
 
The Company recognized income tax expense of $8.2 million in 2008, an income tax benefit from continuing operations of $46.0 million in 2007 and income tax expense from continuing operations of $178.9 million in 2006. These amounts represent effective tax rates of .8% for 2008, 3.0% for 2007 and 31.0% for 2006. The change in the Company’s effective tax rate in 2008 from 2007 was primarily due to the disallowance of tax benefits related to the Company’s current year loss as a result of a full valuation allowance. The decrease in the Company’s effective tax rate in 2007 from 2006 was primarily due to the noncash valuation allowance recorded against net deferred tax assets.
 
In accordance with SFAS No. 109, the Company evaluates its deferred tax assets quarterly to determine if valuation allowances are required. SFAS No. 109 requires that companies assess whether valuation allowances should be established based on the consideration of all available evidence using a “more likely than not” standard. For 2008, the Company recorded a valuation allowance of $355.9 million against its net deferred tax assets. The valuation allowance was reflected as a noncash charge of $358.2 million to income tax expense and a noncash benefit of $2.3 million to accumulated other comprehensive loss (as a result of an adjustment made in accordance with SFAS No. 158). For 2007, the Company recorded a valuation allowance totaling approximately $522.9 million against its deferred tax assets. The valuation allowance was reflected as a noncash charge of $514.2 million to income tax expense and $8.7 million to accumulated other comprehensive income. The majority of the tax benefits associated with the Company’s net deferred tax assets can be carried forward for 20 years and applied to offset future taxable income. The Company’s deferred tax assets for which it did

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not establish a valuation allowance relate to amounts that can be realized through future reversals of existing taxable temporary differences or through carrybacks to the 2007 and 2006 years. To the extent the Company generates sufficient taxable income in the future to fully utilize the tax benefits of the related deferred tax assets, the Company expects its effective tax rate to decrease as the valuation allowance is reversed.
 
The Company implemented the provisions of FASB Interpretation No. 48 effective December 1, 2007. As of the date of adoption, the Company’s net liability for unrecognized tax benefits was $18.3 million, which represented $27.6 million of gross unrecognized tax benefits less $9.3 million of indirect tax benefits. The Company recognizes accrued interest and penalties related to unrecognized tax benefits in its consolidated financial statements as a component of the provision for income taxes. As of November 30, 2008, the Company’s liability for gross unrecognized tax benefits was $18.3 million, of which $7.0 million, if recognized, will affect the Company’s effective tax rate. The Company had $16.5 million and $16.9 million in accrued interest and penalties at December 1, 2007 and November 30, 2008, respectively.
 
It is reasonably possible that, within the next 12 months, total unrecognized tax benefits may decrease as a result of the potential resolution with the Internal Revenue Service relating to issues stemming from fiscal years 2004 and 2005. However, any such change cannot be estimated at this time.
 
A reconciliation of the beginning and ending balances of the gross unrecognized tax benefits, excluding interest and penalties, is as follows (in thousands):
 
         
    Year Ended
 
    November 30, 2008  
Balance at beginning of year
  $          27,617  
Additions for tax positions related to prior years
     
Reductions for tax positions of prior years
    199  
Settlements
    (9,484 )
         
Balance at end of year
  $ 18,332  
         
 
Included in the balance of gross unrecognized tax benefits at the beginning of the year and the end of the year are tax positions of $6.3 million and $4.3 million, respectively, for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. Because of the impact of deferred tax accounting, other than interest and penalties, the disallowance of the shorter deductibility period would not affect the annual effective tax rate but would accelerate the payment of cash to the tax authority to an earlier period.
 
The tax years 2004-2007 remain open to examination by major taxing jurisdictions to which the Company is subject.


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Note 18.   Supplemental Disclosure to Consolidated Statements of Cash Flows
 
The following are supplemental disclosures to the consolidated statements of cash flows (in thousands):
 
                         
    Years Ended November 30,  
    2008     2007     2006  
Summary of cash and cash equivalents:
                       
Homebuilding
  $ 1,135,399     $ 1,325,255     $   700,041  
Financial services
    6,119       18,487       15,417  
Discontinued operations
                88,724  
                         
Total
  $ 1,141,518     $ 1,343,742     $ 804,182  
                         
Supplemental disclosures of cash flow information:
                       
Interest paid, net of amounts capitalized
  $ 20,726     $ 29,572     $  
Income taxes paid
    (122,872 )     131,329       322,983  
                         
Supplemental disclosures of noncash activities:
                       
Cost of inventories acquired through seller financing
  $ 90,028     $ 4,139     $ 128,726  
Decrease in consolidated inventories not owned
    (143,091 )     (409,505 )     (18,130 )
                         
 
Note 19.   Discontinued Operations
 
On July 10, 2007, the Company sold its 49% equity interest in its publicly traded French subsidiary, KBSA. The sale generated total gross proceeds of $807.2 million and a pretax gain of $706.7 million ($438.1 million, net of income taxes), which was recognized in the third quarter of 2007. The sale was made pursuant to the Share Purchase Agreement among the Company, the Purchaser and the Selling Subsidiaries. Under the Share Purchase Agreement, the Purchaser agreed to acquire the 49% equity interest (representing 10,921,954 shares held collectively by the Selling Subsidiaries) at a price of 55.00 euros per share. The purchase price consisted of 50.17 euros per share paid by the Purchaser in cash, and a cash dividend of 4.83 euros per share paid by KBSA.
 
As a result of the sale, the results of the French operations are included in discontinued operations in the Company’s consolidated statements of operations for all periods presented. In addition, cash flows related to these discontinued operations are presented separately in the consolidated statements of cash flows for all periods presented.
 
The following amounts related to the French operations were derived from historical financial information and have been segregated from continuing operations and reported as discontinued operations (in thousands):
 
                 
    Years Ended November 30,  
    2007     2006  
 
Revenues
  $ 911,841     $ 1,623,709  
Construction and land costs
    (680,234 )     (1,187,484 )
Selling, general and administrative expenses
    (129,407 )     (251,104 )
                 
Operating income
    102,200       185,121  
Interest income
    1,199       643  
Interest expense, net of amounts capitalized
          (2,045 )
Minority interests
    (38,665 )     (68,020 )
Equity in income of unconsolidated joint ventures
    4,118       10,505  
                 
Income from discontinued operations before income taxes
    68,852       126,204  
Income tax expense
    (21,600 )     (36,800 )
                 
Income from discontinued operations, net of income taxes
  $ 47,252     $ 89,404  
                 


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Note 20.   Quarterly Results (unaudited)
 
Shown below are consolidated quarterly results for the Company for the years ended November 30, 2008 and 2007 (in thousands, except per share amounts):
 
                                 
    First     Second     Third     Fourth  
 
                                 
2008
                               
Revenues
  $ 794,224     $ 639,065     $ 681,610     $ 919,037  
Gross profit (loss)
    (121,333 )     (118,746 )     25,383       (76,950 )
Loss from continuing operations
    (268,172 )     (255,930 )     (144,745 )     (307,284 )
Net loss
    (268,172 )     (255,930 )     (144,745 )     (307,284 )
                                 
Basic loss per share
  $ (3.47 )   $ (3.30 )   $ (1.87 )   $ (3.96 )
                                 
Diluted loss per share
  $ (3.47 )   $ (3.30 )   $ (1.87 )   $ (3.96 )
                                 
2007
                               
Revenues
  $ 1,388,838     $ 1,413,208     $ 1,543,900     $ 2,070,580  
Gross profit (loss)
    208,370       (69,419 )     (461,774 )     (102,965 )
Income (loss) from continuing operations
    10,655       (174,152 )     (478,620 )     (772,653 )
Income from discontinued operations, net of income taxes (a)
    16,882       25,466       443,008        
Net income (loss)
    27,537       (148,686 )     (35,612 )     (772,653 )
                                 
Basic earnings (loss) per share:
                               
Continuing operations
  $ .14     $ (2.26 )   $ (6.19 )   $ (9.99 )
Discontinued operations
    .22       .33       5.73        
                                 
Basic earnings (loss) per share
  $ .36     $ (1.93 )   $ (.46 )   $ (9.99 )
                                 
Diluted earnings (loss) per share:
                               
Continuing operations
  $ .13     $ (2.26 )   $ (6.19 )   $ (9.99 )
Discontinued operations
    .21       .33       5.73        
                                 
Diluted earnings (loss) per share
  $ .34     $ (1.93 )   $ (.46 )   $ (9.99 )
                                 
 
 
(a) Discontinued operations consist only of the Company’s French operations, which have been presented as discontinued operations for all periods presented. Income from discontinued operations, net of income taxes, in 2007 includes a gain of $438.1 million realized on the sale of the French operations.
 
Included in gross profit (loss) in the first, second, third and fourth quarters of 2008 were inventory impairment charges of $180.3 million, $154.0 million, $39.1 million and $192.5 million, respectively. Gross profit (loss) in the first, second and fourth quarters of 2008 also included pretax charges for land option contract abandonments of $7.3 million, $20.4 million, and $13.2 million, respectively. There were no such charges in the third quarter of 2008. The loss from continuing operations in the first, second, third and fourth quarters of 2008 also included pretax charges for joint venture impairments of $36.4 million, $2.2 million, $43.1 million and $60.2 million, respectively. Included in gross profit (loss) in the first, second, third and fourth quarters of 2007 were inventory impairment charges of $5.0 million, $261.2 million, $610.3 million and $233.5 million, respectively, and pretax charges for land option contract abandonments of $3.6 million, $5.7 million, $62.7 million and $72.0 million, respectively. The loss from continuing operations in the second, third and fourth quarters of 2007 also included pretax charges for joint venture impairments of $41.3 million, $17.2 million and $97.9 million, respectively.
 
The loss from continuing operations in the second and fourth quarters of 2008 included pretax charges of $24.6 million and $43.4 million, respectively, for goodwill impairments recorded in accordance with SFAS No. 142. The loss from continuing operations in the third quarter of 2007 included a pretax charge of $107.9 million for goodwill impairments recorded in accordance with SFAS No. 142.


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The net loss in the first, second, third and fourth quarters of 2008 included charges of $100.0 million, $98.9 million, $58.1 million and $98.9 million, respectively, to record valuation allowances against net deferred tax assets in accordance with SFAS No. 109. In the fourth quarter of 2007, the loss from continuing operations, net of income taxes, included a charge of $514.2 million to record a valuation allowance on net deferred tax assets in accordance with SFAS No. 109.
 
Quarterly and year-to-date computations of per share amounts are made independently. Therefore, the sum of per share amounts for the quarters may not agree with per share amounts for the year.
 
Note 21.   Supplemental Guarantor Information
 
The Company’s obligations to pay principal, premium, if any, and interest under certain debt instruments are guaranteed on a joint and several basis by the Guarantor Subsidiaries. The guarantees are full and unconditional and the Guarantor Subsidiaries are 100% owned by the Company. The Company has determined that separate, full financial statements of the Guarantor Subsidiaries would not be material to investors and, accordingly, supplemental financial information for the Guarantor Subsidiaries is presented.


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CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(In Thousands)
 
                                         
    Year Ended November 30, 2008  
    KB Home
    Guarantor
    Non-Guarantor
    Consolidating
       
    Corporate     Subsidiaries     Subsidiaries     Adjustments     Total  
 
Revenues
  $     $ 2,331,771     $   702,165     $     $ 3,033,936  
                                         
Homebuilding:
                                       
Revenues
  $     $ 2,331,771     $ 691,398     $     $ 3,023,169  
Construction and land costs
          (2,555,911 )     (758,904 )           (3,314,815 )
Selling, general and administrative expenses
    (74,075 )     (296,964 )     (129,988 )           (501,027 )
Goodwill impairment
    (67,970 )                       (67,970 )
                                         
Operating loss
    (142,045 )     (521,104 )     (197,494 )           (860,643 )
Interest income
    31,666       2,524       420             34,610  
Loss on early redemption/interest expense, net of amounts capitalized
    56,541       (34,946 )     (34,561 )           (12,966 )
Equity in loss of unconsolidated joint ventures
          (10,742 )     (142,008 )           (152,750 )
                                         
Homebuilding pretax loss
    (53,838 )     (564,268 )     (373,643 )           (991,749 )
Financial services pretax income
                23,818             23,818  
                                         
Total pretax loss
    (53,838 )     (564,268 )     (349,825 )           (967,931 )
Income tax expense
    (400 )     (4,600 )     (3,200 )           (8,200 )
Equity in net loss of subsidiaries
    (921,893 )                 921,893        
                                         
Net loss
  $   (976,131 )   $ (568,868 )   $ (353,025 )   $     921,893     $ (976,131 )
                                         
                                         
                                         
    Year Ended November 30, 2007  
    KB Home
    Guarantor
    Non-Guarantor
    Consolidating
       
    Corporate     Subsidiaries     Subsidiaries     Adjustments     Total  
 
Revenues
  $     $ 4,752,649     $    1,663,877     $     $ 6,416,526  
                                         
Homebuilding:
                                       
Revenues
  $     $ 4,752,649     $ 1,647,942     $     $ 6,400,591  
Construction and land costs
          (5,299,357 )     (1,527,022 )           (6,826,379 )
Selling, general and administrative expenses
    (104,646 )     (518,912 )     (201,063 )           (824,621 )
Goodwill impairment
    (107,926 )                       (107,926 )
                                         
Operating loss
    (212,572 )     (1,065,620 )     (80,143 )           (1,358,335 )
Interest income
    21,869       6,193       574             28,636  
Loss on early redemption/interest expense, net of amounts capitalized
    179,100       (146,204 )     (45,886 )           (12,990 )
Equity in loss of unconsolidated joint ventures
          (26,105 )     (125,812 )           (151,917 )
                                         
Homebuilding pretax loss
    (11,603 )     (1,231,736 )     (251,267 )           (1,494,606 )
Financial services pretax income
                33,836             33,836  
                                         
Loss from continuing operations before income taxes
    (11,603 )     (1,231,736 )     (217,431 )           (1,460,770 )
Income tax benefit
    400       38,800       6,800             46,000  
                                         
Loss from continuing operations before equity in net loss of subsidiaries
    (11,203 )     (1,192,936 )     (210,631 )           (1,414,770 )
Income from discontinued operations, net of income taxes
                485,356             485,356  
                                         
Income (loss) before equity in net income (loss) of subsidiaries
    (11,203 )     (1,192,936 )     274,725             (929,414 )
Equity in net income (loss) of subsidiaries:
                                       
Continuing operations
    (1,403,567 )                 1,403,567        
Discontinued operations
    485,356                   (485,356 )      
                                         
Net income (loss)
  $ (929,414 )   $ (1,192,936 )   $ 274,725     $     918,211     $ (929,414 )
                                         
 


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    Year Ended November 30, 2006  
    KB Home
    Guarantor
    Non-Guarantor
    Consolidating
       
    Corporate     Subsidiaries     Subsidiaries     Adjustments     Total  
 
Revenues
  $     $ 7,386,128     $    1,993,955     $     $ 9,380,083  
                                         
Homebuilding:
                                       
Revenues
  $     $ 7,386,128     $ 1,973,715     $     $ 9,359,843  
Construction and land costs
          (5,875,431 )     (1,790,588 )           (7,666,019 )
Selling, general and administrative expenses
    (156,099 )     (713,519 )     (253,890 )           (1,123,508 )
                                         
Operating income (loss)
    (156,099 )     797,178       (70,763 )           570,316  
Interest income
    1,256       3,485       762             5,503  
Loss on early redemption/interest expense, net of amounts capitalized
    201,837       (153,141 )     (65,374 )           (16,678 )
Equity in income (loss) of unconsolidated joint ventures
    27,653       (25,272 )     (23,211 )           (20,830 )
                                         
Homebuilding pretax income (loss)
    74,647       622,250       (158,586 )           538,311  
Financial services pretax income
                33,536             33,536  
                                         
Income (loss) from continuing operations before income taxes
    74,647       622,250       (125,050 )           571,847  
Income tax benefit (expense)
    (23,400 )     (194,600 )     39,100             (178,900 )
                                         
Income (loss) from continuing operations before equity in net income of subsidiaries
    51,247       427,650       (85,950 )           392,947  
Income from discontinued operations, net of income taxes
                89,404             89,404  
                                         
Income before equity in net income of subsidiaries
    51,247       427,650       3,454             482,351  
Equity in net income of subsidiaries:
                                       
Continuing operations
    341,700                   (341,700 )      
Discontinued operations
    89,404                   (89,404 )      
                                         
Net income
  $ 482,351     $ 427,650     $ 3,454     $    (431,104 )   $ 482,351  
                                         

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CONDENSED CONSOLIDATING BALANCE SHEETS
(In Thousands)
 
                                         
    November 30, 2008  
    KB Home
    Guarantor
    Non-Guarantor
    Consolidating
       
    Corporate     Subsidiaries     Subsidiaries     Adjustments     Total  
 
Assets
                                       
Homebuilding:
                                       
Cash and cash equivalents
  $ 987,057     $ 25,067     $      123,275     $     $ 1,135,399  
Restricted cash
    115,404                         115,404  
Receivables
    218,600       126,713       12,406             357,719  
Inventories
          1,748,526       358,190             2,106,716  
Investments in unconsolidated joint ventures
          176,290       1,359             177,649  
Other assets
    83,028       13,954       2,279             99,261  
                                         
      1,404,089       2,090,550       497,509             3,992,148  
Financial services
                52,152             52,152  
Investments in subsidiaries
    51,848                   (51,848 )      
                                         
Total assets
  $ 1,455,937     $ 2,090,550     $ 549,661     $ (51,848 )   $ 4,044,300  
                                         
Liabilities and stockholders’ equity
                                       
Homebuilding:
                                       
Accounts payable, accrued expenses and other liabilities
  $ 190,455     $ 786,717     $ 285,519     $     $ 1,262,691  
Mortgages and notes payable
    1,845,169       96,368                   1,941,537  
                                         
      2,035,624       883,085       285,519             3,204,228  
Financial services
                9,467             9,467  
Intercompany
    (1,410,292 )     1,207,465       202,827              
Stockholders’ equity
    830,605             51,848       (51,848 )     830,605  
                                         
Total liabilities and stockholders’ equity
  $ 1,455,937     $ 2,090,550     $ 549,661     $     (51,848 )   $ 4,044,300  
                                         
 
                                         
    November 30, 2007  
    KB Home
    Guarantor
    Non-Guarantor
    Consolidating
       
    Corporate     Subsidiaries     Subsidiaries     Adjustments     Total  
 
Assets
                                       
Homebuilding:
                                       
Cash and cash equivalents
  $ 1,104,429     $ 71,519     $     149,307     $     $ 1,325,255  
Receivables
    126,531       151,089       18,119             295,739  
Inventories
          2,670,155       642,265             3,312,420  
Investments in unconsolidated joint ventures
          199,254       97,756             297,010  
Other assets
    405,306       19,892       5,942             431,140  
                                         
      1,636,266       3,111,909       913,389             5,661,564  
Financial services
                44,392             44,392  
Investments in subsidiaries
    64,148                   (64,148 )      
                                         
Total assets
  $ 1,700,414     $ 3,111,909     $ 957,781     $ (64,148 )   $ 5,705,956  
                                         
Liabilities and stockholders’ equity
                                       
Homebuilding:
                                       
Accounts payable, accrued expenses and other liabilities
  $ 210,697     $ 1,130,047     $ 334,935     $     $ 1,675,679  
Mortgages and notes payable
    2,142,654       19,140                   2,161,794  
                                         
      2,353,351       1,149,187       334,935             3,837,473  
Financial services
                17,796             17,796  
Intercompany
    (2,503,624 )     1,962,722       540,902              
Stockholders’ equity
    1,850,687             64,148       (64,148 )     1,850,687  
                                         
Total liabilities and stockholders’ equity
  $ 1,700,414     $ 3,111,909     $ 957,781     $    (64,148 )   $ 5,705,956  
                                         


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CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
(In Thousands)
                                         
    Year Ended November 30, 2008  
    KB Home
    Guarantor
    Non-Guarantor
    Consolidating
       
    Corporate     Subsidiaries     Subsidiaries     Adjustments     Total  
 
Cash flows from operating activities:
                                       
Net loss
  $ (976,131 )   $ (568,868 )   $     (353,025 )   $   921,893     $ (976,131 )
Adjustments to reconcile net loss to net cash provided (used) by operating activities:
                                       
Deferred income taxes
    221,306                         221,306  
Inventory impairments and land option contract abandonments
          469,017       137,774             606,791  
Goodwill impairment
    67,970                         67,970  
Changes in assets and liabilities:
                                       
Receivables
    (92,069 )     24,376       7,128             (60,565 )
Inventories
          409,629       136,221             545,850  
Accounts payable, accrued expenses and other liabilities
    (20,246 )     (210,319 )     (52,216 )           (282,781 )
Other, net
    48,519       19,978       150,385             218,882  
                                         
Net cash provided (used) by operating activities
    (750,651 )     143,813       26,267       921,893       341,322  
                                         
Cash flows from investing activities:
                                       
Change in restricted cash
    (115,404 )                       (115,404 )
Investments in unconsolidated joint ventures
          8,985       (68,610 )           (59,625 )
Sales (purchases) of property and equipment, net
    5,837       (55 )     1,291             7,073  
                                         
Net cash provided (used) by investing activities
    (109,567 )     8,930       (67,319 )           (167,956 )
                                         
Cash flows from financing activities:
                                       
Redemption of senior subordinated notes
    (305,814 )                       (305,814 )
Payments on mortgages, land contracts and other loans
          (12,800 )                 (12,800 )
Payments of cash dividends
    (62,967 )                       (62,967 )
Repurchase of common stock
    (967 )                       (967 )
Other, net
    6,958                         6,958  
Intercompany
    1,105,636       (186,395 )     2,652       (921,893 )      
                                         
Net cash provided (used) by financing activities
    742,846       (199,195 )     2,652       (921,893 )     (375,590 )
                                         
Net decrease in cash and cash equivalents
    (117,372 )     (46,452 )     (38,400 )           (202,224 )
Cash and cash equivalents at beginning of year
    1,104,429       71,519       167,794             1,343,742  
                                         
Cash and cash equivalents at end of year
  $ 987,057     $ 25,067     $ 129,394     $     $ 1,141,518  
                                         


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    Year Ended November 30, 2007  
    KB Home
    Guarantor
    Non-Guarantor
    Consolidating
       
    Corporate     Subsidiaries     Subsidiaries     Adjustments     Total  
 
Cash flows from operating activities:
                                       
Net loss
  $ (929,414 )   $ (1,192,936 )   $    (210,631 )   $ 1,403,567     $ (929,414 )
Income from discontinued operations, net of income taxes
                (47,252 )           (47,252 )
Gain on sale of discontinued operations, net of income taxes
    (438,104 )                       (438,104 )
Adjustments to reconcile net loss to net cash provided (used) by operating activities:
                                       
Deferred income taxes
    208,348                         208,348  
Inventory impairments and land option contract abandonments
          1,173,855       80,127             1,253,982  
Goodwill impairment
    107,926                         107,926  
Changes in assets and liabilities:
                                       
Receivables
    (121,225 )     41,726       8,093             (71,406 )
Inventories
          367,142       412,733             779,875  
Accounts payable, accrued expenses and other liabilities
    (199,306 )     62,000       (203,324 )           (340,630 )
Other, net
    (151,042 )     53,528       323,691             226,177  
                                         
Net cash provided (used) by operating activities — continuing operations
    (1,522,817 )     505,315       363,437       1,403,567       749,502  
Net cash provided by operating activities — discontinued operations
                297,397             297,397  
                                         
Net cash provided (used) by operating activities
    (1,522,817 )     505,315       660,834       1,403,567       1,046,899  
                                         
Cash flows from investing activities:
                                       
Sale of discontinued operations, net of cash divested
    739,764                         739,764  
Investments in unconsolidated joint ventures
          (35,227 )     (49,961 )           (85,188 )
Sales (purchases) of property and equipment, net
    (558 )     (201 )     1,444             685  
                                         
Net cash provided (used) by investing activities — continuing operations
    739,206       (35,428 )     (48,517 )           655,261  
Net cash used by investing activities — discontinued operations
                (12,112 )           (12,112 )
                                         
Net cash provided (used) by investing activities
    739,206       (35,428 )     (60,629 )           643,149  
                                         
Cash flows from financing activities:
                                       
Redemption of term loan
    (400,000 )                       (400,000 )
Redemption of senior subordinated notes
    (258,968 )                       (258,968 )
Payments on mortgages, land contracts and other loans
          (87,566 )     (26,553 )           (114,119 )
Payments of cash dividends
    (77,170 )                       (77,170 )
Repurchases of common stock
    (6,896 )                       (6,896 )
Other, net
    13,192                         13,192  
Intercompany
    2,170,661       (461,631 )     (305,463 )     (1,403,567 )      
                                         
Net cash provided (used) by financing activities — continuing operations
    1,440,819       (549,197 )     (332,016 )     (1,403,567 )     (843,961 )
Net cash used by financing activities — discontinued operations
                (306,527 )           (306,527 )
                                         
Net cash provided (used) by financing activities
    1,440,819       (549,197 )     (638,543 )     (1,403,567 )     (1,150,488 )
                                         
Net increase (decrease) in cash and cash equivalents
    657,208       (79,310 )     (38,338 )           539,560  
Cash and cash equivalents at beginning of year
    447,221       150,829       206,132             804,182  
                                         
Cash and cash equivalents at end of year
  $ 1,104,429     $ 71,519     $ 167,794     $     $ 1,343,742  
                                         
 


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    Year Ended November 30, 2006  
    KB Home
    Guarantor
    Non-Guarantor
    Consolidating
       
    Corporate     Subsidiaries     Subsidiaries     Adjustments     Total  
 
Cash flows from operating activities:
                                       
Net income (loss)
  $ 482,351     $ 427,650     $      (85,950 )   $  (341,700 )   $ 482,351  
Income from discontinued operations, net of income taxes
                (89,404 )           (89,404 )
Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities:
                                       
Deferred income taxes
    (189,047 )                       (189,047 )
Inventory impairments and land option contract abandonments
          252,642       119,995             372,637  
Changes in assets and liabilities:
                                       
Receivables
    1,464       (10,126 )     (14,867 )           (23,529 )
Inventories
          (156,135 )     (200,207 )           (356,342 )
Accounts payable, accrued expenses and other liabilities
    (63,541 )     125,535       143,713             205,707  
Other, net
    96,937       35,116       (112,813 )           19,240  
                                         
Net cash provided (used) by operating activities — continuing operations
    328,164       674,682       (239,533 )     (341,700 )     421,613  
Net cash provided by operating activities — discontinued operations
                229,505             229,505  
                                         
Net cash provided (used) by operating activities
    328,164       674,682       (10,028 )     (341,700 )     651,118  
                                         
Cash flows from investing activities:
                                       
Sale of investment in unconsolidated joint venture
    57,767                         57,767  
Investments in unconsolidated joint ventures
    22,587       (98,505 )     (103,266 )           (179,184 )
Purchases of property and equipment, net
    (3,146 )     (8,674 )     (5,818 )           (17,638 )
Other, net
                772             772  
                                         
Net cash provided (used) by investing activities — continuing operations
    77,208       (107,179 )     (108,312 )           (138,283 )
Net cash used by investing activities — discontinued operations
                (4,477 )           (4,477 )
                                         
Net cash provided (used) by investing activities
    77,208       (107,179 )     (112,789 )           (142,760 )
                                         
Cash flows from financing activities:
                                       
Net payments on credit agreements and
other short-term borrowings
    (84,100 )                       (84,100 )
Proceeds from issuance of senior notes and term loan
    698,458                         698,458  
Payments of cash dividends
    (78,258 )                       (78,258 )
Repurchases of common stock
    (394,080 )                       (394,080 )
Other, net
    89,571       (33,494 )     (12,236 )           43,841  
Intercompany
    (244,421 )     (519,129 )     421,850       341,700        
                                         
Net cash provided (used) by financing activities — continuing operations
    (12,830 )     (552,623 )     409,614       341,700       185,861  
Net cash used by financing activities — discontinued operations
                (215,010 )           (215,010 )
                                         
Net cash provided (used) by financing activities
    (12,830 )     (552,623 )     194,604       341,700       (29,149 )
                                         
Net increase in cash and cash equivalents
    392,542       14,880       71,787             479,209  
Cash and cash equivalents at beginning of year
    54,679       135,949       134,345             324,973  
                                         
Cash and cash equivalents at end of year
  $ 447,221     $ 150,829     $ 206,132     $     $ 804,182  
                                         
 
Note 22.  Subsequent Events
 
On December 15, 2008, the Company redeemed the $200 Million Senior Subordinated Notes upon their scheduled maturity.
 
On January 22, 2009, the Company adopted an amendment to the 1989 Rights Plan and a successor rights plan designed to preserve the value of certain of the Company’s net deferred tax assets. The amendment and the successor rights plan are discussed in Note 14. Stockholders’ Equity in this Form 10-K.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
The Board of Directors and Stockholders of KB Home:
 
We have audited the accompanying consolidated balance sheets of KB Home as of November 30, 2008 and 2007, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended November 30, 2008. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of KB Home at November 30, 2008 and 2007, and the consolidated results of its operations and its cash flows for each of the three years in the period ended November 30, 2008, in conformity with U.S. generally accepted accounting principles.
 
As discussed in Note 16 to the consolidated financial statements, in 2007, the Company changed its method of accounting for defined postretirement benefit plans.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), KB Home’s internal control over financial reporting as of November 30, 2008, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated January 26, 2009 expressed an unqualified opinion thereon.
 
(ERNST & YOUNG LLP)
 
Los Angeles, California
January 26, 2009


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Item 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
 
None.
 
Item 9A.  CONTROLS AND PROCEDURES
 
Disclosure Controls and Procedures
 
We have established disclosure controls and procedures to ensure that information we are required to disclose in the reports we file or submit under the Securities and Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and accumulated and communicated to management, including the President and Chief Executive Officer (the “Principal Executive Officer”) and Senior Vice President and Chief Accounting Officer (the “Principal Financial Officer”), as appropriate, to allow timely decisions regarding required disclosure. Under the supervision and with the participation of senior management, including our Principal Executive Officer and Principal Financial Officer, we evaluated our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934. Based on this evaluation, our Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were effective as of November 30, 2008.
 
Internal Control Over Financial Reporting
 
(a)  Management’s Annual Report on Internal Control Over Financial Reporting
 
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Securities and Exchange Act of 1934. Under the supervision and with the participation of senior management, including our Principal Executive Officer and Principal Financial Officer, we evaluated the effectiveness of our internal control over financial reporting based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the evaluation under that framework and applicable SEC rules, our management concluded that our internal control over financial reporting was effective as of November 30, 2008.
 
Ernst & Young LLP, the Independent registered public accounting firm that audited the Company’s consolidated financial statements included in this annual report, has issued its report on the effectiveness of the Company’s internal control over financial reporting as of November 30, 2008.
 
(b)  Report of Independent Registered Public Accounting Firm
 
The Board of Directors and Stockholders of KB Home:
 
We have audited KB Home’s internal control over financial reporting as of November 30, 2008, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). KB Home’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
 
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
 
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with


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generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
In our opinion, KB Home maintained, in all material respects, effective internal control over financial reporting as of November 30, 2008, based on the COSO criteria.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of KB Home as of November 30, 2008 and 2007, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended November 30, 2008 and our report dated January 26, 2009 expressed an unqualified opinion thereon.
 
(ERNST & YOUNG LLP)
 
Los Angeles, California
January 26, 2009
 
(c)  Changes in Internal Control Over Financial Reporting
 
There have been no changes in our internal control over financial reporting during the quarter ended November 30, 2008 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
Item 9B.   OTHER INFORMATION
 
None.


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PART III
 
Item 10.  DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
 
The information required by this item for executive officers is set forth under the heading “Executive Officers of the Registrant” in Part I. Except as set forth below, the other information called for by this item is incorporated by reference to the “Corporate Governance and Board Matters” and the “Proposal 1: Election of Directors” sections of our Proxy Statement for the 2009 Annual Meeting of Stockholders, which will be filed with the SEC not later than March 30, 2009 (120 days after the end of our fiscal year) (the “2009 Proxy Statement”).
 
Ethics Policy
 
We have adopted an Ethics Policy for our directors, officers (including our principal executive officer, principal financial officer and principal accounting officer) and employees. The Ethics Policy is available on our website at http://www.kbhome.com/investor. Stockholders may request a free copy of the Ethics Policy from:
 
     
    KB Home
    Attention: Investor Relations
    10990 Wilshire Boulevard
    Los Angeles, California 90024
    (310) 231-4000
    investorrelations@kbhome.com
 
Within the time period required by the SEC and the New York Stock Exchange, we will post on our website at http://www.kbhome.com/investor any amendment to our Ethics Policy and any waiver applicable to our principal executive officer, principal financial officer or principal accounting officer, or persons performing similar functions, and our other executive officers or directors.
 
Corporate Governance Principles
 
We have adopted Corporate Governance Principles, which are available on our website at http://www.kbhome.com/investor. Stockholders may request a free copy of the Corporate Governance Principles from the address, phone number and email address set forth under “Ethics Policy.”
 
New York Stock Exchange Annual Certification
 
On April 14, 2008, we submitted to the New York Stock Exchange a certification of our President and Chief Executive Officer that he was not aware of any violation by KB Home of the New York Stock Exchange’s corporate governance listing standards as of the date of the certification.
 
Item 11.  EXECUTIVE COMPENSATION
 
The information required by this item is incorporated by reference to the “Corporate Governance and Board Matters” and the “Executive Compensation” sections of the 2009 Proxy Statement.
 
Item 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
 
The information required by this item is incorporated by reference to the “Ownership of KB Home Securities” section of the 2009 Proxy Statement, except for the information required by Item 201(d) of Regulation S-K, which is provided below.


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The following table provides information as of November 30, 2008 with respect to shares of our common stock that may be issued under our existing compensation plans:
 
                         
Equity Compensation Plan Information  
                Number of common
 
    Number of
          shares remaining
 
    common shares to
          available for future
 
    be issued upon
          issuance under equity
 
    exercise of
    Weighted-average
    compensation plans
 
    outstanding options,
    exercise price of
    (excluding common
 
    warrants and
    outstanding options,
    shares reflected in
 
    rights
    warrants and rights
    column(a))
 
Plan category
  (a)     (b)     (c)  
Equity compensation plans approved by stockholders
    7,847,402     $ 30.11       593,897  
Equity compensation plans not approved by stockholders
                (d)
                         
Total
    7,847,402     $ 30.11       593,897  
                         
 
 
(d)  Represents the Non-Employee Directors Stock Plan. The Non-Employee Directors Stock Plan provides for an unlimited number of grants of deferred common stock units or stock options to our non-employee directors. The terms of the stock units and options granted under the Non-Employee Directors Stock Plan are described in the “Director Compensation” section of our 2009 Proxy Statement, which is incorporated herein. Although we may purchase shares of our common stock on the open market to satisfy the payment of stock awards under the Non-Employee Directors Stock Plan, to date, all stock awards under the Non-Employee Directors Stock Plan have been settled in cash. In addition, because of the irrevocable election of each of our non-employee directors to receive payouts in cash of all outstanding stock-based awards granted to them under the Non-Employee Directors Stock Plan, we do not intend to issue any shares of common stock under the plan. Therefore, we consider the Non-Employee Directors Stock Plan as having no available capacity to issue shares of our common stock.
 
Item 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
 
The information required by this item is incorporated by reference to the “Corporate Governance and Board Matters” and the “Other Matters” sections of our 2009 Proxy Statement.
 
Item 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES
 
The information required by this item is incorporated by reference to the “Independent Auditor Fees and Services” section of our 2009 Proxy Statement.


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PART IV
 
Item 15.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 
     Financial Statements
 
Reference is made to the index set forth on page 55 of this Annual Report on Form 10-K.
 
    Exhibits
 
         
Exhibit
   
Number
 
Description
 
  2 .1   Share Purchase Agreement, dated May 22, 2007, by and between KB Home, Kaufman and Broad Development Group, International Mortgage Acceptance Corporation, Kaufman and Broad International, Inc. and Financière Gaillon 8 S.A.S., filed as an exhibit to the Company’s Current Report on Form 8-K dated May 22, 2007, is incorporated by reference herein.
  3 .1   Restated Certificate of Incorporation, filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended February 28, 2007, is incorporated by reference herein.
  3 .2   Certificate of Designation of Series A Participating Cumulative Preferred Stock, dated as of January 22, 2009, filed as an exhibit to the Company’s Current Report on Form 8-K/A dated January 28, 2009, is incorporated by reference herein.
  3 .3   By-Laws, as amended and restated on April 5, 2007, filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended February 28, 2007, is incorporated by reference herein.
  4 .1   Rights Agreement between the Company and Mellon Investor Services LLC, as rights agent, dated January 22, 2009, filed as an exhibit to the Company’s Current Report on Form 8-K/A dated January 28, 2009, is incorporated by reference herein.
  4 .2   Rights Agreement between the Company and ChaseMellon Shareholder Services, L.L.C., as rights agent, dated February 4, 1999, filed as an exhibit to the Company’s Current Report on Form 8-K dated February 4, 1999, is incorporated by reference herein.
  4 .3   First Amendment, dated as of April 29, 2005, to the Rights Agreement, dated as of February 4, 1999, between the Company and Mellon Investor Services LLC, as rights agent, filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended May 31, 2005, is incorporated by reference herein.
  4 .4   Second Amendment, dated as of January 22, 2009, to the Rights Agreement, dated as of February 4, 1999 and amended as of April 29, 2005, between the Company and Mellon Investor Services LLC, as rights agent, filed as an exhibit to the Company’s Current Report on Form 8-K/A dated January 28, 2009, is incorporated by reference herein.
  4 .5   Indenture and Supplemental Indenture relating to 5 3 / 4 % Senior Notes due 2014 among the Company, the Guarantors and Sun Trust Bank, Atlanta, each dated January 28, 2004, filed as exhibits to the Company’s Registration Statement No. 333-114761 on Form S-4, are incorporated by reference herein.
  4 .6   Second Supplemental Indenture relating to 6 3 / 8 % Senior Notes due 2011 among the Company, the Guarantors and Sun Trust Bank, Atlanta, dated June 30, 2004, filed as an exhibit to the Company’s registration statement No. 333-119228 on Form S-4, is incorporated by reference herein.
  4 .7   Third Supplemental Indenture relating to the Company’s Senior Notes by and between the Company, the Guarantors named therein, the Subsidiary Guarantor named therein and SunTrust Bank, dated as of May 1, 2006, filed as an exhibit to the Company’s Current Report on Form 8-K dated May 3, 2006, is incorporated by reference herein.
  4 .8   Fourth Supplemental Indenture relating to the Company’s Senior Notes by and between the Company, the Guarantors named therein and U.S. Bank National Association, dated as of November 9, 2006, filed as an exhibit to the Company’s Current Report on Form 8-K dated November 13, 2006, is incorporated by reference herein.
  4 .9   Fifth Supplemental Indenture, dated August 17, 2007, relating to the Company’s Senior Notes by and between the Company, the Guarantors, and the Trustee, filed as an exhibit to the Company’s Current Report on Form 8-K dated August 22, 2007, is incorporated by reference herein.
  4 .10   Specimen of 5 3 / 4 % Senior Notes due 2014, filed as an exhibit to the Company’s Registration Statement No. 333-114761 on Form S-4, is incorporated by reference herein.


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Exhibit
   
Number
 
Description
 
  4 .11   Specimen of 5 7 / 8 % Senior Notes due 2015, filed as an exhibit to the Company’s Current Report on Form 8-K dated December 15, 2004, is incorporated by reference herein.
  4 .12   Form of officers’ certificates and guarantors’ certificates establishing the terms of the 5 7 / 8 % Senior Notes due 2015, filed as an exhibit to the Company’s Current Report on Form 8-K dated December 15, 2004, is incorporated by reference herein.
  4 .13   Specimen of 6 1 / 4 % Senior Notes due 2015, filed as an exhibit to the Company’s Current Report on Form 8-K dated June 2, 2005, is incorporated by reference herein.
  4 .14   Form of officers’ certificates and guarantors’ certificates establishing the terms of the 6 1 / 4 % Senior Notes due 2015, filed as an exhibit to the Company’s Current Report on Form 8-K dated June 2, 2005, is incorporated by reference herein.
  4 .15   Specimen of 6 1 / 4 % Senior Notes due 2015, filed as an exhibit to the Company’s Current Report on Form 8-K dated June 27, 2005, is incorporated by reference herein.
  4 .16   Form of officers’ certificates and guarantors’ certificates establishing the terms of the 6 1 / 4 % Senior Notes due 2015, filed as an exhibit to the Company’s Current Report on Form 8-K dated June 27, 2005, is incorporated by reference herein.
  4 .17   Specimen of 7 1 / 4 % Senior Notes due 2018, filed as an exhibit to the Company’s Current Report on Form 8-K dated April 3, 2006, is incorporated by reference herein.
  4 .18   Form of officers’ certificates and guarantors’ certificates establishing the terms of the 7 1 / 4 % Senior Notes due 2018, filed as an exhibit to the Company’s Current Report on Form 8-K dated April 3, 2006, is incorporated by reference herein.
  10 .1   Consent Order, Federal Trade Commission Docket No. C-2954, dated February 12, 1979, filed as an exhibit to the Company’s Registration Statement No. 33-6471 on Form S-1, is incorporated by reference herein.
  10 .2*   Kaufman and Broad, Inc. Executive Deferred Compensation Plan, effective as of July 11, 1985, filed as an exhibit to the Company’s 2007 Annual Report on Form 10-K, is incorporated by reference herein.
  10 .3*†   Amendment to Kaufman and Broad, Inc. Executive Deferred Compensation Plan for amounts earned or vested on or after January 1, 2005, effective January 1, 2009.
  10 .4*†   KB Home 1986 Stock Option Plan, as amended and restated on October 2, 2008.
  10 .5*†   KB Home 1988 Employee Stock Plan, as amended and restated on October 2, 2008.
  10 .6*   Kaufman and Broad Home Corporation Directors’ Deferred Compensation Plan established effective as of July 27, 1989, filed as an exhibit to the Company’s 2007 Annual Report on Form 10-K, is incorporated by reference herein.
  10 .7   Consent decree, dated July 2, 1991, relating to Federal Trade Commission Consent Order, filed as an exhibit to the Company’s 2007 Annual Report on Form 10-K, is incorporated by reference herein.
  10 .8*†   KB Home Performance-Based Incentive Plan for Senior Management, as amended and restated on October 2, 2008.
  10 .9*   Form of Stock Option Agreement under KB Home Performance-Based Incentive Plan for Senior Management, filed as an exhibit to the Company’s 1995 Annual Report on Form 10-K, is incorporated by reference herein.
  10 .10*   KB Home Unit Performance Program, filed as an exhibit to the Company’s 1996 Annual Report on Form 10-K, is incorporated by reference herein.
  10 .11*†   KB Home 1998 Stock Incentive Plan, as amended and restated on October 2, 2008.
  10 .12   KB Home Directors’ Legacy Program, as amended January 1, 1999, filed as an exhibit to the Company’s 1998 Annual Report on Form 10-K, is incorporated by reference herein.
  10 .13   Trust Agreement between Kaufman and Broad Home Corporation and Wachovia Bank, N.A. as Trustee, dated as of August 27, 1999, filed as an exhibit to the Company’s 1999 Annual Report on Form 10-K, is incorporated by reference herein.
  10 .14*†   Amended and Restated KB Home 1999 Incentive Plan, as amended and restated on October 2, 2008.
  10 .15*   Form of Non-Qualified Stock Option Agreement under the Company’s Amended and Restated 1999 Incentive Plan, filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended May 31, 2006, is incorporated by reference herein.

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Exhibit
   
Number
 
Description
 
  10 .16*   Form of Incentive Stock Option Agreement under the Company’s Amended and Restated 1999 Incentive Plan, filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended May 31, 2006, is incorporated by reference herein.
  10 .17*   Form of Restricted Stock Agreement under the Company’s Amended and Restated 1999 Incentive Plan, filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended May 31, 2006, is incorporated by reference herein.
  10 .18*   Form of Amended and Restated 1999 Incentive Plan Stock Appreciation Right Agreement, filed as an exhibit to the Company’s Current Report on Form 8-K dated July 18, 2007, is incorporated by reference herein.
  10 .19*   Form of Amended and Restated 1999 Incentive Plan Phantom Share Agreement, filed as an exhibit to the Company’s Current Report on Form 8-K dated July 18, 2007, is incorporated by reference herein.
  10 .20*   Amended and Restated Employment Agreement of Bruce Karatz, dated July 11, 2001, filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended August 31, 2001, is incorporated by reference herein.
  10 .21*   Tolling Agreement, dated as of November 12, 2006, by and between the Company and Bruce Karatz, filed as an exhibit to the Company’s Current Report on Form 8-K dated November 13, 2006, is incorporated by reference herein.
  10 .22*†   KB Home 2001 Stock Incentive Plan, as amended and restated on October 2, 2008.
  10 .23*   Form of Stock Option Agreement under the Company’s 2001 Stock Incentive Plan, filed as an exhibit to the Company’s 2006 Annual Report on Form 10-K, is incorporated by reference herein.
  10 .24*   Form of Stock Restriction Agreement under the Company’s 2001 Stock Incentive Plan, filed as an exhibit to the Company’s 2006 Annual Report on Form 10-K, is incorporated by reference herein.
  10 .25*   KB Home Nonqualified Deferred Compensation Plan with respect to deferrals prior to January 1, 2005, effective March 1, 2001, filed as an exhibit to the Company’s 2001 Annual Report on Form 10-K, is incorporated by reference herein.
  10 .26*†   KB Home Nonqualified Deferred Compensation Plan with respect to deferrals on and after January 1, 2005, effective January 1, 2009.
  10 .27*†   KB Home Change in Control Severance Plan, as amended and restated effective January 1, 2009.
  10 .28*   KB Home Death Benefit Only Plan, filed as an exhibit to the Company’s 2001 Annual Report on Form 10-K, is incorporated by reference herein.
  10 .29*†   Amendment No. 1 to the KB Home Death Benefit Only Plan, effective as of January 1, 2009.
  10 .30*†   KB Home Retirement Plan, as amended and restated effective January 1, 2009.
  10 .31†   KB Home Non-Employee Directors Stock Plan, as amended and restated effective January 1, 2009.
  10 .32   Revolving Loan Agreement, dated as of November 22, 2005, filed as an exhibit to the Company’s Current Report on Form 8-K dated November 23, 2005, is incorporated by reference herein.
  10 .33   First Amendment, dated as of October 10, 2006, to the Revolving Loan Agreement dated as of November 22, 2005 among the Company, the lenders party thereto and Bank of America, N.A., filed as an exhibit to the Company’s Current Report on Form 8-K dated October 19, 2006, is incorporated by reference herein.
  10 .34   Second Amendment to the Revolving Loan Agreement dated as of November 22, 2005 among KB Home, the lenders party thereto, and Bank of America, N.A., as administrative agent, filed as an exhibit to the Company’s Current Report on Form 8-K dated December 12, 2006, is incorporated by reference herein.
  10 .35   Third Amendment Agreement, dated August 17, 2007, to Revolving Loan Agreement, dated as of November 22, 2005, between the Company, as Borrower, the banks party thereto, and Bank of America, N.A., as Administrative Agent, filed as an exhibit to the Company’s Current Report on Form 8-K dated August 22, 2007, is incorporated by reference herein.
  10 .36   Fourth Amendment Agreement, dated January 25, 2008, to Revolving Loan Agreement, dated as of November 22, 2005, between the Company, as Borrower, the banks party thereto, and Bank of America, N.A., as Administrative Agent, filed as an exhibit to the Company’s Current Report on Form 8-K dated January 28, 2008, is incorporated by reference herein.

102


Table of Contents

         
Exhibit
   
Number
 
Description
 
  10 .37   Fifth Amendment, dated August 28, 2008, to Revolving Loan Agreement, dated as of November 22, 2005, among the Company, as Borrower, the banks party thereto, and Bank of America, N.A., as Administrative Agent, filed as an exhibit to the Company’s Current Report on Form 8-K dated August 29, 2008, is incorporated by reference herein.
  10 .38*   Employment Agreement of Jeffrey T. Mezger, dated February 28, 2007, filed as an exhibit to the Company’s Current Report on Form 8-K dated March 6, 2007, is incorporated by reference herein.
  10 .39*†   Amendment to the Employment Agreement of Jeffrey T. Mezger, dated December 24, 2008.
  10 .40*   Amended and Restated 1999 Incentive Plan Performance Stock Agreement between the Company and Jeffrey T. Mezger, filed as an exhibit to the Company’s Current Report on Form 8-K dated July 18, 2007, is incorporated by reference herein.
  10 .41*   Form of Stock Option Agreement under the Employment Agreement between the Company and Jeffrey T. Mezger dated as of February 28, 2007, filed as an exhibit to the Company’s Current Report on Form 8-K dated July 18, 2007, is incorporated by reference herein.
  10 .42*   Form of Stock Option Agreement under the Amended and Restated 1999 Incentive Plan for stock option grant to Jeffrey T. Mezger, filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended August 31, 2007, is incorporated by reference herein.
  10 .43*   Form of Phantom Share Agreement for Non-Senior Management, filed as an exhibit to the Company’s Current Report on Form 8-K dated July 18, 2007, is incorporated by reference herein.
  10 .44*   Form of Over Cap Phantom Share Agreement, filed as an exhibit to the Company’s Current Report on Form 8-K dated July 18, 2007, is incorporated by reference herein.
  10 .45*   Description of fiscal year 2007 bonus arrangements with the Company’s Named Executive Officers and description of fiscal year 2008 annual incentive compensation arrangements with executive officers, each determined on January 22, 2008, filed on the Company’s Current Report on Form 8-K dated January 25, 2008, is incorporated by reference herein.
  10 .46*   Policy Regarding Stockholder Approval of Certain Severance Payments, adopted July 10, 2008, filed as an exhibit to the Company’s Current Report on Form 8-K dated July 15, 2008, is incorporated by reference herein.
  10 .47*   KB Home Executive Severance Plan, filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended August 31, 2008, is incorporated by reference herein.
  10 .48*   Description of Fiscal Year 2009 Long-Term Incentive Awards to the Company’s Named Executive Officers granted on October 2, 2008, filed on the Company’s Current Report on Form 8-K dated October 8, 2008, is incorporated by reference herein.
  10 .49*   Form of Fiscal Year 2009 Stock Appreciation Rights Agreement, filed as an exhibit to the Company’s Current Report on Form 8-K dated October 8, 2008, is incorporated by reference herein.
  10 .50*   Form of Fiscal Year 2009 Phantom Shares Agreement, filed as an exhibit to the Company’s Current Report on Form 8-K dated October 8, 2008, is incorporated by reference herein.
  12 .1†   Computation of Ratio of Earnings to Fixed Charges.
  21   Subsidiaries of the Registrant.
  23   Consent of Independent Registered Public Accounting Firm.
  31 .1†   Certification of Jeffrey T. Mezger, President and Chief Executive Officer of KB Home Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  31 .2†   Certification of William R. Hollinger, Senior Vice President and Chief Accounting Officer of KB Home Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  32 .1†   Certification of Jeffrey T. Mezger, President and Chief Executive Officer of KB Home Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  32 .2†   Certification of William R. Hollinger, Senior Vice President and Chief Accounting Officer of KB Home Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
* Management contract or compensatory plan or arrangement in which executive officers are eligible to participate.
† Document filed with this Form 10-K.

103


Table of Contents

 
     Financial Statement Schedules
 
Financial statement schedules have been omitted because they are not applicable or the required information is shown in the consolidated financial statements and notes thereto.


104


Table of Contents

 
SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) 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.
 
KB Home
 
  By: 
/s/  WILLIAM R. HOLLINGER
William R. Hollinger
Senior Vice President and Chief Accounting Officer
Date: January 22, 2009
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
 
         
Signature
 
Title
 
Date
 
/s/  JEFFREY T. MEZGER


Jeffrey T. Mezger
  Director, President and
Chief Executive Officer
(Principal Executive Officer)
  January 22, 2009
         
/s/  WILLIAM R. HOLLINGER


William R. Hollinger
  Senior Vice President and
Chief Accounting Officer
(Principal Financial and Accounting Officer)
  January 22, 2009
         
/s/  STEPHEN F. BOLLENBACH


Stephen F. Bollenbach
  Chairman of the Board and Director   January 22, 2009
         
/s/  RONALD W. BURKLE


Ronald W. Burkle
  Director   January 22, 2009
         
/s/  TIMOTHY W. FINCHEM


Timothy W. Finchem
  Director   January 22, 2009
         
/s/  KENNETH M. JASTROW, II


Kenneth M. Jastrow, II
  Director   January 22, 2009
         
/s/  ROBERT L. JOHNSON


Robert L. Johnson
  Director   January 22, 2009
         
/s/  MELISSA LORA


Melissa Lora
  Director   January 22, 2009
         
/s/  MICHAEL G. MCCAFFERY


Michael G. McCaffery
  Director   January 22, 2009
         
/s/  LESLIE MOONVES


Leslie Moonves
  Director   January 22, 2009
         
/s/  LUIS G. NOGALES


Luis G. Nogales
  Director   January 22, 2009


105


Table of Contents

LIST OF EXHIBITS FILED
 
                 
        Sequential
 
Exhibit
      Page
 
Number
  Description  
Number
 
 
  2 .1   Share Purchase Agreement, dated May 22, 2007, by and between KB Home, Kaufman and Broad Development Group, International Mortgage Acceptance Corporation, Kaufman and Broad International, Inc. and Financière Gaillon 8 S.A.S., filed as an exhibit to the Company’s Current Report on Form 8-K dated May 22, 2007, is incorporated by reference herein.        
  3 .1   Restated Certificate of Incorporation, filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended February 28, 2007, is incorporated by reference herein.        
  3 .2   Certificate of Designation of Series A Participating Cumulative Preferred Stock, dated as of January 22, 2009, filed as an exhibit to the Company’s Current Report on Form 8-K/A dated January 28, 2009, is incorporated by reference herein.        
  3 .3   By-Laws, as amended and restated on April 5, 2007, filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended February 28, 2007, is incorporated by reference herein.        
  4 .1   Rights Agreement between the Company and Mellon Investor Services LLC, as rights agent, dated January 22, 2009, filed as an exhibit to the Company’s Current Report on Form 8-K/A dated January 28, 2009, is incorporated by reference herein.        
  4 .2   Rights Agreement between the Company and ChaseMellon Shareholder Services, L.L.C., as rights agent, dated February 4, 1999, filed as an exhibit to the Company’s Current Report on Form 8-K dated February 4, 1999, is incorporated by reference herein.        
  4 .3   First Amendment, dated as of April 29, 2005, to the Rights Agreement, dated as of February 4, 1999, between the Company and Mellon Investor Services LLC, as rights agent, filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended May 31, 2005, is incorporated by reference herein.        
  4 .4   Second Amendment, dated as of January 22, 2009, to the Rights Agreement, dated as of February 4, 1999 and amended as of April 29, 2005, between the Company and Mellon Investor Services LLC, as rights agent, filed as an exhibit to the Company’s Current Report on Form 8-K/A dated January 28, 2009, is incorporated by reference herein.        
  4 .5   Indenture and Supplemental Indenture relating to 5 3 / 4 % Senior Notes due 2014 among the Company, the Guarantors and Sun Trust Bank, Atlanta, each dated January 28, 2004, filed as exhibits to the Company’s Registration Statement No. 333-114761 on Form S-4, are incorporated by reference herein.        
  4 .6   Second Supplemental Indenture relating to 6 3 / 8 % Senior Notes due 2011 among the Company, the Guarantors and Sun Trust Bank, Atlanta, dated June 30, 2004, filed as an exhibit to the Company’s registration statement No. 333-119228 on Form S-4, is incorporated by reference herein.        
  4 .7   Third Supplemental Indenture relating to the Company’s Senior Notes by and between the Company, the Guarantors named therein, the Subsidiary Guarantor named therein and SunTrust Bank, dated as of May 1, 2006, filed as an exhibit to the Company’s Current Report on Form 8-K dated May 3, 2006, is incorporated by reference herein.        
  4 .8   Fourth Supplemental Indenture relating to the Company’s Senior Notes by and between the Company, the Guarantors named therein and U.S. Bank National Association, dated as of November 9, 2006, filed as an exhibit to the Company’s Current Report on Form 8-K dated November 13, 2006, is incorporated by reference herein.        
  4 .9   Fifth Supplemental Indenture, dated August 17, 2007, relating to the Company’s Senior Notes by and between the Company, the Guarantors, and the Trustee, filed as an exhibit to the Company’s Current Report on Form 8-K dated August 22, 2007, is incorporated by reference herein.        


Table of Contents

                 
        Sequential
 
Exhibit
      Page
 
Number
  Description  
Number
 
 
  4 .10   Specimen of 5 3 / 4 % Senior Notes due 2014, filed as an exhibit to the Company’s Registration Statement No. 333-114761 on Form S-4, is incorporated by reference herein.        
  4 .11   Specimen of 5 7 / 8 % Senior Notes due 2015, filed as an exhibit to the Company’s Current Report on Form 8-K dated December 15, 2004, is incorporated by reference herein.        
  4 .12   Form of officers’ certificates and guarantors’ certificates establishing the terms of the 5 7 / 8 % Senior Notes due 2015, filed as an exhibit to the Company’s Current Report on Form 8-K dated December 15, 2004, is incorporated by reference herein.        
  4 .13   Specimen of 6 1 / 4 % Senior Notes due 2015, filed as an exhibit to the Company’s Current Report on Form 8-K dated June 2, 2005, is incorporated by reference herein.        
  4 .14   Form of officers’ certificates and guarantors’ certificates establishing the terms of the 6 1 / 4 % Senior Notes due 2015, filed as an exhibit to the Company’s Current Report on Form 8-K dated June 2, 2005, is incorporated by reference herein.        
  4 .15   Specimen of 6 1 / 4 % Senior Notes due 2015, filed as an exhibit to the Company’s Current Report on Form 8-K dated June 27, 2005, is incorporated by reference herein.        
  4 .16   Form of officers’ certificates and guarantors’ certificates establishing the terms of the 6 1 / 4 % Senior Notes due 2015, filed as an exhibit to the Company’s Current Report on Form 8-K dated June 27, 2005, is incorporated by reference herein.        
  4 .17   Specimen of 7 1 / 4 % Senior Notes due 2018, filed as an exhibit to the Company’s Current Report on Form 8-K dated April 3, 2006, is incorporated by reference herein.        
  4 .18   Form of officers’ certificates and guarantors’ certificates establishing the terms of the 7 1 / 4 % Senior Notes due 2018, filed as an exhibit to the Company’s Current Report on Form 8-K dated April 3, 2006, is incorporated by reference herein.        
  10 .1   Consent Order, Federal Trade Commission Docket No. C-2954, dated February 12, 1979, filed as an exhibit to the Company’s Registration Statement No. 33-6471 on Form S-1, is incorporated by reference herein.        
  10 .2*   Kaufman and Broad, Inc. Executive Deferred Compensation Plan, effective as of July 11, 1985, filed as an exhibit to the Company’s 2007 Annual Report on Form 10-K, is incorporated by reference herein.        
  10 .3*†   Amendment to Kaufman and Broad, Inc. Executive Deferred Compensation Plan for amounts earned or vested on or after January 1, 2005, effective January 1, 2009.        
  10 .4*†   KB Home 1986 Stock Option Plan, as amended and restated on October 2, 2008.        
  10 .5*†   KB Home 1988 Employee Stock Plan, as amended and restated on October 2, 2008.        
  10 .6*   Kaufman and Broad Home Corporation Directors’ Deferred Compensation Plan established effective as of July 27, 1989, filed as an exhibit to the Company’s 2007 Annual Report on Form 10-K, is incorporated by reference herein.        
  10 .7   Consent decree, dated July 2, 1991, relating to Federal Trade Commission Consent Order, filed as an exhibit to the Company’s 2007 Annual Report on Form 10-K, is incorporated by reference herein.        
  10 .8*†   KB Home Performance-Based Incentive Plan for Senior Management, as amended and restated on October 2, 2008.        
  10 .9*   Form of Stock Option Agreement under KB Home Performance-Based Incentive Plan for Senior Management, filed as an exhibit to the Company’s 1995 Annual Report on Form 10-K, is incorporated by reference herein.        
  10 .10*   KB Home Unit Performance Program, filed as an exhibit to the Company’s 1996 Annual Report on Form 10-K, is incorporated by reference herein.        
  10 .11*†   KB Home 1998 Stock Incentive Plan, as amended and restated on October 2, 2008.        


Table of Contents

                 
        Sequential
 
Exhibit
      Page
 
Number
  Description  
Number
 
 
  10 .12   KB Home Directors’ Legacy Program, as amended January 1, 1999, filed as an exhibit to the Company’s 1998 Annual Report on Form 10-K, is incorporated by reference herein.        
  10 .13   Trust Agreement between Kaufman and Broad Home Corporation and Wachovia Bank, N.A. as Trustee, dated as of August 27, 1999, filed as an exhibit to the Company’s 1999 Annual Report on Form 10-K, is incorporated by reference herein.        
  10 .14*†   Amended and Restated KB Home 1999 Incentive Plan, as amended and restated on October 2, 2008.        
  10 .15*   Form of Non-Qualified Stock Option Agreement under the Company’s Amended and Restated 1999 Incentive Plan, filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended May 31, 2006, is incorporated by reference herein.        
  10 .16*   Form of Incentive Stock Option Agreement under the Company’s Amended and Restated 1999 Incentive Plan, filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended May 31, 2006, is incorporated by reference herein.        
  10 .17*   Form of Restricted Stock Agreement under the Company’s Amended and Restated 1999 Incentive Plan, filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended May 31, 2006, is incorporated by reference herein.        
  10 .18*   Form of Amended and Restated 1999 Incentive Plan Stock Appreciation Right Agreement, filed as an exhibit to the Company’s Current Report on Form 8-K dated July 18, 2007, is incorporated by reference herein.        
  10 .19*   Form of Amended and Restated 1999 Incentive Plan Phantom Share Agreement, filed as an exhibit to the Company’s Current Report on Form 8-K dated July 18, 2007, is incorporated by reference herein.        
  10 .20*   Amended and Restated Employment Agreement of Bruce Karatz, dated July 11, 2001, filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended August 31, 2001, is incorporated by reference herein.        
  10 .21*   Tolling Agreement, dated as of November 12, 2006, by and between the Company and Bruce Karatz, filed as an exhibit to the Company’s Current Report on Form 8-K dated November 13, 2006, is incorporated by reference herein.        
  10 .22*†   KB Home 2001 Stock Incentive Plan, as amended and restated on October 2, 2008.        
  10 .23*   Form of Stock Option Agreement under the Company’s 2001 Stock Incentive Plan, filed as an exhibit to the Company’s 2006 Annual Report on Form 10-K, is incorporated by reference herein.        
  10 .24*   Form of Stock Restriction Agreement under the Company’s 2001 Stock Incentive Plan, filed as an exhibit to the Company’s 2006 Annual Report on Form 10-K, is incorporated by reference herein.        
  10 .25*   KB Home Nonqualified Deferred Compensation Plan with respect to deferrals prior to January 1, 2005, effective March 1, 2001, filed as an exhibit to the Company’s 2001 Annual Report on Form 10-K, is incorporated by reference herein.        
  10 .26*†   KB Home Nonqualified Deferred Compensation Plan with respect to deferrals on and after January 1, 2005, effective January 1, 2009.        
  10 .27*†   KB Home Change in Control Severance Plan, as amended and restated effective January 1, 2009.        
  10 .28*   KB Home Death Benefit Only Plan, filed as an exhibit to the Company’s 2001 Annual Report on Form 10-K, is incorporated by reference herein.        
  10 .29*†   Amendment No. 1 to the KB Home Death Benefit Only Plan, effective as of January 1, 2009.        
  10 .30*†   KB Home Retirement Plan, as amended and restated effective January 1, 2009.        
  10 .31†   KB Home Non-Employee Directors Stock Plan, as amended and restated effective January 1, 2009.        


Table of Contents

                 
        Sequential
 
Exhibit
      Page
 
Number
  Description  
Number
 
 
  10 .32   Revolving Loan Agreement, dated as of November 22, 2005, filed as an exhibit to the Company’s Current Report on Form 8-K dated November 23, 2005, is incorporated by reference herein.        
  10 .33   First Amendment, dated as of October 10, 2006, to the Revolving Loan Agreement dated as of November 22, 2005 among the Company, the lenders party thereto and Bank of America, N.A., filed as an exhibit to the Company’s Current Report on Form 8-K dated October 19, 2006, is incorporated by reference herein.        
  10 .34   Second Amendment to the Revolving Loan Agreement dated as of November 22, 2005 among KB Home, the lenders party thereto, and Bank of America, N.A., as administrative agent, filed as an exhibit to the Company’s Current Report on Form 8-K dated December 12, 2006, is incorporated by reference herein.        
  10 .35   Third Amendment Agreement, dated August 17, 2007, to Revolving Loan Agreement, dated as of November 22, 2005, between the Company, as Borrower, the banks party thereto, and Bank of America, N.A., as Administrative Agent, filed as an exhibit to the Company’s Current Report on Form 8-K dated August 22, 2007, is incorporated by reference herein.        
  10 .36   Fourth Amendment Agreement, dated January 25, 2008, to Revolving Loan Agreement, dated as of November 22, 2005, between the Company, as Borrower, the banks party thereto, and Bank of America, N.A., as Administrative Agent, filed as an exhibit to the Company’s Current Report on Form 8-K dated January 28, 2008, is incorporated by reference herein.        
  10 .37   Fifth Amendment, dated August 28, 2008, to Revolving Loan Agreement, dated as of November 22, 2005, among the Company, as Borrower, the banks party thereto, and Bank of America, N.A., as Administrative Agent, filed as an exhibit to the Company’s Current Report on Form 8-K dated August 29, 2008, is incorporated by reference herein.        
  10 .38*   Employment Agreement of Jeffrey T. Mezger, dated February 28, 2007, filed as an exhibit to the Company’s Current Report on Form 8-K dated March 6, 2007, is incorporated by reference herein.        
  10 .39*†   Amendment to the Employment Agreement of Jeffrey T. Mezger, dated December 24, 2008.        
  10 .40*   Amended and Restated 1999 Incentive Plan Performance Stock Agreement between the Company and Jeffrey T. Mezger, filed as an exhibit to the Company’s Current Report on Form 8-K dated July 18, 2007, is incorporated by reference herein.        
  10 .41*   Form of Stock Option Agreement under the Employment Agreement between the Company and Jeffrey T. Mezger dated as of February 28, 2007, filed as an exhibit to the Company’s Current Report on Form 8-K dated July 18, 2007, is incorporated by reference herein.        
  10 .42*   Form of Stock Option Agreement under the Amended and Restated 1999 Incentive Plan for stock option grant to Jeffrey T. Mezger, filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended August 31, 2007, is incorporated by reference herein.        
  10 .43*   Form of Phantom Share Agreement for Non-Senior Management, filed as an exhibit to the Company’s Current Report on Form 8-K dated July 18, 2007, is incorporated by reference herein.        
  10 .44*   Form of Over Cap Phantom Share Agreement, filed as an exhibit to the Company’s Current Report on Form 8-K dated July 18, 2007, is incorporated by reference herein.        
  10 .45*   Description of fiscal year 2007 bonus arrangements with the Company’s Named Executive Officers and description of fiscal year 2008 annual incentive compensation arrangements with executive officers, each determined on January 22, 2008, filed on the Company’s Current Report on Form 8-K dated January 25, 2008, is incorporated by reference herein.        


Table of Contents

                 
        Sequential
 
Exhibit
      Page
 
Number
  Description  
Number
 
 
  10 .46*   Policy Regarding Stockholder Approval of Certain Severance Payments, adopted July 10, 2008, filed as an exhibit to the Company’s Current Report on Form 8-K dated July 15, 2008, is incorporated by reference herein.        
  10 .47*   KB Home Executive Severance Plan, filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended August 31, 2008, is incorporated by reference herein.        
  10 .48*   Description of Fiscal Year 2009 Long-Term Incentive Awards to the Company’s Named Executive Officers granted on October 2, 2008, filed on the Company’s Current Report on Form 8-K dated October 8, 2008, is incorporated by reference herein.        
  10 .49*   Form of Fiscal Year 2009 Stock Appreciation Rights Agreement, filed as an exhibit to the Company’s Current Report on Form 8-K dated October 8, 2008, is incorporated by reference herein.        
  10 .50*   Form of Fiscal Year 2009 Phantom Shares Agreement, filed as an exhibit to the Company’s Current Report on Form 8-K dated October 8, 2008, is incorporated by reference herein.        
  12 .1†   Computation of Ratio of Earnings to Fixed Charges.        
  21   Subsidiaries of the Registrant.        
  23   Consent of Independent Registered Public Accounting Firm.        
  31 .1†   Certification of Jeffrey T. Mezger, President and Chief Executive Officer of KB Home Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.        
  31 .2†   Certification of William R. Hollinger, Senior Vice President and Chief Accounting Officer of KB Home Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.        
  32 .1†   Certification of Jeffrey T. Mezger, President and Chief Executive Officer of KB Home Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.        
  32 .2†   Certification of William R. Hollinger, Senior Vice President and Chief Accounting Officer of KB Home Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.        
 
 
* Management contract or compensatory plan or arrangement in which executive officers are eligible to participate.
 
†  Document filed with this Form 10-K.

Exhibit 10.3
AMENDMENT TO KAUFMAN AND BROAD, INC.
EXECUTIVE DEFERRED COMPENSATION PLAN
     The Kaufman and Broad, Inc. Executive Deferred Compensation Plan, effective as of July 11, 1985 (the “Plan”), is hereby amended by KB HOME, a Delaware corporation (the “Company”), effective January 1, 2009, in the following manner, in accordance with Section 12(a) of the Plan. This Amendment shall only apply with respect to amounts earned or vested on and after January 1, 2005.
1. Section 1 of the Plan shall be amended by adding the following at the end thereof:
     “This Plan is intended to comply with all applicable law, including Section 409A, related Treasury guidance and regulations, and the transition relief provided in IRS Notice 2007-86, 2007-46 I.R.B. 990, and shall be operated and interpreted in accordance with this intention. Notwithstanding the preceding sentence, Section 409A shall not apply with respect to amounts earned and vested prior to January 1, 2005 (“Grandfathered Amounts”).”
2. Subsection 2(n) of the Plan shall be amended by adding the following at the end thereof:
     “In the case of amounts that are not Grandfathered Amounts, Early Retirement Date means attainment of age 50 and completion of ten (10) years of continuous employment with Employer.”
3. Subsection 2(r) of the Plan shall be amended by adding the following at the end thereof:
     “In the case of amounts that are not Grandfathered Amounts, Normal Retirement Date means attainment of age 65, unless the Executive attains age 60 and completes ten (10) years of continuous employment with Employer.”
4. Section 3 of the Plan shall be amended and restated by replacing Subsections (a) through (e) with the following and relettering Subsection (f) as (b):
     “(a) No Further Deferrals :
     No further deferrals or contributions shall be permitted effective January 1, 2009.”
5. Subsection 4(a) of the Plan shall be amended by adding the following at the end thereof:
     “Notwithstanding the foregoing, in the case of amounts that are not Grandfathered Amounts, a Participant who separates from service on his Normal Retirement Date shall be entitled to a Retirement Income Benefit commencing at his Normal Retirement Date consisting of equal monthly payments over 20 years or, in the case of Retirement Income Benefits commencing prior to January 1, 2009, the remaining term of such payments as of such date.”
6. Subsection 4(b)(i) of the Plan shall be amended by adding the following at the end thereof:

 


 

     “Notwithstanding the foregoing, in the case of amounts that are not Grandfathered Amounts, a Participant who separates from service prior to his Normal Retirement Date, but on or after his Early Retirement Date shall be entitled to a Retirement Income Benefit commencing on his Normal Retirement Date, consisting of equal monthly payments over 20 years or, in the case of Retirement Income Benefits commencing prior to January 1, 2009, the remaining term of such payments as of such date.”
7. Subsection 4(c) of the Plan shall be amended by adding the following at the end thereof:
     “Notwithstanding the foregoing, in the case of amounts that are not Grandfathered Amounts, a Participant who separates from service after his Normal Retirement Date shall be entitled to a Retirement Income Benefit commencing on the first day of the month after his separation from service consisting of equal monthly payments over 20 years or, in the case of Retirement Income Benefits commencing prior to January 1, 2009, the remaining term of such payments as of such date. Retirement Income Benefits shall be determined using the balance in his Account as of his separation from service in lieu of the balance as of his Normal Retirement Date.”
8. Subsections 4(b)(ii), (d), (e) and (f) of the Plan shall each be amended by adding the following at the end thereof:
     “Notwithstanding the foregoing, this subsection shall not apply with respect to amounts that are not Grandfathered Amounts.”
9. Subsection 4(g) of the Plan shall be amended by adding the following at the end thereof:
     “Notwithstanding the foregoing, in the case of amounts that are not Grandfathered Amounts, such amounts shall be paid in a lump sum within 60 days of a Change in Control. For purposes of the preceding sentence, a “Change in Control” shall mean the occurrence of a “change in the ownership,” a “change in the effective control” or a “change in the ownership of a substantial portion of the assets” of a corporation, as determined in accordance with this Subsection.
     In order for an event described below to constitute a Change in Control with respect to a Participant, except as otherwise provided in part (II)(B) of this subsection, the applicable event must relate to the corporation for which the Participant is providing services, the corporation that is liable for payment of the Participant’s Account Balance (or all corporations liable for payment if more than one), as identified by the Committee in accordance with Section 1.409A-3(i)(5)(ii)(A)(2) of the Treasury Regulations, or such other corporation identified by the Committee in accordance with Section 1.409A-3(i)(5)(ii)(A)(3) of the Treasury Regulations.
     In determining whether an event shall be considered a “change in the ownership,” a “change in the effective control” or a “change in the ownership of a substantial portion of the assets” of a corporation, the following provisions shall apply:

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     (I) A “change in the ownership” of the applicable corporation shall occur on the date on which any one person, or more than one person acting as a group, acquires ownership of stock of such corporation that, together with stock held by such person or group, constitutes more than 50% of the total fair market value or total voting power of the stock of such corporation, as determined in accordance with Section 1.409A-3(i)(5)(v) of the Treasury Regulations. If a person or group is considered either to own more than 50% of the total fair market value or total voting power of the stock of such corporation, or to have effective control of such corporation within the meaning of part (II) of this subsection, and such person or group acquires additional stock of such corporation, the acquisition of additional stock by such person or group shall not be considered to cause a “change in the ownership” of such corporation.
     (II) A “change in the effective control” of the applicable corporation shall occur on either of the following dates:
          (A) The date on which any one person, or more than one person acting as a group, acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such person or persons) ownership of stock of such corporation possessing 30% or more of the total voting power of the stock of such corporation, as determined in accordance with Section 1.409A-3(i)(5)(vi) of the Treasury Regulations. If a person or group is considered to possess 30% or more of the total voting power of the stock of a corporation, and such person or group acquires additional stock of such corporation, the acquisition of additional stock by such person or group shall not be considered to cause a “change in the effective control” of such corporation; or
          (B) The date on which a majority of the members of the applicable corporation’s board of directors is replaced during any 12-month period by directors whose appointment or election is not endorsed by a majority of the members of such corporation’s board of directors before the date of the appointment or election, as determined in accordance with Section 1.409A-3(i)(5)(vi) of the Treasury Regulations. In determining whether the event described in the preceding sentence has occurred, the applicable corporation to which the event must relate shall only include a corporation identified in accordance with Section 1.409A-3(i)(5)(ii) of the Treasury Regulations for which no other corporation is a majority shareholder.
     (III) A “change in the ownership of a substantial portion of the assets” of the applicable corporation shall occur on the date on which any one person, or more than one person acting as a group, acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such person or persons) assets from the corporation that have a total gross fair market value equal to or more than 40% of the total gross fair market value of all of the assets of the corporation immediately before such acquisition or acquisitions, as determined in accordance with Section 1.409A-3(i)(5)(vii) of the Treasury Regulations. A transfer of assets shall not be treated as a “change in the ownership of a substantial portion of the assets” when such transfer is made to an entity that is controlled by the shareholders of the transferor corporation, as

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 determined in accordance with Section 1.409A-3(i)(5)(vii)(B) of the Treasury Regulations.
10. Subsection 5(a) shall be amended by adding the following at the end thereof:
     “Notwithstanding the foregoing, in the case of amounts that are not Grandfathered Amounts, the benefit shall be paid in a lump sum within 60 days of the Participant’s death.”
11. Subsection 5(b) shall be amended by adding the following at the end thereof:
     “Notwithstanding the foregoing, this subsection shall not apply with respect to amounts that are not Grandfathered Amounts.”
12. Subsections 8(b), (c) and (d) of the Plan shall each be amended by adding the following at the end thereof:
     “Notwithstanding the foregoing, this subsection shall not apply with respect to amounts that are not Grandfathered Amounts.”
13. Subsections 12(b) and (c) of the Plan shall each be amended by adding the following at the end thereof:
     “Notwithstanding the foregoing, this subsection shall not apply with respect to amounts that are not Grandfathered Amounts.”
14. A new Subsection 12(d) shall be added to the Plan, which shall read in its entirety as follows:
     “(d) Notwithstanding anything to the contrary in this Plan, the Plan shall terminate with respect to the Participant, and the Company shall have no further obligations hereunder, upon payment by the Company of all payments to which the Participant or his Beneficiary shall be entitled pursuant to Sections 4 and 6 of the Plan, and any Benefit Agreement entered into by the Company and the Participant shall have no further force or effect.”
15. A new Section 14 shall be added to the Plan, which shall read in its entirety as follows:
     “14. Section 409A.
     In the case of amounts that are not Grandfathered Amounts, this Plan shall be interpreted, construed and administered in a manner that satisfies the requirements of Section 409A. Each of the payments under this Plan shall be considered a separate payment for purposes of Section 409A. Notwithstanding any provision to the contrary in the Plan, if a Participant is a “specified employee” at the time of his separation from service within the meaning of Section 409A, and if any payment or benefit payable pursuant to the Plan would subject such Participant to any tax, interest or penalty imposed under Section 409A if such payment or benefit were paid within six months of the Participant’s separation from service, then each such payment or benefit that would otherwise have been payable within the first six months following the Participant’s

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separation from service shall be accumulated and shall be paid on the first day of the calendar month that begins at least six months after the Participant’s separation from service, or if earlier, on the date of the Participant’s death. For purposes of the preceding sentence, “specified employee” means a “key employee” (as defined under Section 416(i) of the Code without regard to paragraph (5) thereof) for the applicable period, as determined annually by the Committee in accordance with the methodology specified by resolution of the Board or the Management Development and Compensation Committee of the Board and in accordance with Section 1.409A-1(i) of the Treasury Regulations.”

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Exhibit 10.4
KB HOME
1986 STOCK OPTION PLAN
(as amended and restated on October 2, 2008)
          SECTION 1. Purpose . The purpose of the 1986 Stock Option Plan (the “Plan”) is to promote the success of KB Home (the “Company”) by providing a method whereby key employees of the Company and its subsidiaries may be encouraged to invest in the Common Stock of the Company (“Common Stock”) and thereby increase their proprietary interest in its business, encourage them to remain in the employ of the Company or its subsidiaries, and increase their personal interest in the continued success and progress of the Company.
          SECTION 2. Administration . (a) The Board of Directors of the Company shall designate a committee of not less than three Directors (the “Committee”). No individual shall become a member of the Committee if he shall have been eligible to receive options to acquire shares of capital stock of the Company or any subsidiary at any time during the 12-month period prior to his becoming a member and no member of the Committee shall be eligible to receive options. The Committee shall have full power and authority, subject to such orders or resolutions not inconsistent with the provisions of the Plan as may from time to time be issued or adopted by the Board of Directors, to grant to eligible persons options to purchase shares of Common Stock pursuant to the provisions of the Plan, to fix the exercise price of such options, to interpret the provisions of the Plan and any option agreements issued under the Plan, and to supervise the administration of the Plan.
          (b) All decisions made by the Committee pursuant to the provisions of the Plan and related orders or resolutions of the Board of Directors shall be final, conclusive and binding on all persons, including the Company, stockholders, employees and optionees.
          SECTION 3. Stock Options . (a) Grant of Options. Stock options on shares of Common Stock may be granted to participants by the Committee from time to time at its sole discretion. Each option shall be evidenced by an option agreement which shall contain such terms and conditions as may be approved by the Committee and shall be signed by an officer of the Company and the optionee. Neither the execution of any option agreement nor the granting of any option evidenced thereby shall constitute or be evidence of any agreement or other understanding, express or implied, on the part of the Company or any Subsidiary to employ an individual for any specific period.
          (b) Shares Subject to the Plan. (1) The shares to be delivered upon exercise of options granted under the Plan may be made available from the authorized but unissued shares of the Company or from shares reacquired by the Company, including shares purchased in the open market or in private transactions.
          (2) Subject to adjustments made pursuant to the provisions of paragraph (3) of this Section 3(b), (i) the aggregate number of shares to be delivered upon exercise of all options which may be granted under the Plan shall not exceed 2,000,000 shares of Common Stock, $1.00 par value, of the Company. If an option granted under the Plan shall expire or terminate for any

 


 

reason, the shares subject to, but not delivered under, such option shall be available for other options to the same employee or other employees.
          (3) In the event of any merger, reorganization, consolidation, recapitalization, stock dividend, or other change in corporate structure affecting the Common Stock of the Company, the Committee shall make appropriate proportional adjustments to any or all of the aggregate number of shares which may be delivered under the Plan and the number and option price of shares subject to the outstanding options granted under the Plan (provided that the number of shares subject to any option shall always be a whole number). Any adjustment under this Section 3(b)(3) shall be made only to the extent that such adjustment will not cause a violation of the requirements of Section 409A of the Internal Revenue Code.
          SECTION 4. Eligibility and Extent of Participation . (a) The employees eligible to receive options under the Plan shall consist of key employees of the Company and its subsidiaries. For the purpose of the Plan, the term “subsidiary” means a corporation 50% or more of the voting power of which is owned by the Company directly or indirectly through one or more subsidiaries.
          (b) Subject to the limitations of the Plan, the Committee shall, after such consultation with and consideration of the recommendations of management as the Committee considers desirable, select from eligible employees those to be granted options and determine the time when each option shall be granted and the number of shares subject to each option. Subject to the provisions of paragraph (b) of Section 3, more than one option may be granted to the same person.
          SECTION 5. Option Price . The price at which shares may be purchased upon exercise of a particular option shall be as specified by the Committee, in its sole discretion, at the time such option is granted and shall be set forth in the applicable option agreement.
          SECTION 6. Exercise of Options . (a) Subject to the provisions of the Plan with respect to death, retirement and termination of employment, the period during which each option may be exercised shall be fixed by the Committee in its sole discretion at the time such option is granted, but in no event shall such period expire later than fifteen years from the date the option is granted.
          (b) No option granted under the Plan may be exercised until the expiration of one year of continued employment by the Company or any of its subsidiaries or affiliates immediately following the date the option is granted and, except as provided in Section 9, only during the continuance of the optionee’s employment with the Company or any of its subsidiaries or affiliates. Subject to the foregoing limitations and unless cancelled prior to exercise, each option shall be exercisable in installments on a cumulative basis pursuant to the following schedule, subject to such different or additional terms and conditions as the Committee may, in its sole discretion, specify in the applicable option agreement or thereafter:
     (1) 20% on and after the first anniversary of the grant of the option,
     (2) an additional 20% on and after the second anniversary of the grant of the option,

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     (3) an additional 20% on and after the third anniversary of the grant of the option,
     (4) an additional 20% on and after the fourth anniversary of the grant of the option, and
     (5) the remaining 20% on and after the fifth anniversary of the grant of the option.
          (c) The Committee may impose such other conditions with respect to the exercise of options, including without limitation any conditions relating to the application of federal or state securities laws, as it may deem necessary or advisable.
          (d) No shares shall be delivered pursuant to any exercise of an option until payment in full of the option price therefor is received by the Company. Such payment may be made in cash, or its equivalent, or by exchanging shares of Company stock owned by the optionee (which are not the subject of any pledge or other security interest), or by a combination of the foregoing, provided that the combined value of all cash and cash equivalents and the fair market value of any such stock so tendered to the Company, valued as of the date of such tender, is equal to such option price. No optionee or the legal representative, legatee or distributee of an optionee, shall be deemed to be a holder of any shares subject to any option prior to the issuance of such shares upon exercise of such option.
          (e) Notwithstanding the foregoing, unless otherwise specifically determined by the Committee at the time of grant, all options theretofore granted and not fully exercisable shall become exercisable in full upon the happening of any of the following events: (i) a tender or exchange offer for Common Stock (other than such an offer by the Company) shall have been consummated and following the consummation thereof the offeror (or any “group”, as defined in Section 13(d)(3) of the Securities Exchange Act, of which the offeror is a member) shall be the owner of shares of the Company with respect to which 25% or more of the total number of votes for the election of directors may be cast, (ii) the shareholders of the Company shall have approved an agreement providing for a transaction for the exchange of at least a majority of the outstanding Common Stock for cash or property or securities (other than common stock of the Company) or for the sale or other disposition of all or substantially all of the assets of the Company. Options which become fully exercisable by reason of events specified in clauses (i) or (ii) shall remain exercisable for 90 days following the date on which they become so exercisable, after which they will revert to being exercisable in accordance with their other terms, provided, however, that no option which has previously been exercised or has expired or otherwise terminated shall become exercisable by virtue of this paragraph nor shall this paragraph permit exercise of any option during the portion, if any, of such 90 day period which follows the termination or expiration of any such option. As used in this paragraph, the term “offeror” includes any person controlling, controlled by or under common control with the offeror.
          (f) Anything herein to the contrary notwithstanding, no shares shall be issued pursuant to any exercise of an option to the extent that upon issuance of such shares the Company would cease to be an includible corporation in an affiliated group of which KB Home

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is also an includible corporation (all as described in Section 1504 of the Internal Revenue Code). To the extent that the Company shall be so precluded from issuing shares upon the exercise of an option, the optionee shall be entitled to receive either (i) shares reacquired by the Company as contemplated by Section 3(b) hereof, (ii) a cash sum equal to the amount by which the fair market value of the shares which the optionee would otherwise be entitled to receive, valued as of the date of such exercise, exceeds the option price of such shares, net of applicable withholding taxes, plus any amount tendered by the optionee at the time of exercise, or (iii) a combination of (i) and (ii), as the Committee shall determine in its sole discretion.
          SECTION 7. Financing of Shares Upon Exercise . If requested by the optionee at the time of exercise of an option, the Committee may in its sole discretion provide financing by the Company to the optionee for the purchase of such shares. Unless otherwise determined by the Committee in accordance with subparagraph 7(g), such financing shall be upon the following terms and conditions:
          (a) Amount . Loans may be made in an amount no greater than the lesser of (i) the exercise price, or (ii) 50% of the fair market value of the Common Stock purchased on the date of exercise of the option, or (iii) such amount as may be permitted by law or regulation.
          (b) Interest Rate . The principal amount of each such loan shall bear interest at a floating rate equal to 1% over the minimum commercial lending rate charged by Morgan Guaranty Trust Company of New York, as the same may change from time to time, or any lesser rate required by applicable law.
          (c) Repayment . A payment on account of interest shall be due on the November 30 following the borrowing in an amount equal to the lesser of (i) 3% per annum on the then outstanding balance of such loan or (ii) the aggregate amount of all cash dividends received by the optionee on the Common Stock so financed during the period from date of option exercise. Accrued unpaid interest on December 1 of each year shall be added to principal of the loan. Principal and all accrued unpaid interest thereon shall be due and payable upon the first to occur of (1) the date the optionee sells or otherwise transfers such shares , (2) the date the optionee ceases employment with the Company or any subsidiary or affiliate, or (3) the expiration of 12 months from the date of the borrowing.
          (d) Security . Such loans shall be recourse obligations of the optionee secured by the pledge of the shares so financed.
          (e) Documentation . In connection with such loan, the optionee shall execute such documents, promissory notes and pledge and security agreements with the Company and shall take such further and other action as the Committee may deem necessary or appropriate.
          (f) General Restrictions . Such financing shall be subject to all legal requirements and restrictions pertinent thereto, including, if applicable, Regulation G as promulgated by the Federal Reserve Board. The grant of any option by the Committee shall in no way obligate the Company or the Committee to provide any financing whatsoever upon the exercise of any option.

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          (g) Amendments . Subject only to the restrictions set forth in subparagraph 7(f), the Committee may, in its sole discretion, provide Company financing, or assist in arranging other financing, for optionees upon the exercise of options upon such other terms and conditions as it may deem to be appropriate or advisable.
          SECTION 8. Transferability of Options . An option granted under the Plan may not be transferred except by will or the laws of descent and distribution and, during the lifetime of the person to whom granted, may be exercised only by such person.
          SECTION 9. Death, Retirement and Termination of employment . Subject to the condition that no option may be exercised in whole or in part after the expiration of the option period specified in the applicable option agreement:
          (a) Upon the death of any optionee while employed or within the three-month period referred to in clause (b) below, the person or persons to whom such optionee’s right, under the option are transferred by will or the laws of descent and distribution may, prior to the expiration of twelve months after the date of such optionee’s death, purchase any or all of the shares with respect to which such optionee was entitled to exercise such option immediately prior to his death;
          (b) Upon termination of employment for any reason , including retirement, an optionee may, prior to the expiration of three months after the date of such termination, purchase any or all of the shares with respect to which such optionee was entitled to exercise such option immediately prior to such termination; and
          (c) Upon expiration of the twelve month or three month periods described in subparagraphs 9(a) and 9(b), as the case may be, the options of an optionee who has died or terminated employment shall be cancelled to the extent not theretofore cancelled or exercised.
          (d) For purposes of this Plan, termination of employment shall not be deemed to occur upon the transfer of any optionee from the employ of the Company to the employ of any subsidiary or affiliate. For purposes of this subparagraph 9(d), “affiliate” means (1) any entity 50% or more of the voting interest in which is owned, directly or indirectly, by an entity which owns, directly or indirectly, 50% or more of the voting interest in the Company and (2) any entity which owns, directly or indirectly, 50% or more of the voting interest in the Company.
          SECTION 10. Delivery of Shares . No shares shall be delivered pursuant to any exercise of an option until the requirements of such laws and regulations as may be deemed by the Committee to be applicable thereto are satisfied.
          SECTION 11. Withholding . Prior to the delivery of certificates for shares, the Company shall have the right to require a payment from a participant to cover any applicable withholding taxes due in connection with the exercise of an option.
          SECTION 12. Amendments, Suspension or Discontinuance . The Board of Directors may amend, suspend, or discontinue the Plan, and may, except upon the happening of an event described in Section 6(e), cancel any option granted pursuant to the Plan prior to the time any portion of such option becomes exercisable pursuant to the applicable option

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agreement, but except as permitted by paragraph (b) (3) of Section 3 , may not, without the prior approval of the stockholders of the Company, make any amendment which operates (a) to abolish the Committee, change the qualification of its members or withdraw the administration of the Plan from its supervision, (b) to make any material change in the class of eligible employees as defined in the Plan, (c) to increase the total number of shares which may be delivered on exercise of options granted under the Plan, or (d) to extend the maximum option period or the period during which options may be granted under the Plan.
          SECTION 13. Term of Plan . The Plan shall become effective on the date it is approved and adopted by the Board of Directors of the Company, subject to the approval of the Plan by shareholders of the Company. No award shall be granted under the Plan after the date that is ten (10) years after the date on which the Plan was approved by the Company’s shareholders or after such earlier date as the Committee may decide, in its sole discretion.

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EXHIBIT 10.5
(KB HOME LOGO)
KB HOME
1988 EMPLOYEE STOCK PLAN
(as amended and restated on October 2, 2008)
     SECTION 1. Purpose. The purpose of the KB Home 1988 Employee Stock Plan (the “Plan”) is to promote the success of KB Home, formerly Kaufman and Broad Home Corporation (the “Company”) by providing a method whereby key employees of the Company and its subsidiaries and certain other individuals may be encouraged to invest in the Common Stock, $1.00 par value, of the Company (“Common Stock”), increase their proprietary interest in its business, remain in the employ of the Company or its subsidiaries, and increase their personal interests in the continued success and progress of the Company. The Plan is an amendment and restatement of the KB Home 1988 Employee Stock Plan, which amendment and restatement shall be effective as of October 2, 2008 (the “Amendment Date”).
     SECTION 2. Definitions. As used in this Plan, the following terms shall have the indicated meanings:
     (a) Amendment Date: Amendment Date shall have the meaning set forth in Section 1 hereof.
     (b) Award: An award of restricted shares under Section 7 and, except for purposes of Section 7, a Stock Unit Award granted pursuant to Section 8.
     (c) Board: The Board of Directors of the Company.
     (d) Code: The Internal Revenue Code of 1986, as amended from time to time. All references to the Code or any section thereof shall include the Treasury Regulations and other Department of Treasury guidance issued thereunder.
     (e) Committee: The Personnel, Compensation and Stock Option Committee of the Board
     (f) Company: KB Home and its Subsidiaries.
     (g) Effective Date: Effective Date shall have the meaning set forth in Section 13(a) hereof.
     (h) Lapsing Formula: With reference to a particular Award under Section 7, a formula or schedule, and such other conditions as may be imposed, determined by the Committee and set forth in a Stock Restriction Agreement, as a basis for establishing the number of shares of Stock which may be released from the restrictions of an Award. A Lapsing Formula may differ from Participant to Participant and from Award to Award.

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     (i) Limited Stock Appreciation Right: A right granted pursuant to Section 6(b) to receive cash in certain circumstances with respect to a related Option.
     (j) Option: A right to buy Common Stock granted pursuant to Section 6(a).
     (k) Option Agreement: The agreement reflecting the grant of an Option pursuant to Section 6(a).
     (l) Participant: A key employee or other individual selected to participate in this Plan pursuant to its terms.
     (m) Performance Objectives: With reference to a particular Award under Section 7, the threshold Performance Objective, target Performance Objective and super Performance Objective pertaining thereto, as determined by the Committee and specified in the applicable Stock Restriction Agreement, which objectives are the criteria established by the Committee which may accelerate the release of shares of Common Stock from the restrictions of such Award and its Lapsing Formula. The Performance Objectives may differ from Participant to Participant and from Award to Award.
     (n) Performance Period: With reference to a particular Award under Section 7, the period of time within which the Performance Objectives are to be achieved, as determined by the Committee and specified in the applicable Stock Restriction Agreement. The Performance Period may differ from Participant to Participant and from Award to Award.
     (o) Plan: The KB Home 1988 Employee Stock Plan, as it may be amended from time to time.
     (p) Section 409A: Section 409A of the Code and, for the avoidance of doubt only, the Treasury Regulations and other Department of Treasury guidance issued thereunder.
     (q) Stock Restriction Agreement: With reference to a particular Award, the agreement between the Company and the Participant containing the restrictions set forth in Section 7(e), the Lapsing Formula and the Performance Objectives.
     (r) Stock Unit Award: An award granted under Section 8.
     (s) Subsidiary: A subsidiary of the Company within the meaning of Section 424(f) of the Code.
     (t) Tax Date: The date on which taxes of any kind are required by law to be withheld with respect to shares of Common Stock subject to an Option or Award.
     SECTION 3. Administration.
     (a) The Committee shall have full power and authority, subject to such orders or

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resolutions not inconsistent with the provisions of the Plan as may from time to time be issued or adopted by the Board, to grant to eligible persons Awards, Options and Limited Stock Appreciation Rights with respect to shares of Common Stock pursuant to the provisions of the Plan, to fix the exercise price and other terms of such Options, to fix the terms of any Award in a manner consistent with the terms of Section 7, to prescribe, amend and rescind rules and regulations, if any, relating to the Plan, to interpret the provisions of the Plan, Stock Restriction Agreements and Option Agreements issued under the Plan, to amend such Option Agreements and Stock Restriction Agreements from time to time subject to the provisions of the Plan, and to supervise the administration of the Plan. No individual shall become a member of the Committee if he or she shall have been eligible to receive Awards or Options to acquire shares of capital stock of the Company or any subsidiary at any time during the 12-month period prior to becoming a member and no member of the Committee shall be eligible to receive Awards or Options.
     (b) All decisions made by the Committee pursuant to the provisions of the Plan and related orders or resolutions of the Board shall be final, conclusive and binding on all persons, including the Company, stockholders, employees and optionees.
     (c) Each person who is or shall have been a member of the Committee or of the Board shall be indemnified and held harmless by the Company from any loss, cost, liability or expense that may be imposed upon or reasonably incurred by him or her in connection with any claim, action, suit or proceeding to which he or she may be a party by reason of any action taken or any failure to act under the Plan. The foregoing right of indemnification shall not be exclusive of any other rights of indemnification to which such persons may be entitled under the Company’s Articles of Incorporation or Bylaws, or as a matter of law, or otherwise, or any power that the Company may have to indemnify them or hold them harmless.
     SECTION 4. Shares Subject to the Plan.
     (a) The shares to be delivered upon exercise of Options granted under the Plan or pursuant to Awards may be made available from the authorized but unissued shares of the Company or from shares reacquired by the Company, including shares purchased in the open market or in private transactions.
     (b) Subject to adjustments made pursuant to the provisions of Section 4(c), the aggregate number of shares to be delivered pursuant to Awards and upon exercise of all Options which may be granted under the Plan shall not exceed 3,000,000 shares of Common Stock. If an Option or Award granted under the Plan shall expire or terminate for any reason, other than by reason of the exercise of an associated Limited Stock Appreciation Right, or if an Award is forfeited, the shares subject to but not delivered under such Option or forfeited Award shall be available for other Awards or Options and associated Limited Stock Appreciation Rights granted to the same Participant or other Participants.
     (c) In the event of any stock dividend, extraordinary cash dividend, recapitalization, reorganization, merger, consolidation, split-up, spin-off, combination, exchange of shares, warrants or rights offering to purchase Common Stock at a price substantially below fair market

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value, or other similar corporate event affecting the Common Stock such that an adjustment is required in order to preserve the benefits or potential benefits intended to be made available to Participants under this Plan, the Committee shall make appropriate proportional adjustments to any or all of (1) the number and kind of shares which thereafter may be awarded or optioned and sold or made the subject of Limited Stock Appreciation Rights under the Plan, (2) the number and kind of shares subject to outstanding Options and Awards, and Limited Stock Appreciation Rights, and (3) the exercise price with respect to any of the foregoing and/or, if deemed appropriate, make provision for a cash payment to a Participant, including to reflect such an event occurring prior to an Award, the grant of which was intentionally deferred in anticipation of such event; provided, however, that the number of shares subject to any Option or Award shall always be a whole number. Any adjustment under this Section 4(d) shall be made only to the extent that such adjustment will not cause a violation of the requirements of Section 409A.
     SECTION 5. Eligibility and Extent of Participation.
     (a) The persons eligible to receive Awards, Options and associated Limited Stock Appreciation Rights under the Plan shall consist of key employees of the Company and other individuals who, in the Committee’s judgment, can make substantial contributions to the Company’s long-term profitability and value.
     (b) Subject to the limitations of the Plan, the Committee shall, after such consultation with and consideration of the recommendations of management as the Committee considers desirable, select from eligible persons those Participants to be granted Options and Awards and determine the time when each Option and Award shall be granted, the number of shares subject to each Option and Award and whether Limited Stock Appreciation Rights should be granted in connection with such Option, the number of shares for each Award and the restrictions associated with such Award. Subject to the provisions of Section 4, both Options and Awards may be granted to the same Participant.
     SECTION 6. Grants of Options and Limited Stock Appreciation Rights.
     (a)  Grant of Options . Options on shares of Common Stock may be granted to Participants by the Committee from time to time at its sole discretion. Each Option shall be evidenced by an Option Agreement which shall contain such terms and conditions as may be approved by the Committee and shall be signed by an officer of the Company and the optionee. Neither the execution of any Option Agreement nor the granting of any Option evidenced thereby shall constitute or be evidence of any agreement or other understanding, express or implied, on the part of the Company or any Subsidiary to employ an individual for any specific period.
     (b)  Grant of Limited Stock Appreciation Rights in the Event of Change of Ownership. If deemed by the Committee to be in the best interests of the Company, any Option granted on or after the effective date of the Plan may include a Limited Stock Appreciation Right at the time of grant of the Option; also, the Committee may grant a Limited Stock Appreciation Right with respect to any unexercised Option at any time after granting such Option prior to the end of its term, provided such Option was granted after the effective date of the Plan. Such Limited Stock Appreciation Rights shall be subject to such terms and conditions not inconsistent with the Plan

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as the Committee shall impose, provided that:
          (1) A Limited Stock Appreciation Right shall be exercisable only during the 91 day period specified in the last sentence of Section 9(a), provided, however, that no Limited Stock Appreciation Right shall be exercisable by an officer of the Company within six months of the date of its grant; and
          (2) A Limited Stock Appreciation Right shall, upon its exercise, entitle the optionee to whom such Limited Stock Appreciation Right was granted to receive an amount of cash equal to the amount by which the “Offer Price per Share” (as such term is hereinafter defined) shall exceed the exercise price of the associated Option, multiplied by the number of shares of Common Stock with respect to which such Limited Stock Appreciation Right shall have been exercised. Upon the exercise of a Limited Stock Appreciation Right, any associated Option shall cease to be exercisable to the extent of the shares of Common Stock with respect to which such Limited Stock Appreciation Right was exercised. Upon the exercise or termination of an associated Option, any related Limited Stock Appreciation Right shall terminate to the extent of the shares of Common Stock with respect to which such associated Option was exercised or terminated.
     The term “Offer Price per Share” as used in this Section 6(b) shall mean with respect to a Limited Stock Appreciation Right the higher of (i) the fair market value per share of Common Stock on the date of exercise of such Limited Stock Appreciation Right or (ii) the highest price per share for Common Stock paid or to be paid in the transaction, if any, giving rise to the event specified in clauses (1) or (2) (as the case may be) of Section 9(a) which triggered the exercisability of such Limited Stock Appreciation Right. For purposes of clause (ii) above, any securities or property which are part of the consideration paid or to be paid in such transactions shall be valued in determining the Offer Price per Share at the highest of (A) the valuation placed on such securities or property by the company, person or other entity engaging in such transaction, or (B) the valuation placed on such securities or property by the Committee.
     (c)  Exercise Price.
          (1) The price at which each share of Common Stock may be purchased upon exercise of a particular Option shall be as specified by the Committee, in its sole discretion, at the time such Option is granted and shall not be less than 100% of the fair market value of a share of Common Stock at the time such Option is granted. The Option exercise price shall be set forth in the applicable Option Agreement.
          (2) If the Committee, in its discretion, shall deem it desirable, and subject to the requirements of Section 409A, if applicable, the grant of an Option may be made conditional upon the receipt of a payment therefor by the optionee. Such condition and the terms and conditions as to its satisfaction shall be set forth in the applicable Option Agreement which may also provide for the reimbursement to the optionee of any part or all of such payment under such circumstances as may be specified in such Option Agreement.
     (d)  Exercise.

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          (1) Each Option shall be exercisable at such times and subject to such terms and conditions as the Committee may, in its sole discretion, specify in the applicable Option Agreement or thereafter, subject to Section 6(f) hereof, provided, however, that in no event may any Option granted hereunder be exercisable after the expiration of 15 years from the date of such grant. Subject to the foregoing, each Option Agreement shall specify the effect thereon of the death, retirement or other termination of employment of the optionee. In addition, the Committee may impose such other conditions with respect to the exercise of Options, including without limitation, any relating to the application of Federal or state securities laws, as it may deem necessary or advisable.
          (2) No shares shall be delivered pursuant to any exercise of an Option until payment in full of the exercise price therefor is received by the Company. Such payment may be made in cash, or its equivalent, or by exchanging shares of Common Stock owned by the optionee (which are not the subject of any pledge or other security interest), or by a combination of the foregoing, provided that the combined value of all cash and cash equivalents and the fair market value of any such Common Stock so tendered to the Company, valued as of the date of such tender, is at least equal to such exercise price. No optionee or the legal representative, legatee or distributee of an optionee, shall be deemed to be a holder of any shares subject to any Option prior to the issuance of such shares upon exercise of such Option.
     (e)  Transferability of Options. An Option granted under the Plan, and any related Limited Stock Appreciation Right, may not be transferred except by will or the laws of descent and distribution and, during the lifetime of the person to whom granted, may be exercised only by such person.
     (f)  Modifications . The Committee shall not amend an Option to reduce the per share exercise price (except as permitted by Section 4(c) hereof, extend the exercise period of an Option beyond the earlier of the latest date upon which the Option could have expired by its original terms under any circumstances or the tenth anniversary of the date of grant of such Option, or otherwise modify any Option or add any feature for the deferral of compensation in any manner that would cause a violation of the requirements of Section 409A.
     SECTION 7. Awards.
     (a)  Grant of Restricted Stock Awards.
          (1) Selection of Participants. Subject to the terms of this Plan, the Committee shall select those Participants to whom Awards shall be granted for each Performance Period. Awards shall generally be made at the beginning of a Performance Period but may, in the Committee’s discretion, be made from time to time during the term of a Performance Period.
          (2) Award of Shares. The Committee shall determine the number of shares of Common Stock covered by each Award. After the close of, and, if appropriate, during the term of, each Performance Period, and at appropriate times based on the Lapsing Formula the

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Committee shall determine whether the restrictions set forth in Section 7(e) hereof shall lapse with respect to a portion or all of the shares covered by an Award.
          (3) Form of Instrument. Each Award shall be made pursuant to a Stock Restriction Agreement in a form prescribed by the Committee. Such instrument shall specify the restrictions set forth in Section 7(e), a Lapsing Formula, a Performance Period and the Performance Objectives which, if achieved during the Performance Period with respect to which they were awarded, shall cause acceleration of the lapsing of restrictions imposed upon all or part of the shares covered by an Award.
     (b)  Lapsing Formula and Performance Objectives. Each Award shall be subject to a Lapsing Formula pursuant to which the restrictions set forth in Section 7(e) shall lapse, unless such restrictions have earlier lapsed as to all or part of the shares due to achievement of Performance Objectives during the Performance Period. Each Award shall be subject to Performance Objectives which may be achieved by the Company during the Performance Period With respect to which the Award is made. Performance Objectives may relate to separate performance objectives for the Company or any Subsidiary or for any division, department or operation of the Company or any subsidiary. Notwithstanding anything else in this Plan to the contrary, the restrictions set forth in Section 7(e) shall not lapse with respect to a Restricted Stock Award prior to the third anniversary of the date of grant of such Award; provided, however, that the Committee may determine to have the restrictions set forth in Section 7(e) lapse after the first anniversary of the date of grant of an Award if the Committee has established Performance Objectives for such Award. Subject to the preceding sentence, once established, Performance Objectives and Lapsing Formulas may be changed, adjusted or amended during the term of a Performance Period or thereafter.
     (c)  Rights with Respect to Shares. Subject to Section 7(d), each Participant to whom an Award has been made shall have absolute ownership of such shares including the right to vote the same and to receive dividends and other distributions thereon, subject, however, to the terms, conditions and restrictions described in this Plan and in the Stock Restriction Agreement.
     (d)  Escrow. Shares of Common Stock issued pursuant to an Award shall be held in escrow by the Company until such time as the Committee shall have determined that the restrictions set forth in Section 7(e) shall have lapsed or until the shares subject to such Award are forfeited pursuant to Section 7(e)(2).
     (e)  Restrictions Applicable to Awards. Each Stock Restriction Agreement under this Plan shall contain the following terms, conditions and restrictions and such additional terms, conditions and restrictions as may be determined by the Committee:
Until the restrictions set forth in this Section 7(e) shall lapse pursuant to Section 7(f), shares of Common Stock awarded to a Participant pursuant to each Award:
          (1) shall not be sold, assigned, transferred, pledged, hypothecated or otherwise disposed of, and

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          (2) except as otherwise set forth in the Stock Restriction Agreement, shall be forfeited and returned to the Company, and all rights of the Participant to such shares shall terminate without any payment of consideration by the Company, If the Participant’s continuous employment with or other service to the Company upon which an Award is based shall terminate with or without cause or as a result of any event or for any other reason.
     (f)  Lapse of Restrictions.
          (1) Lapse of Restrictions Due to Achievement of Performance Objectives. As soon as practicable after the close of each Performance Period or prior thereto, if the Committee in its discretion deems it appropriate, the Committee shall determine whether the Performance Objectives established for such Performance Period have been achieved. Each Participant who has received an Award shall be notified as to whether the Performance Objectives established for the Performance Period have been achieved and the number of shares, if any, of Common Stock with respect to which the restrictions of Section 7(e) have lapsed.
          (2) Lapse of Restrictions Based on Lapsing Schedule. As to any shares covered by an Award as to which the restrictions imposed by Section 7(e) have not lapsed pursuant to paragraph (1) of this Section 7(f), such restrictions shall lapse in accordance with the Lapsing Formula for such Award.
     (g)  Restrictive Legends. Certificates for shares of Common Stock delivered pursuant to Awards shall bear an appropriate legend referring to the terms, conditions and restrictions described in this Plan and in the applicable Stock Restriction Agreement. Any attempt to dispose of any such shares of Common Stock in contravention of the terms, conditions and restrictions described in this Plan or in the applicable Stock Restriction Agreement shall be ineffective. Any shares of Common Stock of the Company or other property, including cash, received by a Participant as a dividend or as a result of any stock split, combination, exchange of shares, reorganization, merger, consolidation or similar event with respect to shares of Common Stock received pursuant to an Award shall have the same status and bear the same legend and be held in escrow pursuant to Section 7(d) as the shares received pursuant to the Award unless otherwise determined by the Committee at the time of such event.
     (h)  Designation of Beneficiaries. A Participant may designate a beneficiary or beneficiaries to receive such Participant’s Common Stock hereunder in the event of such Participant’s death, and may, at any time and from time to time, change any such beneficiary designation. All beneficiary designations and changes therein shall be in writing and shall be effective only if and when delivered to the Committee during the lifetime of the Participant.
     (i) The Committee may make adjustments or modifications, and its determination thereof shall be conclusive, in the Lapsing Formula, Performance Objectives or Performance Period to give effect to the intent of this Plan in connection with any event affecting the performance criteria established as the Performance Objectives, including without limitation, any reorganization, recapitalization, merger, consolidation, offering of additional shares of Common Stock or other change in the Company’s shareholders’ equity by means other than earnings, or any similar event. No such adjustment shall be made if it would reduce the benefits otherwise

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accruing to existing Participants under the Plan.
     SECTION 8. Stock Unit Awards.
     (a)  Grant of Stock Unit Awards. In addition to granting Options, Limited Stock Appreciation Rights and Awards of restricted shares under Section 7, the Committee shall have authority to grant to Participants Stock Unit Awards which can be in the form of Common Stock or units, the value of which is based, in whole or in part, on the value of Common Stock. Subject to the provisions of the Plan, including Section 8(b) below, Stock Unit Awards shall be subject to such terms, restrictions, conditions, vesting requirements and payment rules (all of which are sometimes, hereinafter collectively referred to as “rules”) as the Committee may determine in its sole discretion, all such rules applicable to a particular Stock Unit Award to be reflected in writing and furnished to the Participant at the time of grant. The rules need not be identical for each Stock Unit Award.
     (b ) Rules. In the sole discretion of the Committee, a Stock Unit Award may be granted subject to the following rules:
          (1) Any shares of Common Stock which are part of a Stock Unit Award may not be assigned, sold, transferred, pledged or otherwise encumbered prior to the date on which the shares are issued or, if later, the date provided by the Committee at the time of the Award.
          (2) Stock Unit Awards may provide for the payment of cash consideration by the person to whom such Award is granted or provide that the Award, and Common Stock to be issued in connection therewith, if applicable, shall be delivered without the payment of cash consideration, provided that for any Common Stock to be purchased in connection with a Stock Unit Award the purchase price shall be at least 50% of the fair market value of such Common Stock on the date such Award is granted.
          (3) Stock Unit Awards may relate in whole or in part to certain performance criteria established by the Committee at the time of grant.
          (4) Stock Unit Awards may provide for deferred payment schedules, vesting over a specified period of employment, the payment (on a current or deferred basis) of dividend equivalent amounts, with respect to the number of shares of Common Stock covered by the Award, and elections by the employee to defer the payment of the Award or the lifting of restrictions on the Award, if any.
          (5) In such circumstances as the Committee may deem advisable, the Committee may waive or otherwise remove, in whole or in part, any restrictions or limitation to which a Stock Unit Award was made subject at the time of grant.
     SECTION 9. Special Rules.
     (a) Notwithstanding anything to the contrary in this Plan, unless otherwise specifically determined by the Committee at the time of grant, all Options theretofore granted and not fully

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exercisable shall become exercisable in full and the restrictions on all outstanding Awards shall lapse upon the occurrence of a Change of Ownership. A “Change of Ownership” shall be deemed to have occurred if either (1) individuals who, as of the Effective Date of this Plan, constitute the Board of Directors of the Company (the “Board of Directors” generally and as of the Effective Date, the “Incumbent Board”) cease for any reason to constitute at least a majority of the directors constituting the Board of Directors, provided that any person becoming a director subsequent to the Effective Date of this Plan whose election, or nomination for election by the Company’s shareholders, was approved by a vote of at least three-quarters (3/4) of the then directors who are members of the Incumbent Board (other than an election or nomination of an individual whose initial assumption of office is (A) in connection with the acquisition by a third person, including a “group” as such term is used in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended (the “Act”), of beneficial ownership, directly or indirectly, of 20% or more of the combined voting securities ordinarily having the right to vote for the election of directors of the Company (unless such acquisition of beneficial ownership was approved by a majority of the Board of Directors who are members of the Incumbent Board), or (B) in connection with an actual or threatened election contest relating to the election of the directors of the Company, as such terms are used in Rule 14a-ll of Regulation 14A promulgated under the Act) shall be, for purposes of this Plan, considered as though such person were a member of the Incumbent Board, or (2) the Board of Directors (a majority of which shall consist of directors who are members of the Incumbent Board) has determined that a Change of Ownership triggering the exercisability of Options and the lapse of restrictions on Awards as described in this Section 9 shall have occurred. Options which become fully exercisable by reason of events specified in clauses (1) or (2) shall remain exercisable for 90 days following the date on which they become so exercisable, after which they will revert to being exercisable in accordance with their original terms, provided, however, that no Option which has previously been exercised or has expired or otherwise terminated shall become exercisable by virtue of this Section nor shall this Section permit exercise of any option during the portion, if any, of such 90 day period which follows the termination Or expiration of any such Option.
     (b) For purposes of this Plan and any Option or Award hereunder, termination of employment shall not be deemed to occur upon the transfer of any optionee from the employ of the Company to the employ of any Subsidiary or affiliate. For purposes of this Plan, “affiliate” means (1) any entity 50% or more of the voting interest in which is owned, directly or indirectly, by an entity which owns, directly or indirectly, 50% or more of the voting interest in the Company and (2) any entity which owns, directly or indirectly, 50% or more of the voting interest in the Company.
     SECTION 10. Delivery of Shares. No shares of Common Stock shall be delivered pursuant to an Award or any exercise of an Option until the requirements of such laws and regulations as may be deemed by the Committee to be applicable thereto are satisfied.
     SECTION 11. Financing and Withholding.
     (a)  Withholding of Taxes. As a condition to the making of an Award, to the lapse of the restrictions pertaining to an Award, or to the delivery of shares in connection with the exercise of an Option, the Company may require the Participant to pay to the Company, or make

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arrangements satisfactory to the Committee regarding payment of, any taxes of any kind required by law to be withheld with respect to such shares of Common Stock.
     (b)  Financing. If requested by a Participant who exercises an Option or who has received shares of Common Stock pursuant to an Award, the Committee may in its discretion provide financing to the Participant in a principal amount sufficient for the purchase of shares of Common Stock pursuant to such Option exercise or to pay the amount of taxes required by law to be withheld with respect to such Option exercise or such receipt of shares of Common Stock. Any such loan shall be subject to all legal requirements, and restrictions pertinent thereto, including if applicable, Regulation G promulgated by the Federal Reserve Board. The grant of an Option or Award shall in no way obligate the Company or the Committee to provide any financing whatsoever upon the lapse of restrictions on shares or the exercise of such Option.
     (c)  Withholding of Shares.
          (1) If requested by a Participant who acquires shares of Common Stock upon the exercise of an Option or who has received Common Stock pursuant to an Award with respect to which the restrictions shall have lapsed, the Committee may in its discretion permit the Participant to satisfy any tax withholding obligations, in whole or in part, by having the Company withhold a portion of such shares with a value equal to the amount of taxes required by law to be withheld, based on the applicable minimum statutory withholding rates.
          (2) Requests by a Participant to have shares of Common Stock withheld shall be (A) made prior to the Tax Date and (B) irrevocable. In addition, in the event the Participant is an officer or director of the Company within the meaning of Section 16 of the Act, such requests must be made either six months prior to the Tax Date or in a ten day period beginning on the third day following the release of the Company’s quarterly or annual earnings statement.
     SECTION 12. Amendments, Suspension or Discontinuance. The Board of Directors may amend, suspend or discontinue the Plan. Notwithstanding the foregoing, except as permitted by Section 4(c), the Board may not, without prior approval of the shareholders of the Company, make any amendment which operates (a) to abolish the Committee, change the qualification of its members or withdraw the administration of the Plan from its supervision, (b) to make any material change in the class of eligible persons as defined in the Plan, (c) to increase the total number of shares of Common Stock which may be delivered in respect of Awards or on exercise of Options granted under the Plan, (d) to extend the maximum option period or the period which Options or Awards may be granted under the Plan or (e) to reduce the minimum permissible option exercise price or modify any Option except as permitted under Section 6(f) hereof.
     SECTION 13. Term of Plan.
     (a)  Effective Date. The Plan became effective on July 25, 1988, the date it was approved and adopted by the Board (the “Effective Date”), and was subsequently approved by shareholders of the Company. This amendment and restatement shall be effective as of the Amendment Date as defined herein.

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     (b)  Expiration Date. As of the Amendment Date, the Plan has expired and no further Options or awards shall be granted under the Plan.
     SECTION 14. Section 409A.
     (a) To the extent that the Committee determines that any Option granted under the Plan is subject to Section 409A, the award agreement evidencing such Option shall comply with the requirements of Section 409A. To the extent applicable, the Plan and award agreements shall be interpreted in accordance with Section 409A, including without limitation any Treasury Regulations or other Department of Treasury guidance that may be issued or amended after the Effective Date or the Amendment Date. Notwithstanding any provision of the Plan to the contrary, in the event that following the Effective Date the Committee determines that any Option may be subject to Section 409A, including such Department of Treasury guidance as may be issued after the Effective Date or the Amendment Date, the Committee may adopt such amendments to the Plan and the applicable award agreement or adopt other policies and procedures (including amendments, policies and procedures (including amendments, policies and procedures with retroactive effect), or take any other actions that the Committee determines are necessary or appropriate to (i) exempt the Option from Section 409A and/or preserve the intended tax treatment of the benefits provided with respect to the Option, or (ii) comply with the requirements of Section 409A.
     (b) A Participant shall be solely responsible and liable for the satisfaction of all taxes, interest, and penalties that may be imposed on such Participant or for such Participant’s account in connection with an Option (including any taxes, interest, and penalties under Section 409A), and neither the Company nor its affiliates shall have any obligation to indemnify or otherwise hold such Participant harmless from any or all of such taxes, interest, or penalties.

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Exhibit 10.8
(KB HOME LOGO)
KB HOME
PERFORMANCE-BASED INCENTIVE PLAN FOR SENIOR MANAGEMENT
(as amended and restated on October 2, 2008)
     SECTION 1. Purpose. The purposes of the KB Home Performance-Based Incentive Plan for Senior Management (the “Plan”) are to promote the interests of KB Home and its stockholders by (i) attracting and retaining exceptional executive personnel and other key employees of the Company and its Affiliates, as defined below; (ii) motivating such employees by means of performance-related incentives to achieve long-range performance goals; (iii) enabling such employees to participate in the long-term growth and financial success of the Company; and (iv) qualifying compensation paid under the Plan for deductibility under Section 162(m) of the Internal Revenue Code of 1986, as amended. The Plan is an amendment and restatement of the Kaufman and Broad Home Corporation Performance-Based Incentive Plan for Senior Management which shall be effective as of October 2, 2008 (the “Amendment Date”).
     SECTION 2. Definitions. As used in the Plan, the following terms shall have the meanings set forth below:
     “Affiliate” shall mean (i) any entity that, directly or indirectly, is controlled by the Company and (ii) any entity in which the Company has a significant equity interest, in either case as determined by the Committee.
     “Amendment Date” shall have the meaning set forth in Section 1 hereof.
     “Award” shall mean any Performance-Based Bonus opportunity granted under the Plan, as well as any Option, Stock Appreciation Right, award of Restricted Stock, or Other Stock-Based Award granted under the Plan or granted in payment or settlement of a Performance-Based Bonus.
     “Award Agreement” shall mean any written agreement, contract, or other instrument or document (which may include, if so designated by the Committee, an Employment Agreement, as defined herein) evidencing any Award, which may, but need not, be executed or acknowledged by a Participant.
     “Board” shall mean the Board of Directors of the Company.
     “Change of Ownership” shall be deemed to have occurred if either (1) individuals who, as of the Effective Date of this Plan, constitute the Board of the Company (as of the Effective Date, the “Incumbent Board”) cease for any reason to constitute at least a majority of the directors constituting the Board, provided that any person becoming a director subsequent to the

1


 

Effective Date of this Plan whose election, or nomination for election by the Company’s stockholders, was approved by a vote of at least three-quarters (3/4) of the then directors who are members of the Incumbent Board (other than an election or nomination of an individual whose initial assumption of office is (A) in connection with the acquisition by a third person, including a “group” as such term is used in Section 13(d)(3) of the Exchange Act, of beneficial ownership, directly or indirectly, of 20% or more of the combined voting securities ordinarily having the right to vote for the election of directors of the Company (unless such acquisition of beneficial ownership was approved by a majority of the Board who are members of the Incumbent Board), or (B) in connection with an actual or threatened election contest relating to the election of the directors of the Company, as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) shall be, for purposes of this Plan, considered as though such person were a member of the Incumbent Board, or (2) the Board (a majority of which shall consist of directors who are members of the Incumbent Board) has determined that a Change of Ownership, for purposes of this Plan, shall have occurred. If any of the events enumerated in clauses (1) or (2) occur, the Board shall determine the effective date of the Change of Ownership resulting therefrom, for purposes of the Plan.
     “Code” shall mean the Internal Revenue Code of 1986, as amended from time to time. All references to the Code or any section thereof shall include the Treasury Regulations and other Department of Treasury guidance issued thereunder.
     “Committee” shall mean a committee of the Board designated by the Board to administer the Plan and composed of not less than the minimum number of persons from time to time required by Rule 16b-3, each of whom (i) to the extent necessary to comply with Rule 16b-3 only, is a “disinterested Person” within the meaning of Rule 16b-3 and (ii) to the extent necessary to comply with Section 162(m) only, is an “outside director” within the meaning of Section 162(m). Until otherwise determined by the Board, the Compensation Committee designated by the Board shall be the Committee under the Plan.
     “Company” shall mean KB Home, together with any successor thereto.
     “Effective Date” shall have the meaning set forth in Section 14(a) hereof.
     “Employment Agreement” shall mean (i) with respect to Awards relating to performance in fiscal year 1995, an agreement between the Company and a Participant, the effectiveness or continuing effectiveness of which is contingent upon approval, or approval of the Plan, by the Company’s stockholders, which approval shall satisfy all applicable requirements of Section 162(m) and (ii) with respect to Awards relating to performance in any fiscal year of the Company after fiscal year 1995, an agreement between the Company and a Participant entered into prior to the end of the first fiscal quarter of such fiscal year.
     “Exchange Act” shall mean the Securities Exchange Act of 1934, as amended.
     “Fair Market Value” shall mean the fair market value of the property or other item being valued, as determined by the Committee in its sole discretion.

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     “Incentive Stock Option” shall mean a right to purchase Shares from the Company that is granted under Section 7 of the Plan and that is intended to meet the requirements of Section 422 of the Code or any successor provision thereto.
     “Non-Qualified Stock Option” shall mean a right to purchase Shares from the Company that is granted under Section 7 of the Plan and that is not intended to be an Incentive Stock Option.
     “Officer” shall mean, at any time, an individual who is an officer of the Company or any of its subsidiaries.
     “Option” shall mean an Incentive Stock Option or a Non-Qualified Stock Option.
     “Other Stock-Based Award” shall mean any right granted under Section 11 of the Plan.
     “Participant” shall mean any Officer selected by the Committee to receive an Award under the Plan.
     “Performance-Based Bonus” shall mean a bonus opportunity awarded in accordance with Section 6 of the Plan.
     “Person” shall mean any individual, corporation, partnership, association, joint-stock company, trust, unincorporated organization, government or political subdivision thereof or other entity.
     “Plan” shall mean this KB Home Performance-Based Incentive Plan for Senior Management.
     “Restricted Stock” shall mean any Share granted under Section 9 of the Plan.
     “Rule 16b-3” shall mean Rule 16b-3 as promulgated and interpreted by the SEC under the Exchange Act, or any successor rule or regulation thereto as in effect from time to time.
     “Section 162(m)” shall mean Section 162(m) of the Code and, for the avoidance of doubt only, the Treasury Regulations and other Department of Treasury guidance issued thereunder.
     “Section 409A” shall mean Section 409A of the Code and, for the avoidance of doubt only, the Treasury Regulations and other Department of Treasury guidance issued thereunder.
     “SEC” shall mean the Securities and Exchange Commission or any successor thereto and shall include the Staff thereof.
     “Shares” shall mean shares of the Common Stock, $1 par value, of the Company, or such other securities of the Company as may be designated by the Committee from time to time.
     “Stock Appreciation Right” shall mean any right granted under Section 8 of the Plan.

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     “Substitute Awards” shall mean Awards granted in assumption of, or in substitution for, outstanding awards previously granted by a company acquired by the Company or with which the Company combines.
     SECTION 3. Administration.
     (a)  Authority of Committee. The Plan shall be administered by the Committee. Subject to the terms of the Plan and applicable law, and in addition to other express powers and authorizations conferred on the Committee by the Plan, the Committee shall have full power and authority to: (i) designate Participants; (ii) determine the type or types of Awards to be granted to an eligible Officer; (iii) determine the number of Shares to be covered by, or with respect to which payments, rights, or other matters are to be calculated in connection with, Awards; (iv) determine the terms and conditions of any Award; (v) determine whether, to what extent, and under what circumstances Awards may be settled or exercised in cash, Shares, other securities, or other property, or canceled, forfeited, or suspended and the method or methods by which Awards may be settled, exercised, canceled, forfeited, or suspended, provided that Options may be settled only in cash and Shares; (vi) determine whether, to what extent, and under what circumstances cash, Shares, other securities, other Awards, other property, and other amounts payable with respect to an Award shall be deferred either automatically or at the election of the holder thereof or of the Committee, provided that such determinations shall not cause a violation of the requirements of Section 409A; (vii) interpret and administer the Plan and any instrument or agreement relating to, or Award made under, the Plan; (viii) recommend to the Board any amendment, alteration, suspension, discontinuance or termination of the Plan, and subject to the shareholder approval requirement set forth in Section 12(a), to take any such action not required by applicable law to be taken by the Board, (ix) establish, amend, suspend, or waive such rules and regulations and appoint such agents as it shall deem appropriate for the proper administration of the Plan; and (x) make any other determination and take any other action that the Committee deems necessary or desirable for the administration of the Plan.
     (b)  Committee Discretion Binding. Unless otherwise expressly provided in the Plan, all designations, determinations, interpretations, and other decisions under or with respect to the Plan or any Award shall be within the sole discretion of the Committee, may be made at any time and shall be final, conclusive, and binding upon all Persons, including the Company, any Affiliate, any Participant, any holder or beneficiary of any Award, any stockholder and any Officer.
     SECTION 4. Award Limits.
     (a)  Plan Shares. Subject to adjustment as provided in Section 4(c), the number of Shares with respect to which Awards may be granted under the Plan shall be 1,000,000. If, after the Effective Date of the Plan, any Shares covered by an Award denominated in Shares granted under the Plan, or to which such an Award relates, are forfeited, or if such an Award is settled for cash or otherwise terminates or is canceled without the delivery of Shares, then the Shares covered by such Award, or to which such Award relates, or the number of Shares otherwise counted against the aggregate number of Shares with respect to which Awards may be granted,

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to the extent of any such settlement, forfeiture, termination or cancellation, shall again become Shares with respect to which Awards may be granted. In the event that any Option or other Award granted hereunder is exercised through the delivery of Shares or in the event that withholding tax liabilities arising from such Award are satisfied by the withholding of Shares by the Company, the number of Shares available for Awards under the Plan shall be increased by the number of Shares so surrendered or withheld.
     (b)  Individual Stock-Based Awards. Subject to adjustment as provided in Section 4(c), no Participant may receive stock-based Awards under the Plan in any calendar year that relate to more than 100,000 Shares; provided, however, that such number may be increased with respect to any Participant by any Shares available for grant to such Participant in accordance with this Paragraph 4(b) in any prior years that were not granted in such prior years. No provision of this Paragraph 4(b) shall be construed as limiting the amount of any cash-based Award which may be granted to any Participant.
     (c)  Adjustments. In the event of any dividend or other distribution (whether in the form of cash, Shares, other securities, or other property, and other than normal cash dividends), recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase, or exchange of Shares or other securities of the Company, issuance of warrants or other rights to purchase Shares or other securities of the Company, or other similar corporate transaction or event affecting the Shares or the price of the Shares, the Committee shall make appropriate proportionate adjustments to reflect such change with respect to any or all of (i) the number of Shares or other securities of the Company (or number and kind of other securities or property) with respect to which Awards may be granted, (ii) the number of Shares or other securities of the Company (or number and kind of other securities or property) subject to outstanding Awards, and (iii) the grant or exercise price with respect to any Award, or, if deemed appropriate, make provision for a cash payment to the holder of an outstanding Award; provided, in each case, that (A) with respect to Awards of Incentive Stock Options no such adjustment shall be authorized to the extent that such authority would cause the Plan to fail to qualify under Section 422(b)(1) of the Code, as from time to time amended, (B) with respect to any Award no such adjustment shall be authorized to the extent that such authority would be inconsistent with the Plan’s meeting the requirements of Section 162(m) of the Code, as from time to time amended, and (C) with respect to any Award under the Plan no such adjustment shall be authorized to the extent that such authorization or adjustment would cause a violation of the requirements of Section 409A.
     (d)  Substitute Awards. Any Shares underlying Substitute Awards shall not, except in the case of Shares with respect to which Substitute Awards are granted to individuals who are officers or directors of the Company for purposes of Section 16 of the Exchange Act or any successor section thereto, be counted against the Shares available for Awards under the Plan; provided that any assumption or substitution under this Section 4(d) must comply with the requirements of Section 409A.
     (e)  Sources of Shares Deliverable Under Awards. Any Shares delivered pursuant to an Award may consist, in whole or in part, of authorized and unissued Shares or of Shares acquired by the Company on the open market or otherwise.

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     (f)  Cash Award Limits. (i) Any Participant who is the Chief Executive Officer at the time of payment of an Award (other than a stock-based Award) shall be eligible to be paid in any calendar year an amount not in excess of $5,000,000 in respect of any such cash Award under the Plan, and (ii) no Participant other than a Participant described in clause (i) of this Paragraph 4(f) shall be eligible to be paid in any calendar year more than $2,000,000 in respect of any such cash Award. No provision of this Paragraph 4(f) shall be construed as limiting the number of stock-based Awards that a Participant may receive.
     SECTION 5. Eligibility. Any Officer, including any Officer who is a director of the Company or any Affiliate, who is not a member of the Committee, shall be eligible to be designated a Participant.
     SECTION 6. Performance-Based Bonuses.
     (a) At such times and in such manner as may be prescribed by Section 162(m), the Committee may select Participants and award to such Participants the opportunity to earn a Performance-Based Bonus, which will be contingent upon the Company’s attainment of performance goals selected by the Committee.
     (b) Performance goals which may be employed by the Committee for purposes of a Performance-Based Bonus awarded under Paragraph (a) will include pre-tax income, after-tax income, cash flow, return on equity, return on capital, earnings per share, unit volume, net sales or service quality, as determined in accordance with GAAP, if applicable, which goals may relate to the Company as a whole or, if applicable, to the performance of one or more specific divisions or Affiliates.
     (c) Notwithstanding Paragraphs (a) and (b), the formula for determining a Performance-Based Bonus to any Participant may, if so determined by the Committee, be governed by the terms of an Employment Agreement applicable to such Participant.
     (d) Performance-Based Bonuses awarded under Paragraph (a) may be paid in cash, other Awards or any combination thereof, and the form of payment may be governed, as to any Participant, by an Employment Agreement applicable to such Participant.
     SECTION 7. Stock Options.
     (a)  Grant. Subject to the provisions of the Plan, the Committee shall have sole and complete authority to determine the Officers to whom Options shall be granted, the number of Shares to be covered by each Option, the exercise price therefor and the conditions and limitations applicable to the exercise of the Option, provided, however, that the Committee shall not amend an Option to reduce the per Share exercise price (except as permitted by Section 4(c)) or otherwise modify an Option or add any feature for the deferral of compensation in any manner that would cause a violation of the requirements of Section 409A. The Committee shall have the authority to grant Incentive Stock Options, or to grant Non-Qualified Stock Options, or to grant both types of options. In the case of Incentive Stock Options, the terms and conditions of such

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grants shall be subject to and comply with such rules as may be prescribed by Section 422 of the Code, as from time to time amended, and any regulations implementing such statute.
     (b)  Exercise Price. The Committee in its sole discretion shall establish the exercise price at the time each Option is granted, which exercise price shall be not less than the Fair Market Value of the Shares subject to the Option on the date of grant of the Option.
     (c)  Exercise. Each Option shall be exercisable at such times and subject to such terms and conditions as the Committee may, in its sole discretion, specify in the applicable Award Agreement or thereafter, provided, however, that the Committee shall not extend the exercise period of an Option beyond the earlier of the latest date upon which the Option could have expired by its original terms under any circumstances or the tenth anniversary of the date of grant of such Option. The Committee may impose such conditions with respect to the exercise of Options, including without limitation, any relating to the application of federal or state securities laws, as it may deem necessary or advisable.
     (d)  Payment. No Shares shall be delivered pursuant to any exercise of an Option until payment in full of the exercise price therefor is received by the Company. Such payment may be made in cash, or its equivalent, or, if and to the extent permitted by the Committee, by exchanging Shares owned by the Participant (which are not the subject of any pledge or other security interest), or by a combination of the foregoing, provided that the combined value of all cash and cash equivalents and the Fair Market Value of any such Shares so tendered to the Company as of the date of such tender is at least equal to such exercise price plus the related amount of any taxes required to be withheld by the Company in connection with such exercise, to the extent such withholding taxes are then ascertainable. If the amount of such taxes is not ascertainable at the time of the notice of exercise, such amount shall be tendered by you to the Company as soon as the same shall become ascertainable and shall be communicated to you by the Company.
     SECTION 8. Stock Appreciation Rights.
     (a)  Grant. Subject to the provisions of the Plan, the Committee shall have sole and complete authority to determine the Officers to whom Stock Appreciation Rights shall be granted, the number of Shares to be covered by each Stock Appreciation Right Award, the grant price thereof and the conditions and limitations applicable to the exercise thereof. Stock Appreciation Rights may be granted in tandem with another Award, in addition to another Award, or freestanding and unrelated to another Award. Stock Appreciation Rights granted in tandem with or in addition to an Award may be granted either at the same time as the Award or at a later time.
     (b)  Exercise and Payment. A Stock Appreciation Right shall entitle the Participant to receive an amount equal to the excess of the Fair Market Value of a Share on the date of exercise of the Stock Appreciation Right over the grant price thereof, provided that the Committee may for administrative convenience determine that, with respect to any Stock Appreciation Right which is not related to an Incentive Stock Option and which can only be exercised for cash during limited periods of time in order to satisfy the conditions of Rule 16b-3, the exercise of

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such Stock Appreciation Right for cash during such limited period shall be deemed to occur for all purposes hereunder on the day during such limited period on which the Fair Market Value of the Shares is the highest. Any such determination by the Committee may be changed by the Committee from time to time and may govern the exercise of Stock Appreciation Rights granted prior to such determination as well as Stock Appreciation Rights thereafter granted. The Committee shall determine whether a Stock Appreciation Right shall be settled in cash, Shares or a combination of cash and Shares.
     (c)  Other Terms and Conditions. Subject to the terms of the Plan and any applicable Award Agreement, the Committee shall determine, at or after the grant of a Stock Appreciation Right, the term, methods of exercise, methods and form of settlement, and any other terms and conditions of any Stock Appreciation Right. Any such determination by the Committee may be changed by the Committee from time to time and may govern the exercise of Stock Appreciation Rights granted or exercised prior to such determination as well as Stock Appreciation Rights granted or exercised thereafter. The Committee may impose such conditions or restrictions on the exercise of any Stock Appreciation Right as it shall deem appropriate.
     SECTION 9. Restricted Stock.
     (a)  Grant. Subject to the provisions of the Plan, the Committee shall have sole and complete authority to determine the Officers to whom Shares of Restricted Stock shall be granted, the number of Shares of Restricted Stock to be granted to each Participant, the duration of the period during which, and the conditions under which, the Restricted Stock may be forfeited to the Company, and the other terms and conditions of such Awards. Notwithstanding any other provision of this Plan to the contrary, the period during which such Awards may be forfeited to the Company shall not terminate prior to the third anniversary of the date of grant of such Award; provided, however, that the Committee may determine to have such period terminate after the first anniversary of the date of grant of any such Award if the Committee has established conditions for the earning of such Award that relate to performance of the Company or one or more divisions or units thereof. Subject to the preceding sentence, once established, such performance vesting criteria may be changed, adjusted or amended during the term of an Award.
     (b)  Transfer Restrictions. Shares of Restricted Stock may not be sold, assigned, transferred, pledged or otherwise encumbered, except as provided in the Plan or the applicable Award Agreements. Certificates issued in respect of Shares of Restricted Stock shall be registered in the name of the Participant and deposited by such Participant, together with a stock power endorsed in blank, with the Company. Upon the lapse of the restrictions applicable to such Shares of Restricted Stock, the Company shall deliver such certificates to the Participant or the Participant’s legal representative.
     (c)  Dividends and Distributions. Dividends and other distributions paid on or in respect of any Shares of Restricted Stock may be paid directly to the Participant, or may be reinvested in additional Shares of Restricted Stock, as determined by the Committee in its sole discretion.
     SECTION 10. Change of Ownership. Notwithstanding anything to the contrary in this

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Plan, unless otherwise specifically determined by the Committee at the time of grant, all Options theretofore granted and not fully exercisable shall become exercisable in full and the restrictions on any other outstanding Awards shall lapse upon the occurrence of a Change of Ownership.
     SECTION 11. Other Stock-Based Awards. The Committee shall have authority to grant to any Officer an “Other Stock-Based Award”, which shall consist of any right which is (i) not an Award described in Sections 6 through 9 above and (ii) an Award of Shares or an Award denominated or payable in, valued in whole or in part by reference to, or otherwise based on or related to, Shares (including, without limitation, securities convertible into Shares), as deemed by the Committee to be consistent with the purposes of the Plan; provided that any such rights must comply, to the extent deemed desirable by the Committee, with Rule 16b-3 and applicable law. Subject to the terms of the Plan and any applicable Award Agreement, the Committee shall determine the terms and conditions of any such Other Stock-Based Award.
     SECTION 12. Amendment and Termination.
     (a)  Amendments to the Plan. Subject to the authority of the Committee as set forth in Section 3, and subject to the requirements of Section 409A and of Section 13(p) hereof, if applicable, the Board may amend, alter, suspend, discontinue, or terminate the Plan or any portion thereof at any time; provided that no such amendment, alteration, suspension, discontinuation or termination shall be made without shareholder approval if such approval is necessary to comply with any tax or regulatory requirement, including for these purposes any approval requirement which is a prerequisite for exemptive relief from Section 16(b) of the Exchange Act, for which or with which the Board deems it necessary or desirable to qualify or comply. Notwithstanding anything to the contrary herein, the Committee may amend the Plan in such manner as may be necessary so as to have the Plan conform with local rules and regulations in any jurisdiction outside the United States, subject to the requirements of Section 409A and of Section 13(p) hereof, if applicable.
     (b)  Amendments to Awards. Subject to the requirements of Section 409A and of Section 13(p) hereof, if applicable, the Committee may waive any conditions or rights under, amend any terms of, or alter, suspend, discontinue, cancel or terminate, any Award theretofore granted, prospectively or retroactively; provided that any such waiver, amendment, alteration, suspension, discontinuance, cancellation or termination that would adversely affect the rights of any Participant or any holder or beneficiary of any Award theretofore granted shall not to that extent be effective without the consent of the affected Participant, holder or beneficiary; and provided further that no outstanding Option may be amended to decrease the per Share exercise price or extend the exercise period thereof, or otherwise modified in any manner, except in accordance with Sections 4(c), 7(a), and 7(c) hereof.
     (c)  Adjustment of Awards Upon the Occurrence of Certain Unusual or Nonrecurring Events. The Committee is hereby authorized to make adjustments in the terms and conditions of, and the criteria included in, Awards in recognition of unusual or nonrecurring events (including, without limitation, the events described in Section 4(c) hereof) affecting the Company, any Affiliate, or the financial statements of the Company or any Affiliate, or of changes in applicable laws, regulations, or accounting principles, whenever the Committee determines that such

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adjustments are appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan; provided that no such adjustment shall be authorized to the extent that such authority would be inconsistent with the Plan’s meeting the requirements of Section 162(m) of the Code, as from time to time amended, or to the extent that such authority or adjustment would cause a violation of the requirements of Section 409A.
     (d)  Cancellation. Any provision of this Plan or any Award Agreement to the contrary notwithstanding, the Committee may cause any Award granted hereunder to be canceled in consideration of a cash payment or alternative Award made to the holder of such canceled Award equal in value to the Fair Market Value of such canceled Award; provided, however, that except as permitted by Sections 4(c) and 12(c) hereof, no Option may be granted in exchange for, or in connection with, the cancellation or surrender of an Option having a higher per Share exercise price, and no alternative Award may be made if such action would cause a violation of Section 409A.
     SECTION 13. General Provisions.
     (a)  Dividend Equivalents. In the sole and complete discretion of the Committee, an Award, whether made as an Other Stock-Based Award under Section 10 or as an Award granted pursuant to Sections 6 through 9 hereof, may provide the Participant with dividends or dividend equivalents, payable in cash, Shares, other securities or other property on a current or deferred basis.
     (b)  Nontransferability. No Award shall be assigned, alienated, pledged, attached, sold or otherwise transferred or encumbered by a Participant, except by will or the laws of descent and distribution; provided, however, that an Award may be transferable, to the extent set forth in the applicable Award Agreement, (i) if such Award Agreement provisions do not disqualify such Award for exemption under Rule 16b-3, or (ii) if such Award is not intended to qualify for exemption under such rule.
     (c)  No Rights to Awards. Except as may be provided in an Employment Agreement, no Officer, Participant or other Person shall have any claim to be granted any Award, and there is no obligation for uniformity of treatment of Employees, Participants, or holders or beneficiaries of Awards. The terms and conditions of Awards need not be the same with respect to each recipient.
     (d)  Share Certificates. All certificates for Shares or other securities of the Company or any Affiliate delivered under the Plan pursuant to any Award or the exercise thereof shall be subject to such stop transfer orders and other restrictions as the Committee may deem advisable under the Plan or the rules, regulations, and other requirements of the Securities and Exchange Commission, any stock exchange upon which such Shares or other securities are then listed, and any applicable Federal or state laws, and the Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions.
     (e)  Withholding. A Participant may be required to pay to the Company or any Affiliate,

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and the Company or any Affiliate shall have the right and is hereby authorized to withhold from any Award, from any payment due or transfer made under any Award or under the Plan or from any compensation or other amount owing to a Participant the amount (in cash, Shares, other securities, other Awards or other property) of any applicable withholding taxes in respect of an Award, its exercise, or any payment or transfer under an Award or under the Plan and to take such other action as may be necessary in the opinion of the Company to satisfy all obligations for the payment of such taxes. Notwithstanding any other provision of the Plan, the number of Shares which may be withheld pursuant to this Section 13(e) shall be limited to the number of Shares which have a Fair Market Value on the date of withholding or repurchase equal to the aggregate amount of the liability for such withholding taxes based on the minimum applicable statutory withholding rates.
     (f)  Award Agreements. Each Award hereunder shall be evidenced by an Award Agreement which shall be delivered to the Participant and shall specify the terms and conditions of the Award and any rules applicable thereto, including but not limited to the effect on such Award of the death, retirement or other termination of employment of a Participant.
     (g)  No Limit on Other Compensation Arrangements. Nothing contained in the Plan shall prevent the Company or any Affiliate from adopting or continuing in effect other compensation arrangements, which may, but need not, provide for the grant of bonuses, options, restricted stock, Shares and other types of Awards provided for hereunder (subject to shareholder approval if such approval is required), and such arrangements may be either generally applicable or applicable only in specific cases.
     (h)  No Right to Employment. The grant of an Award shall not be construed as giving a Participant the right to be retained in the employ of the Company or any Affiliate. Further, the Company or an Affiliate may at any time dismiss a Participant from employment, free from any liability or any claim under the Plan, unless otherwise expressly provided in the Plan or in any Award Agreement.
     (i)  No Rights as Stockholder. Subject to the provisions of the applicable Award, no Participant or holder or beneficiary of any Award shall have any rights as a stockholder with respect to any Shares to be distributed under the Plan until he or she has become the holder of such Shares. Notwithstanding the foregoing, in connection with each grant of Restricted Stock hereunder, the applicable Award shall specify if and to what extent the Participant shall not be entitled to the rights of a stockholder in respect of such Restricted Stock.
     (j)  Governing Law. The validity, construction, and effect of the Plan and any rules and regulations relating to the Plan and any Award Agreement shall be determined in accordance with the laws of the State of California, except to the extent that the General Corporation Law of the State of Delaware shall be applicable to the Company.
     (k)  Severability. If any provision of the Plan or any Award is or becomes or is deemed to be invalid, illegal, or unenforceable in any jurisdiction or as to any Person or Award, or would disqualify the Plan or any Award under any law deemed applicable by the Committee, such provision shall be construed or deemed amended to conform the applicable laws, or if it cannot

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be construed or deemed amended without, in the determination of the Committee, materially altering the intent of the Plan or the Award, such provision shall be stricken as to such jurisdiction, Person or Award and the remainder of the Plan and any such Award shall remain in full force and effect.
     (l)  Other Laws. The Committee may refuse to issue or transfer any Shares or other consideration under an Award if, acting in its sole discretion, it determines that the issuance or transfer of such Shares or such other consideration might violate any applicable law or regulation or entitle the Company to recover the same under Section 16(b) of the Exchange Act, and any payment tendered to the Company by a Participant, other holder or beneficiary in connection with the exercise of such Award shall be promptly refunded to the relevant Participant, holder or beneficiary. Without limiting the generality of the foregoing, no Award granted hereunder shall be construed as an offer to sell securities of the Company, and no such offer shall be outstanding, unless and until the Committee in its sole discretion has determined that any such offer, if made, would be in compliance with all applicable requirements of the U.S. federal securities laws and any other laws to which such offer, if made, would be subject.
     (m)  No Trust or Fund Created. Neither the Plan nor any Award shall create or be construed to create a trust or separate fund of any kind or a fiduciary relationship between the Company or any Affiliate and a Participant or any other Person. To the extent that any Person acquires a right to receive payments from the Company or any Affiliate pursuant to an Award, such right shall be no greater than the right of any unsecured general creditor of the Company or any Affiliate.
     (n)  No Fractional Shares. No fractional Shares shall be issued or delivered pursuant to the Plan or any Award, and cash shall be paid in lieu of any fractional Shares, and such fractional Shares shall be eliminated by rounding down.
     (o)  Headings. Headings are given to the Sections and subsections of the Plan solely as a convenience to facilitate reference. Such headings shall not be deemed in any way material or relevant to the construction or interpretation of the Plan or any provision thereof.
     (p)  Section 409A.
          (1) To the extent that the Committee determines that any Award granted under the Plan is subject to Section 409A, the Award Agreement evidencing such Award shall comply with the requirements of Section 409A. To the extent applicable, the Plan and Award Agreements shall be interpreted in accordance with Section 409A, including without limitation any Treasury Regulations or other Department of Treasury guidance that may be issued or amended after the Effective Date or the Amendment Date. Notwithstanding any provision of the Plan to the contrary, in the event that following the Effective Date the Committee determines that any Award may be subject to Section 409A, including such Department of Treasury guidance as may be issued after the Effective Date or the Amendment Date, the Committee may adopt such amendments to the Plan and the applicable Award Agreement or adopt other policies and procedures (including amendments, policies and procedures with retroactive effect), or take any other actions, that the Committee determines are necessary or appropriate to (A) exempt the

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Award from Section 409A and/or preserve the intended tax treatment of the benefits provided with respect to the Award, or (B) comply with the requirements of Section 409A.
          (2) A Participant shall be solely responsible and liable for the satisfaction of all taxes, interest, and penalties that may be imposed on such Participant or for such Participant’s account in connection with an Award (including any taxes, interest, and penalties under Section 409A), and neither the Company nor its affiliates shall have any obligation to indemnify or otherwise hold such Participant harmless from any or all of such taxes, interest, or penalties.
     SECTION 14. Term of the Plan.
     (a)  Effective Date. The Plan became effective as of December 1, 1994 (the “Effective Date”) and was subsequently approved by the shareholders of the Company within one year thereafter. This amendment and restatement shall be effective as of the Amendment Date as defined herein.
     (b)  Expiration Date. The plan expired on November 30, 2004. No Award shall be granted under the Plan after November 30, 2004. Unless otherwise expressly provided in the Plan or in an applicable Award Agreement, any Award granted hereunder may, and the authority of the Board or the Committee to amend, alter, adjust, suspend, discontinue, or terminate any such Award or to waive any conditions or rights under any such Award shall, continue after the authority for grant of new Awards hereunder has been exhausted.

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EXHIBIT 10.11
KB HOME
1998 STOCK INCENTIVE PLAN
(as amended and restated on October 2, 2008)
     SECTION 1. PURPOSE. The purpose of the 1998 Stock Incentive Plan (the “Plan”) is to promote the success of KB Home (the “Company”) by providing a method whereby employees of the Company and its subsidiaries and other eligible participants may be encouraged to invest in the Common Stock, $1.00 par value, of the Company (“Common Stock”), increase their proprietary interest in its business, remain in the employ of the Company or its subsidiaries, and increase their personal interests in the continued success and progress of the Company. The Plan provides for the grant of Options that satisfy the requirements for treatment as Incentive Stock Options (“ISOs”) as defined under Section 422 of the Code or that are not intended to satisfy such requirements (“Non-qualified Options”), as well as for certain other “Awards,” as defined below.
     SECTION 2. DEFINITIONS. As used in this Plan, the following terms shall have the indicated meanings:
     (a) Award: An award under this Plan of a Performance Stock Award, Restricted Stock Award, or Stock Unit Award.
     (b) Board: The board of directors of KB Home.
     (c) Code: The Internal Revenue Code of 1986, as amended.
     (d) Committee: The Committee specified in Section 3(a) of this Plan.
     (e) Company or Corporation: KB Home and its Subsidiaries.
     (f) Exchange Act: The Securities Exchange Act of 1934, as amended.
     (g) Limited Stock Appreciation Right: A right granted pursuant to Section 6(b) to receive cash in certain circumstances with respect to a related Option.
     (h) Option: An Option is a right granted under Section 6(a) to purchase a number of shares of Common Stock at such exercise price, at such times, and on such other terms and conditions as are specified in or determined pursuant to the document(s) evidencing the Award.
     (i) Participant: An individual eligible under Section 5(a) to participate in this Plan.
     (j) Performance Objectives: With reference to a particular Option or Award, the objectives established by the Committee under various criteria, the satisfaction of which may result in the grant, issuance, retention and/or vesting of an Option, a Performance Stock Award or Stock Unit Award, or which may accelerate the release of shares of Common Stock from the restrictions of a Restricted Stock Award. The Performance Objectives may differ from Participant to Participant and from Award to Award, as determined by the Committee and

 


 

specified in the applicable Award. For purposes of an Award that is intended to qualify as “performance-based compensation” under Code Section 162(m), the term “Performance Objective” shall mean any one or more of the following performance criteria, either individually, alternatively or in any combination, applied to either the Company as a whole or to a business unit or subsidiary, either individually, alternatively or in any combination, and measured either annually or cumulatively over a period of years, on an absolute basis or relative to a pre-established target, to previous years’ results or to a designated comparison group, in each case as specified by the Committee in the Award: (i) pre-tax income, (ii) after-tax income, (iii) cash flow, (iv) return on equity, (v) return on capital, (vi) earnings per share (including earnings before interest, taxes, depreciation and amortization), (vii) unit volume, (viii) net sales, (ix) service quality or (v) total shareholder return, in each case as determined in accordance with Generally Accepted Accounting Principles, if applicable.
     (k) Performance Stock Award: Performance Stock is an award of shares of Common Stock made under Section 7(a), the grant, issuance, retention and/or vesting of which is subject to such performance and other conditions as are expressed in the document(s) evidencing the Award.
     (l) Plan: The KB Home 1998 Stock Incentive Plan, as it may be amended from time to time.
     (m) Restricted Stock Award: Restricted Stock is a right granted under Section 7(b) to shares of Common Stock issued or issuable under the Plan but subject during specified periods of time to such conditions on vesting, restrictions on transferability and/or repurchase rights as are expressed in the document(s) evidencing the Award.
     (n) Stock Unit Award: An award granted under Section 8 of this Plan.
     (o) Subsidiary: Any corporation of which the Corporation owns, directly or indirectly, fifty percent (50%) or more of the voting or capital stock, or any partnership or other entity of which the Company owns, directly or indirectly, a fifty percent (50%) or more participating interest or the general partner of which is a Subsidiary.
     (p) Tax Date: The date on which taxes of any kind are required by law to be withheld with respect to shares of Common Stock subject to an Option or Award.
     SECTION 3. ADMINISTRATION.
     (a) The Plan shall be administered by the Board and/or by a committee of the Board, as appointed from time to time by the Board (the “Committee”). The Board shall fill vacancies on, and from time to time may remove or add members to, the Committee. The Committee shall act pursuant to a majority vote or unanimous written consent. Notwithstanding the foregoing, with respect to any Award that is not intended to satisfy the conditions of Rule 16b-3 under the Exchange Act or Section 162(m)(4)(C) of the Code, the Committee may appoint one or more separate committees (any such committee, a “Subcommittee”) composed of one or more directors of the Corporation (who may but need not be members of the Committee) and may delegate to any such Subcommittee(s) the authority to grant Options, Limited Stock Appreciation Rights and/or Awards under the Plan, to determine all terms of such Options, Limited Stock

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Appreciation Rights and /or Awards, and to administer the Plan or any aspect of it. Any action by any such Subcommittee shall be deemed for all purposes to have been taken by the Committee. The Committee may designate the Secretary of the Corporation or other Company employees to assist the Committee in the administration of the Plan, and may grant authority to such persons to issue and/or execute agreements or other documents under this Plan on behalf of the Committee or the Company.
     (b) The Committee shall have full power and authority, subject to such orders or resolutions not inconsistent with the provisions of the Plan as may from time to time be issued or adopted by the Board, to grant to eligible persons Options, Limited Stock Appreciation Rights and Awards pursuant to the provisions of the Plan, to fix the exercise price and other terms of Options, to fix the terms of any Performance Stock Award and/or Restricted Stock Award in a manner consistent with the terms of Section 7, to fix the terms of any Stock Unit Award in a manner consistent with the terms of Section 8, to prescribe, amend and rescind rules and regulations, if any, relating to the Plan, to interpret the provisions of the Plan, Options, Limited Stock Appreciation Rights and Awards issued under the Plan, to amend such Options, Limited Stock Appreciation Rights and Awards from time to time subject to the provisions of the Plan, and to supervise the administration of the Plan. All decisions made by the Committee pursuant to the provisions of the Plan and related orders or resolutions of the Board shall be final, conclusive and binding on all persons, including the Company, stockholders, employees and optionees.
     (c) Each person who is or shall have been a member of the Committee or of the Board shall be indemnified and held harmless by the Company from any loss, cost, liability or expense that may be imposed upon or reasonably incurred by him or her in connection with any claim, action, suit or proceeding to which he or she may be a party by reason of any action taken or any failure to act under the Plan. The foregoing right of indemnification shall not be exclusive of any other rights of indemnification to which such persons may be entitled under the Company’s Articles of Incorporation or Bylaws, or as a matter of law, or otherwise, or any power that the Company may have to indemnify them or hold them harmless.
     SECTION 4. SHARES SUBJECT TO THE PLAN.
     (a) The shares to be delivered upon exercise of Options or Limited Stock Appreciation Rights granted under the Plan or pursuant to Awards, may be made available from the authorized but unissued shares of the Company or from shares reacquired by the Company, including shares purchased in the open market or in private transactions.
     (b) Subject to adjustments made pursuant to the provisions of Section 4(d) and this Section 4(b), the aggregate number of shares reserved for issuance upon the exercise of Options and pursuant to Awards which may be granted under the Plan shall not exceed 1,900,000 shares of Common Stock. The aggregate number of shares of Common Stock issued under this Plan shall equal only the number of shares actually issued upon exercise or settlement of an Option or vesting or settlement of any Award and not returned to the Company upon cancellation, expiration or forfeiture of Options and Awards or delivered (either actually or by attestation) in payment or satisfaction of the exercise price, purchase price or tax obligation of Options and Awards.

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     (c) The aggregate number of shares of Common Stock issued and issuable pursuant to ISOs may not exceed 1,900,000 shares. The maximum number of shares of Common Stock subject to Options granted during any calendar year to any one Participant shall not exceed 1,000,000. The maximum number of shares of Common Stock subject to Awards (other than Stock Units issued or issuable upon exercise of Options) that may be granted during any calendar year to any one Participant shall not exceed 250,000 in the aggregate.
     (d) In the event of any stock dividend, extraordinary cash dividend, recapitalization, reorganization, merger, consolidation, split-up, spin-off, combination, exchange of shares, warrants or rights offering to purchase Common Stock at a price substantially below fair market value, or other similar corporate event affecting the Common Stock such that an adjustment is required in order to preserve the benefits or potential benefits intended to be made available to Participants under this Plan, the Committee shall make appropriate proportional adjustments to any or all of (1) the number and kind of shares which thereafter may be awarded or optioned and sold or made the subject of Limited Stock Appreciation Rights under the Plan, (2) the number and kind of shares subject to outstanding Options and Awards, and Limited Stock Appreciation Rights, and (3) the option price with respect to any of the foregoing and/or, if deemed appropriate, make provision for a cash payment to a Participant, including to reflect such an event occurring prior to an Option or Award, the grant of which was intentionally deferred in anticipation of such event; provided, however, that the number of shares subject to any Option or Award shall always be a whole number. Any adjustment under this Section 4(d) shall be made only to the extent that such adjustment will not cause a violation of the requirements of Section 409A.
     SECTION 5. ELIGIBILITY AND EXTENT OF PARTICIPATION.
     (a) The persons eligible to receive Awards, Options and associated Limited Stock Appreciation Rights under the Plan shall consist of employees or prospective employees of the Company and consultants or advisors of the Company who, in the Committee’s judgment, can make substantial contributions to the Company’s long-term profitability and value. For purposes of the administration of previously granted Options and Awards, the term “Participant” shall also include a former Participant and any permitted transferee (including any trust, partnership or estate) of a Participant or former Participant.
     (b) Subject to the limitations of the Plan, the Committee shall, after such consultation with and consideration of the recommendations of management as the Committee considers desirable, select from eligible persons those Participants to be granted Options and Awards and determine the time when each Option and Award shall be granted, the number of shares subject to each Option and Award and whether Limited Stock Appreciation Rights should be granted in connection with such Option, the number of shares for each Award and the restrictions associated with such Award. Subject to the provisions of Section 4, both Options and Awards may be granted to the same Participant.
     SECTION 6. GRANTS OF OPTIONS AND LIMITED STOCK APPRECIATION RIGHTS.
     (a) Grant of Options. Options on shares of Common Stock may be granted to

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Participants by the Committee from time to time at its sole discretion. Options intended to qualify as ISOs pursuant to Code Section 422 and Non-Qualified Options which are not intended to qualify as ISOs may be granted as the Committee in its sole discretion shall determine. Each Option grant shall contain such terms and conditions as may be approved by the Committee. Subject to the terms of the Plan, the Committee may establish provisions regarding (1) the number of shares of Common Stock which may be issued upon exercise of the Option, (2) the purchase price of the shares of Common Stock and the means of payment for the shares of Common Stock, (3) the term of the Option, (4) such terms and conditions of exercisability as may be determined from time to time by the Committee, (5) restrictions on the transfer of the Option and forfeiture provisions, and (6) such further terms and conditions, in each case not inconsistent with the Plan as may be determined from time to time by the Committee. The grant of an Option shall not constitute or be evidence of any agreement or other understanding, express or implied, on the part of the Company or any Subsidiary to employ an individual for any specific period.
     (b) Grant of Limited Stock Appreciation Rights in the Event of Change of Ownership. If deemed by the Committee to be in the best interests of the Company, any Option granted on or after the effective date of the Plan may include a Limited Stock Appreciation Right at the time of grant of the Option; also, the Committee may grant a Limited Stock Appreciation Right with respect to any unexercised Option at any time after granting such Option prior to the end of its term, provided such Option was granted after the effective date of the Plan. Unless otherwise specified, any reference in this Plan to an Option or Options shall include any associated Limited Stock Appreciation Right. Such Limited Stock Appreciation Rights shall be subject to such terms and conditions not inconsistent with the Plan as the Committee shall impose, provided that:
  (1)   A Limited Stock Appreciation Right shall be exercisable only during the ninety-one (91) day period specified in the last sentence of Section 9(a), provided, however, that except in connection with a Change of Ownership, no Limited Stock Appreciation Right granted to a Participant who is subject to Section 16 of the Exchange Act shall be exercisable within six (6) months of the date of its grant; and
 
  (2)   A Limited Stock Appreciation Right shall, upon its exercise, entitle the optionee to whom such Limited Stock Appreciation Right was granted to receive an amount of cash equal to the amount by which the “Offer Price per Share” (as such term is hereinafter defined) shall exceed the exercise price of the associated Option, multiplied by the number of shares of Common Stock with respect to which such Limited Stock Appreciation Right shall have been exercised. Upon the exercise of a Limited Stock Appreciation Right, any associated Option shall cease to be exercisable to the extent of the shares of Common Stock with respect to which such Limited Stock Appreciation Right was exercised. Upon the exercise or termination of an associated Option, any related Limited Stock Appreciation Right shall terminate to the extent of the shares of Common Stock with respect to which such associated Option was exercised or terminated.
 
      The term “Offer Price per Share” as used in this Section 6(b) shall mean with

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      respect to a Limited Stock Appreciation Right the higher of (i) the fair market value per share of Common Stock on the date of exercise of such Limited Stock Appreciation Right or (ii) the highest price per share for Common Stock paid or to be paid in the transaction, if any, giving rise to the event specified in clauses (1) or (2) (as the case may be) of Section 9(a) which triggered the exercisability of such Limited Stock Appreciation Right. For purposes of clause (ii) above, any securities or property which are part of the consideration paid or to be paid in such transactions shall be valued in determining the Offer Price per Share at the highest of (A) the valuation placed on such securities or property by the company, person or other entity engaging in such transaction, or (B) the valuation placed on such securities or property by the Committee.
 
  (c)   Option Price.
 
  (1)   The price at which each share of Common Stock may be purchased upon exercise of a particular Option shall be as specified by the Committee, in its sole discretion, but in no event shall the exercise price be less than 100% of the fair market value of a share of Common Stock at the time such Option is granted, except that (i) in the event that an optionee is required to make a payment or to forego the receipt of other compensation pursuant to paragraph (c)(3) below prior to receiving such Option, the exercise price per share of Common Stock of such Option shall not be less than 100% of the fair market value of a share of Common Stock at the time such Option is granted less the purchase price per share of Common Stock of such Option, and (ii) the Committee may specifically provide that the exercise price of an Option may be higher or lower in the case of an Option granted to employees of a company acquired by the Company in assumption and substitution of options held by such employees at the time such company is acquired.
 
  (2)   Unless approved by shareholders and subject to adjustment pursuant to Section 4(d), the exercise price of any Option previously awarded under the Plan may not be adjusted downward, whether through amendment, cancellation or replacement grants, or by any other means.
 
  (3)   If the Committee, in its discretion, shall deem it desirable, the grant of an Option may be made conditional upon the receipt of a payment therefor by the optionee or upon the optionee agreeing to forego receipt of an amount of other compensation. Such condition and the terms and conditions as to its satisfaction may also provide for the reimbursement to the optionee of any part or all of such payment under such circumstances as the Committee may specify.
 
  (d)   Exercise.
 
  (1)   Each Option shall be exercisable at such times and subject to such terms and conditions as the Committee may, in its sole discretion, specify, provided, however, that except in connection with a Change of Ownership, (i) Options granted to Participants who are subject to Section 16 of the Exchange Act shall

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      not become exercisable within six (6) months from the date of grant and (ii) in no event may any Option granted hereunder be exercisable after the expiration of 15 years from the date of such grant. Subject to the foregoing, each Option grant shall specify the effect thereon of the death, retirement or other termination of employment of the optionee. In addition, the Committee may impose such other conditions with respect to the exercise of Options, including without limitation, any relating to the application of Federal or state securities laws, as it may deem necessary or advisable.
 
  (2)   No shares shall be delivered pursuant to any exercise of an Option until the Participant has made payment in full of the option price therefor or provision for such payment satisfactory to the Committee. The exercise price of an Option may be paid in cash or certified or cashiers’ check or by delivery (either actually or by attestation) of shares of Common Stock that have been acquired or held by the Participant in such manner as to not result in an accounting charge. To the extent authorized by the Committee, either at the time of grant or at the time of exercise of an Option, the exercise price of an Option also may be paid through one of more of the following:
(i) shares of capital stock of the Corporation, (ii) other property deemed acceptable by the Committee, (iii) a reduction in the number of shares or other property otherwise issuable pursuant to such Option, (iv) a promissory note of or other commitment to pay by the Participant or of a third party, the terms and conditions of which shall be determined by the Committee, or (vi) any combination of the foregoing. No optionee or the legal representative, legatee or distributee of an optionee shall be deemed to be a holder of any shares subject to any Option prior to the issuance of such shares upon exercise of such Option.
     (e) Transferability of Options. Unless the documents evidencing the grant of an Option (or an amendment thereto authorized by the Committee) expressly states that the Option is transferable as provided hereunder, no Option granted under the Plan may be sold, assigned, conveyed, gifted, pledged, hypothecated or otherwise transferred in any manner, other than by will or the laws of descent and distribution. The Committee may in its sole discretion grant an Option or amend an outstanding Option to provide that the Option is transferable or assignable to a member or members of the Participant’s “immediate family,” as such term is defined under Exchange Act Rule 16a-1(e), or to a trust for the benefit solely of a member or members of the Participant’s immediate family, or to a partnership or other entity whose only owners are members of the Participant’s family, provided that (1) no consideration is given in connection with the transfer of such Option, and (2) following any such transfer or assignment the Option will remain subject to substantially the same terms applicable to the Option while held by the Participant, as modified as the Committee in its sole discretion shall determine appropriate, and the transferee shall agree to be bound by such terms.
     SECTION 7. PERFORMANCE STOCK AWARDS AND RESTRICTED STOCK AWARDS.
     (a) Performance Stock Awards. Subject to the terms of this Plan, Performance Stock Awards may be granted to Participants by the Committee from time to time at its sole discretion.

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Performance Stock Awards shall consist of an award of shares of Common Stock, the grant, issuance, retention and/or vesting of which shall be subject to such Performance Objectives, and to such further terms and conditions as the Committee deems appropriate. Each Performance Stock Award shall contain provisions regarding (1) the number of shares of Common Stock subject to such Award or a formula for determining such, (2) the performance criteria and level of achievement versus these criteria which shall determine the number of shares of Common Stock granted, issued, retainable and/or vested, (3) the period as to which performance shall be measured for determining achievement of such performance criteria (a “Performance Period”), (4) forfeiture provisions, and (5) such further terms and conditions, in each case not inconsistent with the Plan as may be determined from time to time by the Committee. The grant, issuance, retention and/or vesting of each Performance Stock Award shall be subject to such performance criteria and level of achievement versus these criteria as the Committee shall determine, which criteria may be based on financial performance and/or personal performance evaluations. Notwithstanding anything to the contrary herein, the performance criteria for any Performance Stock that is intended by the Committee to satisfy the requirements for “performance-based compensation” under Code Section 162(m) shall be a measure based on one or more Performance Objectives selected by the Committee and specified at the time the Performance Stock Award is granted. Notwithstanding anything in this Plan to the contrary, Performance Stock Awards may provide that upon satisfaction of Performance Objectives the shares subject to the Award are subject to such further holding periods and/or restrictions on transferability as the Committee may provide.
     (b) Restricted Stock Awards. Subject to the terms of this Plan, Restricted Stock Awards may be granted to Participants by the Committee from time to time at its sole discretion. Restricted Stock consists of shares of Common Stock which are registered or are issuable by the Company in the name of a Participant in exchange for such cash or other consideration, if any, as determined by the Committee. Restricted Stock shall be subject during specified periods of time to such conditions to vesting, to restrictions on their sale or other transfer by the Participant and/or to repurchase rights as may be determined by the Committee, consistent with the terms of the Plan. The transfer and sale of shares of Common Stock pursuant to Restricted Stock Awards shall be subject to the following terms and conditions:
  (1)   The number of shares of Common Stock to be transferred or sold by the Company to a Participant pursuant to a Restricted Stock award shall be determined by the Committee.
 
  (2)   Subject to the requirements of applicable law, the Committee shall determine the price, if any, at which shares of Restricted Stock shall be sold or awarded to a Participant, which may vary from time to time and among Participants and which may be below the fair market value of such Shares at the date of grant or issuance.
 
  (3)   All shares of Common Stock transferred or sold as Restricted Stock hereunder shall be subject to such restrictions or conditions as the Committee may determine, including, without limitation any or all of the following: (i) a prohibition against the sale, transfer, pledge or other encumbrance of the Shares, such prohibition to lapse at such time or times as the Committee shall determine (whether in annual or more frequent installments, at the time of the death,

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      disability or retirement of the holder of such Shares, or otherwise); (ii) a requirement that the holder of shares of Common Stock forfeit or resell back to the Company at a price specified by the Committee (which price may be more than the price, if any, paid by the Participant for such Shares) all or part of such shares of Common Stock in the event of termination of employment during any period in which such shares of Common Stock are subject to conditions; (iii) such other conditions or restrictions as the Committee may deem advisable; and (iv) any applicable Performance Objectives which, if achieved, shall cause acceleration of the lapsing of restrictions imposed upon all or part of the shares covered by the Restricted Stock Award.
Notwithstanding anything else in this Plan to the contrary, the restrictions set forth in Section 7(b)(3) shall not lapse with respect to a Restricted Stock Award before the second anniversary of the date of grant of such Restricted Stock Award, provided, however, that the Committee, in its sole discretion, may designate that such restrictions shall lapse upon the achievement of Performance Objectives. Subject to the preceding sentence, once established, Performance Objectives and the terms under which the lapsing of restrictions may be accelerated may be changed, adjusted or amended by the Committee in its sole discretion. Notwithstanding anything in this Plan to the contrary, Restricted Stock Awards may provide that upon the lapsing of restrictions set forth above, the shares subject to the Award may be subject to such further holding periods and/or restrictions on transferability as the Committee may provide.
     (c) Rights with Respect to Shares. Unless the terms of the Award provide otherwise, unless and until forfeited pursuant to the terms of this Plan or the Award, a Participant shall have the right to vote and to receive dividends and other distributions on shares subject to a Performance Stock Award or Restricted Stock Award, subject, however, to the terms, conditions and restrictions described in this Plan and the Award.
     (d) Escrow. Shares of Common Stock issued pursuant to a Performance Stock Award or Restricted Stock Award may be held in escrow by the Company until such time as the Committee shall have determined that the restrictions set forth in Section 7 have lapsed or until the shares subject to such Performance Stock Award or Restricted Stock Award are forfeited pursuant to their terms.
     (e) Restrictive Legends. Certificates for shares of Common Stock delivered pursuant to Performance Stock Awards or Restricted Stock Awards may bear an appropriate legend referring to the terms, conditions and restrictions described in this Plan and in the applicable Award. Any attempt to dispose of any such shares of Common Stock in contravention of the terms, conditions and restrictions described in this Plan or in the applicable Award shall be ineffective. Any shares of Common Stock of the Company or other property, including cash, received by a Participant as a dividend or as a result of any stock split, combination, exchange of shares, reorganization, merger, consolidation or similar event with respect to shares of Common Stock received pursuant to a Performance Stock Award or Restrictive Stock Award shall have the same status and bear the same legend and be held in escrow pursuant to Section 7(d) as the shares received pursuant to the Performance Stock Award or Restricted Stock Award unless otherwise determined by the Committee at the time of such event.

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     (f) Designation of Beneficiaries. A Participant may designate a beneficiary or beneficiaries to receive such Participant’s Common Stock hereunder in the event of such Participant’s death, and may, at any time and from time to time, change any such beneficiary designation. All beneficiary designations and changes therein shall be in writing and shall be effective if and when delivered to the Committee during the lifetime of the Participant.
     (g) Discretionary Adjustments. Notwithstanding satisfaction of any Performance Objectives, the number of shares of Common Stock granted, issued, retainable and/or vested under a Performance Stock Award on account of either financial performance or personal performance evaluations may be reduced by the Committee on the basis of such further considerations as the Committee in its sole discretion shall determine. The Committee may make adjustments or modifications, and its determination thereof shall be conclusive, in any applicable Performance Objectives to give effect to the intent of this Plan in connection with any event affecting the performance criteria established as the Performance Objectives, including without limitation, any reorganization, recapitalization, merger, consolidation, offering of additional shares of Common Stock or other change in the Company’s shareholders’ equity by means other than earnings, or any similar event. The grant of an Award shall not constitute or be evidence of any agreement or other understanding, express or implied, on the part of the Company or any Subsidiary to employ an individual for any specific period.
     SECTION 8. STOCK UNIT AWARDS.
     (a) Grant of Stock Unit Awards. The Committee shall have authority to grant to Participants Stock Unit Awards, the value of which is based, in whole or in part, on the value of Common Stock. Each “Stock Unit” shall consist of a bookkeeping entry representing an amount equivalent to the fair market value of one share of Common Stock. Such Stock Units represent an unfunded and unsecured obligation of the Company, except as otherwise provided for by the Committee. Stock Units may be granted as additional compensation or in lieu of any other compensation, as specified by the Committee, or may be issued upon exercise of Options, or in lieu of a Performance Stock Award or Restricted Stock Award, provided that for any Common Stock to be purchased in connection with a Stock Unit Award other than upon exercise of an Option or in settlement of a Performance Stock Award or Restricted Stock Award, the purchase price or the amount of consideration paid or of other compensation foregone shall be equal to at least 100% of the fair market value of such Common Stock on the date such Award is granted. Subject to the provisions of the Plan, Stock Unit Awards shall be subject to such terms, restrictions, conditions, vesting requirements and payment rules as the Committee may determine in its sole discretion.
     (b) Transferability of Stock Units. Unless the Stock Unit Award (or an amendment thereto authorized by the Committee) expressly states otherwise, any shares of Common Stock which are part of a Stock Unit Award shall not be assigned, sold transferred, pledged or otherwise encumbered before the date on which the shares are issued.
     (c) Settlement of Stock Units. Unless provided otherwise by the Committee, settlement of Stock Units shall be made by issuance of Common Stock and shall occur within 60 days after a Participant’s termination of employment for any reason. The Committee may provide for Stock Units to be settled in cash (at the election of the Company or the Participant, as

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specified by the Committee) and to be made at such other times as it determines appropriate or as it permits a Participant to choose. The amount of shares of Common Stock, or other settlement medium, to be so distributed may be increased by an interest factor or by dividend equivalents, which may be valued as if reinvested in Common Stock. Until a Stock Unit is settled, the number of shares of Common Stock represented by a Stock Unit shall be subject to adjustment pursuant to Section 4(d).
     SECTION 9. SPECIAL RULES.
     (a) Notwithstanding anything to the contrary in this Plan, unless otherwise specifically determined by the Committee at the time of grant, all Options theretofore granted and not fully exercisable shall become exercisable in full and the restrictions on all outstanding Awards shall lapse upon the occurrence of a Change of Ownership. A “Change of Ownership” shall be deemed to have occurred if either (1) individuals who, as of the effective date of this Plan, constitute the Board of Directors of the Company (the “Board of Directors” generally and as of the date hereof the “Incumbent Board”) cease for any reason to constitute at least a majority of the directors constituting the Board of Directors, provided that any person becoming a director subsequent to the effective date of this Plan whose election, or nomination for election by the Company’s shareholders, was approved by a vote of at least three-quarters (3/4) of the then directors who are members of the Incumbent Board (other than an election or nomination of an individual whose initial assumption of office is (i) in connection with the acquisition by a third person, including a “group” as such term is used in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended (the “Act”), of beneficial ownership, directly or indirectly, of 20% or more of the combined voting securities ordinarily having the right to vote for the election of directors of the Company (unless such acquisition of beneficial ownership was approved by a majority of the Board of Directors who are members of the Incumbent Board), or (ii) in connection with an actual or threatened election contest relating to the election of the directors of the Company, as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Act) shall be, for purposes of this Plan, considered as though such person were a member of the Incumbent Board, or (2) the Board of Directors (a majority of which shall consist of directors who are members of the Incumbent Board) has determined that a Change of Ownership triggering the exercisability of Options and the lapse of restrictions on Awards as described in this Section 10 shall have occurred. Options which become fully exercisable by reason of events specified in clauses (1) or (2) shall remain exercisable for 90 days following the date on which they become so exercisable, after which they will revert to being exercisable in accordance with their original terms, provided, however, that no Option which has previously been exercised or has expired or otherwise terminated shall become exercisable by virtue of this Section nor shall this Section permit exercise of any option during the portion, if any, of such 90 day period which follows the termination or expiration of any such Option.
     (b) For purposes of this Plan and any Option or Award hereunder, termination of employment shall not be deemed to occur upon the transfer of any optionee from the employ of the Company to the employ of any Subsidiary or affiliate. For purposes of this Plan, “affiliate” means (1) any entity 50% or more of the voting interest in which is owned, directly or indirectly, by an entity which owns, directly or indirectly, 50% or more of the voting interest in the Company and (2) any entity which owns, directly or indirectly, 50% or more of the voting interest in the Company.

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     SECTION 10. DELIVERY OF SHARES. No shares of Common Stock shall be delivered pursuant to an Award or any exercise of an Option until the requirements of such laws and regulations as may be deemed by the Committee to be applicable thereto are satisfied.
     SECTION 11. FINANCING AND WITHHOLDING.
     (a) Withholding of Taxes. As a condition to the making of an Award, to the lapse of the restrictions pertaining to an Award, or to the delivery of shares in connection with the exercise of an Option, the Company may require the Participant to pay to the Company, or make arrangements satisfactory to the Committee regarding payment of, any taxes of any kind required by law to be withheld with respect to such shares of Common Stock.
     (b) Financing. If requested by a Participant who exercises an Option or who has received shares of Common Stock pursuant to an Award, the Committee may in its discretion provide financing to the Participant in a principal amount sufficient for the purchase of shares of Common Stock pursuant to such Option exercise or under such Award, and/or to pay the amount of taxes required by law to be withheld with respect to such Option exercise or such receipt of shares of Common Stock. Any such loan shall be subject to all legal requirements, and restrictions pertinent thereto, including if applicable, Regulation G promulgated by the Federal Reserve Board. The grant of an Option or Award shall in no way obligate the Company or the Committee to provide any financing whatsoever upon the lapse of restrictions on shares or the exercise of such Option.
     (c) Withholding of Shares.
  (1)   If requested by a Participant who acquires shares of Common Stock upon the exercise of an Option or who has received Common Stock pursuant to an Award with respect to which the restrictions shall have lapsed, the Committee may in its discretion permit the Participant to satisfy any tax withholding obligations, in whole or in part, by having the Company withhold a portion of such shares with a value equal to the amount of taxes required by law to be withheld.
 
  (2)   Requests by a Participant to have shares of Common Stock withheld shall be (i) made prior to the Tax Date and (ii) irrevocable. In addition, in the event the Participant is an officer or director of the Company within the meaning of Section 16 of the Act, such requests must be made either six months prior to the Tax Date or in a ten day period beginning on the third day following the release of the Company’s quarterly or annual earnings statement.
     SECTION 12. AMENDMENTS, SUSPENSION OR DISCONTINUANCE. The Board of Directors may amend, suspend or discontinue the Plan or any Option or Award granted under the Plan. Notwithstanding the foregoing, except as permitted by Section 4(c), the Board may not, without prior approval of the shareholders of the Company, make any amendment which operates (a) to reduce the exercise price of outstanding Options or amend the provisions of Section 6(c)(2) relating to repricing Options, (b) to materially increase the total number of shares of Common Stock which may be delivered in respect of Awards or on exercise of Options granted under the Plan, (c) to extend the maximum option period or the period which Options or

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Awards may be granted under the Plan or (d) to reduce the minimum permissible Option exercise price.
     SECTION 13. TERM OF PLAN. The Plan shall become effective on the date it is approved and adopted by the Board, subject to its subsequent approval by shareholders of the Company. No Option or Award shall be granted under the Plan after the date that is ten (10) years after the date on which the Plan is approved by the Company’s shareholders or after such earlier date as the Committee may decide, in its sole discretion.
     SECTION 14. OPTION GRANTS BY SUBSIDIARIES. In the case of a grant of an option to any Participant by a Subsidiary, such grant may, if the Committee so directs, be implemented by the Corporation issuing any subject shares to the Subsidiary, for such lawful consideration as the Committee may determine, upon the condition or understanding that the Subsidiary will transfer the shares to the optionholder in accordance with the terms of the option specified by the Committee pursuant to the provisions of the Plan. Notwithstanding any other provision hereof, such option may be issued by and in the name of the Subsidiary and shall be deemed granted on such date as the Committee shall determine.
     SECTION 15. NON-EXCLUSIVITY OF THE PLAN. Neither the adoption of the Plan by the Board nor the submission of the Plan to the shareholders of the Company for approval shall be construed as creating any limitations on the power of the Board or the Committee to adopt such other incentive arrangements as it or they may deem desirable, including without limitation, the granting of restricted stock or stock options otherwise than under the Plan, and such arrangements may be either generally applicable or applicable only in specific cases.

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Exhibit 10.14
(KB HOME LOGO)
AMENDED AND RESTATED KB HOME 1999 INCENTIVE PLAN
(as amended and restated on October 2, 2008)
     SECTION 1. Purpose. The purposes of the Amended and Restated KB Home 1999 Incentive Plan (the “Plan”) are to promote the interests of KB Home and its stockholders by (i) attracting and retaining exceptional employees; (ii) motivating such employees by means of performance-related incentives to achieve long-range performance goals; (iii) enabling such employees to participate in the long-term growth and financial success of the Company; and (iv) qualifying compensation paid under the Plan for deductibility under Section 162(m) of the Internal Revenue Code of 1986, as amended. The Plan is an amendment and restatement of the KB Home 1999 Incentive Plan which shall be effective as of October 2, 2008 (the “Amendment Date”).
     SECTION 2. Definitions. As used in the Plan, the following terms shall have the meanings set forth below:
     “Amendment Date” shall have the meaning set forth in Section 1 hereof.
     “Award” shall mean any Performance-Based Bonus opportunity granted under the Plan, as well as any Option, Stock Appreciation Right, share of Restricted Stock, Performance Share, Stock Unit, or Other Stock-Based Award or a Performance-Based Award granted under the Plan or granted in payment or settlement of a Performance-Based Bonus.
     “Award Agreement” shall mean any written agreement, contract, or other instrument or document (which may include, if so designated by the Committee, an Employment Agreement, as defined herein), including through electronic medium, evidencing any Award, which may, but need not, be executed or acknowledged by a Participant.
     “Board” shall mean the Board of Directors of the Company.
     “Change of Ownership” means and includes each of the following: (a) Individuals who, as of the Effective Date of this Plan, constitute the Board of Directors of the Company (the “Board of Directors” generally and as of the Effective Date, the “Incumbent Board”) cease for any reason to constitute at least a majority of the directors constituting the Board of Directors, provided that any person becoming a director subsequent to the Effective Date of this Plan whose election, or nomination for election by the Company’s shareholders, was approved by a vote of at least three-quarters (3/4) of the then directors who are members of the Incumbent Board (other than an election or nomination of an individual whose initial assumption of office is (i) in connection with the acquisition by a third person, including a “group” as such term is used in Section 13(d)(3) of the Exchange Act, of beneficial ownership, directly or indirectly, of 20% or more of the combined voting securities ordinarily having the right to vote for the election of

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directors of the Company (unless such acquisition of beneficial ownership was approved by a majority of the Board of Directors who are members of the Incumbent Board), or (ii) in connection with an actual or threatened election contest relating to the election of the directors of the Company, as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) shall be, for purposes of this Plan, considered as though such person were a member of the Incumbent Board; or (b) The Board of Directors (a majority of which shall consist of directors who are members of the Incumbent Board) has determined that a Change of Ownership triggering the exercisability of Options and the lapse of restrictions on other Awards as described in Section 13 hereof shall have occurred.
     “Code” shall mean the Internal Revenue Code of 1986, as amended from time to time. All references to the Code or any section thereof shall include the Treasury Regulations and other Department of Treasury guidance issued thereunder.
     “Committee” shall mean the committee of the Board described in Section 3(a) hereof.
     “Company” shall mean KB Home, together with any successor thereto.
     “Covered Employee” shall mean an Employee who is, or could be, a “covered employee” within the meaning of Section 162(m) of the Code.
     “Disability” shall mean a Participant’s disability, as determined by the Committee in its sole discretion.
     “Effective Date” shall have the meaning set forth in Section 16(a) hereof.
     “Eligible Individual” shall mean any person who is an Employee, as determined by the Committee.
     “Employee” shall mean any employee (as defined in accordance with Section 3401(c) of the Code) of the Company or any Subsidiary.
     “Employment Agreement” shall mean, with respect to Awards relating to performance in any fiscal year of the Company, an agreement between the Company and a Participant entered into prior to the end of the first fiscal quarter of such fiscal year.
     “Exchange Act” shall mean the Securities Exchange Act of 1934, as amended.
     “Fair Market Value” shall mean, as of any given date, (a) if Shares are traded on a securities exchange, the closing price of a Share as reported in the Wall Street Journal for such date or, if no sale occurred on such date, for the first trading date immediately prior to such date during which a sale occurred; or (b) if Shares are not traded on a securities exchange, (i) the last sales price on such date (if Shares are then listed as a Global Market Issue under the NASDAQ Global Market System) or (ii) the mean between the closing representative bid and asked prices (in all other cases) for Shares on such date; or, if no sales prices or bid and asked prices, as applicable, are reported by a national quotation system, the first date immediately prior to such

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date on which sales prices or bid and asked prices, as applicable, are reported by a national quotation system; or (c) if Shares are not publicly traded, or with respect to any non-Share based Award or settlement of an Award, the fair market value established by the Committee acting in good faith.
     “Full Value Award” means any Award other than an Option or Stock Appreciation Right or other Award for which the Participant pays the intrinsic value.
     “Incentive Stock Option” means an Option that is intended to meet the requirements of Section 422 of the Code or any successor provision thereto.
     “Non-Qualified Stock Option” shall mean an Option that is not intended to be an Incentive Stock Option.
     “Option” shall mean a right granted to a Participant pursuant to Section 7 of the Plan to purchase a specified number of Shares at a specified price during specified time periods. An Option may be either an Incentive Stock Option or a Non-Qualified Stock Option.
     “Other Stock-Based Award” shall mean any right granted under Section 10 of the Plan.
     “Participant” shall mean any Eligible Individual who has been granted an Award pursuant to the Plan.
     “Performance-Based Award” shall mean an Award granted to selected Covered Employees pursuant to Sections 6, 8, 9 or 10 hereof, but which is subject to the terms and conditions set forth in Section 11 hereof. All Performance-Based Awards are intended to qualify as Qualified Performance-Based Compensation.
     “Performance-Based Bonus” shall mean a bonus opportunity awarded in accordance with Section 6 of the Plan.
     “Performance Criteria” shall mean the criteria that the Committee selects for purposes of establishing the Performance Goal or Performance Goals for a Participant for a Performance Period. The Performance Criteria that may be used to establish Performance Goals are limited to the following: economic value-added, sales or revenue, net income (either before or after interest, taxes, depreciation and amortization), operating earnings, cash flow (including, but not limited to, operating cash flow and free cash flow), cash flow return on capital, return on net assets, return on stockholders’ equity, return on assets, return on capital, stockholder returns, return on sales, return on investments, productivity, expense, margins, operating efficiency, customer satisfaction, working capital, earnings per Share, price per Share, market share, unit volume, net sales and service quality, any of which may be measured either in absolute terms or as compared to any incremental change or as compared to results of a peer group. The Committee shall define in an objective fashion the manner of calculating the Performance Criteria it selects to use for such Performance Period for such Participant.
     “Performance Goals” shall mean, for a Performance Period, the goals established in

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writing by the Committee for the Performance Period based upon one or more of the Performance Criteria, as selected by the Committee. Depending on the Performance Criteria used to establish such Performance Goals, the Performance Goals may be expressed in terms of overall Company performance or the performance of a division, business unit, or an individual. The Committee, in its discretion, may, within the time prescribed by Section 162(m) of the Code, adjust or modify the calculation of Performance Goals for such Performance Period in order to prevent the dilution or enlargement of the rights of Participants (a) in the event of, or in anticipation of, any unusual or extraordinary corporate item, transaction, event, or development, or (b) in recognition of, or in anticipation of, any other unusual or nonrecurring events affecting the Company, or the financial statements of the Company, or in response to, or in anticipation of, changes in applicable laws, regulations, accounting principles, or business conditions.
     “Performance Period” shall mean the one or more periods of time, which may be of varying and overlapping durations, as the Committee may select, over which the attainment of one or more Performance Goals will be measured for the purpose of determining a Participant’s right to, and the payment of, a Performance-Based Award.
     “Performance Share” shall mean a right granted to a Participant pursuant to Section 10(a) hereof, to receive Shares, the payment of which is contingent upon achieving certain Performance Goals or other performance-based targets established by the Committee.
     “Person” shall mean any individual, corporation, partnership, association, joint-stock company, trust, unincorporated organization, government or political subdivision thereof or other entity.
     “Qualified Performance-Based Compensation” shall mean any compensation that is intended to qualify as “qualified performance-based compensation” as described in Section 162(m)(4)(C) of the Code.
     “Restricted Stock” shall mean any Share awarded to a Participant pursuant to Section 9 of the Plan that is subject to certain restrictions and may be subject to risk of forfeiture.
     “Rule 16b-3” shall mean Rule 16b-3 as promulgated and interpreted by the SEC under the Exchange Act, or any successor rule or regulation thereto as in effect from time to time.
     “SEC” shall mean the Securities and Exchange Commission or any successor thereto and shall include the Staff thereof.
     “Section 409A” shall mean Section 409A of the Code and, for the avoidance of doubt only, the Treasury Regulations and other Department of Treasury guidance issued thereunder.
     “Securities Act” shall mean the Securities Act of 1933, as amended.
     “Shares” shall mean shares of the Common Stock, $1 par value, of the Company, and such other securities of the Company that may be substituted for the Shares pursuant to Section 13 of the Plan.

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     “Stock Appreciation Right” shall mean any right granted under Section 8 of the Plan.
     “Stock Unit” shall mean any right granted under Section 10(b) of the Plan.  
     “Subsidiary” shall mean any “subsidiary corporation” as defined in Section 424(f) of the Code and any applicable regulations promulgated thereunder or any other entity of which a majority of the outstanding voting stock or voting power is beneficially owned directly or indirectly by the Company.
     SECTION 3. Administration.
     (a)  Committee. The Plan shall be administered by the Committee. The Committee shall consist solely of two or more members of the Board each of whom is an “outside director,” within the meaning of Section 162(m) of the Code, a member of the Board who qualifies as a “Non-Employee Director” as defined in Rule 16b-3(b)(3) under the Exchange Act, or any successor rule, and an “independent director” under the rules of the New York Stock Exchange (or other principal securities market on which the Shares are traded), as the same may be amended from time to time. Appointment of Committee members shall be effective upon acceptance of appointment. In its sole discretion, the Board may at any time and from time to time exercise any and all rights and duties of the Committee under the Plan except with respect to matters which under Section 162(m) of the Code or Rule 16b-3, or any regulations or rules issued thereunder, are required to be determined in the sole discretion of the Committee.
     (b)  Authority of Committee. Subject to the terms of the Plan and applicable law, and in addition to other express powers and authorizations conferred on the Committee by the Plan, the Committee shall have full power and authority to: (i) designate Participants; (ii) determine the type or types of Awards to be granted to each Participant; (iii) determine the number of Awards to be granted and the number of Shares to be covered by, or with respect to which payments, rights, or other matters are to be calculated in connection with, Awards; (iv) determine the terms and conditions of any Award granted pursuant to the Plan, including, but not limited to, the grant date, the exercise price, grant price, or purchase price, any restrictions or limitations on the Award, any schedule for lapse of forfeiture restrictions or restrictions on the exercisability of an Award, and accelerations or waivers thereof, and any provisions related to non-competition and recapture of gain on an Award, based in each case on such considerations as the Committee in its sole discretion determines; provided, however , that the Committee shall not have the authority to accelerate the vesting or waive the forfeiture of any Performance-Based Awards; (v) determine whether, to what extent, and under what circumstances Awards may be settled or exercised in cash, Shares, other securities, or other property, or canceled, forfeited, or suspended and the method or methods by which Awards may be settled, exercised, canceled, forfeited, or suspended, provided, however, that Options and Stock Appreciation Rights may be settled only in cash and Shares; (vi) interpret and administer the Plan and any instrument or agreement relating to, or Award made under, the Plan; (vii) recommend to the Board any amendment, alteration, suspension, discontinuance or termination of the Plan, and subject to the stockholder approval requirement set forth in Section 14(a) hereof, to take any such action not required by applicable law to be taken by the Board; (viii) establish, amend, suspend, or waive such rules and

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regulations and appoint such agents as it shall deem appropriate for the proper administration of the Plan; and (ix) make any other determination and take any other action that the Committee deems necessary or desirable for the administration of the Plan.
     (c)  Action by the Committee. A majority of the Committee shall constitute a quorum. The acts of a majority of the members present at any meeting at which a quorum is present, and acts approved in writing by all members of the Committee in lieu of a meeting, shall be deemed the acts of the Committee. Each member of the Committee is entitled to, in good faith, rely or act upon any report or other information furnished to that member by any Employee of the Company or any Subsidiary, the Company’s independent registered public accounting firm, or any executive compensation consultant or other professional retained by the Company or the Committee to assist in the administration of the Plan.
     (d)  Committee Decisions Binding. Unless otherwise expressly provided in the Plan, all designations, determinations, interpretations, and other decisions under or with respect to the Plan or any Award shall be within the sole discretion of the Committee, may be made at any time and shall be final, conclusive, and binding upon all Persons, including, but not limited to, the Company, any Subsidiary, any Participant, any holder or beneficiary of any Award, any stockholder and any Employee.
     SECTION 4. Award Limits.
     (a)  Plan Shares. Subject to Section 4(b) and Section 13 hereof, the aggregate number of Shares which may be granted pursuant to Awards under the Plan shall only be the aggregate number of Shares which are available or may become available for grant under the Amended and Restated KB Home 1999 Incentive Plan as in effect immediately prior to the Amendment Date (the “Prior Plan”); provided, however , that such aggregate number of Shares available for grant under the Plan shall be reduced by 1.25 Shares for each Share granted pursuant to any Full Value Award and shall be reduced by 1.0 Share for each Share granted pursuant to any Option or Stock Appreciation Right Award.
     (b)  Shares Available for Grant. To the extent that an Award terminates, expires, or lapses for any reason, or is settled in cash, any Shares subject to the Award shall again be available for the grant of an Award pursuant to the Plan. Any Shares tendered or withheld to satisfy the grant or exercise price or tax withholding obligation pursuant to any Award shall not be available for the grant of an Award pursuant to the Plan. To the extent permitted by applicable law or securities exchange rules, Shares issued in assumption of, or in substitution for, any outstanding awards of any entity acquired in any form of combination by the Company or any Subsidiary shall not be counted against Shares available for grant pursuant to this Plan; provided, however, that any assumption or substitution pursuant to this Section 4(b) shall not cause a violation of the requirements of Section 409A. Notwithstanding the provisions of this Section 4(b), no Shares may again be optioned, granted or awarded if such action would cause an Incentive Stock Option to fail to qualify as an incentive stock option under Section 422 of the Code.
     (c)  Individual Stock-Based Awards. Subject to adjustment as provided in Section 13 hereof, no Participant may be granted stock-based Awards under the Plan in any fiscal year of

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the Company that relate to more than 1,000,000 Shares. No provision of this Section 4(c) shall be construed as limiting the amount of any cash-based Award which may be granted to any Participant.
     (d)  Sources of Shares Deliverable Under Awards. Any Shares delivered pursuant to an Award may consist, in whole or in part, of authorized and unissued Shares or of Shares acquired by the Company on the open market or otherwise.
     (e)  Cash Award Limits. (i) Any Participant who is the Chief Executive Officer at the time of payment of an Award or Awards under the Plan (other than a stock-based Award) shall be eligible to be paid in cash in any fiscal year of the Company an amount not in excess of $5,000,000 in respect of any such Award(s), and (ii) no Participant other than a Participant described in clause (i) of this Section 4(e) shall be eligible to be paid more than $3,000,000 in cash in any fiscal year of the Company in respect of any Award(s) under the Plan. No provision of this Section 4(e) shall be construed as limiting the number of stock-based Awards, or other cash-based compensation for employment, that a Participant may receive.
     SECTION 5. Eligibility and Participation.
     (a)  Eligibility. Each Eligible Individual shall be eligible to be granted one or more Awards pursuant to the Plan.
     (b)  Participation. Subject to the provisions of the Plan, the Committee may, from time to time, select from among all Eligible Individuals, those to whom Awards shall be granted and shall determine the nature and amount of each Award. No Eligible Individual shall have any right to be granted an Award pursuant to this Plan.
     SECTION 6. Performance-Based Bonuses.
     (a)  Grant. At such times and in such manner as the Committee deems appropriate, the Committee may select Participants and, subject to Section 4(e) hereof, award to such Participants the opportunity to earn a cash bonus (a “Performance-Based Bonus”), which shall be contingent upon the attainment of Performance Goals or other specific performance goals that are established by the Committee and relate to one or more of the Performance Criteria or other specific performance criteria, in each case on a specified date or dates or over any period or periods determined by the Committee, and which shall comply with, or be exempt from, the requirements of Section 409A. Any such Performance-Based Bonus paid to a Covered Employee shall be a Performance-Based Award and be based upon objectively determinable bonus formulas established in accordance with Section 11(c) hereof.
     (b)  Employment Agreement. Notwithstanding Section 6(a) above, the formula for determining a Performance-Based Bonus to any Participant may, if so determined by the Committee, be governed by the terms of an Employment Agreement applicable to such Participant; provided, however , that such formula is in accordance with Section 162(m) of the Code.

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     SECTION 7. Stock Options.
     (a)  General. The Committee is authorized to grant Options to Participants on the following terms and conditions, provided that no Option may be granted to a Participant unless the Company is an “eligible issuer of service recipient stock” within the meaning of Section 409A with respect to such Participant:
     (1)  Exercise Price. The exercise price per Share subject to an Option shall be determined by the Committee and set forth in the Award Agreement; provided , however , that subject to Section 7(b)(3) hereof, the exercise price for any Option shall not be less than 100% of the Fair Market Value of a Share on the date of grant.
     (2)  Time and Conditions of Exercise. The Committee shall determine the time or times at which an Option may be exercised in whole or in part; provided , however , that the term of any Option granted under the Plan shall not exceed ten years. The Committee shall also determine the performance or other conditions, if any, that must be satisfied before all or part of an Option may be exercised; provided , however , that no Option granted under the Plan shall become exercisable after ten years from the date of grant.
     (3)  Payment. The Committee shall determine the form in which the exercise price of an Option may be paid, including, without limitation: (i) cash, (ii) Shares held for such period of time as may be required by the Committee in order to avoid adverse accounting consequences and having a Fair Market Value on the date of delivery equal to the aggregate exercise price of the Option or exercised portion thereof, or (iii) other property acceptable to the Committee (including through the delivery of a notice that the Participant has placed a market sell order with a broker with respect to Shares then issuable upon exercise of the Option, and that the broker has been directed to pay a sufficient portion of the net proceeds of the sale to the Company in satisfaction of the Option exercise price; provided , however , that payment of such proceeds is then made to the Company upon settlement of such sale), and the methods by which Shares shall be delivered or deemed to be delivered to Participants. In the event that the Company establishes, for itself or using the services of a third party, an automated system for the exercise of Awards, such as a system using an internet website or interactive voice response, then the paperless exercise of Awards by a Participant may be permitted through the use of such an automated system. Notwithstanding any other provision of the Plan to the contrary, no Participant shall be permitted to pay the exercise price of an Option with a loan from the Company or a loan arranged by the Company in violation of Section 13(k) of the Exchange Act.
     (4)  Evidence of Grant; Other Terms and Conditions. All Options shall be evidenced by an Award Agreement between the Company and the Participant. The Award Agreement shall include such additional provisions not inconsistent with the Plan as may be specified by the Committee. The Committee shall determine the number of Shares subject to an Option and the exercise price of such Option on or before the date of grant of such Option, and shall not amend an Option to reduce the per Share exercise price (except as permitted by Section 13 hereof), extend the exercise period of an Option beyond the earlier of the latest date upon which the Option could have expired by its original terms under any circumstances or the tenth anniversary of the date of grant of such Option, or otherwise modify an Option or add any feature for the

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deferral of compensation in any manner that would cause a violation of the requirements of Section 409A.
     (5)  Prohibition on Reload Grants. The Committee shall not have the authority to grant or provide for the automatic grant of an Option to any Participant to replace Shares a Participant delivers in payment of the exercise price of any Option granted hereunder in accordance with Section 7(a)(3) hereof, or in the event that the withholding tax liability arising upon exercise of any Option by a Participant is satisfied through the withholding by the Company of Shares otherwise deliverable upon exercise of the Option.
     (b)  Incentive Stock Options. Incentive Stock Options shall be granted only to Employees and the terms of any Incentive Stock Options granted pursuant to the Plan, in addition to the requirements of Section 7(a) above, must comply with the provisions of this Section 7(b).
     (1)  Expiration. Subject to Section 7(b)(3) below, an Incentive Stock Option shall expire and may not be exercised to any extent by any Participant (or permitted beneficiary or representative of such Participant) after the first to occur of the following events:
          (i) Ten years from the date it is granted, unless an earlier time is set in the Award Agreement;
          (ii) Ninety days after the termination of the Participant’s employment as an Employee for any reason other than Disability or death; and
          (iii) One year after the date of the termination of the Participant’s employment as an Employee on account of Disability or death. Upon the Participant’s Disability or death, any Incentive Stock Options exercisable at the Participant’s Disability or death may be exercised by the Participant’s legal representative or representatives, by the person or persons entitled to do so pursuant to the Participant’s last will and testament, or, if the Participant fails to make testamentary disposition of such Incentive Stock Option or dies intestate, by the person or persons entitled to receive the Incentive Stock Option pursuant to the applicable laws of descent and distribution.
     (2)  Dollar Limitation. The aggregate Fair Market Value (determined as of the time the Option is granted) of all Shares with respect to which Incentive Stock Options are first exercisable by a Participant in any calendar year may not exceed $100,000 or such other limitation as imposed by Section 422(d) of the Code, or any successor provision. To the extent that Incentive Stock Options are first exercisable by a Participant in excess of such limitation, the excess shall be considered Non-Qualified Stock Options.
     (3)  Ten Percent Owners. An Incentive Stock Option may be granted to any Participant who, at the date of grant, owns Shares possessing more than ten percent of the total combined voting power of all classes of Shares only if such Option is granted at a price that is not less than 110% of Fair Market Value on the date of grant and the Option is exercisable for no more than five years from the date of grant.

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     (4)  Notice of Disposition. The Participant shall give the Company prompt notice of any disposition of Shares acquired by exercise of an Incentive Stock Option within (i) two years from the date of grant of such Incentive Stock Option or (ii) one year after the transfer of such Shares to the Participant.
     (5)  Right to Exercise. Except as provided in Section 7(b)(1)(iii) above, during a Participant’s lifetime, an Incentive Stock Option may be exercised only by the Participant.
     (6)  Failure to Meet Requirements. Any Option (or portion thereof) purported to be an Incentive Stock Option, which, for any reason, fails to meet the requirements of Section 422 of the Code shall be considered a Non-Qualified Stock Option.
     SECTION 8. Stock Appreciation Rights.
     (a)  Grant. Subject to the provisions of the Plan, the Committee shall have sole and complete authority to determine the Participants to whom Stock Appreciation Rights shall be granted, provided that no Stock Appreciation Right may be granted to a Participant unless the Company is an “eligible issuer of service recipient stock” within the meaning of Section 409A with respect to such Participant; the number of Shares to be covered by each Stock Appreciation Right Award; the strike price per Share thereof, provided that such strike price shall not be less than 100% of the Fair Market Value of a Share on the date of grant; and the conditions and limitations applicable to the exercise thereof. Stock Appreciation Rights may be granted in tandem with another Award no later than the grant date of such Award, in addition to another Award, or freestanding and unrelated to another Award. A Stock Appreciation Right shall be subject to such terms and conditions not inconsistent with the Plan as the Committee shall impose and shall be evidenced by an Award Agreement.
     (b)  Exercise and Payment. The Committee shall determine the time or times at which a Stock Appreciation Right may be exercised in whole or in part; provided, however , that the term of any Stock Appreciation Right granted under the Plan shall not exceed ten years. The Committee shall also determine the performance or other conditions, if any, that must be satisfied before all or part of a Stock Appreciation Right may be exercised; provided, however , that no Stock Appreciation Right granted under the Plan shall become exercisable after ten years from the date of grant. A Stock Appreciation Right shall entitle the Participant (or other person entitled to exercise the Stock Appreciation Right pursuant to the Plan) to exercise all or a specified portion of the Stock Appreciation Right (to the extent then exercisable pursuant to its terms) and to receive from the Company an amount equal to the product of (i) the excess of (A) the Fair Market Value of Shares on the date the Stock Appreciation Right is exercised over (B) the strike price and (ii) the number of Shares with respect to which the Stock Appreciation Right is exercised, subject to any limitations the Committee may impose and any applicable tax withholding. Payment of the amounts determined under this Section 8(b) shall be made in cash, in Shares (based on their Fair Market Value as of the date the Stock Appreciation Right is exercised) or a combination of both, as determined by the Committee in the Award Agreement.
     (c)  Evidence of Grant; Other Terms and Conditions. All Stock Appreciation Rights shall be evidenced by an Award Agreement between the Company and the Participant. The Award

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Agreement shall include such additional provisions not inconsistent with the Plan as may be specified by the Committee. Subject to the terms of the Plan and the applicable Award Agreement, the Committee shall determine, on or before the date of grant of a Stock Appreciation Right, the number of Shares subject to a Stock Appreciation Right and the strike price thereof, the term, methods of exercise, methods and form of settlement, and any other terms and conditions of any Stock Appreciation Right. Any such determination by the Committee may be changed by the Committee from time to time and may govern the exercise of Stock Appreciation Rights granted or exercised prior to such determination as well as Stock Appreciation Rights granted or exercised thereafter; provided, however, that the Committee shall not amend a Stock Appreciation Right to reduce the per Share strike price (except as permitted by Section 13 hereof), extend the exercise period of a Stock Appreciation Right beyond the earlier of the latest date upon which the Stock Appreciation Right could have expired by its original terms under any circumstances or the tenth anniversary of the date of grant of such Stock Appreciation Right, or otherwise modify a Stock Appreciation Right or add any feature for the deferral of compensation in any manner that would cause a violation of the requirements of Section 409A. Except as otherwise set forth herein, the Committee may impose such conditions or restrictions on the exercise of any Stock Appreciation Right as it shall deem appropriate.
     SECTION 9. Restricted Stock.
     (a)  Grant. Subject to the provisions of the Plan, the Committee shall have sole and complete authority to determine the Participants to whom Shares of Restricted Stock shall be granted, the number of Shares of Restricted Stock to be granted to each Participant, the duration of the period during which, and the conditions under which, the Restricted Stock may be forfeited to the Company, and the other terms and conditions of such Awards. Subject to Section 13(b) hereof, the period during which such Awards may be forfeited to the Company shall terminate in three equal annual installments from the date of grant of such Awards; provided, however , that the Committee may determine to have such period terminate after the first anniversary of the date of grant of any such Award if the Committee has established conditions for the earning of such Award that relate to performance of the Company or one or more divisions or units thereof. All awards of Restricted Stock shall be evidenced by an Award Agreement.
     (b)  Forfeiture. Except as otherwise determined by the Committee at the time of the grant of the Award or thereafter, upon termination of employment during the applicable restriction period, Restricted Stock that is at that time subject to restrictions shall be forfeited.
     (c)  Certificates for Restricted Stock. Restricted Stock granted pursuant to the Plan may be evidenced in such manner as the Committee shall determine. If certificates representing shares of Restricted Stock are registered in the name of the Participant, certificates must bear an appropriate legend referring to the terms, conditions, and restrictions applicable to such Restricted Stock, and the Company may, at its discretion, retain physical possession of the certificate until such time as all applicable restrictions lapse.
     (d)  Dividends and Distributions. Dividends and other distributions paid on or in respect of any Shares of Restricted Stock may be paid directly to the Participant, or may be reinvested in

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additional Shares of Restricted Stock, as determined by the Committee in its sole discretion.
     SECTION 10. Other Stock-Based Awards. The Committee shall have authority to grant to any Participant an “Other Stock-Based Award”, which shall consist of any right which is (i) not an Award described in Section 6 through Section 9 hereof and (ii) an Award of Shares or an Award denominated or payable in, valued in whole or in part by reference to, or otherwise based on or related to, Shares (including, without limitation, securities convertible into Shares), as deemed by the Committee to be consistent with the purposes of the Plan; provided, however , that any such rights must comply with applicable law and, to the extent deemed desirable by the Committee, with applicable securities exchange listing requirements, and provided, further , that any Other Stock-Based Award shall comply with, or be exempt from, the requirements of Section 409A. Subject to the terms of the Plan and any applicable Award Agreement, the Committee shall determine the terms and conditions of any such Other Stock-Based Award. Other Stock-Based Awards shall include, but not be limited to, Performance Share Awards and Stock Unit Awards.
     (a)  Performance Share Awards. Any Participant selected by the Committee may be granted one or more Performance Share Awards which shall be denominated in a number of Shares and which may be linked to any one or more of the Performance Criteria or other specific performance criteria determined appropriate by the Committee, in each case on a specified date or dates or over any period or periods determined by the Committee. In making such determinations, the Committee shall consider (among such other factors as it deems relevant in light of the specific type of Award) the contributions, responsibilities and other compensation of the particular Participant. In addition, the Committee will have the sole and complete authority to determine the duration of the period during which, and the conditions under which, any such Performance Share Award shall be subject to restrictions and may be forfeited to the Company; provided , however , that, subject to Sections 10(e) and 13(b) hereof, the period during which any Performance Share Award granted to a Participant will be restricted from transfer by the Participant and may be forfeited to the Company will terminate no earlier than the first anniversary of the date of grant, unless otherwise provided in an applicable Award Agreement.
     (b)  Stock Unit Awards.
          (1)  Grant of Stock Unit Awards. The Committee shall have authority to grant to Participants Stock Unit Awards, the value of which is based, in whole or in part, on the Fair Market Value of Shares. Each Stock Unit shall consist of a bookkeeping entry representing an amount equivalent to the Fair Market Value of one Share. Such Stock Units represent an unfunded and unsecured obligation of the Company, except as otherwise provided for by the Committee. Stock Units may be granted as additional compensation or in lieu of any other compensation, as specified by the Committee, provided that Stock Units shall not be granted in substitution for or payment of any Award or other compensation in a manner that causes a violation of the requirements of Section 409A. Subject to the provisions of the Plan, Stock Unit Awards shall be subject to such terms, restrictions, conditions, vesting requirements and payment rules as the Committee may determine in its sole discretion.
          (2)  Settlement of Stock Units. Settlement of Stock Units shall be made by issuance of

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Shares, provided that the Committee may provide for Stock Units to be settled in cash (in the sole discretion of the Company). The amount of Shares, or other settlement medium, to be so distributed may be increased by an interest factor or by dividend equivalents, which may be valued as if reinvested in Shares. Until a Stock Unit is settled, the number of Shares represented by a Stock Unit shall be subject to adjustment pursuant to Section 13 hereof.
     (c)  Term. Except as otherwise provided herein, the term of any Award of Performance Shares, Stock Units or Other Stock-Based Awards shall be set by the Committee in its discretion.
     (d)  Exercise or Purchase Price. The Committee may establish the exercise or purchase price, if any, of any Other Stock-Based Awards; provided, however , that such price shall not be less than the par value of a Share on the date of grant, unless otherwise permitted by applicable state law.
     (e)  Settlement of Other Stock-Based Awards. Settlement of Other Stock-Based Awards (including Performance Share and Stock Unit Awards) shall occur within 60 days after the date on which such Other Stock-Based Awards shall vest. The Committee may provide for Other Stock-Based Awards to be settled at such other times as it determines appropriate, provided that in no event shall any Other Stock-Based Award be settled after the later of: (i) the 15 th day of the third month following the end of the Participant’s first taxable year in which the Other Stock-Based Award is no longer subject to a substantial risk of forfeiture or (ii) the 15 th day of the third month following the end of the Company’s first taxable year in which the Other Stock-Based Award is no longer subject to a substantial risk of forfeiture. The Committee in its sole and absolute discretion may provide that an Award of Performance Shares, Stock Units, or Other Stock-Based Awards may vest upon an involuntary “separation from service” within the meaning of Section 409A, following a Change of Ownership of the Company, because of the Participant’s death or Disability, or otherwise; provided, however , that any such provision with respect to Performance Shares or Stock Units shall be subject to the requirements of Section 162(m) of the Code that apply to Qualified Performance-Based Compensation, where applicable for Company deductibility purposes.
     (f)  Form of Payment. Payments with respect to any Awards granted under this Section 10 shall be made in cash, in Shares or a combination of both, as determined by the Committee.
     (g)  Award Agreement. All Awards under this Section 10 shall be subject to such additional terms and conditions as determined by the Committee and shall be evidenced by an Award Agreement.
     SECTION 11. Performance-Based Awards
     (a)  Purpose. The purpose of this Section 11 is to provide the Committee the ability to qualify Awards other than Options and that are granted pursuant to Sections 6, 8, 9 and 10 hereof as Performance-Based Awards. If the Committee, in its discretion, decides to grant a Performance-Based Award to a Covered Employee, the provisions of this Section 11 shall control over any contrary provision contained in Section 6, 8, 9 or 10 hereof; provided, however , that the Committee may in its discretion grant Awards to Covered Employees that are based on

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Performance Criteria or Performance Goals but that do not satisfy the requirements of this Section 11.
     (b)  Applicability. This Section 11 shall apply only to those Covered Employees selected by the Committee to receive Performance-Based Awards. The designation of a Covered Employee as a Participant for a Performance Period shall not in any manner entitle the Participant to receive payment of an Award for the period. Moreover, designation of a Covered Employee as a Participant for a particular Performance Period shall not require designation of such Covered Employee as a Participant in any subsequent Performance Period and designation of one Covered Employee as a Participant shall not require designation of any other Covered Employees as a Participant in such period or in any other period.
     (c)  Procedures with Respect to Performance-Based Awards. To the extent necessary to comply with the Qualified Performance-Based Compensation requirements of Section 162(m)(4)(C) of the Code, with respect to any Award granted under Section 6, 8, 9 or 10 hereof which may be granted to one or more Covered Employees, no later than ninety (90) days following the commencement of any fiscal year of the Company in question or any other designated fiscal period or period of service (or such other time as may be required or permitted by Section 162(m) of the Code), the Committee shall, in writing, (1) designate one or more Covered Employees, (2) select the Performance Criteria applicable to the Performance Period, (3) establish the Performance Goals, and amounts of such Awards, as applicable, which may be earned for such Performance Period, and (4) specify the relationship between Performance Criteria and the Performance Goals and the amounts of such Awards, as applicable, to be earned by each Covered Employee for such Performance Period. Following the completion of each Performance Period, the Committee shall certify in writing whether the applicable Performance Goals have been achieved for such Performance Period. In determining the amount earned by a Covered Employee, the Committee shall have the right to reduce or eliminate (but not to increase) the amount payable at a given level of performance to take into account additional factors that the Committee may deem relevant to the assessment of individual or corporate performance for the Performance Period.
     (d)  Payment of Performance-Based Awards. Unless otherwise provided in the applicable Award Agreement, a Covered Employee must be employed by the Company or a Subsidiary on the day a Performance-Based Award is paid to the Covered Employee. Furthermore, a Covered Employee shall be eligible to receive payment pursuant to a Performance-Based Award for a Performance Period only if the Performance Goals for such period are achieved. In determining the amount earned under a Performance-Based Award, the Committee may reduce or eliminate the amount of the Performance-Based Award earned for the Performance Period, if in its sole and absolute discretion, such reduction or elimination is appropriate.
     (e)  Additional Limitations. Notwithstanding any other provision of the Plan, any Award which is granted to a Covered Employee and is intended to constitute Qualified Performance-Based Compensation shall be subject to any additional limitations set forth in Section 162(m) of the Code (including any amendment to Section 162(m) of the Code) or any regulations or rulings issued thereunder that are requirements for qualification as Qualified Performance-Based Compensation, and the Plan shall be deemed amended to the extent necessary to conform to such

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requirements.
     SECTION 12. Provisions Applicable to Awards.
     (a)  Stand-Alone and Tandem Awards. Awards granted pursuant to the Plan may, in the discretion of the Committee, be granted either alone, or in tandem with, any other Award granted pursuant to the Plan. Awards granted in addition to or in tandem with other Awards may be granted no later than the time of grant of such other Awards, and such grants shall comply with the requirements of Section 409A (unless exempt therefrom) and the Plan.
     (b)  Beneficiaries. Notwithstanding Section 15(b) hereof, a Participant may, in the manner determined by the Committee, designate a beneficiary to exercise the rights of the Participant and to receive any distribution with respect to any Award upon the Participant’s death. A beneficiary, legal guardian, legal representative, or other person claiming any rights pursuant to the Plan is subject to all terms and conditions of the Plan and any Award Agreement applicable to the Participant, except to the extent the Plan and Award Agreement otherwise provide, and to any additional restrictions deemed necessary or appropriate by the Committee. If no beneficiary has been designated or survives the Participant, payment shall be made to the person entitled thereto pursuant to the Participant’s will or the laws of descent and distribution. Subject to the foregoing, a beneficiary designation may be changed or revoked by a Participant at any time provided the change or revocation is filed with the Committee.
     SECTION 13. Changes in Capital Structure.
     (a)  Adjustments.
          (1) In the event of any stock dividend, stock split, combination or exchange of shares, merger, consolidation, spin-off, recapitalization or other distribution (other than normal cash dividends) of Company assets to stockholders, or any other change affecting the Shares or the price of the Shares, the Committee shall make appropriate proportionate adjustments to reflect such change with respect to (i) the aggregate number and kind of shares that may be issued under the Plan (including, but not limited to, adjustments of the limitations in Section 4(a) and Section 4(c) hereof); (ii) the terms and conditions of any outstanding Awards (including, without limitation, any applicable performance targets or criteria with respect thereto); and (iii) subject to Section 14, the grant, exercise, or strike price per Share for any outstanding Awards under the Plan. Any adjustment affecting an Award intended as Qualified Performance-Based Compensation shall be made consistent with the requirements of Section 162(m) of the Code.
          (2) In the event of any transaction or event described in this Section 13 or any unusual or nonrecurring transactions or events affecting the Company, any Subsidiary, any affiliate of the Company, or the financial statements of the Company or any Subsidiary or affiliate, or of changes in applicable laws, regulations or accounting principles, the Committee, in its sole and absolute discretion, and on such terms and conditions as it deems appropriate, either by the terms of the Award or by action taken prior to the occurrence of such transaction or event and either automatically or upon the Participant’s request, is hereby authorized to take any one or more of the following actions whenever the Committee determines that such action is appropriate in

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order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan or with respect to any Award under the Plan, to facilitate such transactions or events or to give effect to such changes in laws, regulations or principles:
          (i) To provide for either (A) termination of any such Award in exchange for an amount of cash, if any, equal to the amount that would have been attained upon the exercise of such Award or realization of the Participant’s rights (and, for the avoidance of doubt, if as of the date of the occurrence of the transaction or event described in this Section 13 the Committee determines in good faith that no amount would have been attained upon the exercise of such Award or realization of the Participant’s rights, then such Award may be terminated by the Company without payment) or (B) the replacement of such Award with other rights or property selected by the Committee in its sole discretion;
          (ii) To provide that such Award be assumed by the successor or survivor corporation, or a parent or subsidiary thereof, or shall be substituted for by similar options, rights or awards covering the stock of the successor or survivor corporation, or a parent or subsidiary thereof, with appropriate adjustments as to the number and kind of shares and prices;
          (iii) To make adjustments in the number and type of Shares (or other securities or property) subject to outstanding Awards, and in the number and kind of outstanding Restricted Stock, Performance Shares or Stock Units and/or in the terms and conditions of (including the grant or exercise price), and the criteria included in, outstanding options, rights and awards and options, rights and awards which may be granted in the future;
          (iv) To provide that such Award shall be exercisable or payable or fully vested with respect to all Shares covered thereby, notwithstanding anything to the contrary in the Plan or the applicable Award Agreement; and
          (v) To provide that the Award cannot vest, be exercised or become payable after such event.
          Any adjustment under this Section 13(a) shall be made only to the extent that such adjustment will not cause a violation of the requirements of Section 409A.
     (b)  Acceleration Upon a Change of Ownership. Notwithstanding Section 13(a) above, and except as may otherwise be provided in any applicable Award Agreement or other written agreement entered into between the Company and a Participant, if a Change of Ownership occurs and a Participant’s Awards are not converted, assumed, or replaced by a successor entity, then immediately prior to the Change of Ownership such Awards shall become fully exercisable and all forfeiture restrictions on such Awards shall lapse. Upon, or in anticipation of, a Change of Ownership, the Committee may cause any and all Awards outstanding hereunder to terminate at a specific time in the future, including but not limited to the date of such Change of Ownership, and shall give each Participant the right to exercise such Awards during a period of time as the Committee, in its sole and absolute discretion, shall determine; provided, however , that the Committee may not extend the original exercise periods for Options or Stock Appreciation Rights if such extension would cause such Options or Stock Appreciation Rights to

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violate the requirements of Section 409A; and provided, further , that the Committee may not change the time at which any Other Stock-Based Award may be settled, paid, or exercised if such change would cause a violation of Section 409A. In the event that the terms of any agreement (other than this Plan and any Award Agreement hereunder) between the Company or any Subsidiary or affiliate of the Company and a Participant contains provisions that conflict with and are more restrictive than the provisions of this Section 13(b), this Section 13(b) shall prevail and control and the more restrictive terms of such agreement (and only such terms) shall be of no force or effect.
     (c)  No Other Rights. Except as expressly provided in the Plan, no Participant shall have any rights by reason of any subdivision or consolidation of shares of stock of any class, the payment of any dividend, any increase or decrease in the number of shares of stock of any class or any dissolution, liquidation, merger, or consolidation of the Company or any other corporation. Except as expressly provided in the Plan or pursuant to action of the Committee under the Plan, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number of Shares subject to an Award or the grant or exercise price of any Award.
     SECTION 14. Amendment and Termination.
     (a)  Amendments to the Plan. Subject to the requirements of Section 409A and of Section 15(s) hereof, if applicable, with the approval of the Board, at any time and from time to time, the Committee may terminate, amend or modify the Plan; provided, however , that (1) to the extent necessary and desirable to comply with any applicable law, regulation, or securities exchange rule, the Company shall obtain stockholder approval of any Plan amendment in such a manner and to such a degree as required, and (2) stockholder approval is required for any amendment to the Plan that (i) increases the number of shares available under the Plan (other than any adjustment as provided by Section 13 hereof), (ii) permits the Committee to grant Options or Stock Appreciation Rights with an exercise or strike price that is below Fair Market Value on the date of grant, (iii) permits the Committee to extend the exercise period for an Option or Stock Appreciation Right beyond ten years from the date of grant, or (iv) expands the class of persons who are eligible to participate in the Plan. Notwithstanding any provision in this Plan to the contrary, no Option may be amended to reduce the per Share exercise price of the Shares subject to such Option below the per Share exercise price as of the date the Option is granted and, except as permitted by Section 13 hereof, no Option may be granted in exchange for, or in connection with, the cancellation or surrender of an Option having a higher per Share exercise price.
     (b)  Amendments to Awards. Except with respect to amendments made pursuant to Section 15(s) hereof, no termination, amendment, or modification of the Plan shall adversely affect in any material way any Award previously granted pursuant to the Plan without the prior written consent of the Participant.
     (c)  Cancellation. Any provision of this Plan or any Award Agreement to the contrary notwithstanding, the Committee may cause any Award granted hereunder to be canceled in consideration of a cash payment or alternative Award made to the holder of such canceled

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Award equal in value to the Fair Market Value of such canceled Award; provided, however , that no Option may be amended to reduce the per Share exercise price of the Shares subject to such Option below the per Share exercise price as of the date the Option is granted and, except as permitted by Section 13 hereof, no Option or Stock Appreciation Right may be granted in exchange for, or in connection with, the cancellation or surrender of an Option or Stock Appreciation Right having a higher per Share exercise price or strike price, and no alternative Award may be made if such action would cause a violation of Section 409A.
     SECTION 15. General Provisions
     (a)  Dividend Equivalents. In the sole and complete discretion of the Committee, any Award (other than Award made as an Option or a Stock Appreciation Right) may provide the Participant with dividends or dividend equivalents, payable in cash, Shares, other securities or other property on a current or deferred basis.
     (b)  Nontransferability. No Award shall be assigned, alienated, pledged, attached, sold or otherwise transferred or encumbered by a Participant, except by will or the laws of descent and distribution and, in the case of any Award, except by gift or pursuant to a domestic relations order (as defined in Section 414(p)(1)(B) of the Code, and including acceleration of the time of payment as permitted under Section 1.409A-3(j)(ii) of the Treasury Regulations) to members of the Participant’s family, or trusts or other entities whose beneficiaries or beneficial owners are the Participant or members of the Participant’s family, without approval of the stockholders of the Company.
     (c)  No Rights to Awards. Except as may be provided in an Employment Agreement, no Eligible Individual or other person shall have any claim to be granted any Award, and there is no obligation for uniformity of treatment of Employees, Participants, or holders or beneficiaries of Awards. The terms and conditions of Awards need not be the same with respect to each recipient.
     (d)  Share Certificates; Book Entry Procedures.
          (1) Notwithstanding anything herein to the contrary, the Company shall not be required to issue or deliver any certificates evidencing Shares pursuant to the exercise of any Award, unless and until the Board has determined, with advice of counsel, that the issuance and delivery of such certificates is in compliance with all applicable laws, regulations of governmental authorities and, if applicable, the requirements of any securities exchange on which the Shares are listed or traded. All Share certificates delivered pursuant to the Plan are subject to any stop-transfer orders and other restrictions as the Committee deems necessary or advisable to comply with federal, state, or foreign jurisdiction, securities or other laws, rules and regulations and the rules of any securities exchange or automated quotation system on which the Shares are listed, quoted, or traded. The Committee may place legends on any Share certificate to reference restrictions applicable to the Shares. In addition to the terms and conditions provided herein, the Committee may require that a Participant make such reasonable covenants, agreements, and representations, or do or refrain from such acts, as the Committee, in its discretion, deems advisable in order to comply with any such laws, regulations, or requirements.

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The Committee shall have the right to require any Participant to comply with any timing or other restrictions with respect to the settlement or exercise of any Award, including a window-period limitation, as may be imposed in the discretion of the Committee.
          (2) Notwithstanding any other provision of the Plan, unless otherwise determined by the Committee or required by any applicable law, rule or regulation, the Company shall not deliver to any Participant certificates evidencing Shares issued in connection with any Award and instead such Shares shall be recorded in the books of the Company (or, as applicable, its transfer agent or stock plan administrator).
     (e)  Withholding. The Company or any Subsidiary shall have the authority and the right to deduct or withhold, or require a Participant to remit to the Company, an amount sufficient to satisfy federal, state, local and foreign taxes (including the Participant’s employment tax obligations) required by law to be withheld with respect to any taxable event concerning a Participant arising as a result of this Plan. The Committee may in its discretion and in satisfaction of the foregoing requirement allow a Participant to elect to have the Company withhold Shares otherwise issuable under an Award (or allow the return of Shares) having a Fair Market Value equal to the sums required to be withheld. Notwithstanding any other provision of the Plan, the number of Shares which may be withheld with respect to the issuance, vesting, exercise or payment of any Award (or which may be repurchased from the Participant of such Award) in order to satisfy the Participant’s federal, state, local and foreign income and payroll tax liabilities with respect to the issuance, vesting, exercise or payment of the Award shall be limited to the number of Shares which have a Fair Market Value on the date of withholding or repurchase equal to the aggregate amount of such liabilities based on the minimum statutory withholding rates for federal, state, local and foreign income tax and payroll tax purposes that are applicable to such supplemental taxable income.
     (f)  Award Agreements. Each Award hereunder shall be evidenced by an Award Agreement which shall be delivered to the Participant and shall specify the terms and conditions of the Award and any rules applicable thereto, including but not limited to the effect on such Award of the death, Disability, retirement or other termination of employment of a Participant, and the Company’s authority to unilaterally or bilaterally amend, modify, suspend, cancel or rescind an Award.
     (g)  No Limit on Other Compensation Arrangements. Nothing contained in the Plan shall prevent the Company or any Subsidiary from adopting or continuing in effect other compensation arrangements, which may, but need not, provide for the grant of bonuses, options, restricted stock, Shares and other types of Awards provided for hereunder (subject to stockholder approval if such approval is required), and such arrangements may be either generally applicable or applicable only in specific cases.
     (h)  No Right to Employment. Nothing in the Plan or any Award shall be construed as giving a Participant the right to be retained in the employ of the Company or any Subsidiary. Further, the Company or a Subsidiary may at any time dismiss a Participant from employment, with or without cause, free from any liability or any claim under the Plan.

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     (i)  No Rights as Stockholder. Subject to the provisions of the applicable Award, no Participant or holder or beneficiary of any Award shall have any rights as a stockholder with respect to any Shares to be distributed under the Plan until he or she has become the record or beneficial owner of such Shares. Notwithstanding the foregoing, in connection with each grant of Restricted Stock hereunder, the applicable Award shall specify if and to what extent the Participant shall not be entitled to the rights of a stockholder in respect of such Restricted Stock.
     (j)  Governing Law. The validity, construction, and effect of the Plan and any rules and regulations relating to the Plan and any Award Agreement shall be determined in accordance with the laws of the State of California, except to the extent that the General Corporation Law of the State of Delaware is applicable.
     (k)  Severability. If any provision of the Plan or any Award is or becomes or is deemed to be invalid, illegal, or unenforceable in any jurisdiction or as to any Person or Award, or would disqualify the Plan or any Award under any law deemed applicable by the Committee, such provision shall be construed or deemed amended to conform the applicable laws, or if it cannot be construed or deemed amended without, in the determination of the Committee, materially altering the intent of the Plan or the Award, such provision shall be stricken as to such jurisdiction, Person or Award and the remainder of the Plan and any such Award shall remain in full force and effect.
     (l)  Other Laws. The obligation of the Company to make payment of awards in Shares or otherwise shall be subject to all applicable laws, rules, and regulations, and to such approvals by government agencies as may be required. The Company may refuse to issue or transfer any Shares or other consideration under an Award if, acting in its sole discretion, it determines that the issuance or transfer of such Shares or such other consideration might violate any applicable law or regulation or entitle the Company to recover the same under Section 16(b) of the Exchange Act, and any payment tendered to the Company by a Participant, other holder or beneficiary in connection with the exercise of such Award shall be promptly refunded to the relevant Participant, holder or beneficiary. Without limiting the generality of the foregoing, no Award granted hereunder shall be construed as an offer to sell securities of the Company, and no such offer shall be outstanding, unless and until the Committee in its sole discretion has determined that any such offer, if made, would be in compliance with all applicable requirements of the U.S. federal securities laws and any other laws to which such offer, if made, would be subject. The Company shall be under no obligation to register pursuant to the Securities Act any of the Shares paid pursuant to the Plan. If Shares paid pursuant to the Plan may in certain circumstances be exempt from registration pursuant to the Securities Act, the Company may restrict the transfer of such shares in such manner as it deems advisable to ensure the availability of any such exemption.
     (m)  No Trust or Fund Created. The Plan is intended to be an “unfunded” plan for incentive compensation. Neither the Plan nor any Award shall create or be construed to create a trust or separate fund of any kind or a fiduciary relationship between the Company or any Subsidiary or any affiliate and a Participant or any other Person. To the extent that any Person acquires a right to receive payments from the Company or any Subsidiary pursuant to an Award, such right shall be no greater than the right of any unsecured general creditor of the Company or

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any Subsidiary.
     (n)  Indemnification. To the extent allowable pursuant to applicable law, each member of the Committee and each member of the Board shall be indemnified and held harmless by the Company from any loss, cost, liability, or expense that may be imposed upon or reasonably incurred by such member in connection with or resulting from any claim, action, suit, or proceeding to which he or she may be a party or in which he or she may be involved by reason of any action or failure to act pursuant to the Plan and against and from any and all amounts paid by him or her in satisfaction of judgment in such action, suit, or proceeding against him or her; provided, however , that he or she gives the Company an opportunity, at its own expense, to handle and defend the same before he or she undertakes to handle and defend it on his or her own behalf. The foregoing right of indemnification shall not be exclusive of any other rights of indemnification to which such persons may be entitled pursuant to the Company’s Certificate of Incorporation or Bylaws, as a matter of law, or otherwise, or any power that the Company may have to indemnify them or hold them harmless.
     (o)  No Fractional Shares. No fractional Shares shall be issued or delivered pursuant to the Plan or any Award, and cash shall be paid in lieu of any fractional Shares, and such fractional Shares shall be eliminated by rounding down.
     (p)  Expenses. The expenses of administering the Plan shall be borne by the Company and its Subsidiaries.
     (q)  Headings. Headings are given to the Sections and subsections of the Plan solely as a convenience to facilitate reference. Such headings shall not be deemed in any way material or relevant to the construction or interpretation of the Plan or any provision thereof and, in the event of any conflict, the text of the Plan, rather than such titles or headings, shall control.
     (r)  Limitations Applicable to Section 16 Persons. Notwithstanding any other provision of the Plan, the Plan, and any Award granted or awarded to any Participant who is then subject to Section 16 of the Exchange Act, shall be subject to any additional limitations set forth in any applicable exemptive rule under Section 16 of the Exchange Act (including any amendment to Rule 16b-3) that are requirements for the application of such exemptive rule. To the extent permitted by applicable law, the Plan and Awards granted or awarded hereunder shall be deemed amended to the extent necessary to conform to such applicable exemptive rule.
     (s)  Section 409A.
          (1) To the extent that the Committee determines that any Award granted under the Plan is subject to Section 409A, the Award Agreement evidencing such Award shall comply with the requirements of Section 409A. To the extent applicable, the Plan and Award Agreements shall be interpreted in accordance with Section 409A, including without limitation any Treasury Regulations or other Department of Treasury guidance that may be issued or amended after the Effective Date or the Amendment Date. Notwithstanding any provision of the Plan to the contrary, in the event that following the Effective Date the Committee determines that any Award may be subject to Section 409A, including such Department of Treasury guidance as

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may be issued after the Effective Date or the Amendment Date, the Committee may adopt such amendments to the Plan and the applicable Award Agreement or adopt other policies and procedures (including amendments, policies and procedures with retroactive effect), or take any other actions, that the Committee determines are necessary or appropriate to (A) exempt the Award from Section 409A and/or preserve the intended tax treatment of the benefits provided with respect to the Award, or (B) comply with the requirements of Section 409A.
          (2) If, at the time of a Participant’s “separation from service” (within the meaning of Section 409A), (A) such Participant is a “specified employee” (within the meaning of Section 409A as determined annually by the Committee in accordance with the methodology specified by resolution of the Board or the Committee and in accordance with Section 1.409A-1(i) of the Treasury Regulations) and (B) the Company shall make a good-faith determination that an amount payable pursuant to an Award constitutes “deferred compensation” (within the meaning of Section 409A) the payment of which is required to be delayed pursuant to the six-month delay rule set forth in Section 409A in order to preserve the tax treatment intended for such payment or to avoid additional tax, interest, or penalties under Section 409A, then the Company shall not pay such amount on the otherwise scheduled payment date but shall instead pay it on the first business day after such six-month period. Such amount shall be paid without interest, unless otherwise determined by the Committee, in its sole discretion, or as otherwise provided in any applicable agreement between the Company and the relevant Participant.
          (3) For purposes of this Plan, a “separation from service” within the meaning of Section 409A shall mean termination of services provided by a Participant to his or her Company, whether voluntary or involuntary, as determined by the Committee in accordance with Treasury Regulation Section 1.409A-1(h). In determining whether a Participant has experienced a Separation from Service, the following provisions shall apply:
          (i) For a Participant who provides services to the Company as an employee, except as otherwise provided in part (iii) of this Subsection, a separation from service shall occur when such Participant has experienced a termination of employment with the Company. Such Participant shall be considered to have experienced a termination of employment when the facts and circumstances indicate that the Participant and the Company reasonably anticipate that either (A) no further services will be performed for the Company after a certain date, or (B) the level of bona fide services the Participant will perform for the Company after such date (whether as an employee or as an independent contractor) will permanently decrease to no more than 20% of the average level of bona fide services performed by such Participant (whether as an employee or an independent contractor) over the immediately preceding 36-month period (or the full period of services to the Company if the Participant has been providing services to the Company less than 36 months).
     If such Participant is on military leave, sick leave, or other bona fide leave of absence, the employment relationship between the Participant and the Company shall be treated as continuing intact, provided that the period of such leave does not exceed 6 months, or if longer, so long as the Participant retains a right to reemployment with the Company under an applicable statute or by contract. If the period of a military leave, sick leave, or other bona fide leave of absence exceeds 6 months and the Participant does not retain a right to reemployment under an applicable statute or by contract, the employment relationship shall be considered to be terminated for

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purposes of this Plan as of the first day immediately following the end of such 6-month period. In applying the provisions of this paragraph, a leave of absence shall be considered a bona fide leave of absence only if there is a reasonable expectation that the Participant will return to perform services for the Company. For purposes of this paragraph, where a leave of absence is due to any physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than six months, where such impairment causes the Participant to be unable to perform the duties of his or her position of employment or any substantially similar position of employment, a 29-month period of absence shall be substituted for such 6-month period.
          (ii) For a Participant who provides services to the Company as an independent contractor, except as otherwise provided in part (iii) of this Subsection, a separation from service shall occur upon the expiration of the contract (or in the case of more than one contract, all contracts) under which services are performed for the Company, provided that the expiration of such contract(s) is determined by the Committee to constitute a good-faith and complete termination of the contractual relationship between the Participant and the Company.
          (iii) For a Participant who provides services to the Company as both an employee and an independent contractor , a separation from service generally shall not occur until the Participant has ceased providing services for such Company as both as an employee and as an independent contractor, as determined in accordance with the provisions set forth in parts (i) and (ii) of this Subsection, respectively. Similarly, if a Participant either (A) ceases providing services for the Company as an independent contractor and begins providing services for the Company as an employee, or (B) ceases providing services for the Company as an employee and begins providing services for the Company as an independent contractor, the Participant will not be considered to have experienced a separation from service until the Participant has ceased providing services for the Company in both capacities, as determined in accordance with the applicable provisions set forth in parts (i) and (ii) of this Subsection.
          Notwithstanding the foregoing provisions in this part (iii), if a Participant provides services for the Company as both an employee and as a director of the Board of the Company, to the extent permitted by Treas. Reg. §1.409A-1(h)(5) the services provided by such Participant as a director of the Board of the Company shall not be taken into account in determining whether the Participant has experienced a Separation from Service as an employee.
          (iv) For purposes of this Subsection, services performed for the Company shall include service performed both for the Company and for any other corporation that is a member of the same “controlled group” of corporations as the Company under Section 414(b) of the Code or any other trade or business (such as a partnership)_that is under common control with the Company as determined under Section 414(c) of the Code, in each case as modified by Treasury Regulation Section 1.409A-1(h)(3) and substituting “at least 50 percent” for “at least 80 percent” each place it appears in Section 1563(a) of the Code or Treasury Regulation Section 1.414(c)-2.
          (4) A Participant shall be solely responsible and liable for the satisfaction of all taxes, interest, and penalties that may be imposed on such Participant or for such Participant’s account in connection with an Award (including any taxes, interest, and penalties under Section 409A), and neither the Company nor its affiliates shall have any obligation to indemnify or otherwise

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hold such Participant harmless from any or all of such taxes, interest, or penalties.
     SECTION 16. Term of the Plan.
     (a)  Effective Date. The Plan first became effective on April 2, 1999, the date on which the Plan was adopted and approved by the Board (the “Effective Date”), and was subsequently approved by the Company’s stockholders. This amendment and restatement shall be effective as of the Amendment Date as defined herein.
     (b)  Expiration Date. The Plan will expire on, and no Option or Award shall be granted under the Plan after, April 2, 2009, or after such earlier date as the Committee may determine, in its sole discretion. Any Awards that are outstanding on April 2, 2009 shall remain in force according to the terms of the Plan and the applicable Award Agreement.

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Exhibit 10.22
(KB HOME LOGO)
KB HOME
2001 STOCK INCENTIVE PLAN
(as amended and restated on October 2, 2008)
     SECTION 1. Purpose . The purpose of the KB Home 2001 Stock Incentive Plan (the “Plan”) is to promote the success of KB Home (the “Company”) by providing a method whereby employees of the Company and its subsidiaries and other eligible participants may be encouraged to invest in the Common Stock, $1.00 par value, of the Company (“Common Stock”), increase their proprietary interest in its business, remain in the employ of the Company or its subsidiaries, and increase their personal interests in the continued success and progress of the Company. The Plan provides for the grant of Options that satisfy the requirements for treatment as Incentive Stock Options (“ISOs”) as defined under Section 422 of the Code or that are not intended to satisfy such requirements (“Non-Qualified Options”), as well as for certain other “Awards,” as defined below. The Plan is an amendment and restatement of the KB Home 2001 Stock Incentive Plan, which amendment and restatement shall be effective as of October 2, 2008 (the “Amendment Date”).
     SECTION 2. Definitions. As used in this Plan, the following terms shall have the indicated meanings:
     (a) Amendment Date: Amendment Date shall have the meaning set forth in Section 1 hereof.
     (b) Award: An award under this Plan of a Performance Stock Award, Restricted Stock Award, or Stock Unit Award.
     (c) Board: The board of directors of KB Home.
     (d) Code: The Internal Revenue Code of 1986, as amended from time to time. All references to the Code or any section thereof shall include the Treasury Regulations and other Department of Treasury guidance issued thereunder.
     (e) Committee: The Committee specified in Section 3(a) of this Plan.
     (f) Company: KB Home and its Subsidiaries.
     (g) Effective Date: Effective Date shall have the meaning set forth in Section 13(a) hereof.
     (h) Exchange Act: The Securities Exchange Act of 1934, as amended.

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     (i) Fair Market Value: As of any given date, (a) if Shares are traded on a securities exchange, the closing price of a Share as reported in the Wall Street Journal for such date or, if no sale occurred on such date, for the first trading date immediately prior to such date during which a sale occurred; or (b) if Shares are not traded on a securities exchange, (i) the last sales price on such date (if Shares are then listed as a Global Market Issue under the NASDAQ Global Market System) or (ii) the mean between the closing representative bid and asked prices (in all other cases) for Shares on such date; or, if no sales prices or bid and asked prices, as applicable, are reported by a national quotation system, the first date immediately prior to such date on which sales prices or bid and asked prices, as applicable, are reported by a national quotation system; or (c) if Shares are not publicly traded, or with respect to any non-Share based Award or settlement of an Award, the fair market value established by the Committee acting in good faith.
     (j) Limited Stock Appreciation Right: A right granted pursuant to Section 6(b) to receive cash in certain circumstances with respect to a related Option.
     (k) Option: An Option is a right granted under Section 6(a) to purchase a number of shares of Common Stock at such exercise price, at such times, and on such other terms and conditions as are specified in or determined pursuant to the document(s) evidencing the Award.
     (l) Participant: An individual eligible under Section 5(a) to participate in this Plan.
     (m) Performance Objectives: With reference to a particular Option or Award, the objectives established by the Committee under various criteria, the satisfaction of which may result in the grant, issuance, retention and/or vesting of an Option, a Performance Stock Award or Stock Unit Award, or which may accelerate the release of shares of Common Stock from the restrictions of a Restricted Stock Award. The Performance Objectives may differ from Participant to Participant and from Award to Award, as determined by the Committee and specified in the applicable Award. For purposes of an Award that is intended to qualify as “qualified performance-based compensation” under Code Section 162(m), the term “Performance Objective” shall mean any one or more of the following performance criteria, either individually, alternatively or in any combination, applied to either the Company as a whole or to a business unit or subsidiary, either individually, alternatively or in any combination, and measured either annually or cumulatively over a period of years, on an absolute basis or relative to a pre-established target, to previous years’ results or to a designated comparison group, in each case as specified by the Committee in the Award: (i) pre-tax income, (ii) after-tax income, (iii) cash flow, (iv) return on equity, (v) return on capital, (vi) earnings per share (including earnings before interest, taxes, depreciation and amortization), (vii) unit volume, (viii) net sales, (ix) service quality or (v) total shareholder return, in each case as determined in accordance with Generally Accepted Accounting Principles, if applicable.
     (n) Performance Stock Award: Performance Stock is an award of shares of Common Stock made under Section 7(a), the grant, issuance, retention and/or vesting of which is subject to such performance and other conditions as are expressed in the document(s) evidencing the Award.
     (o) Plan: The KB Home 2001 Stock Incentive Plan, as it may be amended from time to

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time.
     (p) Restricted Stock Award: Restricted Stock is a right granted under Section 7(b) to shares of Common Stock issued or issuable under the Plan but subject during specified periods of time to such conditions on vesting, restrictions on transferability and/or repurchase rights as are expressed in the document(s) evidencing the Award.
     (n) Section 409A: Section 409A of the Code and, for the avoidance of doubt only, the Treasury Regulations and other Department of Treasury guidance issued thereunder.
     (o) Stock Unit Award: An award granted under Section 8 of this Plan.
     (p) Subsidiary: Any corporation of which the Company owns, directly or indirectly, fifty percent (50%) or more of the voting or capital stock, or any partnership or other entity of which the Company owns, directly or indirectly, a fifty percent (50%) or more participating interest or the general partner of which is a Subsidiary.
     (q) Tax Date: The date on which taxes of any kind are required by law to be withheld with respect to shares of Common Stock subject to an Option or Award.
     SECTION 3. Administration.
     (a) The Plan shall be administered by the Board and/or by a committee of the Board, as appointed from time to time by the Board (the “Committee”). The Board shall fill vacancies on, and from time to time may remove or add members to, the Committee. The Committee shall act pursuant to a majority vote or unanimous written consent. The Committee may designate the Secretary of the Company or other Company employees to assist the Committee in the administration of the Plan, and may grant authority to such persons to issue and/or execute agreements or other documents under this Plan on behalf of the Committee or the Company.
     (b) The Committee shall have full power and authority, subject to applicable law, the terms of the Plan, and such orders or resolutions not inconsistent with the provisions of the Plan as may from time to time be issued or adopted by the Board, to grant to eligible persons Options, Limited Stock Appreciation Rights and Awards pursuant to the provisions of the Plan, to fix the exercise price and other terms of Options, to fix the terms of any Performance Stock Award and/or Restricted Stock Award in a manner consistent with the terms of Section 7, to fix the terms of any Stock Unit Award in a manner consistent with the terms of Section 8, to prescribe, amend and rescind rules and regulations, if any, relating to the Plan, to interpret the provisions of the Plan, Options, Limited Stock Appreciation Rights and Awards issued under the Plan, to amend such Options, Limited Stock Appreciation Rights and Awards from time to time subject to the provisions of the Plan, and to supervise the administration of the Plan. All decisions made by the Committee pursuant to the provisions of the Plan and related orders or resolutions of the Board shall be final, conclusive and binding on all persons, including the Company, stockholders, employees and optionees.
     (c) Each person who is or shall have been a member of the Committee or of the Board

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shall be indemnified and held harmless by the Company from any loss, cost, liability or expense that may be imposed upon or reasonably incurred by him or her in connection with any claim, action, suit or proceeding to which he or she may be a party by reason of any action taken or any failure to act under the Plan. The foregoing right of indemnification shall not be exclusive of any other rights of indemnification to which such persons may be entitled under the Company’s Articles of Incorporation or Bylaws, or as a matter of law, or otherwise, or any power that the Company may have to indemnify them or hold them harmless.
     SECTION 4. Shares Subject to the Plan.
     (a) The shares to be delivered upon exercise of Options or Limited Stock Appreciation Rights granted under the Plan or pursuant to Awards, may be made available from the authorized but unissued shares of the Company or from shares reacquired by the Company, including shares purchased in the open market or in private transactions.
     (b) Subject to adjustments made pursuant to the provisions of Section 4(d) and this Section 4(b), the aggregate number of shares reserved for issuance upon the exercise of Options and pursuant to Awards which may be granted under the Plan shall not exceed 4,200,000 shares of Common Stock. The aggregate number of shares of Common Stock issued under this Plan shall equal only the number of shares actually issued upon exercise or settlement of an Option or vesting or settlement of any Award and not returned to the Company upon cancellation, expiration or forfeiture of Options and Awards or delivered (either actually or by attestation) in payment or satisfaction of the exercise price, purchase price or tax obligation of Options and Awards.
     (c) The aggregate number of shares of Common Stock issued and issuable pursuant to ISOs may not exceed 4,200,000 shares. The maximum number of shares of Common Stock subject to Options granted during any calendar year to any one Participant shall not exceed 1,000,000. The maximum number of shares of Common Stock subject to Awards (other than Stock Units issued or issuable upon exercise of Options) that may be granted during any calendar year to any one Participant shall not exceed 500,000 in the aggregate.
     (d) In the event of any stock dividend, extraordinary cash dividend, recapitalization, reorganization, merger, consolidation, split-up, spin-off, combination, exchange of shares, warrants or rights offering to purchase Common Stock at a price substantially below fair market value, or other similar corporate event affecting the Common Stock such that an adjustment is required in order to preserve the benefits or potential benefits intended to be made available to Participants under this Plan, the Committee shall make appropriate proportional adjustments to any or all of (1) the number and kind of shares which thereafter may be awarded or optioned and sold or made the subject of Limited Stock Appreciation Rights under the Plan, (2) the number and kind of shares subject to outstanding Options and Awards, and Limited Stock Appreciation Rights, and (3) the exercise price with respect to any of the foregoing and/or, if deemed appropriate, make provision for a cash payment to a Participant, including to reflect such an event occurring prior to an Option or Award, the grant of which was intentionally deferred in anticipation of such event; provided, however, that the number of shares subject to any Option or Award shall always be a whole number. Any adjustment under this Section 4(d) shall be made

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only to the extent that such adjustment will not cause a violation of the requirements of Section 409A.
     SECTION 5. Eligibility and Extent of Participation.
     (a) The persons eligible to receive Awards, Options and associated Limited Stock Appreciation Rights under the Plan shall consist of employees or prospective employees of the Company and consultants or advisors of the Company who, in the Committee’s judgment, can make substantial contributions to the Company’s long-term profitability and value. For purposes of the administration of previously granted Options and Awards, the term “Participant” shall also include a former Participant and any permitted transferee (including any trust, partnership or estate) of a Participant or former Participant.
     (b) Subject to the limitations of the Plan, the Committee shall, after such consultation with and consideration of the recommendations of management as the Committee considers desirable, select from eligible persons those Participants to be granted Options and Awards and determine the time when each Option and Award shall be granted, the number of shares subject to each Option and Award and whether Limited Stock Appreciation Rights should be granted in connection with such Option, the number of shares for each Award and the restrictions associated with such Award. Subject to the provisions of Section 4, both Options and Awards may be granted to the same Participant.
     SECTION 6. Grants of Options and Limited Stock Appreciation Rights.
     (a)  Grant of Options. Options on shares of Common Stock may be granted to Participants by the Committee from time to time at its sole discretion, provided that no Option may be granted to a Participant unless the Company is an “eligible issuer of service recipient stock” within the meaning of Section 409A with respect to such Participant. Options intended to qualify as ISOs pursuant to Code Section 422 and Non-Qualified Options which are not intended to qualify as ISOs may be granted as the Committee in its sole discretion shall determine. Each Option grant shall contain such terms and conditions as may be approved by the Committee. Subject to the terms of the Plan, the Committee may establish provisions regarding (1) the number of shares of Common Stock which may be issued upon exercise of the Option, (2) the purchase price of the shares of Common Stock and the means of payment for the shares of Common Stock, (3) the term of the Option, (4) such terms and conditions of exercisability as may be determined from time to time by the Committee, (5) restrictions on the transfer of the Option and forfeiture provisions, and (6) such further terms and conditions, in each case not inconsistent with the Plan as may be determined from time to time by the Committee. The grant of an Option shall not constitute or be evidence of any agreement or other understanding, express or implied, on the part of the Company or any Subsidiary to employ an individual for any specific period.
     (b) Grant of Limited Stock Appreciation Rights in the Event of Change of Ownership. If deemed by the Committee to be in the best interests of the Company, any Option granted on or after the Effective Date of the Plan may include a Limited Stock Appreciation Right at the time of grant of the Option. Unless otherwise specified, any reference in this Plan to an Option or

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Options shall include any associated Limited Stock Appreciation Right. Such Limited Stock Appreciation Rights shall be subject to such terms and conditions not inconsistent with the Plan as the Committee shall impose, provided that:
          (1) A Limited Stock Appreciation Right shall be exercisable only during the ninety-one (91) day period specified in the last sentence of Section 9(a), provided, however, that except in connection with a Change of Ownership, no Limited Stock Appreciation Right granted to a Participant who is subject to Section 16 of the Exchange Act shall be exercisable within six (6) months of the date of its grant; and
          (2) A Limited Stock Appreciation Right shall, upon its exercise, entitle the optionee to whom such Limited Stock Appreciation Right was granted to receive an amount of cash equal to the amount by which the the Fair Market Value per share of Common Stock on the date of exercise of such Limited Stock Appreciation Right shall exceed the exercise price of the associated Option, multiplied by the number of shares of Common Stock with respect to which such Limited Stock Appreciation Right shall have been exercised. Upon the exercise of a Limited Stock Appreciation Right, any associated Option shall cease to be exercisable to the extent of the shares of Common Stock with respect to which such Limited Stock Appreciation Right was exercised. Upon the exercise or termination of an associated Option, any related Limited Stock Appreciation Right shall terminate to the extent of the shares of Common Stock with respect to which such associated Option was exercised or terminated.
     (c)  Exercise Price.
          (1) The price at which each share of Common Stock may be purchased upon exercise of a particular Option shall be as specified by the Committee, in its sole discretion, but in no event shall the exercise price be less than 100% of the Fair Market Value of a share of Common Stock at the time such Option is granted, except that the Committee may specifically provide that the exercise price of an Option may be higher or lower in the case of an Option granted to employees of a company acquired by the Company in assumption and substitution of options held by such employees at the time such company is acquired, provided that such assumption and substitution shall not cause a violation of the requirements of Section 409A.
          (2) Unless approved by shareholders and subject to adjustment pursuant to Section 4(d), the exercise price of any Option previously awarded under the Plan may not be adjusted downward, whether through amendment, cancellation or replacement grants, or by any other means.
          (3) If the Committee, in its discretion, shall deem it desirable, and subject to the requirements of Section 409A, if applicable, the grant of an Option may be made conditional upon the receipt of a payment therefor by the optionee or upon the optionee agreeing to forego receipt of an amount of other compensation. Such condition and the terms and conditions as to its satisfaction may also provide for the reimbursement to the optionee of any part or all of such payment under such circumstances as the Committee may specify.
     (d)  Exercise.

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          (1) Each Option shall be exercisable at such times and subject to such terms and conditions as the Committee may, in its sole discretion, specify, provided, however, that except in connection with a Change of Ownership, (i) Options granted to Participants who are subject to Section 16 of the Exchange Act shall not become exercisable within six (6) months from the date of grant and (ii) in no event may any Option granted hereunder be exercisable after the expiration of 15 years from the date of such grant. Subject to the foregoing, each Option grant shall specify the effect thereon of the death, retirement or other termination of employment of the optionee. In addition, the Committee may impose such other conditions with respect to the exercise of Options, including without limitation, any relating to the application of Federal or state securities laws, as it may deem necessary or advisable.
          (2) No shares shall be delivered pursuant to any exercise of an Option until the Participant has made payment in full of the option price therefor or provision for such payment satisfactory to the Committee. The exercise price of an Option may be paid in cash or certified or cashiers’ check or by delivery (either actually or by attestation) of shares of Common Stock that have been acquired or held by the Participant in such manner as to not result in an accounting charge. To the extent authorized by the Committee, either at the time of grant or at the time of exercise of an Option, the exercise price of an Option also may be paid through one of more of the following: (i) shares of capital stock of the Corporation, (ii) other property deemed acceptable by the Committee, (iii) a reduction in the number of shares or other property otherwise issuable pursuant to such Option, (iv) a promissory note of or other commitment to pay by the Participant or of a third party, the terms and conditions of which shall be determined by the Committee, or (v) any combination of the foregoing. No optionee or the legal representative, legatee or distributee of an optionee shall be deemed to be a holder of any shares subject to any Option prior to the issuance of such shares upon exercise of such Option.
     (e)  Transferability of Options. Unless the documents evidencing the grant of an Option (or an amendment thereto authorized by the Committee) expressly states that the Option is transferable as provided hereunder, no Option granted under the Plan may be sold, assigned, conveyed, gifted, pledged, hypothecated or otherwise transferred in any manner, other than by will or the laws of descent and distribution. The Committee may in its sole discretion grant an Option or amend an outstanding Option to provide that the Option is transferable or assignable to a member or members of the Participant’s “immediate family,” as such term is defined under Exchange Act Rule 16a-1(e), or to a trust for the benefit solely of a member or members of the Participant’s immediate family, or to a partnership or other entity whose only owners are members of the Participant’s family, provided that (1) no consideration is given in connection with the transfer of such Option, and (2) following any such transfer or assignment the Option will remain subject to substantially the same terms applicable to the Option while held by the Participant, as modified as the Committee in its sole discretion shall determine appropriate, and the transferee shall agree to be bound by such terms.
     (f) Evidence of Grant; Other Terms and Conditions. All Options shall be evidenced by an award agreement between the Company and the Participant. Such award agreement shall include such additional provisions not inconsistent with the Plan as may be specified by the Committee. The Committee shall determine the number of Shares subject to an Option and the

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exercise price of such Option on or before the date of grant of such Option, and shall not amend an Option to reduce the per Share exercise price (except as permitted by Section 4(d) hereof), extend the exercise period of an Option beyond the earlier of the latest date upon which the Option could have expired by its original terms under any circumstances or the tenth anniversary of the date of grant of such Option, or otherwise modify such Option or add any feature for the deferral of compensation in any manner that would cause a violation of the requirements of Section 409A.
     SECTION 7. Performance Stock Awards and Restricted Stock Awards.
     (a)  Performance Stock Awards. Subject to the terms of this Plan, Performance Stock Awards may be granted to Participants by the Committee from time to time at its sole discretion. Performance Stock Awards shall consist of an award of shares of Common Stock, the grant, issuance, retention and/or vesting of which shall be subject to such Performance Objectives, and to such further terms and conditions as the Committee deems appropriate. Each Performance Stock Award shall contain provisions regarding (1) the number of shares of Common Stock subject to such Award or a formula for determining such, (2) the performance criteria and level of achievement versus these criteria which shall determine the number of shares of Common Stock granted, issued, retainable and/or vested, (3) the period as to which performance shall be measured for determining achievement of such performance criteria (a “Performance Period”), (4) forfeiture provisions, and (5) such further terms and conditions, in each case not inconsistent with the Plan as may be determined from time to time by the Committee. The grant, issuance, retention and/or vesting of each Performance Stock Award shall be subject to such performance criteria and level of achievement versus these criteria as the Committee shall determine, which criteria may be based on financial performance and/or personal performance evaluations. Notwithstanding anything to the contrary herein, the performance criteria for any Performance Stock that is intended by the Committee to satisfy the requirements for “qualified performance-based compensation” under Code Section 162(m) shall be a measure based on one or more Performance Objectives selected by the Committee and specified at the time the Performance Stock Award is granted. Notwithstanding anything in this Plan to the contrary, Performance Stock Awards may provide that upon satisfaction of Performance Objectives the shares subject to the Award are subject to such further holding periods and/or restrictions on transferability as the Committee may provide. Any Performance Stock Award shall comply with, or be exempt from, the requirements of Section 409A.
     (b)  Restricted Stock Awards. Subject to the terms of this Plan, Restricted Stock Awards may be granted to Participants by the Committee from time to time at its sole discretion. Restricted Stock consists of shares of Common Stock which are registered or are issuable by the Company in the name of a Participant in exchange for such cash or other consideration, if any, as determined by the Committee. Restricted Stock shall be subject during specified periods of time to such conditions to vesting, to restrictions on their sale or other transfer by the Participant and/or to repurchase rights as may be determined by the Committee, consistent with the terms of the Plan. The transfer and sale of shares of Common Stock pursuant to Restricted Stock Awards shall be subject to the following terms and conditions:
          (1) The number of shares of Common Stock to be transferred or sold by the Company

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to a Participant pursuant to a Restricted Stock award shall be determined by the Committee.
          (2) Subject to the requirements of applicable law, the Committee shall determine the price, if any, at which shares of Restricted Stock shall be sold or awarded to a Participant, which may vary from time to time and among Participants and which may be below the Fair Market Value of such Shares at the date of grant.
          (3) All shares of Common Stock transferred or sold as Restricted Stock hereunder shall be subject to such restrictions or conditions as the Committee may determine, including, without limitation any or all of the following: (i) a prohibition against the sale, transfer, pledge or other encumbrance of the Shares, such prohibition to lapse at such time or times as the Committee shall determine (whether in annual or more frequent installments, at the time of the death, disability or retirement of the holder of such Shares, or otherwise); (ii) a requirement that the holder of shares of Common Stock forfeit or resell back to the Company at a price specified by the Committee (which price may be more than the price, if any, paid by the Participant for such Shares) all or part of such shares of Common Stock in the event of termination of employment during any period in which such shares of Common Stock are subject to conditions; (iii) such other conditions or restrictions as the Committee may deem advisable; and (iv) any applicable Performance Objectives which, if achieved, shall cause acceleration of the lapsing of restrictions imposed upon all or part of the shares covered by the Restricted Stock Award.
Notwithstanding anything else in this Plan to the contrary, the restrictions set forth in Section 7(b)(3) shall not lapse with respect to a Restricted Stock Award before the second anniversary of the date of grant of such Restricted Stock Award, provided, however, that the Committee, in its sole discretion, may designate that such restrictions shall lapse upon the achievement of Performance Objectives. Subject to the preceding sentence, once established, Performance Objectives and the terms under which the lapsing of restrictions may be accelerated may be changed, adjusted or amended by the Committee in its sole discretion. Notwithstanding anything in this Plan to the contrary, Restricted Stock Awards may provide that upon the lapsing of restrictions set forth above, the shares subject to the Award may be subject to such further holding periods and/or restrictions on transferability as the Committee may provide.
     (c)  Settlement of Awards. To the extent that any Performance Share Award or Restricted Stock Award provides for shares to be issued, or the Award to be otherwise settled, later than the date of grant of such Award, such issuance or settlement shall occur within 60 days after the date on which such Award shall vest. The Committee may provide for any Performance Share Award or Restricted Stock Award to be settled at such other time as it determines appropriate, provided that in no event shall any such Award be settled after the later of: (i) the 15 th day of the third month following the end of the Participant’s taxable year in which the Award is no longer subject to a substantial risk of forfeiture or (ii) the 15 th day of the third month following the end of the Company’s first taxable year in which the Award is no longer subject to a substantial risk of forfeiture.
     (d) Rights with Respect to Shares. Unless the terms of the Award provide otherwise, unless and until shares subject to the Award are forfeited pursuant to the terms of this Plan or the Award, a Participant shall have the right to vote and to receive dividends and other distributions

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on shares subject to a Performance Stock Award or Restricted Stock Award, subject, however, to the terms, conditions and restrictions described in this Plan and the Award.
     (e)  Escrow. Shares of Common Stock issued pursuant to a Performance Stock Award or Restricted Stock Award may be held in escrow by the Company until such time as the Committee shall have determined that the restrictions set forth in Section 7 have lapsed or until the shares subject to such Performance Stock Award or Restricted Stock Award are forfeited pursuant to their terms.
     (f)  Restrictive Legends. Certificates for shares of Common Stock delivered pursuant to Performance Stock Awards or Restricted Stock Awards may bear an appropriate legend referring to the terms, conditions and restrictions described in this Plan and in the applicable Award. Any attempt to dispose of any such shares of Common Stock in contravention of the terms, conditions and restrictions described in this Plan or in the applicable Award shall be ineffective. Any shares of Common Stock of the Company or other property, including cash, received by a Participant as a dividend or as a result of any stock split, combination, exchange of shares, reorganization, merger, consolidation or similar event with respect to shares of Common Stock received pursuant to a Performance Stock Award or Restrictive Stock Award shall have the same status and bear the same legend and be held in escrow pursuant to Section 7(d) as the shares received pursuant to the Performance Stock Award or Restricted Stock Award unless otherwise determined by the Committee at the time of such event.
     (g)  Designation of Beneficiaries. A Participant may designate a beneficiary or beneficiaries to receive such Participant’s Common Stock hereunder in the event of such Participant’s death, and may, at any time and from time to time, change any such beneficiary designation. All beneficiary designations and changes therein shall be in writing and shall be effective if and when delivered to the Committee during the lifetime of the Participant.
     (h)  Discretionary Adjustments. Notwithstanding satisfaction of any Performance Objectives, the number of shares of Common Stock granted, issued, retainable and/or vested under a Performance Stock Award on account of either financial performance or personal performance evaluations may be reduced by the Committee on the basis of such further considerations as the Committee in its sole discretion shall determine. The Committee may make adjustments or modifications, and its determination thereof shall be conclusive, in any applicable Performance Objectives to give effect to the intent of this Plan in connection with any event affecting the performance criteria established as the Performance Objectives, including without limitation, any reorganization, recapitalization, merger, consolidation, offering of additional shares of Common Stock or other change in the Company’s shareholders’ equity by means other than earnings, or any similar event, provided that any such adjustment or modification shall be made only to the extent that it will not cause a violation of the requirements of Section 409A. The grant of an Award shall not constitute or be evidence of any agreement or other understanding, express or implied, on the part of the Company or any Subsidiary to employ an individual for any specific period.
     SECTION 8. Stock Unit Awards

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     (a)  Grant of Stock Unit Awards. The Committee shall have authority to grant to Participants Stock Unit Awards, the value of which is based, in whole or in part, on the value of Common Stock. Each “Stock Unit” shall consist of a bookkeeping entry representing an amount equivalent to the Fair Market Value of one share of Common Stock. Such Stock Units represent an unfunded and unsecured obligation of the Company, except as otherwise provided for by the Committee. Stock Units may be granted as additional compensation or in lieu of any other compensation, as specified by the Committee, provided that Stock Units shall not be granted in substitution for or payment of any Award or other compensation in a manner that causes a violation of the requirements of Section 409A. Subject to the provisions of the Plan, Stock Unit Awards shall be subject to such terms, restrictions, conditions, vesting requirements and payment rules as the Committee may determine in its sole discretion.
     (b)  Transferability of Stock Units. Unless the Stock Unit Award (or an amendment thereto authorized by the Committee) expressly states otherwise, any shares of Common Stock which are part of a Stock Unit Award shall not be assigned, sold transferred, pledged or otherwise encumbered before the date on which the shares are issued.
     (c)  Settlement of Stock Units. Settlement of Stock Units shall be made by issuance of Common Stock (unless provided otherwise by the Committee at the time of grant).and shall occur within 60 days after the date on which such Stock Units shall vest. The Committee may provide in the terms of the Stock Unit Award for Stock Units to be settled in cash (in the sole discretion of the Company) and to be settled at such other times as it determines appropriate, provided that in no event shall any Stock Unit be settled after the later of: (i) the 15 th day of the third month following the end of the Participant’s first taxable year in which the Stock Unit is no longer subject to a substantial risk of forfeiture or (ii) the 15 th day of the third month following the end of the Company’s first taxable year in which the Stock Unit is no longer subject to a substantial risk of forfeiture. The amount of shares of Common Stock, or other settlement medium, to be so distributed may be increased by an interest factor or by dividend equivalents, which may be valued as if reinvested in Common Stock. Until a Stock Unit is settled, the number of shares of Common Stock represented by a Stock Unit shall be subject to adjustment pursuant to Section 4(d).
     SECTION 9. Special Rules.
     (a) Notwithstanding anything to the contrary in this Plan, unless otherwise specifically determined by the Committee at the time of grant, all Options theretofore granted and not fully exercisable shall become exercisable in full and the restrictions on all outstanding Awards shall lapse upon the occurrence of a Change of Ownership. A “Change of Ownership” shall be deemed to have occurred if either (1) individuals who, as of the Effective Date of this Plan, constitute the Board of Directors of the Company (the “Board of Directors” generally and as of the Effective Date, the “Incumbent Board”) cease for any reason to constitute at least a majority of the directors constituting the Board of Directors, provided that any person becoming a director subsequent to the Effective Date of this Plan whose election, or nomination for election by the Company’s shareholders, was approved by a vote of at least three-quarters (3/4) of the then directors who are members of the Incumbent Board (other than an election or nomination of an individual whose initial assumption of office is (i) in connection with the acquisition by a third

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person, including a “group” as such term is used in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended (the “Act”), of beneficial ownership, directly or indirectly, of 20% or more of the combined voting securities ordinarily having the right to vote for the election of directors of the Company (unless such acquisition of beneficial ownership was approved by a majority of the Board of Directors who are members of the Incumbent Board), or (ii) in connection with an actual or threatened election contest relating to the election of the directors of the Company, as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Act) shall be, for purposes of this Plan, considered as though such person were a member of the Incumbent Board, or (2) the Board of Directors (a majority of which shall consist of directors who are members of the Incumbent Board) has determined that a Change of Ownership triggering the exercisability of Options and the lapse of restrictions on Awards as described in this Section 10 shall have occurred. Options which become fully exercisable by reason of events specified in clauses (1) or (2) shall remain exercisable for 90 days following the date on which they become so exercisable, after which they will revert to being exercisable in accordance with their original terms, provided, however, that no Option which has previously been exercised or has expired or otherwise terminated shall become exercisable by virtue of this Section nor shall this Section permit exercise of any option during the portion, if any, of such 90 day period which follows the termination or expiration of any such Option.
     (b) For purposes of this Plan and any Option or Award hereunder, termination of employment shall not be deemed to occur upon the transfer of any optionee from the employ of the Company to the employ of any Subsidiary or affiliate. For purposes of this Plan, “affiliate” means (1) any entity 50% or more of the voting interest in which is owned, directly or indirectly, by an entity which owns, directly or indirectly, 50% or more of the voting interest in the Company and (2) any entity which owns, directly or indirectly, 50% or more of the voting interest in the Company.
     (c) Either at the time an Award is granted or by subsequent action, the Committee may impose such restrictions, conditions or limitations as it determines appropriate as to the timing and manner of any resales by a Participant or other subsequent transfers by a Participant of any shares issued under an Award, including without limitation (i) restrictions under an insider trading policy, (ii) restrictions designed to delay and/or coordinate the timing and manner of sales by Participants, and (iii) restrictions as to the use of a specified brokerage firm for such resales or other transfers.
     (d) The existence of outstanding Awards (including any Options) shall not affect in any way the right or power of the Company or its stockholders to make or authorize any or all adjustments, recapitalizations, reorganizations, exchanges, or other changes in the Company’s capital structure or its business, or any merger or consolidation of the Company, or any issuance of shares or other securities or subscription rights thereto, or any issuance of bonds, debentures, preferred or prior preference stock ahead of or affecting the shares or the rights thereof, or the dissolution or liquidation of the Company, or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding, whether of a similar character or otherwise. Further, except as herein expressly provided, (i) the issuance by the Company of shares of stock or any class of securities convertible into shares of stock of any class, for cash, property, labor or services, upon direct sale, upon the exercise of rights or warrants to subscribe therefor, or upon

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conversion of shares or obligations of the Company convertible into such shares or other securities, (ii) the payment of a dividend in property other than Common Stock, or (iii) the occurrence of any similar transaction, and in any case whether or not for fair value, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number of shares subject to Options theretofore granted or the purchase price per share, unless the Committee shall determine in its sole discretion that an adjustment is necessary to provide equitable treatment to Participant.
     SECTION 10. Delivery of Shares. No shares of Common Stock shall be delivered pursuant to an Award or any exercise of an Option until the requirements of such laws and regulations as may be deemed by the Committee to be applicable thereto are satisfied.
     SECTION 11. Financing and Withholding.
     (a)  Withholding of Taxes. As a condition to the making of an Award, to the lapse of the restrictions pertaining to an Award, to the transfer of shares issued under an Award or to the delivery of shares in connection with the exercise of an Option, the Company may require the Participant to pay to the Company, or make arrangements satisfactory to the Committee regarding payment of, any taxes of any kind required by law to be withheld with respect to such shares of Common Stock.
     (b)  Financing. If requested by a Participant who exercises an Option or who has received shares of Common Stock pursuant to an Award, the Committee may in its discretion provide financing to the Participant in a principal amount sufficient for the purchase of shares of Common Stock pursuant to such Option exercise or under such Award, and/or to pay the amount of taxes required by law to be withheld with respect to such Option exercise or such receipt of shares of Common Stock. Any such loan shall be subject to all legal requirements, and restrictions pertinent thereto, including if applicable, Regulation G promulgated by the Federal Reserve Board. The grant of an Option or Award shall in no way obligate the Company or the Committee to provide any financing whatsoever upon the lapse of restrictions on shares or the exercise of such Option.
     (c)  Withholding of Shares.
          (1) If requested by a Participant who acquires shares of Common Stock upon the exercise of an Option or who has received Common Stock pursuant to an Award with respect to which the restrictions shall have lapsed, the Committee may in its discretion permit the Participant to satisfy any tax withholding obligations, in whole or in part, by having the Company withhold a portion of such shares with a value equal to the amount of taxes required by law to be withheld, based on the applicable minimum statutory withholding rates.
          (2) Requests by a Participant to have shares of Common Stock withheld shall be (i) made prior to the Tax Date and (ii) irrevocable.
     SECTION 12. Amendments, Suspension or Discontinuance. The Board of Directors may amend, suspend or discontinue the Plan or any Option or Award granted under the Plan.

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Notwithstanding the foregoing, except as permitted by Section 4(c), the Board may not, without prior approval of the shareholders of the Company, make any amendment which operates (a) to reduce the exercise price of outstanding Options or amend the provisions of Section 6(c)(2) relating to repricing Options, (b) to materially increase the total number of shares of Common Stock which may be delivered in respect of Awards or on exercise of Options granted under the Plan, (c) to extend the maximum option period or the period which Options or Awards may be granted under the Plan or (d) to reduce the minimum permissible Option exercise price.
     SECTION 13. Term of Plan.
     (a)  Effective Date. The Plan became effective on February 1, 2001, the date the Plan was approved and adopted by the Board (the “Effective Date”), and was subsequently approved by the Company’s shareholders. This amendment and restatement shall be effective as of the Amendment Date as defined herein.
     (b)  Expiration Date. The Plan will expire on, and no Option or Award shall be granted under the Plan after, the date that is ten (10) years after the date on which the Plan was approved by the Company’s shareholders or after such earlier date as the Committee may decide, in its sole discretion.
     SECTION 14. Option Grants by Subsidiaries. In the case of a grant of an option to any Participant by a Subsidiary, such grant may, if the Committee so directs, be implemented by the Company issuing any subject shares to the Subsidiary, for such lawful consideration as the Committee may determine, upon the condition or understanding that the Subsidiary will transfer the shares to the optionholder in accordance with the terms of the option specified by the Committee pursuant to the provisions of the Plan. Notwithstanding any other provision hereof, such option may be issued by and in the name of the Subsidiary and shall be deemed granted on such date as the Committee shall determine.
     SECTION 15. Liability of the Company. The Company and any Affiliate which is in existence or hereafter comes into existence shall not be liable to a Participant, an Eligible Person or other persons as to:
     (a)  The Non-Issuance of Shares. The non-issuance or sale of shares as to which the Company has been unable to obtain from any regulatory body having jurisdiction the authority deemed by the Company’s counsel to be necessary to the lawful issuance and sale of any shares hereunder; and
     (b)  Tax Consequences. Any tax consequence expected, but not realized, by any Participant, Eligible Person or other person due to the receipt, exercise or settlement of any option or other Award granted hereunder.
     SECTION 16. Non-Exclusivity of the Plan. Neither the adoption of the Plan by the Board nor the submission of the Plan to the shareholders of the Company for approval shall be construed as creating any limitations on the power of the Board or the Committee to adopt such other incentive arrangements as it or they may deem desirable, including without limitation, the

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granting of restricted stock or stock options otherwise than under the Plan, and such arrangements may be either generally applicable or applicable only in specific cases.
     SECTION 17. Section 409A.
     (a) To the extent that the Committee determines that any Option or Award granted under the Plan is subject to Section 409A, the award agreement evidencing such Option or Award shall comply with the requirements of Section 409A. To the extent applicable, the Plan and award agreements shall be interpreted in accordance with Section 409A, including without limitation any Treasury Regulations or other Department of Treasury guidance that may be issued or amended after the Effective Date or the Amendment Date. Notwithstanding any provision of the Plan to the contrary, in the event that following the Effective Date the Committee determines that any Option or Award may be subject to Section 409A, including such Department of Treasury guidance as may be issued after the Effective Date or the Amendment Date, the Committee may adopt such amendments to the Plan and the applicable award agreement or adopt other policies and procedures (including amendments, policies and procedures (including amendments, policies and procedures with retroactive effect), or take any other actions that the Committee determines are necessary or appropriate to (i) exempt the Option or Award from Section 409A and/or preserve the intended tax treatment of the benefits provided with respect to the Option or Award, or (ii) comply with the requirements of Section 409A.
     (b) If, at the time of a Participant’s “separation from service” (within the meaning of Section 409A), (i) such Participant is a “specified employee” (within the meaning of Section 409A as determined annually by the Committee in accordance with the methodology specified by resolution of the Board or the Committee and in accordance with Section 1.409A-1(i) of the Treasury Regulations) and (ii) the Company shall make a good-faith determination that an amount payable pursuant to an Option or Award constitutes “deferred compensation” (within the meaning of Section 409A) the payment of which is required to be delayed pursuant to the six-month delay rule set forth in Section 409A in order to preserve the tax treatment intended for such payment or to avoid additional tax, interest, or penalties under Section 409A, then the Company shall not pay such amount on the otherwise scheduled payment date but shall instead pay it on the first business day after such six-month period. Such amount shall be paid without interest, unless otherwise determined by the Committee, in its sole discretion, or as otherwise provided in any applicable agreement between the Company and the relevant Participant.
     (c) For purposes of this Plan, whether a “separation from service” within the meaning of Section 409A has occurred shall be determined in accordance with Section 1.409A-1(h) of the Treasury Regulations. Without limiting the foregoing, (i) for a Participant who provides services to the Company as an employee, a separation from service shall be deemed to occur when a Participant has experienced a termination of employment with the Company, and the facts and circumstances indicate that the Participant and the Company reasonably anticipate that either (A) no further services will be performed for the Company after a certain date or (B) the level of bona fide services the Participant will perform for the Company after such date (whether as an employee or as an independent contractor) will permanently decrease to no more than 20% of the average level of bona fide services performed (whether as an employee or an independent contractor) over the immediately preceding 36-month period (or the full period of services to the

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Company if the Participant has been providing services to the Company less than 36 months); and (ii) for a Participant who provides services to the Company as an independent contractor, a separation from service shall be deemed to occur upon expiration of all contracts under which services are performed for the Company, provided that such expiration constitutes a good-faith and complete termination of the contractual relationship between the Participant and the Company, and provided, further, that for a Participant who provides services to the Company as both an employee and an independent contractor, a separation from service shall generally not occur until the Participant has ceased providing services for such Company as both an employee and an independent contractor pursuant to clauses (i) and (ii) of this sentence. For purposes of determining whether a separation from service has occurred, services performed for the Company shall include services performed both for the Company and for any other corporation that is a member of the same “controlled group” of corporations as the Company under Section 414(b) of the Code or any other trade or business (such as a partnership) that is under common control with the Company as determined under Section 414(c) of the Code, in each case as modified by Section 1.409A-1(h)(3) of the Treasury Regulations and substituting “at least 50 percent” for “at least 80 percent” each place it appears in Section 1563(a) of the Code or Section 1.414(c)-2 of the Treasury Regulations.
     (d) A Participant shall be solely responsible and liable for the satisfaction of all taxes, interest, and penalties that may be imposed on such Participant or for such Participant’s account in connection with an Option or Award (including any taxes, interest, and penalties under Section 409A), and neither the Company nor its affiliates shall have any obligation to indemnify or otherwise hold such Participant harmless from any or all of such taxes, interest, or penalties.

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Exhibit 10.26
          KB HOME
          Section 409A Nonqualified Deferred Compensation Plan — Effective January 1, 2009
           Master Plan Document
Section 409A Nonqualified Deferred Compensation Plan
Effective January 1, 2009
For Amounts Deferred or Vested On and After January 1, 2005

 


 

          KB HOME
          Section 409A Nonqualified Deferred Compensation Plan — Effective January 1, 2009
           Master Plan Document
TABLE OF CONTENTS
         
    Page  
ARTICLE 1 Definitions
    1  
 
       
ARTICLE 2 Selection, Enrollment, Eligibility
    8  
 
       
2.1 Selection by Committee
    8  
 
       
2.2 Enrollment and Eligibility Requirements; Commencement of Participation
    8  
 
       
ARTICLE 3 Deferral Commitments/Company Contribution Amounts/Company Matching Amounts /Vesting/Crediting/Taxes
    8  
 
       
3.1 Maximum Deferrals
    9  
 
       
3.2 Timing of Deferral Elections; Effect of Election Form
    9  
 
       
3.3 Withholding and Crediting of Annual Deferral Amounts
    11  
 
       
3.4 Company Contribution Amount
    11  
 
       
3.5 Company Matching Amount
    12  
 
       
3.6 Vesting
    12  
 
       
3.7 Crediting/Debiting of Account Balances
    13  
 
       
3.8 FICA and Other Taxes
    15  
 
       
ARTICLE 4 Short-Term Payout; Unforeseeable Emergencies
    15  
 
       
4.1 Short-Term Payouts
    15  
 
       
4.2 Postponing Short-Term Payouts
    16  
 
       
4.3 Other Benefits Take Precedence Over Short-Term Payouts
    16  
 
       
4.4 Unforeseeable Emergencies
    16  
 
       
ARTICLE 5 Retirement Benefit
    17  
 
       
5.1 Retirement Benefit
    17  
 
       
5.2 Payment of Retirement Benefit
    17  
 
       
ARTICLE 6 Pre-Retirement Survivor Benefit
    18  
 
       
6.1 Pre-Retirement Survivor Benefit
    18  
 
       
6.2 Payment of Pre-Retirement Survivor Benefit
    18  
 
       
ARTICLE 7 Termination Benefit
    19  
 
       
7.1 Termination Benefit
    19  
 
       

- i -


 

          KB HOME
          Section 409A Nonqualified Deferred Compensation Plan — Effective January 1, 2009
           Master Plan Document
         
    Page  
7.2 Payment of Termination Benefit
    19  
 
       
ARTICLE 8 Disability Benefit
    19  
 
       
8.1 Disability Benefit
    19  
 
       
8.2 Payment of Disability Benefit
    20  
 
       
ARTICLE 9 Post-Retirement Survivor Benefit
    20  
 
       
9.1 Death Prior to Completion of Retirement Benefit
    20  
 
       
9.2 Payment of Post-Retirement Survivor Benefit
    20  
 
       
ARTICLE 10 Beneficiary Designation
    20  
 
       
10.1 Beneficiary
    20  
 
       
10.2 Beneficiary Designation; Change; Spousal Consent
    20  
 
       
10.3 Acknowledgement
    21  
 
       
10.4 No Beneficiary Designation
    21  
 
       
10.5 Doubt as to Beneficiary
    21  
 
       
10.6 Discharge of Obligations
    21  
 
       
ARTICLE 11 Leave of Absence
    21  
 
       
11.1 Paid Leave of Absence
    21  
 
       
11.2 Unpaid Leave of Absence
    21  
 
       
ARTICLE 12 Termination of Plan, Amendment or Modification
    21  
 
       
12.1 Termination of Plan
    22  
 
       
12.2 Amendment
    22  
 
       
12.3 Plan Agreement
    22  
 
       
12.4 Effect of Payment
    22  
 
       
ARTICLE 13 Administration
    22  
 
       
13.1 Committee Duties
    23  
 
       
13.2 Administration Upon Change In Control
    23  
 
       
13.3 Agents
    23  
 
       
13.4 Binding Effect of Decisions
    23  
 
       
13.5 Indemnity of Committee
    23  
 
       

- ii -


 

          KB HOME
          Section 409A Nonqualified Deferred Compensation Plan — Effective January 1, 2009
           Master Plan Document
         
    Page  
13.6 Employer Information
    23  
 
       
ARTICLE 14 Other Benefits and Agreements
    24  
 
       
14.1 Coordination with Other Benefits
    24  
 
       
ARTICLE 15 Claims Procedures
    24  
 
       
15.1 Presentation of Claim
    24  
 
       
15.2 Notification of Decision
    24  
 
       
15.3 Review of a Denied Claim
    25  
 
       
15.4 Decision on Review
    25  
 
       
15.5 Legal Action
    26  
 
       
ARTICLE 16 Trust
    26  
 
       
16.1 Establishment of the Trust
    26  
 
       
16.2 Interrelationship of the Plan and the Trust
    26  
 
       
16.3 Distributions From the Trust
    26  
 
       
ARTICLE 17 Miscellaneous
    26  
 
       
17.1 Status of Plan
    26  
 
       
17.2 Unsecured General Creditor
    26  
 
       
17.3 Employer’s Liability
    27  
 
       
17.4 Nonassignability
    27  
 
       
17.5 Not a Contract of Employment
    27  
 
       
17.6 Furnishing Information
    27  
 
       
17.7 Terms
    27  
 
       
17.8 Captions
    27  
 
       
17.9 Governing Law
    27  
 
       
17.10 Notice
    27  
 
       
17.11 Successors
    28  
 
       
17.12 Spouse’s Interest
    28  
 
       
17.13 Validity
    28  
 
       
17.14 Incompetent
    28  
 

- iii -


 

          KB HOME
          Section 409A Nonqualified Deferred Compensation Plan — Effective January 1, 2009
           Master Plan Document
         
    Page  
17.15 Domestic Relations Orders
    28  
 
       
17.16 Distribution in the Event of Income Inclusion Under Code Section 409A
    28  
 
       
17.17 Deduction Limitation on Benefit Payments
    29  
 
       
APPENDIX A
    30  

- iv -


 

          KB HOME
          Section 409A Nonqualified Deferred Compensation Plan — Effective January 1, 2009
           Master Plan Document
KB HOME
SECTION 409A NONQUALIFIED DEFERRED COMPENSATION PLAN
Effective January 1, 2009
Purpose
          This Plan applies with respect to compensation deferred or vested on and after January 1, 2005. There is a separate KB Home Nonqualified Deferred Compensation Plan, effective as of March 1, 2001, that applies with respect to amounts deferred and vested prior to January 1, 2005. The purpose of this Plan is to provide specified benefits to a select group of management or highly compensated Employees who contribute materially to the continued growth, development and future business success of KB Home, a Delaware corporation, and its subsidiaries, if any, that sponsor this Plan. This Plan shall be unfunded for tax purposes and for purposes of Title I of ERISA.
          This Plan is intended to comply with all applicable law, including Code Section 409A and related Treasury guidance and Regulations, and shall be operated and interpreted in accordance with this intention. In order to transition to the requirements of Code Section 409A and related Treasury Regulations, the Committee may make available to Participants certain transition relief provided under Notice 2006-79 and Notice 2007-86, as described more fully in Appendix A of this Plan.
ARTICLE 1
Definitions
          For the purposes of this Plan, unless otherwise clearly apparent from the context, the following phrases or terms shall have the following indicated meanings:
1.1   “Account Balance” shall mean, with respect to a Participant, an entry on the records of the Employer equal to the sum of the Participant’s Annual Accounts. The Account Balance shall be a bookkeeping entry only and shall be utilized solely as a device for the measurement and determination of the amounts to be paid to a Participant, or his or her designated Beneficiary, pursuant to this Plan.
 
1.2   “Annual Account” shall mean, with respect to a Participant, an entry on the records of the Employer equal to (a) the sum of the Participant’s Annual Deferral Amount, Company Contribution Amount and Company Matching Amount for any one Plan Year, plus (b) amounts credited or debited to such amounts pursuant to this Plan, less (c) all distributions made to the Participant or his or her Beneficiary pursuant to this Plan that relate to the Annual Account for such Plan Year. The Annual Account shall be a bookkeeping entry only and shall be utilized solely as a device for the measurement and determination of the amounts to be paid to a Participant, or his or her designated Beneficiary, pursuant to this Plan.

1


 

          KB HOME
          Section 409A Nonqualified Deferred Compensation Plan — Effective January 1, 2009
           Master Plan Document
1.3   “Annual Deferral Amount” shall mean that portion of a Participant’s Base Salary and Bonus that a Participant defers in accordance with Article 3 for any one Plan Year, without regard to whether such amounts are withheld and credited during such Plan Year.
 
1.4   “Annual Installment Method” shall mean the method used to determine the amount of each payment due to a Participant who has elected to receive a benefit over a period of years in accordance with the applicable provisions of the Plan. The amount of each annual payment due to the Participant shall be calculated by multiplying the balance of the Participant’s benefit by a fraction, the numerator of which is one and the denominator of which is the remaining number of annual payments due to the Participant. The amount of the first annual payment shall be calculated as of the close of business on or around the Participant’s Benefit Distribution Date, and the amount of each subsequent annual payment shall be calculated on or around each anniversary of such Benefit Distribution Date. For purposes of this Plan, the right to receive a benefit payment in annual installments shall be treated as the entitlement to a single payment.
 
1.5   “Base Salary” shall mean the annual cash compensation relating to services performed during any calendar year, excluding distributions from nonqualified deferred compensation plans, bonuses, commissions, overtime, fringe benefits, stock options, relocation expenses, incentive payments, non-monetary awards, director fees and other fees, and automobile and other allowances paid to a Participant for employment services rendered (whether or not such allowances are included in the Employee’s gross income). Base Salary shall be calculated before reduction for compensation voluntarily deferred or contributed by the Participant pursuant to all qualified or nonqualified plans of any Employer and shall be calculated to include amounts not otherwise included in the Participant’s gross income under Code Sections 125, 402(e)(3), 402(h), or 403(b) pursuant to plans established by any Employer; provided, however, that all such amounts will be included in compensation only to the extent that had there been no such plan, the amount would have been payable in cash to the Employee.
 
1.6   “Beneficiary” shall mean one or more persons, trusts, estates or other entities, designated in accordance with Article 10, that are entitled to receive benefits under this Plan upon the death of a Participant.
 
1.7   “Beneficiary Designation Form” shall mean the form established from time to time by the Committee that a Participant completes, signs and returns to the Committee to designate one or more Beneficiaries.
 
1.8   “Benefit Distribution Date” shall mean the date upon which all or an objectively determinable portion of a Participant’s vested benefits will become eligible for distribution. Except as otherwise provided in the Plan, a Participant’s Benefit Distribution Date shall be determined based on the earliest to occur of an event or scheduled date set forth in Articles 4 through 9, as applicable.
 
1.9   “Board” shall mean the board of directors of the Company.

2


 

          KB HOME
          Section 409A Nonqualified Deferred Compensation Plan — Effective January 1, 2009
           Master Plan Document
1.10   “Bonus” shall mean compensation earned by a Participant under any Employer’s annual bonus plan (and shall not include any other incentive compensation).
 
1.11   “Change in Control” shall mean the first to occur of either of the following events:
  (a)   individuals who, as of March 1, 2001, constitute the Board of Directors of the Company (the “Incumbent Board”) cease for any reason to constitute at least a majority of the directors constituting the Board of Directors, provided that any person becoming a director subsequent to March 1, 2001, whose election, or nomination for election by the Company’s shareholders, was approved by a vote of at least three-quarters (3/4) of the then directors who are members of the Incumbent Board (other than an election or nomination of an individual whose initial assumption of office is (i) in connection with the acquisition by a third person, including a “group” as such term is used in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended (the “Act”), of beneficial ownership, directly or indirectly, of 20% or more of the combined voting securities ordinarily having the right to vote for the election of directors of the Company (unless such acquisition of beneficial ownership was approved by a majority of the Board of Directors who are members of the Incumbent Board), or (ii) in connection with an actual or threatened election contest relating to the election of the directors of the Company, as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Act) shall be, for purposes of this Plan, considered as though such person were a member of the Incumbent Board; or
 
  (b)   the Board of Directors (a majority of which shall consist of directors who are members of the Incumbent Board) has determined that a Change in Control shall have occurred.
1.12   “Code” shall mean the Internal Revenue Code of 1986, as it may be amended from time to time.
 
1.13   “Committee” shall mean the committee described in Article 13.
 
1.14   “Company” shall mean KB HOME, a Delaware corporation, and any successor to all or substantially all of the Company’s assets or business.
 
1.15   “Company Contribution Amount” shall mean, for any one Plan Year, the amount determined in accordance with Section 3.4.
 
1.16   “Company Matching Amount” shall mean, for any one Plan Year, the amount determined in accordance with Section 3.5.
 
1.17   “Director” shall mean any member of the board of directors of any Employer.
 
1.18   “Disability” or “Disabled” shall mean that a Participant is either (a) unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, or (b) by reason of any medically determinable physical or

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          KB HOME
          Section 409A Nonqualified Deferred Compensation Plan — Effective January 1, 2009
           Master Plan Document
    mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, receiving income replacement benefits for a period of not less than 3 months under an accident and health plan covering employees of the Participant’s Employer. For purposes of this Plan, a Participant shall be deemed Disabled if determined to be totally disabled by the Social Security Administration. A Participant shall also be deemed Disabled if determined to be disabled in accordance with the applicable disability insurance program of such Participant’s Employer, provided that the definition of “disability” applied under such disability insurance program complies with the requirements of this Section. Notwithstanding the foregoing, and solely for purposes of vesting under Section 3.6(d), “Disability” shall mean a period of disability during which a Participant qualifies for permanent disability benefits under the KB Home Long-term Disability Plan, or, if a Participant does not participate in such plan, a period of disability during which the Participant would have qualified for permanent disability benefits under such plan had the Participant been a participant in such plan, as determined in the sole discretion of the Committee, and if the Participant’s Employer does not sponsor such plan, or discontinues to sponsor such plan, Disability shall be determined by the Committee in its sole discretion.
1.19   “Election Form” shall mean the form, which may be in electronic format, established from time to time by the Committee that a Participant completes, signs and returns to the Committee to make an election under the Plan.
 
1.20   “Employee” shall mean a person who is an employee of an Employer.
 
1.21   “Employer(s)” shall be defined as follows:
  (a)   Except as otherwise provided in part (b) of this Section, the term “Employer” shall mean the Company and/or any of its subsidiaries (now in existence or hereafter formed or acquired) that have been selected by the Board to participate in the Plan and have adopted the Plan as a sponsor.
 
  (b)   For the purpose of determining whether a Participant has experienced a Separation from Service, the term “Employer” shall mean:
  (i)   The entity for which the Participant performs services and with respect to which the legally binding right to compensation deferred or contributed under this Plan arises; and
 
  (ii)   All other entities with which the entity described above would be aggregated and treated as a single employer under Code Section 414(b) (controlled group of corporations) and Code Section 414(c) (a group of trades or businesses, whether or not incorporated, under common control), as applicable. In order to identify the group of entities described in the preceding sentence, the Committee shall use an ownership threshold of at least 50% as a substitute for the 80% minimum ownership threshold that appears in, and otherwise must be used when applying, the applicable provisions of (A) Code Section 1563 for determining a controlled

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          KB HOME
          Section 409A Nonqualified Deferred Compensation Plan — Effective January 1, 2009
           Master Plan Document
      group of corporations under Code Section 414(b), and (B) Treas. Reg. §1.414(c)-2 for determining the trades or businesses that are under common control under Code Section 414(c).
1.22   “ERISA” shall mean the Employee Retirement Income Security Act of 1974, as it may be amended from time to time.
 
1.23   “401(k) Plan” shall mean, that certain KB HOME 401(k) Savings Plan adopted by the Employer, as it may be amended from time to time.
 
1.24   “Participant” shall mean any Employee (i) who is selected by the Board (or a committee to which the Board has delegated such authority) from among the highly compensated and management employees of the Employer to participate in the Plan, (ii) who elects to participate in the Plan, (iii) who signs a Plan Agreement, an Election Form and a Beneficiary Designation Form, (iv) whose signed Plan Agreement, Election Form and Beneficiary Designation Form are accepted by the Committee, (v) who commences participation in the Plan, and (vi) whose Plan Agreement has not terminated. A spouse or former spouse of a Participant shall not be treated as a Participant in the Plan or have an account balance under the Plan, even if he or she has an interest in the Participant’s benefits under the Plan as a result of applicable law or property settlements resulting from legal separation or divorce.
 
1.25   “Performance-Based Compensation” shall mean compensation the entitlement to or amount of which is contingent on the satisfaction of pre-established organizational or individual performance criteria relating to a performance period of at least 12 consecutive months, as determined by the Committee in accordance with Treas. Reg. §1.409A-1(e).
 
1.26   “Plan” shall mean the KB HOME Section 409A Nonqualified Deferred Compensation Plan, which shall be evidenced by this instrument, as it may be amended from time to time, and by any other documents that together with this instrument define a Participant’s rights to amounts credited to his or her Account Balance.
 
1.27   “Plan Agreement” shall mean a written agreement in the form prescribed by or acceptable to the Committee that evidences a Participant’s agreement to the terms of the Plan and which may establish additional terms or conditions of Plan participation for a Participant. Unless otherwise determined by the Committee, the most recent Plan Agreement accepted with respect to a Participant shall supersede any prior Plan Agreements for such Participant. Plan Agreements may vary among Participants and may provide additional benefits not set forth in the Plan or limit the benefits otherwise provided under the Plan.
 
1.28   “Plan Year” shall mean a period beginning on January 1 of each calendar year and continuing through December 31 of such calendar year.
 
1.29   “Retirement,” “Retire(s)” or “Retired” shall mean with respect to a Participant who is an Employee, a Separation from Service for any reason other than a leave of absence, death or

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          KB HOME
          Section 409A Nonqualified Deferred Compensation Plan — Effective January 1, 2009
           Master Plan Document
    Disability at such time as the sum of the Employee’s age and Years of Service equals at least sixty-five (65) or more, provided that the Employee is then at least fifty-five (55) years of age.
1.30   “Separation from Service” shall mean a termination of services provided by a Participant to his or her Employer, whether voluntarily or involuntarily, other than by reason of death or Disability, as determined by the Committee in accordance with Treas. Reg. §1.409A-1(h). In determining whether a Participant has experienced a Separation from Service, the following provisions shall apply:
  (a)   For a Participant who provides services to an Employer as an Employee, except as otherwise provided in part (c) of this Section, a Separation from Service shall occur when such Participant has experienced a termination of employment with such Employer. A Participant shall be considered to have experienced a termination of employment when the facts and circumstances indicate that the Participant and his or her Employer reasonably anticipate that either (i) no further services will be performed for the Employer after a certain date, or (ii) that the level of bona fide services the Participant will perform for the Employer after such date (whether as an Employee or as an independent contractor) will permanently decrease to no more than 20% of the average level of bona fide services performed by such Participant (whether as an Employee or an independent contractor) over the immediately preceding 36-month period (or the full period of services to the Employer if the Participant has been providing services to the Employer less than 36 months).
     If a Participant is on military leave, sick leave, or other bona fide leave of absence, the employment relationship between the Participant and the Employer shall be treated as continuing intact, provided that the period of such leave does not exceed 6 months, or if longer, so long as the Participant retains a right to reemployment with the Employer under an applicable statute or by contract. If the period of a military leave, sick leave, or other bona fide leave of absence exceeds 6 months and the Participant does not retain a right to reemployment under an applicable statute or by contract, the employment relationship shall be considered to be terminated for purposes of this Plan as of the first day immediately following the end of such 6-month period. In applying the provisions of this paragraph, a leave of absence shall be considered a bona fide leave of absence only if there is a reasonable expectation that the Participant will return to perform services for the Employer. For purposes of this paragraph, where a leave of absence is due to any physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than six months, where such impairment causes the Participant to be unable to perform the duties of his or her position of employment or any substantially similar position of employment, a 29-month period of absence shall be substituted for such 6-month period.
  (b)   For a Participant who provides services to an Employer as an independent contractor, except as otherwise provided in part (c) of this Section, a Separation from Service shall occur upon the expiration of the contract (or in the case of more than one contract, all

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          KB HOME
          Section 409A Nonqualified Deferred Compensation Plan — Effective January 1, 2009
           Master Plan Document
      contracts) under which services are performed for such Employer, provided that the expiration of such contract(s) is determined by the Committee to constitute a good-faith and complete termination of the contractual relationship between the Participant and such Employer.
  (c)   For a Participant who provides services to an Employer as both an Employee and an independent contractor , a Separation from Service generally shall not occur until the Participant has ceased providing services for such Employer as both as an Employee and as an independent contractor, as determined in accordance with the provisions set forth in parts (a) and (b) of this Section, respectively. Similarly, if a Participant either (i) ceases providing services for an Employer as an independent contractor and begins providing services for such Employer as an Employee, or (ii) ceases providing services for an Employer as an Employee and begins providing services for such Employer as an independent contractor, the Participant will not be considered to have experienced a Separation from Service until the Participant has ceased providing services for such Employer in both capacities, as determined in accordance with the applicable provisions set forth in parts (a) and (b) of this Section.
     Notwithstanding the foregoing provisions in this part (c), if a Participant provides services for an Employer as both an Employee and as a Director, to the extent permitted by Treas. Reg. §1.409A-1(h)(5) the services provided by such Participant as a Director shall not be taken into account in determining whether the Participant has experienced a Separation from Service as an Employee.
  (d)   For purposes of this Subsection, services performed for the Employer shall include service performed both for the Employer and for any other corporation that is a member of the same “controlled group” of corporations as the Employer under Section 414(b) of the Code or any other trade or business (such as a partnership)_that is under common control with the Employer as determined under Section 414(c) of the Code, in each case as modified by Treasury Regulation Section 1.409A-1(h)(3) and substituting “at least 50 percent” for “at least 80 percent” each place it appears in Section 1563(a) of the Code or Treasury Regulation Section 1.414(c)-2.
1.31   “Specified Employee” shall mean any Participant who is determined to be a “key employee” (as defined under Code Section 416(i) without regard to paragraph (5) thereof) for the applicable period, as determined annually by the Committee in accordance with the methodology specified by resolution of the Board or the Management Development and Compensation Committee of the Board and in accordance with Treas. Reg. §1.409A-1(i).
 
1.32   “Trust” shall mean one or more trusts established by the Company in accordance with Article 16.
 
1.33   “Unforeseeable Emergency” shall mean a severe financial hardship of the Participant resulting from (a) an illness or accident of the Participant, the Participant’s spouse, the Participant’s Beneficiary or the Participant’s dependent (as defined in Code Section 152 without regard to

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          KB HOME
          Section 409A Nonqualified Deferred Compensation Plan — Effective January 1, 2009
           Master Plan Document
    paragraphs (b)(1), (b)(2) and (d)(1)(b) thereof), (b) a loss of the Participant’s property due to casualty, or (c) such other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant, all as determined by the Committee based on the relevant facts and circumstances.
1.34   “Years of Service” shall mean the total number of full years in which a Participant has been employed by one or more Employers. For purposes of this definition, a year of employment shall be a 365 day period (or 366 day period in the case of a leap year) that, for the first year of employment, commences on the Employee’s date of hiring and that, for any subsequent year, commences on an anniversary of that hiring date. A partial year of employment shall not be treated as a Year of Service.
ARTICLE 2
Selection, Enrollment, Eligibility
2.1   Selection by Committee . Participation in the Plan shall be limited to,a select group of management or highly compensated Employees (as determined by the Committee in its sole discretion). From that group, the Committee shall select, in its sole discretion, those individuals who may actually participate in this Plan.
 
2.2   Enrollment and Eligibility Requirements; Commencement of Participation .
  (a)   As a condition to participation, each selected Employee shall complete, execute and return to the Committee a Plan Agreement, an Election Form and a Beneficiary Designation Form by the deadline(s) established by the Committee in accordance with the applicable provisions of this Plan. In addition, the Committee shall establish from time to time such other enrollment requirements as it determines, in its sole discretion, are necessary.
 
  (b)   Each selected Employee who is eligible to participate in the Plan shall commence participation in the Plan on the date that the Committee determines that the Employee has met all enrollment requirements set forth in this Plan and required by the Committee, including returning all required documents to the Committee within the specified time period.
 
  (c)   If an Employee fails to meet all requirements established by the Committee within the period required, that Employee shall not be eligible to participate in the Plan during such Plan Year.

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          KB HOME
          Section 409A Nonqualified Deferred Compensation Plan — Effective January 1, 2009
           Master Plan Document
ARTICLE 3
Deferral Commitments/Company Contribution Amounts/
Company Matching Amounts/ Vesting/Crediting/Taxes
3.1   Maximum Deferrals .
  (a)   Maximum Deferrals for Annual Deferral Amount . For each Plan Year, a Participant may elect to defer, as his or her Annual Deferral Amount, Base Salary and Bonus, up to the following maximum percentages for each deferral elected:
         
Deferral
  Maximum Percentage  
Base Salary
    75%
Bonus
    75%
  (b)   Maximum Deferrals for Short Plan Year . Notwithstanding the foregoing, if a Participant first becomes a Participant after the first day of a Plan Year, then to the extent required by Section 3.2 and Code Section 409A and related Treasury Regulations, the maximum amount of the Participant’s Base Salary and Bonus that may be deferred by the Participant for the Plan Year shall be determined by applying the percentages set forth in Section 3.1(c) to the portion of such compensation attributable to services performed after the date that the Participant’s deferral election is made.
3.2   Timing of Deferral Elections; Effect of Election Form .
  (a)   General Timing Rule for Deferral Elections . Except as otherwise provided in this Section 3.2, in order for a Participant to make a valid election to defer Base Salary and Bonus, the Participant must submit an Election Form on or before the deadline established by the Committee, which in no event shall be later than the December 31 st preceding the Plan Year in which such compensation will be earned.
     Any deferral election made in accordance with this Section 3.2(a) shall be irrevocable; provided, however, that if the Committee permits or requires Participants to make a deferral election by the deadline described above for an amount that qualifies as Performance-Based Compensation, the Committee may permit a Participant to subsequently change his or her deferral election for such compensation by submitting a new Election Form in accordance with Section 3.2(d) below.

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          KB HOME
          Section 409A Nonqualified Deferred Compensation Plan — Effective January 1, 2009
           Master Plan Document
  (b)   Timing of Deferral Elections for Newly Eligible Plan Participants . A selected Employee who first becomes eligible to participate in the Plan on or after the beginning of a Plan Year, as determined in accordance with Treas. Reg. §1.409A-2(a)(7)(ii) and the “plan aggregation” rules provided in Treas. Reg. §1.409A-1(c)(2), may be permitted to make an election to defer the portion of Base Salary or Bonus, attributable to services to be performed after such election, provided that the Participant submits an Election Form on or before the deadline established by the Committee, which in no event shall be later than 30 days after the Participant first becomes eligible to participate in the Plan.
     If a deferral election made in accordance with this Section 3.2(b) relates to compensation earned based upon a specified performance period, the amount eligible for deferral shall be equal to (i) the total amount of compensation for the performance period, multiplied by (ii) a fraction, the numerator of which is the number of days remaining in the service period after the Participant’s deferral election is made, and the denominator of which is the total number of days in the performance period.
     Any deferral election made in accordance with this Section 3.2(b) shall become irrevocable no later than the 30 th day after the date the selected Employee becomes eligible to participate in the Plan.
  (c)   Timing of Deferral Elections for Fiscal Year Compensation . In the event that the fiscal year of an Employer is different than the taxable year of a Participant, the Committee may determine that a deferral election may be made for “fiscal year compensation” (as defined below), by submitting an Election Form on or before the deadline established by the Committee, which in no event shall be later than the last day of the Employer’s fiscal year immediately preceding the fiscal year in which the services related to such compensation will begin to be performed. For purposes of this Section, the term “fiscal year compensation” shall only include Bonus amounts relating to a service period coextensive with one or more consecutive fiscal years of the Employer, of which no amount is paid or payable during the Employer’s fiscal year(s) that constitute the service period.
     A deferral election made in accordance with this Section 3.2(c) shall be irrevocable; provided, however, that if the Committee permits or requires Participants to make a deferral election by the deadline described in this Section 3.2(c) for an amount that qualifies as Performance-Based Compensation, the Committee may permit a Participant to subsequently change his or her deferral election for such compensation by submitting a new Election Form in accordance with 3.2(d) below.
  (d)   Timing of Deferral Elections for Performance-Based Compensation . Subject to the limitations described below, the Committee may determine that an irrevocable deferral election for an amount that qualifies as Performance-Based Compensation may be made by submitting an Election Form on or before the deadline established by the Committee, which in no event shall be later than 6 months before the end of the performance period.

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          KB HOME
          Section 409A Nonqualified Deferred Compensation Plan — Effective January 1, 2009
           Master Plan Document
     In order for a Participant to be eligible to make a deferral election for Performance-Based Compensation in accordance with the deadline established pursuant to this Section 3.2(d), the Participant must have performed services continuously from the later of (i) the beginning of the performance period for such compensation, or (ii) the date upon which the performance criteria for such compensation are established, through the date upon which the Participant makes the deferral election for such compensation. In no event shall a deferral election submitted under this Section 3.2(d) be permitted to apply to any amount of Performance-Based Compensation that has become readily ascertainable.
  (e)   Timing Rule for Deferral of Compensation Subject to Risk of Forfeiture . With respect to compensation (i) to which a Participant has a legally binding right to payment in a subsequent year, and (ii) that is subject to a forfeiture condition requiring the Participant’s continued services for a period of at least 12 months from the date the Participant obtains the legally binding right, the Committee may determine that an irrevocable deferral election for such compensation may be made by timely delivering an Election Form to the Committee in accordance with its rules and procedures, no later than the 30 th day after the Participant obtains the legally binding right to the compensation, provided that the election is made at least 12 months in advance of the earliest date at which the forfeiture condition could lapse, as determined in accordance with Treas. Reg. §1.409A-2(a)(5).
     Any deferral election(s) made in accordance with this Section 3.2(e) shall become irrevocable no later than the 30 th day after the Participant obtains the legally binding right to the compensation subject to such deferral election(s).
3.3   Withholding and Crediting of Annual Deferral Amounts . For each Plan Year, the Base Salary portion of the Annual Deferral Amount shall be withheld from each regularly scheduled Base Salary payroll in equal amounts, as adjusted from time to time for increases and decreases in Base Salary. The Bonus portion of the Annual Deferral Amount shall be withheld at the time the Bonus are or otherwise would be paid to the Participant, whether or not this occurs during the Plan Year itself. Annual Deferral Amounts shall be credited to the Participant’s Annual Account for such Plan Year at the time such amounts would otherwise have been paid to the Participant.
 
3.4   Company Contribution Amount .
  (a)   For each Plan Year, an Employer may be required to credit amounts to a Participant’s Annual Account in accordance with employment or other agreements entered into between the Participant and the Employer, which amounts shall be part of the Participant’s Company Contribution Amount for that Plan Year. Such amounts shall be credited to the Participant’s Annual Account for the applicable Plan Year on the date or dates prescribed by such agreements.
 
  (b)   For each Plan Year, an Employer, in its sole discretion, may, but is not required to, credit any amount it desires to any Participant’s Annual Account under this Plan, which amount shall be part of the Participant’s Company Contribution Amount for that Plan Year. The

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Section 409A Nonqualified Deferred Compensation Plan — Effective January 1, 2009
Master Plan Document
      amount so credited to a Participant may be smaller or larger than the amount credited to any other Participant, and the amount credited to any Participant for a Plan Year may be zero, even though one or more other Participants receive a Company Contribution Amount for that Plan Year. The Company Contribution Amount described in this Section 3.4(b), if any, shall be credited to the Participant’s Annual Account for the applicable Plan Year on a date or dates to be determined by the Committee.
 
  (c)   If not otherwise specified in the Participant’s employment or other agreement entered into between the Participant and the Employer, the amount (or the method or formula for determining the amount) of a Participant’s Company Contribution Amount shall be set forth in writing in one or more documents, which shall be deemed to be incorporated into this Plan in accordance with Section 1.26, no later than the date on which such Company Contribution Amount is credited to the applicable Annual Account of the Participant.
3.5   Company Matching Amount . A Participant’s Annual Company Matching Amount for any Plan Year shall be the sum of all Pay Period Company Matching Contributions for the Plan Year. For this purpose, a Pay Period Company Matching Contribution shall mean an amount which, when added to the matching contribution allocated to the Participant’s account under the 401(k) Plan for the same pay period, equals the match the Participant would have received under the 401(k) Plan during the corresponding plan year of the 401(k) Plan, if the portion of Annual Base Salary elected to be deferred had instead been elected and contributed as a salary deferral contribution under the 401(k) Plan (determined as if the 401(k) Plan was not subject to the limitations imposed under Code Sections 401(a)(17), 401(k)(3), 402(g) and 415). The Annual Company Matching Amount shall be credited during the Plan Year on a pay period-by-pay period basis. The Annual Company Matching Amount shall not be credited for any Annual Bonus deferrals made to this Plan. Notwithstanding any provision of this Plan to the contrary, the Company shall have the right, in its sole and absolute discretion, to alter the manner in which the Annual Company Matching Amount is calculated and/or to terminate the Annual Company Matching Amount.
3.6   Vesting .
  (a)   A Participant shall at all times be 100% vested in the portion of his or her Account Balance attributable to Annual Deferral Amounts, plus amounts credited or debited on such amounts pursuant to Section 3.7.
 
  (b)   A Participant shall be vested in the portion of his or her Account Balance attributable to any Company Contribution Amounts, plus amounts credited or debited on such amounts pursuant to Section 3.7, in accordance with the vesting schedules established by the Committee, in its sole and absolute discretion, at the time each such Company Contribution Amount is first credited to the Participant’s Account Balance under the Plan. The vesting schedules established by the Committee for each Company Contribution Amount may be different for different Participants.
 

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Section 409A Nonqualified Deferred Compensation Plan — Effective January 1, 2009
Master Plan Document
  (c)   A Participant shall be vested in the portion of his or her Company Matching Amount in accordance with the following schedule:
         
Years of Service   Vested Percentage
Less than 1 year
    0 %
1 year or more, but less than 2
    10 %
2 years or more, but less than 3
    25 %
3 years or more, but less than 4
    50 %
4 years or more, but less than 5
    75 %
5 years or more
    100 %
  (d)   Notwithstanding anything to the contrary contained in this Section 3.6, except as provided in (e) below, in the event of a Change in Control, or upon a Participant’s Disability, Separation from Service on or after qualifying for Retirement, or death prior to Separation from Service, any amounts that are not vested in accordance with Sections 3.6(b) or 3.6(c) above, shall immediately become 100% vested.
 
  (e)   Notwithstanding subsection 3.6(d) above, the vesting schedules described in Sections 3.6(b) or 3.6(c) above shall not be accelerated upon a Change in Control to the extent that the Committee determines that such acceleration would cause the deduction limitations of Section 280G of the Code to become effective. In the event of such a determination, the Participant may request independent verification of the Committee’s calculations with respect to the application of Section 280G. In such case, the Committee must provide to the Participant within 90 days of such a request an opinion from a nationally recognized accounting firm selected by the Participant (the “Accounting Firm”). The opinion shall state the Accounting Firm’s opinion that any limitation in the vested percentage hereunder is necessary to avoid the limits of Section 280G and contain supporting calculations. The cost of such opinion shall be paid for by the Company.
 
  (f)   Section 3.6(e) shall not prevent the acceleration of the vesting schedules described in Sections 3.6(b) and 3.6(c) if such Participant is entitled to a “gross-up” payment, to eliminate the effect of the Code section 4999 excise tax, pursuant to his or her employment agreement or other agreement entered into between such Participant and the Employer.
3.7   Crediting/Debiting of Account Balances . In accordance with, and subject to, the rules and procedures that are established from time to time by the Committee, in its sole discretion, amounts shall be credited or debited to a Participant’s Account Balance in accordance with the following rules:
  (a)   Measurement Funds . The Participant may elect one or more of the measurement funds selected by the Committee, in its sole discretion, which are based on certain mutual funds (the “Measurement Funds”), for the purpose of crediting or debiting additional amounts

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Section 409A Nonqualified Deferred Compensation Plan — Effective January 1, 2009
Master Plan Document
      to his or her Account Balance. As necessary, the Committee may, in its sole discretion, discontinue, substitute or add a Measurement Fund. Each such action will take effect as of the first day of the first month that begins at least 30 days after the day on which the Committee gives Participants advance written notice of such change.
 
  (b)   Election of Measurement Funds . A Participant, in connection with his or her initial deferral election in accordance with Section 3.2 above, shall elect, on the Election Form, one or more Measurement Fund(s) (as described in Section 3.7(a) above) to be used to determine the amounts to be credited or debited to his or her Account Balance. If a Participant does not elect any of the Measurement Funds as described in the previous sentence, the Participant’s Account Balance shall automatically be allocated into the Money Market Measurement Fund, or other low-risk Measurement Fund, as determined by the Committee, in its sole discretion. The Participant may (but is not required to) elect, by submitting an Election Form to the Committee that is accepted by the Committee, to add or delete one or more Measurement Fund(s) to be used to determine the amounts to be credited or debited to his or her Account Balance, or to change the portion of his or her Account Balance allocated to each previously or newly elected Measurement Fund. If an election is made in accordance with the previous sentence, it shall apply as of the first business day deemed reasonably practicable by the Committee, in its sole discretion, and shall continue thereafter for each subsequent day in which the Participant participates in the Plan, unless changed in accordance with the previous sentence. Notwithstanding the foregoing, the Committee, in its sole discretion, may impose limitations on the frequency with which one or more of the Measurement Funds elected in accordance with this Section 3.7(b) may be added or deleted by such Participant; furthermore, the Committee, in its sole discretion, may impose limitations on the frequency with which the Participant may change the portion of his or her Account Balance allocated to each previously or newly elected Measurement Fund.
 
  (c)   Proportionate Allocation . In making any election described in Section 3.7(b) above, the Participant shall specify on the Election Form, in increments of five percentage points (5%), the percentage of his or her Account Balance or Measurement Fund, as applicable, to be allocated/reallocated.
 
  (d)   Crediting or Debiting Method . The performance of each Measurement Fund (either positive or negative) will be determined on a daily basis based on the manner in which such Participant’s Account Balance has been hypothetically allocated among the Measurement Funds by the Participant.
 
  (e)   No Actual Investment . Notwithstanding any other provision of this Plan that may be interpreted to the contrary, the Measurement Funds are to be used for measurement purposes only, and a Participant’s election of any such Measurement Fund, the allocation of his or her Account Balance thereto, the calculation of additional amounts and the crediting or debiting of such amounts to a Participant’s Account Balance shall not be considered or construed in any manner as an actual investment of his or her Account

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      Balance in any such Measurement Fund. In the event that the Company or the Trustee (as that term is defined in the Trust), in its own discretion, decides to invest funds in any or all of the investments on which the Measurement Funds are based, no Participant shall have any rights in or to such investments themselves. Without limiting the foregoing, a Participant’s Account Balance shall at all times be a bookkeeping entry only and shall not represent any investment made on his or her behalf by the Company or the Trust; the Participant shall at all times remain an unsecured creditor of the Company.
3.8   FICA and Other Taxes .
  (a)   Annual Deferral Amounts . For each Plan Year in which an Annual Deferral Amount is being withheld from a Participant, the Participant’s Employer(s) shall withhold from that portion of the Participant’s Base Salary and Bonus that is not being deferred, in a manner determined by the Employer(s), the Participant’s share of FICA and other employment taxes on such Annual Deferral Amount. If necessary, the Committee may reduce the Annual Deferral Amount in order to comply with this Section 3.8.
  (b)   Company Matching Amounts and Company Contribution Amounts . When a Participant becomes vested in a portion of his or her Account Balance attributable to any Company Matching Amounts and/or Company Contribution Amounts, the Participant’s Employer(s) shall withhold from that portion of the Participant’s Base Salary and Bonus that is not deferred, in a manner determined by the Employer(s), the Participant’s share of FICA and other employment taxes on such amounts. If necessary, the Committee may reduce the vested portion of the Participant’s Company Matching Amount or Company Contribution Amount, as applicable, in order to comply with this Section 3.8.
 
  (c)   Distributions . The Participant’s Employer(s), or the trustee of the Trust, shall withhold from any payments made to a Participant under this Plan all federal, state and local income, employment and other taxes required to be withheld by the Employer(s), or the trustee of the Trust, in connection with such payments, in amounts and in a manner to be determined in the sole discretion of the Employer(s) and the trustee of the Trust.
ARTICLE 4
Short-Term Payout; Unforeseeable Emergencies
4.1   Short-Term Payouts . In connection with each election to defer an Annual Deferral Amount, a Participant may elect to receive all or a portion of such Annual Deferral Amount, plus amounts credited or debited on that amount pursuant to Section 3.7, in the form of a lump sum payment, calculated as of the close of business on or around the Benefit Distribution Date designated by the Participant in accordance with this Section (a “Short-Term Payout”). The Benefit Distribution Date for the amount subject to a Short-Term Payout election shall be the first day of any Plan Year designated by the Participant, which may be no sooner than 3 Plan Years after the

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    end of the Plan Year to which the Participant’s deferral election relates, unless otherwise provided on an Election Form approved by the Committee.
 
          Subject to the other terms and conditions of this Plan, each Short-Term Payout elected shall be paid out during a 60 day period commencing immediately after the Benefit Distribution Date. By way of example, if a Short-Term Payout is elected for Annual Deferral Amounts that are earned in the Plan Year commencing January 1, 2008, the earliest Benefit Distribution Date that may be designated by a Participant would be January 1, 2012, and the Short-Term Payout would be paid out during the 60 day period commencing immediately after such Benefit Distribution Date.
 
4.2   Postponing Short-Term Payouts . A Participant may elect to postpone a Short-Term Payout described in Section 4.1 above, and have such amount paid out during a 60 day period commencing immediately after an allowable alternative Benefit Distribution Date designated in accordance with this Section 4.2. The Committee may, however, in its sole discretion, accept, modify or reject such an election by a Participant. In order to make such an election, the Participant must submit an Election Form to the Committee in accordance with the following criteria:
  (a)   The election of the new Benefit Distribution Date shall have no effect until at least 12 months after the date on which the election is made;
 
  (b)   The new Benefit Distribution Date selected by the Participant for such Short-Term Payout must be the first day of a Plan Year that is no sooner than 5 years after the previously designated Benefit Distribution Date; and
 
  (c)   The election must be made at least 12 months prior to the Participant’s previously designated Benefit Distribution Date for such Short-Term Payout.
 
       For purposes of applying the provisions of this Section 4.2, a Participant’s election to postpone a Short-Term Payout shall not be considered to be made until the date on which the election becomes irrevocable (including acceptance by the Committee). Such an election shall become irrevocable no later than the date that is 12 months prior to the Participant’s previously designated Benefit Distribution Date for such Short-Term Payout.
4.3   Other Benefits Take Precedence Over Short-Term Payouts . Should an event occur prior to any Benefit Distribution Date designated for a Short-Term Payout that would trigger a benefit under Articles 5 through 9, as applicable, all amounts subject to a Short-Term Payout election shall be paid in accordance with the other applicable provisions of the Plan and not in accordance with this Article 4.
 
4.4   Unforeseeable Emergencies .
  (a)   If a Participant experiences an Unforeseeable Emergency prior to the occurrence of a distribution event described in Articles 5 through 9, as applicable, the Participant may

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      petition the Committee to receive a partial or full payout from the Plan. The payout, if any, from the Plan shall not exceed the lesser of (i) the Participant’s vested Account Balance, calculated as of the close of business on or around the Benefit Distribution Date for such payout, as determined by the Committee in accordance with provisions set forth below, or (ii) the amount necessary to satisfy the Unforeseeable Emergency, plus amounts necessary to pay Federal, state, or local income taxes or penalties reasonably anticipated as a result of the distribution. A Participant shall not be eligible to receive a payout from the Plan to the extent that the Unforeseeable Emergency is or may be relieved (A) through reimbursement or compensation by insurance or otherwise, (B) by liquidation of the Participant’s assets, to the extent the liquidation of such assets would not itself cause severe financial hardship or (C) by cessation of deferrals under this Plan.
 
            If the Committee, in its sole discretion, approves a Participant’s petition for payout from the Plan, the Participant’s Benefit Distribution Date for such payout shall be the date on which such Committee approval occurs and such payout shall be distributed to the Participant in a lump sum no later than 60 days after such Benefit Distribution Date. In addition, in the event of such approval the Participant’s outstanding deferral elections under the Plan shall be cancelled.
  (b)   A Participant’s deferral elections under this Plan shall also be cancelled to the extent the Committee determines that such action is required for the Participant to obtain a hardship distribution from an Employer’s 401(k) Plan pursuant to Treas. Reg. §1.401(k)-1(d)(3).
ARTICLE 5
Retirement Benefit
5.1   Retirement Benefit . If a Participant experiences a Separation from Service that qualifies as a Retirement, the Participant shall be eligible to receive his or her vested Account Balance in either a lump sum or annual installment payments, as elected by the Participant in accordance with Section 5.2 (the “Retirement Benefit”); provided, however, that a Participant shall only be eligible to receive annual installments for Annual Accounts relating to Plan Years beginning before January 1, 2009. A Participant’s Retirement Benefit shall be calculated as of the close of business on or around the applicable Benefit Distribution Date for such benefit, which shall be (i) the first day after the end of the 6-month period immediately following the date on which the Participant experiences such Separation from Service if the Participant is a Specified Employee, and (ii) for all other Participants, the date on which the Participant experiences a Separation from Service; provided, however, if a Participant changes the form of distribution for one or more Annual Accounts in accordance with Section 5.2(b), the Benefit Distribution Date for the Annual Account(s) subject to such change shall be determined in accordance with Section 5.2(b).
 
5.2   Payment of Retirement Benefit .
  (a)   In connection with a Participant’s election to defer an Annual Deferral Amount, the Participant shall elect the form in which his or her Annual Account for such Plan Year will be paid. The Participant may elect to receive each Annual Account (i) in the form of

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      a lump sum or (ii) pursuant to an Annual Installment Method of 5, 10 or 15 years, but only with respect to Annual Accounts relating to Plan Years beginning before January 1, 2009. If a Participant does not make any election with respect to the payment of an Annual Account, then the Participant shall be deemed to have elected to receive such Annual Account as a lump sum.
 
  (b)   A Participant may change the form of payment for an Annual Account by submitting an Election Form to the Committee in accordance with the following criteria:
  (i)   The election shall not take effect until at least 12 months after the date on which the election is made;
 
  (ii)   The new Benefit Distribution Date for such Annual Account shall be at least 5 years after the Benefit Distribution Date that would otherwise have been applicable to such Annual Account; and
 
  (iii)   The election must be made at least 12 months prior to the Benefit Distribution Date that would otherwise have been applicable to such Annual Account.
            For purposes of applying the provisions of this Section 5.2(b), a Participant’s election to change the form of payment for an Annual Account shall not be considered to be made until the date on which the election becomes irrevocable. Such an election shall become irrevocable no later than the date that is 12 months prior to the Benefit Distribution Date that would otherwise have been applicable to such Annual Account. Subject to the requirements of this Section 5.2(b), the Election Form most recently accepted by the Committee that has become effective for an Annual Account shall govern the form of payout of such Annual Account.
 
  (c)   The lump sum payment shall be made, or installment payments shall commence, no later than 60 days after the applicable Benefit Distribution Date. Remaining installments, if any, shall continue in accordance with the Participant’s election for each Annual Account and shall be paid no later than 60 days after each anniversary of the Benefit Distribution Date.
ARTICLE 6
Pre-Retirement Survivor Benefit
6.1   Pre-Retirement Survivor Benefit . The Participant’s Beneficiary shall receive a Pre-Retirement Survivor Benefit equal to the Participant’s Account Balance if the Participant dies before he or she Retires, experiences a Separation from Service or suffers a Disability.
 
6.2   Payment of Pre-Retirement Survivor Benefit . A Participant, in connection with his or her commencement of participation in the Plan, shall elect on an Election Form whether the Pre-Retirement Survivor Benefit shall be received by his or her Beneficiary in a lump sum or, in the case of Annual Accounts relating to Plan Years beginning before January 1, 2009, pursuant to an

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    Annual Installment Method of 5, 10 or 15 years. The Participant may annually change this election to an allowable alternative payout period by submitting a new Election Form to the Committee; provided, however, the election shall not take effect until at least 12 months after the date on which the election is made. If a Participant does not make any election with respect to the payment of the Pre-Retirement Survivor Benefit, then such benefit shall be paid in a lump sum. Despite the foregoing, if the Participant’s Account Balance at the time of his or her death is less than $25,000, payment of the Pre-Retirement Survivor Benefit shall be made in a lump sum . The lump sum payment shall be made, or installment payments shall commence, no later than 60 days after the Committee is provided with proof that is satisfactory to the Committee of the Participant’s death.
ARTICLE 7
Termination Benefit
7.1   Termination Benefit . If a Participant experiences a Separation from Service that does not qualify as a Retirement, the Participant shall receive his or her vested Account Balance in the form of a lump sum payment (the “Termination Benefit”). A Participant’s Termination Benefit shall be calculated as of the close of business on or around the Benefit Distribution Date for such benefit, which shall be (i) the first day after the end of the 6-month period immediately following the date on which the Participant experiences such Separation from Service if the Participant is a Specified Employee, and (ii) for all other Participants, the date on which the Participant experiences a Separation from Service.
 
7.2   Payment of Termination Benefit . The Termination Benefit shall be paid to the Participant no later than 60 days after the Participant’s Benefit Distribution Date. Notwithstanding the foregoing, to the extent a Participant’s Account Balance is equal to or greater than $25,000 at the time of Separation from Service, the Participant may request that the Committee cause the Termination Benefit to be paid pursuant to an Annual Installment Method of 5, 10, or 15 years (but only with respect to Annual Deferral Amounts relating to Plan Years beginning before January 1, 2009). The Committee may, in its sole discretion, accept, modify or reject the request of a Participant to pay the Termination Benefit pursuant to a method other than lump sum. Such request, along with any Committee acceptance, shall comply with the requirements of Section 5.2(b) (relating to subsequent changes of payment elections). Once the change in election to pay the Termination Benefit pursuant to a method other than a lump sum has been approved by the Committee, this election can no longer be modified again at a later date. The lump sum payment shall be made, or installment payments shall commence, no later than 60 days after the Participant’s Benefit Distribution Date.
ARTICLE 8
Disability Benefit
8.1   Disability Benefit . If a Participant becomes Disabled prior to the occurrence of a distribution event described in Articles 5 through 7, as applicable, the Participant shall receive his or her

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    vested Account Balance in the form of a lump sum payment (the “Disability Benefit”). The Disability Benefit shall be calculated as of the close of business on or around the Participant’s Benefit Distribution Date for such benefit, which shall be the date on which the Participant becomes Disabled.
 
8.2   Payment of Disability Benefit . The Disability Benefit shall be paid to the Participant no later than 60 days after the Participant’s Benefit Distribution Date.
ARTICLE 9
Post-Retirement Survivor Benefit
9.1   Death Prior to Completion of Retirement Benefit . If a Participant dies after Retirement but before the Retirement Benefit is paid in full, the Participant’s unpaid Retirement Benefit payments shall continue and shall be paid to the Participant’s Beneficiary in a lump sum.
 
9.2   Payment of Post-Retirement Survivor Benefit . The Post-Retirement Survivor Benefit under this Article shall be paid to the Participant’s Beneficiary(ies) no later than 60 days after the Participant’s Benefit Distribution Date, which shall be the date on which the Committee is provided with proof that is satisfactory to the Committee of the Participant’s death.
ARTICLE 10
Beneficiary Designation
10.1   Beneficiary . Each Participant shall have the right, at any time, to designate his or her Beneficiary(ies) (both primary as well as contingent) to receive any benefits payable under the Plan to a beneficiary upon the death of a Participant. The Beneficiary designated under this Plan may be the same as or different from the Beneficiary designation under any other plan of an Employer in which the Participant participates.
 
10.2   Beneficiary Designation; Change; Spousal Consent . A Participant shall designate his or her Beneficiary by completing and signing the Beneficiary Designation Form, and returning it to the Committee or its designated agent. A Participant shall have the right to change a Beneficiary by completing, signing and otherwise complying with the terms of the Beneficiary Designation Form and the Committee’s rules and procedures, as in effect from time to time. If the Participant names someone other than his or her spouse as a Beneficiary, the Committee may, in its sole discretion, determine that spousal consent is required to be provided in a form designated by the Committee, executed by such Participant’s spouse and returned to the Committee. Upon the acceptance by the Committee of a new Beneficiary Designation Form, all Beneficiary designations previously filed shall be canceled. The Committee shall be entitled to rely on the last Beneficiary Designation Form filed by the Participant and accepted by the Committee prior to his or her death.
 

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10.3   Acknowledgment . No designation or change in designation of a Beneficiary shall be effective until received and acknowledged in writing by the Committee or its designated agent.
 
10.4   No Beneficiary Designation . If a Participant fails to designate a Beneficiary as provided in Sections 10.1, 10.2 and 10.3 above or, if all designated Beneficiaries predecease the Participant or die prior to complete distribution of the Participant’s benefits, then the Participant’s designated Beneficiary shall be deemed to be his or her surviving spouse. If the Participant has no surviving spouse, the benefits remaining under the Plan to be paid to a Beneficiary shall be payable to the executor or personal representative of the Participant’s estate.
 
10.5   Doubt as to Beneficiary . If the Committee has any doubt as to the proper Beneficiary to receive payments pursuant to this Plan, the Committee shall have the right, exercisable in its discretion, to cause the Participant’s Employer to withhold such payments until this matter is resolved to the Committee’s satisfaction.
 
10.6   Discharge of Obligations . The payment of benefits under the Plan to a Beneficiary shall fully and completely discharge all Employers and the Committee from all further obligations under this Plan with respect to the Participant, and that Participant’s Plan Agreement shall terminate upon such full payment of benefits.
ARTICLE 11
Leave of Absence
11.1   Paid Leave of Absence . If a Participant is authorized by the Participant’s Employer to take a paid leave of absence from the employment of the Employer, and such leave of absence does not constitute a Separation from Service, (a) the Participant shall continue to be considered eligible for the benefits provided under the Plan, and (b) the Annual Deferral Amount shall continue to be withheld during such paid leave of absence in accordance with Section 3.2.
 
11.2   Unpaid Leave of Absence . If a Participant is authorized by the Participant’s Employer to take an unpaid leave of absence from the employment of the Employer for any reason, and such leave of absence does not constitute a Separation from Service, such Participant shall continue to be eligible for the benefits provided under the Plan. During the unpaid leave of absence, the Participant shall not be allowed to make any additional deferral elections. However, if the Participant returns to employment, the Participant may elect to defer an Annual Deferral Amount for the Plan Year following his or her return to employment and for every Plan Year thereafter while a Participant in the Plan, provided such deferral elections are otherwise allowed and an Election Form is delivered to and accepted by the Committee for each such election in accordance with Section 3.2 above.
ARTICLE 12
Termination of Plan, Amendment or Modification

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12.1   Termination of Plan . Although each Employer anticipates that it will continue the Plan for an indefinite period of time, there is no guarantee that any Employer will continue the Plan or will not terminate the Plan at any time in the future. Accordingly, each Employer reserves the right to terminate the Plan with respect to all of its Participants. In the event of a Plan termination no new deferral elections shall be permitted for the affected Participants and such Participants shall no longer be eligible to receive new Company contributions. However, after the Plan termination the Account Balances of such Participants shall continue to be credited with Annual Deferral Amounts attributable to a deferral election that was in effect prior to the Plan termination to the extent deemed necessary to comply with Code Section 409A and related Treasury Regulations, and additional amounts shall continue to credited or debited to such Participants’ Account Balances pursuant to Section 3.7. The Measurement Funds available to Participants following the termination of the Plan shall be comparable in number and type to those Measurement Funds available to Participants in the Plan Year preceding the Plan Year in which the Plan termination is effective. In addition, following a Plan termination, Participant Account Balances shall remain in the Plan and shall not be distributed until such amounts become eligible for distribution in accordance with the other applicable provisions of the Plan. Notwithstanding the preceding sentence, to the extent permitted by Treas. Reg. §1.409A-3(j)(4)(ix), the Employer may provide that upon termination of the Plan, all Account Balances of the Participants shall be distributed, subject to and in accordance with any rules established by such Employer deemed necessary to comply with the applicable requirements and limitations of Treas. Reg. §1.409A-3(j)(4)(ix).
12.2   Amendment . Any Employer may, at any time, amend or modify the Plan in whole or in part with respect to that Employer. Notwithstanding the foregoing, (i) no amendment or modification shall be effective to decrease or restrict the value of a Participant’s Account Balance in existence at the time the amendment or modification is made, calculated as if the Participant had experienced a Separation from Service as of the effective date of the amendment or modification or, if the amendment or modification occurs after the date upon which the Participant was eligible to Retire, the Participant had Retired as of the effective date of the amendment or modification, (ii) no amendment or modification shall be effective upon or after a Change in Control without the prior written consent of a majority of the Participants, and (iii) no amendment or modification of this Section 12.2 or Section 13.2 of the Plan shall be effective.
 
12.3   Plan Agreement . Despite the provisions of Sections 12.1, if a Participant’s Plan Agreement contains benefits or limitations that are not in this Plan document, the Employer may only amend or terminate such provisions with the written consent of the Participant.
 
12.4   Effect of Payment . The full payment of the Participant’s vested Account Balance in accordance with the applicable provisions of the Plan shall completely discharge all obligations to a Participant and his or her designated Beneficiaries under this Plan, and the Participant’s Plan Agreement shall terminate.
ARTICLE 13
Administration

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13.1   Committee Duties . Except as otherwise provided in this Article 13, this Plan shall be administered by a Committee, which shall consist of the Board, or such committee as the Board shall appoint. Members of the Committee may be Participants under this Plan. The Committee shall also have the discretion and authority to (a) make, amend, interpret, and enforce all appropriate rules and regulations for the administration of this Plan, and (b) decide or resolve any and all questions, including benefit entitlement determinations and interpretations of this Plan, as may arise in connection with the Plan. Any individual serving on the Committee who is a Participant shall not vote or act on any matter relating solely to himself or herself. When making a determination or calculation, the Committee shall be entitled to rely on information furnished by a Participant or the Company.
 
13.2   Administration Upon Change In Control . Within 120 days following a Change in Control, the individuals who comprised the Committee immediately prior to the Change in Control (whether or not such individuals are members of the Committee following the Change in Control) may, by written consent of the majority of such individuals, appoint an independent third party administrator (the “Administrator”) to perform any or all of the Committee’s duties described in Section 13.1 above, including without limitation, the power to determine any questions arising in connection with the administration or interpretation of the Plan, and the power to make benefit entitlement determinations. Upon and after the effective date of such appointment, (a) the Company must pay all reasonable administrative expenses and fees of the Administrator, and (b) the Administrator may only be terminated with the written consent of the majority of Participants with an Account Balance in the Plan as of the date of such proposed termination.
13.3   Agents . In the administration of this Plan, the Committee or the Administrator, as applicable, may, from time to time, employ agents and delegate to them such administrative duties as it sees fit (including acting through a duly appointed representative) and may from time to time consult with counsel.
 
13.4   Binding Effect of Decisions . The decision or action of the Committee or Administrator, as applicable, with respect to any question arising out of or in connection with the administration, interpretation and application of the Plan and the rules and regulations promulgated hereunder shall be final and conclusive and binding upon all persons having any interest in the Plan.
 
13.5   Indemnity of Committee . All Employers shall indemnify and hold harmless the members of the Committee, any Employee to whom the duties of the Committee may be delegated, and the Administrator against any and all claims, losses, damages, expenses or liabilities arising from any action or failure to act with respect to this Plan, except in the case of willful misconduct by the Committee, any of its members, any such Employee or the Administrator.
 
13.6   Employer Information . To enable the Committee and/or Administrator to perform its functions, the Company and each Employer shall supply full and timely information to the Committee and/or Administrator, as the case may be, on all matters relating to the Plan, the Trust, the Participants and their Beneficiaries, the Account Balances of the Participants, the compensation of its Participants, the date and circumstances of the Separation from Service,

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    Disability or death of its Participants, and such other pertinent information as the Committee or Administrator may reasonably require.
ARTICLE 14
Other Benefits and Agreements
14.1   Coordination with Other Benefits . The benefits provided for a Participant and Participant’s Beneficiary under the Plan are in addition to any other benefits available to such Participant under any other plan or program for employees of the Participant’s Employer. The Plan shall supplement and shall not supersede, modify or amend any other such plan or program except as may otherwise be expressly provided.
ARTICLE 15
Claims Procedures
15.1   Presentation of Claim . Any Participant or Beneficiary of a deceased Participant (such Participant or Beneficiary being referred to below as a “Claimant”) may deliver to the Committee a written claim for a determination with respect to the amounts distributable to such Claimant from the Plan. If such a claim relates to the contents of a notice received by the Claimant, the claim must be made within 60 days after such notice was received by the Claimant. All other claims must be made within 180 days of the date on which the event that caused the claim to arise occurred. The claim must state with particularity the determination desired by the Claimant.
 
15.2   Notification of Decision . The Committee shall consider a Claimant’s claim within a reasonable time, but no later than 90 days after receiving the claim. If the Committee determines that special circumstances require an extension of time for processing the claim, written notice of the extension shall be furnished to the Claimant prior to the termination of the initial 90 day period. In no event shall such extension exceed a period of 90 days from the end of the initial period. The extension notice shall indicate the special circumstances requiring an extension of time and the date by which the Committee expects to render the benefit determination. The Committee shall notify the Claimant in writing:
  (a)   that the Claimant’s requested determination has been made, and that the claim has been allowed in full; or
 
  (b)   that the Committee has reached a conclusion contrary, in whole or in part, to the Claimant’s requested determination, and such notice must set forth in a manner calculated to be understood by the Claimant:
  (i)   the specific reason(s) for the denial of the claim, or any part of it;
 

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  (ii)   specific reference(s) to pertinent provisions of the Plan upon which such denial was based;
 
  (iii)   a description of any additional material or information necessary for the Claimant to perfect the claim, and an explanation of why such material or information is necessary;
 
  (iv)   an explanation of the claim review procedure set forth in Section 15.3 below; and
 
  (v)   a statement of the Claimant’s right to bring a civil action under ERISA Section 502(a) following an adverse benefit determination on review.
15.3   Review of a Denied Claim . On or before 60 days after receiving a notice from the Committee that a claim has been denied, in whole or in part, a Claimant (or the Claimant’s duly authorized representative) may file with the Committee a written request for a review of the denial of the claim. The Claimant (or the Claimant’s duly authorized representative):
  (a)   may, upon request and free of charge, have reasonable access to, and copies of, all documents, records and other information relevant (as defined in applicable ERISA regulations) to the claim for benefits;
 
  (b)   may submit written comments or other documents; and/or
 
  (c)   may request a hearing, which the Committee, in its sole discretion, may grant.
15.4   Decision on Review . The Committee shall render its decision on review promptly, and no later than 60 days after the Committee receives the Claimant’s written request for a review of the denial of the claim. If the Committee determines that special circumstances require an extension of time for processing the claim, written notice of the extension shall be furnished to the Claimant prior to the termination of the initial 60 day period. In no event shall such extension exceed a period of 60 days from the end of the initial period. The extension notice shall indicate the special circumstances requiring an extension of time and the date by which the Committee expects to render the benefit determination. In rendering its decision, the Committee shall take into account all comments, documents, records and other information submitted by the Claimant relating to the claim, without regard to whether such information was submitted or considered in the initial benefit determination. The decision must be written in a manner calculated to be understood by the Claimant, and it must contain:
  (a)   specific reasons for the decision;
 
  (b)   specific reference(s) to the pertinent Plan provisions upon which the decision was based;
 
  (c)   a statement that the Claimant is entitled to receive, upon request and free of charge, reasonable access to and copies of, all documents, records and other information relevant (as defined in applicable ERISA regulations) to the Claimant’s claim for benefits; and
 

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  (d)   a statement of the Claimant’s right to bring a civil action under ERISA Section 502(a).
15.5   Legal Action . A Claimant’s compliance with the foregoing provisions of this Article 15 is a mandatory prerequisite to a Claimant’s right to commence any legal action with respect to any claim for benefits under this Plan.
ARTICLE 16
Trust
16.1   Establishment of the Trust . In order to provide assets from which to fulfill its obligations to the Participants and their Beneficiaries under the Plan, the Company may establish a trust by a trust agreement with a third party, the trustee, to which each Employer may, in its discretion, contribute cash or other property, including securities issued by the Company, to provide for the benefit payments under the Plan (the “Trust”).
 
16.2   Interrelationship of the Plan and the Trust . The provisions of the Plan and the Plan Agreement shall govern the rights of a Participant to receive distributions pursuant to the Plan. The provisions of the Trust shall govern the rights of the Employers, Participants and the creditors of the Employers to the assets transferred to the Trust. Each Employer shall at all times remain liable to carry out its obligations under the Plan.
 
16.3   Distributions From the Trust . Each Employer’s obligations under the Plan may be satisfied with Trust assets distributed pursuant to the terms of the Trust, and any such distribution shall reduce the Employer’s obligations under this Plan.
ARTICLE 17
Miscellaneous
17.1   Status of Plan . The Plan is intended to be a plan that is not qualified within the meaning of Code Section 401(a) and that “is unfunded and is maintained by an employer primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees” within the meaning of ERISA Sections 201(2), 301(a)(3) and 401(a)(1). The Plan shall be administered and interpreted (a) to the extent possible in a manner consistent with the intent described in the preceding sentence, and (b) in accordance with Code Section 409A and related Treasury guidance and Regulations.
 
17.2   Unsecured General Creditor . Participants and their Beneficiaries, heirs, successors and assigns shall have no legal or equitable rights, interests or claims in any property or assets of an Employer. For purposes of the payment of benefits under this Plan, any and all of an Employer’s assets shall be, and remain, the general, unpledged unrestricted assets of the Employer. An Employer’s obligation under the Plan shall be merely that of an unfunded and unsecured promise to pay money in the future.
 

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KB HOME
Section 409A Nonqualified Deferred Compensation Plan — Effective January 1, 2009
Master Plan Document
17.3   Employer’s Liability . An Employer’s liability for the payment of benefits shall be defined only by the Plan and the Plan Agreement, as entered into between the Employer and a Participant. An Employer shall have no obligation to a Participant under the Plan except as expressly provided in the Plan and his or her Plan Agreement.
 
17.4   Nonassignability . Neither a Participant nor any other person shall have any right to commute, sell, assign, transfer, pledge, anticipate, mortgage or otherwise encumber, transfer, hypothecate, alienate or convey in advance of actual receipt, the amounts, if any, payable hereunder, or any part thereof, which are, and all rights to which are expressly declared to be, unassignable and non-transferable. No part of the amounts payable shall, prior to actual payment, be subject to seizure, attachment, garnishment or sequestration for the payment of any debts, judgments, alimony or separate maintenance owed by a Participant or any other person, be transferable by operation of law in the event of a Participant’s or any other person’s bankruptcy or insolvency or be transferable to a spouse as a result of a property settlement or otherwise.
 
17.5   Not a Contract of Employment . The terms and conditions of this Plan shall not be deemed to constitute a contract of employment between any Employer and the Participant. Such employment is hereby acknowledged to be an “at will” employment relationship that can be terminated at any time for any reason, or no reason, with or without cause, and with or without notice, unless expressly provided in a written employment agreement. Nothing in this Plan shall be deemed to give a Participant the right to be retained in the service of any Employer, or to interfere with the right of any Employer to discipline or discharge the Participant at any time.
 
17.6   Furnishing Information . A Participant or his or her Beneficiary will cooperate with the Committee by furnishing any and all information requested by the Committee and take such other actions as may be requested in order to facilitate the administration of the Plan and the payments of benefits hereunder, including but not limited to taking such physical examinations as the Committee may deem necessary.
 
17.7   Terms . Whenever any words are used herein in the masculine, they shall be construed as though they were in the feminine in all cases where they would so apply; and
 
    whenever any words are used herein in the singular or in the plural, they shall be construed as though they were used in the plural or the singular, as the case may be, in all cases where they would so apply.
 
17.8   Captions . The captions of the articles, sections and paragraphs of this Plan are for convenience only and shall not control or affect the meaning or construction of any of its provisions.
 
17.9   Governing Law . Subject to ERISA, the provisions of this Plan shall be construed and interpreted according to the internal laws of the State of California without regard to its conflicts of laws principles.
 
17.10   Notice . Any notice or filing required or permitted to be given to the Committee under this Plan shall be sufficient if in writing and hand-delivered, or sent by registered or certified mail, to the address below:

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KB HOME
Section 409A Nonqualified Deferred Compensation Plan — Effective January 1, 2009
Master Plan Document
Senior Vice President, Taxation
KB HOME
10990 Wilshire Blvd.
Los Angeles, CA 90024
    Such notice shall be deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark on the receipt for registration or certification.
 
    Any notice or filing required or permitted to be given to a Participant under this Plan shall be sufficient if in writing and hand-delivered, or sent by mail, to the last known address of the Participant.
 
17.11   Successors . The provisions of this Plan shall bind and inure to the benefit of the Participant’s Employer and its successors and assigns and the Participant and the Participant’s designated Beneficiaries.
 
17.12   Spouse’s Interest . The interest in the benefits hereunder of a spouse of a Participant who has predeceased the Participant shall automatically pass to the Participant and shall not be transferable by such spouse in any manner, including but not limited to such spouse’s will, nor shall such interest pass under the laws of intestate succession.
 
17.13   Validity . In case any provision of this Plan shall be illegal or invalid for any reason, said illegality or invalidity shall not affect the remaining parts hereof, but this Plan shall be construed and enforced as if such illegal or invalid provision had never been inserted herein.
 
17.14   Incompetent . If the Committee determines in its discretion that a benefit under this Plan is to be paid to a minor, a person declared incompetent or to a person incapable of handling the disposition of that person’s property, the Committee may direct payment of such benefit to the guardian, legal representative or person having the care and custody of such minor, incompetent or incapable person. The Committee may require proof of minority, incompetence, incapacity or guardianship, as it may deem appropriate prior to distribution of the benefit. Any payment of a benefit shall be a payment for the account of the Participant and the Participant’s Beneficiary, as the case may be, and shall be a complete discharge of any liability under the Plan for such payment amount.
 
17.15   Domestic Relations Orders . If necessary to comply with a domestic relations order, as defined in Code Section 414(p)(1)(B), pursuant to which a court has determined that a spouse or former spouse of a Participant has an interest in the Participant’s benefits under the Plan, the Committee shall have the right to immediately distribute the spouse’s or former spouse’s interest in the Participant’s benefits under the Plan to such spouse or former spouse.
 
17.16   Distribution in the Event of Income Inclusion Under Code Section 409A . If any portion of a Participant’s Account Balance under this Plan is required to be included in income by the Participant prior to receipt due to a failure of this Plan to comply with the requirements of Code Section 409A and related Treasury Regulations, the Committee may determine that such

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     KB HOME
     Section 409A Nonqualified Deferred Compensation Plan — Effective January 1, 2009
      Master Plan Document
    Participant shall receive a distribution from the Plan in an amount equal to the lesser of (i) the portion of his or her Account Balance required to be included in income as a result of the failure of the Plan to comply with the requirements of Code Section 409A and related Treasury Regulations, or (ii) the unpaid vested Account Balance.
 
17.17   Deduction Limitation on Benefit Payments . If an Employer reasonably anticipates that the Employer’s deduction with respect to any distribution from this Plan would be limited or eliminated by application of Code Section 162(m), then to the extent permitted by Treas. Reg. §1.409A-2(b)(7)(i), payment shall be delayed as deemed necessary to ensure that the entire amount of any distribution from this Plan is deductible. Any amounts for which distribution is delayed pursuant to this Section shall continue to be credited/debited with additional amounts in accordance with Section 3.7. The delayed amounts (and any amounts credited thereon) shall be distributed to the Participant (or his or her Beneficiary in the event of the Participant’s death) at the earliest date the Employer reasonably anticipates that the deduction of the payment of the amount will not be limited or eliminated by application of Code Section 162(m). In the event that such date is determined to be after a Participant’s Separation from Service and the Participant to whom the payment relates is determined to be a Specified Employee, then to the extent deemed necessary to comply with Treas. Reg. §1.409A-3(i)(2), the delayed payment shall not made before the end of the six-month period following such Participant’s Separation from Service.

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     KB HOME
     Section 409A Nonqualified Deferred Compensation Plan — Effective January 1, 2009
      Master Plan Document
APPENDIX A
LIMITED TRANSITION RELIEF FOR DISTRIBUTION ELECTIONS MADE
AVAILABLE IN ACCORDANCE WITH NOTICE 2006-79, 2007-86 AND SUBSEQUENT
GUIDANCE
     The capitalized terms below shall have the same meaning as provided in Article 1 of the Plan.
      Opportunity to Make New (or Revise Existing) Distribution Elections . Notwithstanding the required deadline for the submission of an initial distribution election under Article 4 of the Plan, the Committee may, to the extent permitted by Notice 2006-79, provide a limited period in which Participants may make new distribution elections, or revise existing distribution elections, with respect to amounts subject to the terms of the Plan, by submitting an Election Form on or before the deadline established by the Committee, which in no event shall be later than December 31, 2007. Any distribution election(s) made by a Participant, and accepted by the Committee, in accordance with this Appendix A shall not be treated as a change in either the form or timing of a Participant’s benefit payment for purposes of Code Section 409A or the Plan. If any distribution election submitted by a Participant in accordance with this Appendix A either (a) relates to an amount that would otherwise be paid to the Participant in 2007, or (b) would cause an amount to be paid to the Participant in 2007, such election shall not be effective.
     In addition, notwithstanding the required deadlines for the submission of distribution elections under the Plan, the Committee may, to the extent permitted by Notice 2007-86, provide a limited period in which Participants may make new distribution elections, or revise existing distribution elections, with respect to amounts subject to the terms of the Plan, by submitting an Election Form on or before the deadline established by the Committee, which for amounts that would otherwise be paid to the Participant after 2008 shall in no event be later than December 31, 2008. If any distribution election submitted by a Participant in accordance with this paragraph either (a) relates to an amount that would otherwise be paid to the Participant in 2008, or (b) would cause an amount to be paid to the Participant in 2008, such election shall not be effective.
     Any distribution election(s) made by a Participant, and accepted by the Committee, in accordance with this Appendix A shall not be treated as a change in either the form or timing of a Participant’s benefit payment for purposes of Code Section 409A or the Plan.
     The Committee may provide further transition relief for new distribution elections and changes in existing distribution elections with respect to amounts subject to the terms of the Plan to the extent permitted in future Treasury Department or Internal Revenue Service guidance.

30

Exhibit 10.27
KB HOME
CHANGE IN CONTROL SEVERANCE PLAN

(AMENDED AND RESTATED EFFECTIVE JANUARY 1, 2009)
     KB HOME, a Delaware corporation (the “Company”), has adopted this Change in Control Severance Plan (the “Plan”) for the benefit of certain key employees of the Company. This Plan is effective as of October 4, 2001 and has been amended and restated pursuant to Section 10.3 of the Plan effective January 1, 2009.
     The purposes of the Plan are as follows:
     (1) To reinforce and encourage the continued attention and dedication of members of the Company’s management to their assigned duties without the distraction arising from the possibility of a Change in Control (as defined below) of the Company;
     (2) To enable and encourage the Company’s management to focus their attention on obtaining the best possible deal for the Company’s shareholders and to make an independent evaluation of all possible transactions, without being diverted by their personal concerns regarding the possible impact of various transactions on the security of their jobs and benefits;
     (3) To provide severance benefits to any Participant (as defined below) who incurs a termination of employment under the circumstances described herein within a certain period following a Change in Control; and
     (4) To comply with all applicable law, including Section 409A of the Code and related Treasury guidance and regulations, and be operated and interpreted in accordance with this intention.
      1.  Defined Terms . For purposes of the Plan, the following terms shall have the meanings indicated below:
     (A)  “Act” shall mean the Securities Exchange Act of 1934, as amended from time to time.
     (B) “ Affiliate ” shall have the meaning set forth in Rule 12b-2 promulgated under Section 12 of the Act.
     (C) “ Board ” shall mean the Board of Directors of the Company.
     (D) “ Cause ” shall mean (i) acts of fraud or misappropriation committed by the Participant and intended to result in substantial personal enrichment at the expense of the Company or (ii) repeated violations by the Participant of the Participant’s obligations to the Company which are demonstrably willful and deliberate and which result in material injury to the Company; provided that, in each case, the Participant has received written notice of the

 


 

described activity, has been afforded a period of 20 days to cure or correct the activity described in the notice, and has failed to cure, correct or cease the activity, as appropriate.
     (E) “Change in Control” shall mean the occurrence of a “change in the ownership,” a “change in the effective control” or a “change in the ownership of a substantial portion of the assets” of a corporation, as determined in accordance with this Section.
In order for an event described below to constitute a Change in Control with respect to a Participant, except as otherwise provided in part (ii)(b) of this Section, the applicable event must relate to the corporation for which the Participant is providing services, the corporation that is liable for payment of the Participant’s Account Balance (or all corporations liable for payment if more than one), as identified by the Committee in accordance with Section 1.409A-3(i)(5)(ii)(A)(2) of the Treasury Regulations, or such other corporation identified by the Committee in accordance with Section 1.409A-3(i)(5)(ii)(A)(3) of the Treasury Regulations.
In determining whether an event shall be considered a “change in the ownership,” a “change in the effective control” or a “change in the ownership of a substantial portion of the assets” of a corporation, the following provisions shall apply:
     (i) A “change in the ownership” of the applicable corporation shall occur on the date on which any one person, or more than one person acting as a group, acquires ownership of stock of such corporation that, together with stock held by such person or group, constitutes more than 50% of the total fair market value or total voting power of the stock of such corporation, as determined in accordance with Section 1.409A-3(i)(5)(v) of the Treasury Regulations. If a person or group is considered either to own more than 50% of the total fair market value or total voting power of the stock of such corporation, or to have effective control of such corporation within the meaning of part (ii) of this Section, and such person or group acquires additional stock of such corporation, the acquisition of additional stock by such person or group shall not be considered to cause a “change in the ownership” of such corporation.
     (ii) A “change in the effective control” of the applicable corporation shall occur on either of the following dates:
     (a) The date on which any one person, or more than one person acting as a group, acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such person or persons) ownership of stock of such corporation possessing 30% or more of the total voting power of the stock of such corporation, as determined in accordance with Section 1.409A-3(i)(5)(vi) of the Treasury Regulations. If a person or group is considered to possess 30% or more of the total voting power of the stock of a corporation, and such person or group acquires additional stock of such corporation, the acquisition of additional stock by such person or group shall not be considered to cause a “change in the effective control” of such corporation; or
     (b) The date on which a majority of the members of the applicable corporation’s board of directors is replaced during any 12-month period by directors whose appointment or election is not endorsed by a majority of the members of such corporation’s board of directors before the date of the

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appointment or election, as determined in accordance with Section 1.409A-3(i)(5)(vi) of the Treasury Regulations. In determining whether the event described in the preceding sentence has occurred, the applicable corporation to which the event must relate shall only include a corporation identified in accordance with Section 1.409A-3(i)(5)(ii) of the Treasury Regulations for which no other corporation is a majority shareholder.
     (iii) A “change in the ownership of a substantial portion of the assets” of the applicable corporation shall occur on the date on which any one person, or more than one person acting as a group, acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such person or persons) assets from the corporation that have a total gross fair market value equal to or more than 40% of the total gross fair market value of all of the assets of the corporation immediately before such acquisition or acquisitions, as determined in accordance with Section 1.409A-3(i)(5)(vii) of the Treasury Regulations. A transfer of assets shall not be treated as a “change in the ownership of a substantial portion of the assets” when such transfer is made to an entity that is controlled by the shareholders of the transferor corporation, as determined in accordance with Section 1.409A-3(i)(5)(vii)(B) of the Treasury Regulations.
     (F) “ Code ” shall mean the Internal Revenue Code of 1986, as amended from time to time.
     (G) “ Committee ” shall mean the committee responsible for administering the Plan, as described in Section 3 hereof.
     (H) “ Company ” shall mean KB HOME, a Delaware corporation, and, except in determining under Section 1(E) hereof whether or not any Change in Control of the Company has occurred, shall include any successor to its business and/or assets.
     (I) “ Disability ” shall mean the Participant’s incapacity due to physical or mental illness to perform his or her full-time duties with the Company for a continuous period of three months or an aggregate of six months in any eighteen-month period.
     (J) “ Good Reason ” shall mean, without the consent of the Participant, (i) any changes in the duties and responsibilities of the Participant which are materially inconsistent with the duties and responsibilities of the Participant within the Company immediately prior to the Change in Control, (ii) any reduction of the Participant’s salary, aggregate incentive compensation opportunities (excluding any reduction in incentive compensation awards due to the economic performance of the Company) or aggregate benefits, (iii) any required relocation of the Participant’s office beyond a 50 mile radius from the location of the Participant’s office immediately prior to the Change in Control, (iv) any failure by the Company to obtain the assumption of the Plan by a successor of the Company, or (v) the Company’s requiring the Participant to travel materially in excess of the Participant’s business travel obligations prior to the Change in Control.
     (K) “ Participants ” shall mean those persons who are expressly designated in writing by the Committee from time to time and identified as “Group A Participants” or “Group B

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Participants,” as the case may be.
     (L) “ Protected Period ” shall mean the period beginning on the date of a Change in Control and ending on the date which is eighteen months after the date of such Change in Control.
     (M) “Separation from Service” shall mean a termination of services provided by a Participant to the Company, other than by reason of death or Disability, as determined by the Committee in accordance with Treas. Reg. §1.409A-1(h). In determining whether a Participant has experienced a Separation from Service, the following provisions shall apply:
(i) For a Participant who provides services to the Company as an Employee, except as otherwise provided in part (iii) of this Paragraph, a Separation from Service shall occur when such Participant has experienced a termination of employment with the Company. A Participant shall be considered to have experienced a termination of employment when the facts and circumstances indicate that the Participant and the Company reasonably anticipate that either (a) no further services will be performed for the Company after a certain date, or (b) that the level of bona fide services the Participant will perform for the Company after such date (whether as an employee or as an independent contractor) will permanently decrease to no more than 20% of the average level of bona fide services performed by such Participant (whether as an employee or an independent contractor) over the immediately preceding 36-month period (or the full period of services to the Company if the Participant has been providing services to the Company less than 36 months).
     If a Participant is on military leave, sick leave, or other bona fide leave of absence, the employment relationship between the Participant and the Company shall be treated as continuing intact, provided that the period of such leave does not exceed 6 months, or if longer, so long as the Participant retains a right to reemployment with the Company under an applicable statute or by contract. If the period of a military leave, sick leave, or other bona fide leave of absence exceeds 6 months and the Participant does not retain a right to reemployment under an applicable statute or by contract, the employment relationship shall be considered to be terminated for purposes of this Plan as of the first day immediately following the end of such 6-month period. In applying the provisions of this paragraph, a leave of absence shall be considered a bona fide leave of absence only if there is a reasonable expectation that the Participant will return to perform services for the Company. For purposes of this paragraph, where a leave of absence is due to any physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than six months, where such impairment causes the Participant to be unable to perform the duties of his or her position of employment or any substantially similar position of employment, a 29-month period of absence shall be substituted for such 6-month period.
(ii) For a Participant who provides services to the Company as an independent contractor, except as otherwise provided in part (iii) of this

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Paragraph, a Separation from Service shall occur upon the expiration of the contract (or in the case of more than one contract, all contracts) under which services are performed for the Company, provided that the expiration of such contract(s) is determined by the Committee to constitute a good-faith and complete termination of the contractual relationship between the Participant and the Company.
(iii) For a Participant who provides services to the Company as both an employee and an independent contractor, a Separation from Service generally shall not occur until the Participant has ceased providing services for the Company as both as an employee and as an independent contractor, as determined in accordance with the provisions set forth in parts (i) and (ii) of this Paragraph, respectively. Similarly, if a Participant either (a) ceases providing services for the Company as an independent contractor and begins providing services for the Company as an employee, or (b) ceases providing services for the Company as an employee and begins providing services for the Company as an independent contractor, the Participant will not be considered to have experienced a Separation from Service until the Participant has ceased providing services for the Company in both capacities, as determined in accordance with the applicable provisions set forth in parts (i) and (ii) of this Paragraph.
     Notwithstanding the foregoing provisions in this part (iii), if a Participant provides services for the Company as both an employee and as a director, to the extent permitted by Treas. Reg. §1.409A-1(h)(5) the services provided by such Participant as a director shall not be taken into account in determining whether the Participant has experienced a Separation from Service as an employee.
(iv) For purposes of this Paragraph, services performed for the Company shall include service performed both for the Company and for any other corporation that is a member of the same “controlled group” of corporations as the Company under Section 414(b) of the Code or any other trade or business (such as a partnership)_that is under common control with the Company as determined under Section 414(c) of the Code, in each case as modified by Treasury Regulation Section 1.409A-1(h)(3) and substituting “at least 50 percent” for “at least 80 percent” each place it appears in Section 1563(a) of the Code or Treasury Regulation Section 1.414(c)-2..
     (N) “ Specified Employee ” shall mean any Participant who is determined to be a “key employee” (as defined under Section 416(i) of the Code without regard to paragraph (5) thereof) for the applicable period, as determined annually by the Committee in accordance with the methodology specified by resolution of the Board or the Management Development and Compensation Committee of the Board and in accordance with Section 1.409A-1(i) of the Treasury Regulations.
      2.  Effective Date of Plan . The original effective date of the Plan was October 4, 2001, and the effective date of the amendment and restatement of the Plan is January 1, 2009 (the “Effective Date”). The Plan shall remain in effect until the earlier of (i) such time as the Company has discharged all of its obligations hereunder, or (ii) the date of the termination of

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the Plan pursuant to Section 10.3 hereof.
      3.  Administration .
     (A) Prior to the date of a Change in Control, the Plan shall be interpreted, administered and operated by the Personnel, Compensation and Stock Plan Committee of the Board; on and after the date of a Change in Control, the Plan shall be interpreted, administered and operated by a committee appointed by a committee of individuals appointed by the Personnel, Compensation and Stock Plan Committee of the Board as such Committee is constituted immediately prior to the Change in Control. In each case, subject to the terms of the Plan, the Committee shall have complete authority, in its sole discretion subject to the express provisions of the Plan, to determine who shall be a Participant, to interpret the Plan, to prescribe, amend and rescind rules and regulations relating to it, and to make all other determinations necessary or advisable for the administration of the Plan. Notwithstanding the foregoing, the Committee may delegate any of its duties hereunder to such person or persons from time to time as it may designate.
     (B) All expenses and liabilities which members of the Committee incur in connection with the administration of the Plan shall be borne by the Company. The Committee may employ attorneys, consultants, accountants, appraisers, brokers, or other persons, and the Committee, the Company and the Company’s officers and directors shall be entitled to rely upon the advice, opinions or valuations of any such persons. No member of the Committee or the Board shall be personally liable for any action, determination or interpretation made in good faith with respect to the Plan, and all members of the Committee shall be fully protected by the Company in respect of any such action, determination or interpretation.
      4.  Benefits Provided .
     4.1 Termination After Change in Control . (A) Subject to Section 4.2 and 4.3 hereof, if a Participant’s employment with the Company is terminated during the Protected Period (a) by the Company other than for Cause or Disability, or (b) by the Participant for Good Reason, the Company shall, except as provided in Section 4.1(C), pay to each Participant within ten (10) business days after the Participant’s Separation from Service a severance payment (the “Severance Payment”) in an amount determined as follows: (i) in the case of each Group A Participant, a lump sum payment in an amount equal to two (2) times the sum of the Participant’s average annual base salary and the Participant’s average actual annual cash bonus under the Company’s incentive compensation plan, in each case, for the three fiscal years prior to the fiscal year in which the Change in Control occurs and (ii) in the case of each Group B Participant, a lump sum payment in an amount equal to one (1) times the sum of the Participant’s average annual base salary and the Participant’s average actual annual cash bonus under the Company’s Incentive Compensation Plan, in each case, for the three fiscal years prior to the fiscal year in which the Change in Control occurs. In addition, notwithstanding any provisions of the Company’s stock option plans, incentive plans, or other similar plans, all outstanding options, if any, granted to a Participant under any of the Company’s stock option plans, incentive plans, or other similar plans (or options substituted therefor covering the stock of a successor corporation) shall become fully vested and exercisable upon a “Change in Control” or “Change of Ownership,” as such terms are defined in the applicable plan or agreement thereunder, as to all shares of stock covered thereby, and the restricted period with

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respect to any restricted stock or any other equity award granted to a Participant thereunder shall lapse immediately upon such “Change in Control” or Change of Ownership.” In addition, notwithstanding any provisions of the Company’s Death Benefit Only Life Insurance Plan, each Participant’s interest in such plan shall become fully vested upon a Change in Control. The Severance Payment and other benefits described herein shall be conditioned upon the execution by the Participant of the Company’s standard form general release, in accordance with paragraph (B) of this Section 4.1.
     (B) Notwithstanding anything to the contrary contained in this Plan, a Participant shall not be entitled to receive any Severance Payment or any other benefit under the Plan unless and until the Participant has signed and returned to the Plan Administrator a release (the “Release”) by the deadline established by the Plan Administrator (which shall be no later than 50 calendar days after the Participant’s Separation from Service) and any period during which the Participant may revoke the Release under applicable law or pursuant to the terms of the Release has elapsed.
     (C) If on the date of the Change in Control, a Participant is party to any employment or similar agreement with the Company that provides severance payments or any of the other benefits provided in this Plan, and any terms of that agreement are inconsistent with, or in addition to, the terms of this Plan, the terms of that agreement shall apply to the Participant to the extent of such inconsistent or additional terms. In addition, except as otherwise expressly provided in a written agreement between the Company and the Participant that such severance payments or benefits are to be paid in addition to any payment or benefit described herein, the payment herein shall be reduced by the aggregate amount of any other cash payments in the nature of severance payments or the like that any Employer is obligated to pay to the Participant by any contract, plan, or arrangement other than this Plan.
     4.2 Section 280G. (A) Notwithstanding anything in this Plan to the contrary, in the event that it shall be determined that any payment or benefit to a Group A Participant, whether pursuant to the terms of this Plan or otherwise (a “Payment”), would constitute an “excess parachute payment” within the meaning of Section 280G of the Code, the Group A Participant shall be paid an additional amount (a “Gross-Up Payment”) such that the net amount retained by the Group A Participant after deduction of any excise tax imposed under Section 4999 of the Code, and any federal, state and local income and employment taxes and excise tax, including any interest and penalties with respect thereto, imposed upon the Gross-Up Payment shall be equal to the Payment. For purposes of determining the amount of the Gross-Up Payment, the Group A Participant shall be deemed to pay federal income tax and employment taxes at the highest marginal rate of federal income and employment taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of the Group A Participant’s residence on the date the Payment is made, net of the reduction in federal income taxes that the Group A Participant may obtain from the deduction of such state and local income taxes. Group B Participants shall not be eligible to receive a Gross-Up Payment under this Plan.
     (B) All determinations to be made under this Section 4.2 shall be made by the Company’s independent public accountant immediately prior to the date the Payment is made (the “Accounting Firm”), which firm shall provide its determinations and any supporting calculations and workpapers both to the Company and the Group A Participant within ten (10) 

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days of such date. Any such determination by the Accounting Firm shall be binding upon the Company and the Group A Participant. Within five days after receipt of the Accounting Firm’s determination, the Company shall pay to the Group A Participant the Gross-Up Payment determined by the Accounting Firm.
     (C) In the event that upon any audit by the Internal Revenue Service, or by a state or local taxing authority, of a Payment or Gross-Up Payment, a change is finally determined to be required in the amount of taxes paid by the Group A Participant, appropriate adjustments shall be made under this Section 4.2 such that the net amount which is payable to the Group A Participant after taking into account the provisions of Section 4999 of the Code and any interest and penalties shall reflect the intent of the parties as expressed in paragraph (A) of this Section 4.2, in the manner determined by the Accounting Firm. The Group A Participant shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of a Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten (10) business days after the Group A Participant is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Group A Participant shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Group A Participant in writing prior to the expiration of such period that it desires to contest such claim, the Group A Participant shall: (i) give the Company any information reasonably requested by the Company relating to such claim; (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company; (iii) cooperate with the Company in good faith in order effectively to contest such claim; and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however , that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Group A Participant harmless, on an after-tax basis, for any excise tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 4.2, the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may contest the claim in any permissible manner, and the Group A Participant agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine. The Company’s control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Group A Participant shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority.
     (D) All of the fees and expenses of the Accounting Firm in performing the determinations referred to in paragraphs (B) and (C) of this Section 4.2 shall be borne solely by the Company. The Company agrees to indemnify and hold harmless the Accounting Firm from any and all claims, damages and expenses resulting from or relating to its determinations pursuant to paragraphs (B) and (C) of this Section 4.2, except for claims, damages or expenses

8


 

resulting from the gross negligence or willful misconduct of the Accounting Firm.
     (E) Pursuant to the requirements of Section 409A of the Code, any payment due to the Group A Participant under this Section 4.2 shall be made no later than the end of the calendar year following the year in which related taxes are remitted to the relevant taxing authority, or, in the case of an audit or litigation that results in no taxes being remitted, no later than the end of the calendar year following the year in which such audit or litigation is completed.
      4.3 Compliance with Section 409A of the Code; Delay in Payments to Specified Employees . Payments under this Plan are intended to comply with Section 409A of the Code (to the extent applicable) and this Plan shall be interpreted consistent with that intent. In the case of a Participant who is a Specified Employee, payment of benefits under Section 4.1 (to the extent subject to Section 409A of the Code) shall not be made sooner than six months following the Participant’s Separation from Service. Any resulting delayed payments shall be made on the first day of the seventh month following the date of the Participant’s Separation from Service.
      5.  Termination Procedures .
     5.1 Notice of Termination . Any purported termination of a Participant’s employment following a Change in Control (other than by reason of death) shall be communicated by written Notice of Termination from one party to the other party in accordance with Section 8 hereof. For purposes of this Plan, a “Notice of Termination” shall mean a notice which shall indicate the specific termination provision in this Plan relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Participant’s employment under the provision so indicated. Further, no termination for Cause shall be effective without (i) reasonable notice to the Participant setting forth the reasons for the Company’s intention to terminate, and (ii) an opportunity for the Participant to cure or correct any such breach within twenty (20) days after receipt of such notice. Notwithstanding anything contained herein, no termination for Good Reason shall be effective unless (i) the Participant has delivered to the Company a Notice of Termination in accordance with this Section 5.1 within thirty (30) days after the occurrence of the event or circumstance which constitutes Good Reason under Section 1(J) hereof, and (ii) the Company has been afforded an opportunity to cure or correct such event or circumstance within twenty (20) days after receipt of such notice.
     5.2 Date of Termination . “Date of Termination,” with respect to any purported termination of a Participant’s employment (other than by reason of the Participant’s death or Disability), shall mean the date specified in the Notice of Termination (which shall be within thirty (30) days from the date such Notice of Termination is given).
     5.3 Covenants . The Participant agrees that, in order for the Participant to be eligible to receive the Severance Payment and other benefits described herein, the Participant must comply with the covenants set forth in paragraphs (A) and (B) of this Section 5.3. In the event that a Participant breaches or violates any provision of paragraphs (A) and (B) of this Section 5.3, the Participant shall forfeit any right and interest of the Participant to receive any Severance Payment or other benefit described herein and the Participant shall promptly refund to the Company all payments received under Section 4.1(A).

9


 

     (A) The Participant hereby agrees that, upon termination of the Participant’s employment with the Company, the Participant shall not discuss or use any confidential and/or secret information of a proprietary nature which is not otherwise publicly available.
     (B) The Participant hereby agrees that, for a period commencing on the Date of Termination and terminating on the first anniversary thereof, the Participant shall not, either on the Participant’s own account or jointly with or as a manager, agent, officer, employee, consultant, partner, joint venturer, owner or shareholder or otherwise on behalf of any other person, firm or corporation, directly or indirectly solicit or attempt to solicit away from the Company any of its officers or employees; provided, however , that a general advertisement to which an employee of the Company responds shall in no event be deemed to result in a breach of this Section 5.3(B).
      6.  No Mitigation . The Company agrees that, in order for a Participant to be eligible to receive the Severance Payment and other benefits described herein, the Participant is not required to seek other employment or to attempt in any way to reduce any amounts payable to the Participant by the Company pursuant to Section 4 hereof. Further, the amount of any payment or benefit provided for in this Plan hereof shall not be reduced by any compensation or income earned by the Participant as the result of employment by another employer or self-employment, by retirement benefits, by offset against any amount claimed to be owed by the Participant to the Company, or otherwise.
      7.  Successors .
     7.1 (A) The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume this Plan and all obligations of the Company hereunder in the same manner and to the same extent that the Company would be so obligated if no such succession had taken place.
          (B) This Plan shall inure to the benefit of and shall be binding upon the Company, its successors and assigns, but without the prior written consent of the Participants this Plan may not be assigned other than in connection with the merger or sale of substantially all of the business and/or assets of the Company or similar transaction in which the successor or assignee assumes (whether by operation of law or express assumption) all obligations of the Company hereunder.
     7.2 This Plan shall inure to the benefit of and be enforceable by the Participant’s personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees, legatees or other beneficiaries. If a Participant shall die while any amount would still be payable to such Participant hereunder (other than amounts which, by their terms, terminate upon the death of the Participant) if such Participant had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Plan to the executors, personal representatives or administrators of such Participant’s estate.
      8.  Notices . For the purpose of this Plan, notices and all other communications

10


 

provided for in the Plan shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed, if to a Participant, to the address on file with the Company and, if to the Company, to the address set forth below, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon actual receipt:
To the Company:
KB Home
10990 Wilshire Boulevard
Los Angeles, California 90024
Attention: Senior Vice President, Human Resources
      9.  Claims Procedures; Expenses .
     9.1 Claim for Benefits. A Participant may file with the Committee a written claim for benefits under the Plan if the Participant believes that the Company has not paid the Participant all amounts due under the Plan. The Committee shall, within a reasonable time not to exceed ninety (90) days, unless special circumstances require an extension of time of not more than an additional ninety
     (90) days (in which event a Participant will be notified of the delay during the first ninety (90) day period), provide adequate notice in writing to any Participant whose claim for benefits shall have been denied, setting forth the following in a manner calculated to be understood by the Participant: (i) the specific reason or reasons for the denial; (ii) specific reference to the provision or provisions of the Plan on which the denial is based; (iii) a description of any additional material or information required to perfect the claim, and an explanation of why such material or information is necessary; and (iv) information as to the steps to be taken in order that the denial of the claim may be reviewed. If written notice of the denial of a claim has not been furnished to a Participant, and such claim has not been granted within the time prescribed in this Section 9.1 (including any applicable extension), the claim for benefits shall be deemed denied.
     9.2 Appeal of Denial. (A) A Participant whose claim for benefits shall have been denied in whole or in part, may, within sixty (60) days from either the receipt of the denial of the claim or from the time the claim is deemed denied (unless the notice of denial grants a longer period within which to respond), appeal such denial to the Committee. In the event of a claim, the Participant may, upon request, at this time review documents pertinent to his claim and may submit written issues and comments.
     (B) The Committee shall notify a Participant of its decision within sixty (60) days after an appeal is received, unless special circumstances require an extension of time of not more than an additional sixty (60) days (in which event a Participant will be notified of the delay during the first sixty (60) day period). Such decision shall be given in writing in a manner calculated to be understood by the Participant and shall include the following: (i) specific reasons for the decision; and (ii) specific reference to the provision or provisions of the Plan on which the decision is based.
     9.3 Expenses, Legal Fees. If a Participant commences a legal action to enforce any

11


 

of the obligations of the Company under this Plan and it is ultimately determined that the Participant is entitled to any payments or benefits under this Plan, the Company shall pay the Participant the amount necessary to reimburse the Participant in full for all reasonable expenses (including reasonable attorneys’ fees and legal expenses) incurred by the Participant with respect to such action.
     10.  Miscellaneous .
     10.1 No Waiver . No waiver by the Company or any Participant, as the case may be, at any time of any breach by the other party of, or of any lack of compliance with, any condition or provision of this Plan to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. All other plans, policies and arrangements of the Company in which the Participant participates during the term of this Plan shall be interpreted so as to avoid the duplication of benefits paid hereunder.
     10.2 No Right to Employment . Nothing contained in this Plan or any documents relating to the Plan shall (i) confer upon any Participant any right to continue in the employ of the Company or a subsidiary, (ii) constitute any contract or agreement of employment, or (iii) interfere in any way with the right of the Company to terminate the Participant’s employment at any time, with or without Cause.
     10.3 Termination and Amendment of Plan . Prior to a Change in Control, the Board shall have the right to amend or terminate the Plan and to add or remove Participants from time to time, in its sole and absolute discretion. From and after the date of a Change in Control, the Board shall not have the right to terminate the Plan or amend it in any manner which adversely affects the rights of any Participant unless the Company has obtained the prior written consent of each affected Participant. Notwithstanding the foregoing, the Plan shall automatically terminate on the date following the termination of the Protected Period, provided that all obligations accrued by Participants prior to such termination of the Plan must be satisfied in full in accordance with the terms hereof.
     10.4 Benefits not Assignable . Except as otherwise provided herein or by law, no right or interest of any Participant under the Plan shall be assignable or transferable, in whole or in part, either directly or by operation of law or otherwise, including without limitation by execution, levy, garnishment, attachment, pledge or in any manner; no attempted assignment or transfer thereof shall be effective; and no right or interest of any Participant under the Plan shall be liable for, or subject to, any obligation or liability of such Participant. When a payment is due under this Plan to a Participant who is unable to care for his or her affairs, payment may be made directly to his or her legal guardian or personal representative.
     10.5 Tax Withholding . All amounts payable hereunder shall be subject to applicable federal, state and local tax withholding.
     10.6 Delaware Law . This Plan shall be construed, interpreted and the rights of the parties determined in accordance with the laws of the State of Delaware (without regard to the conflicts of laws principles thereof), to the extent not preempted by federal law, which shall otherwise control.

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     10.7. Validity . The invalidity or unenforceability of any provision of this Plan shall not affect the validity or enforceability of any other provision of this Plan, which shall remain in full force and effect. If this Plan shall for any reason be or become unenforceable by either party, this Plan shall thereupon terminate and become unenforceable by the other party as well.

13

EXHIBIT 10.29
AMENDMENT NO. 1
TO THE
KB HOME DEATH BENEFIT ONLY PLAN
     The Committee hereby adopts this Amendment No. 1 to the KB Home Death Benefit Only Plan (the “ Plan ”), on this 31st day of October, 2008, to be effective as of January 1, 2009. Capitalized terms used herein but not defined have the meanings set forth in the Plan.
     Section 9.2 is hereby amended by inserting the following new sentence at the end of the sixth paragraph thereof:
“In no event shall the B component be paid to the Participant later than the end of the taxable year of the Participant following the taxable year in which the Participant remits the related taxes.”
     Except as set forth above, all of the existing terms and conditions of the Plan shall remain in full force and effect.

1

Exhibit 10.30
KB HOME
RETIREMENT PLAN
(AMENDED AND RESTATED EFFECTIVE JANUARY 1, 2009)

 


 

TABLE OF CONTENTS
ARTICLE I
THE PLAN
         
1.1 Establishment of the Plan
    1  
1.2 Purpose
    1  
ARTICLE II
DEFINITIONS
         
2.1 Definitions
    1  
2.2 Gender and Number
    5  
ARTICLE III
PARTICIPATION
         
3.1 Eligibility for Participation
    5  
3.2 Date of Participation
    6  
3.3 Duration of Participation
    7  
3.4 Re-Employment
    7  
ARTICLE IV
SUPPLEMENTAL RETIREMENT BENEFITS
         
4.1 Vesting
    8  
4.2 Supplemental Retirement Benefits
    8  
4.3 Commencement and Duration
    8  
4.4 Benefits in the Event of Death
    9  
ARTICLE V
SPECIAL BENEFIT PAYMENT RULES
         
5.1 Receipt and Release
    9  
5.2 Cost of Living Adjustments
    10  
ARTICLE VI
CHANGE IN CONTROL
         
6.1 Full Vesting and Lump Sum Option Upon Change in Control
    11  
6.2 Amount of Lump Sum Benefit
    11  
ARTICLE VII
TRUST
         
7.1 Establishment of the Trust
    12  
7.2 Contributions
    12  
7.3 Payment of Benefits
    13  

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ARTICLE VIII
ADMINISTRATION
         
8.1 Administration
    13  
8.2 Decisions and Actions of Committee
    13  
8.3 Rules and Records of the Committee
    13  
8.4 Employment of Agents
    14  
8.5 Agent for Service of Legal Process
    14  
8.6 Plan Expenses
    14  
8.7 Indemnification
    14  
8.8 Tax Withholding
    14  
8.9 Claims Procedure
    14  
ARTICLE IX
MISCELLANEOUS
         
9.1 Rights Against the Company
    15  
9.2 Rights Under the Company’s Other Retirement Plans
    15  
9.3 Payment of Benefits to Incompetent
    16  
9.4 Missing Person
    16  
9.5 Amendment or Termination
    16  
9.6 Merger or Consolidation of Plan and Trust
    17  
9.7 Arbitration/Interest on Unpaid Amounts/Controlling Law
    17  
9.8 Rights to Trust Fund Assets
    18  
9.9 Nontransferability
    18  
9.10 Illegality of Particular Provision
    18  

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ARTICLE I
The Plan
      1.1 Establishment of the Plan
     KB Home hereby establishes an unfunded supplemental retirement incentive plan for the benefit of certain selected executives of KB Home. This plan is effective as of July 11, 2002, has been amended and restated effective January 1, 2009, and shall be known as the KB Home Retirement Plan. This Plan is intended to be an “employee benefit plan” within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended.
      1.2 Purpose
     The purpose of this Plan is to help KB Home attract and retain qualified executives by providing certain selected executives with an opportunity to supplement the benefits provided under the tax-qualified retirement plans maintained by KB Home. This Plan is intended to comply with all applicable law, including Code Section 409A and related Treasury guidance and regulations, and shall be operated and interpreted in accordance with this intention.
ARTICLE II
Definitions
      2.1 Definitions
     Whenever capitalized in this document, the following terms shall have the meanings set forth below unless otherwise expressly provided.
  (a)   “Act” shall mean the Securities Exchange Act of 1934, as amended.
 
  (b)   “Actuarial Equivalent” shall mean a single sum present value of a benefit amount otherwise payable, calculated using an annual interest rate assumption equal to 100% of the Applicable Federal Rate last announced by the Internal Revenue Service prior to the determination for the period of time over which the benefits (or remaining annual benefits, as the case may be) would otherwise be paid, and based on annual compounding.
 
  (c)   “Administrative Committee” shall mean a committee composed of one or more officers of the Company appointed by the Company, acting through its Chief Executive Officer or a delegate of such officer, from time to time. In the absence of such a committee, references to the Administrative Committee shall be deemed to be references to the Committee.
 
  (d)   “Annual Benefit Amount” shall mean the dollar amount, determined by the Committee and set forth in the Participant’s Participation Agreement, that is to be used for purposes of calculating the Participant’s benefit opportunity under this Plan.
 
  (e)   “Beneficiary” shall mean the person or persons last designated in writing, on a form or in a manner approved by the Administrative Committee, by a Participant to

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      receive benefits in the event of the death of the Participant. In the event that a Participant failed to designate a beneficiary, or if for any reason such designation shall be legally ineffective, or if all designated beneficiaries predecease him or die simultaneously with him, a distribution to which the Participant would have been entitled under this Plan shall be made to the Participant’s surviving spouse or, if none, to the Participant’s estate.
 
      Upon the Committee or Administrative Committee being provided with written notice of the dissolution of marriage of a Participant, any earlier designation of the Participant’s former spouse as a Beneficiary for a portion or all of the benefits specified herein shall be treated as though the Participant’s former spouse had predeceased the Participant. Notwithstanding the preceding sentence, any designation of the Participant’s former spouse as a Beneficiary shall not be treated as though the Participant’s former spouse had predeceased the Participant if, after the dissolution of the Participant’s marriage and prior to payment of benefits on behalf of the Participant (1) the Participant executes and delivers a new Beneficiary designation that complies with this Plan that clearly names such former spouse as a Beneficiary, or (2) there is delivered to the Plan a domestic relations order providing that the former spouse is to be treated as the Beneficiary. In any case in which the Participant’s former spouse is treated under the Participant’s Beneficiary designation as having predeceased the Participant, no heirs or other beneficiaries of the former spouse shall receive benefits from this Plan as a Beneficiary of the Participant except as provided otherwise in the Participant’s Beneficiary designation.
 
      (The following example illustrates the application of the preceding paragraph. Assume that a Participant, “Participant A,” is married to “Spouse A” and that Participant A files a valid and effective Beneficiary designation under this Plan naming Spouse A as a 50% Beneficiary and each of Participant A’s two children with Spouse A (the “Children”) as a 25% Beneficiary. Assume that Participant A becomes divorced from Spouse A after making such Beneficiary designation. Upon the Committee or Administrative Committee being provided with written notice of the divorce, Spouse A shall be deemed to have predeceased Participant A for purposes of Participant A’s Beneficiary designation subject to the second sentence of the preceding paragraph. If Participant A later dies without having made a valid post-divorce Beneficiary designation under this Plan and assuming that no Plan benefits have been paid and that there is no domestic relations order to the contrary, Participant A’s Beneficiaries shall be deemed to be his two Children, with each child being a 50% Beneficiary.)
 
      Notwithstanding any of the foregoing to the contrary, a Participant shall be treated as having revoked all prior beneficiary designations under this Plan in the event the Participant becomes married (or re-married following a divorce, as the case may be) and such revocation shall be effective upon the later of (1) the date of such marriage (or re-marriage) or (2) the date that the Committee or Administrative Committee is provided with written notice of such marriage (or re-marriage); subject to any domestic relations order providing that a former spouse of the Participant is to be treated as a Beneficiary.

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      (The following example illustrates the application of the preceding paragraph. Assume the same facts as in the last example, except that after becoming divorced from Spouse A and before Participant A’s death, Participant A becomes re-married to “Spouse B,” that the Committee or Administrative Committee has written notice of such re-marriage, and that there is no domestic relations order to the contrary. In this case, Participant A’s beneficiary shall be deemed to be Spouse B (his spouse at the time of his death) because Participant A shall be deemed to have revoked all prior beneficiary designations under this Plan in connection with his re-marriage. In the absence of a new valid and effective beneficiary designation, Participant A’s beneficiary is deemed to be his or her surviving spouse as provided in the first paragraph of this definition.)
 
  (f)   “Board” shall mean the Board of Directors of the Company.
 
  (g)   “Cause” with respect to a Participant shall mean a termination of employment based upon a finding by the Committee, acting in good faith and based on its reasonable belief at the time, that the Participant:
  (1)   has been materially negligent in the discharge of his or her duties to the Company or a Subsidiary, repeatedly refused to perform stated or assigned duties or is materially incompetent in or (other than by reason of a disability or analogous condition) materially incapable of performing those duties; or
 
  (2)   has committed or engaged in a material act of theft, embezzlement or fraud; or
 
  (3)   has materially breached a fiduciary duty, or willfully and materially violated any other duty, law, rule, regulation or policy of the Company or a Subsidiary; or has been convicted of, or plead guilty or nolo contendere to, a felony or misdemeanor (other than minor traffic violations or similar offenses); or
 
  (4)   has materially breached any of the provisions of any agreement with the Company or a Subsidiary; or
 
  (5)   has engaged in unfair competition with, or otherwise acted intentionally in a manner injurious to the reputation, business or assets of, the Company or a Subsidiary;
      provided, however, that, if a cure is reasonably possible in the circumstances, no conduct (or lack thereof) referred to above shall constitute Cause unless the Participant shall have been given advance notice of such conduct (or lack thereof) and a reasonable opportunity to cure such conduct (or lack thereof) and such conduct (or lack thereof) is not timely cured. In no event shall a cure period of more than fifteen days be required.
 
  (h)   “Change in Control” shall mean any change in control of the Company of a nature that would be required to be reported in response to Item 1(a) of the Current Report on Form 10-K, as in effect on the Effective Date, pursuant to Section 13 or 15(d) of the Act; provided that, without limitation, such a “Change in Control” shall be deemed to have occurred if:

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  (1)   a third person, including a “group” as such term is used in section 13(d)(3) of the Act, becomes the beneficial owner, directly or indirectly, of 15 percent or more of the combined voting power of the Company’s outstanding voting securities ordinarily having the right to vote for the election of directors of the Company, unless such acquisition of beneficial ownership is approved by a majority of the Incumbent Board (as such term is defined in paragraph (2) below); or
 
  (2)   individuals who, as of July 11, 2002, constitute the Board (the “Incumbent Board”) cease for any reason to constitute at least a majority of the Board, provided that any person becoming a director subsequent to July 11, 2002, whose election, or nomination for election by the Company’s shareholders, was approved by a vote of at least three-quarters of the directors comprising the Incumbent Board (other than an election or nomination of an individual whose initial assumption of office is in connection with an actual or threatened election contest relating to the election of the directors of the Company, as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Act) shall be, for purposes of this provision, considered as though such person were a member of the Incumbent Board..
(i)   “Code” shall mean the Internal Revenue Code of 1986, as amended.
 
(j)   “Committee” shall mean the Personnel, Compensation and Stock Plan Committee of the Board (or a designee of that Committee).
 
(k)   “Company” shall mean KB Home, and any successor thereto.
 
(l)   “Disability” with respect to a Participant shall mean that the Participant has become “totally disabled” (or the equivalent term used if “totally disabled” is not a defined term) for purposes of the long-term disability plan of the Company or one of its Subsidiaries in which the Participant participates.
 
(m)   “Effective Date” shall mean the effective date of this Plan as set forth in section 1.1.
 
(n)   “Eligible Person” shall mean any executive employed by the Company or one of its Subsidiaries.
 
(o)   “Participant” shall mean any Eligible Person who has satisfied the conditions for participation in this Plan as set forth in sections 3.1 and 3.4.
 
(p)   “Participation Agreement” shall mean a written agreement in a form approved by the Committee or Administrative Committee, and signed by a member of the Committee or by a member of the Administrative Committee (in each case other than the Eligible Person covered by the agreement), informing an Eligible Person of his selection by the Committee as a participant in this Plan, containing the Eligible Person’s agreement to be bound by the terms of this Plan, and setting forth such information as may be required pursuant to section 3.1.
 
(q)   “Participation Date” shall mean the date, determined by the Committee and set forth in the Participant’s Participation Agreement, that is used in determining

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    whether a Participant is eligible for benefits hereunder upon or following the Participant’s Separation from Service.
 
(r)   “Plan” shall mean this KB Home Retirement Plan, as it may be amended from time to time.
 
(s)   “Subsidiary” shall mean any corporation or other entity a majority of whose outstanding voting stock or voting power is owned, directly or indirectly, by the Company.
 
(t)   “Separation from Service” shall mean termination of services provided by a Participant to his or her Company, whether voluntary or involuntary, as determined by the Administrative Committee in accordance with Treasury Regulation Section 1.409A-1(h). In determining whether a Participant has experienced a Separation from Service, the following provisions shall apply:
  (1)   For a Participant who provides services to the Company as an employee, except as otherwise provided in part (3) of this Subsection, a Separation from Service shall occur when such Participant has experienced a termination of employment with the Company. A Participant shall be considered to have experienced a termination of employment when the facts and circumstances indicate that the Participant and the Company reasonably anticipate that either (i) no further services will be performed for the Company after a certain date, or (ii) that the level of bona fide services the Participant will perform for the Company after such date (whether as an employee or as an independent contractor) will permanently decrease to no more than 20% of the average level of bona fide services performed by such Participant (whether as an employee or an independent contractor) over the immediately preceding 36-month period (or the full period of services to the Company if the Participant has been providing services to the Company less than 36 months).
 
      If a Participant is on military leave, sick leave, or other bona fide leave of absence, the employment relationship between the Participant and the Company shall be treated as continuing intact, provided that the period of such leave does not exceed 6 months, or if longer, so long as the Participant retains a right to reemployment with the Company under an applicable statute or by contract. If the period of a military leave, sick leave, or other bona fide leave of absence exceeds 6 months and the Participant does not retain a right to reemployment under an applicable statute or by contract, the employment relationship shall be considered to be terminated for purposes of this Plan as of the first day immediately following the end of such 6-month period. In applying the provisions of this paragraph, a leave of absence shall be considered a bona fide leave of absence only if there is a reasonable expectation that the Participant will return to perform services for the Company. For purposes of this paragraph, where a leave of absence is due to any physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than six months, where such

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      impairment causes the Participant to be unable to perform the duties of his or her position of employment or any substantially similar position of employment, a 29-month period of absence shall be substituted for such 6-month period.
 
  (2)   For a Participant who provides services to the Company as an independent contractor, except as otherwise provided in part (3) of this Subsection, a Separation from Service shall occur upon the expiration of the contract (or in the case of more than one contract, all contracts) under which services are performed for the Company, provided that the expiration of such contract(s) is determined by the Committee to constitute a good-faith and complete termination of the contractual relationship between the Participant and the Company.
 
  (3)   For a Participant who provides services to the Company as both an employee and an independent contractor , a Separation from Service generally shall not occur until the Participant has ceased providing services for such Company as both as an employee and as an independent contractor, as determined in accordance with the provisions set forth in parts (1) and (2) of this Subsection, respectively. Similarly, if a Participant either (i) ceases providing services for the Company as an independent contractor and begins providing services for the Company as an employee, or (ii) ceases providing services for the Company as an employee and begins providing services for the Company as an independent contractor, the Participant will not be considered to have experienced a Separation from Service until the Participant has ceased providing services for the Company in both capacities, as determined in accordance with the applicable provisions set forth in parts 0 and 0 of this Subsection.
 
      Notwithstanding the foregoing provisions in this part (3), if a Participant provides services for the Company as both an employee and as a director of the Board of the Company, to the extent permitted by Treas. Reg. §1.409A-1(h)(5) the services provided by such Participant as a director of the Board of the Company shall not be taken into account in determining whether the Participant has experienced a Separation from Service as an employee.
 
  (4)   For purposes of this Subsection, services performed for the Company shall include service performed both for the Company and for any other corporation that is a member of the same “controlled group” of corporations as the Company under Section 414(b) of the Code or any other trade or business (such as a partnership)_that is under common control with the Company as determined under Section 414(c) of the Code, in each case as modified by Treasury Regulation Section 1.409A-1(h)(3) and substituting “at least 50 percent” for “at least 80 percent” each place it appears in Section 1563(a) of the Code or Treasury Regulation Section 1.414(c)-2.

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(u)   “Specified Employee” shall mean any Participant who is determined to be a “key employee” (as defined under Code Section 416(i) without regard to paragraph (5) thereof) for the applicable period, as determined annually by the Committee in accordance with the methodology specified by resolution of the Board or the Management Development and Compensation Committee of the Board and in accordance with Treas. Reg. §1.409A-1(i).
 
(v)   “Trust” shall mean the legal entity organized pursuant to the Trust Agreement between the Company and the Trustee to hold and administer the Trust Fund in which any contributions made by the Company are to be held, invested, and disbursed to, or for the benefit of, Participants and their Beneficiaries.
 
(w)   “Trust Agreement” shall mean the agreement in the nature of a trust entered into between the Company and Trustee with respect to this Plan.
 
(x)   “Trust Fund” shall mean the assets of every kind and description held in the Trust pursuant to the Trust Agreement.
 
(y)   “Trustee” shall mean the entity, not affiliated with the Company, acting as the trustee under the Trust Agreement at the time of reference.
      2.2 Gender and Number
     Unless the context clearly requires otherwise, the masculine pronoun whenever used shall include the feminine pronoun, and the singular shall include the plural.
ARTICLE III
Participation
      3.1 Eligibility for Participation
     Subject to Section 3.3, an Eligible Person shall participate in this Plan only if:
  (1)   he has been selected by the Committee and designated in writing by the Committee as a participant in this Plan,
 
  (2)   he executes his Participation Agreement and returns an original copy of such agreement, along with such administrative and other forms as the Committee may require, to the Committee no later than thirty (30) days after the date of his Participation Agreement, and
 
  (3)   he timely completes any other participation conditions as may be prescribed by the Committee or Administrative Committee and set forth in the Participation Agreement (including, without limitation, the completion and timely return of any consent to insure forms that may be required by the Committee or Administrative Committee in the circumstances).
The Committee shall send (or cause there to be sent) a Participation Agreement to each Eligible Person that is selected by the Committee for participation in this Plan. An Eligible Person’s

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Participation Agreement shall set forth his Annual Benefit Amount and Participation Date, each as determined by the Committee. The Company shall notify, within ninety (90) days after the applicable deadline, an Eligible Person who has failed to become a Participant by virtue of not timely satisfying the eligibility requirement referred to in either clause (2) or clause (3) above.
     The Committee shall limit the group of all Participants to “a select group of management or highly compensated employees” within the meaning of 29 C.F.R. 2520.104-23 or any similar successor provision.
     The Committee shall designate an Eligible Person as a participant in this Plan only if the Committee first determines that the inclusion of such Eligible Person as a Participant will not result in the expected value of the Trust Fund assets (including the expected value of any assets that are to be contributed to the Trust Fund in connection with the designation of such Eligible Person) being less than the Company’s expected Plan benefit obligations (including the expected value of the benefit obligations with respect to that person if he becomes a Participant). The Committee may base such calculations on any factors and assumptions that are reasonable in the circumstances. For determinations made prior to a Change in Control, the Committee’s determination of reasonableness for such purposes shall be final and binding on all persons. The Committee’s failure to make such a determination (or an incorrect determination) with respect to the designation of an Eligible Person prior to a Change in Control shall not constitute a breach of this Plan and shall not give rise to any right or claim of any Participant or other person. Furthermore, and notwithstanding the preceding provisions of this paragraph to the contrary, an Eligible Person who is designated by the Committee as a participant in this Plan prior to a Change in Control and who has otherwise satisfied the Plan participation conditions set forth above in this Section 3.1 shall not fail to become a Participant merely because the Committee fails to make the determination required by this paragraph and/or such determination is later determined to be erroneous.
      3.2 Date of Participation
     Subject to Section 3.3, an Eligible Person designated in writing by the Committee as a participant in this Plan shall become a Participant as of the date that all of the conditions to such participation, determined pursuant to section 3.1, have been timely satisfied. The Committee may, however, establish a Participation Date for any Participant that is earlier than, concurrent with, or later than such date. Once the Committee has established a Participation Date as to a Participant, the Committee may not subsequently change that date to a later date, but it may change that date to an earlier date (thereby, in effect, accelerating that Participant’s vesting opportunity under this Plan). Any such change shall be made by a written amendment to the Participant’s Participation Agreement signed by a member of the Committee or by a member of the Administrative Committee (in each case other than the affected Participant).
      3.3 Duration of Participation
     Participation in this Plan of any Participant shall continue while the Participant is an employee of the Company or a Subsidiary, whether or not there is in effect an employment agreement between the Participant and the Company or any Subsidiary, and thereafter for so long as he is entitled to receive any benefits hereunder. Without limiting the generality of the preceding sentence, once an Eligible Person becomes a Participant, he may not (other than in connection with a Separation from Service for which he is not entitled to benefits under this Plan or, following the commencement of benefits to the Participant under this Plan, upon the

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satisfaction of all such benefits due to the Participant) subsequently be removed from participation in this Plan; provided, however, that the Committee may, in its sole discretion but only prior to a Change in Control, rescind its selection of an Eligible Person as a participant in this Plan if the Committee gives the Eligible Employee written notice of such rescission no later than thirty (30) days (subject to extension as provided below) after the date that the Eligible Person would have otherwise become a Participant. Such a rescission shall be effective regardless of whether the Eligible Person had otherwise satisfied the requirements for participation in this Plan and, in the event of a rescission, the Eligible Person shall have no right to benefits or other compensation with respect to this Plan or such rescission. The Committee or Administrative Committee may, in its sole discretion, extend the 30-day period referred to in the second sentence of this paragraph by an additional sixty (60) days by written notice to that effect given to the Eligible Person within the original 30-day period for a notice of rescission. A Participant’s Annual Benefit Amount may be changed only by a written amendment to the Participant’s Participation Agreement signed by a member of the Committee or by a member of the Administrative Committee (in each case other than the affected Participant); provided that the Committee may not decrease a Participant’s Annual Benefit Amount without the written consent of the affected Participant. In no event shall reductions expressly contemplated by this Plan (such as present value calculations, the 20% reduction provision of section 4.1, and tax withholding provisions) be deemed to be decreases to the Participant’s Annual Benefit Amount for such purpose.
      3.4 Re-Employment
     If a former Participant later becomes re-employed as an Eligible Person, he shall again become a Participant only if re-selected and re-designated by the Committee as such pursuant to section 3.1 and only if the other requirements of section 3.1 are satisfied with respect to such re-selection. In such circumstances, the Committee may, in its sole discretion, establish a new Annual Benefit Amount and/or Participation Date for the Participant.
ARTICLE IV
Supplemental Retirement Benefits
      4.1 Vesting
     Except as provided in the next sentence, a Participant shall be entitled to the benefits described in section 4.2 only if the Participant’s Separation from Service occurs either (1) on or after the fifth anniversary of the Participant’s Participation Date, or (2) before the fifth anniversary of the Participant’s Participation Date and such Separation from Service is the result of the death or Disability of the Participant. If a Participant has a Separation from Service that results from a termination of employment by the Company or a Subsidiary other than for Cause (and other than due to the Participant’s Disability) after the fourth anniversary of the Participant’s Participation Date and before the fifth anniversary of the Participant’s Participation Date, then the Participant shall be entitled to the benefits described in section 4.2; provided, however, that in such circumstances the amount of the Participant’s Annual Benefit Amount shall be multiplied by 0.8 (80%) for purposes of calculating the Participant’s benefits under the other provisions of this Plan. Except as provided in the preceding sentence, if a Participant’s Separation from Service occurs prior to the fifth anniversary of the Participant’s Participation Date (and other than a Separation from Service that is the result of the Participant’s death or

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Disability), then he shall cease to be a Participant on the date of such Separation from Service and he shall not be entitled to any benefits hereunder. There will be no pro-rated benefits or pro-rated vesting in such circumstances. In any event, a Participant’s rights to benefits under this Plan are subject to section 5.1.
      4.2 Supplemental Retirement Benefits
     Subject to section 4.1, a Participant’s benefits under this Plan shall be annual supplemental retirement benefits paid in substantially equal installments (not less frequently than quarterly and without interest) over a period of twenty (20) years commencing as of a date determined in accordance with section 4.3. Subject to section 8.8, a Participant’s aggregate annual supplemental retirement benefit under this Plan for any such year shall equal the amount of the Participant’s Annual Benefit Amount. (For example, subject to sections 4.1 and 8.8, if a Participant is entitled to benefits under this Plan and the Participant’s Annual Benefit Amount is $100,000, the Participant will be paid $100,000 per year over a twenty (20) year period commencing as of a date determined in accordance with section 4.2. If payments are to be made on a quarterly basis, then the Participant will receive four $25,000 (again, subject to section 8.8) payments for each year during that period.)
      4.3 Commencement and Duration
     If a Participant is entitled to the benefits described in section 4.2, the first benefit payment to the Participant pursuant to section 4.2 shall be paid by the Company no later than sixty (60) days after the last to occur of the following: (1) the Participant’s attainment of age 55; (2) the tenth anniversary of the Participant’s Participation Date; or (3) the Participant’s Separation from Service. Notwithstanding the preceding sentence, in the case of a Participant who is a Specified Employee, the first benefit payment shall commence no earlier than the first day after the end of the 6-month period immediately following the date on which the Participant experiences a Separation from Service, and such benefit payment shall also include a lump sum payment equal to the amounts that otherwise would have been paid during the 6-month period but for the delay. After a Participant’s benefits commence, the Company shall continue to make the payments to the Participant required by section 4.2 until all of the Participant’s benefits have been paid (i.e., supplemental retirement benefits pursuant to section 4.2 have been paid to the Participant for a period of twenty (20) years or the remaining benefits are paid in a lump sum in accordance with this Plan). Each benefit payment shall be made in cash.
      4.4 Benefits in the Event of Death
     In the event of a Participant’s death, the Participant’s Plan benefit (or remaining Plan benefits if payments have already commenced prior to the Participant’s death) shall be paid to the Participant’s Beneficiary in a lump sum payment equal to the Actuarial Equivalent of his Plan benefits (or remaining benefits, as the case may be). The lump sum payment shall be made no later than 60 days after the Administrative Committee is provided with proof that is satisfactory to the Administrative Committee of the Participant’s death.

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ARTICLE V
Special Benefit Payment Rules
      5.1 Receipt and Release
     Notwithstanding anything else contained in this Plan to the contrary, as a condition precedent to any Company benefit obligation under this Plan to any Participant (or to the Participant’s Beneficiary in the event of the Participant’s death), the Participant (or Beneficiary, as the case may be) shall, within 50 days following the Participant’s Separation from Service, provide the Company with a valid, executed, written Release (as defined below) (in a form provided by or reasonably acceptable to the Company) and such release shall have not been revoked by the Participant (or Beneficiary) pursuant to any revocation rights afforded by applicable law. The Company shall have no obligation to make any payment to the Participant (or Beneficiary) pursuant to this Plan unless and until the Release contemplated by this section 5.1 becomes irrevocable by the Participant (or Beneficiary) in accordance with all applicable laws, rules and regulations and all payments to the Participant (or Beneficiary) pursuant to this Plan shall be forfeited if the valid, executed, written Release contemplated by this section 5.1 is not provided to the Company within 50 days following the Participant’s Separation from Service.
     As used in the preceding paragraph, “Release” shall mean a written release, discharge and covenant not to sue entered into by the Participant on behalf of himself, his descendants, dependents, heirs, executors, administrators, assigns, and successors, and each of them, of and in favor of the Company, its parent (if any), the Company’s Subsidiaries and other affiliates, past and present, and each of them, as well as its and their trustees, directors, officers, agents, attorneys, insurers, employees, stockholders, members, representatives, assigns, and successors, past and present, and each of them (the “releasees”), with respect to and from any and all claims, wages, demands, rights, liens, agreements, contracts, covenants, actions, suits, causes of action, obligations, debts, costs, expenses, attorneys’ fees, damages, judgments, orders and liabilities of whatever kind or nature in law, equity or otherwise, whether now known or unknown, suspected or unsuspected, and whether or not concealed or hidden, which he may then own or hold or he at any time theretofore owned or held or may in the future hold as against any or all of said releasees, arising out of or in any way connected with the Participant’s employment relationship with each and every releasee with which the Participant has had such a relationship, or the termination of his employment or any other transactions, occurrences, acts or omissions or any loss, damage or injury whatever, known or unknown, suspected or unsuspected, resulting from any act or omission by or on the part of said releasees, or any of them, committed or omitted prior to the date of such release including, without limiting the generality of the foregoing, any claim under Section 1981 of the Civil Rights Act of 1866, Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act, the Americans with Disabilities Act, the Family and Medical Leave Act of 1993, the California Fair Employment and Housing Act, the California Family Rights Act, any other claim under any other federal, state or local law or regulation, and any other claim for severance pay, bonus or incentive pay, sick leave, holiday pay, vacation pay, life insurance, health or medical insurance or any other fringe benefit, medical expenses, or disability (except that such release shall not constitute a release of any Company obligation to the Participant under this Plan upon the Company’s receipt of such release, under any benefit plan of a releasee that is intended to be qualified under the Employee Retirement Income Security Act of 1974, as amended, or any claim for severance benefits expressly contemplated by a written employment contract with the Company or a Subsidiary). The Release shall also contain the Participant’s warrant that he has not theretofore assigned or

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transferred to any person or entity, other than the Company, any released matter or any part or portion thereof and that he will defend, indemnify and hold harmless the Company and the aforementioned releasees from and against any claim (including the payment of attorneys’ fees and costs actually incurred whether or not litigation is commenced) that is directly or indirectly based on or in connection with or arising out of any such assignment or transfer made, purported or claimed.
      5.2 Cost-of-Living Adjustments
     The Committee may adjust a Participant’s Annual Benefit Amount for cost-of-living increases and may adopt rules providing for automatic annual increases (e.g., using the same rate for determining annual Social Security cost-of-living increases unless revoked by the Committee) .
ARTICLE VI
Change in Control
      6.1 Full Vesting and Lump Sum Payment Upon Change in Control
     All Participants at the time of a Change in Control (excluding, without limitation, those Participants who had a Termination of Employment prior to the Change in Control and who had not again become Participants in accordance with section 3.4) shall be deemed to be fully vested in their benefits under this Plan (that is, each such Participant shall be deemed to have been a Participant for at least five years for purposes of section 4.1). Furthermore, in the event of a Change in Control that also, pursuant to Treas. Reg. Section 1.409-3(i)(5), constitutes a change in the ownership or effective control of the Company, or a change in the ownership of a substantial portion of the assets of the Company, a Participant (or Beneficiary) shall receive an immediate lump sum payment in lieu of all benefits otherwise payable to the Participant (or Beneficiary) under this Plan. The lump sum benefit shall be paid within 30 days of the Change in Control that also, pursuant to Treas. Reg. Section 1.409-3(i)(5), constitutes a change in the ownership or effective control of the Company, or a change in the ownership of a substantial portion of the assets of the Company,
      6.2 Amount of Lump Sum Benefit
     The amount of the lump sum benefit payable to the Participant (or Beneficiary) pursuant to section 6.1 (in the event of a Change in Control that also, pursuant to Treas. Reg. Section 1.409-3(i)(5), constitutes a change in the ownership or effective control of the Company, or a change in the ownership of a substantial portion of the assets of the Company) shall be equal to the Actuarial Equivalent of his Plan benefits (or remaining benefits, as the case may be). As to any Participant who had not yet commenced receiving benefits under this Plan, such calculation of the Actuarial Equivalent of the Participant’s benefit payments pursuant to this section 6.2 shall be made assuming that the Participant’s Separation from Service was the date of the Change in Control and shall take into consideration (if applicable) that benefits would not otherwise have commenced prior to the later of the Participant’s attainment of age 55 or the tenth anniversary of his Participation Date.

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ARTICLE VII
Trust
      7.1 Establishment of the Trust
     The Company shall establish a Trust as a part of this Plan in order to implement and carry out the provisions of this Plan and to finance the benefits under this Plan. The Company shall establish the Trust by entering into a Trust Agreement with a Trustee selected by the Committee. The Trust shall be an irrevocable grantor Trust within the meaning of Code sections 671 through 677, and the Company shall be treated as the owner of the Trust. It is intended that the Trust shall be in such form as may be necessary for this Plan to be deemed unfunded for purposes of the Employee Retirement Income Security Act of 1974, as amended.
     The Trust shall maintain a Trust Fund. The administration and management of the Trust Fund shall be set forth in the Trust Agreement, the terms of which shall be consistent with the provisions of this Plan. Nothing in the Trust Agreement shall impair the rights of the Participant and his Beneficiary nor shall the agreement limit the obligations of the Company under this Plan.
      7.2 Contributions
     The Company shall make such contributions to the Trust as it may determine in its sole discretion. Notwithstanding the preceding sentence: (1) within 30 days of a Change in Control, the Company shall make a contribution to the Trust Fund that causes the assets of the Trust Fund to equal the then Actuarial Equivalent of the benefits remaining due under this Plan; (2) within fifteen days of each January 1 following a Change in Control, the Company shall make any additional contribution necessary to cause the assets of the Trust Fund to equal, as of that January 1, the Actuarial Equivalent of the benefits remaining due under this Plan; and (3) following a Change in Control, each time an Eligible Person is designated as a participant in this Plan the Company shall promptly (and in no event more than five days after the designation) make any additional contribution necessary to cause the assets of the Trust Fund to equal, as of the date of that designation, the Actuarial Equivalent of the benefits remaining due under this Plan (assuming, for purposes of such benefit calculation, that the designated Eligible Person is a Participant as of the date of his designation as a participant).
      7.3 Payment of Benefits
     The benefits under this Plan shall be paid from the Trust Fund. To the extent the Trust Fund is insufficient to pay all required benefits under this Plan, payment of benefits shall be made from the general assets of the Company.
ARTICLE VIII
Administration
      8.1 Administration
     The Committee shall have principal administrative authority over this Plan. The Committee shall be authorized to construe and interpret all of the provisions of this Plan, to adopt procedures and practices concerning the administration of this Plan, and to make any

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determinations necessary hereunder, which shall (subject to section 9.7) be binding and conclusive on all parties.
     The Administrative Committee shall have only the authority expressly contemplated by this Plan or otherwise delegated by the Committee. An Administrative Committee member may resign by delivering his written resignation to the Company or be removed by the Company by delivery of written notice of removal, to take effect on the date specified therein. Vacancies on the Administrative Committee due to resignation, death, removal or other causes shall be filled promptly by the Company. The Committee may assume the authority of the Administrative Committee with respect to this Plan at any time.
     The Committee and Administrative Committee may each appoint one or more individuals and delegate such of its power and duties as it deems desirable to any such individual, in which case every reference herein made to the Committee or Administrative Committee, as applicable, shall be deemed to mean or include the individuals as to matters within their jurisdiction.
      8.2 Decisions and Actions of Committee
     The Committee and Administrative Committee each may act at a meeting or in writing without a meeting. All decisions and actions of each of the Committee and Administrative Committee shall be made by vote of the majority of the members thereof, including actions in writing taken without a meeting.
      8.3 Rules and Records of the Committee
     The Committee may make such rules and regulations in connection with its administration of this Plan as are consistent with the terms and provisions hereof. The Administrative Committee shall keep a record of each Participant’s name, address, social security number, Participation Date, Annual Benefit Amount, and such other data as may be necessary for the proper administration of this Plan, and shall be responsible for supplying all information and reports to the Internal Revenue Service, Department of Labor, Participants, Beneficiaries, and others as required by law.
      8.4 Employment of Agents
     The Committee may employ agents, including without limitation, accountants, actuaries, consultants, or attorneys, to exercise and perform the powers and duties of the Committee as the Committee delegates to them, and to render such services to the Committee as the Committee may determine, and the Committee may enter into agreements setting forth the terms and conditions of such service.
      8.5 Agent for Service of Legal Process
     The Chairman of the Committee shall serve as agent for service of legal process.
      8.6 Plan Expenses
     The Company shall pay all expenses reasonably incurred in the administration of this Plan and Trust; provided, however, that the Trustee may pay such expenses from the assets of the Trust, to the extent such expenses have not been paid by the Company. In such event, the

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Company shall reimburse the Trustee promptly for any such expenses paid by the Trustee from the Trust. The members of each of the Committee and Administrative Committee shall serve without compensation for their services as such, but all expenses of each of the Committee and Administrative Committee shall be paid by the Company. No employee of the Company shall receive compensation from this Plan regardless of the nature of his services to this Plan.
      8.7 Indemnification
     To the extent permitted by law, each of the Committee and Administrative Committee and each and every agent and representative of each such committee shall be indemnified by the Company and saved harmless against any claims, and the expenses of defending against such claims, resulting from any action or conduct relating to the administration of this Plan except claims arising from gross negligence, willful neglect, or willful misconduct.
      8.8 Tax Withholding
     The Company or Trustee shall withhold from any payment to the Participant or Beneficiary any federal, state, or local taxes required by law to be withheld with respect to such payment. With respect to any other federal, state or local taxes required by law to be withheld with respect to a Participant’s benefits under this Plan, the Company and its Subsidiaries may reduce any amount of compensation otherwise payable to the Participant by the amount of such withholding obligations or provide for an off-set of such amounts against any benefits that may then be due (or may become due) to the Participant or his Beneficiary under this Plan.
      8.9 Claims Procedure
  (a)   Submission of Claims . Claims for benefits under this Plan and any Participation Agreement shall be submitted in writing to the Committee or to an individual designated by the Committee for this purpose.
 
  (b)   Denial of Claim . If any claim for benefits is wholly or partially denied, the claimant shall be given written notice within 60 days following the date on which the claim is filed, which notice shall set forth ¾
  (1)   the specific reason or reasons for the denial;
 
  (2)   specific reference to pertinent Plan and Trust provisions on which the denial is based;
 
  (3)   a description of any additional material or information necessary for the claimant to perfect the claim and an explanation of why such material or information is necessary; and
 
  (4)   an explanation of this Plan’s claim review procedure.
      If the claim has not been granted, and if written notice of the denial of the claim is not furnished within 60 days following the date on which the claim is filed, the claim shall be deemed denied for the purpose of proceeding to the claim review procedure.

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  (c)   Claim Review Procedure . The claimant or his authorized representative shall have 60 days after receipt of written notification of denial of a claim to request a review of the denial by making written request to the Committee (or its delegate), and may review pertinent documents and submit issues and comments in writing within such 60-day period. Not later than 60 days after receipt of the request for review, the Committee shall render and furnish to the claimant a written decision which shall include specific reasons for the decision, and shall make specific references to pertinent Plan and Trust provisions on which it is based. The Committee decision shall only be subject to further review as described in section 9.7. If a decision on review is not furnished to a claimant within the specified time period, the claim shall be deemed to have been denied on review.
ARTICLE IX
Miscellaneous
      9.1 Rights Against the Company
     Neither the establishment of this Plan, nor any modification thereof, nor any payments hereunder, nor any Participation Agreement, shall be construed to give any Participant the right to be retained in the employ of the Company or any Subsidiary or to interfere with the right of the Company or any Subsidiary to discharge the Participant at any time, subject to the terms of any employment agreement between the Participant and the Company or any Subsidiary.
      9.2 Rights Under the Company’s Other Retirement Plans
     Nothing in this Plan shall be construed to limit, broaden, restrict, grant, or otherwise affect any rights of any Participant or Beneficiary under the Company’s other retirement plans, nor grant any additional rights or benefits to any Participant or Beneficiary under the Company’s other retirement plans, nor in any way to limit, modify, repeal, or otherwise affect the Company’s or its Board’s right to amend or modify any such retirement plan.
      9.3 Payment of Benefits to Incompetent
     If the Committee receives evidence that -
  (a)   a person entitled to receive any benefit under this Plan is legally, physically, or mentally incompetent to receive such benefit and to give a valid release therefore, and
 
  (b)   another person or an institution is then maintaining or has custody of such person and no guardian, committee, or other representative of the estate of such person has been duly appointed by a court of competent jurisdiction,
the payment of such benefit may be made to such other person or institution as the Committee may determine. Any such payment shall be a payment on behalf of such person and shall, to the extent thereof, be a complete discharge of any liability under this Plan to such person, and neither the Company, the Trustee, nor any member of the Board or the Committee shall be liable to any person or individual by reason of such payment.

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      9.4 Missing Person
     To the extent permitted by Code Section 409A, in the event any benefit shall become payable to any person or upon his death to his legal representative and, if after written notice from the Committee mailed to such person’s last-known address as shown in the Company’s records, such person or his legal representative shall not have presented himself to the Committee within six years after the mailing of such notice, then the Committee may, in its sole discretion, distribute such amount, including any benefit thereafter becoming due to such person or legal representative, among the spouse and blood relatives of such person. Payments made in good faith to any person, to a person’s legal representative, or to any individual(s) who have, on the presentation of reasonable proof, established to the satisfaction of the Committee that he is the spouse or blood relative of such person, shall, to the extent of such payments, be a complete discharge of all obligations arising pursuant to this Plan, and neither the Company, the Trustee, nor any member of the Board or the Committee shall be liable to any person or individual by reasons of such payments.
      9.5 Amendment or Termination
     This Plan may be amended or terminated, in whole or in part, at any time by written action of the Board or Committee or, as to administrative amendments, by written action of the Administrative Committee; provided that any amendment that materially and adversely affects any Participant in this Plan at the time of such amendment must be consented to in writing by that Participant before it shall have any effect as to that Participant. The Board may terminate the Plan without Participant consent; provided that the Board fully vests all Participants then participating in the Plan and pays each such Participant’s Plan benefit (or remaining benefit, as the case may be) as such amounts become eligible for distribution in accordance with the other applicable provisions of the Plan. Notwithstanding the preceding sentence, to the extent permitted by Treas. Reg. §1.409A-3(j)(4)(ix), the Company shall provide that upon termination of the Plan, each such Participant’s Plan benefit (or remaining benefit, as the case may be) shall be distributed as quickly as possible in a lump sum benefit, subject to and in accordance with any rules established by the Administrative Committee deemed necessary to comply with the applicable requirements and limitations of Treas. Reg. §1.409A-3(j)(4)(ix). In such event, the amount of the lump sum benefit payable to a particular Participant shall equal the Actuarial Equivalent of the Participant’s benefits (or remaining benefit payments, as the case may be), assuming in the case of a Participant who had not previously commenced benefits that his benefits were to commence immediately. For this purpose, such benefit shall be paid at the time specified regardless of whether the Participant had attained age 55 or had participated in the Plan for at least ten years since his Participation Date; provided that the calculation of the Actuarial Equivalent of the Participant’s benefit payment pursuant to this section 9.5 shall take into consideration (if applicable) that benefits would not otherwise have commenced prior to the later of the Participant’s attainment of age 55 or the tenth anniversary of his Participation Date.
      9.6 Merger or Consolidation of Plan and Trust
     Neither this Plan nor the Trust may be merged or consolidated with, nor may its assets or liabilities be transferred to, any other plan or trust without the prior written consent of each affected Participant or, as to any Participant who has died, his Beneficiary if such Beneficiary remains entitled to benefits under this Plan.

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      9.7 Arbitration/Interest on Unpaid Amounts/Controlling Law
  (a)   A Participant or Beneficiary may further appeal pursuant to this section a Committee decision under section 8.9(b) on his appeal. The Participant or Beneficiary may submit the controversy to final and binding arbitration pursuant to the then most applicable Rules of the American Arbitration Association; provided, however, that unless the parties otherwise agree, the arbitration shall be before a single arbitrator selected either by mutual agreement or, failing agreement, from a list of seven arbitrators provided by AAA, (1) four of whom shall be retired judges of the Superior or Appellate Courts of California who are residents of Los Angeles or Orange County and, if such list exists at the time of the dispute, who are members of the Independent List of Retired Judges, and (2) three of whom shall be members of the National Academy of Arbitrators, resident in Los Angeles or Orange Counties. In the event the parties are unable to agree upon such an arbitrator from such list of seven, each party shall strike one name in turn with the first to strike being chosen by lot. When only one name remains, that person shall be the parties’ arbitrator. The parties hereto expressly waive their rights, if any, to have such matters heard by a jury or a judge, whether in state or federal court. The cost of the arbitration, including, but not limited to, any reasonable legal fees or other expenses incident thereto incurred in connection with such arbitration, shall be borne by the Company unless the arbitrators(s) determines that the Participant’s or Beneficiary’s claim is frivolous, in which case the Participant or Beneficiary shall bear his own legal fees. In the arbitration the Committee’s decision on appeal shall not be entitled to a presumption of correctness; rather, the dispute shall be decided de novo .
 
  (b)   The Company agrees to pay interest on any amounts payable to a Participant or Beneficiary under this Plan which are not paid within 30 days after the date when due and on any money judgment which is awarded to the Participant or Beneficiary following a proceeding to enforce any portion of this Plan from the date that payments should have been made under this Plan. Such interest shall be calculated at the prime rate offered by Bank of America, or its successor, from the date that payments should have been made under this Plan to the time of actual payment.
 
  (c)   The provisions of this Plan shall be construed, interpreted, administered, and enforced according to applicable federal law and the laws of the State of California, without giving effect to conflict of laws principals thereunder and to the extent not preempted by federal law.
      9.8 Rights to Trust Fund Assets
     No Participant or Beneficiary shall have any right to, or interest in, any assets of the Trust Fund upon his Separation from Service or otherwise, except as provided in this Plan, and then only to the extent of the benefits payable under this Plan to him that are payable out of the assets of the Trust Fund.
      9.9 Nontransferability
     In no event shall the Company or Trustee make any payment under this Plan to any assignee or creditor of a Participant or Beneficiary, except as otherwise required by law. Prior to the time of a payment hereunder, a Participant or Beneficiary shall have no rights by way of

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anticipation or otherwise to assign or otherwise dispose of any interest under this Plan, nor shall rights be assigned or transferred by operation of law.
      9.10 Illegality of Particular Provision
     The illegality of arty particular provision of this document shall not affect the other provisions, and the document shall be construed in all respects as if such invalid provision were omitted.

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Exhibit 10.31
(KB HOME LOGO)
KB HOME
NON-EMPLOYEE DIRECTORS STOCK PLAN
(amended and restated effective January 1, 2009)
     1. PURPOSE OF THE PLAN. The purpose of KB Home Non-Employee Directors Stock Plan (“Plan”) is to grant Awards of Stock Units and/or Options to non-employee Directors of KB Home (the “Company”) in order to align their compensation with the equity interests of the Company’s stockholders. The Plan provides for compensation through (i) annual grants of Stock Units to Directors and Committee Chairs, (ii) the payment of Directors’ Annual Retainer and Meeting Fees in cash or Stock Units, and (iii) the ability under certain conditions for Directors to elect to receive any or all of the foregoing in the form of Options. The Plan was adopted effective as of September 26, 1996 (the “Effective Date”), was subsequently amended as of December 4, 1998, December 6, 1999, and July 10, 2003. and is hereby amended and restated effective January 1, 2009 (the “Amendment Date”).
     2. DEFINITIONS.
     “AMENDMENT DATE” shall mean January 1, 2009.
     “ANNUAL MEETING” shall mean an annual meeting of stockholders of the Company.
     “ANNUAL RETAINER” shall mean the retainer fee, established by the Board, paid to a Director for service as a Director on the Board for a Director Year.
     “ANNUAL STOCK UNIT AWARD” shall mean the annual Award of Stock Units, established by the Board, paid to a Director at the beginning of a Director Year in consideration for such Director’s agreement to serve as a Director on the Board for the Director Year.
     “AWARD” shall mean an award of Stock Units or Options pursuant to the Plan.
     “BOARD” shall mean the Board of Directors of the Company.
     “CHANGE IN CONTROL” of the Company shall mean the occurrence of a “change in the ownership,” a “change in the effective control,” or a “change in the ownership of a substantial portion of the assets” of the Company (or of such other corporation described in Section 1.409A-3(i)(5)(ii)(A)), as determined in accordance with Section 1.409A-1(i)(5) of the Treasury Regulations and the following provisions:
     (a) A “change in the ownership” of the Company (or other applicable corporation) shall occur on the date on which any one person, or more than one person acting as a group, acquires ownership of stock of the corporation that, together with stock held by such person or group,

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constitutes more than 50% of the total fair market value or total voting power of the stock of such corporation. However, if any person or group is considered to own more than 50% of the total fair market value or total voting power of the stock of such corporation, and such person or group acquires additional stock of such corporation, the acquisition of additional stock by such person or group shall not be considered to cause a “change in the ownership” (or a “change in the effective control”) of such corporation.
     (b) A “change in the effective control” of the Company (or other applicable corporation) shall occur on either of the following dates: (i) The date on which any one person, or more than one person acting as a group, acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such person or persons) ownership of stock of the corporation possessing 30% or more of the total voting power of the stock of such corporation; provided, however, that if any person or group is considered to own more than 30% of the total total voting power of the stock of such corporation, and such person or group acquires additional stock of such corporation, the acquisition of additional stock by such person or group shall not be considered to cause a “change in the effective control” of such corporation; or (ii) The date on which a majority of the Company’s Board of Directors is replaced during any 12-month period by directors whose appointment or election is not endorsed by a majority of the members of the Company’s Board of Directors before the date of the appointment or election.
     (c) A “change in the ownership of a substantial portion of the assets” of the Company (or other applicable corporation) shall occur on the date on which any one person, or more than one person acting as a group, acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such person or persons) assets from the corporation that have a total gross fair market value equal to or more than 40% of the total gross fair market value of all of the assets of the corporation immediately before such acquisition or acquisitions. However, a transfer of assets shall not be treated as a “change in the ownership of a substantial portion of the assets” when such a transfer is made to a related person as described in Section 1.409A-3(i)(5)(vii)(B) of the Treasury Regulations.
     “CODE” shall mean the Internal Revenue Code of 1986, as amended from time to time. All references to the Code or any section thereof shall include the Treasury Regulations and other Department of Treasury guidance issued thereunder.
     “COMMITTEE” shall mean the Nominating and Corporate Governance Committee of the Board or such other committee as may be designated by the Board.
     “COMMITTEE CHAIR RETAINER” shall mean the annual Award of Stock Units, established by the Board, to be paid to a Director for service as Chairman of a committee of the Board of Directors for a Director Year.
     “COMPANY” shall mean KB Home.
     “DIRECTOR” shall mean a non-employee director of the Company.
     “DIRECTOR YEAR” shall mean the fiscal year commencing on the date of the

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Company’s Annual Meeting and ending on the date immediately preceding the next Annual Meeting.
     “DIVIDEND EQUIVALENT PAYMENTS” shall mean the payment described in Section 7 hereof, to a holder of Stock Units with respect to certain dividends paid on outstanding shares of Stock.
     “EFFECTIVE DATE” shall mean September 26, 1996.
     “FAIR MARKET VALUE” of the Stock on a particular date shall equal (a) if Shares are traded on a securities exchange, the closing price of a Share as reported in the Wall Street Journal for such date or, if no sale occurred on such date, for the first trading date immediately prior to such date during which a sale occurred; or (b) if Shares are not traded on a securities exchange, (i) the last sales price on such date (if Shares are then listed as a Global Market Issue under the NASDAQ Global Market System) or (ii) the mean between the closing representative bid and asked prices (in all other cases) for Shares on such date; or, if no sales prices or bid and asked prices, as applicable, are reported by a national quotation system, the first date immediately prior to such date on which sales prices or bid and asked prices, as applicable, are reported by a national quotation system; or (c) if Shares are not publicly traded, or with respect to any non-Share based Award or settlement of an Award, the fair market value established by the Committee acting in good faith.
     “OPTION” shall mean a right to purchase a number of shares of Stock at such exercise price, at such times, and on such other terms and conditions as are specified herein or pursuant to such other documentation as may evidence the Award. Options granted under this Plan are not intended to satisfy the requirements for treatment as Incentive Stock Options as defined under Section 422 of the Internal Revenue Code of 1986, as amended.
     “PER DIEM FEES” shall mean a fee, established by the Board, authorized by the Chief Executive Officer of the Company, in his or her sole discretion, to a Director who is asked to work on Board issues for a significant part of the day outside of normal Board or committee meetings.
     “RATIO” shall mean such ratio of the grant-date value of an Option to the Fair Market Value of the Stock underlying the Option as may be determined by the Committee from time to time for the purposes to calculating the number of Options to be granted to a Director, provided that any adjustment in such ratio shall be subject to the approval of the Board.
     “RULE 16B-3” shall mean Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended.
     “SECTION 409A” shall mean Section 409A of the Code and, for the avoidance of doubt only, the Treasury Regulations and other Department of Treasury guidance issued thereunder.
     “STOCK” shall mean shares of Common Stock, par value $1.00 per share, of the Company.

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     “STOCK UNIT” shall mean a right to (i) receive a share of Stock or (ii) receive a cash payment, in accordance with the conditions set forth herein, of the Fair Market Value of a share of Stock.
     “TERMINATION DATE” shall mean the date a Director’s service on the Board terminates for any reason, provided that such termination constitutes a “separation from service” within the meaning of Section 409A as determined in accordance with Section 10(c) hereof.
     3. SOURCE OF SHARES DELIVERED UNDER AWARDS. Any Stock delivered pursuant to an Award shall consist of shares of stock acquired by the Company on the open market.
     4. ANNUAL RETAINER AND STOCK UNIT AWARDS.
     (a) The Committee shall from time to time establish the dollar amount of the Annual Retainer for a Director Year, the number of shares of Stock subject to the Annual Stock Unit Award and Committee Chair Retainers for a Director Year, and the applicable Ratio for Options granted during a Director Year, provided that any adjustment in such amounts or numbers shall be subject to the approval of the Board.
     (b) On the date of each Annual Meeting, each incumbent Director or who has been elected as of the date of such Annual Meeting shall receive an Annual Stock Unit Award of 4,000 Stock Units, which amount shall be subject to adjustment in future Director Years as contemplated in Section 4(a) hereof. If an individual is first elected as Director during a Director Year, he or she shall receive a prorated Annual Stock Unit Award for the remaining balance of the Director Year.
     (c) On the date of each Annual Meeting, the then-incumbent Chairman of the Audit and Compliance Committee shall receive a Committee Chair Retainer of 1000 Stock Units; Chairmen of other Committees of the Board shall receive a retainer of 600 Stock Units. Committee Chair Retainers shall be subject to adjustment in future Director Years as contemplated in Section 4(a) hereof. If a Director is elected as the Chairman of a Committee during a Director Year, he or she shall receive a prorated Committee Chair Retainer for the remaining balance of the Director Year.
     5. ANNUAL RETAINER. Each Director shall be entitled to receive an Annual Retainer with respect to each Director Year in accordance with the provisions of this Section 5. Each Director shall be given an opportunity by the Company on an annual basis to elect (“Annual Election”) to receive his or her Annual Retainer: (i) in cash, (ii) in Stock Units, or (iii) in Options. A Director who does not make an Annual Election shall receive his or her Annual Retainer in cash.
     (a) The Annual Election for the Annual Retainer with respect to any Director Year (or for the Committee Chair Retainer or Annual Stock Unit Award with respect to any Director Year, pursuant to Section 6 hereof) must be in writing and shall be delivered to the Secretary of the

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Company no later than the last day of the Director’s taxable year ending prior to the Director Year, subject to Section 5(c). (The Annual Election shall be irrevocable after the last day of the Director’s taxable year ending prior to the Director Year, subject to Section 5(c).) The Annual Election shall specify the Annual Retainer that such Director elects to receive in cash, or Stock Units, or Options (or the Committee Chair Retainer or Annual Stock Unit Award that such Director elects to receive in Options). If such Director elects to receive Stock Units or Options, such Annual Election shall specify whether such Stock Units or Options shall be settled in cash or shares. If the Director does not specify whether such Stock Units or Options shall be settled in cash or shares, settlement shall be made in cash.
     (b) If a Director elects to receive his or her Annual Retainer in cash, payment shall be made on a quarterly basis. If a Director elects to receive Stock Units in lieu of the Annual Retainer, the Director shall receive Stock Units (including fractional Stock Units) with respect to Stock having a Fair Market Value (on the date of the Company’s Annual Meeting) equal to 120% of the Annual Retainer.
     (c) Any person who becomes a Director on or after the date of an Annual Meeting, whether by appointment or election as a Director (or by change in status from a full-time employee), shall receive an Annual Retainer prorated for the balance of that Director Year. Notwithstanding the provisions of Section 5(a), such Director’s Annual Election for the Director Year in which he or she first becomes a Director may be delivered to the Secretary of the Company no later than the date on which such person first becomes a Director, and such Annual Election shall be irrevocable after the date on which such person first becomes a Director. In the event a Director voluntarily resigns from the Board during a Director Year, (i) the Director shall return to the Company any cash payment covering the prorated portion of the Annual Retainer for the balance of that Director Year and (ii) the Director shall forfeit a percentage of any Stock Units or Options awarded (or if an Option has been exercised, the Director shall return to the Company a cash amount equal to the taxable amount realized by the Director on the date of the Option exercise) prorated for the balance of the portion of the Director Year (if any) as to which such Stock Units or Options were awarded. No return of any portion of the Annual Retainer, Stock Unit or Option grant shall be required in the event a Director leaves the Board as the result of retirement, incapacity or death.
     6. OPTION AWARDS IN LIEU OF FEES OR STOCK UNITS.
     (a) Any Director may elect, by means of an Annual Election in accordance with Section 5 hereof, to receive an Award of Options in lieu of the Annual Retainer, Committee Chair Retainer, and/or Annual Stock Unit Award that such Director otherwise would be entitled to receive. Options shall be granted as of the date of the Company’s Annual Meeting at the commencement of the Director Year for which the Award is being made.
     (b) The number of shares of Stock subject to an Option granted in lieu of the Annual Retainer shall equal the number of shares, rounded up to the nearest whole number, obtained by dividing (i) the dollar amount of the Annual Retainer by (ii) the product of the Ratio and the Fair Market Value of a share of Stock on the date of the Award. The number of shares of Stock subject to an Option granted in lieu of the Annual Stock Unit Award and/or the Committee Chair

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Retainer shall equal the number of shares, rounded up to the nearest whole number, obtained by dividing (i) the Fair Market Value of the number of shares of Stock subject to the Annual Stock Unit Award and/or the Committee Chair Retainer, by (ii) the product of the Ratio and the Fair Market Value of a share of Stock on the date of the Award.
     (c) The price at which each share of Stock may be purchased upon exercise of a particular Option shall be the Fair Market Value of the Stock on the date of the Annual Meeting at which the Option is granted. The exercise period of any Option previously awarded under the Plan may not be adjusted downward, whether through amendment, cancellation or replacement grants, or by any other means, except as provided in Section 12 hereof. The Committee shall not extend the exercise price of an Option beyond the earlier of the latest date upon which the Option could have expired by its original terms under any circumstances or the tenth anniversary of the date of grant of such Option, or otherwise modify any Option or add any feature for the deferral of compensation in any manner that would cause a violation of the requirements of Section 409A.
     (d) Each Option shall be vested on the date of grant, but cannot be exercised unless and until the earlier of: (i) the Director’s acquisition and continued beneficial ownership of at least 10,000 shares of Stock or Stock Units or (ii) the Director’s Termination Date. Options shall have a maximum term of 15 years from the date of grant. Except as provided in Section 5(c) herein, Options shall remain outstanding and fully exercisable for one (1) year from the Termination Date, except in the event of removal for cause, in which case Options shall remain outstanding and fully exercisable for 30 days.
     (e) No Stock shall be delivered pursuant to any exercise of an Option until the Director has made payment in full of the Option price therefor or provision for such payment satisfactory to the Committee. The exercise price of an Option may be paid in cash or certified or cashiers’ check or by delivery (either actually or by attestation) of shares of Stock that have been acquired or held by the Director in such manner as to not result in an accounting charge.
     (f) Unless the documents evidencing the grant of an Option (or an amendment thereto authorized by the Committee) expressly states that the Option is transferable, no Option granted under the Plan may be sold, assigned, conveyed, gifted, pledged, hypothecated or otherwise transferred in any manner, other than by will or the laws of descent and distribution.
     7. DIVIDEND EQUIVALENT PAYMENTS. Effective as of each dividend payment date for outstanding shares of Stock, a current cash payment shall be made on each outstanding Stock Unit to the holder thereof in an amount equal to dividend paid on an outstanding share of Stock.
     8. STOCK UNITS. Each Stock Unit Award under this Plan shall be evidenced by an Award Agreement that complies with, or is exempt from, the requirements of Section 409A. Unless otherwise provided herein, all payments in respect of a Director’s Stock Units shall be made as soon as practicable after (but in no event later than 60 days following) the earlier of: (i) the occurrence of a Change in Control and (ii) the Termination Date.
     9. FORM OF PAYMENT. Payment in respect of Stock Units and/or Options shall be made in Stock or in cash, in accord with the previous annual elections made by the Director. The

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Company shall not issue fractions of a share. Whenever under the terms of the Plan a fractional share would otherwise be required to be issued, the Director shall be paid in cash for such fractional share.
     10. SECTION 409A.
     (a) To the extent that the Committee determines that any Award granted under the Plan is subject to Section 409A, the Award Agreement evidencing such Award shall comply with the requirements of Section 409A. To the extent possible, the Plan and Award Agreements shall be interpreted in accordance with Section 409A, including without limitation any Treasury Regulations or other Department of Treasury guidance that may be issued or amended after the Effective Date or the Amendment Date. Notwithstanding any provision of the Plan to the contrary, in the event that following the Effective Date the Committee determines that any Award may be subject to Section 409A, including such Department of Treasury guidance as may be issued after the Effective Date or the Amendment Date, the Committee may adopt such amendments to the Plan and the applicable Award Agreement or adopt other policies and procedures (including amendments, policies and procedures with retroactive effect), or take any other actions, that the Committee determines are necessary or appropriate to (i) exempt the Award from Section 409A and/or preserve the intended tax treatment of the benefits provided with respect to the Award, or (ii) comply with the requirements of Section 409A.
     (b) If, on a Director’s Termination Date, (i) such Director is a “specified employee” of the Company (within the meaning of Section 409A as determined annually by the Committee in accordance with the methodology specified by resolution of the Board or the Committee and in accordance with Section 1.409A-1(i) of the Treasury Regulations) and (ii) the Company shall make a good-faith determination that an amount payable pursuant to an Award constitutes “deferred compensation” (within the meaning of Section 409A) the payment of which is required to be delayed pursuant to the six-month delay rule set forth in Section 409A in order to preserve the tax treatment intended for such payment or to avoid additional tax, interest, or penalties under Section 409A, then the Company shall not pay such amount on the otherwise scheduled payment date but shall instead pay it on the first business day after such six-month period. Such amount shall be paid without interest, unless otherwise determined by the Committee, in its sole discretion, or as otherwise provided in any applicable agreement between the Company and the relevant Director.
     (c) For purposes of this Plan, a “separation from service” within the meaning of Section 409A shall mean termination of services provided by a Director to the Company, whether voluntary or involuntary, as determined by the Committee in accordance with Section 1.409A-1(h) of the Treasury Regulations. In determining whether a Director has experienced a separation from service, the following provisions shall apply:
          (i) If a Director provides services for the Company as both an employee and as a director of the Board of the Company, to the extent permitted by Section 1.409A-1(h)(5) of the Treasury Regulations, the services provided by such Director as an employee shall not be taken into account in determining whether the Director has experienced a separation from service as a director of the Board of the Company, and the services provided by such Director as a director of the Board of the Company shall not be taken into account in determining whether the Director

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has experienced a separation from service as an employee.
          (ii) For purposes of this Subsection, services performed for the Company shall include service performed both for the Company and for any other corporation that is a member of the same “controlled group” of corporations as the Company under Section 414(b) of the Code or any other trade or business (such as a partnership) that is under common control with the Company as determined under Section 414(c) of the Code, in each case as modified by Treasury Regulation Section 1.409A-1(h)(3) and substituting “at least 50 percent” for “at least 80 percent” each place it appears in Section 1563(a) of the Code or Treasury Regulation Section 1.414(c)-2.
     (d) A Director shall be solely responsible and liable for the satisfaction of all taxes, interest, and penalties that may be imposed on such Director or for such Director’s account in connection with an Award (including any taxes, interest, and penalties under Section 409A), and neither the Company nor its affiliates shall have any obligation to indemnify or otherwise hold such Director harmless from any or all of such taxes, interest, or penalties.
     11. STATEMENT OF ACCOUNT. Each Director shall receive an annual statement showing the number of Stock Units and/or Options that have been awarded to the Director under the Plan.
     12. CHANGE IN CAPITAL STRUCTURE. In the event of any change in the Stock by reason of any stock dividend, split, combination of shares, exchange of shares warrants or rights offering to purchase Stock at a price below its fair market value, reclassification, recapitalization, merger, consolidation or other change in capitalization, appropriate adjustment shall be made by the Committee in the number and kind of shares subject to the Plan, the exercise price of any outstanding Options under the Plan, and any other relevant provisions of the Plan or any outstanding Awards, whose determination shall be binding and conclusive on all persons; provided, however, that such adjustment shall be made only to the extent that it does not cause a violation of the requirements of Section 409A.
     13. NONTRANSFERABILITY. Stock Units shall not be transferable and may not be alienated by a Director except by will or the laws of descent and distribution.
     14. RIGHTS. Except to the extent otherwise set forth herein, Directors shall not have any of the rights of a stockholder with respect to the Stock Units.
     15. ADMINISTRATION OF THE PLAN. The Plan shall be administered by the Committee. The Committee shall have full power, discretion and authority to interpret and administer the Plan, except that the Committee shall have no power to (i) determine the eligibility for Awards or the number of Stock Units or timing or value of Awards to be granted to any Director, or (ii) take any action specifically delegated to the Board under the plan. With respect to any determination contemplated in subsection (i) of the preceding sentence, the Committee shall make recommendations to the Board, but any final determination with respect to such recommendation shall be subject to the approval of the full Board.
     16. AMENDMENT OR TERMINATION OF THE PLAN. The Board may, at any time, amend or terminate the plan; but no amendment or termination shall, without the written consent

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of a Director, reduce the Director’s rights under previously granted Awards or with respect to any Fees previously earned. No amendment which requires stockholder approval in order for the Plan to continue to comply with Rule 16b-3 shall be effective unless the same shall be approved by the requisite vote of the stockholders of the Company.
     17. NO RIGHT TO RENOMINATION. Nothing in the plan or in any Award shall confer upon any Director the right to be nominated for reelection to the Board.
     18. PAYMENTS UPON DEATH. In the event of a Director’s death, payments with respect to any Stock Units shall be made in a single lump sum payment to the beneficiary designated by the Director, and the right to exercise any Options shall be accorded to such beneficiary, or in the absence of an executed beneficiary form, to the person legally entitled thereto, as designated under his or her will, or to such heirs as determined under the laws of intestacy for the state of his or her domicile.
     19. GOVERNING LAW. The Plan and all actions taken thereunder shall be governed by and construed in accordance with the laws of the State of California.

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Exhibit 10.39
AMENDMENT
TO THE
EMPLOYMENT AGREEMENT BETWEEN JEFFREY T. MEZGER AND KB HOME
     This Amendment to the Employment Agreement, dated February 27, 2007 (the “Agreement”), between Jeffrey T. Mezger (the “Executive”) and KB Home (the “Company”), is entered into by the Executive and the Company on this 24th day of December, 2008, to be effective as of January 1, 2009. Capitalized terms used herein but not defined have the meanings set forth in the Agreement.
     WHEREAS, the Executive and the Company desire to make certain technical amendments to the Agreement in light of new requirements under Section 409A of the Internal Revenue Code; and
     WHEREAS, the amendments are being made pursuant to this Amendment in accordance with Sections 9 and 11(b) of the Agreement.
     NOW THEREFORE, for good and valuable consideration, the receipt of which is hereby acknowledged, the Executive and the Company, each intending to be legally bound, agree as follows:
     1. Section 6(a) is hereby amended by striking “While” at the beginning of the second sentence thereof and replacing it with “Subject to the requirements of Section 6(k), while”.
     2. Section 6(d) is hereby amended by striking the period at the end of the first sentence thereof and inserting the following:
“(except that cash lump sum payments under any arrangements or agreements subject to Internal Revenue Code Section 409A shall only be permitted as provided under the terms of those arrangements or agreements).”
     3. Section 6(d) is hereby amended by inserting the following new sentence at the end of the last paragraph thereof:
“In no event shall the payments contemplated under this paragraph be paid to the Executive later than the end of the taxable year of the Executive following the taxable year in which the Executive remits the related taxes.”
     4. Section 6 is hereby amended by inserting the following new subsection (k) at the end thereof:
“(k) Timing of Payment of Cash Severance and Execution of Release. Subject to Section 9, the payment of Cash Severance under Section 6(a) shall be made within 60 days after the date of the Executive’s Involuntary Termination; provided, however, that no payment of Cash Severance shall be made under this

 


 

Agreement unless the Executive delivers an executed Release to the Company within 50 days after the date of the Executive’s Involuntary Termination.”
     5. Section 9 is hereby amended by deleting the first sentence thereof and replacing it with the following:
“If the Company shall make a good-faith determination that the Cash Severance payable pursuant to Section 6 constitutes “deferred compensation” (within the meaning of Section 409A) the payment of which is required to be delayed pursuant to the six-month delay rule set forth in Section 409A in order to preserve the tax treatment intended for such payment or to avoid additional tax, interest, or penalties under Section 409A, then the Company shall not pay such amount on the otherwise scheduled payment date but shall instead pay it on the first business day after such six-month period.”
IN WITNESS WHEREOF, the Executive and the Company have executed this Agreement on the date first set forth above.
                 
KB HOME       EXECUTIVE    
 
               
By:
Name:
  /s/ Wendy C. Shiba
 
Wendy C. Shiba
      /s/ Jeffrey T. Mezger
 
Jeffrey T. Mezger
   
Title:
  Executive Vice President, General            
 
  Counsel and Secretary            

- 2 -

Exhibit 12.1
 
KB HOME
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(In Thousands, Except Ratios)
 
                                         
    Years Ended November 30,  
    2008     2007     2006     2005     2004  
 
Earnings
                                       
Income (loss) from continuing operations before income taxes
  $ (967,931 )   $ (1,460,770 )   $ 571,847     $ 1,201,534     $ 642,184  
Add:
                                       
Interest incurred
    156,402       199,550       237,801       164,245       140,602  
Amortization of premiums and discounts related to debt
    2,062       2,478       2,441       1,550       1,617  
Portion of rent expense considered to be interest
    16,503       28,464       27,657       19,294       14,073  
Amortization of previously capitalized interest
    129,901       171,496       143,249       100,971       77,266  
Distribution of earnings from unconsolidated joint ventures, net of equity in income (loss)
    157,393       171,576       15,164       (2,242 )     (2,302 )
Deduct:
                                       
Interest capitalized
    (143,436 )     (186,560 )     (221,074 )     (142,738 )     (121,241 )
                                         
Income (loss) as adjusted
  $ (649,106 )   $ (1,073,766 )   $ 777,085     $ 1,342,614     $  752,199  
                                         
Fixed charges
                                       
Interest incurred
  $ 156,402     $ 199,550     $ 237,801     $ 164,245     $ 140,602  
Amortization of premiums and discounts related to debt
    2,062       2,478       2,441       1,550       1,617  
Portion of rent expense considered to be interest
    16,503       28,464       27,657       19,294       14,073  
                                         
    $ 174,967     $ 230,492     $ 267,899     $ 185,089     $ 156,292  
                                         
Ratio of earnings to fixed charges
                2.90       7.25       4.81  
                                         
Coverage deficiency (a)
  $ (824,073 )   $ (1,304,258 )   $     $     $  
                                         
 
 
The ratios of earnings to fixed charges are computed on a consolidated basis excluding the French discontinued operations.
 
(a) Earnings for the year ended November 30, 2008 were insufficient to cover fixed charges for the period by $824.1 million. Earnings for the year ended November 30, 2007 were insufficient to cover fixed charges for the period by $1.30 billion.

 
EXHIBIT 21
 
KB HOME AND CONSOLIDATED SUBSIDIARIES
 
SUBSIDIARIES OF THE REGISTRANT
 
The following subsidiaries* of KB Home were included in the November 30, 2008 consolidated financial statements:  
 
         
    Percentage of
 
    Voting Securities
 
    Owned by
 
    the Registrant
 
    or a
 
    Subsidiary of
 
                    Name of Company  
the Registrant
 
Arizona
       
KB HOME Phoenix Inc. 
    100  
KB HOME Sales — Phoenix Inc. 
    100  
KB HOME Sales — Tucson Inc. 
    100  
KB HOME Tucson Inc. 
    100  
         
California
       
KB HOME Central Valley Inc. 
    100  
KB HOME Coastal Inc. 
    100  
KB HOME Greater Los Angeles Inc. 
    100  
KB HOME Insurance Agency Inc. 
    100  
KB HOME Sacramento Inc. 
    100  
KB HOME South Bay Inc. 
    100  
         
Colorado
       
KB HOME Colorado Inc. 
    100  
         
Delaware
       
KB HOME Atlanta LLC
    100  
KB HOME Charlotte Inc.
    100  
KB HOME DelMarVa Inc. 
    100  
KB HOME District of Columbia Inc. 
    100  
KB HOME Florida LLC
    100  
KB HOME Fort Myers LLC
    100  
KB HOME Georgia LLC
    100  
KB HOME Gold Coast LLC
    100  
KB HOME Gulf Coast Inc. 
    100  
KB HOME Illinois Inc. 
    100  
KB HOME Indiana Inc. 
    100  
KB HOME Jacksonville LLC
    100  
KB HOME Maryland Inc. 
    100  
KB HOME New Orleans Inc. 
    100  
KB HOME North Carolina Inc.
    100  
KB HOME Orlando LLC
    100  
KB HOME Raleigh-Durham Inc.
    100  
KB HOME/Shaw Louisiana LLC
    100  
KB HOME South Carolina Inc. 
    100  
KB HOME Tampa LLC
    100  
KB HOME Treasure Coast LLC
    100  
KB HOME Virginia Inc. 
    100  
KB HOME Wisconsin LLC
    100  
KB Urban Inc. 
    100  


 

         
    Percentage of
 
    Voting Securities
 
    Owned by
 
    the Registrant
 
    or a
 
    Subsidiary of
 
                    Name of Company  
the Registrant
 
Rate One Holdings, Inc. 
    100  
rateOne Home Loans, LLC
    100  
         
Florida
       
KB HOME Title Services Inc. 
    100  
         
Georgia
       
Colony Homes, L.L.C. 
    100  
         
Illinois
       
KB HOME Mortgage Company
    100  
         
Michigan
       
Keywick, Inc. 
    100  
         
Nevada
       
KB Home Kyle Inc.
    100  
KB HOME Nevada Inc. 
    100  
KB HOME Reno Inc. 
    100  
         
New Mexico
       
KB HOME New Mexico Inc. 
    100  
         
Texas
       
KB HOME Lone Star Inc.
    100  
KBSA Inc. 
    100  
 
 
* Certain subsidiaries have been omitted from this list. These subsidiaries, when considered in the aggregate as a single subsidiary, do not constitute a significant subsidiary as defined in Rule 1-02(u) of Regulation S-X.

 
EXHIBIT 23
 
KB HOME AND CONSOLIDATED SUBSIDIARIES
 
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
We consent to the incorporation by reference in the following Registration Statements:
 
(1) Registration Statement (Form S-3 No. 333-14977), as amended, of KB Home,
 
(2) Registration Statement (Form S-3 No. 333-41549) of KB Home,
 
(3) Registration Statement (Form S-3 No. 333-51825), as amended, of KB Home,
 
(4) Registration Statement (Form S-3 No. 333-71630), as amended, of KB Home,
 
(5) Registration Statement (Form S-3 No. 333-120458) of KB Home,
 
(6) Registration Statement (Form S-3 No. 333-154432) of KB Home,
 
(7) Registration Statement (Form S-8 No. 33-11692) pertaining to the 1986 Stock Option Plan, and
 
  (8)  Registration Statement (Form S-8 No. 333-129273) pertaining to the 1988 Employee Stock Plan, the 1998 Stock Incentive Plan, the Performance-Based Incentive Plan for Senior Management, the Non-Employee Directors Stock Plan, the 401(k) Savings Plan, the 1999 Incentive Plan, the 2001 Stock Incentive Plan, certain stock grants and the resale of certain shares by officers of the Company;
 
of our reports dated January 26, 2009 with respect to the consolidated financial statements of KB Home, and the effectiveness of internal control over financial reporting of KB Home, included in this Annual Report (Form 10-K) for the year ended November 30, 2008.
 
(ERNST & YOUNG LLP)
 
 
Los Angeles, California
January 28, 2009

 
EXHIBIT 31.1
 
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
 
I, Jeffrey T. Mezger, certify that:
 
  1.   I have reviewed this annual report on Form 10-K of KB Home;
 
  2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
  3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
  4.   The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
  a)  Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
  b)  Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
  c)  Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
  d)  Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
  5.   The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
  a)  All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
  b)  Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
Dated January 27, 2009
 
/s/   JEFFREY T. MEZGER
Jeffrey T. Mezger
President and Chief Executive Officer
(Principal Executive Officer)

 
EXHIBIT 31.2
 
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
 
I, William R. Hollinger, certify that:
 
  1.   I have reviewed this annual report on Form 10-K of KB Home;
 
  2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
  3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
  4.   The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
  a)  Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
  b)  Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
  c)  Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
  d)  Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
  5.   The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
  a)  All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
  b)  Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
 
Dated January 27, 2009
 
/s/   WILLIAM R. HOLLINGER
William R. Hollinger
Senior Vice President and Chief Accounting Officer
(Principal Financial Officer)

EXHIBIT 32.1
 
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT
TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
In connection with the Annual Report of KB Home (the “Company”) on Form 10-K for the period ended November 30, 2008 (the “Report”), I, Jeffrey T. Mezger, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
 
  (1)  The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
  (2)  The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
     
Dated January 27, 2009
 
/s/   JEFFREY T. MEZGER

Jeffrey T. Mezger
President and Chief Executive Officer
(Principal Executive Officer)

EXHIBIT 32.2
 
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT
TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
In connection with the Annual Report of KB Home (the “Company”) on Form 10-K for the period ended November 30, 2008 (the “Report”), I, William R. Hollinger, Senior Vice President and Chief Accounting Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
 
  (1)  The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
  (2)  The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
     
Dated January 27, 2009
 
/s/   WILLIAM R. HOLLINGER

William R. Hollinger
Senior Vice President and Chief Accounting Officer
(Principal Financial Officer)