UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
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For the quarterly period ended August 31, 2008.
or
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934.
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For the transition period from [
] to [
].
Commission File No. 001-09195
KB HOME
(Exact name of registrant as specified in its charter)
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Delaware
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95-3666267
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(State of incorporation)
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(IRS employer identification number)
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10990 Wilshire Boulevard
Los Angeles, California 90024
(310) 231-4000
(Address and telephone number of principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes
þ
No
o
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. (Check one):
Large accelerated filer
þ
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Accelerated filer
o
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Non-accelerated filer
o
(Do not check if a smaller reporting company)
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Smaller reporting company
o
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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
Indicate the number of shares outstanding of each of the issuers classes of common stock as of
August 31, 2008.
Common stock, par value $1.00 per share: 89,623,718 shares outstanding, including 12,020,382 shares
held by the Registrants Grantor Stock Ownership Trust and excluding 25,483,921 shares held in
treasury.
KB HOME
FORM 10-Q
INDEX
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
KB HOME
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts Unaudited)
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Nine Months
Ended August 31,
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Three Months
Ended August 31,
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2008
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2007
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2008
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2007
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Total revenues
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$
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2,114,899
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$
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4,345,946
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$
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681,610
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$
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1,543,900
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Homebuilding:
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Revenues
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$
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2,107,517
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$
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4,335,242
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$
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679,115
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$
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1,540,607
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Construction and land costs
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(2,322,213
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)
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(4,658,065
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)
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(653,732
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)
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(2,002,381
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)
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Selling, general and administrative expenses
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(379,914
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)
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(595,971
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)
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(133,211
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)
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(197,164
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)
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Goodwill impairment
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(24,570
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)
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(107,926
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)
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(107,926
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)
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Operating loss
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(619,180
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)
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(1,026,720
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)
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(107,828
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)
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(766,864
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)
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Interest income
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29,240
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18,882
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6,686
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8,614
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Loss on early redemption of debt
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(10,388
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)
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(12,990
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)
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(10,388
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)
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(12,990
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)
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Equity in loss of unconsolidated joint ventures
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(91,564
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)
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(62,727
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)
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(46,203
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)
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(21,027
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)
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Homebuilding pretax loss
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(691,892
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)
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(1,083,555
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)
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(157,733
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)
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(792,267
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Financial services:
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Revenues
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7,382
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10,704
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2,495
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3,293
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Expenses
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(3,317
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)
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(3,524
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)
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(1,085
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)
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(1,113
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)
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Equity in income of unconsolidated joint venture
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12,880
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14,558
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4,578
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4,367
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Financial services pretax income
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16,945
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21,738
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5,988
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6,547
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Loss from continuing operations before
income taxes
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(674,947
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)
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(1,061,817
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)
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(151,745
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)
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(785,720
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)
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Income tax benefit
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6,100
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419,700
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7,000
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307,100
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Loss from continuing operations
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(668,847
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)
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(642,117
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)
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(144,745
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)
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(478,620
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Income from discontinued operations, net of
income taxes
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47,252
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4,904
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Gain on sale of discontinued operations, net of
income taxes
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438,104
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438,104
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Net loss
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$
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(668,847
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)
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$
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(156,761
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)
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$
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(144,745
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$
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(35,612
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)
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Basic and diluted earnings (loss) per share:
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Continuing operations
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$
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(8.63
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$
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(8.32
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)
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$
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(1.87
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)
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$
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(6.19
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)
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Discontinued operations
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6.29
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5.73
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Basic and diluted loss per share
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$
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(8.63
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)
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$
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(2.03
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)
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$
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(1.87
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$
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(.46
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)
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Basic and diluted average shares outstanding
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77,464
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77,120
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77,565
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77,265
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Cash dividends declared per common share
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$
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.75
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$
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.75
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$
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$
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.25
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See accompanying notes.
3
KB HOME
CONSOLIDATED BALANCE SHEETS
(In Thousands Unaudited)
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August 31,
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November 30,
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2008
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2007
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Assets
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Homebuilding:
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Cash and cash equivalents
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$
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942,451
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$
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1,325,255
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Receivables
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188,312
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295,739
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Inventories
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2,562,682
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3,312,420
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Investments in unconsolidated joint ventures
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250,425
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297,010
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Deferred income taxes
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222,458
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222,458
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Goodwill
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43,400
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67,970
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Other assets
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109,943
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140,712
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4,319,671
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5,661,564
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Financial services
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58,274
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44,392
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Total assets
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$
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4,377,945
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$
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5,705,956
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Liabilities and stockholders equity
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Homebuilding:
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Accounts payable
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$
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646,185
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$
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699,851
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Accrued expenses and other liabilities
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705,978
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975,828
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Mortgages and notes payable
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1,877,362
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2,161,794
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3,229,525
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3,837,473
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Financial services
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14,650
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17,796
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Common stock
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115,108
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114,976
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Paid-in capital
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862,556
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851,628
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Retained earnings
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1,239,473
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1,968,881
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Accumulated other comprehensive loss
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(22,923
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)
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(22,923
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)
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Grantor stock ownership trust, at cost
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(130,620
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)
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(132,608
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)
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Treasury stock, at cost
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(929,824
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)
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(929,267
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)
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Total stockholders equity
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1,133,770
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1,850,687
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Total liabilities and stockholders equity
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$
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4,377,945
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$
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5,705,956
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See accompanying notes.
4
KB HOME
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands Unaudited)
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Nine Months Ended August 31,
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2008
|
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|
2007
|
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Cash flows from operating activities:
|
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|
|
|
|
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Net loss
|
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$
|
(668,847
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)
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$
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(156,761
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)
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Income from discontinued operations, net of income taxes
|
|
|
|
|
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|
(47,252
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)
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Gain on sale of discontinued operations, net of income taxes
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|
|
|
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(438,104
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)
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Adjustments to reconcile net loss to net cash provided by operating
activities:
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Equity in loss of unconsolidated joint ventures
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78,684
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48,169
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Distributions of earnings from unconsolidated joint ventures
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9,125
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27,215
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Amortization of discounts and issuance costs
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2,942
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1,898
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Depreciation and amortization
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7,542
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13,361
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Loss on early redemption of debt
|
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|
10,388
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12,990
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Provision for deferred income taxes
|
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|
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|
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(237,870
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)
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Tax benefit associated with exercise of stock options
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2,097
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(714
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)
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Stock-based compensation expense
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3,830
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6,103
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Inventory impairments and land option contract abandonments
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401,073
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948,534
|
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Goodwill impairment
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|
24,570
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|
|
|
107,926
|
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Changes in assets and liabilities:
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Receivables
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109,032
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|
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(3,207
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)
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Inventories
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230,307
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|
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205,221
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Accounts payable, accrued expenses and other liabilities
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|
(196,540
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)
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|
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(498,970
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)
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Other, net
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|
16,040
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|
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33,380
|
|
|
|
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|
|
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Net cash provided by operating activities continuing operations
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|
30,243
|
|
|
|
21,919
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Net cash provided by operating activities discontinued operations
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|
|
|
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297,397
|
|
|
|
|
|
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Net cash provided by operating activities
|
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|
30,243
|
|
|
|
319,316
|
|
|
|
|
|
|
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Cash flows from investing activities:
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|
|
|
|
|
|
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Sale of discontinued operations, net of cash divested
|
|
|
|
|
|
|
739,764
|
|
Investments in unconsolidated joint ventures
|
|
|
(61,464
|
)
|
|
|
(56,969
|
)
|
Sales (purchases) of property and equipment, net
|
|
|
6,124
|
|
|
|
(2,582
|
)
|
|
|
|
|
|
|
|
Net cash provided (used) by investing activities continuing operations
|
|
|
(55,340
|
)
|
|
|
680,213
|
|
Net cash used by investing activities discontinued operations
|
|
|
|
|
|
|
(12,112
|
)
|
|
|
|
|
|
|
|
Net cash provided (used) by investing activities
|
|
|
(55,340
|
)
|
|
|
668,101
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Redemption of term loan
|
|
|
|
|
|
|
(400,000
|
)
|
Redemption of senior subordinated notes
|
|
|
(305,814
|
)
|
|
|
(258,968
|
)
|
Payments on mortgages, land contracts and other loans
|
|
|
(3,066
|
)
|
|
|
(114,119
|
)
|
Issuance of common stock under employee stock plans
|
|
|
5,111
|
|
|
|
10,823
|
|
Excess tax benefit associated with exercise of stock options
|
|
|
|
|
|
|
714
|
|
Payments of cash dividends
|
|
|
(58,102
|
)
|
|
|
(57,844
|
)
|
Repurchases of common stock
|
|
|
(557
|
)
|
|
|
(4,909
|
)
|
|
|
|
|
|
|
|
Net cash used by financing activities continuing operations
|
|
|
(362,428
|
)
|
|
|
(824,303
|
)
|
Net cash used by financing activities discontinued operations
|
|
|
|
|
|
|
(306,527
|
)
|
|
|
|
|
|
|
|
Net cash used by financing activities
|
|
|
(362,428
|
)
|
|
|
(1,130,830
|
)
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(387,525
|
)
|
|
|
(143,413
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
1,343,742
|
|
|
|
804,182
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
956,217
|
|
|
$
|
660,769
|
|
|
|
|
|
|
|
|
See accompanying notes.
5
KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.
|
|
Basis of Presentation and Significant Accounting Policies
|
|
|
|
The accompanying unaudited consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States for interim financial
information and the rules and regulations of the Securities and Exchange Commission (SEC).
Accordingly, certain information and footnote disclosures normally included in the annual
financial statements prepared in accordance with generally accepted accounting principles have
been condensed or omitted.
|
|
|
|
In the opinion of KB Home (the Company), the accompanying unaudited consolidated financial
statements contain all adjustments (consisting only of normal recurring accruals) necessary to
present fairly the Companys consolidated financial position as of August 31, 2008, the results
of its consolidated operations for the nine months and three months ended August 31, 2008 and
2007, and its consolidated cash flows for the nine months ended August 31, 2008 and 2007. The
consolidated balance sheet at November 30, 2007 has been taken from the audited consolidated
financial statements as of that date. These unaudited consolidated financial statements should
be read in conjunction with the audited consolidated financial statements for the year ended
November 30, 2007, which are contained in the Companys Annual Report on Form 10-K for that
period.
|
|
|
|
Seasonality
|
|
|
|
Historically, the homebuilding industry has experienced seasonal fluctuations in quarterly
operating results. The Company has also experienced such seasonal fluctuations. Therefore, the
results of the Companys consolidated operations for the nine months and three months ended
August 31, 2008 are not necessarily indicative of the results to be expected for the year ending
November 30, 2008.
|
|
|
|
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 loss per share calculation for the nine
months and three months ended August 31, 2008 and 2007 because the effect of their inclusion
would be antidilutive, or would decrease the reported loss per share.
|
|
|
|
Comprehensive loss
|
|
|
|
The Companys comprehensive loss was $144.7 million and $35.6 million for the three months ended
August 31, 2008 and 2007, respectively, and $668.8 million and $156.8 million for the nine
months ended August 31, 2008 and 2007, respectively.
|
|
|
|
Accumulated other comprehensive loss
|
|
|
|
The balances of accumulated other comprehensive loss reported in the consolidated balance sheets
as of August 31, 2008 and November 30, 2007 are comprised solely of an adjustment of $22.9
million recorded directly to accumulated other comprehensive loss at the end of 2007 to
initially apply Statement of Financial Accounting Standards No. 158, Employers Accounting for
Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87,
88, 106 and 132(R), which 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).
|
|
|
|
Reclassifications
|
|
|
|
Certain amounts in the consolidated financial statements of prior periods have been reclassified
to conform to the 2008 presentation.
|
6
KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2.
|
|
Stock-Based Compensation
|
|
|
|
The Company adopted the fair value recognition provisions of Statement of Financial Accounting
Standards No. 123(R), Share-Based Payment (SFAS No. 123(R)), using the modified prospective
transition method effective December 1, 2005. SFAS No. 123(R) requires a public entity to
measure compensation cost associated with awards of equity instruments based on the grant-date
fair value of the awards over the requisite service period. SFAS No. 123(R) requires public
entities to initially measure compensation cost associated with awards of liability instruments
based on their current fair value. The fair value of that award is to be remeasured subsequently
at each reporting date through the settlement date. Changes in fair value during the requisite
service period will be recognized as compensation cost over that period.
|
|
|
|
Stock Options
|
|
|
|
In accordance with SFAS No. 123(R), the Company estimates the grant-date fair value of its stock
options using the Black-Scholes option-pricing model, which takes into account assumptions
regarding the dividend yield, the risk-free interest rate, the expected stock-price volatility
and the expected term of the stock options. The following table summarizes the stock options
outstanding as of August 31, 2008 as well as activity during the nine months then ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average Exercise
|
|
|
|
Options
|
|
|
Price
|
|
Options outstanding at beginning of period
|
|
|
8,173,464
|
|
|
$
|
30.17
|
|
Exercised
|
|
|
(131,354
|
)
|
|
|
18.88
|
|
Cancelled
|
|
|
(138,861
|
)
|
|
|
43.54
|
|
|
|
|
|
|
|
|
Options outstanding at end of period
|
|
|
7,903,249
|
|
|
$
|
30.13
|
|
|
|
|
|
|
|
|
Options exercisable at end of period
|
|
|
7,194,279
|
|
|
$
|
29.14
|
|
|
|
|
|
|
|
|
|
|
As of August 31, 2008, the weighted average remaining contractual lives of stock options
outstanding and stock options exercisable were 9.3 years and 9.4 years, respectively. There was
$3.1 million of total unrecognized compensation cost related to unvested stock option awards as
of August 31, 2008. For the three months ended August 31, 2008 and 2007, stock-based
compensation expense associated with stock options totaled $1.2 million and $2.6 million,
respectively. For the nine months ended August 31, 2008 and 2007, stock-based compensation
expense totaled $3.8 million and $6.1 million, respectively. The aggregate intrinsic value of
both stock options outstanding and stock options exercisable was $9.5 million as of August 31,
2008. (The intrinsic value of a stock option is the amount by which the market value of a share
of the Companys common stock exceeds the exercise price of the stock option.) The aggregate
intrinsic value of stock options exercised during the nine months ended August 31, 2008 was $.9
million.
|
|
|
|
Other Stock-Based Awards
|
|
|
|
From time to time, the Company grants restricted stock, phantom shares and stock appreciation
rights to various employees. The Company recognized total compensation expense of $3.0 million
in the three months ended August 31, 2008 and $1.5 million in the three months ended August 31,
2007 related to these stock-based awards. The Company recognized total compensation expense of
$9.6 million in the nine months ended August 31, 2008 and $3.8 million in the nine months ended
August 31, 2007 related to restricted stock, phantom shares and stock appreciation rights.
|
|
3.
|
|
Segment Information
|
|
|
|
As of August 31, 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
|
7
KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3.
|
|
Segment Information (continued)
|
|
|
|
accordance with Statement of Financial Accounting Standards No. 131, Disclosures about Segments
of an Enterprise and Related Information. As of August 31, 2008, the Companys homebuilding
reporting segments conducted ongoing operations in the following states:
|
|
|
|
West Coast: California
Southwest: Arizona and Nevada
Central: Colorado and Texas
Southeast: Florida, Georgia, North Carolina and South Carolina
|
|
|
|
The Companys 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 Companys 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 pretax income.
|
|
|
|
The Companys financial services reporting segment provides title and insurance services to the
Companys 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 Companys homebuyers indirectly through Countrywide KB Home Loans, LLC
(Countrywide KB Home Loans), a joint venture between a Company subsidiary and CWB Venture
Management Corporation, a subsidiary of Countrywide Financial Corporation. On July 1, 2008,
Bank of America Corporation completed its purchase of Countrywide Financial Corporation. On
October 1, 2008, Bank of America, N.A. purchased 100% of the stock of CWB Venture Management
Corporation. Accordingly, as of October 1, 2008, Countrywide KB Home Loans and CWB Venture
Management Corporation are operating subsidiaries of Bank of America, N.A. At this time, the
Company does not believe that these transactions will have a material effect on the joint
ventures activities. The Companys financial services reporting segment conducts operations in
the same markets as the Companys homebuilding reporting segments.
|
|
|
|
The Companys reporting segments follow the same accounting policies used for the Companys
consolidated financial statements. Operational results of each segment are not necessarily
indicative of the results that would have occurred had the segment operated as an independent,
stand-alone entity during the periods presented and are not necessarily indicative of the
results to be expected for the full year.
|
|
|
|
The following tables present financial information relating to the Companys reporting segments
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended August 31,
|
|
|
Three Months Ended August 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
West Coast
|
|
$
|
700,301
|
|
|
$
|
1,475,662
|
|
|
$
|
259,362
|
|
|
$
|
553,366
|
|
Southwest
|
|
|
459,672
|
|
|
|
963,930
|
|
|
|
95,471
|
|
|
|
292,232
|
|
Central
|
|
|
442,650
|
|
|
|
703,456
|
|
|
|
142,175
|
|
|
|
254,116
|
|
Southeast
|
|
|
504,894
|
|
|
|
1,192,194
|
|
|
|
182,107
|
|
|
|
440,893
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total homebuilding revenues
|
|
|
2,107,517
|
|
|
|
4,335,242
|
|
|
|
679,115
|
|
|
|
1,540,607
|
|
Financial services
|
|
|
7,382
|
|
|
|
10,704
|
|
|
|
2,495
|
|
|
|
3,293
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
2,114,899
|
|
|
$
|
4,345,946
|
|
|
$
|
681,610
|
|
|
$
|
1,543,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3.
|
|
Segment Information (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended August 31,
|
|
|
Three Months Ended August 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Income (loss) from
continuing operations
before income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
West Coast
|
|
$
|
(191,455
|
)
|
|
$
|
(532,802
|
)
|
|
$
|
(18,020
|
)
|
|
$
|
(351,086
|
)
|
Southwest
|
|
|
(186,634
|
)
|
|
|
(150,356
|
)
|
|
|
(68,553
|
)
|
|
|
(179,930
|
)
|
Central
|
|
|
(48,850
|
)
|
|
|
(50,281
|
)
|
|
|
(7,070
|
)
|
|
|
(16,876
|
)
|
Southeast
|
|
|
(185,783
|
)
|
|
|
(144,945
|
)
|
|
|
(40,891
|
)
|
|
|
(106,088
|
)
|
Corporate and other (a)
|
|
|
(79,170
|
)
|
|
|
(205,171
|
)
|
|
|
(23,199
|
)
|
|
|
(138,287
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total homebuilding
loss from continuing
operations before
income taxes
|
|
|
(691,892
|
)
|
|
|
(1,083,555
|
)
|
|
|
(157,733
|
)
|
|
|
(792,267
|
)
|
Financial services
|
|
|
16,945
|
|
|
|
21,738
|
|
|
|
5,988
|
|
|
|
6,547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loss from
continuing operations
before income taxes
|
|
$
|
(674,947
|
)
|
|
$
|
(1,061,817
|
)
|
|
$
|
(151,745
|
)
|
|
$
|
(785,720
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
West Coast
|
|
$
|
30,557
|
|
|
$
|
33,220
|
|
|
$
|
14,241
|
|
|
$
|
19,173
|
|
Southwest
|
|
|
22,856
|
|
|
|
30,842
|
|
|
|
7,916
|
|
|
|
13,577
|
|
Central
|
|
|
17,717
|
|
|
|
15,916
|
|
|
|
8,292
|
|
|
|
4,809
|
|
Southeast
|
|
|
24,863
|
|
|
|
26,704
|
|
|
|
11,268
|
|
|
|
16,977
|
|
Corporate and other
|
|
|
653
|
|
|
|
6,266
|
|
|
|
31
|
|
|
|
4,814
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total (b)
|
|
$
|
96,646
|
|
|
$
|
112,948
|
|
|
$
|
41,748
|
|
|
$
|
59,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in income
(loss) of
unconsolidated joint
ventures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
West Coast
|
|
$
|
(17,346
|
)
|
|
$
|
(10,527
|
)
|
|
$
|
(6,540
|
)
|
|
$
|
(2,767
|
)
|
Southwest
|
|
|
(24,330
|
)
|
|
|
1,942
|
|
|
|
(18,314
|
)
|
|
|
(3,327
|
)
|
Central
|
|
|
(4,519
|
)
|
|
|
(2,417
|
)
|
|
|
75
|
|
|
|
(677
|
)
|
Southeast
|
|
|
(45,369
|
)
|
|
|
(51,725
|
)
|
|
|
(21,424
|
)
|
|
|
(14,256
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(91,564
|
)
|
|
$
|
(62,727
|
)
|
|
$
|
(46,203
|
)
|
|
$
|
(21,027
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Corporate and other includes corporate general and administrative expenses.
|
|
(b)
|
|
Interest cost for the three months ended August 31, 2008 and 2007 represents $31.4 million and $46.4 million, respectively, of interest amortized in construction and land costs. Interest cost for the nine months ended
August 31, 2008 and 2007 represents $86.3 million and $100.0 million, respectively, of interest amortized in construction and land costs. Interest cost for both the three months and nine months ended August 31, 2008
includes $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 the amendment of the unsecured revolving credit facility (the Credit
Facility). Interest cost for both the three months and nine months ended August 31, 2007 includes $13.0 million related to the loss on early redemption of debt.
|
9
KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3.
|
|
Segment Information (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended August 31,
|
|
|
Three Months Ended August 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory impairments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
West Coast
|
|
$
|
134,776
|
|
|
$
|
562,702
|
|
|
$
|
1,807
|
|
|
$
|
359,510
|
|
Southwest
|
|
|
140,181
|
|
|
|
212,648
|
|
|
|
37,318
|
|
|
|
183,325
|
|
Central
|
|
|
20,539
|
|
|
|
21,485
|
|
|
|
|
|
|
|
13,281
|
|
Southeast
|
|
|
77,900
|
|
|
|
79,660
|
|
|
|
|
|
|
|
54,148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
373,396
|
|
|
$
|
876,495
|
|
|
$
|
39,125
|
|
|
$
|
610,264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory abandonments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
West Coast
|
|
$
|
9,186
|
|
|
$
|
11,813
|
|
|
$
|
|
|
|
$
|
5,083
|
|
Southwest
|
|
|
187
|
|
|
|
10,023
|
|
|
|
|
|
|
|
9,920
|
|
Central
|
|
|
|
|
|
|
2,961
|
|
|
|
|
|
|
|
1,616
|
|
Southeast
|
|
|
18,304
|
|
|
|
47,242
|
|
|
|
|
|
|
|
46,076
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
27,677
|
|
|
$
|
72,039
|
|
|
$
|
|
|
|
$
|
62,695
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unconsolidated joint venture impairments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
West Coast
|
|
$
|
13,757
|
|
|
$
|
3,650
|
|
|
$
|
5,651
|
|
|
$
|
|
|
Southwest
|
|
|
21,311
|
|
|
|
3,362
|
|
|
|
16,367
|
|
|
|
3,362
|
|
Central
|
|
|
2,629
|
|
|
|
750
|
|
|
|
|
|
|
|
|
|
Southeast
|
|
|
43,934
|
|
|
|
50,673
|
|
|
|
21,099
|
|
|
|
13,766
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
81,631
|
|
|
$
|
58,435
|
|
|
$
|
43,117
|
|
|
$
|
17,128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 31,
|
|
|
November 30,
|
|
|
|
2008
|
|
|
2007
|
|
Assets:
|
|
|
|
|
|
|
|
|
West Coast
|
|
$
|
1,258,162
|
|
|
$
|
1,542,948
|
|
Southwest
|
|
|
623,160
|
|
|
|
887,361
|
|
Central
|
|
|
523,268
|
|
|
|
643,599
|
|
Southeast
|
|
|
624,412
|
|
|
|
845,679
|
|
Corporate and other
|
|
|
1,290,669
|
|
|
|
1,741,977
|
|
|
|
|
|
|
|
|
Total homebuilding assets
|
|
|
4,319,671
|
|
|
|
5,661,564
|
|
Financial services
|
|
|
58,274
|
|
|
|
44,392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
4,377,945
|
|
|
$
|
5,705,956
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in unconsolidated joint ventures:
|
|
|
|
|
|
|
|
|
West Coast
|
|
$
|
71,277
|
|
|
$
|
63,450
|
|
Southwest
|
|
|
123,752
|
|
|
|
134,082
|
|
Central
|
|
|
2,836
|
|
|
|
7,230
|
|
Southeast
|
|
|
52,560
|
|
|
|
92,248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
250,425
|
|
|
$
|
297,010
|
|
|
|
|
|
|
|
|
4.
|
|
Financial Services
|
|
|
|
The following table presents financial information related to the Companys financial services
reporting segment (in thousands):
|
10
KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4.
|
|
Financial Services (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended August 31,
|
|
|
Three Months Ended August 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
155
|
|
|
$
|
124
|
|
|
$
|
50
|
|
|
$
|
41
|
|
Title services
|
|
|
1,557
|
|
|
|
4,169
|
|
|
|
574
|
|
|
|
1,530
|
|
Insurance commissions
|
|
|
5,670
|
|
|
|
5,812
|
|
|
|
1,871
|
|
|
|
1,712
|
|
Escrow coordination fees
|
|
|
|
|
|
|
599
|
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
7,382
|
|
|
|
10,704
|
|
|
|
2,495
|
|
|
|
3,293
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
(3,317
|
)
|
|
|
(3,524
|
)
|
|
|
(1,085
|
)
|
|
|
(1,113
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
4,065
|
|
|
|
7,180
|
|
|
|
1,410
|
|
|
|
2,180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in income of unconsolidated
joint venture
|
|
|
12,880
|
|
|
|
14,558
|
|
|
|
4,578
|
|
|
|
4,367
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax income
|
|
$
|
16,945
|
|
|
$
|
21,738
|
|
|
$
|
5,988
|
|
|
$
|
6,547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 31,
|
|
|
November 30,
|
|
|
|
2008
|
|
|
2007
|
|
Assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
13,766
|
|
|
$
|
18,487
|
|
Receivables
|
|
|
1,050
|
|
|
|
2,655
|
|
Investment in unconsolidated joint venture
|
|
|
43,379
|
|
|
|
23,140
|
|
Other assets
|
|
|
79
|
|
|
|
110
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
58,274
|
|
|
$
|
44,392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
14,650
|
|
|
$
|
17,796
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
14,650
|
|
|
$
|
17,796
|
|
|
|
|
|
|
|
|
|
|
In 2008, Countrywide KB Home Loans, the Companys unconsolidated mortgage banking joint venture,
which is included in the Companys financial services segment, adopted 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 (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 (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, the Companys equity in income of unconsolidated joint venture of the
financial services segment increased by $2.1 million in 2008.
|
11
KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5.
|
|
Inventories
|
|
|
|
Inventories consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
August 31,
|
|
|
November 30,
|
|
|
|
2008
|
|
|
2007
|
|
Homes, lots and improvements in production
|
|
$
|
2,114,420
|
|
|
$
|
2,473,980
|
|
Land under development
|
|
|
448,262
|
|
|
|
838,440
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,562,682
|
|
|
$
|
3,312,420
|
|
|
|
|
|
|
|
|
|
|
The Companys interest costs are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended August 31,
|
|
|
Three Months Ended August 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Capitalized interest at beginning of period
|
|
$
|
348,084
|
|
|
$
|
333,020
|
|
|
$
|
370,091
|
|
|
$
|
382,311
|
|
Interest incurred
|
|
|
123,029
|
|
|
|
161,410
|
|
|
|
46,124
|
|
|
|
58,521
|
|
Loss on early redemption of debt
|
|
|
(10,388
|
)
|
|
|
(12,990
|
)
|
|
|
(10,388
|
)
|
|
|
(12,990
|
)
|
Interest amortized
|
|
|
(86,258
|
)
|
|
|
(99,958
|
)
|
|
|
(31,360
|
)
|
|
|
(46,360
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized interest at end of period (a)
|
|
$
|
374,467
|
|
|
$
|
381,482
|
|
|
$
|
374,467
|
|
|
$
|
381,482
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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.
|
6.
|
|
Impairments and Abandonments
|
|
|
|
Each parcel or community in the Companys 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 Statement
of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets (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, home delivery volume 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 Companys 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 conditions in the market in which the asset is located at the time an assessment
is made. These factors are specific to each community and may vary among communities.
|
12
KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
6.
|
|
Impairments and Abandonments (continued)
|
Based on the results of its evaluations, the Company recognized pretax, non-cash inventory
impairment charges of $39.1 million in the three months ended August 31, 2008 and $610.3 million
in the three months ended August 31, 2007. In the nine months ended August 31, 2008 and 2007,
the Company recognized pretax, non-cash inventory impairment charges of $373.4 million and
$876.5 million, respectively. As of August 31, 2008, the aggregate carrying value of inventory
impacted by pretax, non-cash impairment charges was $1.32 billion, representing 151 communities
and various other land parcels. As of November 30, 2007, the aggregate carrying value of
inventory impacted by pretax, non-cash impairment charges was $1.35 billion, representing 144
communities and various other land parcels.
The Companys optioned inventory is assessed to determine whether it continues to meet the
Companys 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 a land option contract 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 project.
The Company recognized no abandonment charges associated with land option contracts in the three
months ended August 31, 2008. The Company recognized abandonment charges of $62.7 million in
the three months ended August 31, 2007. In the nine months ended August 31, 2008 and 2007, the
Company recognized abandonment charges of $27.7 million and $72.0 million, respectively. The
inventory impairment charges and land option contract abandonment charges are included in
construction and land costs in the Companys consolidated statements of operations.
Due to the judgment and assumptions applied in the estimation process with respect to
impairments and abandonments, it is possible that actual results could differ substantially from
those estimated.
The Companys equity in loss of unconsolidated joint ventures in the three months ended August
31, 2008 and 2007 reflected pretax, non-cash impairment charges of $43.1 million and $17.1
million, respectively, including valuation adjustments related to the Companys investments in
certain unconsolidated joint ventures. In the nine months ended August 31, 2008 and 2007, the
Companys equity in loss of unconsolidated joint ventures reflected pretax, non-cash impairment
charges of $81.6 million and $58.4 million, respectively, including valuation adjustments
related to the Companys investments in certain unconsolidated joint ventures.
7.
|
|
Consolidation of Variable Interest Entities
|
In December 2003, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
No. 46(R), Consolidation of Variable Interest Entities (FASB Interpretation No. 46(R)), to
clarify the application of Accounting Research Bulletin No. 51, Consolidated Financial
Statements, to certain entities, called variable interest 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 VIEs expected losses, receives a majority of the VIEs 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 Companys joint
ventures at August 31, 2008 and November 30, 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.
13
KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7.
|
|
Consolidation of Variable Interest Entities (continued)
|
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 option agreements generally allows the
Company to reduce the risks associated with direct land ownership and development, reduces the
Companys capital and financial commitments, including interest and other carrying costs, and
minimizes the amount of the Companys 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
Companys 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 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 Companys consolidated balance sheets
by $15.5 million at August 31, 2008 and $19.0 million at November 30, 2007. The liabilities
related to the Companys consolidation of VIEs from which it is purchasing land under option
contracts represents the difference between the purchase price of optioned land not yet
purchased and the Companys cash deposits. The Companys cash deposits related to these land
option contracts totaled $3.4 million at August 31, 2008 and $4.7 million at November 30, 2007.
Creditors, if any, of these VIEs have no recourse against the Company. As of August 31, 2008,
excluding consolidated VIEs, the Company had cash deposits totaling $32.7 million, which were
associated with land option contracts having an aggregate purchase price of $605.9 million.
The Company also evaluates 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 its evaluations, increased inventories, with a corresponding increase to
accrued expenses and other liabilities, on its consolidated balance sheets by $89.9 million at
August 31, 2008 and $221.1 million at November 30, 2007.
8.
|
|
Investments in Unconsolidated Joint Ventures
|
The Company participates in unconsolidated joint ventures that conduct land acquisition,
development and/or other homebuilding activities in certain markets where the Companys
homebuilding operations are located. These unconsolidated joint ventures are typically
structured through entities in which ownership is shared with the Companys partners. The
Companys 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 projects 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 Companys 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.
14
KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
8.
|
|
Investments in Unconsolidated Joint Ventures (continued)
|
The Company and its unconsolidated joint venture partners make initial and/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 ventures
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
Companys unconsolidated joint ventures (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended August 31,
|
|
|
Three Months Ended August 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
85,232
|
|
|
$
|
262,761
|
|
|
$
|
29,947
|
|
|
$
|
218,860
|
|
Construction and land costs
|
|
|
(191,910
|
)
|
|
|
(272,582
|
)
|
|
|
(41,613
|
)
|
|
|
(205,336
|
)
|
Other expenses, net
|
|
|
(38,918
|
)
|
|
|
(20,775
|
)
|
|
|
(16,377
|
)
|
|
|
(7,382
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss)
|
|
$
|
(145,596
|
)
|
|
$
|
(30,596
|
)
|
|
$
|
(28,043
|
)
|
|
$
|
6,142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With respect to the Companys investment in unconsolidated joint ventures, its equity in loss of
unconsolidated joint ventures for the three months ended August 31, 2008 included pretax,
non-cash impairment charges of $43.1 million. In the three months ended August 31, 2007, the
Companys equity in income of unconsolidated joint ventures included pretax, non-cash impairment
charges of $17.1 million. In the nine months ended August 31, 2008 and 2007, the Companys
equity in loss of unconsolidated joint ventures included pretax, non-cash impairment charges of
$81.6 million and $58.4 million, respectively.
The following table presents combined condensed balance sheet information for the Companys
unconsolidated joint ventures (in thousands):
|
|
|
|
|
|
|
|
|
|
|
August 31,
|
|
|
November 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
26,202
|
|
|
$
|
51,249
|
|
Receivables
|
|
|
189,824
|
|
|
|
234,265
|
|
Inventories
|
|
|
1,985,786
|
|
|
|
2,209,907
|
|
Other assets
|
|
|
57,697
|
|
|
|
15,513
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,259,509
|
|
|
$
|
2,510,934
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and equity
|
|
|
|
|
|
|
|
|
Accounts payable and other liabilities
|
|
$
|
130,015
|
|
|
$
|
68,217
|
|
Mortgages and notes payable
|
|
|
1,457,450
|
|
|
|
1,540,931
|
|
Equity
|
|
|
672,044
|
|
|
|
901,786
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
2,259,509
|
|
|
$
|
2,510,934
|
|
|
|
|
|
|
|
|
15
KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
8.
|
|
Investments in Unconsolidated Joint Ventures (continued)
|
The following table presents information relating to the Companys investments in unconsolidated
joint ventures and the outstanding debt of unconsolidated joint ventures as of the dates
specified, categorized by the nature of the Companys potential responsibility under a guaranty,
if any, for such debt (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
August 31,
|
|
|
November 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Number of investments in unconsolidated joint ventures:
|
|
|
|
|
|
|
|
|
With recourse debt (a)
|
|
|
1
|
|
|
|
1
|
|
With limited recourse debt (b)
|
|
|
6
|
|
|
|
7
|
|
With non-recourse debt (c)
|
|
|
12
|
|
|
|
14
|
|
Other (d)
|
|
|
11
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
30
|
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in unconsolidated joint ventures:
|
|
|
|
|
|
|
|
|
With recourse debt
|
|
$
|
2,836
|
|
|
$
|
1,855
|
|
With limited recourse debt
|
|
|
18,708
|
|
|
|
17,342
|
|
With non-recourse debt
|
|
|
71,946
|
|
|
|
161,721
|
|
Other
|
|
|
156,935
|
|
|
|
116,092
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
250,425
|
|
|
$
|
297,010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding debt of unconsolidated joint ventures:
|
|
|
|
|
|
|
|
|
With recourse debt
|
|
$
|
3,238
|
|
|
$
|
6,317
|
|
With limited recourse debt
|
|
|
220,155
|
|
|
|
276,553
|
|
With non-recourse debt
|
|
|
860,121
|
|
|
|
894,115
|
|
Other
|
|
|
373,936
|
|
|
|
363,946
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total (e)
|
|
$
|
1,457,450
|
|
|
$
|
1,540,931
|
|
|
|
|
|
|
|
|
(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 ventures outstanding debt.
|
|
(b)
|
|
This category consists of unconsolidated joint ventures as to which the Company has
entered into a loan-to-value maintenance guaranty, as that term is described below, with
respect to a portion of each such unconsolidated joint ventures outstanding secured debt.
|
|
(c)
|
|
This category consists of unconsolidated joint ventures as to which the Company has not
entered into a guaranty, and does not otherwise have any obligation, to repay or to support
the value of the collateral underlying such unconsolidated joint ventures respective
outstanding secured debt (excluding any potential responsibility under a carve-out
guaranty, as that term is described below).
|
|
(d)
|
|
In addition to including unconsolidated joint ventures with no outstanding debt, this category
includes 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 ventures 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.
|
16
KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
8.
|
|
Investments in Unconsolidated Joint Ventures (continued)
|
|
|
In some cases, the Company may have also entered into a completion guaranty and/or a
carve-out guaranty, as those terms are described below, 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
Companys potential responsibility for such debt, if any. The Companys 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
borrowing arrangements. To finance their respective land acquisition and development
activities, many of the Companys 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 $1.46 billion at August 31, 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 Companys 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 ventures lenders that may
include one or more of the following: (a) completion guaranty; (b) loan-to-value maintenance
guaranty; and/or (c) 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 value of an unconsolidated joint
ventures secured collateral (generally land and improvements) at or above a specific percentage
of the applicable outstanding loan balance. 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 Companys maximum potential responsibility under these guarantees and
indemnities is limited to either a specified maximum amount or an amount equal to its pro rata
interest in the relevant unconsolidated joint venture. In a few cases, the Company has provided
a loan-to-value maintenance guaranty up to a specified maximum amount and has entered into an
agreement with its unconsolidated joint venture partners to be reimbursed for any amounts the
Company may pay pursuant to such guaranty above its pro rata interest in the relevant
unconsolidated joint venture. If the Companys unconsolidated joint venture partners are unable
to fulfill their reimbursement obligations, or otherwise fail to do so, the Company may be
responsible for more than its allocable share, up to its specified maximum responsibility under
the relevant loan-to-value maintenance guaranty. Should there be indications that advances (if
made) will not be voluntarily repaid under any such reimbursement arrangements, the Company
intends to vigorously pursue all rights and remedies available to it under the applicable
agreements, at law or in equity to enforce its reimbursement rights.
The Companys potential responsibility under its completion guarantees is limited to the amount,
if any, by which an unconsolidated joint ventures outstanding borrowings exceed the value of
its assets, though in the aggregate the Company believes its actual responsibility under these
guarantees should be substantially less than this amount. At this time, the Company has no
reason to believe that its carve-out guarantees will be triggered in any material amount.
17
KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
8.
|
|
Investments in Unconsolidated Joint Ventures (continued)
|
At August 31, 2008, the Companys pro rata share of loan-to-value maintenance guarantees related
to unconsolidated joint venture debt totaled approximately $92.1 million. This amount represents
the Companys maximum responsibility under such loan-to-value maintenance guarantees without
regard to the underlying value of the collateral and defenses available against attempted
enforcement of such guarantees.
In addition to the above-described guarantees and indemnities, the Company has also provided a
several guaranty to the lenders of one of the Companys 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 ventures 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 Companys potential responsibility under this several
guaranty fluctuates with the outstanding borrowings against the unconsolidated joint ventures
debt and with its and its partners respective land purchases from the unconsolidated joint
venture. At August 31, 2008, this unconsolidated joint venture had total outstanding
indebtedness of approximately $373.9 million and, if this guaranty were then enforced, the
Companys potential responsibility under the guaranty would have been approximately $182.7
million. 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 its 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 Companys 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 Companys 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. In those cases, the Company would consolidate the joint venture, which
would result in an increase in the Companys 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. 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, the Company does not believe that its exposure related to any defaults by these
particular unconsolidated joint ventures is material to the Companys consolidated financial
position or results of operations.
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 Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets (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, the Company determined that it was necessary to evaluate goodwill for impairment due
to deteriorating conditions in certain housing markets and the significant inventory impairments
the Company identified and recognized during the year in accordance with SFAS No. 144. 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
18
KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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.
The Companys goodwill balance at November 30, 2007 totaled $68.0 million. Of this total, $24.6
million related to the Companys Central reporting segment and $43.4 million related to its
Southeast reporting segment. Based on the results of its impairment evaluation performed in
the quarter ended May 31, 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 Companys goodwill balance of $43.4 million at
August 31, 2008 related entirely to its Southeast reporting segment.
During the third quarter of 2007, the Company evaluated its goodwill for impairment and recorded
an impairment charge of $107.9 million related to its Southwest reporting segment, where all of
the goodwill previously recorded was determined to be impaired.
The goodwill impairment charges in 2008 and 2007 were recorded at the Companys corporate level
because all goodwill is carried at that level.
The process of evaluating goodwill for impairment involves the determination of the fair value
of the Companys reporting units. Inherent in such fair value determinations are certain
judgments and estimates relating to future cash flows, including the Companys interpretation of
current economic indicators and market valuations, and assumptions about the Companys strategic
plans with regard to its operations. To the extent additional information arises, market
conditions change or the Companys strategies change, it is possible that the Companys
conclusion regarding whether existing goodwill in its Southeast reporting unit is impaired could
change and result in a material effect on its consolidated financial position or results of
operations.
10.
|
|
Mortgages and Notes Payable
|
Mortgages and notes payable consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
August 31,
|
|
|
November 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Mortgages and land contracts due to land sellers and other loans
|
|
$
|
32,394
|
|
|
$
|
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%
|
|
|
348,816
|
|
|
|
348,549
|
|
Senior notes due 2014 at 5 3/4%
|
|
|
249,195
|
|
|
|
249,102
|
|
Senior notes due 2015 at 5 7/8%
|
|
|
298,649
|
|
|
|
298,521
|
|
Senior notes due 2015 at 6 1/4%
|
|
|
449,643
|
|
|
|
449,612
|
|
Senior notes due 2018 at 7 1/4%
|
|
|
298,665
|
|
|
|
298,597
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,877,362
|
|
|
$
|
2,161,794
|
|
|
|
|
|
|
|
|
On July 14, 2008, the Company completed the early redemption of all $300.0 million of its 7 3/4%
senior subordinated notes due in 2010 (the $300 Million 7 3/4% 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 the third quarter of 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.
19
KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
10.
|
|
Mortgages and Notes Payable (continued)
|
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 August 31, 2008, the Company had no cash borrowings
outstanding and $185.8 million in letters of credit outstanding under the Credit Facility.
On August 28, 2008, the Company entered into the fifth amendment (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 Companys 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 the
Companys 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 consolidated interest coverage ratio (Coverage Ratio), the maximum
consolidated leverage ratio (Leverage Ratio), and distributions in respect of capital stock;
(b) amended covenants regarding payment of subordinated obligations, investments in subsidiaries
and joint ventures, 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. The Company filed the Fifth Amendment with the SEC as an
exhibit to a Current Report on Form 8-K dated August 29, 2008. 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 the third quarter of 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 Companys unimproved land book value, speculative unit
deliveries within a given fiscal quarter and borrowing base requirements.
The Companys senior subordinated notes indenture contains certain restrictive covenants that,
among other things, limit the Companys ability to incur additional indebtedness; pay dividends;
make stock repurchases; prepay subordinated debt; make certain investments in foreign
subsidiaries and certain joint ventures; create certain liens; engage in mergers,
consolidations, or sales of assets; or engage in certain transactions with officers, directors
and employees.
The Companys 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 Companys 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 August 31, 2008, the Company was in compliance with the applicable terms of all of its
covenants under its Credit Facility, senior subordinated notes indenture, and senior notes
indenture. However, the Companys ability to continue to borrow funds depends in part on its
ability to remain in such compliance. The Companys 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.
20
KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
11.
|
|
Commitments and Contingencies
|
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
such as appliances. 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 Companys 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 Companys warranty liability are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended August 31,
|
|
|
Three Months Ended August 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
151,525
|
|
|
$
|
141,060
|
|
|
$
|
146,050
|
|
|
$
|
140,675
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warranties issued
|
|
|
16,952
|
|
|
|
40,380
|
|
|
|
6,183
|
|
|
|
13,902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments and adjustments
|
|
|
(22,645
|
)
|
|
|
(38,282
|
)
|
|
|
(6,401
|
)
|
|
|
(11,419
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
145,832
|
|
|
$
|
143,158
|
|
|
$
|
145,832
|
|
|
$
|
143,158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, Guarantors 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 issued 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 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 Companys historical claims and include an estimate of construction defect claims
incurred but not yet reported. The Companys estimated liabilities for such items were $100.5
million at August 31, 2008 and $95.6 million at November 30, 2007, and are included in the
consolidated balance sheets as accrued expenses and other liabilities.
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 August 31, 2008, the Company had approximately
$826.0 million of performance bonds and $185.8 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. 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
21
KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
11.
|
|
Commitments and Contingencies (continued)
|
on a year-to-year basis. Performance bonds do not have stated expiration dates. Rather, the
Company is released from the performance bonds as the contractual performance is completed.
Borrowings outstanding and letters of credit issued under the Companys Credit Facility are
guaranteed by certain of the Companys subsidiaries (the Guarantor Subsidiaries).
In the ordinary course of its business, the Company enters into land option contracts to procure
land for the construction of homes. At August 31, 2008, the Company had total deposits of $71.3
million, comprised of cash deposits of $36.1 million and letters of credit of $35.2 million, to
purchase land with a total remaining purchase price of $624.9 million. The Companys land option
contracts generally do not contain provisions requiring the Companys specific performance.
Derivative Litigation
On July 10, 2006, a shareholder derivative action, Wildt v. Karatz, et al., was filed in Los
Angeles Superior Court. On August 8, 2006, a virtually identical shareholder derivative lawsuit,
Davidson v. Karatz, et al., was also filed in Los Angeles Superior Court. These actions, which
ostensibly are brought on behalf of the Company, allege, among other things, that defendants
(various of the Companys current and former directors and officers) 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 Companys shareholder-approved stock option
plans, and seek unspecified money damages and injunctive and other equitable relief. Defendants
have not yet responded to the complaints. On January 22, 2007, the court entered an order,
pursuant to an agreement among the parties and the Company, providing, among other things, that,
to preserve the status quo without prejudicing any partys substantive rights, the Companys
former Chairman and Chief Executive Officer shall not exercise any of his outstanding options,
at any price, during the period in which the order is in effect. Pursuant to further
stipulations and court orders, these terms remain in effect and are now scheduled to expire on
November 3, 2008, unless otherwise agreed in writing. The plaintiffs have agreed to stay their
cases while the parallel federal court derivative lawsuits discussed below are pursued. A
stipulation and order effectuating the parties agreement to stay the state court actions was
entered by the court on February 7, 2007. The parties may extend the agreement that options will
not be exercised by the Companys former Chairman and Chief Executive Officer beyond the current
November 3, 2008 expiration date.
On August 16, 2006, a shareholder derivative lawsuit, Redfield v. Karatz, et al., was filed in
the United States District Court for the Central District of California. On August 31, 2006, a
virtually identical shareholder derivative lawsuit, Staehr v. Karatz, et al., was also filed in
the United States District Court for the Central District of California. These actions, which
ostensibly are brought on behalf of the Company, allege, among other things, that defendants
(various of the Companys current and former directors and officers) 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 Companys shareholder-approved stock option
plans and seek unspecified money damages and injunctive and other equitable relief. Unlike
Wildt and Davidson, however, these lawsuits also include substantive claims under the federal
securities laws. On January 9, 2007, plaintiffs filed a consolidated complaint. All defendants
filed motions to dismiss the complaint on April 2, 2007. Subsequently, plaintiffs filed a
motion for partial summary judgment against certain of the defendants. Pursuant to stipulated
orders, the motions to dismiss and the motion for partial summary judgment remained suspended
for several months while the parties engaged in settlement discussions. Settlement discussions
are ongoing. On May 14, 2008, the court ordered that the partial summary judgment motion shall
be taken off calendar, subject to being reset at a future time, following resolution of the
motions to dismiss. On August 15, 2008, the court removed defendants various motions to
dismiss from its calendar. A hearing on the motions to dismiss may be rescheduled in the
future. A status conference is scheduled for October 15, 2008. Discovery has not commenced.
At this time, the Company has not concluded whether any potential outcome of the derivative
litigation is likely to be material to its consolidated financial position or results of
operations.
22
KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
12.
|
|
Legal Matters (continued)
|
Government Investigations
In August 2006, the Company announced that it had received an informal inquiry from the SEC
relating to its stock option grant practices. In January 2007, the Company was informed of the
SECs decision to conduct a formal investigation of this matter. In September 2008, the Company
was notified that the SEC staffs investigation was completed with respect to the Company and
that the staff did not intend to recommend any enforcement action by the SEC against the
Company.
The Department of Justice (DOJ) has also been looking into these practices but has informed
the Company that it is not a target of this investigation. The Company has cooperated with the
DOJ and intends to continue to do so. At this time, the Company has not concluded whether an
unfavorable outcome of the DOJs investigation is likely to be material to its consolidated
financial position or results of operations.
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 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 KB Home 401(k) Savings Plan (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 Companys 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 Companys motion to dismiss the plaintiffs claims for breach of fiduciary duty
and breach of the duty to monitor and granted the Companys 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
Companys answer to the amended complaint is due on or before October 21, 2008. 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.
Storm Water Matter
In January 2003, the Company received a request for information from the Environmental Protection
Agency (EPA) pursuant to Section 308 of the Clean Water Act. Several other public homebuilders
received similar requests. The request sought information about storm water pollution control
program implementation at certain of the Companys construction sites, and the Company provided
information pursuant to the request. In May 2004, on behalf of the EPA, the DOJ asserted that
certain regulatory requirements applicable to storm water discharges had been violated on certain
occasions at certain of the Companys construction sites, and unspecified civil penalties and
injunctive relief might be warranted. The Company explored with the EPA, DOJ and other homebuilders
methods of resolving the matter. In May 2008, the Company signed a consent decree with the EPA, DOJ
and various states affecting the Companys storm water pollution practices at its construction
sites. Other homebuilders also signed similar consent decrees. In June 2008, the DOJ filed suit in
the United States District Court for the Eastern District of Virginia (Civil Action No. 1:08CV603)
and simultaneously submitted the Companys consent decree for approval by the court. The court
approved and entered the consent decree on July 23, 2008. Under the consent decree, the Company
paid a civil penalty of
23
KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
12.
|
|
Legal Matters (continued)
|
$1.2 million. In addition, the Company has implemented certain process improvements for the
control of storm water at homebuilding sites and will submit periodic reports to the DOJ, the
EPA and the participating states for a period of at least three years, in each case as required
by the consent decree. The Company believes that the costs associated with implementing the
consent decree are not 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.
As of August 31, 2008, the Company was authorized to repurchase four million shares of its
common stock under a board-approved share repurchase program. The Company did not repurchase any
shares of its common stock under this program in the first nine months of 2008. The Company
acquired $.6 million of common stock during the nine months ended August 31, 2008, 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.
During the quarter ended February 29, 2008, the Companys 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, the Companys 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.
14.
|
|
Recent Accounting Pronouncements
|
In September 2006, the 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. 157-2,
Effective Date of FASB Statement No. 157, which delayed for one year the applicability of SFAS
No. 157s 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 Companys consolidated financial position or results of operations. The Company is
currently evaluating the potential impact of adopting the remaining provisions of SFAS No. 157
on its consolidated financial position and results of operations.
In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, Disclosures
About Derivative Instruments and Hedging Activitiesan amendment of FASB Statement No. 133
(SFAS No. 161). SFAS No. 161 expands the disclosure requirements in Statement of Financial
Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities,
regarding an entitys derivative instruments and hedging activities. SFAS No. 161 is effective
for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company is currently
evaluating the potential impact of adopting SFAS No. 161 on its consolidated financial position
and results of operations.
24
KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
14.
|
|
Recent Accounting Pronouncements (continued)
|
|
|
|
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. 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 issued Statement of Financial Accounting Standards No. 163, Accounting
for Financial Guarantee Insurance Contractsan 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, 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 FASB Staff Position Emerging Issues Task Force 03-6-1,
Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating
Securities (FSP-EITF 03-6-1). Under FSP-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-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-EITF 03-6-1 on its earnings per share.
|
|
15.
|
|
Income Taxes
|
|
|
|
The Companys income tax benefit from continuing operations totaled $7.0 million in the third
quarter of 2008, compared to $307.1 million in the third quarter of 2007. For the nine months
ended August 31, 2008, the Companys income tax benefit from continuing operations totaled $6.1
million compared to $419.7 million for the nine months ended August 31, 2007. These amounts
represented effective income tax rates from continuing operations of 4.6% and 39.1% for the
three months ended August 31, 2008 and 2007, respectively, and .9% and 39.5% for the nine months
ended August 31, 2008 and 2007, respectively.
|
|
|
|
The significant year-over-year change in the Companys effective tax rate for the three months
and nine months ended August 31, 2008 resulted primarily from the disallowance of tax benefits
related to the Companys current year losses as a result of a full valuation allowance, and
the recognition of a liability for unrecognized tax benefits. In accordance with Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes (SFAS No. 109), the
Company was unable to record deferred tax benefits that would have reduced its net losses in
the three months and nine months ended August 31, 2008 due to the uncertainty of realizing
such deferred tax assets. For the three months ended August 31, 2008, the Company recorded a
valuation allowance of $58.1 million. For the nine months ended August 31, 2008, the
valuation allowance recorded totaled $257.0 million. The income tax benefit reported for the
three months and nine months ended August 31, 2008 was mainly due to the recognition of a $6.0
million tax benefit previously unrecognized under FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes an interpretation of FASB Statement No. 109 (FASB
Interpretation No. 48). In July 2006, the FASB issued FASB Interpretation No. 48, which
prescribes a recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a tax return.
FASB Interpretation No. 48 also provides guidance on derecognition, classification, interest
and penalties, accounting in interim periods, disclosure and transition. The Company
implemented the provisions of 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. Gross unrecognized tax benefits totaled
$37.8 million as of December
|
25
KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
15.
|
|
Income Taxes (continued)
|
|
|
|
1, 2007 and $33.1 million as of August 31, 2008. As of the date of its adoption of FASB
Interpretation No. 48, the Companys liability for unrecognized tax benefits was $29.0 million,
which, if recognized, would affect the Companys effective tax rate.
|
|
|
|
During the third quarter of 2008, $6.0 million of unrecognized federal income tax liability
reversed due to the expiration of time to assess tax. Other than this reversal, there have been
no material changes to the components of the Companys total unrecognized tax benefit, including
the amounts which, if recognized, would affect the Companys effective tax rate. The Company
estimates that within 12 months from the date of its adoption of FASB Interpretation No. 48, no
additional unrecognized tax liability will reverse. As of the date of the Companys adoption of
FASB Interpretation No. 48, fiscal years 2003 through 2007 remain subject to examination.
|
|
|
|
As of August 31, 2008, primarily due to the reversal of the $6.0 million, the Companys
liability for unrecognized tax benefits was $24.3 million, which, if recognized, would affect
the Companys tax rate. It is reasonably possible that, within the next 12 months, total
unrecognized tax benefits may decrease as a result of a 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.
|
|
|
|
The Company recognizes accrued interest and penalties related to unrecognized tax benefits in
its consolidated financial statements as a component of the income tax provision consistent with
the Companys historical accounting policy. After the Companys adoption of FASB Interpretation
No. 48 on December 1, 2007, the Companys total gross accrued interest and penalties was $16.5
million. At August 31, 2008, its total gross accrued interest and penalties was $17.0 million.
The Companys liability for unrecognized tax benefits, combined with accrued interest and
penalties, is reflected as a component of accrued expenses and other liabilities in its
consolidated balance sheet.
|
|
|
|
Including the valuation allowances for net deferred tax assets recorded in 2008, the Company has
$779.9 million of net deferred tax assets fully reserved as of August 31, 2008.
|
|
16.
|
|
Supplemental Disclosure to Statements of Cash Flows
|
|
|
|
The following are supplemental disclosures to the consolidated statements of cash flows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended August, 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Summary of cash and cash equivalents:
|
|
|
|
|
|
|
|
|
Homebuilding
|
|
$
|
942,451
|
|
|
$
|
645,933
|
|
Financial services
|
|
|
13,766
|
|
|
|
14,836
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
956,217
|
|
|
$
|
660,769
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Interest paid, net of amounts capitalized
|
|
$
|
48,386
|
|
|
$
|
65,825
|
|
Income taxes paid (refunded)
|
|
|
(105,102
|
)
|
|
|
22,703
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of noncash activities:
|
|
|
|
|
|
|
|
|
Cost of inventories acquired through seller financing
|
|
$
|
16,320
|
|
|
$
|
4,139
|
|
Decrease in consolidated inventories not owned
|
|
|
(134,678
|
)
|
|
|
(179,829
|
)
|
|
|
|
|
|
|
|
26
KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
17.
|
|
Supplemental Guarantor Information
|
|
|
|
The Companys 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.
|
|
|
|
Condensed Consolidating Statements of Operations
Nine Months Ended August 31, 2008 (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
KB Home
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
Consolidating
|
|
|
|
|
|
|
Corporate
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Adjustments
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
|
|
|
$
|
1,620,364
|
|
|
$
|
494,535
|
|
|
$
|
|
|
|
$
|
2,114,899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homebuilding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
|
|
|
$
|
1,620,364
|
|
|
$
|
487,153
|
|
|
$
|
|
|
|
$
|
2,107,517
|
|
Construction and land costs
|
|
|
|
|
|
|
(1,781,778
|
)
|
|
|
(540,435
|
)
|
|
|
|
|
|
|
(2,322,213
|
)
|
Selling, general and
administrative expenses
|
|
|
(59,467
|
)
|
|
|
(221,123
|
)
|
|
|
(99,324
|
)
|
|
|
|
|
|
|
(379,914
|
)
|
Goodwill impairment
|
|
|
(24,570
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24,570
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(84,037
|
)
|
|
|
(382,537
|
)
|
|
|
(152,606
|
)
|
|
|
|
|
|
|
(619,180
|
)
|
Interest income
|
|
|
26,700
|
|
|
|
2,231
|
|
|
|
309
|
|
|
|
|
|
|
|
29,240
|
|
Loss on early redemption of debt
|
|
|
42,542
|
|
|
|
(28,368
|
)
|
|
|
(24,562
|
)
|
|
|
|
|
|
|
(10,388
|
)
|
Equity in loss of
unconsolidated joint ventures
|
|
|
|
|
|
|
(6,586
|
)
|
|
|
(84,978
|
)
|
|
|
|
|
|
|
(91,564
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homebuilding pretax loss
|
|
|
(14,795
|
)
|
|
|
(415,260
|
)
|
|
|
(261,837
|
)
|
|
|
|
|
|
|
(691,892
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial services pretax income
|
|
|
|
|
|
|
|
|
|
|
16,945
|
|
|
|
|
|
|
|
16,945
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total pretax loss
|
|
|
(14,795
|
)
|
|
|
(415,260
|
)
|
|
|
(244,892
|
)
|
|
|
|
|
|
|
(674,947
|
)
|
Income tax benefit
|
|
|
100
|
|
|
|
3,700
|
|
|
|
2,300
|
|
|
|
|
|
|
|
6,100
|
|
Equity in net loss of subsidiaries
|
|
|
(654,152
|
)
|
|
|
|
|
|
|
|
|
|
|
654,152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(668,847
|
)
|
|
$
|
(411,560
|
)
|
|
$
|
(242,592
|
)
|
|
$
|
654,152
|
|
|
$
|
(668,847
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
17.
|
|
Supplemental Guarantor Information (continued)
|
|
|
|
Condensed Consolidating Statements of Operations
Nine Months Ended August 31, 2007 (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
KB Home
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
Consolidating
|
|
|
|
|
|
|
Corporate
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Adjustments
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
|
|
|
$
|
3,238,642
|
|
|
$
|
1,107,304
|
|
|
$
|
|
|
|
$
|
4,345,946
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homebuilding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
|
|
|
$
|
3,238,642
|
|
|
$
|
1,096,600
|
|
|
$
|
|
|
|
$
|
4,335,242
|
|
Construction and land costs
|
|
|
|
|
|
|
(3,652,898
|
)
|
|
|
(1,005,167
|
)
|
|
|
|
|
|
|
(4,658,065
|
)
|
Selling, general and administrative
expenses
|
|
|
(86,607
|
)
|
|
|
(364,705
|
)
|
|
|
(144,659
|
)
|
|
|
|
|
|
|
(595,971
|
)
|
Goodwill impairment
|
|
|
(107,926
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(107,926
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(194,533
|
)
|
|
|
(778,961
|
)
|
|
|
(53,226
|
)
|
|
|
|
|
|
|
(1,026,720
|
)
|
Interest income
|
|
|
13,856
|
|
|
|
4,429
|
|
|
|
597
|
|
|
|
|
|
|
|
18,882
|
|
Loss on early redemption of debt
|
|
|
130,317
|
|
|
|
(111,229
|
)
|
|
|
(32,078
|
)
|
|
|
|
|
|
|
(12,990
|
)
|
Equity in loss of unconsolidated joint
ventures
|
|
|
|
|
|
|
(4,930
|
)
|
|
|
(57,797
|
)
|
|
|
|
|
|
|
(62,727
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homebuilding pretax loss
|
|
|
(50,360
|
)
|
|
|
(890,691
|
)
|
|
|
(142,504
|
)
|
|
|
|
|
|
|
(1,083,555
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial services pretax income
|
|
|
|
|
|
|
|
|
|
|
21,738
|
|
|
|
|
|
|
|
21,738
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
before income taxes
|
|
|
(50,360
|
)
|
|
|
(890,691
|
)
|
|
|
(120,766
|
)
|
|
|
|
|
|
|
(1,061,817
|
)
|
Income tax benefit
|
|
|
19,900
|
|
|
|
352,100
|
|
|
|
47,700
|
|
|
|
|
|
|
|
419,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
before equity in net income (loss) of
subsidiaries
|
|
|
(30,460
|
)
|
|
|
(538,591
|
)
|
|
|
(73,066
|
)
|
|
|
|
|
|
|
(642,117
|
)
|
Income from discontinued operations,
net of income taxes
|
|
|
|
|
|
|
|
|
|
|
485,356
|
|
|
|
|
|
|
|
485,356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before equity in net income
(loss) of subsidiaries
|
|
|
(30,460
|
)
|
|
|
(538,591
|
)
|
|
|
412,290
|
|
|
|
|
|
|
|
(156,761
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in net income (loss) of subsidiaries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
|
(611,657
|
)
|
|
|
|
|
|
|
|
|
|
|
611,657
|
|
|
|
|
|
Discontinued operations
|
|
|
485,356
|
|
|
|
|
|
|
|
|
|
|
|
(485,356
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(156,761
|
)
|
|
$
|
(538,591
|
)
|
|
$
|
412,290
|
|
|
$
|
126,301
|
|
|
$
|
(156,761
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28
KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
17.
|
|
Supplemental Guarantor Information (continued)
|
|
|
|
Condensed Consolidating Statements of Operations
Three Months Ended August 31, 2008 (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
KB Home
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
Consolidating
|
|
|
|
|
|
|
Corporate
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Adjustments
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
|
|
|
$
|
516,431
|
|
|
$
|
165,179
|
|
|
$
|
|
|
|
$
|
681,610
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homebuilding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
|
|
|
$
|
516,431
|
|
|
$
|
162,684
|
|
|
$
|
|
|
|
$
|
679,115
|
|
Construction and land costs
|
|
|
|
|
|
|
(506,871
|
)
|
|
|
(146,861
|
)
|
|
|
|
|
|
|
(653,732
|
)
|
Selling, general and
administrative expenses
|
|
|
(22,035
|
)
|
|
|
(79,750
|
)
|
|
|
(31,426
|
)
|
|
|
|
|
|
|
(133,211
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(22,035
|
)
|
|
|
(70,190
|
)
|
|
|
(15,603
|
)
|
|
|
|
|
|
|
(107,828
|
)
|
Interest income
|
|
|
6,234
|
|
|
|
337
|
|
|
|
115
|
|
|
|
|
|
|
|
6,686
|
|
Loss on early redemption of debt
|
|
|
2,480
|
|
|
|
(5,914
|
)
|
|
|
(6,954
|
)
|
|
|
|
|
|
|
(10,388
|
)
|
Equity in loss of
unconsolidated joint ventures
|
|
|
|
|
|
|
(2,471
|
)
|
|
|
(43,732
|
)
|
|
|
|
|
|
|
(46,203
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homebuilding pretax loss
|
|
|
(13,321
|
)
|
|
|
(78,238
|
)
|
|
|
(66,174
|
)
|
|
|
|
|
|
|
(157,733
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial services pretax income
|
|
|
|
|
|
|
|
|
|
|
5,988
|
|
|
|
|
|
|
|
5,988
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total pretax loss
|
|
|
(13,321
|
)
|
|
|
(78,238
|
)
|
|
|
(60,186
|
)
|
|
|
|
|
|
|
(151,745
|
)
|
Income tax benefit
|
|
|
600
|
|
|
|
3,300
|
|
|
|
3,100
|
|
|
|
|
|
|
|
7,000
|
|
Equity in net loss of subsidiaries
|
|
|
(132,024
|
)
|
|
|
|
|
|
|
|
|
|
|
132,024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(144,745
|
)
|
|
$
|
(74,938
|
)
|
|
$
|
(57,086
|
)
|
|
$
|
132,024
|
|
|
$
|
(144,745
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29
KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
17.
|
|
Supplemental Guarantor Information (continued)
|
|
|
|
Condensed Consolidating Statements of Operations
Three Months Ended August 31, 2007 (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
KB Home
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
Consolidating
|
|
|
|
|
|
|
Corporate
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Adjustments
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
|
|
|
$
|
1,129,929
|
|
|
$
|
413,971
|
|
|
$
|
|
|
|
$
|
1,543,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homebuilding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
|
|
|
$
|
1,129,929
|
|
|
$
|
410,678
|
|
|
$
|
|
|
|
$
|
1,540,607
|
|
Construction and land costs
|
|
|
|
|
|
|
(1,607,808
|
)
|
|
|
(394,573
|
)
|
|
|
|
|
|
|
(2,002,381
|
)
|
Selling, general and administrative
expenses
|
|
|
(27,873
|
)
|
|
|
(120,839
|
)
|
|
|
(48,452
|
)
|
|
|
|
|
|
|
(197,164
|
)
|
Goodwill impairment
|
|
|
(107,926
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(107,926
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(135,799
|
)
|
|
|
(598,718
|
)
|
|
|
(32,347
|
)
|
|
|
|
|
|
|
(766,864
|
)
|
Interest income
|
|
|
6,850
|
|
|
|
1,590
|
|
|
|
174
|
|
|
|
|
|
|
|
8,614
|
|
Loss on early redemption of debt
|
|
|
33,586
|
|
|
|
(32,364
|
)
|
|
|
(14,212
|
)
|
|
|
|
|
|
|
(12,990
|
)
|
Equity in loss of unconsolidated joint
ventures
|
|
|
|
|
|
|
(6,543
|
)
|
|
|
(14,484
|
)
|
|
|
|
|
|
|
(21,027
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homebuilding pretax loss
|
|
|
(95,363
|
)
|
|
|
(636,035
|
)
|
|
|
(60,869
|
)
|
|
|
|
|
|
|
(792,267
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial services pretax income
|
|
|
|
|
|
|
|
|
|
|
6,547
|
|
|
|
|
|
|
|
6,547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
before income taxes
|
|
|
(95,363
|
)
|
|
|
(636,035
|
)
|
|
|
(54,322
|
)
|
|
|
|
|
|
|
(785,720
|
)
|
Income tax benefit
|
|
|
37,300
|
|
|
|
248,600
|
|
|
|
21,200
|
|
|
|
|
|
|
|
307,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
before equity in net income (loss) of
subsidiaries
|
|
|
(58,063
|
)
|
|
|
(387,435
|
)
|
|
|
(33,122
|
)
|
|
|
|
|
|
|
(478,620
|
)
|
Income from discontinued operations,
net of income taxes
|
|
|
|
|
|
|
|
|
|
|
443,008
|
|
|
|
|
|
|
|
443,008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before equity in net income
(loss) of subsidiaries
|
|
|
(58,063
|
)
|
|
|
(387,435
|
)
|
|
|
409,886
|
|
|
|
|
|
|
|
(35,612
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in net income (loss) of subsidiaries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
|
(420,557
|
)
|
|
|
|
|
|
|
|
|
|
|
420,557
|
|
|
|
|
|
Discontinued operations
|
|
|
443,008
|
|
|
|
|
|
|
|
|
|
|
|
(443,008
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(35,612
|
)
|
|
$
|
(387,435
|
)
|
|
$
|
409,886
|
|
|
$
|
(22,451
|
)
|
|
$
|
(35,612
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
17.
|
|
Supplemental Guarantor Information (continued)
|
Condensed Consolidating Balance Sheets
August 31, 2008 (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
KB Home
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
Consolidating
|
|
|
|
|
|
|
Corporate
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Adjustments
|
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homebuilding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
797,221
|
|
|
$
|
27,945
|
|
|
$
|
117,285
|
|
|
$
|
|
|
|
$
|
942,451
|
|
Receivables
|
|
|
27,322
|
|
|
|
137,426
|
|
|
|
23,564
|
|
|
|
|
|
|
|
188,312
|
|
Inventories
|
|
|
|
|
|
|
2,107,889
|
|
|
|
454,793
|
|
|
|
|
|
|
|
2,562,682
|
|
Other assets
|
|
|
356,091
|
|
|
|
208,441
|
|
|
|
61,694
|
|
|
|
|
|
|
|
626,226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,180,634
|
|
|
|
2,481,701
|
|
|
|
657,336
|
|
|
|
|
|
|
|
4,319,671
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial services
|
|
|
|
|
|
|
|
|
|
|
58,274
|
|
|
|
|
|
|
|
58,274
|
|
Investments in subsidiaries
|
|
|
(89,304
|
)
|
|
|
|
|
|
|
|
|
|
|
89,304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,091,330
|
|
|
$
|
2,481,701
|
|
|
$
|
715,610
|
|
|
$
|
89,304
|
|
|
$
|
4,377,945
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and stockholders equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homebuilding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable, accrued expenses
and other liabilities
|
|
$
|
162,568
|
|
|
$
|
872,550
|
|
|
$
|
317,045
|
|
|
$
|
|
|
|
$
|
1,352,163
|
|
Mortgages and notes payable
|
|
|
1,844,968
|
|
|
|
32,394
|
|
|
|
|
|
|
|
|
|
|
|
1,877,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,007,536
|
|
|
|
904,944
|
|
|
|
317,045
|
|
|
|
|
|
|
|
3,229,525
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial services
|
|
|
|
|
|
|
|
|
|
|
14,650
|
|
|
|
|
|
|
|
14,650
|
|
Intercompany
|
|
|
(2,049,976
|
)
|
|
|
1,653,551
|
|
|
|
396,425
|
|
|
|
|
|
|
|
|
|
Stockholders equity
|
|
|
1,133,770
|
|
|
|
(76,794
|
)
|
|
|
(12,510
|
)
|
|
|
89,304
|
|
|
|
1,133,770
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
1,091,330
|
|
|
$
|
2,481,701
|
|
|
$
|
715,610
|
|
|
$
|
89,304
|
|
|
$
|
4,377,945
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 30, 2007 (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
Other assets
|
|
|
405,306
|
|
|
|
219,146
|
|
|
|
103,698
|
|
|
|
|
|
|
|
728,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31
KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
17.
|
|
Supplemental Guarantor Information (continued)
|
|
|
|
Condensed Consolidating Statements of Cash Flows
Nine Months Ended August 31, 2008 (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
KB Home
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
Consolidating
|
|
|
|
|
|
|
Corporate
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Adjustments
|
|
|
Total
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(668,847
|
)
|
|
$
|
(411,560
|
)
|
|
$
|
(242,592
|
)
|
|
$
|
654,152
|
|
|
$
|
(668,847
|
)
|
Adjustments to reconcile net loss to net cash provided
(used) by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory impairments and land option
contract abandonments
|
|
|
|
|
|
|
303,981
|
|
|
|
97,092
|
|
|
|
|
|
|
|
401,073
|
|
Goodwill impairment
|
|
|
24,570
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,570
|
|
Change in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
99,209
|
|
|
|
13,663
|
|
|
|
(3,840
|
)
|
|
|
|
|
|
|
109,032
|
|
Inventories
|
|
|
|
|
|
|
149,701
|
|
|
|
80,606
|
|
|
|
|
|
|
|
230,307
|
|
Accounts payable, accrued expenses and other
liabilities
|
|
|
(48,130
|
)
|
|
|
(132,593
|
)
|
|
|
(15,817
|
)
|
|
|
|
|
|
|
(196,540
|
)
|
Other, net
|
|
|
32,384
|
|
|
|
12,555
|
|
|
|
85,709
|
|
|
|
|
|
|
|
130,648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided (used) by operating activities
|
|
|
(560,814
|
)
|
|
|
(64,253
|
)
|
|
|
1,158
|
|
|
|
654,152
|
|
|
|
30,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in unconsolidated joint ventures
|
|
|
|
|
|
|
(1,821
|
)
|
|
|
(59,643
|
)
|
|
|
|
|
|
|
(61,464
|
)
|
Sales (purchases) of property and equipment, net
|
|
|
5,869
|
|
|
|
(28
|
)
|
|
|
283
|
|
|
|
|
|
|
|
6,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided (used) by investing activities
|
|
|
5,869
|
|
|
|
(1,849
|
)
|
|
|
(59,360
|
)
|
|
|
|
|
|
|
(55,340
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redemption of senior subordinated notes
|
|
|
(305,814
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(305,814
|
)
|
Payments on mortgages, land contracts and other loans
|
|
|
|
|
|
|
(3,066
|
)
|
|
|
|
|
|
|
|
|
|
|
(3,066
|
)
|
Payments of cash dividends
|
|
|
(58,102
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(58,102
|
)
|
Other, net
|
|
|
4,554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,554
|
|
Intercompany
|
|
|
607,099
|
|
|
|
25,594
|
|
|
|
21,459
|
|
|
|
(654,152
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided (used) by financing activities
|
|
|
247,737
|
|
|
|
22,528
|
|
|
|
21,459
|
|
|
|
(654,152
|
)
|
|
|
(362,428
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(307,208
|
)
|
|
|
(43,574
|
)
|
|
|
(36,743
|
)
|
|
|
|
|
|
|
(387,525
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
1,104,429
|
|
|
|
71,519
|
|
|
|
167,794
|
|
|
|
|
|
|
|
1,343,742
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
797,221
|
|
|
$
|
27,945
|
|
|
$
|
131,051
|
|
|
$
|
|
|
|
$
|
956,217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32
KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
17.
|
|
Supplemental Guarantor Information (continued)
|
|
|
|
Condensed Consolidated Statements of Cash Flows
Nine Months Ended August 31, 2007 (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
KB Home
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
Consolidating
|
|
|
|
|
|
|
Corporate
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Adjustments
|
|
|
Total
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(156,761
|
)
|
|
$
|
(538,591
|
)
|
|
$
|
(73,066
|
)
|
|
$
|
611,657
|
|
|
$
|
(156,761
|
)
|
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 cash provided (used ) by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory impairments and land option contract
abandonments
|
|
|
|
|
|
|
898,219
|
|
|
|
50,315
|
|
|
|
|
|
|
|
948,534
|
|
Goodwill impairment
|
|
|
107,926
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
107,926
|
|
Change in assets and liabilites:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
1,630
|
|
|
|
1,972
|
|
|
|
(6,809
|
)
|
|
|
|
|
|
|
(3,207
|
)
|
Inventories
|
|
|
|
|
|
|
(1,356
|
)
|
|
|
206,577
|
|
|
|
|
|
|
|
205,221
|
|
Accounts payable, accrued expenses and other liabilities
|
|
|
(279,497
|
)
|
|
|
(125,450
|
)
|
|
|
(94,023
|
)
|
|
|
|
|
|
|
(498,970
|
)
|
Other, net
|
|
|
(175,105
|
)
|
|
|
18,973
|
|
|
|
60,664
|
|
|
|
|
|
|
|
(95,468
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided (used) by operating activities continuing
operations
|
|
|
(939,911
|
)
|
|
|
253,767
|
|
|
|
96,406
|
|
|
|
611,657
|
|
|
|
21,919
|
|
Net cash provided by operating activities discontinued
operations
|
|
|
|
|
|
|
|
|
|
|
297,397
|
|
|
|
|
|
|
|
297,397
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided (used) by operating activities
|
|
|
(939,911
|
)
|
|
|
253,767
|
|
|
|
393,803
|
|
|
|
611,657
|
|
|
|
319,316
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of discontinued operations, net of cash divested
|
|
|
739,764
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
739,764
|
|
Investments in unconsolidated joint ventures
|
|
|
|
|
|
|
(36,773
|
)
|
|
|
(20,196
|
)
|
|
|
|
|
|
|
(56,969
|
)
|
Sales (purchases) of property and equipment, net
|
|
|
(338
|
)
|
|
|
(3,577
|
)
|
|
|
1,333
|
|
|
|
|
|
|
|
(2,582
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided (used) by investing activities continuing
operations
|
|
|
739,426
|
|
|
|
(40,350
|
)
|
|
|
(18,863
|
)
|
|
|
|
|
|
|
680,213
|
|
Net cash used by investing activities discontinued
operations
|
|
|
|
|
|
|
|
|
|
|
(12,112
|
)
|
|
|
|
|
|
|
(12,112
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided (used) by investing activities
|
|
|
739,426
|
|
|
|
(40,350
|
)
|
|
|
(30,975
|
)
|
|
|
|
|
|
|
668,101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
(57,844
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(57,844
|
)
|
Other, net
|
|
|
6,628
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,628
|
|
Intercompany
|
|
|
1,012,888
|
|
|
|
(238,005
|
)
|
|
|
(163,226
|
)
|
|
|
(611,657
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided (used) by financing activities continuing
operations
|
|
|
302,704
|
|
|
|
(325,571
|
)
|
|
|
(189,779
|
)
|
|
|
(611,657
|
)
|
|
|
(824,303
|
)
|
Net cash used by financing activities discontinued
operations
|
|
|
|
|
|
|
|
|
|
|
(306,527
|
)
|
|
|
|
|
|
|
(306,527
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided (used) by financing activities
|
|
|
302,704
|
|
|
|
(325,571
|
)
|
|
|
(496,306
|
)
|
|
|
(611,657
|
)
|
|
|
(1,130,830
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
102,219
|
|
|
|
(112,154
|
)
|
|
|
(133,478
|
)
|
|
|
|
|
|
|
(143,413
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
447,221
|
|
|
|
150,829
|
|
|
|
206,132
|
|
|
|
|
|
|
|
804,182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
549,440
|
|
|
$
|
38,675
|
|
|
$
|
72,654
|
|
|
$
|
|
|
|
$
|
660,769
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33
Item 2. Managements 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.
Discontinued operations are comprised solely of our French construction operations, which we
sold on July 10, 2007. The following table presents a summary of our results for the nine
months and three months ended August 31, 2008 and 2007 (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended August 31,
|
|
|
Three Months Ended August 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homebuilding
|
|
$
|
2,107,517
|
|
|
$
|
4,335,242
|
|
|
$
|
679,115
|
|
|
$
|
1,540,607
|
|
Financial services
|
|
|
7,382
|
|
|
|
10,704
|
|
|
|
2,495
|
|
|
|
3,293
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,114,899
|
|
|
$
|
4,345,946
|
|
|
$
|
681,610
|
|
|
$
|
1,543,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homebuilding
|
|
$
|
(691,892
|
)
|
|
$
|
(1,083,555
|
)
|
|
$
|
(157,733
|
)
|
|
$
|
(792,267
|
)
|
Financial services
|
|
|
16,945
|
|
|
|
21,738
|
|
|
|
5,988
|
|
|
|
6,547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
before income taxes
|
|
|
(674,947
|
)
|
|
|
(1,061,817
|
)
|
|
|
(151,745
|
)
|
|
|
(785,720
|
)
|
Income tax benefit
|
|
|
6,100
|
|
|
|
419,700
|
|
|
|
7,000
|
|
|
|
307,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(668,847
|
)
|
|
|
(642,117
|
)
|
|
|
(144,745
|
)
|
|
|
(478,620
|
)
|
Income from discontinued
operations, net of income taxes
|
|
|
|
|
|
|
47,252
|
|
|
|
|
|
|
|
4,904
|
|
Gain on sale of discontinued
operations, net of income taxes
|
|
|
|
|
|
|
438,104
|
|
|
|
|
|
|
|
438,104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(668,847
|
)
|
|
$
|
(156,761
|
)
|
|
$
|
(144,745
|
)
|
|
$
|
(35,612
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(8.63
|
)
|
|
$
|
(8.32
|
)
|
|
$
|
(1.87
|
)
|
|
$
|
(6.19
|
)
|
Discontinued operations
|
|
|
|
|
|
|
6.29
|
|
|
|
|
|
|
|
5.73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted loss per share
|
|
$
|
(8.63
|
)
|
|
$
|
(2.03
|
)
|
|
$
|
(1.87
|
)
|
|
$
|
(.46
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the first nine months of 2008, difficult operating conditions prevailed across most U.S.
housing markets. The supply of unsold homes in the marketplace rose substantially, exacerbated
by record-high foreclosures. Meanwhile, demand for new homes remained constrained by declining
consumer confidence and tightening consumer mortgage lending standards. This protracted
supply/demand imbalance intensified competition for sales throughout the period and produced
relentless downward pressures on prices. These adverse conditions have now persisted to varying
degrees since the second half of 2006 and their impact is reflected in our results for the
three- and nine-month reporting periods ended August 31, 2008. In both periods, we experienced
year-over-year declines in net orders, homes delivered and revenues across all of our
homebuilding reporting segments. As a result, we reported net losses for both periods.
Our results for the third quarter and nine months ended August 31, 2008 were also affected by
strategic actions we have taken in the past several quarters to reduce overhead, inventory
investments, and our active community count in line with currently depressed housing market
activity. In both periods, we operated from 38% fewer active communities than in the comparable
periods of 2007. At August 31, 2008, our inventory of lots owned and controlled was down 36%
from a year ago. Our workforce has been reduced 40% since the beginning of fiscal 2008. Our
year-over-year results for the three months and nine months ended August 31, 2008 were also
affected by targeted price reductions and sales incentives in certain communities, taken
primarily in the first half of 2008, in response to competitive conditions or to facilitate our
exit from specific project or product types. In the third quarter of 2008, our net orders fell
compared to the year-earlier quarter as we implemented comprehensive community-by-community
pricing strategies that resulted in greater pricing discipline and fewer
34
price reductions and sales incentives; as we allowed certain communities to wind-down as backlog
was delivered; and as we discontinued product in specific communities as part of a transition to
more efficient, lower priced models.
Because of current market conditions and our strategic initiatives in response, we expect to
report reduced year-over-year net orders, home deliveries and revenues for the balance of fiscal
2008. We also believe difficult market conditions will persist for the housing industry well
into fiscal 2009. Against this backdrop, we took additional steps during the third quarter to
streamline our organizational structure, consolidating some of our homebuilding divisions and
further reducing our workforce. We believe these steps will produce tangible benefits in the
form of lower selling, general and administrative expenses going forward, although one-time
costs to implement these steps offset their immediate impact in the third quarter of 2008.
Our total revenues of $681.6 million for the three months ended August 31, 2008 decreased 56%
from $1.54 billion for the three months ended August 31, 2007 due to lower housing and land sale
revenues. Third quarter housing revenues of $668.3 million declined 56% from $1.53 billion in
the year-earlier quarter, reflecting decreases in both the number of homes delivered and the
average selling price. We delivered 2,788 homes in the third quarter of 2008, down 51% from the
5,699 homes we delivered in the year-earlier quarter. The overall average selling price of our
homes decreased 10% to $239,700 in the third quarter of 2008 from $267,700 in the corresponding
period of 2007. We use the term home in this discussion and analysis to refer to a
single-family residence, whether it is a single-family home or other type of residential
property. Included in our total revenues were financial services revenues of $2.5 million in the
three months ended August 31, 2008 and $3.3 million in the three months ended August 31, 2007.
We incurred a net loss of $144.7 million, or $1.87 per diluted share, in the third quarter of
2008, including pretax, non-cash charges of $82.2 million for inventory and joint venture
impairments. The inventory impairments resulted from increased housing supply and persistently
poor demand, which amplified pricing pressures and diminished asset values in certain of our
markets. Inventory values were also affected by the uncertain time frame of a housing market
recovery. Of the total third quarter impairment charges, $7.4 million related to our West Coast
segment, $53.7 million related to our Southwest segment and $21.1 million related to our
Southeast segment. There were no impairment charges in our Central segment. Approximately 52%
of the total third quarter impairment charges were associated with unconsolidated joint
ventures. Overall, the current quarters total impairment charges were 88% lower than the total
impairment and land option contract abandonment charges in the year-earlier quarter and 53%
lower than such charges in the second quarter of 2008. Our inventory-related charges have
decreased sequentially for the last four consecutive quarters. Our net loss in the third
quarter of 2008 also included a charge of $58.1 million to record a valuation allowance against
net deferred tax assets generated during the quarter in accordance with SFAS No. 109. In the
third quarter of 2007, we generated an after-tax loss from continuing operations of $478.6
million, or $6.19 per diluted share, including pretax, non-cash charges of $690.1 million for
inventory and joint venture impairments and the abandonment of land option contracts, and $107.9
million for goodwill impairments. Of the total impairment and land option contract abandonment
charges in the third quarter of 2007, $364.6 million related to our West Coast segment, $196.6
million related to our Southwest segment, $14.9 million related to our Central segment and
$114.0 million related to our Southeast segment. Our net loss of $35.6 million, or $.46 per
diluted share, in the third quarter of 2007 reflected after-tax income of $443.0 million, or
$5.73 per diluted share from our French discontinued operations, including the gain on sale from
these operations.
Total revenues for the nine months ended August 31, 2008 were $2.11 billion, a decrease of 51%
from $4.35 billion for the nine months ended August 31, 2007. Included in our total revenues
were financial services revenues of $7.4 million in the nine months ended August 31, 2008 and
$10.7 million in the nine months ended August 31, 2007. Our net loss for the first nine months
of 2008 totaled $668.8 million, or $8.63 per diluted share, including pretax, non-cash charges
of $482.7 million for inventory and joint venture impairments and the abandonment of land option
contracts, and $24.6 million for goodwill impairment. The net loss also reflected a $257.0
million valuation allowance charge against net deferred tax assets to fully reserve the tax
benefits generated from our pretax loss in the period in accordance with SFAS No. 109. For the
nine months ended August 31, 2007, we reported a net loss of $156.8 million, or $2.03 per
diluted share, including pretax, non-cash charges of $1.01 billion for inventory and joint
venture impairments and land option contract abandonments, $107.9 million related to goodwill
impairments, and after-tax income of $485.4 million, or $6.29 per diluted share, from the French
discontinued operations, including the gain on sale from these operations.
Our backlog at August 31, 2008 consisted of 4,774 homes, representing projected future housing
revenues of approximately $1.13 billion. These backlog measures declined 60% and 63%,
respectively, from the 11,880
35
homes, representing approximately $3.07 billion in projected future housing revenues, at August
31, 2007. The decrease in backlog levels reflected 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 align with reduced
housing market activity. Net orders generated from our homebuilding operations decreased 66% to
1,329 in the third quarter of 2008 from 3,907 net orders in the third quarter of 2007, with
year-over-year declines experienced in each of our homebuilding reporting segments. The
decrease in net orders reflected our reduced community counts compared to the year-earlier third
quarter, as well as our decisions to reduce our use of price reductions and sales incentives as
part of a comprehensive, community-by-community review of pricing strategies; to wind down
certain communities as backlog is delivered; and to discontinue product in particular
communities as part of a product transition strategy. Our cancellation rate based on gross
orders continued to exhibit volatility, increasing to 51% in the third quarter of 2008 from 27%
in the second quarter of 2008 and 50% in the third quarter of 2007. As a percentage of
beginning backlog, however, the cancellation rate improved to 22% in the third quarter of 2008
from 33% in the second quarter of 2008 and 29% in the year-earlier quarter.
We continue to take steps to maintain a strong financial position and to align our operations
with the significantly reduced market demand compared to the record levels of a few years ago.
At August 31, 2008, our cash balance totaled $942.5 million compared to $1.33 billion at
November 30, 2007. Our debt balance of $1.88 billion at August 31, 2008 decreased from $2.16
billion at November 30, 2007 due to our early redemption on July 14, 2008 of the $300 Million 7
3/4% Senior Subordinated Notes. As of August 31, 2008, our ratio of debt to total capital, net
of cash, of 45.2% remained within our targeted range of 40-50%. Our liquidity, including the
available capacity under our Credit Facility, was approximately $1.55 billion at August 31,
2008. We have reduced our inventory levels by 42% to $2.56 billion at August 31, 2008 from
$4.42 billion at August 31, 2007, and ended the third quarter of 2008 with what we believe is an
attractive, geographically diverse land portfolio of approximately 52,700 lots owned or
controlled. We believe our solid financial position and present 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.
HOMEBUILDING
We have grouped our homebuilding activities into four reporting segments, which we refer to as
West Coast, Southwest, Central and Southeast. As of August 31, 2008, our homebuilding segments
consisted of ongoing operations located in the following states: West Coast California;
Southwest Arizona and Nevada; Central Colorado and Texas; and Southeast Florida,
Georgia, North Carolina and South Carolina.
The following table presents a summary of selected financial and operational data for our
homebuilding operations (dollars in thousands, except average selling price):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended August 31,
|
|
|
Three Months Ended August 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Housing
|
|
$
|
2,031,725
|
|
|
$
|
4,196,487
|
|
|
$
|
668,292
|
|
|
$
|
1,525,863
|
|
Land
|
|
|
75,792
|
|
|
|
138,755
|
|
|
|
10,823
|
|
|
|
14,744
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,107,517
|
|
|
|
4,335,242
|
|
|
|
679,115
|
|
|
|
1,540,607
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and land costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Housing
|
|
|
2,162,558
|
|
|
|
4,461,484
|
|
|
|
642,467
|
|
|
|
1,952,718
|
|
Land
|
|
|
159,655
|
|
|
|
196,581
|
|
|
|
11,265
|
|
|
|
49,663
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,322,213
|
|
|
|
4,658,065
|
|
|
|
653,732
|
|
|
|
2,002,381
|
|
Selling, general and
administrative
expenses
|
|
|
379,914
|
|
|
|
595,971
|
|
|
|
133,211
|
|
|
|
197,164
|
|
Goodwill impairment
|
|
|
24,570
|
|
|
|
107,926
|
|
|
|
|
|
|
|
107,926
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,726,697
|
|
|
|
5,361,962
|
|
|
|
786,943
|
|
|
|
2,307,471
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
$
|
(619,180
|
)
|
|
$
|
(1,026,720
|
)
|
|
$
|
(107,828
|
)
|
|
$
|
(766,864
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended August 31,
|
|
Three Months Ended August 31,
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homes delivered
|
|
|
8,526
|
|
|
|
15,611
|
|
|
|
2,788
|
|
|
|
5,699
|
|
Average selling price
|
|
$
|
238,300
|
|
|
$
|
268,800
|
|
|
$
|
239,700
|
|
|
$
|
267,700
|
|
Housing gross margin
|
|
|
-6.4
|
%
|
|
|
-6.3
|
%
|
|
|
3.9
|
%
|
|
|
-28.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and
administrative expenses as
a percent of housing revenues
|
|
|
18.7
|
%
|
|
|
14.2
|
%
|
|
|
19.9
|
%
|
|
|
12.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss as a percent of
homebuilding revenues
|
|
|
-29.4
|
%
|
|
|
-23.7
|
%
|
|
|
-15.9
|
%
|
|
|
-49.8
|
%
|
The following tables present information by reporting segment and with respect to our
unconsolidated joint ventures in terms of homes delivered to buyers, net orders taken and
cancellation rates based on gross orders for the three-month and nine-month periods ended August
31, 2008 and 2007, together with backlog data in terms of homes and value at August 31, 2008 and
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended August 31,
|
|
|
Homes Delivered
|
|
Net Orders
|
|
Cancellation Rates
|
Segment
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
West Coast
|
|
|
731
|
|
|
|
1,252
|
|
|
|
361
|
|
|
|
713
|
|
|
|
48
|
%
|
|
|
57
|
%
|
Southwest
|
|
|
425
|
|
|
|
1,133
|
|
|
|
282
|
|
|
|
604
|
|
|
|
37
|
%
|
|
|
51
|
%
|
Central
|
|
|
745
|
|
|
|
1,433
|
|
|
|
506
|
|
|
|
1,370
|
|
|
|
43
|
%
|
|
|
47
|
%
|
Southeast
|
|
|
887
|
|
|
|
1,881
|
|
|
|
180
|
|
|
|
1,220
|
|
|
|
74
|
%
|
|
|
49
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,788
|
|
|
|
5,699
|
|
|
|
1,329
|
|
|
|
3,907
|
|
|
|
51
|
%
|
|
|
50
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unconsolidated joint ventures
|
|
|
45
|
|
|
|
13
|
|
|
|
39
|
|
|
|
79
|
|
|
|
57
|
%
|
|
|
43
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended August 31,
|
|
|
Homes Delivered
|
|
Net Orders
|
|
Cancellation Rates
|
Segment
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
West Coast
|
|
|
1,948
|
|
|
|
3,097
|
|
|
|
1,877
|
|
|
|
3,853
|
|
|
|
37
|
%
|
|
|
37
|
%
|
Southwest
|
|
|
1,699
|
|
|
|
3,379
|
|
|
|
1,228
|
|
|
|
3,149
|
|
|
|
33
|
%
|
|
|
36
|
%
|
Central
|
|
|
2,507
|
|
|
|
4,096
|
|
|
|
1,701
|
|
|
|
4,606
|
|
|
|
44
|
%
|
|
|
42
|
%
|
Southeast
|
|
|
2,372
|
|
|
|
5,039
|
|
|
|
2,172
|
|
|
|
5,308
|
|
|
|
42
|
%
|
|
|
38
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
8,526
|
|
|
|
15,611
|
|
|
|
6,978
|
|
|
|
16,916
|
|
|
|
40
|
%
|
|
|
38
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unconsolidated joint ventures
|
|
|
194
|
|
|
|
32
|
|
|
|
218
|
|
|
|
273
|
|
|
|
38
|
%
|
|
|
30
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 31,
|
|
|
|
|
|
|
|
|
|
|
|
Backlog Value
|
|
|
|
Backlog Homes
|
|
|
(In Thousands)
|
|
Segment
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
West Coast
|
|
|
1,119
|
|
|
|
2,371
|
|
|
$
|
391,525
|
|
|
$
|
1,042,194
|
|
Southwest
|
|
|
835
|
|
|
|
2,300
|
|
|
|
190,279
|
|
|
|
590,711
|
|
Central
|
|
|
1,205
|
|
|
|
3,565
|
|
|
|
230,154
|
|
|
|
599,400
|
|
Southeast
|
|
|
1,615
|
|
|
|
3,644
|
|
|
|
321,321
|
|
|
|
834,588
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
4,774
|
|
|
|
11,880
|
|
|
$
|
1,133,279
|
|
|
$
|
3,066,893
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unconsolidated joint ventures
|
|
|
233
|
|
|
|
295
|
|
|
$
|
136,918
|
|
|
$
|
108,821
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
. Homebuilding revenues decreased by $861.5 million, or 56%, to $679.1 million in the
quarter ended August 31, 2008, from $1.54 billion in the year-earlier quarter, due to a decline
in housing and land sales revenues. Housing revenues for the quarter ended August 31, 2008
totaled $668.3 million, down $857.6 million, or 56%, from $1.53 billion in the year-earlier
quarter, reflecting fewer homes delivered and a lower average selling price. We delivered 2,788
homes in the third quarter of 2008, down 51% from 5,699 homes delivered in the third quarter of
2007, with each of our homebuilding reporting segments posting a year-over-year decrease. The
overall decline in homes delivered was largely due to the 38% decrease in the number of our
active communities in the third quarter of 2008 compared to the year-earlier quarter. Over the
past several quarters we have decreased community counts to better align our operations with
reduced housing market activity. We anticipate our lower active community count will continue
to reduce the number of homes we deliver and the amount of revenues we generate from our housing
operations, measured on a year-over-year basis, for the remainder of 2008. Our average selling
price was $239,700 for the three months ended August 31, 2008, a decrease of 10% from $267,700
in the year-earlier period. Persistent housing supply and demand imbalances in our markets,
which were exacerbated by growing foreclosures, heightened competition from homebuilders and
other sellers and intensified downward pricing pressures during the quarter. In addition, we
introduced product at lower price points to address the ongoing affordability concerns of
potential homebuyers. The largest year-over-year decrease was in our West Coast segment, where
the average selling price was down 20% in the quarter ended August 31, 2008. Both the overall
average selling price, and the average selling prices in each of our homebuilding reporting
segments, were sequentially higher in the third quarter compared to the second quarter of 2008
due to differences in product mix. Nonetheless, we anticipate that our average selling price in
2008 will remain below year-earlier levels, given the challenging market conditions, increased
foreclosures, tightening consumer lending requirements, affordability concerns among potential
homebuyers, and our introduction and roll out of value-engineered product at lower price points
as part of a product transition strategy.
Homebuilding revenues for the nine months ended August 31, 2008 decreased by $2.22 billion, or
51%, to $2.11 billion from $4.33 billion for the year-earlier period, due to lower housing and
land sale revenues. Housing revenues for the nine months ended August 31, 2008 totaled $2.03
billion, down 52% from $4.20 billion in the year-earlier period, reflecting a 45% decrease in
the number of homes delivered and an 11% decrease in our average selling price. Company-wide
homes delivered decreased to 8,526 in the first nine months of 2008 from 15,611 in the first
nine months of 2007 primarily due to our reduced number of active communities. Our average
selling price decreased to $238,300 in the first nine months of 2008 from $268,800 in the
corresponding period of 2007 as a result of downward pricing pressures driven by difficult
market conditions, intense competition and the roll out of more affordable product.
Revenues from land sales totaled $10.8 million for the three months ended August 31, 2008 and
$14.7 million for the three months ended August 31, 2007. For the nine months ended August 31,
2008, revenues from land sales totaled $75.8 million compared to $138.8 million for the nine
months ended August 31, 2007. 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 the markets we serve and
prevailing market conditions. Land sale revenues were more significant in the three-month and
nine-month periods ended August 31, 2007 compared to the corresponding 2008 periods because we
sold more land in 2007 as part of our strategic efforts to realign our land inventories with
future sales expectations.
38
Operating loss
. Our homebuilding operations recorded operating losses of $107.8 million in the
three months ended August 31, 2008 and $766.9 million in the three months ended August 31, 2007
due to losses from both housing operations and land sales. The 2008 third quarter operating loss
represented 15.9% of homebuilding revenues; in the year-earlier quarter, the operating loss
represented 49.8% of homebuilding revenues. Within our homebuilding operations, the 2008 third
quarter operating loss was largely the result of pretax, non-cash charges of $38.5 million for
inventory impairments, continued pressure on margins in light of highly competitive market
conditions, and high overhead costs relative to the volume of homes delivered. The inventory
impairment charges in the third quarter of 2008 reflected the impact of increased housing supply
and persistently poor demand, which increased pricing pressure and decreased asset values in
certain markets. In the third quarter of 2007, the operating loss within housing operations was
primarily due to pretax, non-cash inventory impairment and land option contract abandonment
charges of $639.0 million, which were driven by similar housing market supply and demand
factors. Our housing gross margin, including inventory-related non-cash charges, improved to
3.9% in the third quarter of 2008 from a negative 28.0% in the third quarter of 2007. Excluding
the inventory-related non-cash charges, our housing gross margin would have been 9.6% in the
third quarter of 2008 and 13.9% in the third quarter of 2007.
Company-wide land sales produced a loss of $.4 million in the three months ended August 31,
2008, including $.6 million of impairment charges related to planned future land sales. In the
three months ended August 31, 2007, land sales generated a loss of $34.9 million, which included
$34.0 million of similar impairment charges.
Selling, general and administrative expenses decreased by $64.0 million, or 32%, to $133.2
million in the three months ended August 31, 2008 from $197.2 million in the corresponding 2007
period. The decrease reflected our ongoing efforts to rescale the size of our operations to the
lower volume of homes we are delivering and our future sales expectations. Due to continued
deterioration in housing market conditions, we took aggressive actions during the third quarter
of 2008 to further streamline our organizational structure by consolidating certain homebuilding
operations and reducing our workforce. The potential benefit of these actions in reducing our
selling, general and administrative expenses is not reflected in our third quarter results due
to the costs incurred to implement them. As a percentage of housing revenues, selling, general
and administrative expenses increased to 19.9% in the third quarter of 2008 from 12.9% in the
year-earlier period, largely due to the substantial year-over-year decrease in our homebuilding
revenues, which has outpaced our significant overhead reductions. Despite our intentions to
continue to reduce our selling, general and administrative expenses, we expect the ratio of
these expenses to housing revenues to remain above 2007 levels for the balance of the year.
Our homebuilding operations generated operating losses of $619.2 million for the first nine
months of 2008 and $1.03 billion for the first nine months of 2007, reflecting losses from both
housing operations and land sales. As a percentage of homebuilding revenues, the operating loss
was 29.4% in the first nine months of 2008 compared to 23.7% in the first nine months of 2007,
reflecting a slight decrease in our housing gross margin to negative 6.4% from negative 6.3% and
an increase in our selling, general and administrative expenses as a percent of housing
revenues. Our housing gross margin for the nine months ended August 31, 2008 was adversely
impacted by pretax, non-cash charges of $315.9 million for inventory impairments and land option
contract abandonments, lower average selling prices and our use of price reductions and sales
incentives, primarily in the first half of 2008, in response to competitive conditions or to
facilitate strategic project or product exits. In the nine months ended August 31, 2007, the
housing gross margin reflected $889.0 million of inventory impairment and land option contract
abandonment charges. Company-wide land sales generated a loss of $83.9 million in the first nine
months of 2008, including $85.2 million of impairment charges related to future land sales. In
the first nine months of 2007, land sales produced losses of $57.8 million, including $59.6
million of similar impairment charges.
Selling, general and administrative expenses decreased by $216.1 million, or 36%, to $379.9
million in the nine months ended August 31, 2008 from $596.0 million in the corresponding period
of 2007, reflecting our cost reduction efforts. As a percentage of housing revenues, selling,
general and administrative expenses rose to 18.7% in the first nine months of 2008 from 14.2% in
the year-earlier period, primarily due to the fact that our expense reductions were outpaced by
the significant year-over-year decline in housing revenues, as well as the cost of implementing
these reductions.
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 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
the quarters ended May 31, 2008 and August 31, 2007, we
39
determined that it was necessary to evaluate goodwill for impairment due to deteriorating conditions in certain
housing markets and the significant inventory impairments we identified and recognized during
the quarters in accordance with SFAS No. 144. 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.
Based on the results of our impairment evaluation performed in the quarter ended May 31, 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.
Based on the results of our impairment evaluation 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 goodwill
impairment charges in 2008 and 2007 were recorded at our corporate level because all goodwill is
carried at that level.
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 in our
Southeast reporting unit is impaired could change and result in a material effect on our
consolidated financial position or results of operations.
Interest Income.
Interest income totaled $6.7 million in the third quarter of 2008 and $8.6
million in the third quarter of 2007. For the first nine months of 2008, interest income
totaled $29.2 million compared to $18.9 million in the first nine months of 2007. 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. The increase in interest income for the nine-month period ended August 31, 2008
compared to the year-earlier period reflected a substantial increase in short-term investments
due to the higher level of cash 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 of Debt.
On July 14, 2008, we redeemed the $300 Million 7 3/4% 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 the third quarter of 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 to our Credit Facility, which
reduced the aggregate commitment under the Credit Facility from $1.30 billion to $800.0 million.
In light of the reduction in the aggregate commitment, we wrote off $3.3 million of unamortized
fees associated with the Credit Facility during the third quarter of 2008.
On July 27, 2007, we redeemed all $250.0 million of our 9 1/2% senior subordinated notes due in
2011 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, together with accrued interest to the date of repayment. The unsecured
$400.0 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.
Equity in Loss of Unconsolidated Joint Ventures.
Our equity in loss of unconsolidated joint
ventures totaled $46.2 million in the three months ended August 31, 2008 and $21.0 million in
the three months ended August 31, 2007. Our equity in loss of unconsolidated joint ventures
included pretax, non-cash charges of $43.1 million in the three months ended August 31, 2008 and
$17.1 million in the three months ended August 31, 2007 to recognize the impairment of certain
unconsolidated joint venture investments. Our unconsolidated joint ventures recorded combined
revenues of $29.9 million in the third quarter of 2008 compared to $218.9 million in the
corresponding period of 2007. For the nine months ended August 31, 2008, our equity in loss of
unconsolidated joint ventures totaled $91.6 million compared to $62.7 million for the same
period of 2007. These amounts included pretax, non-cash charges of $81.6 million in the nine
months ended August 31, 2008
40
and $58.4 million in the nine months ended August 31, 2007 to
recognize the impairment of certain unconsolidated joint venture investments. Combined revenues
from these unconsolidated joint ventures totaled $85.2 million in the first nine months of 2008 and $262.8 million in the first nine months of
2007. The year-over-year decrease in combined revenues from unconsolidated joint ventures for
the three months and nine months ended August 31, 2008 reflected the inclusion of $209.2 million
of land sale revenues from an unconsolidated joint venture in the year-earlier periods.
Activities performed by our unconsolidated joint ventures generally include buying, developing
and selling land, and, in some cases building and delivering homes. Unconsolidated joint
ventures generated combined losses of $28.0 million in the third quarter of 2008 and combined
income of $6.1 million in the corresponding period of 2007. In the first nine months of 2008
and 2007, unconsolidated joint ventures generated combined losses of $145.6 million and $30.6
million, respectively.
HOMEBUILDING SEGMENTS
The following table presents financial information related to our homebuilding reporting
segments for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended August 31,
|
|
|
Three Months Ended August 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
West Coast:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
700,301
|
|
|
$
|
1,475,662
|
|
|
$
|
259,362
|
|
|
$
|
553,366
|
|
Construction and land costs
|
|
|
(794,169
|
)
|
|
|
(1,863,961
|
)
|
|
|
(238,564
|
)
|
|
|
(850,789
|
)
|
Selling, general and
administrative expenses
|
|
|
(88,761
|
)
|
|
|
(148,735
|
)
|
|
|
(32,620
|
)
|
|
|
(52,422
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(182,629
|
)
|
|
|
(537,034
|
)
|
|
|
(11,822
|
)
|
|
|
(349,845
|
)
|
Other, net
|
|
|
(8,826
|
)
|
|
|
4,232
|
|
|
|
(6,198
|
)
|
|
|
(1,241
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax loss
|
|
$
|
(191,455
|
)
|
|
$
|
(532,802
|
)
|
|
$
|
(18,020
|
)
|
|
$
|
(351,086
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Southwest:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
459,672
|
|
|
$
|
963,930
|
|
|
$
|
95,471
|
|
|
$
|
292,232
|
|
Construction and land costs
|
|
|
(566,094
|
)
|
|
|
(1,019,101
|
)
|
|
|
(126,402
|
)
|
|
|
(436,825
|
)
|
Selling, general and
administrative
expenses
|
|
|
(54,109
|
)
|
|
|
(90,732
|
)
|
|
|
(16,693
|
)
|
|
|
(27,696
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(160,531
|
)
|
|
|
(145,903
|
)
|
|
|
(47,624
|
)
|
|
|
(172,289
|
)
|
Other, net
|
|
|
(26,103
|
)
|
|
|
(4,453
|
)
|
|
|
(20,929
|
)
|
|
|
(7,641
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax loss
|
|
$
|
(186,634
|
)
|
|
$
|
(150,356
|
)
|
|
$
|
(68,553
|
)
|
|
$
|
(179,930
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Central:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
442,650
|
|
|
$
|
703,456
|
|
|
$
|
142,175
|
|
|
$
|
254,116
|
|
Construction and land costs
|
|
|
(409,674
|
)
|
|
|
(633,791
|
)
|
|
|
(123,513
|
)
|
|
|
(232,717
|
)
|
Selling, general and
administrative
expenses
|
|
|
(72,790
|
)
|
|
|
(114,242
|
)
|
|
|
(23,465
|
)
|
|
|
(37,400
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(39,814
|
)
|
|
|
(44,577
|
)
|
|
|
(4,803
|
)
|
|
|
(16,001
|
)
|
Other, net
|
|
|
(9,036
|
)
|
|
|
(5,704
|
)
|
|
|
(2,267
|
)
|
|
|
(875
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax loss
|
|
$
|
(48,850
|
)
|
|
$
|
(50,281
|
)
|
|
$
|
(7,070
|
)
|
|
$
|
(16,876
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended August 31,
|
|
|
Three Months Ended August 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Southeast:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
504,894
|
|
|
$
|
1,192,194
|
|
|
$
|
182,107
|
|
|
$
|
440,893
|
|
Construction and land costs
|
|
|
(543,724
|
)
|
|
|
(1,133,549
|
)
|
|
|
(161,791
|
)
|
|
|
(478,163
|
)
|
Selling, general and
administrative
expenses
|
|
|
(92,159
|
)
|
|
|
(150,025
|
)
|
|
|
(34,492
|
)
|
|
|
(52,025
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(130,989
|
)
|
|
|
(91,380
|
)
|
|
|
(14,176
|
)
|
|
|
(89,295
|
)
|
Other, net
|
|
|
(54,794
|
)
|
|
|
(53,565
|
)
|
|
|
(26,715
|
)
|
|
|
(16,793
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax loss
|
|
$
|
(185,783
|
)
|
|
$
|
(144,945
|
)
|
|
$
|
(40,891
|
)
|
|
$
|
(106,088
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
West Coast
Our West Coast segment generated total revenues of $259.4 million in the three
months ended August 31, 2008, down 53% from $553.4 million in the year-earlier period due to
decreases in housing and land sale revenues. Third quarter 2008 housing revenues declined 53%
to $258.6 million from $553.4 million in the third quarter of 2007, due to a 42% decrease in
homes delivered and a 20% decrease in the average selling price. We delivered 731 homes at an
average selling price of $353,800 in the quarter ended August 31, 2008 compared to 1,252 homes
delivered at an average selling price of $442,000 in the year-earlier quarter. The lower number
of homes delivered was largely due to a 33% year-over-year decrease in our active communities in
the segment. The lower average selling price in the third quarter of 2008 was driven by
downward pricing pressure from increased foreclosures and weakening demand, as well as our
efforts to roll out more affordable products. Our West Coast segment had land sale revenues of
$.8 million in the third quarter of 2008. In the year-earlier quarter the segment had no land
sale revenues.
Our West Coast segment recorded pretax losses of $18.0 million in the three months ended August
31, 2008 and $351.1 million in the year-earlier period. Pretax results improved in the third
quarter of 2008 compared to the year-earlier period due to decreased inventory-related charges
and lower selling, general and administrative expenses. The segments inventory impairment
charges totaled $1.8 million in the third quarter of 2008, down from impairment and land option
contact abandonment charges of $364.6 million in the third quarter of 2007. The gross margin in
this segment improved to 8.0% in the third quarter of 2008 from negative 53.7% in the
year-earlier quarter, reflecting a decrease in inventory-related charges as a percent of
revenues, partly offset by a decrease in the average selling prices. Selling, general and
administrative expenses in our West Coast segment decreased by $19.8 million, or 38%, to $32.6
million in the three months ended August 31, 2008 from $52.4 million in the year-earlier period,
reflecting the steps we have taken to align our business operations in the segment with reduced
housing market activity. Included in other, net expenses are unconsolidated joint venture
impairments of $5.6 million in the third quarter of 2008. There were no unconsolidated joint
venture impairments in the third quarter of 2007.
For the nine months ended August 31, 2008, our West Coast segment generated total revenues of
$700.3 million, a decrease of 53% from $1.48 billion in the year-earlier period, reflecting
lower housing and land sale revenues. Housing revenues from our West Coast segment totaled
$699.5 million, down from $1.42 billion in the year-earlier period due to a 37% decrease in
homes delivered and a 22% decrease in the average selling price. Homes delivered in this segment
decreased to 1,948 in the nine months ended August 31, 2008 from 3,097 in the year-earlier
period mainly due to a 35% year-over-year reduction in our active communities. The average
selling price fell to $359,100 in the first nine months of 2008 from $459,100 in the
year-earlier period due to greater use of targeted sales price reductions and sales incentives
in the first half of 2008, in response to highly competitive conditions and weak demand, as well
as our efforts to introduce more affordable product. Our West Coast segment had land sale
revenues of $.8 million in the nine months ended August 31, 2008 and $53.8 million in the nine
months ended August 31, 2007.
Our West Coast segment posted pretax losses of $191.5 million for the nine months ended August
31, 2008 and $532.8 million in the year-earlier period. Pretax results improved in the first
nine months of 2008 compared to the year-earlier period due to decreased inventory impairment
and land option contract abandonment charges and lower selling, general and administrative
expenses. Inventory impairment and land option contract abandonment charges in this segment
totaled $144.0 million in the first nine months of 2008 and $574.5 million in the first nine
months of 2007. As a percentage of revenues, these charges were 21% in 2008 and 39% in 2007.
The gross margin in our West Coast segment was negative 13.4% for the nine months ended August
31, 2008 compared to negative 26.3% in the year-earlier period, 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
42
reductions and sales incentives, primarily in the first half of 2008. Selling, general and
administrative expenses in our West Coast segment decreased by $59.9 million, or 40%, to $88.8
million in the first nine months of 2008 from $148.7 million in the year-earlier period due to
our actions to align overhead with a reduced volume of homes delivered and our future sales
expectations. Included in other, net expenses are unconsolidated joint venture impairments of
$13.8 million for the nine months ended August 31, 2008 and $3.7 million in the year-earlier
period.
Southwest
Total revenues from our Southwest segment decreased 67% to $95.5 million in the
third quarter of 2008 from $292.2 million in the year-earlier period due to declines in housing
and land sale revenues. Housing revenues from our Southwest segment fell 67% to $95.5 million in
the three months ended August 31, 2008 from $291.1 million in the year-earlier period, due to a
62% decrease in homes delivered and a 13% decrease in the average selling price. Homes
delivered in this segment decreased to 425 in the third quarter of 2008 from 1,133 in the
year-earlier quarter largely due to a 40% year-over-year decrease in our active communities. The
average selling price declined to $224,600 in the three months ended August 31, 2008 from
$256,900 in the three months ended August 31, 2007 due to pricing pressures driven by an excess
supply of new and resale homes, rising foreclosures and lower demand. The Southwest segment had
no land sales in the third quarter of 2008. In the year-earlier quarter, the segment had land
sale revenues of $1.1 million.
Our Southwest segment generated pretax losses of $68.6 million in the quarter ended August 31,
2008 and $179.9 million in the year-earlier quarter. The improved pretax result reflected an
improved gross margin and lower selling, general and administrative expenses. The gross margin
in the Southwest segment improved to negative 32.4% in the third quarter of 2008 from negative
49.5% in the third quarter of 2007, mainly due to a decrease in inventory-related charges.
Inventory impairment charges decreased to $37.3 million in the third quarter of 2008 compared to
inventory impairment and land option contract abandonment charges of $193.2 million in the
year-earlier quarter. Selling, general and administrative expenses decreased by $11.0 million,
or 40%, to $16.7 million in the quarter ended August 31, 2008 from $27.7 million in the
year-earlier quarter, reflecting the impact of our initiatives to reduce the size of our
business in line with reduced housing market activity in this segment. Included in other, net
expenses are unconsolidated joint venture impairments of $16.4 million for the three months
ended August 31, 2008 and $3.4 million of joint venture impairments in the year-earlier quarter.
For the first nine months of 2008, our Southwest segment generated total revenues of $459.7
million, down 52% from $963.9 million in the year-earlier period, mainly due to a decrease in
housing revenues. In the nine months ended August 31, 2008, housing revenues from the segment
declined 56% to $397.0 million from $905.4 million in the nine months ended August 31, 2007,
reflecting a 50% decrease in homes delivered and a 13% decrease in the average selling price.
We delivered 1,699 homes at an average selling price of $233,700 in the nine months ended August
31, 2008 compared to 3,379 homes at an average selling price of $267,900 in the year-earlier
period. The lower number of homes delivered was mainly due to a 30% year-over-year decrease in
the number of our active communities in the segment. The lower average selling price reflected
highly competitive conditions in this segment stemming from the persistent imbalance in housing
supply and demand. The Southwest segments total revenues included land sale revenues of $62.6
million in the first nine months of 2008 and $58.5 million in the first nine months of 2007.
Our Southwest segment posted pretax losses of $186.6 million for the nine months ended August
31, 2008 and $150.4 million for the nine months ended August 31, 2007. The increased pretax loss
in 2008 reflected a lower gross margin, partly offset by a decrease in selling, general and
administrative expenses. The segments gross margin declined to negative 23.2% in the first nine
months of 2008 from negative 5.7% in the first nine months of 2007, mainly due to increased
inventory-related impairment charges as a percentage of revenues. Inventory impairment charges
totaled $140.4 million in the first nine months of 2008, compared to inventory impairment and
land option contact abandonment charges of $222.7 million in the first nine months of 2007. As
a percentage of revenues, these charges were 31% in the first nine months of 2008 and 23% in the
year-earlier period. Selling, general and administrative expenses were $54.1 million in the
nine months ended August 31, 2008, down by $36.6 million, or 40%, from $90.7 million in the
year-earlier period, largely as a result of our cost reduction efforts. Included in other, net
expenses are unconsolidated joint venture impairments of $21.3 million for the nine months ended
August 31, 2008 and $3.4 million for the year-earlier period.
Central
Our Central segment posted total revenues of $142.2 million in the three months ended
August 31, 2008, down 44% from $254.1 million in the year-earlier period, primarily due to a
decrease in housing revenues. Third quarter housing revenues from our Central segment declined
47% to $134.7 million from $252.2 million in the third quarter of 2007, due to a 48% decrease in
homes delivered partly offset by a 3%
43
increase in the average selling price. We delivered 745 homes at an average price of $180,900
in the quarter ended August 31, 2008, compared to 1,433 homes delivered at an average price of
$176,000 in the year-earlier quarter. The decrease in homes delivered was principally due to a
41% year-over-year decrease in the number of active communities from which we operated. The
average selling price increased mainly due to a change in product mix. The Central segments
total revenues included land sale revenues of $7.4 million in the third quarter of 2008 and $1.9
million in the third quarter of 2007.
Our Central segment posted pretax losses of $7.1 million in the third quarter of 2008 and $16.9
million in the year-earlier quarter. The lower pretax loss in the third quarter of 2008 was
mainly due to increased gross profits that resulted primarily from a decrease in
inventory-related charges. The Central segments gross margin increased to 13.1% in the third
quarter of 2008 from 8.4% in the third quarter of 2007. There were no inventory-related charges
in the Central segment in the third quarter of 2008, compared to $14.9 million in the third
quarter of 2007. Selling, general and administrative expenses improved to $23.5 million in the
third quarter of 2008 from $37.4 million in the year-earlier quarter due to our actions taken to
reduce overhead.
For the nine months ended August 31, 2008, our Central segment generated total revenues of
$442.7 million, a decrease of 37% from $703.5 million in the year-earlier period, mainly due to
lower housing revenues. Housing revenues from the segment totaled $434.4 million in the first
nine months of 2008, down from $695.0 million in the corresponding period of 2007, reflecting a
39% decrease in homes delivered, partly offset by a 2% increase in the average selling price.
Homes delivered decreased to 2,507 in the nine months ended August 31, 2008 from 4,096 in the
year-earlier period mainly due to a 35% year-over-year reduction in the number of active
communities from which we operated. The average selling price increased to $173,300 in the
first nine months of 2008 from $169,700 in the year-earlier period due to a change in product
mix. The Central segments total revenues included land sale revenues of $8.3 million in the
first nine months of 2008 and $8.5 million in the first nine months of 2007.
Our Central segment posted a pretax loss of $48.9 million for the nine months ended August 31,
2008 and $50.3 million for the year-earlier period. The segments gross margin decreased to
7.4% in the first nine months of 2008 from 9.9% in the first nine months of 2007. Inventory
impairment and land option contract abandonment charges totaled $20.5 million in the 2008 period
compared to $24.4 million in the year-earlier period. Selling, general and administrative
expenses were $72.8 million in the nine months ended August 31, 2008, down by $41.4 million, or
36%, from $114.2 million in the year-earlier period, reflecting our efforts to calibrate our
operations in the segment with reduced housing market activity.
Southeast
In the third quarter of 2008, our Southeast segment generated total revenues of
$182.1 million, a decline of 59% from $440.9 million in the third quarter of 2007, primarily due
to a decrease in housing revenues. Third quarter 2008 housing revenues fell 58% to $179.5
million from $429.2 million in the corresponding quarter of 2007, reflecting a 53% decrease in
homes delivered and an 11% decrease in the average selling price. We delivered 887 homes at an
average selling price of $202,300 in the quarter ended August 31, 2008 compared to 1,881 homes
delivered at an average selling price of $228,200 in the year-earlier quarter. The decrease in
the number of homes delivered was primarily due to a 36% year-over-year reduction in the number
of our active communities in the segment. The lower average selling price reflected increased
pricing pressure driven by highly competitive conditions and rising foreclosures. The Southeast
segments total revenues included land sale revenues of $2.6 million in the third quarter of
2008 and $11.7 million in the third quarter of 2007.
Our Southeast segment generated pretax losses of $40.9 million in the three months ended August
31, 2008 and $106.1 million in the three months ended August 31, 2007. These improved pretax
results primarily reflected a substantial improvement in the gross margin, which increased to
11.2% in 2008 from negative 8.5% in 2007, largely due to the absence of inventory impairment and
land option contract abandonment charges in the 2008 period. In the three months ended August
31, 2007, inventory impairment and land option contract abandonment charges totaled $100.2
million. Selling, general and administrative expenses decreased by $17.5 million, or 34%, to
$34.5 million in the third quarter of 2008 from $52.0 million in the third quarter of 2007 due
to our actions to reduce overhead. Included in other, net expenses are unconsolidated joint
venture impairments of $21.1 million for the three months ended August 31, 2008 and $13.8
million for the year-earlier quarter.
In the nine months ended August 31, 2008, our Southeast segment generated total revenues of
$504.9 million, down 58% from $1.19 billion in the year-earlier period, mainly due to lower
housing revenues. The segments housing revenues for the first nine months of 2008 totaled
$500.8 million, a decrease of 57% from $1.17 billion
44
in the corresponding period of 2007,
reflecting a 53% decrease in homes delivered and a 9% decrease in the
average selling price. Homes delivered decreased to 2,372 in the nine months ended August 31,
2008 from 5,039 in the year-earlier period mainly due to a 46% year-over-year reduction in our
active communities in the segment. The average selling price in the segment decreased to
$211,100 in the first nine months of 2008 from $233,000 in the year-earlier period due to highly
competitive selling conditions. Our Southeast segments total revenues included land sale
revenues of $4.1 million in the first nine months of 2008 and $18.0 million in the first nine
months of 2007.
Our Southeast segment generated pretax losses of $185.8 million in the nine months ended August
31, 2008 and $144.9 million in the year-earlier period. The increased loss reflected a
substantial decline in the gross margin, partly offset by a decrease in selling, general and
administrative expenses. The segments gross margin declined to negative 7.7% in the first nine
months of 2008 from 4.9% in the first nine months of 2007, reflecting the impact of lower
average selling prices and an increase in inventory-related charges as a percentage of revenues.
Inventory impairment and land option contract abandonment charges totaled $96.2 million in the
nine months ended August 31, 2008 and $126.9 million in the corresponding period of 2007. As a
percentage of revenues, these charges totaled 19% in the first nine months of 2008 and 11% in
the first nine months of 2007. Selling, general and administrative expenses decreased by $57.8
million, or 39%, to $92.2 million in the first nine months of 2008 from $150.0 million in the
first nine months of 2007 due to our efforts to reduce operations in line with lower housing
market activity. Other, net expenses of $54.8 million in the nine months ended August 31, 2008
included $43.9 million of impairment charges related to this segments unconsolidated joint
venture investments. In the nine months ended August 31, 2007, other, net expenses of $53.6
million included impairment charges of $50.7 million associated with unconsolidated joint
venture investments in this segment.
FINANCIAL SERVICES
Our financial services segment provides title and insurance services to our homebuyers and
provided escrow coordination services until the second quarter of 2007, when we terminated the
escrow coordination business. The segment also provides mortgage banking services to our
homebuyers indirectly through Countrywide KB Home Loans. We and CWB Venture Management
Corporation, a subsidiary of Countrywide Financial Corporation, each have a 50% ownership
interest in Countrywide KB Home Loans, with CWB Venture Management Corporation providing
management oversight of the joint ventures operations. On July 1, 2008, Bank of America
Corporation completed its purchase of Countrywide Financial Corporation. On October 1, 2008,
Bank of America, N.A. purchased 100% of the stock of CWB Venture Management Corporation.
Accordingly, as of October 1, 2008, Countrywide KB Home Loans and CWB Venture Management
Corporation are operating subsidiaries of Bank of America, N.A. At this time, we do not believe
that these transactions will have a material effect on the joint ventures activities.
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended August 31,
|
|
|
Three Months Ended August 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
7,382
|
|
|
$
|
10,704
|
|
|
$
|
2,495
|
|
|
$
|
3,293
|
|
Expenses
|
|
|
(3,317
|
)
|
|
|
(3,524
|
)
|
|
|
(1,085
|
)
|
|
|
(1,113
|
)
|
Equity in income of unconsolidated
joint venture
|
|
|
12,880
|
|
|
|
14,558
|
|
|
|
4,578
|
|
|
|
4,367
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax income
|
|
$
|
16,945
|
|
|
$
|
21,738
|
|
|
$
|
5,988
|
|
|
$
|
6,547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total originations (a):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
|
7,010
|
|
|
|
10,618
|
|
|
|
2,215
|
|
|
|
4,123
|
|
Principal
|
|
$
|
1,454,475
|
|
|
$
|
2,534,341
|
|
|
$
|
464,734
|
|
|
$
|
987,184
|
|
Retention rate
|
|
|
79
|
%
|
|
|
69
|
%
|
|
|
80
|
%
|
|
|
73
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans sold to third parties (a):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
|
8,045
|
|
|
|
11,461
|
|
|
|
2,277
|
|
|
|
4,039
|
|
Principal
|
|
$
|
1,683,551
|
|
|
$
|
2,747,379
|
|
|
$
|
475,524
|
|
|
$
|
965,237
|
|
45
|
|
|
(a)
|
|
Loan originations and sales are within Countrywide KB Home Loans.
|
Revenues.
In the three-month and nine-month periods ended August 31, 2008 and 2007, our
financial services operations generated revenues primarily from the following sources: interest
income; title services; and insurance commissions. In the three months and nine months ended
August 31, 2007, financial services revenues also included escrow coordination fees. Financial
services revenues totaled $2.5 million in the third quarter of 2008 and $3.3 million in the
third quarter of 2007. In the first nine months of 2008, financial services revenues totaled
$7.4 million compared to $10.7 million in the corresponding year-earlier period. The decrease
in financial services revenues in the three-month and nine-month periods ended August 31, 2008
compared to the corresponding year-earlier periods resulted from lower revenues from title and
insurance services, reflecting fewer homes delivered from our homebuilding operations, and the
elimination of escrow coordination fee revenues due to the termination of our escrow
coordination business in the second quarter of 2007.
Expenses.
General and administrative expenses totaled $1.1 million in each of the third
quarters of 2008 and 2007. In the first nine months of 2008, general and administrative
expenses totaled $3.3 million compared to $3.5 million in the year-earlier period. The
year-over-year decrease in general and administrative expenses in the first nine months of 2008
was primarily due to the termination of the escrow coordination business in the second quarter
of 2007.
Equity in Income of Unconsolidated Joint Venture.
Equity in income of unconsolidated joint
venture relates to our 50% interest in Countrywide KB Home Loans and totaled $4.6 million for
the three months ended August 31, 2008 and $4.4 million for the three months ended August 31,
2007. For the nine months ended August 31, 2008, equity in income of unconsolidated joint
venture totaled $12.9 million compared to $14.6 million for the nine months ended August 31,
2007. The equity in income of unconsolidated joint venture reflects Countrywide KB Home Loans
adoption of SAB No. 109 and SFAS No. 159 in 2008. SAB No. 109 revises and rescinds portions of
SAB No. 105 and expresses the current view of the SEC that, consistent with the guidance in 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 these accounting
pronouncements, our equity in income of unconsolidated joint venture of the financial services
segment increased by $2.1 million in 2008.
Countrywide KB Home Loans originated 2,215 loans in the third quarter of 2008 compared to 4,123
loans in the year-earlier quarter. In the first nine months of 2008, Countrywide KB Home Loans
originated 7,010 loans, down from 10,618 loans originated in the year-earlier period. The
year-over-year decrease in loan originations for the three-month and nine-month periods
reflected the impact of fewer homes delivered from our homebuilding operations, 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 for
the three months ended August 31, 2008 increased by 7 percentage points to 80%, compared to 73%
for the year-earlier quarter. For the nine months ended August 31, 2008, the retention rate
increased by 10 percentage points to 79%, compared to 69% for the year-earlier period. The
higher retention rates primarily reflected the diminished availability of alternative consumer
mortgage lenders in the marketplace.
INCOME TAXES
Our income tax benefit from continuing operations totaled $7.0 million in the third quarter of
2008, compared to $307.1 million in the third quarter of 2007. These amounts represented
effective income tax rates from continuing operations of 4.6% in the third quarter of 2008 and
39.1% in the third quarter of 2007. For the first nine months of 2008, our income tax benefit
from continuing operations totaled $6.1 million compared to $419.7 million for the nine months
ended August 31, 2007. These amounts represented effective income tax rates from continuing
operations of .9% for the nine months ended August 31, 2008 and 39.5% for the nine months ended
August 31, 2007. The significant year-over-year change in our effective tax rate for the three
months and nine months ended August 31, 2008 resulted primarily from the disallowance of tax
benefits related to our current year losses as a result of a full valuation allowance, and the
recognition of a liability for unrecognized tax benefits. In the three months and nine months
ended August 31, 2008, we recorded valuation allowances of $58.1 million and $257.0 million,
respectively. In accordance with SFAS No. 109, we were
46
unable to record deferred tax benefits
that would have reduced our net losses in the three months and nine
months ended August 31, 2008 due to the uncertainty of realizing such deferred tax assets.
Including the valuation allowances for net deferred tax assets recorded in 2008, we have $779.9
million of net deferred tax assets fully reserved as of August 31, 2008. To the extent we
generate taxable income in the future to utilize these tax benefits, we expect to reverse the
valuation allowance and decrease our effective tax rate on that future income. However, to the
extent we generate future operating losses, we will be required to increase the valuation
allowance on our net deferred tax assets and our income tax provision will be adversely
affected. The valuation allowance on our net deferred tax assets is significant relative to our
current stockholders equity and could have a meaningful impact on our book value per share and
on our leverage ratios if it is realized. The income tax benefit reported for the three months
and nine months ended August 31, 2008 was mainly due to the recognition of a $6.0 million tax
benefit previously unrecognized under FASB Interpretation No. 48.
Liquidity and Capital Resources
Overview
. Historically, we have funded our homebuilding and financial services activities 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 discontinued operations and
other assets, reducing inventory and our active community counts, reducing our workforce,
consolidating operations, and selectively exiting underperforming markets. During the first nine
months of 2008, we remained committed to our balance sheet initiatives and, as a result, we
ended the third quarter with $942.5 million of cash and $1.88 billion of debt. We anticipate
generating positive cash flows for the balance of our 2008 fiscal year and for the full year.
Capital Resources
. At August 31, 2008, we had $1.88 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 our early redemption of debt during the third quarter of 2008.
On July 14, 2008, we completed the early redemption of the $300 Million 7 3/4% 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 the third quarter of 2008 related to
the early redemption of debt, as a result of the call premium and the unamortized original issue
discount.
As part of our commitment to actively manage our investments in unconsolidated joint ventures,
we expect, in some cases, to opportunistically purchase our partners interests. In those
cases, we would consolidate the joint venture, which would result in an increase in our
consolidated mortgages and notes payable. We consolidated one joint venture in the third
quarter of 2008 after purchasing our partners interest, and anticipate consolidating additional
joint ventures in the fourth quarter of 2008. 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 intend to pay off all $200.0 million of our 8 5/8% senior
subordinated notes upon their December 15, 2008 scheduled maturity. Our next bond maturity does
not occur until August 15, 2011, when our $350.0 million 6 3/8% senior notes become due.
Our financial leverage, as measured by the ratio of debt to total capital, was 62.3% at August
31, 2008 compared to 53.9% at November 30, 2007. The increase in this ratio reflected lower
retained earnings at August 31, 2008, primarily due to pretax, non-cash charges recorded during
the first nine months of 2008 for the impairment of inventory, joint ventures and goodwill, and
the abandonment of land option contracts, as well as a 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 August 31, 2008 was 45.2%, compared to 31.1% at November 30, 2007 and 36.3% at
August 31, 2007. Net debt to net total capital is calculated by dividing mortgages and notes
payable, net of homebuilding cash, by net total capital (mortgages and notes payable, net of
homebuilding 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 August 31, 2008, we had no cash borrowings outstanding and $185.8 million in letters of
credit outstanding under our Credit Facility, leaving us with $614.2 million available for
future borrowings.
47
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 subtracting the amount of outstanding borrowings under the
Credit Facility as of the measurement date.
Under the terms of the Credit Facility as amended by the Fifth Amendment, 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, as amended, 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 August 31, 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 with the Credit
Facilitys administrative agent an interest reserve account (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.
The following table summarizes certain key financial ratios we are required to maintain under
our Credit Facility, as amended, and our actual ratios:
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August 31, 2008
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Financial Covenant
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Covenant Requirement
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Actual
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Minimum consolidated tangible net worth
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$278.2 million
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$1.09 billion
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Coverage Ratio
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(a
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)
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(a
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)
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Leverage Ratio (b)
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£
1.00
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.56
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Investment in subsidiaries and joint
ventures as a percent of Adjusted
Consolidated Tangible Net Worth
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<35
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%
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17
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%
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Borrowing base in excess of senior
indebtedness (as defined)
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Greater than zero
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$961.4 million
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48
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(a)
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Our Coverage Ratio of negative .17 was less than 1.00 to 1.00 as of August 31, 2008.
Because our Leverage Ratio as of August 31, 2008 was below 1.00 to 1.00, we will establish
an Interest Reserve Account of $115.4 million in the fourth quarter of 2008 with the Credit Facilitys
administrative agent to remain in compliance with the terms of the Credit Facility.
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(b)
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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.
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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 unit 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.
Other covenants provide that (a) the unimproved land book value cannot exceed consolidated
tangible net worth; (b) investments in subsidiaries and joint ventures (as defined in the Credit
Facility) cannot exceed 35% of Adjusted Consolidated Tangible Net Worth; (c) speculative unit
deliveries within a given quarter cannot exceed 40% of the previous 12 months total deliveries;
and (d) the borrowing base (as defined in the Credit Facility) cannot be lower than total senior
indebtedness (as defined in the Credit Facility).
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.
As of August 31, 2008, we were in compliance with the terms of all of our covenants under the
Credit Facility.
The indenture governing our senior subordinated notes, the only outstanding series of which is
$200.0 million of 8 5/8% notes due December 15, 2008, contains certain covenants that, among
other things, limit our ability to incur additional indebtedness; pay dividends; make stock
repurchases; prepay subordinated debt; make certain investments in foreign subsidiaries and
certain joint ventures; create certain liens; engage in mergers, consolidations, or sales of
assets; or engage in certain transactions with officers, directors and employees. The
significant covenants are (a) additional indebtedness may not be incurred unless either (i) our
ratio of consolidated adjusted operating income (as defined under the senior subordinated notes
indenture) to consolidated interest incurred is greater than 2.00 to 1.00 or (ii) our ratio of
consolidated indebtedness to consolidated net worth (as defined under the senior subordinated
notes indenture) is less than 3.50 to 1.00, (b) dividends, stock repurchases and prepayment of
subordinated debt are limited to $100.0 million in the aggregate, increased for activity related
to the issuance of capital stock and stock options and from 50% of our cumulative consolidated
net income after August 31, 1996, and (c) investments in foreign subsidiaries and certain joint
ventures cannot exceed $110.0 million plus cash dividends and distributions from these same
entities. No additional financial statement ratios are required to be maintained under our
senior subordinated notes. The covenants under the senior subordinated notes indenture will not
apply to us if there is no series of senior subordinated notes outstanding.
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 August 31, 2008, we were in compliance with the applicable terms of the covenants under
our senior subordinated notes indenture and our senior notes indenture. However, our ability to
continue to borrow funds depends in part on our ability to remain in compliance with the
applicable terms of the covenants of our Credit Facility and our public note indentures, as
described above. Our inability to do so could make it more
49
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. Through the nine months ended August 31, 2008, we have declared and paid total
cash dividends of $.75 per share of common stock.
Consolidated Cash Flows
. Operating, investing and financing activities used net cash of $387.5
million in the nine months ended August 31, 2008 and $143.4 million in the nine months ended
August 31, 2007. The increase in cash used in the first nine months of 2008 compared to the
year-earlier period was primarily due to the cash proceeds we received from the sale of our
French discontinued operations in July 2007.
Operating Activities
. Operating activities provided net cash flows of $30.2 million in the first
nine months of 2008 and $319.3 million in the first nine months of 2007. The year-over-year
change in operating cash flow was due to the $297.4 million of cash provided by the French
discontinued operations in the first nine months of 2007. Our sources of operating cash in the
first nine months of 2008 included a net decrease in inventories of $230.3 million (excluding
inventory impairments and land option contract abandonments, $16.3 million of inventories
acquired through seller financing and a decrease of $134.7 million in consolidated inventories
not owned), a decrease in receivables of $109.0 million, other operating sources of $16.0
million and various non-cash items added to the net loss. Partially offsetting the cash provided
in the period was a net loss of $668.8 million and a decrease in accounts payable, accrued
expenses and other liabilities of $196.5 million.
Operating cash provided by continuing operations in the nine months ended August 31, 2007
included a net decrease in inventories of $205.2 million (excluding inventory impairments and
land option contract abandonments, $4.1 million of inventories acquired through seller financing
and a decrease of $179.8 million in consolidated inventories not owned), other operating sources
of $33.4 million and various non-cash items added to the loss from continuing operations.
Partially offsetting the cash provided in the period was a decrease in accounts payable, accrued
expenses and other liabilities of $499.0 million. Our French discontinued operations provided
net cash from operating activities of $297.4 million in the first nine months of 2007.
Investing Activities
. Investing activities used net cash of $55.3 million in the nine months
ended August 31, 2008 and provided net cash of $668.1 million in the year-earlier period. In
the first nine months of 2008, $61.4 million of cash was used for investments in unconsolidated
joint ventures. The cash used in the period was partially offset by $6.1 million provided from
net sales of property and equipment. In the first nine months of 2007, continuing operations
provided cash of $739.8 million from the sale of our French discontinued operations, net of cash
divested. Partially offsetting the cash provided in the period was $57.0 million used for
investments in unconsolidated joint ventures and $2.6 million used for net purchases of property
and equipment. Our French discontinued operations used net cash of $12.1 million for investing
activities in the first nine months of 2007.
Financing Activities
. Net cash used for financing activities totaled $362.4 million in the first
nine months of 2008 and $1.13 billion in the first nine months of 2007. In the first nine months
of 2008, cash was used for the redemption of the $300 Million 7 3/4% Senior Subordinated Notes,
dividend payments of $58.1 million, net payments on short-term borrowings of $3.0 million and
repurchases of common stock of $.6 million in connection with the satisfaction of employee
withholding taxes on vested restricted stock. These uses of cash were partly offset in the
period by $5.1 million provided from the issuance of common stock under our employee stock
plans.
In the first nine months of 2007, financing activities used cash for the redemption of an
unsecured $400.0 million term loan, which was scheduled to mature on April 11, 2011, the
redemption of $250.0 million of 9 1/2% senior subordinated notes due in 2011, net payments on
short-term borrowings of $114.1 million, dividend payments of $57.8 million, and repurchases of
common stock of $4.9 million in connection with the satisfaction of employee withholding taxes
on vested restricted stock. These uses of cash were partly offset in the period by $10.8 million
provided from the issuance of common stock under our employee stock plans and $.7 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 the first nine months of
2007.
50
Shelf Registration Statement
. At August 31, 2008, $450.0 million of capacity remained available
under our universal shelf registration statement filed with the SEC on November 12, 2004.
Share Repurchase Program
. As of August 31, 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 the first nine months of 2008.
We continually consider various options for the use of our 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, 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 land acquisition and development activities will remain
limited in the near term until markets stabilize, we are analyzing potential lot acquisitions
and will use our present financial strength to acquire lots in good long-term markets when the
prices and timing are compelling.
Off-Balance Sheet Arrangements, Contractual Obligations and Commercial Commitments
We participate in unconsolidated joint ventures that conduct land acquisition, development
and/or other homebuilding activities in certain markets where our homebuilding operations are
located. These unconsolidated joint ventures are typically structured through entities in which
ownership is shared with our partners. 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 projects 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.
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 ventures 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 $250.4 million at August 31, 2008 and
$297.0 million at November 30, 2007. These unconsolidated joint ventures had total assets of
$2.26 billion at August 31, 2008 and $2.51 billion at November 30, 2007. We expect our
investments in unconsolidated joint ventures to continue to decrease and are reviewing each
investment to ensure it fits into our overall strategic plans and business objectives.
The unconsolidated joint ventures finance land and inventory investments through a variety of
borrowing 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
$1.46 billion at August 31, 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.
51
In certain instances, we and/or our partner(s) in an unconsolidated joint venture provide
guarantees and indemnities to the unconsolidated joint ventures lenders that may include one or
more of the following: (a) completion guaranty; (b) loan-to-value maintenance guaranty; and/or
(c) 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 value of an unconsolidated joint ventures secured collateral (generally land and improvements) at or above a specific percentage of the applicable
outstanding loan balance. 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 amount or an amount equal to our pro rata interest in the
relevant unconsolidated joint venture. In a few cases, we have provided a loan-to-value
maintenance guaranty up to a specified maximum amount and have entered into an agreement with
our unconsolidated joint venture partners to be reimbursed for any amounts we may pay pursuant
to such guaranty above our pro rata interest in the relevant unconsolidated joint venture. If
our unconsolidated joint venture partners are unable to fulfill their reimbursement obligations,
or otherwise fail to do so, we may be responsible for more than our allocable share, up to our
specified maximum responsibility under the relevant loan-to-value maintenance guaranty. Should
there be indications that advances (if made) will not be voluntarily repaid under any such
reimbursement arrangements, we intend to 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 is limited to the amount, if any,
by which an unconsolidated joint ventures outstanding borrowings exceed the value of its
assets, though in the aggregate we believe our actual responsibility under these guarantees
should be substantially less than this amount. At this time, we have no reason to believe that
our carve-out guarantees will be triggered in any material amount.
At August 31, 2008, our pro rata share of loan-to-value maintenance guarantees related to
unconsolidated joint venture debt totaled approximately $92.1 million. This amount represents
our maximum responsibility under such loan-to-value maintenance guarantees without regard to the
underlying value of the collateral and defenses available against attempted enforcement of such
guarantees.
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 ventures 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 ventures debt and our and our partners respective
land purchases from the unconsolidated joint venture. At August 31, 2008, this unconsolidated
joint venture had total outstanding indebtedness of approximately $373.9 million and, if this
guaranty were then enforced, our potential responsibility under the guaranty would have been
approximately $182.7 million. 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. In those cases, we would
consolidate the joint venture, which would result in an increase in our consolidated mortgages
and notes payable. However, such purchases may not
52
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. 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 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 option agreements 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), certain of our land option contracts
may create a variable interest for us, with the land seller being identified as a VIE. As of
August 31, 2008, excluding consolidated VIEs, we had cash deposits totaling $32.7 million, which
were associated with land option contracts having an aggregate purchase price of $605.9 million.
We also evaluate land option contracts in accordance with 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 $89.9 million at August 31, 2008 and $221.1
million at November 30, 2007.
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 August 31, 2008, we had
approximately $826.0 million of performance bonds and $185.8 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. 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. Performance bonds do not have
stated expiration dates. Rather, we are released from the performance bonds as the contractual
performance is completed.
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.
Critical Accounting Policies
Except as set forth below, there have been no significant changes to our critical accounting
policies and estimates during the nine months ended August 31, 2008 compared to those disclosed
in Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
included in our Annual Report on Form 10-K for the fiscal year ended November 30, 2007.
Inventory Impairments and Abandonments
. 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
53
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, home delivery volume 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 conditions in the market in which the asset is located at the time an 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 a land option contract 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 project.
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 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 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
housing market conditions 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
non-cash charges would have an adverse effect on our consolidated financial position and results
of operations.
Goodwill
. 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
54
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 quarter ended May 31, 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.
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 the third quarter of 2007 related to our
Southwest reporting segment, where all of the goodwill previously recorded was determined to be
impaired. The goodwill impairment charges in 2008 and 2007 were recorded at our corporate level
because all goodwill is carried at that level. Our goodwill balance of $43.4 million at August
31, 2008 related entirely to our Southeast reporting segment. If housing market conditions
deteriorate further or if our marketing strategy in the Southeast reporting unit changes, it is
possible that goodwill in this reporting unit may become impaired in future periods.
Income Taxes
. 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 15. Income Taxes, in the Notes to Consolidated Financial Statements in this
quarterly report, we implemented the provisions of 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 returns 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).
55
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 sheet.
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 the consolidated statements of operations and effective tax rates as more items are
recognized and/or derecognized discretely within income tax expense.
Outlook
At August 31, 2008, our backlog of new home orders totaled 4,774 homes, representing projected
future housing revenues of approximately $1.13 billion. These backlog measures declined 60% and
63%, respectively, from 11,880 homes, representing approximately $3.07 billion in projected
future housing revenues, at August 31, 2007. Our substantially lower backlog of homes and
corresponding projected future housing revenues at the end of the 2008 third quarter compared to
the prior years quarter-end reflected 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 align with reduced housing
market activity. Our active community count in the third quarter of 2008 was down 38% from the
year-earlier quarter as a result of our actions to reduce our operations in certain markets and
to completely exit other markets that no longer fit our current marketing strategy.
Our lower active community count also reduced our operating results in the third quarter of 2008
compared to the year-earlier quarter. Our homebuilding operations generated 1,329 net orders in
the third quarter of 2008, down 66% from the 3,907 net orders generated in the corresponding
quarter of 2007. Our year-over-year homes delivered and revenues were also lower. Our net
orders in the third quarter of 2008 were further curtailed as a result of our decision in the
quarter to reduce our use of sales price reductions and sales incentives as part of a
comprehensive community-by-community review of our pricing strategies; to wind down certain
communities as backlog is delivered; and to discontinue product in particular communities as
part of a product transition strategy, which slowed sales in those communities.
With foreclosure activity continuing to rise, consumer confidence continuing to decline, and
consumer mortgage lending along with other credit markets tightening in light of the recent
crisis in global financial markets, we believe the timing of a housing market recovery remains
highly uncertain. Though home prices have fallen substantially during 2008, improving
affordability, many potential homebuyers remain reluctant or unable to commit to a new home
purchase. There are several reasons why, 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, particularly as more foreclosed homes come onto
the market. We expect this environment of diminished demand and substantial oversupply to
continue into 2009, sustaining the sharply reduced home sales volumes and severe downward
pricing pressures our industry has experienced since the second half of 2006 compared to the
first half of this decade.
As we continue to navigate this unprecedented decline in the housing market, we remain focused
on three primary goals: maintaining a strong cash position and balance sheet; restoring KB Home
to profitability; and positioning our operations to capitalize on a housing market recovery when
it occurs. For the past two years, we have made financial strength and operational
repositioning the centerpiece of our strategic response to the declining markets and reduced
levels of demand. We have built and conserved our cash, reduced our inventory and active
community counts, and consolidated operations and cut overhead in many markets, while
selectively exiting others. Our substantial cash position enabled us to complete the early
redemption of the $300 Million 7 3/4% Senior Subordinated Notes in the third quarter of 2008.
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 pursuing a strategy of selling the right product at the right price with the right
marketing strategy for each individual market in
56
which we operate, though at a reduced sales
volume compared to prior periods. It also means continuing to reduce our costs and to operate
more efficiently in accordance with the disciplined, Built to Order principles of our KBnxt
operational business model, while preparing for a future housing market recovery.
Consistent with our near-term focus on offering the right product at the right price, we
initiated a product transition strategy in the third quarter of 2008, introducing in particular
communities a series of new, value-engineered product with smaller sizes and more affordable
standard features that can be offered at lower base selling prices compared to prior product
offerings. The reengineered product is designed to meet the needs and affordability concerns of
our core first-time homebuyers in the current market environment. At the same time, it is more
cost-effective to build than the product it is replacing, and our homebuyers will still be able
to customize their homes with options available through our KB Home Studios. We are currently
rolling out the reengineered product to several of our communities, a process that we expect to
continue through the first quarter of 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 in transitioning communities in the fourth quarter of 2008 and first quarter of 2009,
reflecting a lag between discontinuing prior product and bringing new product online, and will
reduce our year-over-year results of operations for those periods and for our 2008 fiscal year.
During the third quarter of 2008, we continued our aggressive steps to streamline our
organizational structure to reduce costs in proportion to our revenues. We consolidated certain
homebuilding divisions and reduced our headcount by approximately 18%. Over the past two years,
we have reduced our workforce by approximately 66%. We expect these changes to produce tangible
benefits, in the form of selling, general and administrative expense reductions, in future
quarters, and we will relentlessly continue to reduce these costs. In making these
adjustments, we have selectively maintained operations in key markets and have made investments
that we believe will enable us to prudently and effectively expand our operations when market
conditions improve. In implementing organizational adjustments in future quarters, we will
maintain our focus on bringing our costs in line with our revenues and preserving a solid
foundation that can support 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 land investment and development activities until we see reasonable signs of
a housing market recovery. As a result, we expect our delivery volume and related revenues to
remain below year-earlier levels for the remainder of 2008 and, if market conditions decline
further, we may need to take additional charges for inventory impairments and land option
contract abandonments in future quarters. In addition, our fourth quarter and 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
would further diminish the prospects for a recovery in housing markets. At this time, it is too
early to assess the near-term or long-term impact, if any, that recent government actions and
proposed initiatives to stabilize the unprecedented turbulence in the global financial system
and U.S. mortgage lending market will have on the housing industry or our results of operations.
Based in large part on the aggressive actions we have taken in 2007 and the first nine months of
2008, we believe we are well-positioned financially and strategically to navigate the current
housing market downturn and to capitalize on potential future opportunities for growth. We
ended the third quarter of 2008 with a substantial cash balance of $942.5 million and no cash
borrowings outstanding under our Credit Facility. We expect to have no outstanding cash
borrowings under our Credit Facility at the end of our 2008 fiscal year.
In light of the current crisis in the U.S. financial markets, 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 inventory levels, price stabilization, reduced foreclosure rates, and the
restoration of consumer and credit market confidence that will support a decision to buy a home.
While it is difficult to predict when these events will occur, we believe we have responded
with the right strategies to the current and expected near-term housing market environment.
Longer term, we believe favorable demographics, population growth and a continuing desire for
home ownership will drive demand for new homes in our markets, and that our operating approach
and financial resources will allow us to capitalize on the recovery in those markets when it
comes.
57
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,
liquidity, earnings or 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
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 inventory impairments,
abandonment charges or goodwill impairments, including an oversupply of unsold homes and
declining home prices, among other things; material prices and availability; labor costs and
availability; changes in interest rates; our debt level; declines in consumer confidence;
increases in competition; weather conditions, significant natural disasters and other
environmental factors; government regulations; the availability and cost of land in desirable
areas; government investigations and shareholder lawsuits regarding our past stock option grant
practices and the restatement of certain of our financial statements; other legal or regulatory
proceedings or claims; conditions in the capital, credit (including consumer mortgage lending
standards, the availability of consumer mortgage financing and mortgage foreclosure rates) and
homebuilding markets; the ability and/or willingness of participants in our unconsolidated joint
ventures to fulfill their obligations; our ability to access our available capacity under our
Credit Facility; and other events outside of our control. Please see our periodic reports and
other filings with the SEC for a further discussion of these and other risks and uncertainties
applicable to our business.
Item 3. 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 and senior
subordinated notes. For fixed-rate debt, changes in interest rates generally affect the fair
market 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 changes
in interest rates.
The following table sets forth principal cash flows by scheduled maturity, weighted average
interest rates and estimated fair market value of our long-term debt obligations as of August
31, 2008 (dollars in thousands):
58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
Fiscal Year of Expected Maturity
|
|
Fixed Rate Debt (a)
|
|
|
Interest Rate
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
$
|
|
|
|
|
|
%
|
2009
|
|
|
200,000
|
|
|
|
8.6
|
|
2010
|
|
|
|
|
|
|
|
|
2011
|
|
|
348,816
|
|
|
|
6.4
|
|
2012
|
|
|
|
|
|
|
|
|
Thereafter
|
|
|
1,296,152
|
|
|
|
6.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,844,968
|
|
|
|
6.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair market value at August 31,
2008
|
|
$
|
1,587,628
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Includes senior and senior subordinated notes. The fixed-rate debt expected to mature
in our 2009 fiscal year is scheduled to mature on December 15, 2008.
|
For additional information regarding our market risk, refer to Item 7A, Quantitative and
Qualitative Disclosures About Market Risk, in our Annual Report on Form 10-K for the fiscal year
ended November 30, 2007.
Item 4. Controls and Procedures
We have established disclosure controls and procedures to ensure the information we are required
to disclose in the reports we file or submit under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported, within the time periods specified in the SECs
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 our 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 our Principal Financial Officer concluded that our disclosure controls and
procedures were effective as of August 31, 2008.
59
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Derivative Litigation
On July 10, 2006, a shareholder derivative action, Wildt v. Karatz, et al., was filed in Los
Angeles Superior Court. On August 8, 2006, a virtually identical shareholder derivative lawsuit,
Davidson v. Karatz, et al., was also filed in Los Angeles Superior Court. These actions, which
ostensibly are brought on our behalf, allege, among other things, that 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 shareholder-approved stock option plans, and seek unspecified money damages and
injunctive and other equitable relief. Defendants have not yet responded to the complaints. On
January 22, 2007, the court entered an order, pursuant to an agreement among the parties and us,
providing, among other things, that, to preserve the status quo without prejudicing any partys
substantive rights, our former Chairman and Chief Executive Officer shall not exercise any of
his outstanding options, at any price, during the period in which the order is in effect.
Pursuant to further stipulations and court orders, these terms remain in effect and are now
scheduled to expire on November 3, 2008, unless otherwise agreed in writing. The plaintiffs have
agreed to stay their cases while the parallel federal court derivative lawsuits discussed below
are pursued. A stipulation and order effectuating the parties agreement to stay the state court
actions was entered by the court on February 7, 2007. The parties may extend the agreement that
options will not be exercised by our former Chairman and Chief Executive Officer beyond the
current November 3, 2008 expiration date.
On August 16, 2006, a shareholder derivative lawsuit, Redfield v. Karatz, et al., was filed in
the United States District Court for the Central District of California. On August 31, 2006, a
virtually identical shareholder derivative lawsuit, Staehr v. Karatz, et al., was also filed in
the United States District Court for the Central District of California. These actions, which
ostensibly are brought on our behalf, allege, among other things, that 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 shareholder-approved stock option plans and seek unspecified money damages and
injunctive and other equitable relief. Unlike Wildt and Davidson, however, these lawsuits also
include substantive claims under the federal securities laws. On January 9, 2007, plaintiffs
filed a consolidated complaint. All defendants filed motions to dismiss the complaint on April
2, 2007. Subsequently, plaintiffs filed a motion for partial summary judgment against certain of
the defendants. Pursuant to stipulated orders, the motions to dismiss and the motion for partial
summary judgment remained suspended for several months while the parties engaged in settlement
discussions. Settlement discussions are ongoing. On May 14, 2008, the court ordered that the
partial summary judgment motion shall be taken off calendar, subject to being reset at a future
time, following resolution of the motions to dismiss. On August 15, 2008, the court removed
defendants various motions to dismiss from its calendar. A hearing on the motions to dismiss
may be rescheduled in the future. A status conference is scheduled for October 15, 2008.
Discovery has not commenced.
Government Investigations
In August 2006, we announced that we had received an informal inquiry from the SEC relating to
our stock option grant practices. In January 2007, we were informed of the SECs decision to
conduct a formal investigation of this matter. In September 2008, we were notified that the SEC
staffs investigation was completed with respect to KB Home and that the staff did not intend to
recommend any enforcement action by the SEC against the KB Home.
The DOJ has also been looking into these practices but has informed KB Home that it is not a
target of this investigation. We have cooperated with the DOJ and intend to continue to do so.
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 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
60
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 individual
defendants based on the standing of plaintiffs to sue. Our answer to the amended complaint is
due on or before October 21, 2008.
Storm Water Matter
In January 2003, we received a request for information from the EPA pursuant to Section 308 of
the Clean Water Act. Several other public homebuilders received similar requests. The request
sought information about storm water pollution control program implementation at certain of our
construction sites, and we provided information pursuant to the request. In May 2004, on behalf
of the EPA, the DOJ asserted that certain regulatory requirements applicable to storm water
discharges had been violated on certain occasions at certain of our construction sites, and
unspecified civil penalties and injunctive relief might be warranted. We explored with the EPA,
DOJ and other homebuilders methods of resolving the matter. In May 2008, we signed a consent
decree with the EPA, DOJ and various states affecting our storm water pollution practices at our
construction sites. Other homebuilders also signed similar consent decrees. In June 2008, the
DOJ filed suit in the United States District Court for the Eastern District of Virginia (Civil
Action No. 1:08CV603) and simultaneously submitted our consent decree for approval by the court.
The court approved and entered the consent decree on July 23, 2008. Under the consent decree,
we paid a civil penalty of $1.2 million. In addition, we have implemented certain process
improvements for the control of storm water at homebuilding sites and will submit periodic
reports to the DOJ, the EPA and the participating states for a period of at least three years,
in each case as required by the consent decree. We believe that the costs associated with
implementing the consent decree are not likely to be material to our consolidated financial
position or results of operations.
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 1A. Risk Factors
There have been no material changes from our risk factors as previously disclosed in our Annual
Report on Form 10-K for the fiscal year ended November 30, 2007 and our Quarterly Report on Form
10-Q for the quarter ended February 29, 2008.
Item 5. Other Information
Effective October 7, 2008, William R. Hollinger, who has served as our Senior Vice President and
Chief Accounting Officer since 2007 and in the position of Senior Vice President and Controller
from 2001 through 2006, will serve as our Principal Financial Officer pending the selection of a
Chief Financial Officer for KB Home. Domenico Cecere is no longer serving KB Home in this
capacity.
61
Item 6. Exhibits
|
|
|
Exhibits
|
|
|
|
|
|
10.40
|
|
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, incorporated by reference to KB Homes Current
Report on Form 8-K dated August 29, 2008.
|
|
|
|
10.41*
|
|
KB Home Executive Severance Plan.
|
|
|
|
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.
|
62
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
|
|
Dated October 10, 2008
|
/s/ JEFFREY T. MEZGER
|
|
|
Jeffrey T. Mezger
|
|
|
President and Chief Executive
Officer
(Principal Executive Officer)
|
|
|
|
|
|
|
|
|
|
Dated October 10, 2008
|
/s/ WILLIAM R. HOLLINGER
|
|
|
William R. Hollinger
Senior Vice President and Chief Accounting Officer
(Principal Financial Officer)
|
|
63
INDEX OF EXHIBITS
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10.40
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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, incorporated by reference to KB Homes Current
Report on Form 8-K dated August 29, 2008.
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10.41*
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KB Home Executive Severance Plan, filed herewith.
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31.1
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Certification of Jeffrey T. Mezger, President and Chief Executive Officer of KB Home
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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31.2
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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.
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32.1
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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.
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32.2
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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.
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*
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Management contract or compensatory plan or arrangement in which executive officers are
eligible to participate.
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64