SECURITIES AND EXCHANGE COMMISSION
Form 10-K
þ Annual Report Pursuant to Section 13 or 15(d) of
For the Fiscal Year Ended November 30, 2001
or
o Transition Report Pursuant to Section 13 or 15(d) of
For the transition period from __________ to __________.
Commission File No. 1-9195
KB HOME
10990 WILSHIRE BOULEVARD, LOS ANGELES,
CALIFORNIA 90024
Registrants telephone number, including
area code: (310) 231-4000
Securities Registered Pursuant to Section
12(b) of the Act:
Incorporated in Delaware
(State or other jurisdiction of
incorporation or organization)
95-3666267
(I.R.S. Employer
Identification No.)
Name of Each Exchange
Title of Each Class
on Which Registered
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act:
None
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 ü NO
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE BEST OF REGISTRANTS KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K. x
THE AGGREGATE MARKET VALUE OF VOTING STOCK HELD BY NON-AFFILIATES OF THE REGISTRANT ON FEBRUARY 15, 2002 WAS $2,113,558,971, INCLUDING 7,941,640 SHARES HELD BY THE REGISTRANTS GRANTOR STOCK OWNERSHIP TRUST AND EXCLUDING 1,448,100 SHARES HELD IN TREASURY.
THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANTS CLASSES OF COMMON STOCK ON FEBRUARY 15, 2002 WAS AS FOLLOWS:
Common Stock (par value $1.00 per share) 51,175,762 shares, including 7,941,640 shares held by the Registrants Grantor Stock Ownership Trust and excluding 1,448,100 shares held in treasury. |
Documents Incorporated by Reference
2001 Annual Report to Stockholders (incorporated into Part II).
Notice of 2002 Annual Meeting of Stockholders and Proxy Statement (incorporated into Part III).
PART I
Item 1. BUSINESS
General
KB Home is one of the largest homebuilders in the
United States based on the number of homes delivered. We have
domestic operations in Arizona, California, Colorado, Florida,
Nevada, New Mexico and Texas, and, through a majority-owned
subsidiary, international operations in France. In January 2001,
we changed our name from Kaufman and Broad Home Corporation to
KB Home, a name which was intended to convey our strong customer
focus and commitment to helping homebuyers realize their dream
of homeownership. Founded in 1957, KB Home builds innovatively
designed homes which cater primarily to first-time and first
move-up homebuyers, generally in medium-sized developments close
to major metropolitan areas. Kaufman & Broad S.A.
(KBSA), KB Homes majority-owned French
subsidiary, builds single-family homes, high density residential
properties such as condominium complexes and commercial projects
in France. KBSA is among the largest builders in France based on
the number of homes delivered. KB Home provides mortgage banking
services to domestic homebuyers through its wholly owned
subsidiary, KB Home Mortgage Company (KBHMC).
KB Home is a Delaware corporation with principal
executive offices at the following address: 10990 Wilshire
Boulevard, Los Angeles, California 90024. The telephone number
of our corporate headquarters is (310) 231-4000 and our Internet
address is www.kbhome.com.
Markets
We delivered 24,538 units in 2001 (excluding
330 deliveries from unconsolidated joint ventures), the
highest number of units delivered during any single year in our
history. Our unit deliveries for the year ended
November 30, 2001 increased nearly 10% from the previous
years 22,392 units (excluding 455 deliveries
from unconsolidated joint ventures). During 2001, we operated an
average of 329 active communities, an increase of 2% over
2000. The average selling price of our homes was $178,000 in
2001, up 6% from 2000.
Since 1997, our unit deliveries have grown at a
compound annual rate of 21%. We believe that our strategy of
operating in high growth markets according to the principles of
our KBnxt operational business model (formerly known as KB2000)
has been a key driver in our expansion. We hope to continue to
increase our unit deliveries in future years, with our current
primary growth strategies to expand existing operations to
optimal market volume levels, while exploring entry into new
markets through acquisitions or de novo entry. Our growth could
be materially affected by various risk factors such as changes
in general economic conditions either nationally, in the U.S. or
France, or in the localized regions in which we operate or may
commence operations; job growth and employment levels; home
mortgage interest rates or consumer confidence; or disruptions
to national security in the U.S. or France, among other things.
Nevertheless, we hope to continue to grow our business in 2002.
In recent years, in addition to growing our existing businesses,
we have been active in completing acquisitions.
During 2001, we acquired Trademark Home Builders,
Inc. (Trademark), a builder of single-family homes
in Jacksonville, Florida. The acquisition marked our entry into
Florida. Also in 2001, KBSA, our majority-owned French
subsidiary, acquired Résidences Bernard Teillaud
(RBT), a France-based builder of condominiums. As a
result of the acquisition, KBSA anticipates having a leading
market position in the Rhône-Alpes region of France. KBSA
purchased four homebuilders during 2000 with operations in
Paris, Lille, Toulouse and Montpellier, France.
During the late 1990s as a result of both
organic growth and acquisitions, our homebuilding operations
became more geographically diverse. Prior to that, for
approximately a decade, we built virtually all of our homes in
the California and Paris, France markets. We believe this
increased diversity reduces the risk of financial impacts
resulting from changes in demand in individual markets. Our
principal regional markets as of November 30, 2001 were:
West Coast California;
Southwest Arizona, Nevada and New
Mexico; Central Colorado, Florida and
Texas; and France. We delivered our first homes in California in
1963, France in 1970, Nevada in 1993, Colorado in 1994, New
Mexico in 1995, Texas in 1996 and Florida in 2001. In 1994, we
also re-entered Arizona, a market in which we had operated
several years earlier.
1
To enhance our operating capabilities in regional
submarkets, we conducted our domestic homebuilding business in
2001 through five divisional offices in California, four
divisional offices in Texas, two divisional offices in Arizona,
and one divisional office in each of Colorado, Florida, Nevada
and New Mexico. In addition, we operated 15 KB Home
Studios in 2001, which are large showrooms where our customers
may select from thousands of options for their home.
Internationally, KBSA operates our construction business through
two divisional offices in France.
West Coast.
Our
West Coast region, comprised of operations in Northern and
Southern California, accounted for 23% of our total deliveries
in 2001 compared to 25% in 2000 and 28% in 1999. During the
first half of the 1990s, weak conditions for new housing
and general recessionary trends in the West Coast region along
with our desire for continued growth prompted us to begin
diversifying our business through aggressive expansion into
other western states in 1993. Since 1995, the West Coast region
housing market has improved with the number of new housing
permits issued in the region having increased each year. In
2001, with deliveries of 5,550 units, up slightly from the
previous year, and a market share of 5%, we believe that we held
the largest market share of any homebuilder in the region.
During 2001, the average number of active communities we
operated in the region decreased 8% from the previous year to 79.
In Southern California, we conduct our
homebuilding activity in Los Angeles, Orange, Riverside, San
Bernardino, San Diego and Ventura counties. In Northern
California, our homebuilding activities are conducted in the
Central Valley, Monterey Bay, Sacramento and San Francisco
Bay-Oakland-San Jose regions.
The communities we develop in our West Coast
region consist of single-family detached homes primarily
designed for the entry-level housing market. These homes ranged
in size from approximately 1,200 to 3,700 square feet
in 2001 and sold at an average price of $283,100, well below the
regions new home average of $318,900, as a result of our
emphasis on the entry-level market. Our average selling price in
the West Coast region increased 10% in 2001 from the
previous year average of $257,000 primarily due to strategic
increases in sales prices implemented throughout the region.
Southwest.
In
the early 1990s, the greatly improved business conditions
in other western states coupled with a prolonged economic
downturn in California caused us to expand our domestic
operations outside the state. Our Southwest region, which
includes operations in Arizona, Nevada and New Mexico, accounted
for 25% of our home deliveries in 2001 compared to 26% in
both 2000 and 1999. Deliveries from our Southwest region totaled
6,238 units in 2001, up 7% from the prior year despite
the average number of active communities in the region
decreasing 5% to 74 in 2001.
We conduct our Southwest region homebuilding
activities in Phoenix and Tucson, Arizona; Las Vegas, Nevada;
and Albuquerque, New Mexico. We had also operated in Reno,
Nevada since 1999, but closed the office in 2001.
The communities we develop in our Southwest
region primarily consist of single-family detached entry-level
homes. These homes ranged in size from approximately 1,100
to 3,800 square feet in 2001 and sold at an average price
of $157,600. In the Southwest region, the average selling price
of our homes increased 9% in 2001 from $145,200 in 2000 as a
result of selected increases in sales prices in certain markets
due to favorable market conditions.
Central
. Our
Central region, which includes operations in Colorado, Florida
and Texas, accounted for 38% of our deliveries in 2001
compared to 36% in 2000 and 35% in 1999. Since delivering our
first homes in the Central region in 1994, we have substantially
grown these operations, both organically and through
acquisitions. In July 2001, we expanded into Florida through the
acquisition of Trademark, a local builder of single-family homes
in Jacksonville. Our operations in the Central region delivered
9,368 units in 2001, up 15% from 8,112 units in 2000
as active communities in the region rose 9% to 109 in
2001.
We conduct our Central region homebuilding
activities in Denver, Colorado; Jacksonville, Florida; and
Austin, Dallas, Houston and San Antonio, Texas. Based on the
number of homes we delivered in the state in 2001, we believe we
are the largest homebuilder in Texas.
The communities we develop in our Central region
consist primarily of single-family detached homes targeted at
the entry-level housing market. These homes ranged in size from
approximately 1,100 to 3,800 square feet in 2001 and
sold at an average price of $140,700, up more than 9% from
$128,600 in 2000.
France
. KBSA,
our majority-owned subsidiary, is one of the leading builders of
homes (individual attached homes in communities and condominium
units) in France. KBSAs principal market in France is the
Ile-de-France region, where it currently builds 76% of its
individual homes and 52% of its condominium units. KBSA
also has activities in the regions of Lyon, Marseille, Toulouse
and Grenoble. In 2001, housing deliveries from KBSAs
homebuilding operations
2
Prior to February 7, 2000, KBSA was wholly
owned by KB Home. On February 7, 2000, KBSA issued
5,314,327 common shares (including an over allotment option) in
an initial public offering. The offering was made in France and
elsewhere in Europe and was priced at 23 euros per share.
Since the initial public offering, KBSA has been listed on the
Premier Marché of the ParisBourse. The offering generated
total net proceeds of $113.1 million, of which
$82.9 million was used to reduce our domestic debt and
repurchase shares of our common stock. The remainder of the
proceeds was used to fund internal and external growth of KBSA.
Since the initial public offering, we have maintained a 57%
majority ownership interest in KBSA and continue to consolidate
these operations in our financial statements.
Unconsolidated Joint
Ventures
. We participate in the
development, construction and sale of residential properties and
commercial projects through a number of unconsolidated joint
ventures. These included joint ventures in Nevada, New Mexico,
and France in 2001; California, Nevada, New Mexico and France in
2000; and California, Nevada, New Mexico, Texas and France in
1999. Only a relatively small portion of our business was
conducted through unconsolidated joint ventures. In 2001, unit
deliveries from joint ventures comprised less than 2% of our
total unit deliveries for the year.
3
Selected Market
Data
. The following table sets
forth, for each of our regions, unit deliveries, average selling
prices and total construction revenues for the years ended
November 30, 2001, 2000 and 1999 (excluding the effects of
unconsolidated joint ventures).
Strategy
We operate under the principles of our KBnxt
operational business model, and have continued to introduce
complementary strategies to enhance the benefits of this model.
The KBnxt operational business model emphasizes efficiencies
generated from a more process-driven, systematic approach to
homebuilding and also focuses on gaining a deeper understanding
of customer interests and needs. Key elements of KBnxt include:
gaining a detailed understanding of customer desires and
preferences through frequent and localized surveys; emphasizing
pre-sales instead of speculative inventory; maintaining lower
average levels of in-process and standing inventory;
establishing even flow production; providing a wide spectrum of
choice to customers in terms of location, design and options;
offering low base prices; and reducing the use of sales
incentives. Since first introducing the KBnxt operational
business model in 1997, we have made significant progress in
implementing it by, among other things, focusing on the pre-sale
and backlog building strategy, developing and implementing a
rigorous and detailed customer survey program, and opening new
KBnxt communities and KB Home Studios.
In order to leverage the benefits of our KBnxt
operational business model, we have concentrated on a strategy
designed to achieve a leading position in our major markets. By
operating in fewer, larger markets at sufficiently large volume
levels, we believe we can better execute our KBnxt operational
business model and use economies of scale to increase profits.
The expected benefits of this strategy include lower land
acquisition costs, improved terms with
4
We hope to continue to increase our overall unit
deliveries in future years. Our growth strategies include
expanding existing operations to optimal market volume levels,
as well as exploring entry into new markets at high volume
levels through acquisitions or de novo entry. Growth in existing
markets will be partly driven by our ability to increase the
average number of active communities in our major markets
through the continued successful implementation of our KBnxt
operational business model. We believe these growth strategies
can be supplemented by de novo entry into new markets as we did
in Denver, Colorado; Phoenix, Arizona; Las Vegas, Nevada; and
Houston and Austin, Texas in the 1990s, and as we
announced with respect to the Tampa, Florida market in
early 2002. In addition, we continue to employ an acquisition
strategy which has enabled us to supplement growth in existing
markets and facilitate expansion into new markets. We believe
that expanding our operations through the acquisition of
existing homebuilding companies affords several benefits such as
established land positions and existing relationships with land
owners, subcontractors and suppliers not found in start-up
operations. During the last six fiscal years, we have made the
following acquisitions:
In identifying acquisition targets, we seek
homebuilders that possess the following characteristics: a
business model similar to or readily convertible to our KBnxt
operational business model; access to or control of a
significant land position to support growth; a strong management
team; and a financial condition positioned to be accretive to
earnings in the first full year following acquisition. We
believe that the combination of de novo market entries, organic
growth in existing markets and continued acquisitions fitting
these criteria will enable us to expand our operations in a
focused and disciplined manner. However, our ability to acquire
other homebuilders in the future could be affected by several
factors, including, among other things, conditions in the U.S.
securities markets, our stock price, the general availability of
appropriate acquisition candidates, pricing for such
transactions, competition among other national or regional
builders for such target companies, changes in general economic
conditions nationally and in target markets, and capital or
credit market conditions.
We regularly review our land assets and
businesses for the purpose of monetizing non-strategic or
marginal positions. We also employ stringent criteria for
prospective land acquisitions.
Local Expertise
We believe that our business requires in-depth
knowledge of local markets in order to acquire land in desirable
locations and on favorable terms, to engage subcontractors, to
plan communities keyed to local demand, to anticipate
5
Designs and Marketing
Strategies
We believe that we have been and continue to be
an innovator in the design of entry-level homes for the
first-time buyer. Our in-house Builder Services group, whose
plans are protected by copyright, has been successful in
creating distinctive design features that meet the core demands
and needs of our customers. In 2001, we continued to employ our
KBnxt operational business model, seeking to design homes that
kept construction costs and base prices as low as possible while
achieving high quality levels and promoting customer choice.
Certain elements of the KBnxt operational
business model include achieving an in depth understanding of
customer desires and preferences through detailed market surveys
and providing a wide spectrum of choice to customers in terms of
location, design and options. Our communities offer entry-level
homebuyers an abundance of choices and options which allows
customers to customize their home to an extent not typically
available with other entry-level builders. After selecting a
floorplan and homesite that meet their needs, our buyers visit
our KB Home Studios to select options for their home, the cost
of which may be rolled into their new home mortgages. Our KB
Home Studios, which are typically approximately
10,000 square feet but can be as large as our 21,000 square
foot facility in Las Vegas, Nevada, are located separately from
our divisional business offices. These studios offer customers
more than 5,000 options from floor plans to
fireplaces to garage doors in a retail environment
convenient to multiple communities. Our personnel are available
at the studios to assist homebuyers in selecting options and
upgrades.
We have an aggressive marketing approach which
serves to heighten our profile among consumers and the financial
community. We market our homes to prospective buyers through
various types of media, including newspaper advertisements,
billboards and direct mail. KB Home billboards dot the highways
and streets near our neighborhoods, and our flyers and
doorhangers are fixtures at apartment complexes and mall parking
lots. We also extend our marketing programs beyond these more
traditional approaches through the use of television and radio
advertising, off-site telemarketing and large-scale promotions.
During 2001, we continued to expand our media and promotional
menu by introducing an e-mail marketing campaign and a full
half-hour infomercial in both English and Spanish. We also held
unique promotional events during the year where we teamed up
with high profile companies such as Krispy Kreme and
InNOut Burger to host activities at our communities.
In addition, we co-sponsored county fairs and were on hand at
major family attractions such as San Antonios SeaWorld, a
San Diego Padres baseball game and a block party in Phoenix.
We maintain market and specific community
information on our Internet Web site which can be reached at
www.kbhome.com and which received just under 13 million
page views in 2001, up 150% from 2000. We also utilize a
houseCall Center, a phone service center designed to bring
potential buyers to our communities while also simplifying the
home buying process for the consumer. The houseCall
TM
center also conducts some telephone surveys for us. The
houseCall Center can be reached at 1-888-KB-HOMES. In
recent years, we have been enhancing the richness of up-to-date
information available at www.kbhome.com and fully integrating
our Web site with the houseCall center, the KB Home
Studios and all sales offices; developing strategic alliances
that will enable us to provide new products and services to
homebuyers; utilizing business-to-business resources such as the
KBbid program to create cost and time savings for us; and
increasing our ability to cross-sell communities through data
collection and retrieval, while protecting the privacy of our
Web site visitors.
In France, we created a village concept through
the elimination of front-yard walls and the extensive use of
landscaping. We also introduced to the French market the
American concept of a master bedroom suite, as well as walk-in
closets, built-in kitchen cabinetry and two-car garages. We
believe that in each of our residential markets, our value
engineering enables us to offer appealing and well-designed
homes without increasing construction costs. Our French
subsidiary, KBSA, operates a 6,500 square foot new home showroom
in Paris, offering a broad choice of options to new
6
In all of our domestic and international
residential markets, the sale of homes is carried out by our
in-house sales force. We maintain on-site sales offices, which
are usually open seven days a week, and market our homes
principally through the use of fully furnished and landscaped
model homes which are decorated to emphasize the distinctive
design features and the choices available to customers. Our
sales representatives are available to assist prospective buyers
by providing them with floor plans, price information and tours
of model homes. These sales representatives are experienced,
trained individuals who can provide buyers with specific
information regarding other products in the area, the variety of
financing programs available, construction schedules and
marketing and advertising plans. In all of our domestic
communities, we encourage participation of outside real estate
brokers in bringing prospective buyers to our communities. Also
in our domestic markets, our KB Homebuyers Club serves as a
resource for prospective homebuyers, providing them with helpful
information, credit counseling and the opportunity to
participate in a variety of activities.
Community Development
The community development process generally
consists of three phases: land acquisition; land development;
and home construction and sale. The normal development cycle for
a community has historically ranged from six to 24 months
in the West Coast region and is typically a somewhat shorter
duration in our Southwest and Central markets. In France, the
development cycle has historically ranged from 12 to 30 months.
Development cycles vary depending on the extent of the
government approvals required, the size of the development,
necessary site preparation, weather conditions and marketing
results.
When feasible, we acquire control of lot
positions through the use of options. In addition, we frequently
acquire finished lots within our pricing parameters, enabling us
to deliver completed homes shortly after acquisition. The total
number of lots in our domestic new home communities vary
significantly but typically range from 50 to 250 lots.
These domestic developments usually include three different
model home designs and generally offer lot sizes ranging from
approximately 3,000 to 10,000 square feet, with premium
lots often containing more square footage, views or orientation
benefits.
In prior years, we also regularly acquired
undeveloped and/or unentitled properties, often with total lots
significantly in excess of 250 lots. With the introduction of
the KBnxt operational business model, we substantially reduced
our prior practice of investing in such long-term development
projects in order to lower the operating risk associated with
such projects. In France, typical single-family developments
consist of approximately 45 to 55 lots, with average
lot sizes of 5,700 square feet.
Land Acquisition and
Development.
In accordance
with the KBnxt operational business model, a deep cross section
of homebuyers of both new and resale homes in each market are
carefully surveyed. Based upon these surveys, a marketing
strategy is developed which targets specific price points and
geographic sectors which we will pursue. We utilize an in-house
staff of land acquisition specialists at each division who carry
out extensive site selection research and analysis in order to
identify properties in desirable locations consistent with our
market strategy. In acquiring land, we consider such factors as:
current market conditions, with an emphasis on the prices of
comparable new and resale homes in the particular market;
expected sales rates; proximity to metropolitan areas;
population, industrial and commercial growth patterns; estimated
costs of completed lot development; customer preferences; and
environmental matters. Several of our highest ranking
executives, including the Chief Executive Officer, Chief
Operating Officer and Senior Vice President of Asset Management
and Acquisitions, comprise our Land Committee which
controls the commitment of our resources for all land
acquisitions and utilizes a series of specific financial and
budgetary controls in approving acquisition opportunities
identified by division land acquisition personnel. The Land
Committee employs strict standards for assessing all proposed
land purchases based, in part, upon specific discounted after
tax cash flow internal rate of return requirements and also
evaluates each divisions overall return on investment.
Extensive due diligence is also performed for each land
acquisition with the results reported to the Land Committee
prior to acquisition decisions. Our geographic expansion to
areas which generally offer lower risk for less investment in
land has resulted in more stringent criteria guiding our land
investment decisions. Consistent with our standards, we seek to
minimize, or defer the timing of, cash expenditures for new land
purchases and development by acquiring lots under option,
phasing the land purchase and lot development, relying upon
non-recourse seller financing or working with third-party land
developers. In addition, we
7
The following table shows the number of lots we
owned in various stages of development and under option
contracts in our principal markets as of November 30, 2001
and 2000. The table does not include acreage which has not yet
been approved for subdivision into lots. This excluded acreage
consisted of 440 acres optioned in the United States in
2001 and 627 acres owned and 376 acres optioned in the United
States in 2000.
Since implementing the KBnxt operational business
model, we have reduced the proportion of unentitled and
unimproved land in our portfolio. In addition, we have continued
to focus on purchasing raw land under options which require
little or no initial payments, or pursuant to purchase
agreements in which our obligations are contingent upon our
being satisfied with the feasibility of developing and selling
homes. During the option period of our acquisition agreements,
we perform technical, environmental, engineering and entitlement
feasibility studies and seek to obtain necessary government
approvals. The use of such option arrangements allows us to
evaluate and obtain regulatory approvals for a project, to
reduce our financial commitments, including interest and other
carrying costs, and to minimize land inventories. It also
improves our capacity to estimate costs accurately, an important
element in planning communities and pricing homes. We typically
purchase amounts sufficient for our expected production needs
and do not purchase land for speculative investment.
In France, despite the improvement in the French
real estate market, KBSA also employs conservative strategies,
including a greater emphasis on the entry-level market segment
and generally restrictive policies regarding land acquisition.
Home Construction and
Sale.
Following the
purchase of land and, if necessary, the completion of the
entitlement process, we typically begin marketing homes and
constructing model homes. The time required for construction of
our homes depends on the weather, time of year, local labor
situations, availability of materials and supplies and other
factors. The construction of production homes is generally
contingent upon customer orders to minimize the costs and risks
of standing inventory. Our KBnxt operational business model
emphasizes pre-selling, maintaining stringent control of
production inventory and reducing unsold inventory. The
pre-selling of homes benefits homebuyers by allowing them to
personalize their homes by selecting from a wider range of
customizing options. As a result of our KBnxt operational
business model pre-sale and backlog building strategies, the
percentage of sold inventory in production in our domestic
operations has increased dramatically and was approximately 80%
at year-end 2001.
We act as the general contractor for virtually
all of our communities and hire subcontractors for all
production activities. The use of subcontractors enables us to
reduce our investment in direct labor costs, equipment and
facilities. Where practical, we use mass production techniques,
and prepackaged, standardized components and materials to
streamline the on-site production phase. During the early
1990s, we developed systems for national and regional
purchasing of certain building materials, appliances and other
items to take advantage of economies of scale and to reduce
costs. At all stages of production, our own administrative and
on-site supervisory personnel coordinate the activities of
subcontractors and subject their work to quality and cost
controls. As part of our KBnxt strategies, we have also
emphasized even flow production methods to enhance
the quality of our homes, minimize production costs and improve
the predictability of our revenues and earnings.
8
We generally price our homes in a given community
only after we have entered into contracts for the construction
of such homes with subcontractors for that community, an
approach which improves our ability to estimate gross profits
accurately. Wherever possible, we seek to acquire land and
construct homes at costs which allow selling prices to be set at
levels below immediate competitors on a per square foot basis,
while maintaining appropriate gross margins.
Our division personnel provide assistance to
homebuyers during all phases of the homebuying process and after
the home is sold. The coordinated efforts of sales
representatives, KB Home Studio consultants, on-site
construction superintendents and post-closing customer service
personnel in the customers homebuying experience is
intended to provide high levels of customer satisfaction and
lead to enhanced customer retention and referrals. In our
domestic homebuilding operations, we provide customers with a
limited home warranty program administered by personnel in each
of our divisions. This arrangement is designed to give our
customers prompt and efficient post-delivery service directly
from KB Home. In all of our domestic markets, our limited
warranty program covers certain repairs, which may be necessary
following new home construction, for one or two year periods and
covers structural integrity for a period of ten years.
Backlog
Sales of our homes are made pursuant to standard
sales contracts which generally require a customer deposit at
the time of execution and an additional payment upon mortgage
approval. Subject to particular contract provisions, we
generally permit customers to cancel their obligations and
obtain refunds of their deposits in the event mortgage financing
is unobtainable within a specified period of time.
Backlog consists of homes for which we have
entered into a sales contract but have not yet delivered. Ending
backlog represents the number of units in backlog from the
previous period plus the number of net orders (sales made less
cancellations) taken during the current period minus unit
deliveries made during the current period. The backlog at any
given time will be affected by cancellations which most commonly
result from the inability of a prospective purchaser to obtain
financing. Historically, our cancellation rates have tended to
increase during difficult economic periods. In addition,
deliveries of new homes typically increase from the first to the
fourth quarter in any year.
Our backlog at November 30, 2001, excluding
the effects of unconsolidated joint ventures, reached a new
year-end record of 11,127 units, up 5% from the
10,559 backlog units at year-end 2000. Our backlog ratio
was 174% at both year-end 2001 and year-end 2000. (Backlog ratio
is defined as the ratio of beginning unit backlog to actual
deliveries in the succeeding quarter.) Domestically, despite a
7% decline in net orders in the fourth quarter of 2001 in
the wake of the September 11th tragedy, unit backlog at
November 30, 2001 was higher by 4% compared to
November 30, 2000. The success of communities designed
under our KBnxt operational business model and our continued
emphasis on pre-sales contributed to the increase in domestic
backlog levels. Internationally, net orders in France increased
38% in the fourth quarter of 2001 from the year-earlier quarter.
As a result, unit backlog in France was 11% higher at
November 30, 2001 compared to November 30, 2000. This
increase was mainly due to substantial improvement in the French
housing market and the acquisition of RBT completed during the
year.
9
The following table sets forth net orders, unit
deliveries and ending backlog relating to sales of homes and
homes under contract for each quarter during the three-year
period ended November 30, 2001. The information in the
table excludes activity related to unconsolidated joint
ventures. Activity associated with unconsolidated joint ventures
included net orders, unit deliveries and ending backlog of 220,
330, and 98, respectively, for the year ended November 30,
2001; 444, 455 and 208, respectively, for the year ended
November 30, 2000; and 38, 38 and 219,
respectively, for the year ended November 30, 1999.
Land and Raw Materials
We believe that our current supply of land is
sufficient for our reasonably anticipated needs over the next
several years, and that we will be able to acquire land on
acceptable terms for future housing developments absent great
changes in current land acquisition market conditions. The
principal raw materials used in the construction of our homes
are concrete and forest products. (In France, the principal
materials used in the construction of our commercial buildings
are steel, concrete and glass). In addition, we use a variety of
other construction materials, including sheetrock, plumbing and
electrical items. We attempt to maintain efficient operations by
utilizing standardized materials which are commercially
available on competitive terms from a variety of sources. In
addition, our centralized or regionalized purchasing of certain
building materials, appliances and fixtures, allows us to
benefit from large quantity purchase discounts for our domestic
operations. When possible, we make bulk purchases of such
products at favorable prices from suppliers and often instruct
subcontractors to submit bids based on such prices.
Land Sales
In the normal course of business, we sell land
which either can be sold at an advantageous price due to market
conditions or does not meet our marketing needs. Such property
may consist of land zoned for commercial use which is part of a
larger parcel being developed for single-family homes or in
areas where we may consider our inventory to be excessive.
Generally, land sales fluctuate with our decisions to maintain
or decrease our land ownership position in certain markets based
upon the volume of our holdings, the strength and number of
competing developers in particular markets at given points in
time, the availability of land in markets we serve and
prevailing market conditions. Land sale revenues totaled
$64.8 million in 2001, $100.5 million in 2000 and
$37.8 million in 1999. The results for 2001 and 1999 are
more representative of our typical historical land sales
activity levels. In contrast, land sale revenues were higher in
2000 as a result of our adoption of an asset repositioning
strategy in late 1999, which included the identification and
sale of non-core assets.
10
Customer Financing KB Home
Mortgage Company
On-site personnel at KB Homes
communities in the United States facilitate sales by offering to
arrange financing for prospective customers through KBHMC. We
believe that the ability to offer customers financing on firm,
competitive terms as a part of the sales process is an important
factor in completing sales.
KBHMCs business primarily consists of
providing KB Homes domestic customers with
competitive financing and coordinating and expediting the loan
origination transaction through the steps of loan application,
loan approval and closing. KBHMC has its headquarters in Los
Angeles and operates regional mortgage centers in
Las Vegas, Nevada; and San Antonio, Texas. During 2001,
KBHMC also operated a regional mortgage center in Fairfield,
California but consolidated these operations into one of the
other regional mortgage centers in January 2002.
KBHMCs principal sources of revenues are:
(i) interest income earned on mortgage loans during the period
they are held by KBHMC prior to their sale to investors; (ii)
net gains from the sale of loans; (iii) loan servicing fees; and
(iv) revenues from the sale of the rights to service loans.
KBHMC is approved by the Government National
Mortgage Association (GNMA) as a seller-servicer of
Federal Housing Administration (FHA) and Veterans
Administration (VA) loans. A portion of the
conventional loans originated by KBHMC (i.e., loans other than
those insured by FHA or guaranteed by VA) qualify for inclusion
in loan guarantee programs sponsored by Fannie Mae or the
Federal Home Loan Mortgage Corporation (FHLMC).
KBHMC arranges for fixed and adjustable rate, conventional,
privately insured mortgages, FHA-insured or VA-guaranteed
mortgages, and mortgages funded by revenue bond programs of
states and municipalities. In 2001, 57% of the mortgages
originated for the Companys customers were conventional
(most of which conformed to Fannie Mae and FHLMC guidelines),
37% were FHA-insured or VA-guaranteed (a portion of which are
adjustable rate loans), 4% were funded by mortgage revenue bond
programs and 2% were adjustable rate mortgages
(ARMs) provided through commitments from
institutional investors. The percentages set forth above change
from year to year reflecting then-current fixed interest rates,
introductory rates for ARMs, housing prices and other economic
conditions. In 2001, KBHMC originated loans for 83% of the
Companys domestic home deliveries to end users who
obtained mortgage financing.
KBHMC is a delegated underwriter under the FHA
Direct Endorsement and VA Automatic programs in accordance with
criteria established by such agencies. Additionally, KBHMC has
delegated underwriting authority from Fannie Mae and FHLMC. As a
delegated underwriter, KBHMC may underwrite and close mortgage
loans under programs sponsored by these agencies without their
prior approval, which expedites the loan origination process.
KBHMC customarily sells nearly all of the loans
that it originates. Loans are sold either individually or in
pools to GNMA, Fannie Mae or FHLMC or against forward
commitments to institutional investors, including banks and
savings and loan associations.
KBHMC typically sells servicing rights on a
regular basis for substantially all of the loans it originates.
However, for a small percentage of loans, and to the extent
required for loans being held for sale to investors, KBHMC
services the mortgages that it originates. Servicing includes
collecting and remitting loan payments, accounting for principal
and interest, making inspections of mortgaged premises as
required, monitoring delinquent mortgages and generally
administering the loans. KBHMC receives fees for servicing
mortgage loans, generally equal to .250% per annum on the
declining principal balances of the loans.
We also assist our customers in France by
arranging financing through third-party lenders, primarily major
French banks with which KBSA has established relationships. In
some cases, French customers qualify for certain
government-assisted, home financing programs. A second mortgage
is usually handled through a government agency. A homebuyer in
France may also have a third mortgage provided through credit
unions or other employee groups.
Employees
All of our operating divisions operate
independently with respect to day-to-day operations within the
context of the KBnxt operational business model. All land
purchases and other significant construction, mortgage banking
and similar operating decisions must be approved by the
operating division and/or senior corporate management.
11
We employ a trained staff of land acquisition
specialists, architects, planners, engineers, construction
supervisors, marketing and sales personnel and finance and
accounting personnel, supplemented as necessary by outside
consultants, who guide the development of communities from their
conception through the marketing and sale of completed homes.
At January 31, 2002, the Company had
approximately 3,700 full-time employees in its operations,
including approximately 400 in KBHMCs operations. No
employees are represented by a collective bargaining agreement.
Construction and mortgage banking personnel are
paid performance bonuses based on individual performance and
incentive compensation based on the performance of the
applicable operating division or subsidiary. Our corporate
personnel are typically paid performance bonuses based on
individual performance and incentive compensation based on the
overall performance of KB Home. Each operating division or
subsidiary is given autonomy regarding employment of personnel
within policy guidelines established by our senior management.
Competition and Other Factors
We expect the use of the KBnxt operational
business model, particularly the aspects which involve gaining a
deeper understanding of customer interests and needs and
offering a wide range of choice to homebuyers, to provide us
with long-term competitive advantages. The housing industry is
highly competitive, and we compete with numerous housing
producers ranging from regional and national firms to small
local builders primarily on the basis of price, location,
financing, design, reputation, quality and amenities. In
addition, we compete with housing alternatives other than new
production homes, including existing homes and rental housing.
In certain markets and at times when housing demand is high, we
also compete with other builders to hire subcontractors.
Financing
We do not generally finance the development of
our domestic communities with proceeds of loans specifically
obtained for, or secured by, particular communities, i.e.,
project financing. Instead, financing of our domestic operations
has been primarily generated from results of operations, public
debt and equity financing, and borrowings under our domestic
unsecured credit facility with various banks. Financing of KBSA
has been primarily generated from results of operations and
borrowings from KBSAs unsecured committed credit lines
with a series of foreign banks. Furthermore, the initial public
offering of KBSA, completed in February 2000, has
strengthened the French business by providing it with access to
additional capital to support its growth. As a result of diverse
external sources of financing, we were not adversely affected by
the tight credit conditions that much of the homebuilding
industry experienced during the recession of the early to
mid-1990s, both domestically and in France.
On February 8, 2001, pursuant to our
previously existing universal shelf registration statement filed
with the Securities and Exchange Commission on December 5,
1997 (the 1997 Shelf Registration), we issued
$250 million of 9 1/2% senior subordinated notes at
100% of the principal amount of the notes. The notes, which are
due February 15, 2011 with interest payable semi-annually,
represent unsecured obligations of KB Home and are
subordinated to all existing and future senior indebtedness of
KB Home. The notes are redeemable at the option of
KB Home, in whole, or in part, at 104.750% of their
principal amount beginning February 15, 2006, and
thereafter at prices declining annually to 100% on and after
February 15, 2009. Proceeds from the issuance of the notes
were used to pay down bank borrowings.
On October 15, 2001, we filed a universal
shelf registration statement (as subsequently amended, the
2001 Shelf Registration) with the Securities and
Exchange Commission for up to $750 million of
KB Homes debt and equity securities, which amount
ultimately included $50 million in unused capacity under
the 1997 Shelf Registration after giving effect to the issuance
of $200 million of 8 5/8% senior subordinated notes in
December 2001. The 2001 Shelf Registration was declared
effective on January 28, 2002 and provides that securities
may be offered from time to time in one or more series and in
the form of senior, senior subordinated or subordinated debt,
preferred stock, common stock, stock purchase contracts, stock
purchase units and/or warrants to purchase such securities.
On December 14, 2001, pursuant to the 1997
Shelf Registration, we issued $200 million of 8 5/8%
senior subordinated notes at 100% of the principal amount of the
notes. The notes, which are due December 15, 2008, with
interest payable semi-annually, represent unsecured obligations
of KB Home and are subordinated to all existing and future
senior indebtedness of KB Home. Before December 15,
2004, we may redeem up to 35% of the aggregate
12
KBHMC competes with other mortgage lenders,
including national, regional and local mortgage bankers, savings
and loan associations and other financial institutions, in the
origination, sale and servicing of mortgage loans. Principal
competitive factors include interest rates and other features of
mortgage loan products available to the consumer. KBHMCs
operations are financed primarily through a $300 million
revolving Mortgage Warehouse Facility and a $200 million
Master Loan and Security Agreement with an investment bank.
During the fourth quarter of 2001, KBHMC negotiated a temporary
increase in the maximum credit amount available under the Master
Loan and Security Agreement to $325 million through
December 31, 2001. The temporary increase was necessary to
meet KBHMCs increased volume of mortgage loan
originations. We believe KBHMC has the ability to access
additional sources of funding both on a short and long-term
basis, if needed.
Regulation and Environmental Matters
It is our policy to use third-party environmental
consultants to investigate land considered for acquisition for
environmental risks and to require disclosure from land sellers
of known environmental risks. Despite these activities, there
can be no assurance that we will avoid material liabilities
relating to the removal of toxic wastes, site restoration,
monitoring or other environmental matters affecting properties
currently or previously owned by us. No estimate of such
potential liabilities can be made although we may, from time to
time, purchase property which requires modest environmental
clean-up costs after appropriate due diligence. In such
instances, we take steps prior to acquisition to gain assurance
as to the precise scope of work required and costs associated
with removal, site restoration and/or monitoring, using detailed
investigations by environmental consultants. To the extent such
contamination or other environmental issues have occurred in the
past, we believe we may be able to recover restoration costs
from third parties, including, but not limited to, the
generators of hazardous waste, land sellers or others in the
prior chain of title and/or insurers. Utilizing such policies,
we anticipate that it is not likely that environmental clean-up
costs will have a material effect on our future results of
operations or financial position. We have not been notified by
any governmental agency of any claim that any of the properties
owned or formerly owned by us are identified by the
Environmental Protection Agency as being a Superfund
clean-up site requiring clean-up costs, which could have a
material effect on our future financial position or results of
operations. Costs associated with the use of environmental
consultants are not material to our results of operations.
Risk Factors
We want you to be aware that the following
important factors could adversely impact our homebuilding and
mortgage lending operations. These factors could cause our
actual results to differ materially from the forward-looking and
other statements that we make in registration statements,
periodic reports and other filings with the Securities and
Exchange Commission, and that we make from time to time in our
news releases, annual reports and other written communications,
as well as oral forward-looking and other statements made from
time to time by our representatives.
Our business is cyclical and is significantly
impacted by changes in general and local economic
conditions.
Our business is substantially affected by changes
in national and general economic factors outside of our control,
such as:
13
The cyclicality of our business is also highly
sensitive to changes in economic conditions that can occur on a
local or regional basis, such as changes in:
Weather conditions and natural disasters such as
earthquakes, hurricanes, tornadoes, floods, droughts, fires and
other casualties can harm our homebuilding business on a local
or regional basis.
Fluctuating lumber prices and shortages, as well
as shortages or price fluctuations in other important building
materials, can have an adverse effect on our homebuilding
business.
Similarly, labor shortages or unrest among key
trades, such as carpenters, roofers, electricians and plumbers,
can delay the delivery of our homes and increase our costs.
The difficulties described above can cause demand
and prices for our homes to diminish or cause us to take longer
and incur more costs to build our homes. We may not be able to
recover these increased costs by raising prices because the
price of each home is usually set several months before the home
is delivered, as our customers typically sign their home
purchase contracts before construction has even begun on their
homes. In addition, some of the difficulties described above
could cause some homebuyers to cancel their home purchase
contracts altogether.
Our success depends on the availability of
improved lots and undeveloped land that meet our land investment
criteria.
The availability of finished and partially
developed lots and undeveloped land for purchase that meet our
internal criteria depends on a number of factors outside our
control, including land availability in general, competition
with other homebuilders and land buyers for desirable property,
inflation in land prices and zoning, allowable housing density
and other regulatory requirements. Should suitable lots or land
become less available, the number of homes we may be able to
build and sell could be reduced, and the cost of land could be
increased, perhaps substantially, which could adversely impact
our results of operations.
Home prices and sales activity in particular
regions of the Western, Southwestern and Central United States
impact our results of operations because our business is
concentrated in these markets.
Home prices and sales activity in some of our key
markets have declined from time to time for market-specific
reasons, including adverse weather or economic contraction due
to, among other things, the failure or decline of key industries
and employers. If home prices or sales activity decline in one
or more of the key markets in which we operate, our costs may
not decline at all or at the same rate and, as a result, our
overall results of operations may be adversely impacted.
Interest rate increases or changes in federal
lending programs could lower demand for our homes and adversely
impact our mortgage lending operations.
Nearly all of our customers finance the purchase
of their homes, and a significant majority of these customers
arrange their financing through our mortgage lending subsidiary.
Increases in interest rates or decreases in availability of
mortgage financing would increase monthly mortgage costs for our
potential homebuyers and could therefore reduce demand for our
homes and mortgages. Increased interest rates can also hinder
our ability to realize our backlog because our sales contracts
provide our customers with a financing contingency. Financing
contingencies allow customers to cancel their home purchase
contracts in the event they cannot arrange for financing at
interest rates that were prevailing when they signed their
contracts.
Because the availability of FNMA, FHLMC, FHA and
VA mortgage financing is an important factor in marketing many
of our homes, any limitations or restrictions on the
availability of those types of financing could reduce our home
sales and the lending volume at our mortgage subsidiary.
14
We are subject to substantial legal and
regulatory requirements regarding the development of land, the
homebuilding process and protection of the environment, which
can cause us to suffer delays and incur costs associated with
compliance and prohibit or restrict homebuilding activity in
some regions or areas.
Our homebuilding business is heavily regulated
and subject to increasing local, state and federal statutes,
ordinances, rules and regulations concerning zoning, resource
protection, building design, construction and similar matters.
These regulations often provide broad discretion to governmental
authorities that regulate these matters, which can result in
unanticipated delays or increases in the cost of a specified
project or a number of projects in particular markets. We may
also experience periodic delays in homebuilding projects due to
building moratoria in any of the areas in which we operate.
We are also subject to a variety of local, state
and federal statutes, ordinances, rules and regulations
concerning the environment. These laws and regulations may cause
delays in construction and delivering new homes, may cause us to
incur substantial compliance and other costs, and can prohibit
or severely restrict homebuilding activity in certain
environmentally sensitive regions or areas. In addition,
environmental laws may impose liability for the costs of removal
or remediation of hazardous or toxic substances whether or not
the developer or owner of the property knew of, or was
responsible for, the presence of those substances. The presence
of these substances on our properties may prevent us from
selling our homes and we may also be liable, under applicable
laws and regulations or lawsuits brought by private parties, for
hazardous or toxic substances on properties and lots that we
have sold in the past.
Further, a significant portion of our business is
conducted in California, which is one of the most highly
regulated and litigious states in the country. Therefore, our
potential exposure to losses and expenses due to new laws,
regulations or litigation may be greater than other homebuilders
with a less significant California presence.
Because of our French business, we are also
subject to regulations and restrictions imposed by the
government of France concerning investments by non-French
companies, such as us, in businesses in France, as well as to
French laws and regulations similar to those discussed above.
Our mortgage operations are heavily regulated and
subject to the rules and regulations promulgated by a number of
governmental and quasi-governmental agencies. We are also
subject to federal and state statutes and regulations which,
among other things, prohibit discrimination, establish
underwriting guidelines which include obtaining inspections and
appraisals, require credit reports on prospective borrowers and
fix maximum loan amounts. A finding that we had materially
violated any of the foregoing laws could have an adverse effect
on our results of mortgage operations.
We are subject to a Consent Order that we entered
into with the Federal Trade Commission in 1979. Pursuant to the
Consent Order, we provide explicit warranties on the quality of
our homes, follow certain guidelines in advertising and provide
certain disclosures to prospective purchasers of our homes. A
finding that we have significantly violated the Consent Order
could result in substantial liability and could limit our
ability to sell homes in certain markets.
We build homes in highly competitive markets,
which could hurt our future operating results.
We compete in each of our markets with a number
of homebuilding companies for homebuyers, land, financing, raw
materials and skilled management and labor resources. Our
competitors include other large national homebuilders, as well
as smaller regional and local builders that can have an
advantage in local markets because of long-standing
relationships they may have with local labor or land sellers. We
also compete with other housing alternatives, such as existing
homes and rental housing.
These competitive conditions can:
Any of these competitive conditions can adversely
impact our revenues, increase our costs and/or impede the growth
of our local or regional homebuilding businesses.
15
Our mortgage lending operation competes with
other mortgage lenders, including national, regional and local
mortgage bankers, savings and loan associations and other
financial institutions. Mortgage lenders with greater access to
capital markets or those with less rigorous lending criteria can
sometimes offer lower interest rates than we can, which can
diminish our ability to compete and adversely impact the results
of operations from our mortgage lending business.
Because of the seasonal nature of our
business, our quarterly operating results fluctuate.
We have experienced seasonal fluctuations in
quarterly operating results. We typically do not commence
significant construction on a home before a sales contract has
been signed with a homebuyer. A significant percentage of our
sales contracts are made during the spring and summer months.
Construction of our homes typically requires approximately three
months and weather delays that often occur during late winter
and early spring may extend this period. As a result of these
combined factors, we historically have experienced uneven
quarterly results, with lower revenues and operating income
generally during the first and second quarters of our fiscal
year.
Our leverage may place burdens on our ability
to comply with the terms of our indebtedness, may restrict our
ability to operate and may prevent us from fulfilling our
obligations.
The amount of our debt could have important
consequences to you. For example, it could:
Our ability to meet our debt service and other
obligations will depend upon our future performance. We are
engaged in businesses that are substantially affected by changes
in economic cycles. Our revenues and earnings vary with the
level of general economic activity in the markets we serve. Our
businesses could also be affected by financial, political,
business and other factors, many of which are beyond our
control. The factors that affect our ability to generate cash
can also affect our ability to raise additional funds through
the sale of debt and/or equity securities, the refinancing of
debt or the sale of assets. Changes in prevailing interest rates
may also affect our ability to meet our debt service
obligations, because borrowings under our bank credit facilities
bear interest at floating rates. A higher interest rate on our
debt could adversely affect our operating results.
Our business may not generate sufficient cash
flow from operations and borrowings may not be available to us
under our bank credit facilities in an amount sufficient to
enable us to pay our debt service obligations or to fund our
other liquidity needs. We may need to refinance all or a portion
of our debt on or before maturity, which we may not be able to
do on favorable terms or at all.
Under the terms of our bank credit facilities,
our debt service payment obligations are defined as Consolidated
Interest Expense. As defined, Consolidated Interest Expense for
the years ended November 30, 2001 and 2000 were
$113.8 million and $109.6 million, respectively. On a
pro forma basis, after giving effect to the issuance on
December 14, 2001 of our $200 million 8 5/8%
Senior Subordinated Notes due 2008 and the redemption on
December 31, 2001 of our $175 million 9 3/8%
Senior Subordinated Notes due 2003, our debt service payment
obligations for the years ended November 30, 2001 and 2000
would have been $114.6 million and $110.4 million,
respectively.
We may have difficulty in continuing to obtain
the additional financing required to operate and develop our
business.
Our homebuilding operations require significant
amounts of cash and/or available credit. It is not possible to
predict the future terms or availability of additional capital.
Moreover, our outstanding domestic public debt, as well as
16
Our future growth may be limited by
contracting economies in the markets in which we currently
operate, our inability to find appropriate acquisition
candidates, or our consummation of acquisitions that may not be
successfully integrated or may not achieve expected
benefits.
Our future growth and results of operations could
be adversely affected if the markets in which we currently
operate do not continue to support the expansion of our existing
business or if we are unable to identify suitable acquisition
opportunities in new markets. Over the last several years, there
has been some significant consolidation in the homebuilding
industry, which has made it somewhat more difficult for us to
identify appropriate acquisition candidates in new markets and
has increased competition for acquisition candidates. If we do
consummate acquisitions in the future, we may not be successful
in integrating the operations of the acquired businesses,
including their product lines, dispersed operations and distinct
corporate cultures. Our inability to grow in existing markets or
find appropriate acquisition opportunities in new markets, or
our failure to successfully manage future acquisitions, would
limit our ability to grow and would adversely impact our future
operating results.
Because we build homes in France, some of our
revenues and earnings are subject to foreign currency and
economic risks.
A portion of our construction operations are
located in France. As a result, our financial results are
affected by fluctuations in the value of the U.S. dollar as
compared to the Euro and changes in the French economy to the
extent those changes affect the homebuilding market there. We do
not currently use any currency hedging instruments or other
strategies to manage currency risks related to fluctuations in
the value of the U.S. dollar or the Euro.
International instability, and future
terrorist acts against or similar adverse developments involving
the United States or France, could have a material adverse
effect on our operations.
The September 11, 2001 terrorist acts
against the United States and the subsequent U.S. military
response initially resulted in generalized economic uncertainty.
In the weeks immediately following the September 11th
attacks, net orders for our homes fell sharply and cancellations
increased, although they have subsequently returned to levels
that compare more favorably on a year-over-year basis. We do not
expect the adverse developments immediately following
September 11th to have a material effect on our overall
future results of operations. Despite this apparent rebound,
considerable instability continues and consumer confidence is
uneven. These generalized conditions or future adverse
developments in the war against terrorism, future terrorist acts
against the U.S. or France or increased international
instability in general, could result in a material long-term
decrease in our net orders and an increase in cancellations,
which could materially adversely affect our operating results or
result in a decline in the market value of our securities.
Item 2. PROPERTIES
KB Homes executive offices are in leased
premises at 10990 Wilshire Boulevard, Los Angeles,
California. Our housing operations are principally conducted
from leased premises located in Phoenix and Tucson, Arizona;
Fremont, Irvine, Los Angeles, Pleasanton, Pomona, San Diego
and Vacaville, California; Denver, Colorado; Jacksonville,
Florida; Las Vegas, Nevada; Albuquerque, New Mexico;
Austin, Dallas and Houston, Texas; and Paris, France.
Our mortgage banking subsidiary leases executive
offices in Los Angeles, California and a regional office in
Las Vegas, Nevada.
17
Our homebuilding and mortgage banking operations
in San Antonio, Texas are principally conducted from premises
which we own.
We believe that such properties, including the
equipment located therein, are suitable and adequate to meet the
requirements of its businesses.
Item 3. LEGAL
PROCEEDINGS
We are involved in litigation incidental to our
business. These cases are in various procedural stages and,
based on reports of counsel, it is managements opinion
that provisions or reserves made for potential losses are
adequate and any liabilities or costs arising out of currently
pending litigation will not have a materially adverse effect
upon our financial position or results of operations.
Item 4. SUBMISSION OF MATTERS
TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth
quarter of 2001 to a vote of security holders, through the
solicitation of proxies or otherwise.
18
EXECUTIVE OFFICERS OF THE REGISTRANT
The following sets forth certain information
regarding the executive officers of KB Home as of
January 31, 2002:
19
Years Ended November 30,
2001
2000
1999
5,550
5,476
6,323
23
%
25
%
28
%
$
283,100
$
257,000
$
246,000
$
1,605.9
$
1,466.4
$
1,579.2
6,238
5,832
5,801
25
%
26
%
26
%
$
157,600
$
145,200
$
141,900
$
993.0
$
862.8
$
830.4
9,368
8,112
7,809
38
%
36
%
35
%
$
140,700
$
128,600
$
121,100
$
1,326.1
$
1,065.8
$
950.2
3,382
2,972
2,489
14
%
13
%
11
%
$
146,300
$
158,700
$
164,700
$
576.7
$
475.5
$
412.3
24,538
22,392
22,422
$
178,000
$
168,300
$
166,500
$
4,501.7
$
3,870.5
$
3,772.1
(1)
Total construction revenues include revenues from
residential development, commercial activities and land sales.
(2)
Average selling prices and total construction
revenues for foreign operations have been translated into U.S.
dollars using weighted average exchange rates for each period.
Entity Acquired
Date Acquired
Markets
March 1996
San Antonio, Texas
July 1997
Paris, France
March 1998
Austin, Houston and San Antonio, Texas
March 1998
Denver, Colorado
April 1998
Phoenix and Tucson, Arizona
August 1998*
Houston, Texas
January 1999
Las Vegas, Nevada and Northern Nevada; Southern
California and the greater Sacramento area of California
August 1999
Paris, France
January 2000
Paris, France
July 2000
Paris, France
July 2000
Lille, France
November 2000
Toulouse and Montpellier, France
July 2001
Jacksonville, Florida
September 2001
Grenoble, Lyon, Chambéry and Annecy, France
*
In August 1998, we acquired a majority interest
in General Homes; we acquired the remaining minority interest in
January 1999, bringing our total ownership interest in General
Homes to 100% at that time.
Total Lots
Homes/Lots in
Land Under
Lots Under
Owned or
Production
Development
Option
Under Option
2001
2000
2001
2000
2001
2000
2001
2000
5,665
6,324
4,783
6,057
5,555
8,475
16,003
20,856
6,491
5,637
1,486
2,719
12,265
6,395
20,242
14,751
12,882
10,406
6,536
7,245
18,299
12,854
37,717
30,505
4,498
2,198
5,059
6,119
2,739
4,367
12,296
12,684
29,536
24,565
17,864
22,140
38,858
32,091
86,258
78,796
Net
Unit
Ending
Orders
Deliveries
Backlog*
6,344
4,528
12,375
7,370
5,723
14,022
5,665
6,473
13,464
5,336
7,814
11,127
5,325
4,565
9,473
7,837
5,042
12,268
5,357
5,710
12,115
5,312
7,075
10,559
5,621
4,279
9,216
7,219
5,139
11,296
5,347
6,103
10,809
4,869
6,901
8,558
*
Backlog amounts for 2001 have been adjusted to
reflect the acquisitions of Trademark and RBT. Therefore,
backlog amounts at November 30, 2000 combined with net
order and delivery activity for 2001 will not equal ending
backlog at November 30, 2001. Similarly, backlog amounts
for 2000 were adjusted to reflect four acquisitions that year in
France and backlog amounts for 1999 were adjusted to reflect the
acquisitions of Lewis Homes and Park.
short and long term interest rates;
the availability of financing for homebuyers;
consumer confidence;
federal mortgage financing programs; and
federal income tax provisions.
housing demand;
population growth;
employment levels and job growth; and
property taxes.
make it difficult for us to acquire desirable
land which meets our land buying criteria;
cause us to offer or to increase our sales
incentives or price discounts; and
result in reduced sales.
limit our ability to obtain future financing for
working capital, capital expenditures, acquisitions, debt
service requirements or other requirements;
require us to dedicate a substantial portion of
our cash flow from operations to the payment of our debt and
reduce our ability to use our cash flow for other purposes;
impact our flexibility in planning for, or
reacting to, changes in our business;
place us at a competitive disadvantage because we
have more debt than some of our competitors; and
make us more vulnerable in the event of a
downturn in our business or in general economic conditions.
Year
Assumed
Present Position at
Present
Other Positions and Other Business Experience within the
Name
Age
January 31, 2002
Position
Last Five Years(1)
From To
56
Chairman and Chief Executive Officer
1993
President
1986-2001
46
Chief Operating Officer and
1999
Senior Vice President and Regional General Manager
1998-1999
Executive Vice President
President, KB Home Phoenix Inc.
1995-1998
57
Chairman and Chief Executive
1999
President, European Operations
1992-1999
Officer, Kaufman & Broad
President, Kaufman & Broad S.A.
1983-1999
S.A.
58
Regional General Manager
1998
Senior Vice President
1998-2001
President, KB Home Coastal Inc.
1997-Present
President, KB Home San Diego Inc.
1987-Present
43
Regional General Manager
2000
President, KB Home Phoenix Inc.
1998-Present
Senior Vice President, KB Home Phoenix Inc.
1997-1998
Vice President, Operations, KB Home Phoenix
Inc.
1995-1997
45
Regional General Manager
2000
President, KB Home North Bay Inc.
2000-Present
President, KB Home South Bay Inc.
1997-Present
Executive Vice President, KB Home South Bay
Inc.
1996-1997
54
Regional General Manager
1999
Senior Vice President
1999-2001
President, KB Home San Antonio
1998-1999
Executive Vice President, KBSA, Inc.
1997-1998
Vice President, Sales and Marketing, KBSA, Inc.
1995-1997
43
Senior Vice President and
2001
Vice President and Controller
1992-2001
Controller
51
Regional General Manager
2000
President, KB Home Greater Los Angeles Inc.
2000-Present
President, KB Home North Bay Inc.
1998-2000
President, KB Home Nevada Inc.
1993-1998
41
Regional General Manager
2001
President, KB Home Austin
1999-Present
Vice President, KB Home Austin
1998-1999
Vice President of Operations, KB Home San Antonio
1996-1998
42
Senior Vice President and General Counsel
1993
53
Senior Vice President, Asset
1999
Senior Vice President, Business Development
1998-1999
Management and Acquisitions
President, KB Home Greater Los Angeles Inc.
1997-1998
Senior Vice President and Regional General Manager
1996-1998
43
Senior Vice President, Human Resources
1996
44
Regional General Manager
2000
President, KB Home Colorado Inc.
1999-Present
Vice President and Treasurer
1996-1999
(1)
All positions described were with KB Home, unless
otherwise indicated.
PART II
As of January 31, 2002, there were
1,204 holders of record of the KB Homes common
stock.
Information as to KB Homes quarterly stock
prices is included on page 68 of KB Homes 2001 Annual
Report to Stockholders, which is included as part of Exhibit 13
hereto.
Information as to the principal markets on which
KB Homes common stock is being traded and quarterly cash
dividends is included on page 68 of KB Homes 2001
Annual Report to Stockholders, which is included as part of
Exhibit 13 hereto.
Item 6. SELECTED FINANCIAL
DATA
The Five Year Summary of KB Home for the
five-year period ended November 30, 2001 is included on
page 32 of KB Homes 2001 Annual Report to
Stockholders, which is included as part of Exhibit 13
hereto. It should be read in conjunction with the consolidated
financial statements included in the KB Homes 2001 Annual
Report to Stockholders which are also included as part of
Exhibit 13 hereto.
Managements Discussion and Analysis of
Financial Condition and Results of Operations of KB Home is
included on pages 33 through 44 of KB Homes
2001 Annual Report to Stockholders, which are included as part
of Exhibit 13 hereto.
We primarily enter into debt obligations to
support general corporate purposes, including acquisitions, and
the operations of our divisions. The primary market risk facing
KB Home is the interest rate risk on our senior and senior
subordinated notes. We have no cash flow exposure due to
interest rate changes for these notes. In connection with our
mortgage banking operations, mortgage loans held for sale and
the associated Mortgage Warehouse Facility and Master Loan and
Security Agreement are subject to interest rate risk; however,
such obligations reprice frequently and are short-term in
duration and accordingly the risk is not material. Under our
current policies, we do not use interest rate derivative
instruments to manage exposure to interest rate changes other
than as disclosed in Notes 1 and 4 to the consolidated
financial statements with regard to our mortgage banking
operations. As disclosed, we use mortgage forward delivery
contracts and non-mandatory commitments to mitigate our exposure
to movements in interest rates on interest rate lock agreements
and mortgage loans held for sale. The estimated fair value of
mortgage forward delivery contracts and non-mandatory
commitments exceeded the contract value by $3.9 million at
November 30, 2001. The estimated fair value of interest
rate lock agreements was less than the contract value by
$.2 million at November 30, 2001.
The following table sets forth as of
November 30, 2001, our long-term debt obligations,
principal cash flows by scheduled maturity, weighted average
interest rates and estimated fair market value (in thousands):
A portion of our construction operations are
located in France. As a result, our financial results could be
affected by factors such as changes in the foreign currency
exchange rate or weak economic conditions in our markets. Our
earnings are affected by fluctuations in the value of the U.S.
dollar as compared to foreign currency in France, as a result of
our
20
Item 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA
The consolidated financial statements of KB Home
are included on pages 45 through 64 of KB Homes
2001 Annual Report to Stockholders, which are included as part
of Exhibit 13 hereto. Reference is made to the Index to
Financial Statements on page F-1 herein.
None.
PART III
The Notice of 2002 Annual Meeting of Stockholders
and Proxy Statement, filed pursuant to Regulation 14A under the
Securities Exchange Act of 1934, is incorporated by reference in
this Annual Report on Form 10-K pursuant to General Instruction
G(3) of Form 10-K and provides the information required under
Part III (Items 10, 11, 12 and 13) except for the
information regarding the executive officers of KB Home,
which is included in Part I on page 19 herein.
PART IV
Financial
Statements
Reference is made to the index set forth on
page F-1 of this Annual Report on Form 10-K.
Exhibits
21
22
23
Financial
Statement Schedules
Reports on Form
8-K
24
Item 5.
MARKET FOR REGISTRANTS COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
Item 7.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Item 7a.
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT
MARKET RISK
Years Ended November 30,
Fair value at
November 30,
2002
2003
2004
2005
2006
Thereafter
Total
2001
$
174,714
$
175,000
$
124,635
$
250,000
$
724,349
$
748,651
9.4%
7.8%
9.6%
9.5%
Item 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
Item 14.
FINANCIAL STATEMENTS, EXHIBITS, FINANCIAL
STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
Exhibit
No.
Description
3.1
Amended Certificate of Incorporation, filed as an
exhibit to the Companys Registration Statement
No. 33-6471 on Form S-1, is incorporated by reference
herein.
3.2
Amendment to Certificate of Incorporation, filed
as an exhibit to the Companys Registration Statement
No. 33-30140 on Form S-1, is incorporated by reference
herein.
3.3
Certificate of Designation of Series A
Participating Cumulative Preferred Stock, filed as an exhibit to
the Companys Registration Statement No. 33-30140 on
Form S-1, is incorporated by reference herein.
3.4
Certificate of Designation of Series B
Mandatory Conversion Premium Dividend Preferred Stock, filed as
an exhibit to the Companys Registration Statement
No. 33-59516 on Form S-3, is incorporated by reference
herein.
Exhibit
No.
Description
3.5
Amended Certificate of Designation of
Series B Mandatory Conversion Premium Dividend Preferred
Stock, filed as an exhibit to the Companys Registration
Statement No. 33-59516 on Form S-3, is incorporated by
reference herein.
3.6
Amended Certificate of Designation of
Series A Participating Cumulative Preferred Stock, filed as
an exhibit to the Companys Registration Statement
No. 001-09195 on Form 8-A12B, is incorporated by
reference herein.
3.7
Certificate of Ownership and Merger effective
January 17, 2001 merging KB Home, Inc. into Kaufman
and Broad Home Corporation, through which the name of the
Company was changed to KB HOME, filed as an exhibit to the
Companys 2000 Annual Report on Form 10-K, is
incorporated by reference herein.
3.8
By-Laws, as amended and restated on
January 17, 2001, to reflect the change in the
Companys name, filed as an exhibit to the Companys
2000 Annual Report on Form 10-K, is incorporated by
reference herein.
4.1
Amended Certificate of Incorporation, filed as an
exhibit to the Companys Registration Statement
No. 33-6471 on Form S-1, is incorporated by reference
herein.
4.2
Amendment to Certificate of Incorporation, filed
as an exhibit to the Companys Registration Statement
No. 33-30140 on Form S-1, is incorporated by reference
herein.
4.3
Indenture relating to 9 5/8% Senior
Subordinated Notes due 2006 between the Company and SunTrust
Bank, Atlanta, dated November 19, 1996, filed as an exhibit
to the Companys Current Report on Form 8-K dated
November 19, 1996, is incorporated by reference herein.
4.4
Specimen of 9 5/8% Senior Subordinated Notes
due 2006, filed as an exhibit to the Companys Current
Report on Form 8-K dated November 19, 1996, is
incorporated by reference herein.
4.5
Indenture relating to 7 3/4% Senior Notes
due 2004 between the Company and SunTrust Bank, Atlanta, dated
October 14, 1997, filed as an exhibit to the Companys
Current Report on Form 8-K dated October 14, 1997, is
incorporated by reference herein.
4.6
Specimen of 7 3/4% Senior Notes due 2004,
filed as an exhibit to the Companys Current Report on
Form 8-K dated October 14, 1997, is incorporated by
reference herein.
4.7
Rights Agreement between the Company and
ChaseMellon Shareholder Services, L.L.C., as Rights Agent, dated
February 4, 1999, filed as an exhibit to the Companys
Current Report on Form 8-K dated February 4, 1999, is
incorporated by reference herein.
4.8
By-Laws, as amended and restated on
January 17, 2001, to reflect the change in the
Companys name, filed as an exhibit to the Companys
2000 Annual Report on Form 10-K, is incorporated by
reference herein.
10.1
KB Home 1986 Stock Option Plan, filed as an
exhibit to the Companys Registration Statement
No. 33-6471 on Form S-1, is incorporated by reference
herein.
10.2
KB Home 1988 Employee Stock Plan, filed as an
exhibit to the definitive Joint Proxy Statement for the
Companys 1989 Special Meeting of Shareholders, is
incorporated by reference herein.
10.3
Consent Order, Federal Trade Commission Docket
No. C-2954, dated February 12, 1979, filed as an
exhibit to the Companys Registration Statement
No. 33-6471 on Form S-1, is incorporated by reference
herein.
10.4
SunAmerica Inc. Executive Deferred Compensation
Plan, approved September 25, 1985, filed as an exhibit to
SunAmerica Inc.s 1985 Annual Report on Form 10-K, is
incorporated by reference herein.
10.5
Directors Deferred Compensation Plan
established effective July 27, 1989, filed as an exhibit to the
Companys 1989 Annual Report on Form 10-K, is incorporated
by reference herein.
10.6
Settlement with Federal Trade Commission of June
27, 1991, filed as an exhibit to the Companys Current
Report on Form 8-K, dated June 28, 1991, is incorporated by
reference herein.
Exhibit
No.
Description
10.7
Amendments to the KB Home 1988 Employee Stock
Plan dated January 27, 1994, filed as an exhibit to the
Companys 1994 Annual Report on Form 10-K, are
incorporated by reference herein.
10.8
KB Home Performance-Based Incentive Plan for
Senior Management, filed as an exhibit to the Companys
1995 Annual Report on Form 10-K, is incorporated by
reference herein.
10.9
Form of Stock Option Agreement under KB Home
Performance-Based Incentive Plan for Senior Management, filed as
an exhibit to the Companys 1995 Annual Report on
Form 10-K, is incorporated by reference herein.
10.10
KB Home Unit Performance Program, filed as an
exhibit to the Companys 1996 Annual Report on
Form 10-K, is incorporated by reference herein.
10.11
Kaufman and Broad France Incentive Plan, filed as
an exhibit to the Companys 1997 Annual Report on Form
10-K, is incorporated by reference herein.
10.12
KB Home 1998 Stock Incentive Plan, filed as an
exhibit to the Companys 1998 Annual Report on Form 10-K,
is incorporated by reference herein.
10.13
KB Home Directors Legacy Program, as
amended January 1, 1999, filed as an exhibit to the
Companys 1998 Annual Report on Form 10-K, is incorporated
by reference herein.
10.14
KB Home 1999 Incentive Plan, filed as an exhibit
to the Companys 1999 Annual Report on Form 10-K, is
incorporated by reference herein.
10.15
Trust Agreement between Kaufman and Broad Home
Corporation and Wachovia Bank, N.A. as Trustee, dated as of
August 27, 1999, filed as an exhibit to the Companys
1999 Annual Report on Form 10-K, is incorporated by reference
herein.
10.16
KB Home Non-Employee Directors Stock Plan, as
amended and restated as of December 6, 1999, filed as an
exhibit to the Companys 1999 Annual Report on Form 10-K,
is incorporated by reference herein.
10.17
2000 Revolving Credit Facility, dated as of
October 3, 2000, by and among the Company, the banks party
thereto, Bank of America, N.A., as Administrative Agent, and
Banc of America Securities LLC, as Lead Arranger and Sole Book
Manager, filed as an exhibit to the Companys 2000 Annual
Report on Form 10-K, is incorporated by reference herein.
10.18
2000 Term Credit Facility, dated as of
October 3, 2000, by and among the Company, the banks party
thereto, Bank of America, N.A., as Administrative Agent, and
Banc of America Securities LLC, as Lead Arranger and Sole Book
Manager, filed as an exhibit to the Companys 2000 Annual
Report on Form 10-K, is incorporated by reference herein.
10.19
Form of limited liability company Operating
Agreement under the e.KB Equity Incentive Program, filed as an
exhibit to the Companys 2000 Annual Report on
Form 10-K, is incorporated by reference herein.
10.20
Amended and Restated Employment Agreement of
Bruce Karatz, dated July 11, 2001, filed as an exhibit to
the KB Homes Form 10-Q for the quarterly period
ended August 31, 2001, is incorporated by reference herein.
10.21
KB Home Nonqualified Deferred Compensation Plan.
10.22
KB Home 2001 Stock Incentive Plan.
10.23
KB Home Change in Control Severance Plan.
10.24
KB Home Death Benefit Only Plan.
13
Pages 32 through 64 and page 68 of
KB Homes 2001 Annual Report to Stockholders.
22
Subsidiaries of the Registrant.
24
Consent of Independent Auditors.
Financial statement schedules have been omitted
because they are not applicable or the required information is
shown in the consolidated financial statements and notes thereto.
No reports on Form 8-K were filed during the
fourth quarter of 2001.
SIGNATURES
Pursuant to the requirements of Section 13 or
15(d) of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed by the
following persons on behalf of the registrant in the capacities
and on the dates indicated:
25
KB HOME AND CONSOLIDATED
SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
The consolidated financial statements, together
with the report thereon of Ernst & Young LLP, dated
December 20, 2001, all appearing on pages 45 through
64 of the 2001 Annual Report to Stockholders, are incorporated
in this Annual Report on Form 10-K between page F-1
and the List of Exhibits Filed. With the exception of the
aforementioned information and the information incorporated in
Items 5, 6 and 7, the 2001 Annual Report to
Stockholders is not to be deemed filed as part of this Annual
Report on Form 10-K.
Separate combined financial statements of
KB Homes unconsolidated joint venture activities have
been omitted because, if considered in the aggregate, they would
not constitute a significant subsidiary as defined by Rule 3-09
of Regulation S-X.
The following pages represent pages 32
through 64 and page 68 of the 2001 Annual Report to
Stockholders of KB Home, and include the Five Year Summary,
Managements Discussion and Analysis of Financial Condition
and Results of Operations, the Consolidated Financial Statements
and related notes thereto, the Report of Independent Auditors,
Report on Financial Statements, Stockholder Information and
Common Stock Prices. These pages were filed with the Securities
and Exchange Commission as Exhibit 13 hereto.
F-1
SELECTED FINANCIAL INFORMATION
32
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS
OVERVIEW
Revenues are primarily generated from the Companys (i) homebuilding
operations in the United States and France and (ii) its domestic mortgage banking operations.
Domestically, the Companys construction revenues are generated from operating
divisions in the following regional groups: West Coast California;
Southwest Arizona, Nevada and New Mexico; and Central Colorado, Florida
and Texas. Internationally, the Company operates in France through a
majority-owned subsidiary.
In January 2001, the Company changed its name from Kaufman and Broad Home
Corporation to KB Home. This new name, which resulted from homebuyer input,
was intended to convey the Companys strong customer focus and its commitment to
helping homebuyers realize their dream of home ownership.
The Company achieved record earnings for the fourth consecutive year in 2001 and
delivered 24,538 homes, the largest number of units delivered during any single
year in its history. Total Company revenues reached a record $4.57 billion in
2001, up 16.4% from $3.93 billion in 2000, which had increased 2.5% from $3.84
billion in 1999. The increase in revenues in 2001 was mainly due to an increase
in housing revenues. The modest increase in revenues in 2000 compared to 1999
was primarily attributable to higher housing and land sale revenues. Included
in total Company revenues were mortgage banking revenues of $72.5 million in
2001, $60.4 million in 2000 and $64.2 million in 1999.
Net income for the year ended November 30, 2001 increased to $214.2 million, or
$5.50 per diluted share, from $210.0 million, or $5.24 per diluted share, for
the year ended November 30, 2000. The results for 2000 included a one-time gain
of $39.6 million, or $.99 per diluted share, on the issuance of stock by the
Companys French subsidiary in an initial public offering (the French IPO
gain). Excluding the French IPO gain, 2000 net income and diluted earnings per
share were $170.4 million and $4.25, respectively. In 2001, net income rose on
higher unit delivery volume, expanded gross margins and increased net income
from mortgage banking operations.
Net income in 2000 was 42.4% higher than the $147.5 million, or $3.08 per
diluted share, recorded in 1999. Excluding the French IPO gain in 2000 and
excluding an after-tax secondary marketing trading loss of $11.8 million, or
$.25 per diluted share, recorded in 1999 as a result of unauthorized trading by
an employee of the Companys mortgage banking subsidiary, earnings per share in
2000 were 27.6% higher than 1999 results. Excluding the impact of the trading
loss, net income for 1999 was $159.2 million and diluted earnings per share were
$3.33. In 2000, the increase in diluted earnings per share was principally
driven by the combined effect of a higher housing gross margin, lower selling,
general and administrative expenses, a lower effective income tax rate and a
16.2% reduction in the average number of diluted shares outstanding due to the
Companys share repurchase program.
33
CONSTRUCTION
REVENUES
Construction revenues reached an all-time high of $4.50 billion in
2001, increasing 16.3% from $3.87 billion in 2000, which had increased from
$3.77 billion in 1999. The increase in 2001 was mainly due to higher housing
revenues driven by increased unit delivery volume and a higher average selling
price. In 2000, the improvement was primarily the result of increased housing
and land sale revenues.
34
Housing revenues totaled $4.37 billion in 2001, $3.77 billion in 2000 and $3.73
billion in 1999, each amount establishing a new Company record for the year in
which it was reported. In 2001, housing revenues increased 15.9% over the
previous year due to a 9.6% increase in unit volume, reflecting growth in all of
the Companys geographic regions, and a 5.8% increase in the average selling
price. In 2000, housing revenues rose 1.0% above 1999 results due to a 1.1%
increase in the average selling price; unit volume was comparable to that of
1999.
Housing revenues from West Coast operations totaled $1.57 billion in 2001, up
11.6% from $1.41 billion in 2000, reflecting a 1.4% increase in unit delivery
volume and a 10.2% increase in the average selling price. West Coast housing
operations generated 40.6% of domestic housing revenues in 2001, down from 42.7%
in 2000 and 46.8% in 1999, a trend that is consistent with the Companys steady
diversification of its domestic operations outside of California since 1993.
Housing revenues generated from the Companys Southwest region rose 16.1% to
$983.1 million in 2001 from $846.9 million in 2000 due to a 7.0% increase in
unit deliveries and an 8.5% increase in the average selling price. The Central
region posted housing revenues of $1.32 billion, up 26.3% from $1.04 billion in
2000, the result of a 15.5% increase in unit deliveries and a 9.4% increase in
the average selling price when compared to 2000. Southwest region housing
revenues accounted for 25.4% of domestic housing revenues in 2001, compared to
25.7% in 2000 and 24.8% in 1999. Central region housing revenues accounted for
34.0% of domestic housing revenues in 2001, up from 31.6% in 2000 and 28.4% in
1999. In France, housing revenues of $494.8 million in 2001 rose 5.2% from
$470.3 million in 2000, the result of a 14.0% increase in unit volume, partially
offset by a 7.7% decrease in the average selling price.
In 2000, West Coast region housing revenues decreased 9.5% from $1.56 billion in
1999 due to a 13.4% decrease in unit deliveries, partially offset by a 4.5%
increase in the average selling price. Housing revenues in the Southwest region
rose 2.9% in 2000 from $823.2 million in 1999, reflecting a small increase in
unit deliveries and a higher average selling price. In the Central region,
housing revenues in 2000 rose 10.4% from $945.4 million in 1999, the result of
increases in both unit volume and average selling price. In France, housing
revenues rose 16.6% in 2000 from $403.4 million in 1999, reflecting higher unit
volume, partially offset by a lower average selling price.
Company-wide housing deliveries increased 9.6% to 24,538 units in 2001 from
22,392 units in 2000, reflecting growth in U.S. and French deliveries of 8.9%
and 14.0%, respectively. The increase in domestic deliveries was driven by
improvement in each of the Companys three geographic regions, with increases of
1.4%, 7.0% and 15.5% achieved in the West Coast, Southwest and Central regions,
respectively. West Coast region deliveries increased to 5,550 units in 2001 from
5,476 units in 2000 even though the Company operated 8.1% fewer active
communities in the region during 2001. Southwest region operations delivered
6,238 units in 2001, up from 5,832 units in 2000, despite a 5.1% decrease in the
average number of active communities operated in this region. In the Central
region, deliveries totaled 9,368 units in 2001, up from 8,112 units in 2000. The
average number of active communities in the Central region rose 9.0% in 2001.
French deliveries increased to 3,382 units in 2001 from 2,967 units in 2000,
partly due to the inclusion of a full year of results from acquisitions made
during 2000.
35
In 2000, housing deliveries of 22,392 units were essentially flat compared with
the 22,422 units delivered in 1999, as a 2.6% decrease in U.S. deliveries was
largely offset by a 20.4% increase in French deliveries. The decline in
domestic deliveries reflected a 13.4% decrease in the West Coast region, partly
offset by increases of .5% and 3.9% in the Southwest and Central regions,
respectively. West Coast deliveries decreased to 5,476 units in 2000 from 6,323
units in 1999, primarily due to two factors. First, the re-focusing of the
Companys West Coast operations following the Lewis Homes acquisition, in
keeping with the KBnxt business model, resulted in fewer active communities in
Northern California in 2000 compared to 1999. Second, the strength of the
Companys Southwest and Central region operations, which generally offered lower
risk for less investment in land, caused the Company to apply more stringent
criteria with regard to its land investment decisions in the West Coast
region. Southwest operations delivered 5,832 units in 2000, up slightly from
5,801 units in 1999, despite a 4.9% decrease in the average number of active
communities compared to the prior year. Deliveries from Central region
operations increased to 8,112 units in 2000 from 7,809 units in 1999, as the
average number of active communities in the region rose 4.2% from the prior
year. French deliveries increased 20.4% to 2,967 units in 2000 from 2,465 units
in 1999, as a result of expansion of these operations during 2000, partly
through acquisitions.
The Company-wide average new home price increased 5.8% in 2001, to $178,000 from
$168,300 in 2000. The 2000 average had advanced 1.1% from $166,500 in 1999. The
increase in the average selling price in 2001 resulted from a higher domestic
average selling price, partially offset by a lower average selling price in
France.
In the West Coast region, the average selling price rose 10.2% in 2001 to
$283,100 from $257,000 in 2000, which had increased 4.5% from $246,000 in 1999.
The average selling price in the Southwest region increased 8.5% to $157,600
in 2001, compared with $145,200 in 2000 and $141,900 in 1999. The Central region
average selling price rose 9.4% to $140,700 in 2001 compared with $128,600 in
2000, which had increased 6.2% from $121,100 in 1999. The higher average selling
prices in each of the Companys domestic regions in 2001 resulted from strategic
increases in sales prices made by the Company in most of its markets. The
increase in 2000 also resulted from modest increases in sales prices in certain
domestic markets.
The Companys average selling price in France decreased 7.7% to $146,300 in 2001
from $158,500 in 2000, which had decreased 3.1% from $163,600 in 1999. The
decreases in 2001 and 2000 were largely the result of a Company strategy to
increase the proportion of its French deliveries from condominiums, which are
typically priced below single-family detached homes, and the adverse foreign
currency translation impact resulting from a weakening in the French franc
compared to the U.S. dollar.
Revenues from the development of commercial buildings, all located in
metropolitan Paris, totaled $69.9 million in 2001, just below the Companys
projections of $75 million to $90 million, but up substantially, as anticipated,
from $.8 million in 2000 and $.7 million in 1999. The Companys French
commercial revenues increased substantially in 2001 due to the Companys
decision to expand its commercial activity as market conditions for commercial
development improved. For several years prior to 2001, the Company had
de-emphasized its commercial development operations, which had generated revenues as high as $362.3 million in 1990, in light of less favorable commercial
market conditions.
Land sale revenues totaled $64.8 million in 2001, $100.5 million in 2000 and
$37.8 million in 1999. Generally, land sale revenues fluctuate with managements
decisions to maintain or decrease the Companys land ownership position in
certain markets based upon the volume of its holdings, the strength and number
of competing developers entering particular markets at given points in time, the
availability of land in markets served by the Company and prevailing market
conditions. The results for 2001 and 1999 are more representative of typical
historical Company land sales activity levels. In contrast, land sale revenues
were higher in 2000 as a result of the Companys adoption of an asset
repositioning strategy, in late 1999, which included the identification and
sale of non-core assets.
OPERATING INCOME
Operating income increased to a new Company record of $352.3
million in 2001, which was 22.1% higher than the previous record of $288.6
million achieved in 2000. As a percentage of revenues, operating income rose to
7.8% in 2001 from 7.5% in 2000. Housing gross profits in 2001 increased 17.8% or
$132.7 million to $876.4 million from $743.7 million in 2000. As a percentage of
related revenues, the housing gross profit margin was 20.1% in 2001, up from
19.7% in the prior year, primarily due to a higher average selling price. The
Companys housing gross profit margin also showed sequential improvement during
each quarter of 2001 progressing from 19.5% in the first quarter to 20.8% in the
fourth quarter. Commercial activities in France generated profits of $10.6
million in 2001, compared to $.2 million in 2000. Company-wide land sales
generated profits of $1.7 million in 2001 and $2.8 million in 2000.
Selling, general and administrative expenses totaled $536.5 million in 2001
compared with $458.0 million in 2000. As a percentage of housing revenues, to
which these expenses are most closely correlated, selling, general and
administrative expenses increased slightly to 12.3% in 2001 from 12.2% in 2000.
For the first nine months of 2001, the Company achieved a lower selling, general
and administrative expense ratio compared to the same period of 2000. However,
selling expenses rose significantly in the fourth quarter as marketing efforts
had to be stepped-up to stimulate traffic in the aftermath of the September 11th
tragedy and to attract sales in the increasingly competitive marketplace.
Provided there are no further negative consequences from the terrorist
activities and U.S. response, and subject to other risk factors described below,
the Company expects selling expenses to remain at higher levels during the first
quarter of 2002 and return to more normal levels in the remainder of the year.
36
Operating income increased 11.4% to $288.6 million in 2000 from $259.1 million
in 1999. This increase was primarily due to higher housing gross profits and
lower selling, general and administrative expenses. Housing gross profits in
2000 increased 3.0%, or $22.1 million, to $743.7 million from $721.6 million in
1999. As a percentage of related revenues, the housing gross profit margin was
19.7% in 2000, up from 19.3% in the prior year. This increase was primarily due
to an improved pricing environment, generally favorable market conditions
throughout 2000, deeper execution of the KBnxt operational business model and a
reduction in the negative impact of purchase accounting associated with the 1999
acquisition of Lewis Homes. Company-wide land sales generated a profit of $2.8
million in 2000, compared to a loss of $1.2 million in 1999.
Selling, general and administrative expenses decreased to $458.0 million in 2000
from $461.3 million in 1999. As a percentage of housing revenues, selling,
general and administrative expenses decreased to 12.2% in 2000 from 12.4% in
1999. The improved ratio resulted from savings generated by the Companys
cost-containment initiatives.
INTEREST INCOME AND EXPENSE
Interest income, which is generated from short-term
investments and mortgages receivable, amounted to $3.6 million in 2001, $5.8
million in 2000 and $7.8 million in 1999. The decrease in interest income in
2001 resulted primarily from a lower interest bearing average balance of
mortgages receivable compared to 2000. Interest income declined in 2000 due to a
decrease in the interest bearing average balances of both short-term investments
and mortgages receivable compared to 1999.
Interest expense results principally from borrowings to finance land purchases,
housing inventory and other operating and capital needs. In 2001, interest
expense, net of amounts capitalized, increased by $9.6 million to $41.1 million,
up from $31.5 million in 2000. Gross interest incurred in 2001 was $8.8 million
higher than that incurred in 2000, reflecting an increase in average
indebtedness. The percentages of interest capitalized in 2001 and 2000 were
60.1% and 66.6%, respectively.
In 2000, interest expense, net of amounts capitalized, increased to $31.5
million from $28.3 million in 1999. Gross interest incurred in 2000 was $16.2
million higher than that incurred in 1999, reflecting an increase in average
indebtedness. The percentage of interest capitalized in 2000 increased from
63.7% capitalized in 1999.
MINORITY INTERESTS
Minority interests are comprised of two major components:
pretax income of consolidated subsidiaries and joint ventures related to
residential and commercial activities; and distributions associated with the
Companys Feline Prides securities. Operating income was reduced by minority
interests of $27.9 million in 2001, $31.6 million in 2000 and $29.4 million in
1999. Minority interests in 2001, 2000 and 1999 included distributions of $11.4
million, $15.2 million and $15.2 million, respectively, associated with the
Feline Prides. Since the Feline Prides mandatorily converted into common stock
of the Company on August 16, 2001, minority interests in future periods will no
longer include distributions associated with these securities. In 2001 and 2000,
minority interests reflected the impact of the Companys French IPO.
EQUITY IN PRETAX INCOME OF UNCONSOLIDATED JOINT VENTURES
The Companys
unconsolidated joint venture activities were located in Nevada, New Mexico and
France in 2001; California, Nevada, New Mexico and France in 2000; and
California, Nevada, New Mexico, Texas and France in 1999. These unconsolidated
joint ventures posted combined revenues of $82.1 million in 2001, $116.8 million
in 2000 and $13.9 million in 1999. Revenues from unconsolidated joint ventures
in 2001 and 2000 were substantially higher than in 1999 primarily due to the
inclusion of a joint venture related to a Nevada community. All unconsolidated
joint venture revenues in 2001, 2000 and 1999 were generated from residential
properties. Unconsolidated joint ventures generated combined pretax income of
$6.5 million in 2001, $4.9 million in 2000 and $3.6 million in 1999. The
Companys share of pretax income from unconsolidated joint ventures totaled $3.9
million in 2001, $2.9 million in 2000 and $.2 million in 1999.
GAIN ON ISSUANCE OF FRENCH SUBSIDIARY STOCK
The Company recognized a one-time
gain of $39.6 million from the issuance of 5,314,327 common shares (including
the over allotment option) by Kaufman & Broad S.A. (KBSA), the Companys
French subsidiary, in an initial public offering in the first quarter of 2000.
The offering was made in France and elsewhere in Europe and was priced at 23
euros per share. Since the initial public offering, KBSA has been listed on the
Premier Marche of the ParisBourse. The offering generated total net proceeds of
$113.1 million, of which $82.9 million was used by the Company to reduce its
domestic debt and repurchase shares of its common stock. The remainder of the
proceeds was used to fund internal and external growth of KBSA. Since the
initial public offering, the Company has maintained a 57% majority ownership
interest in KBSA and continues to consolidate these operations in its financial
statements.
MORTGAGE BANKING
INTEREST INCOME AND EXPENSE
The Companys mortgage banking operations provide
financing principally to purchasers of homes sold by the Companys domestic
housing operations through the origination of residential mortgages. Interest
income is earned primarily from first mortgages and mortgage-backed securities
held for long-term investment as collateral, while interest expense results from
notes payable and the collateralized mortgage obligations. Interest income
increased to $21.9 million in 2001 from $21.1 million in 2000 and $19.2 million
in 1999. Interest expense decreased to $18.4 million in 2001 from $19.4 million
in 2000, which had increased from $16.9 million in 1999. Interest income
increased in both 2001 and 2000 primarily due to a higher balance of first
mortgages held under commitments of sale and other receivables outstanding
compared to the previous year.
37
Interest expense decreased in 2001 from the previous year due to lower interest
rates. Interest expense rose in 2000 from 1999 due to a higher amount of notes
payable outstanding compared to 1999. Combined interest income and expense
resulted in net interest income of $3.5 million in 2001, $1.7 million in 2000
and $2.3 million in 1999. These differences reflect variations in mortgage
production mix; movements in short-term versus long-term interest rates; and the
amount, timing and rates of return on interim reinvestments of monthly principal
amortization and prepayments.
OTHER MORTGAGE BANKING REVENUES
Other mortgage banking revenues, which
principally consist of gains on sales of mortgages and servicing rights and, to
a lesser extent, mortgage servicing fees and insurance commissions, totaled
$50.5 million in 2001, $39.2 million in 2000 and $45.0 million in 1999. The
increase in 2001 reflected higher gains on the sales of mortgages and servicing
rights primarily due to a higher volume of mortgage originations associated both
with increases in underlying housing unit delivery volume and higher retention.
By retention, the Company is referring to the percentage of the Companys
domestic homebuyers using the Companys mortgage banking subsidiary as a loan
originator. Also contributing to the increase in 2001 was a shift in product mix
toward a higher proportion of fixed rate loans. In 2000, the decrease in other
mortgage banking revenues was primarily the result of lower gains on the sales
of mortgages and servicing rights due to lower unit delivery volume. Interest
rate increases during 2000, including a shift in product mix toward more
variable rate loans, lower retention and the intensely competitive mortgage
banking environment also contributed to the decrease.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses
associated with the mortgage banking operations increased to $20.3 million in
2001 from $17.2 million in 2000 and $11.6 million in 1999. In 2001, general and
administrative expenses increased as a result of the expansion of certain
ancillary businesses, higher staff levels in place to accommodate the Companys
higher backlog and the overall growth of the mortgage banking operations in
anticipation of higher origination volumes. The increase in general and
administrative expenses in 2000 was primarily due to expansion of the
operations.
SECONDARY MARKETING TRADING LOSS
On August 31, 1999, the Company disclosed that
it had discovered unauthorized mortgage loan trading activity by an
employee of its mortgage banking subsidiary resulting in a pretax trading loss
of $18.2 million ($11.8 million, or $.25 per diluted share, on an after-tax
basis). It is normal practice for the Companys mortgage banking subsidiary to
sell loans into the market that approximately match loan commitments to the
Companys homebuyers. This practice is intended to hedge exposure to changes in
interest rates that may occur until loans are sold to secondary market investors
in the ordinary course of its business. The loss was the result of a single
employee engaging in unauthorized mortgage loan trading largely unrelated to
mortgage originations. The employee who conducted the unauthorized trading was
terminated.
INCOME TAXES
The Company recorded income tax expense of $110.3 million in 2001, $87.7 million
in 2000 and $79.4 million in 1999. These amounts represented effective income
tax rates of approximately 34.0% in both 2001 and 2000 (excluding the one-time
gain on the issuance of French subsidiary stock in 2000) and 35.0% in 1999. The
effective tax rate declined by 1.0 percentage point in 2000 as a result of
greater utilization of tax credits. Pretax income for financial reporting
purposes and taxable income for income tax purposes historically have differed
primarily due to the impact of state income taxes, foreign tax rate differences,
intercompany dividends and the use of tax credits.
LIQUIDITY AND CAPITAL RESOURCES
The Company assesses its liquidity in terms of its ability to generate cash to
fund its operating and investing activities. Historically, the Company has
funded its construction and mortgage banking activities with internally
generated cash flows and external sources of debt and equity financing.
Operating, investing and financing activities provided net cash of $248.3
million in 2001 and $4.7 million in 2000.
Operating activities provided $45.9 million in 2001 and $52.9 million in 2000.
The Companys sources of operating cash in 2001 included earnings of $214.2
million, an increase in accounts payable, accrued expenses and other liabilities
of $295.9 million, other operating sources of $21.3 million and various noncash
items deducted from net income. The increase in accounts payable, accrued
expenses and other liabilities primarily reflected increased production activity
at the end of the year as the Companys payment terms were essentially unchanged
from the previous year. The cash provided was partially offset by an increase in
receivables of $372.9 million and investments in inventories of $137.1 million
(excluding the effect of acquisitions and $54.6 million of inventories acquired
through seller financing).
In 2000, the sources of operating cash included earnings of $210.0 million and
various noncash items deducted from net income. The cash provided was partially
offset by an investment of $96.1 million in inventories (excluding the effect of
acquisitions and $25.1 million of inventories acquired through seller
financing), a decrease of $55.0 million in accounts payable, accrued expenses
and other liabilities, an increase of $53.9 million in receivables and a gain of
$39.6 million on the issuance of French subsidiary stock.
Cash used by investing activities totaled $48.3 million in 2001 and $24.9
million in 2000. In 2001, $53.7 million, net of cash acquired, was used for two
acquisitions and $12.2 million was used for net purchases of property and
equipment. Partially offsetting these uses were proceeds of $7.9 million
received from mortgage-backed securities, which were principally used to pay
down collateralized mortgage obligations for which the mortgage-backed
securities had served as collateral, distributions of $5.4 million relating to
investments in unconsolidated joint ventures and net sales of $4.3 million of
mortgages held for long-term investment.
38
In 2000, cash used by investing activities included $24.3 million, net
of cash acquired, used for acquisitions, $18.5 million used for net
purchases of property and equipment and $2.6 million used for originations
of mortgages held for long-term investment.
Partially offsetting these uses were distributions of $13.9 million related to
investments in unconsolidated joint ventures and proceeds of $6.6 million
received from mortgage-backed securities.
Financing activities in 2001 provided $250.6 million of cash compared to $23.3
million used in 2000. In 2001, sources of financing cash included $247.5 million
from the issuance of 9-1/2% senior subordinated notes, $37.9 million from the
issuance of common stock under employee stock plans and $5.1 million from net
proceeds on borrowings. Partially offsetting the cash provided were payments to
minority interests of $21.1 million, cash dividend payments of $11.2 million and
payments on collateralized mortgage obligations of $7.6 million. Pursuant to its
universal shelf registration statement filed with the Securities and Exchange
Commission on December 5, 1997 (the 1997 Shelf Registration), the Company
issued the $250.0 million 9-1/2% senior subordinated notes at 100% of the
principal amount of the notes. The notes, which are due February 15, 2011 with
interest payable semi-annually, represent unsecured obligations of the Company
and are subordinated to all existing and future senior indebtedness of the
Company. The notes are redeemable at the option of the Company, in whole, or in
part, at 104.750% of their principal amount beginning February 15, 2006, and
thereafter at prices declining annually to 100% on and after February 15, 2009.
The Companys financial leverage, as measured by the ratio of debt to total
capital was 49.9% at the end of 2001 compared to 53.9% at the end of 2000. The
Company seeks to maintain its ratio of debt to total capital within a targeted
range of 45% to 55%.
Financing activities in 2000 used $169.2 million for the repurchase of common
stock (excluding $78.0 million of common stock repurchased through the issuance
of promissory notes), $20.1 million for payments to minority interests, $11.5
million for cash dividend payments and $6.3 million for payments on
collateralized mortgage obligations. Partially offsetting these uses were $113.1
million of proceeds from the issuance of French subsidiary stock, $59.1 million
of net proceeds from borrowings and $11.6 million from the issuance of common
stock under employee stock plans.
On July 19, 2001, the Company acquired Trademark Home Builders, Inc.
(Trademark), a builder of single-family homes in Jacksonville, Florida. The
acquisition marked the Companys entry into Florida. Trademark was acquired for
approximately $30.1 million, including the assumption of approximately $16.3
million in debt, and was accounted for under the purchase method of accounting.
The excess of the purchase price over the estimated fair value of net assets
acquired was $9.2 million and was allocated to goodwill and assigned to the
Companys construction segment.
On September 26, 2001, KBSA completed the acquisition of Residences Bernard
Teillaud (RBT), a France-based builder of condominiums. As a result of the
acquisition, KBSA anticipates having a leading market position in the
Rhone-Alps region of France. RBT was acquired for approximately $28.7 million and
was accounted for under the purchase method of accounting. The excess of the
purchase price over the estimated fair value of net assets acquired was $10.2
million and was allocated to goodwill and assigned to the Companys construction
segment.
In accordance with Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets, (SFAS No. 142), the goodwill amounts
recorded in connection with the acquisitions of Trademark and RBT will not be
amortized but will be reviewed for impairment on an annual basis. The results of
Trademark and RBT were included in the Companys consolidated financial
statements as of their respective acquisition dates.
During the year ended November 30, 2000, the Companys French subsidiary, KBSA,
completed the acquisitions of four homebuilders in France. These companies were
acquired for an aggregate purchase price of $33.5 million and were accounted for
under the purchase method of accounting. The excess of the purchase price over
the estimated fair value of the net assets acquired was $24.7 million and was
allocated to goodwill. Through November 30, 2001, the Company amortized the
goodwill on a straight-line basis over a period of ten years. However, in
accordance with SFAS No. 142, which the Company adopted as of December 1, 2001,
in future periods the goodwill will no longer be amortized but will be reviewed
for impairment on an annual basis.
In 2000, common stock repurchases made under the Companys share repurchase
program totaled $247.0 million. The Companys share repurchase program was
established in August 1999. The Company repurchased approximately 10.7 million
shares in 2000, thereby completing the purchase of all the 14.5 million shares
of common stock previously authorized for repurchase by the Companys Board of
Directors. Included in the shares repurchased during 2000 were 4.0 million
shares which had been issued as partial consideration for the January 1999
acquisition of Lewis Homes and were repurchased in a private transaction from
the Lewis Homes sellers in September 2000.
On September 21, 2000, in connection with the repurchase of 4.0 million shares
from the Lewis holders, the Company issued promissory notes (the Shareholder
Notes) with an aggregate principal amount of $78.0 million to the Lewis
holders. Interest on the Shareholder Notes accrued monthly at a rate of
6-3/5%. The Company paid off the Shareholder Notes during the year ended
November 30, 2001, prior to their scheduled maturity date of December 6, 2001.
On October 4, 2001, the Companys Board of Directors approved a new stock
repurchase authorization of up to 4.0 million additional shares of the Companys
common stock. The authorization positions management to opportunistically
purchase common shares from time to time on the open market or in privately
negotiated transactions. No shares had been repurchased under this authorization
as of November 30, 2001.
39
In connection with its share repurchase program, on August 27, 1999, the Company
established a grantor stock ownership trust (the Trust) into which certain
shares repurchased in 2000 and 1999 were transferred. The Trust, administered by
an independent trustee, acquires, holds and distributes the shares of common
stock for the purpose of funding certain employee compensation and employee
benefit obligations of the Company under its existing stock option, 401(k) and
other employee benefit plans. The existence of the Trust has no impact on the
amount of benefits or compensation that is paid under these plans.
For financial reporting purposes, the Trust is consolidated with the Company.
Any dividend transactions between the Company and the Trust are eliminated.
Acquired shares held by the Trust remain valued at the market price at the date
of purchase and are shown as a reduction to stockholdersequity in the consolidated balance sheet. The difference between the Trust share value and the
fair market value on the date shares are released from the Trust, for the
benefit of employees, is included in additional paid-in capital. Common stock
held in the Trust is not considered outstanding in the computation of earnings
per share. The Trust held 8.1 million and 8.8 million shares of common stock at
November 30, 2001 and 2000, respectively. The trustee votes shares held by the
Trust in accordance with voting directions from eligible employees, as
specified in a trust agreement with the trustee.
External sources of financing for the Companys construction activities include
its domestic unsecured credit facility, other domestic and foreign bank lines,
third-party secured financings, and the public debt and equity markets.
Substantial unused lines of credit remain available for the Companys future
use, if required, principally through its domestic unsecured revolving credit
facility. On October 6, 2000, the Company entered into an unsecured credit
agreement (the Unsecured Credit Facility) consisting of a four-year committed
revolving credit facility and a five-year term loan, which together replaced its
previously existing revolving credit facility and term loan agreement. The
Unsecured Credit Facility totaled $732.0 million at November 30, 2001 and was
comprised of a $564.1 million four-year committed revolving credit facility and
a $167.9 million five-year term loan. The Unsecured Credit Facility has the
capacity to be expanded up to an aggregate total of $900.0 million if additional
bank lending commitments are obtained. Interest on the Unsecured Credit Facility
is payable monthly at the London Interbank Offered Rate plus an applicable
spread on amounts borrowed. The Company had $536.3 million available for its
future use under the Unsecured Credit Facility at November 30, 2001. In
addition, the Companys French subsidiaries have lines of credit with various
banks which totaled $321.7 million at November 30, 2001 and have various
committed expiration dates through November 2006. Under these unsecured
financing agreements, $184.0 million was available to the Companys French
subsidiaries at November 30, 2001.
Depending upon available terms and its negotiating leverage related to specific
market conditions, the Company also finances certain land acquisitions with
purchase-money financing from land sellers and other third parties. At November
30, 2001, the Company had outstanding seller-financed notes payable of $58.6
million secured primarily by the underlying property which had a carrying value
of $172.2 million.
The Companys primary contractual financing obligations at November 30, 2001
were comprised of senior and senior subordinated notes, term loan borrowings,
shareholder notes, mortgages, land contracts and other loans with principal
payments due as follows: 2002: $40.9 million; 2003: $186.8 million; 2004: $180.6
million; 2005: $168.0 million; 2006: $124.6 million and thereafter: $250.0
million.
On October 15, 2001 the Company filed a universal shelf registration statement
(as subsequently amended, the 2001 Shelf Registration) with the Securities and
Exchange Commission for up to $750.0 million of the Companys debt and equity
securities, which amount ultimately included $50.0 million in unused capacity
under the Companys previously existing 1997 Shelf Registration after giving
effect to the issuance of $200.0 million of 8-5/8% senior subordinated
notes in December 2001. The 2001 Shelf Registration was declared effective on
January 28, 2002 and provides that securities may be offered from time to time
in one or more series and in the form of senior, senior subordinated or
subordinated debt, preferred stock, common stock, stock purchase contracts,
stock purchase units and/or warrants to purchase such securities. As of February
15, 2002 no securities had been issued under the 2001 Shelf Registration and
$750.0 million of capacity remained available.
On July 7, 1998, the Company, together with a KBHC Trust that was wholly owned
by the Company, issued an aggregate of (i) 19.0 million Feline Prides securities,
and (ii) 1.0 million KBHC Trust capital securities, with a $10 stated liquidation
amount. The Feline Prides consisted of (i) 18.0 million Income Prides with the
stated amount per Income Prides of $10, which were units comprised of a capital
security and a stock purchase contract under which the holders were to purchase
common stock from the Company not later than August 16, 2001 and the Company was
to pay to the holders certain unsecured contract adjustment payments, and
(ii) 1.0 million Growth Prides with a face amount per Growth Prides equal to the
$10 stated amount, which were units consisting of a 1/100th beneficial
interest in a zero-coupon U.S. Treasury security and a stock purchase contract
under which the holders were to purchase common stock from the Company not later
than August 16, 2001 and the Company was to pay to the holders certain unsecured
contract adjustment payments.
The KBHC Trust utilized the proceeds from the issuance of the Feline Prides and
capital securities to purchase an equivalent principal amount of the Companys
8% debentures due August 16, 2003 (the 8% Debentures). The 8% Debentures were
the sole asset of the KBHC Trust. On August 16, 2001, all of the Companys
Feline Prides mandatorily converted into approximately 6.0 million shares of the
Companys common stock. In connection with the conversion, all of the 8%
Debentures held by the KBHC Trust were retired and the KBHC Trust was
subsequently dissolved.
40
The Company uses its capital resources primarily for land purchases, land
development and housing construction. The Company typically manages its
investments in land by purchasing property under options and other types of
conditional contracts whenever possible, and similarly controls its investment
in housing inventories by strongly emphasizing the pre-sale of homes over
speculative construction and carefully managing the timing of the production
process. The Companys backlog ratio (beginning backlog as a percentage of unit
deliveries in the succeeding quarter) was approximately 174.0% for the fourth
quarter of 2001 and was essentially flat when compared to the ratio for the
fourth quarter of 2000. The Companys inventories have become significantly more
geographically diverse in the last decade, primarily as a result of the
Companys extensive domestic expansion outside of the West Coast region. As of
November 30, 2001, 24.3% of the lots owned or controlled by the Company were
located in the West Coast region, with 23.5% in the Southwest region, 43.7% in
the Central region and 8.5% in France. The Company continues to concentrate its
housing operations in desirable areas within targeted growth markets,
principally oriented toward entry-level and first-time move up purchasers.
The principal sources of liquidity for the Companys mortgage banking operations
are internally generated funds from the sales of mortgages and related servicing
rights. Mortgages originated by the mortgage banking operations are generally
sold in the secondary market within 60 days of origination. External sources of
financing for these operations include a $300.0 million revolving mortgage
warehouse agreement (the Mortgage Warehouse Facility) and a $200.0 million
Master Loan and Security Agreement. The Master Loan and Security Agreement was
renewed on May 24, 2001 with an investment bank. The agreement, which expires on
May 25, 2002, provides for a facility fee based on the maximum credit amount
available and provides for interest to be paid monthly at the Eurodollar Rate
plus an applicable spread on amounts borrowed. During the fourth quarter of
2001, the Companys mortgage banking subsidiary negotiated a temporary increase
in the maximum credit amount available under the Master Loan and Security
Agreement to $325.0 million through December 31, 2001. The temporary increase
was necessary to meet the Companys increased volume of mortgage loan
originations. The Mortgage Warehouse Facility, which expires on February 18,
2003, provides for an annual fee based on the committed balance of the facility
and provides for interest at either the London Interbank Offered Rate or the
Federal Funds Rate plus an applicable spread on amounts borrowed. The amounts
outstanding under the Mortgage Warehouse Facility and the Master Loan and
Security Agreement are secured by a borrowing base, which includes certain
mortgage loans held under commitments of sale, and are repayable from sales
proceeds. There are no compensating balance requirements under either facility.
Both facilities include financial covenants and restrictions which, among other
things, require the maintenance of certain financial statement ratios, a minimum
tangible net worth and a minimum net income. Due to the increased volume of
mortgage loan originations in the fourth quarter of 2001, a substantial portion
of the borrowing capacity available to the mortgage banking operations was
utilized at November 30, 2001. At November 30, 2001, the Companys mortgage
banking operations had $19.1 million available under its $300.0 million Mortgage
Warehouse Facility and $10.8 million available under its Master Loan and
Security Agreement, which had been temporarily increased to $325.0 million. The
maximum credit amount available under the Master Loan and Security Agreement was
reduced to the original amount of $200.0 million subsequent to December 31, 2001
and all terms of the original agreement remain as they were prior to the
temporary increase. The Company believes its sources of financing are adequate
to fund its mortgage banking operations.
Debt service on the Companys collateralized mortgage obligations is funded by
receipts from mortgage-backed securities. Such funds are expected to be adequate
to meet future debt-payment schedules for the collateralized mortgage
obligations and therefore these securities have virtually no impact on the
capital resources and liquidity of the mortgage banking operations.
The Company continues to benefit in all of its operations from the strength of
its capital position, which has allowed it to maintain overall profitability
during troubled economic times, finance domestic and international expansion,
re-engineer product lines and diversify into new markets. Secure access to
capital at competitive rates, among other reasons, should enable the Company to
continue to grow and expand. As a result of its geographic diversification, the
disciplines of its KBnxt operational business model and its strong capital
position, the Company believes it has adequate resources and sufficient credit
facilities to satisfy its current and reasonably anticipated future
requirements for funds needed to acquire capital assets and land, construct
homes, fund its mortgage banking operations, and meet other needs of its business, both on a short and long-term basis.
CONVERSION TO THE EURO CURRENCY
On January 1, 1999, certain member countries of the European Union (the EU)
established fixed conversion rates between their existing currencies and the
EUs common currency (the euro). The Company conducts substantial business
in France, an EU member country. During the established transition period for
the introduction of the euro, which extends to June 30, 2002, the Company will
address the issues involved with the adoption of the new currency. The most
important issues associated with the conversion, including: the conversion of
information technology systems; the reassessment of currency risk; the
negotiation and amendment of contracts; and the processing of tax and accounting
records, have been addressed by the Company and resulted in no material impact
on the Companys financial results.
Based upon its progress to date, the Company believes that use of the euro will
not have a significant impact on the manner in which it conducts its business
affairs and processes its business and accounting records. Accordingly,
conversion to the euro is not expected to have a material effect on the
Companys financial condition or results of operations.
41
SUBSEQUENT EVENT
On December 14, 2001, pursuant to the 1997 Shelf Registration, the Company
issued $200.0 million of 8-5/8% senior subordinated notes at 100% of the
principal amount of the notes. The notes, which are due December 15, 2008, with
interest payable semi-annually, represent unsecured obligations of the Company
and are subordinated to all existing and future senior indebtedness of the
Company. Before December 15, 2004, the Company may redeem up to 35% of the
aggregate principal amount of the notes with the net proceeds of one or more
public or private equity offerings at a redemption price of 108.625% of their
principal amount, together with accrued and unpaid interest. The notes are not
otherwise redeemable at the option of the Company. The Company used $175.0
million of the net proceeds from the issuance of the notes to redeem all of its
outstanding 9-3/8% senior subordinated notes due 2003. The remaining net
proceeds were used for general corporate purposes.
CRITICAL ACCOUNTING POLICIES
As discussed in Note 1 to the Companys consolidated financial statements,
housing and other real estate sales are recognized when title passes to the
buyer and certain other conditions are met. As a result, the Companys revenue
recognition process does not involve significant judgments or estimations.
Nonetheless, the Company does rely on certain estimates to determine the related
construction and land costs and resulting gross margins associated with revenues
recognized. The Companys construction and land costs are comprised of direct
and allocated costs, including estimated costs for future warranties and amenities. Land, land improvements and other common costs are allocated on a relative
fair value basis to units within a parcel or subdivision. Land and land
development costs generally include related interest and property taxes incurred
until development is substantially completed or deliveries have begun within a
subdivision.
In determining a portion of the construction and land costs for each period, the
Company relies on project budgets that are based on a variety of assumptions,
including assumptions about construction schedules and future costs to be
incurred. It is possible that actual results could differ from budgeted amounts
for various reasons, including construction delays, increases in costs which
have not yet been committed, or unforeseen issues encountered during
construction that fall outside the scope of contracts obtained. While the
actual results for a particular construction project are accurately reported
over time, a variance between the budget and actual costs could result in the
understatement or overstatement of construction and land costs and construction
gross margins in a specific reporting period. To reduce the potential for such
distortion, the Company has set forth procedures that collectively comprise a
critical accounting policy. These procedures, which have been applied by the
Company on a consistent basis, include assessing and revising project budgets on
a monthly basis, obtaining commitments from subcontractors and vendors for
future costs to be incurred, reviewing the adequacy of warranty accruals and
historical warranty claims experience, and utilizing the most recent information
available to estimate construction and land costs to be charged to expense. The
variances between budget and actual amounts identified by the Company have
historically not had a material impact on its consolidated results of
operations. Management believes that the Companys policies provide for
reasonably dependable estimates to be used in the calculation and reporting of
construction and land costs.
As disclosed in the consolidated financial statements, the Company had goodwill
in the amount of $190.8 million at November 30, 2001. In connection with the
adoption of SFAS No. 142, the Company performed an impairment test of goodwill
as of December 1, 2001 which resulted in no impairment being identified.
However, 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, including
the 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 or the Companys strategies change,
it is possible that the Companys conclusion regarding goodwill impairment could
change and result in a material effect on its financial position or results of
operations.
As discussed in Note 10 to the consolidated financial statements, the Company is
involved in litigation incidental to its business, the disposition of which is
expected to have no material effect on the Companys financial position or
results of operations. It is possible, however, that future results of
operations for any particular quarterly or annual period could be materially
affected by changes in the Companys assumptions related to these proceedings.
The Company accrues its best estimate of the probable cost for the resolution
of legal claims. Such estimates are developed in consultation with outside
counsel handling these matters and are based upon a combination of litigation
and settlement strategies. To the extent additional information arises or the
Companys strategies change, it is possible that the Companys best estimate of
its probable liability in these matters may change.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 141, Business Combinations, (SFAS
No. 141). SFAS No. 141 requires all business combinations to be accounted for
using the purchase method of accounting and is effective for all business
combinations with a closing date after June 30, 2001. The Companys adoption of
SFAS No. 141 did not have a material effect on its operating results or
financial condition in 2001.
Also in June 2001, the FASB issued SFAS No. 142. SFAS No. 142 requires goodwill
to be tested for impairment under certain circumstances, and written off when
impaired, rather than amortized as previous standards required. SFAS No. 142 is
effective for fiscal years beginning after December 15, 2001, although early
application is permitted for entities, like the Company, with fiscal years
beginning after March 15, 2001.
42
The Company adopted SFAS No. 142 on December 1, 2001, earlier than required.
Application of the nonamortization provisions of SFAS No. 142 by the Company
will result in the elimination of amortization expense of approximately $28.0
million in 2002. The Company will test goodwill for impairment using the
two-step process prescribed in SFAS No. 142. The first step is a screen for
potential impairment, while the second step measures the amount of impairment,
if any. The impairment test of goodwill performed by the Company as of December
1, 2001 indicated no impairment.
OUTLOOK
The Companys residential backlog at November 30, 2001 reached 11,127 units, the
highest year-end backlog level in its history, and represented aggregate future
revenues of $1.89 billion, also a year-end record. The Companys backlog in
terms of units and value at November 30, 2001 increased 5.4% and 4.8%,
respectively, compared to 10,559 units in residential backlog, representing
aggregate future revenues of $1.80 billion, at year-end 2000. Company-wide net
orders of 5,336 units for the quarter ending November 30, 2001 were essentially
even with the 5,312 net orders reported in the corresponding quarter of 2000.
The Company experienced significant volatility in its net orders during the
fourth quarter of 2001 following the September 11th terrorist attacks, with
year-over-year September domestic net orders down 20.5%. However, net orders
regained strength later in the fourth quarter, with year-over-year comparisons
for the second and third months of the quarter showing sequential improvement
and the month of November 2001 showing improvement over November 2000.
Despite the impact of the September 11th tragedy on fourth quarter net orders,
the Companys domestic residential backlog at November 30, 2001 increased 4.2%
to $1.60 billion, from $1.53 billion at year-end 2000. The growth in domestic
backlog at year-end 2001 reflects increases in backlog in the Southwest and
Central regions, partially offset by a decrease in the West Coast region. On a
unit basis, domestic backlog stood at 9,115 units at year-end 2001, up 4.3% from
8,742 units at year-end 2000. The West Coast region backlog value totaled $474.6
million on 1,643 units at November 30, 2001, down from $643.6 million on 2,421
units at November 30, 2000. West Coast region net orders decreased 18.8% in the
fourth quarter of 2001, to 973 units, from 1,198 units in the fourth quarter of
2000. This decrease was mainly due to year-over-year decreases in net orders for
the months of September and October in the wake of the terrorist attacks. In the
Southwest region, backlog value increased to $420.3 million on 2,551 units at
November 30, 2001 from $345.6 million on 2,311 units at November 30, 2000. This
improvement occurred without any increase in the regions average number of
active communities. In the Southwest region, fourth quarter net orders decreased
13.5% to 1,156 units in 2001 from 1,337 units in 2000, partly due to a decline
in net-order activity following the events of September 11th. In the Central
region, backlog value rose to $700.3 million on 4,921 units at November 30, 2001
from $541.3 million on 4,010 units at November 30, 2000. Fourth quarter net
orders in the Central Region increased 5.7% to 2,051 units in 2001 from 1,941
units in the year-earlier period, despite a temporary decline in net order
activity and an increase in cancellations following the terrorist attacks.
In France, residential backlog at November 30, 2001 totaled $294.9 million on
2,012 units, up 8.1% and 10.7%, respectively, from $272.9 million on 1,817 units
at year-end 2000. French net orders increased 38.3% to 1,156 units in the
fourth quarter of 2001 from 836 units in the year-earlier period. The value of
the backlog associated with French commercial development activities totaled
approximately $41.6 million at November 30, 2001 compared to $88.6 million at
year-end 2000.
Substantially all homes included in the year-end 2001 backlog are expected to be
delivered during 2002. However, cancellation rates could increase, particularly
if market conditions deteriorate, international hostilities flare up, further
terrorist attacks occur or mortgage interest rates increase, thereby decreasing
backlog and related future revenues.
Although the negative impact of the September 11th tragedy on net orders
appeared generally to dissipate with the passage of time, the Company continued
to experience volatility in its net orders during the first two months of fiscal
2002 with net orders down 4.6% from the comparable period of 2001. Domestic net
orders during the two-month period decreased 6.3%, reflecting decreases of 26.6%
and 9.3% in the Southwest and Central regions, respectively, partially offset by
an increase of 35.5% in the West Coast region. In France, net orders for the
first two months of fiscal 2002 increased 11.2% compared to the same period in
2001. Full-year Company-wide net order results could be further affected by
global or regional market uncertainties, including acts of terrorism or other
disruptions, mortgage interest rate volatility in France or the U.S., declines
in consumer confidence in either country and/or other factors.
With the heightened uncertainty surrounding the overall economy due to the
general recessionary trends and the September 11th tragedy, the Company has, for
the time being, taken a more conservative posture with regard to cash
expenditures, including renegotiating or extending option periods on land
purchases and terminating certain discretionary expenditures, among other
things. The Company believes that having increased cash available will enhance
its ability to navigate in a challenging operating environment and better
position it to pursue opportunities to reduce debt, repurchase stock and acquire
land and/or businesses in the future.
43
Although the Company has conservatized its cash expenditures in the wake of the
acts of terrorism and the U.S. military response to terrorism, the Company
intends to increase overall unit deliveries in future years through the
well-developed, long-term growth strategies it has in place. These strategies
include the expansion of existing operations to achieve optimal market volume
levels and the possible entry into new geographic markets through de novo entry,
acquisitions or a combination of the two approaches. Growth in the Companys
existing markets will also be driven by the Companys ability to increase the
average number of active communities in those markets, with this expansion
balanced against changes in the U.S. political and economic environment.
While adhering to the disciplines of its longstanding KBnxt operational business
model, the Company has leveraged the model with additional complementary
initiatives, including strategies to establish and deepen its leading market
positions and to identify new acquisition opportunities. The Company believes
its capital structure and operational disciplines will allow it to deliver
consistent results even during more challenging economic conditions. The Company
has successfully diversified its operations in recent years while at the same
time maintaining a selective approach to land investments. The Companys
strategies are intended to reduce financial risk and limit the Companys
exposure and sensitivity to swings in economic conditions.
The Company currently expects to deliver between 24,500 and 25,000 homes in 2002
and, based upon such projected deliveries, expects to achieve its fifth
consecutive year of record earnings in fiscal 2002. However, these goals could
be materially affected by various risk factors, such as the continued impact of
terrorist activities and U.S. response, accelerating recessionary trends and
other adverse changes in economic conditions either nationally, in the U.S. or
France, or in the localized regions in which the Company operates; continued
diminution in domestic job growth or employment levels; a continued downturn in
the economys pace; continued uncertainties associated with Californias
electricity supply problems; changes in home mortgage interest rates or consumer
confidence, among other things. Although the Company expects its 2002 unit
deliveries to remain essentially even with 2001 levels, it anticipates solid
earnings growth in 2002. The Company believes this projected earnings growth
will come from a higher housing gross margin, a decrease in its selling, general
and administrative expense ratio, the elimination of distributions on the Feline
Prides and an overall reduction in its effective tax rate. The Company currently
believes that it is well-positioned to meet its financial goals for 2002 due to
the performance it achieved in 2001, its excellent cash and borrowing capacity
positions, the backlog of homes in place at the beginning of fiscal year 2002
and its plans to continue to adhere to the disciplines of its KBnxt
operational business model.
IMPACT OF INFLATION
The Companys business is significantly affected by general economic conditions,
particularly by inflation and its generally associated adverse effect on
interest rates. Although inflation rates have been low in recent years, rising
inflation would likely affect the Companys revenues and earning power by
reducing demand for homes as a result of correspondingly higher interest rates.
In periods of high inflation, the rising costs of land, construction, labor,
interest and administrative expenses have often been recoverable through
increased selling prices, although this has not always been possible because of
high mortgage interest rates and competitive factors in the marketplace. In
recent years, inflation has had no significant adverse impact on the Company, as
average annual cost increases have not exceeded the average rate of inflation.
* * * * * * *
Investors are cautioned that certain statements contained in this document, as
well as some statements by the Company in periodic press releases and some oral
statements by Company officials to securities analysts and stockholders during
presentations about the Company are forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 (the Act).
Statements which are predictive in nature, which depend upon or refer to future
events or conditions, or which include words such as expects, anticipates,
intends, plans, believes, estimates, hopes, and similar expressions
constitute forward-looking statements. In addition, any statements concerning
future financial performance (including future revenues, earnings or growth
rates), ongoing business strategies or prospects, and possible future Company
actions, which may be provided by management are also forward-looking
statements as defined by the Act. Forward-looking statements are based on
current expectations and projections about future events and are subject to
risks, uncertainties, and assumptions about the Company, economic and market
factors and the homebuilding industry, among other things. These statements are
not guaranties of future performance, and the Company has no specific intention
to update these statements.
Actual events and results may differ materially from those expressed or
forecasted in the forward-looking statements made by the Company or Company
officials due to a number of factors. The principal important risk factors that
could cause the Companys actual performance and future events and actions to
differ materially from such forward-looking statements include, but are not
limited to, the continued impact of the terrorist activities and U.S. response,
accelerating recessionary trends and other adverse changes in general economic
conditions, material prices, labor costs, interest rates, the secondary market
for loans, consumer confidence, competition, currency exchange rates insofar as
they affect the Companys operations in France, environmental factors,
government regulations affecting the Companys operations, the availability
and cost of land in desirable areas, unanticipated violations of Company policy,
unanticipated legal proceedings, and conditions in the capital, credit and homebuilding markets.
44
KB HOME
By:
/s/ WILLIAM R. HOLLINGER
William R. Hollinger
Senior Vice President and Controller
Signature
Title
Date
/s/ BRUCE KARATZ
Bruce Karatz
Chairman and
Chief Executive Officer
(Principal Executive Officer)
February 28, 2002
/s/ WILLIAM R. HOLLINGER
William R. Hollinger
Senior Vice President and Controller
(Principal Financial Officer and
Principal Accounting Officer)
February 28, 2002
/s/ RONALD W. BURKLE
Ronald W. Burkle
Director
February 28, 2002
/s/ HENRY G. CISNEROS
Henry G. Cisneros
Director
February 28, 2002
/s/ JANE EVANS
Jane Evans
Director
February 28, 2002
/s/ DR. RAY R. IRANI
Dr. Ray R. Irani
Director
February 28, 2002
/s/ KENNETH M. JASTROW, II
Kenneth M. Jastrow, II
Director
February 28, 2002
/s/ JAMES A. JOHNSON
James A. Johnson
Director
February 28, 2002
/s/ DR. BARRY MUNITZ
Dr. Barry Munitz
Director
February 28, 2002
/s/ GUY NAFILYAN
Guy Nafilyan
Director
February 28, 2002
/s/ LUIS G. NOGALES
Luis G. Nogales
Director
February 28, 2002
/s/ SANFORD C. SIGOLOFF
Sanford C. Sigoloff
Director
February 28, 2002
Page No. in
Annual Report
to Stockholders
45
46
47
48
49 through 63
64
64
YEARS ENDED NOVEMBER 30,
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
2001
2000
1999
1998
1997
$
4,501,715
$
3,870,488
$
3,772,121
$
2,402,966
$
1,843,614
352,316
288,609
259,107
148,672
101,751
2,983,522
2,361,768
2,214,076
1,542,544
1,133,861
1,088,615
987,980
813,424
529,846
496,869
$
72,469
$
60,370
$
64,174
$
46,396
$
35,109
33,771
23,832
17,464
21,413
14,508
709,344
467,153
450,159
317,660
285,130
595,035
385,294
377,666
239,413
200,828
22,359
29,928
36,219
49,264
60,058
$
4,574,184
$
3,930,858
$
3,836,295
$
2,449,362
$
1,878,723
386,087
312,441
276,571
170,085
116,259
214,217
209,960
147,469
95,267
58,230
3,692,866
2,828,921
2,664,235
1,860,204
1,418,991
1,683,650
1,373,274
1,191,090
769,259
697,697
22,359
29,928
36,219
49,264
60,058
189,750
189,750
189,750
1,092,481
654,759
676,583
474,511
383,056
$
5.72
$
5.39
$
3.16
$
2.41
$
1.50
5.50
5.24
3.08
2.32
1.45
.30
.30
.30
.30
.30
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
UNCONSOLIDATED
WEST COAST
SOUTHWEST
CENTRAL
FOREIGN
TOTAL
JOINT VENTURES
981
1,248
1,746
553
4,528
84
1,388
1,503
2,121
711
5,723
98
1,553
1,690
2,432
798
6,473
79
1,628
1,797
3,069
1,320
7,814
69
5,550
6,238
9,368
3,382
24,538
330
1,128
1,264
1,653
520
4,565
123
1,207
1,349
1,884
602
5,042
137
1,444
1,596
1,944
726
5,710
102
1,697
1,623
2,631
1,124
7,075
93
5,476
5,832
8,112
2,972
22,392
455
1,176
1,973
2,531
664
6,344
65
1,541
1,855
3,078
896
7,370
74
1,082
1,494
2,369
720
5,665
64
973
1,156
2,051
1,156
5,336
17
4,772
6,478
10,029
3,436
24,715
220
1,341
1,523
1,903
558
5,325
115
2,178
1,875
2,888
896
7,837
121
1,301
1,301
2,191
564
5,357
102
1,198
1,337
1,941
836
5,312
106
6,018
6,036
8,923
2,854
23,831
444
UNCONSOLIDATED
WEST COAST
SOUTHWEST
CENTRAL
FOREIGN
TOTAL
JOINT VENTURES
2,616
3,036
4,795
1,928
12,375
189
2,769
3,388
5,752
2,113
14,022
165
2,298
3,192
5,939
2,035
13,464
150
1,643
2,551
4,921
2,012
11,127
98
2,092
2,366
3,449
1,566
9,473
211
3,063
2,892
4,453
1,860
12,268
195
2,920
2,597
4,700
1,898
12,115
195
2,421
2,311
4,010
1,817
10,559
208
$
754,618
$
460,411
$
667,155
$
297,706
$
2,179,890
$
37,611
790,862
523,751
805,022
285,255
2,404,890
33,330
653,487
497,700
847,614
306,470
2,305,271
30,000
474,645
420,282
700,251
294,870
1,890,048
20,384
$
495,782
$
349,122
$
438,739
$
249,581
$
1,533,224
$
38,824
755,243
413,692
570,012
315,151
2,054,098
36,660
737,912
377,324
607,767
310,240
2,033,243
35,880
643,620
345,609
541,258
272,901
1,803,388
42,224
CONSOLIDATED STATEMENTS OF INCOME
45
CONSOLIDATED BALANCE SHEETS
See accompanying notes.
46
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS EQUITY
[Additional columns below]
[Continued from above table, first column(s) repeated]
See accompanying notes.
47
CONSOLIDATED STATEMENTS OF CASH FLOWS
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
OPERATIONS
KB Home (the Company) is a regional builder of single-family homes
with operations in the United States and France. Domestically, the Company
operates in Arizona, California, Colorado, Florida, Nevada, New Mexico and
Texas. In France, the Company operates through a majority-owned subsidiary which
also develops commercial and high-density residential projects, such as
condominium complexes. Through its mortgage banking subsidiary, KB Home
Mortgage, the Company provides mortgage banking services to its domestic
homebuyers.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts
of the Company and all significant subsidiaries and joint ventures in which a
controlling interest is held. All intercompany transactions have been
eliminated. Investments in unconsolidated joint ventures in which the Company
has less than a controlling interest are accounted for using the equity method.
USE OF ESTIMATES
The financial statements have been prepared in conformity with
generally accepted accounting principles and, as such, include amounts based on
informed estimates and judgments of management. Actual results could differ from
these estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt
instruments and other short-term investments purchased with a maturity of three
months or less to be cash equivalents. As of November 30, 2001 and 2000, the
Companys cash equivalents totaled $291,713,000 and $1,830,000, respectively.
FOREIGN CURRENCY TRANSLATION
Results of operations for French entities are
translated to U.S. dollars using the average exchange rates during the period.
Assets and liabilities are translated using the exchange rates in effect at the
balance sheet date. Resulting translation adjustments are recorded in
stockholdersequity as foreign currency translation adjustments.
CONSTRUCTION OPERATIONS
Housing and other real estate sales are recognized when
title passes to the buyer and all of the following conditions are met: a sale is
consummated, a significant down payment is received, the earnings process is
complete and the collection of any remaining receivables is reasonably assured.
In France, revenues from development and construction of single-family detached
homes, condominiums and commercial buildings, under long-term contracts with
individual investors who own the land, are recognized using the percentage of
completion method, which is generally based on costs incurred as a percentage of
estimated total costs of individual projects. Revenues recognized in excess of
amounts collected are classified as receivables. Amounts received from buyers in
excess of revenues recognized, if any, are classified as other liabilities.
Construction and land costs are comprised of direct and allocated costs,
including estimated future costs for warranties and amenities. Land, land
improvements and other common costs are allocated on a relative fair value basis
to units within a parcel or subdivision. Land and land development costs
generally include related interest and property taxes incurred until development
is substantially completed or deliveries have begun within a subdivision.
Land to be developed and projects under development are stated at cost unless
the carrying amount of the parcel or subdivision is determined not to be
recoverable, in which case the impaired inventories are written down to fair
value. Write-downs of impaired inventories are recorded as adjustments to the
cost basis of the inventory. The Companys inventories typically do not consist
of completed projects.
MORTGAGE BANKING OPERATIONS
First mortgages and mortgage-backed securities
consist of securities held for long-term investment and are valued at amortized
cost. First mortgages held under commitments of sale are valued at the lower of
aggregate cost or market. Market is principally based on public market
quotations or outstanding commitments obtained from investors to purchase first
mortgages receivable.
Principal and interest payments received on mortgage-backed securities are
invested in short-term securities maturing on the next debt service date of the
collateralized mortgage obligations for which the securities are held as
collateral. Such payments are restricted to the payment of the debt service on
the collateralized mortgage obligations.
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Effective December
1, 2000, the Company adopted Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities, (SFAS No. 133), as amended, which addresses the accounting for
and disclosure of derivative instruments, including derivative instruments
embedded in other contracts, and hedging activities. SFAS No. 133 requires the
Company to recognize all derivatives on the balance sheet at fair value.
Derivatives that are not hedges must be adjusted to fair value through income.
If the derivative is a hedge, depending on the nature of the hedge, changes in
the fair value of derivatives are either offset against the change in fair value
of assets, liabilities or firm commitments through earnings or recognized in
other comprehensive income until the hedged item is recognized in earnings.
In the normal course of business, the Company uses financial instruments to meet
the financing needs of its customers and reduce its exposure to fluctuations in
interest rates. The Companys risk management program involves the use of
mortgage forward delivery contracts and non-mandatory commitments to mitigate
its exposure to movements in interest rates on interest rate lock agreements and
mortgage loans held for sale. The Company forecasts the amount and timing of its
future loan sales and uses mortgage forward delivery contracts and non-mandatory
commitments to hedge the variability of the cash flows associated with the
Companys future loan sales. The mortgage forward delivery contracts and
non-mandatory commitments are designated as cash flow hedges and changes in the
value of these instruments are recognized in other comprehensive income until
such time
49
that earnings are affected by the underlying hedged item. At the inception of a
hedge, the Company formally documents the relationship between the mortgage
forward delivery contracts or non-mandatory commitments and the forecasted loan
sales as well as the risk management objective and strategy for undertaking
the hedge transactions. Mortgage forward delivery contracts are obtained through
the U.S. public markets and non-mandatory commitments are entered into with
major financial institutions in order to minimize counterparty credit risk.
In its mortgage loan origination process, the Company also uses interest rate
lock agreements which represent commitments to originate loans to customers at
market rates on the date such agreements are established, typically three months
or less before settlement. These interest rate lock agreements generally have no
value on the date of origination, however, may gain or lose value due to
subsequent changes in mortgage interest rates. All of the Companys interest
rate lock agreements are classified as held for sale upon funding of the
underlying loans. In accordance with SFAS No. 133, the Company classifies and
accounts for its interest rate lock agreements as non-designated derivative
instruments and records these agreements at fair value with changes in value
recorded to current earnings.
In connection with the adoption of SFAS No. 133, at December 1, 2000, the
Company recognized a pretax cumulative effect transition adjustment which
reduced other comprehensive income by $2,400,000. This amount represented the
cumulative net adjustments at December 1, 2000 of mortgage forward delivery
contracts and non-mandatory commitments. Pursuant to the requirements of SFAS
No. 133, cumulative losses in other comprehensive income of $2,400,000 were
recognized in earnings during the year ended November 30, 2001, concurrent with
the settlement of the related forecasted loan sales. Cumulative gains related to
the derivative instruments in the amount of $3,886,000 were recorded in other
comprehensive income at November 30, 2001 and will be recognized in earnings
generally within three months or less, concurrent with the recognition in
earnings of the hedged forecasted loan sales.
SECONDARY MARKETING TRADING LOSS
On August 31, 1999, the Company disclosed that
it had discovered unauthorized mortgage loan trading activity by an
employee of its mortgage banking subsidiary resulting in a pretax trading loss
of $18,155,000 ($11,755,000, or $.25 per diluted share, on an after-tax basis).
It is normal practice for the Companys mortgage banking subsidiary to sell
loans into the market that approximately match loan commitments to the Companys
homebuyers. This practice is intended to hedge exposure to changes in interest
rates that may occur until loans are sold to secondary market investors in the
ordinary course of business. The loss was the result of a single employee
engaging in unauthorized mortgage loan trading largely unrelated to mortgage
originations. The employee who conducted the unauthorized trading was
terminated.
STOCK OPTIONS
The Companys employee stock option plans are accounted for under
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees (APB Opinion No. 25).
INCOME TAXES
Income taxes are provided for at rates applicable in the countries
in which the income is earned. Provision is made currently for United States
federal income taxes on earnings of foreign subsidiaries that are not expected
to be reinvested indefinitely.
EARNINGS PER SHARE
Basic earnings per share is calculated by dividing net income
by the average number of common shares outstanding for the period. Diluted
earnings per share is calculated by dividing net income by the average number of
shares outstanding including all dilutive potentially issuable shares under
various stock option plans and stock purchase contracts. The following table
presents a reconciliation of average shares outstanding:
SEGMENT INFORMATION
In accordance with Statement of Financial Accounting
Standards No. 131, Disclosures about Segments of an Enterprise and Related
Information, the Company has identified two reportable segments: construction
and mortgage banking. The Companys construction segment consists primarily of
domestic and foreign homebuilding operations. The Companys construction
operations 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 the first-time homebuyer. Domestically, the Company currently sells
homes in Arizona, California, Colorado, Florida, Nevada, New Mexico and Texas.
Internationally, the Company operates in France through a majority-owned subsidiary. In addition to constructing homes, the Companys French subsidiary
builds commercial projects and high-density residential properties, such as
condominium complexes, in France. The Companys mortgage banking operations
provide mortgage banking services primarily to the Companys domestic
homebuyers. The mortgage banking segment originates, processes and sells
mortgages to third-party investors. The Company does not retain or service the
mortgages that it originates but, rather, sells the mortgages and related
servicing rights to investors.
Information for the Companys reportable segments are presented in its
consolidated statements of income and consolidated balance sheets included
herein. The Companys reporting segments follow the same accounting policies
used for the Companys consolidated financial statements as described in the
summary of significant accounting policies. Management evaluates a segments
performance based upon a number of factors including pretax results.
50
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards No.
141, Business Combinations, (SFAS
No. 141). SFAS No. 141 requires all
business combinations to be accounted for using the purchase method of
accounting and is effective for all business combinations with a closing date
after June 30, 2001. The Companys adoption of SFAS No. 141 did not have a
material effect on its operating results or financial condition in 2001.
The Company has recorded goodwill in connection with various acquisitions
completed in recent years. Goodwill represents the excess of the purchase price
over the fair value of net assets acquired. The Company amortized goodwill
through November 30, 2001 over periods ranging from five to ten years using the
straight-line method. At November 30, 2001 and 2000, accumulated amortization
totaled $107,744,000 and $79,756,000, respectively. In June 2001, the FASB
issued Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets, (SFAS No. 142). SFAS No. 142 requires goodwill to be
tested for impairment under certain circumstances, and written off when
impaired, rather than amortized as previous standards required. SFAS No. 142 is
effective for fiscal years beginning after December 15, 2001, although early
application is permitted for entities, like the Company, with fiscal years
beginning after March 15, 2001. The Company adopted SFAS No. 142 on December 1,
2001, earlier than required. Application of the nonamortization provisions of
SFAS No. 142 by the Company will result in the elimination of amortization
expense of approximately $28,000,000 in 2002. The Company will test goodwill for
impairment using the two-step process prescribed in SFAS No. 142. The first step
is a screen for potential impairment, while the second step measures the amount
of impairment, if any. The impairment test of goodwill performed by the Company
as of December 1, 2001 indicated no impairment.
RECLASSIFICATIONS
Certain amounts in the consolidated financial statements of
prior years have been reclassified to conform to the 2001 presentation.
NOTE 2. ISSUANCE OF FRENCH SUBSIDIARY STOCK
On February 7, 2000, Kaufman & Broad S.A. (KBSA), the Companys wholly owned
French subsidiary, issued 5,314,327 common shares (including the over-allotment option) in an initial public offering. The offering was made in France and
elsewhere in Europe and was priced at 23 euros per share. Since the initial
public offering, KBSA has been listed on the Premier Marche of the
Paris Bourse.
The offering generated total net proceeds of $113,100,000, of which $82,900,000
was used by the Company to reduce its domestic debt and repurchase shares of its
common stock. The remainder of the proceeds was used to fund internal and
external growth of KBSA. The Company recognized a gain of $39,630,000, or $.99
per diluted share as a result of the offering. For tax purposes, the proceeds
received by the Company in connection with the initial public offering were
treated as a dividend paid out of the accumulated earnings and profits of KBSA.
While such dividends are generally taxed on a current basis, the Company had
sufficient foreign tax credits to offset any federal taxes due on the dividend
received; therefore, no deferred taxes were provided on the gain recognized in
the financial statements for the year ended November 30, 2000. Since the initial
public offering, the Company has maintained a 57% majority ownership interest in
KBSA and continues to consolidate these operations in its financial statements.
NOTE 3. ACQUISITIONS
Effective January 7, 1999, the Company acquired substantially all of the
homebuilding assets of the Lewis Homes group of companies (Lewis Homes). Lewis
Homes was engaged in the acquisition, development and sale of residential real
estate in California and Nevada. The purchase price for Lewis Homes was
approximately $449,244,000, comprised of the assumption of approximately
$303,239,000 in debt and the issuance of 7,886,686 shares of the Companys
common stock valued at approximately $146,005,000. The purchase price was based
on the December 31, 1998 net book values of the entities purchased. The excess
of the purchase price over the estimated fair value of net assets acquired was
$177,600,000 and was allocated to goodwill. Through November 30, 2001, the
Company amortized the goodwill on a straight-line basis over a period of ten
years. However, in accordance with SFAS No. 142, which the Company adopted as of
December 1, 2001, in future periods the goodwill will no longer be amortized but
will be reviewed for impairment on an annual basis.
The 7,886,686 shares of Company common stock issued in the acquisition were
restricted shares and could not be resold without a registration statement or
compliance with Rule 144 under the Securities Act of 1933 (Rule 144), which,
among other things, limits the number of shares that may be resold in a given
period. The Company originally agreed to file a registration statement for
6,000,000 of those shares in three increments at the Lewis familys request from
July 1, 2000 to July 1, 2002. On September 21, 2000, the Company instead
repurchased 4,000,000 of the shares issued in the acquisition from the Lewis
holders at a price of $26.00 per share. In connection with the repurchase, the
Lewis holders registration rights for the first two increments were
extinguished. In the period subsequent to the Companys repurchase, the Lewis
holders sold most of the balance of their shares within the requirements of Rule
144. In connection with the acquisition of Lewis Homes, the Company obtained a
$200,000,000 unsecured term loan agreement with various banks to refinance
certain debt assumed. The Company used borrowings under its existing domestic
unsecured revolving credit facility to refinance certain other debt assumed in
the Lewis Homes acquisition. The acquisition consideration for Lewis Homes was
determined by arms-length negotiations between the parties. The acquisition was
accounted for as a purchase, with the results of Lewis Homes included in the
Companys consolidated financial statements as of January 7, 1999.
During the year ended November 30, 2000, the Companys French subsidiary, KBSA,
completed the acquisitions of four homebuilders in France. These companies were
acquired for an aggregate purchase price of $33,516,000 and were accounted for
under the purchase method of accounting. The excess of the purchase price over
the estimated fair value of the net assets acquired was $24,745,000 and was
allocated to goodwill. Through November 30, 2001, the Company amortized the
goodwill on a straight-line basis over a period of ten years. However, in
accordance with SFAS No. 142, which the Company adopted as of December 1, 2001,
in future periods the goodwill will no longer be amortized but will be reviewed
for impairment on an annual basis. The pro forma results for 2000, assuming
these acquisitions had been made at the beginning of the year, would not be
materially different from reported results.
51
On July 19, 2001, the Company acquired Trademark Home Builders, Inc.
(Trademark), a builder of single-family homes in Jacksonville, Florida. The
acquisition marked the Companys entry into Florida. Trademark was acquired for
approximately $30,146,000, including the assumption of approximately $16,284,000
in debt, and was accounted for under the purchase method of accounting. The
excess of the purchase price over the estimated fair value of net assets
acquired was $9,240,000 and was allocated to goodwill and assigned to the
Companys construction segment. On September 26, 2001, KBSA completed the
acquisition of Residences Bernard Teillaud (RBT), a France-based builder of
condominiums. As a result of the acquisition, KBSA anticipates having a leading
market position in the Rhone-Alpes region of France. RBT was acquired for
approximately $28,675,000 and was accounted for under the purchase method of
accounting. The excess of the purchase price over the estimated fair value of
net assets acquired was $10,152,000 and was allocated to goodwill and assigned
to the Companys construction segment. In accordance with SFAS No. 142, the
goodwill amounts recorded in connection with the acquisitions of Trademark and
RBT will not be amortized but will be reviewed for impairment on an annual basis.
The results of Trademark and RBT were included in the Companys consolidated
financial statements as of their respective acquisition dates. The pro forma
results of the Company for 2001 and 2000, assuming these acquisitions had been
made at the beginning of each year, would not be materially different from
reported results.
NOTE 4. RECEIVABLES
CONSTRUCTION
Trade receivables amounted to $329,812,000 and $213,197,000 at
November 30, 2001 and 2000, respectively. Included in these amounts are unbilled
receivables due from buyers on sales of French single-family detached homes,
condominiums and commercial buildings accounted for using the percentage of
completion method totaling $311,871,000 at November 30, 2001 and $161,658,000 at
November 30, 2000. The buyers are contractually obligated to remit payments
against their unbilled balances. Other receivables of $93,245,000 at November
30, 2001 and $81,563,000 at November 30, 2000 included escrow deposits and
amounts due from municipalities and utility companies.
At November 30, 2001 and 2000, receivables were net of allowances for doubtful
accounts of $19,487,000 and $10,152,000, respectively.
MORTGAGE BANKING
First mortgages and mortgage-backed securities consisted of
loans of $7,464,000 at November 30, 2001 and $11,734,000 at November 30, 2000
and mortgage-backed securities of $23,448,000 and $31,403,000 at November 30,
2001 and 2000, respectively. The mortgage-backed securities serve as collateral
for related collateralized mortgage obligations. The properties covered by the
mortgages underlying the mortgage-backed securities are single-family
residences. Issuers of the mortgage-backed securities are the Government
National Mortgage Association and Fannie Mae. The first mortgages and
mortgage-backed securities bore interest at an average rate of 8-1/4% and
8-3/8% at November 30, 2001 and 2000, respectively (with rates ranging from
7% to 11-5/8% in 2001 and 7% to 12% in 2000).
The Companys mortgage-backed securities held for long-term investment have been
classified as held-to-maturity and are stated at amortized cost, adjusted for
amortization of discounts and premiums to maturity. Such amortization is
included in interest income. The total gross unrealized gains and gross
unrealized losses on the mortgage-backed securities were $1,060,000 and $0,
respectively at November 30, 2001 and $600,000 and $0, respectively at November
30, 2000.
First mortgages held under commitments of sale and other receivables consisted
of first mortgages held under commitments of sale of $628,627,000 at November
30, 2001 and $389,494,000 at November 30, 2000 and other receivables of
$26,864,000 and $13,671,000 at November 30, 2001 and 2000, respectively. The
first mortgages held under commitments of sale bore interest at average rates of
7-1/4% and 7-1/2% at November 30, 2001 and 2000, respectively. The balance
in first mortgages held under commitments of sale and other receivables
fluctuates significantly during the year and typically reaches its highest level
at quarter-ends, corresponding to the Companys home and mortgage delivery
activity.
The Company uses mortgage forward delivery contracts and non-mandatory
commitments to mitigate its exposure to movements in interest rates on interest
rate lock agreements and mortgage loans held for sale. At November 30, 2001 and
2000, the Company had aggregate notional amounts of $825,760,000 and
$512,000,000, respectively, outstanding under mortgage forward delivery
contracts and non-mandatory commitments and notional amounts of $108,077,000 and
$61,485,000, respectively, outstanding under interest rate lock agreements.
Interest rate lock agreements had interest rates ranging from 5% to 8% as of
November 30, 2001 and 6-1/2% to 9-3/4% as of November 30, 2000. The
estimated fair value of mortgage forward delivery contracts and non-mandatory
commitments exceeded the contract value by $3,886,000 at November 30, 2001 and
was less than the contract value by $2,400,000 at November 30, 2000. At November
30, 2001 and 2000, the estimated fair value of interest rate lock agreements was
less than the contract value by $209,000 and $200,000, respectively. All of the
fair values were based on available market information.
NOTE 5. INVENTORIES
Inventories consisted of the following:
52
Land under development primarily consists of parcels on which 50% or less of
estimated development costs have been incurred.
The impact of capitalizing interest costs on consolidated pretax income is as
follows:
NOTE 6. INVESTMENTS IN UNCONSOLIDATED JOINT VENTURES
The Company participates in a number of joint ventures in which it has less than
a controlling interest. These joint ventures, which operate in certain markets
in the United States and France where the Companys consolidated construction
operations are located, are engaged in the development, construction and sale of
residential properties and commercial projects. Combined condensed financial
information concerning the Companys unconsolidated joint venture activities
follows:
The joint ventures finance land and inventory investments of the Companys
operating subsidiaries primarily through a variety of borrowing arrangements.
The Company typically does not guarantee these financing arrangements.
The Companys share of pretax income includes management fees earned from the
unconsolidated joint ventures.
53
NOTE 7. MORTGAGES AND NOTES PAYABLE
CONSTRUCTION
Mortgages and notes payable consisted of the following (interest
rates are as of November 30):
On October 6, 2000, the Company entered into an unsecured credit agreement (the
Unsecured Credit Facility) consisting of a four-year committed revolving
credit facility and a five-year term loan, which together replaced its
previously existing revolving credit facility and term loan agreement. The
Unsecured Credit Facility totaled $732,000,000 at November 30, 2001 and was
comprised of a $564,050,000 four-year committed revolving credit facility and a
$167,950,000 five-year term loan. The Unsecured Credit Facility has the capacity
to be expanded up to an aggregate total of $900,000,000 if additional bank
lending commitments are obtained. Interest on the Unsecured Credit Facility is
payable monthly at the London Interbank Offered Rate plus an applicable spread
on amounts borrowed.
The Companys French subsidiaries have lines of credit with various banks which
totaled $321,675,000 at November 30, 2001 and have various committed expiration
dates through November 2006. These lines of credit provide for interest on
borrowings at either the French Federal Funds Rate or the Paris Interbank
Offered Rate plus an applicable spread.
On September 21, 2000, in connection with the repurchase of 4,000,000 shares
from the Lewis holders, the Company issued promissory notes (the Shareholder
Notes) with an aggregate principal amount of $78,000,000, to the Lewis holders.
Interest on the Shareholder Notes was accrued monthly at an annual rate of
6 3/5%. The Company paid off the Shareholder Notes during the year ended
November 30, 2001.
The weighted average annual interest rate on aggregate unsecured borrowings,
excluding the senior and senior subordinated notes, was 4 3/8% and 7 3/8%
at November 30, 2001 and 2000, respectively.
On April 26, 1993, the Company issued
$175,000,000 principal amount of 9 3/8%
senior subordinated notes at 99.202%. The notes were due May 1, 2003 with
interest payable semi-annually. The notes represented unsecured obligations of
the Company and were subordinated to all existing and future senior indebtedness
of the Company. The Company had the ability to redeem the notes, in whole or in
part, at any time at 100% of their principal amount. The Company redeemed all of
the outstanding 9 3/8% senior subordinated notes on December 31, 2001.
On October 29, 1996, the Company filed a universal shelf registration statement
(the 1996 Shelf Registration) with the Securities and Exchange Commission for
up to $300,000,000 of the Companys debt and equity securities. The Companys
previously outstanding shelf registration for debt securities in the amount of
$100,000,000 was subsumed within the 1996 Shelf Registration. On November 14,
1996, the Company utilized the 1996 Shelf Registration to issue $125,000,000 of
9 5/8% senior subordinated notes at 99.525%. The notes, which are due
November 15, 2006 with interest payable semi-annually, represent unsecured
obligations of the Company and are subordinated to all existing and future
senior indebtedness of the Company. The notes are redeemable at the option of
the Company, in whole or in part, at 104.8125% of their principal amount
beginning November 15, 2001, and thereafter, at prices declining annually to
100% on and after November 15, 2004.
On October 14, 1997, pursuant to the 1996 Shelf Registration, the Company issued
$175,000,000 of 7 3/4% senior notes at 100% of the principal amount of the
notes. The notes, which are due October 15, 2004 with interest payable
semi-annually, represent unsecured obligations of the Company and rank pari
passu in right of payment with all other senior unsecured indebtedness of the
Company. The notes are not redeemable by the Company prior to stated maturity.
This offering resulted in the issuance of all available securities under the
1996 Shelf Registration.
54
On December 5, 1997, the Company filed a universal shelf registration statement
(the 1997 Shelf Registration) with the Securities and Exchange Commission for
up to $500,000,000 of the Companys debt and equity securities. This universal
shelf registration provides that securities may be offered from time to time in
one or more series and in the form of senior, senior subordinated or
subordinated debt, preferred stock, common stock, and/or warrants to purchase
such securities.
On February 8, 2001, pursuant to the 1997 Shelf Registration, the Company issued
$250,000,000 of 9 1/2% senior subordinated notes at 100% of the principal
amount of the notes. The notes, which are due February 15, 2011 with interest
payable semi-annually, represent unsecured obligations of the Company and are
subordinated to all existing and future senior indebtedness of the Company. The
notes are redeemable at the option of the Company, in whole, or in part, at
104.750% of their principal amount beginning February 15, 2006, and thereafter
at prices declining annually to 100% on and after February 15, 2009. Proceeds
from the issuance of the notes were used to pay down bank borrowings.
On October 15, 2001, the Company filed a universal shelf registration statement
(as subsequently amended, the 2001 Shelf Registration) with the Securities and
Exchange Commission for up to $500,000,000 of the Companys debt and equity
securities. The remaining capacity under the 1997 Shelf Registration was rolled
into the 2001 Shelf Registration, thereby providing the Company with a total
issuance capacity of $750,000,000 under the 2001 Shelf Registration. The 2001
Shelf Registration provides that securities may be offered from time to time in
one or more series and in the form of senior, senior subordinated or
subordinated debt, preferred stock, common stock, stock purchase contracts,
stock purchase units and/or warrants to purchase such securities. The 2001 Shelf
Registration had not been declared effective as of November 30, 2001.
The 7 3/4% senior notes and 9 3/8%, 9 5/8% and 9 1/2% senior
subordinated notes contain certain restrictive covenants that, among other
things, limit the ability of the Company to incur additional indebtedness, pay
dividends, make certain investments, create certain liens, engage in mergers,
consolidations, or sales of assets, or engage in certain transactions with
officers, directors and employees. Under the terms of the Unsecured Credit
Facility, the Company is required, among other things, to maintain certain
financial statement ratios and a minimum net worth and is subject to limitations
on acquisitions, inventories and indebtedness. Based on the terms of the
Companys Unsecured Credit Facility, senior notes and senior subordinated notes,
retained earnings of $211,322,000 were available for payment of cash dividends
or stock repurchases at November 30, 2001.
Principal payments on senior and senior subordinated notes, term loan
borrowings, mortgages, land contracts and other loans are due as follows: 2002,
$40,916,000; 2003, $186,769,000; 2004, $180,565,000; 2005, $168,000,000; 2006,
$124,635,000; and thereafter, $250,000,000.
Assets (primarily inventories) having a carrying value of approximately
$172,179,000 are pledged to collateralize mortgages, land contracts and other
secured loans.
MORTGAGE BANKING
Notes payable included the following (interest rates are as of November 30):
First mortgages receivable are financed through a $300,000,000 revolving
mortgage warehouse agreement (the Mortgage Warehouse Facility). The Mortgage
Warehouse Facility, which expires on February 18, 2003, provides for an annual
fee based on the committed balance of the facility and provides for interest at
either the London Interbank Offered Rate or the Federal Funds Rate plus an
applicable spread on amounts borrowed.
On May 24, 2001, the Companys mortgage banking subsidiary renewed its Master
Loan and Security Agreement with an investment bank. The agreement, which
expires on May 25, 2002, provides for a facility fee based on the $200,000,000
maximum amount available and provides for interest to be paid monthly at the
Eurodollar Rate plus an applicable spread on amounts borrowed. During the fourth
quarter of 2001, the Companys mortgage banking subsidiary negotiated a temporary increase in the maximum credit amount available under the Master Loan and
Security Agreement to $325,000,000 through December 31, 2001. The temporary
increase was necessary to meet the Companys increased volume of loan
originations.
55
The amounts outstanding under the Mortgage Warehouse Facility and the Master
Loan and Security Agreement are secured by a borrowing base, which includes
certain mortgage loans held under commitments of sale and are repayable from
sales proceeds. There are no compensating balance requirements under either
facility. Both facilities include financial covenants and restrictions which,
among other things, require the maintenance of certain financial statement
ratios, a minimum tangible net worth and a minimum net income.
Collateralized mortgage obligations represent bonds issued to third parties
which are collateralized by mortgage-backed securities with substantially the
same terms. At both November 30, 2001 and 2000, the collateralized mortgage
obligations bore interest at rates ranging from 8% to 12 1/4% with stated
original principal maturities ranging from 3 to 30 years. Actual maturities are
dependent on the rate at which the underlying mortgage-backed securities are
repaid. No collateralized mortgage obligations have been issued since 1988.
NOTE 8. COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF
SUBSIDIARY TRUST HOLDING SOLELY DEBENTURES OF THE COMPANY (FELINE PRIDES)
On July 7, 1998, the Company, together with KBHC Financing I, a Delaware
statutory business trust (the KBHC Trust) that was wholly owned by the
Company, issued an aggregate of (i) 18,975,000 Feline Prides securities, and
(ii) 1,000,000 KBHC Trust capital securities, with a $10 stated liquidation
amount. The Feline Prides consisted of (i) 17,975,000 Income Prides with a
stated amount per Income Prides of $10 (the Stated Amount), which were units
comprised of a capital security and a stock purchase contract under which the
holders were to purchase common stock from the Company not later than August 16,
2001 and the Company was to pay to the holders certain unsecured contract
adjustment payments, and (ii) 1,000,000 Growth Prides with a face amount per
Growth Prides equal to the Stated Amount, which were units consisting of a
1/100th beneficial interest in a zero-coupon U.S. Treasury security and a stock
purchase contract under which the holders were to purchase common stock from the
Company not later than August 16, 2001 and the Company was to pay to the holders
certain unsecured contract adjustment payments. The distribution rate on the
Income Prides was 8.25% per annum and the distribution rate on the Growth Prides
was .75% per annum.
The KBHC Trust utilized the proceeds from the issuance of the Feline Prides and
capital securities to purchase an equivalent principal amount of the Companys
8% debentures due August 16, 2003 (the 8% Debentures). The 8% Debentures were
the sole asset of the KBHC Trust. The Companys obligations under the 8%
Debentures and related agreements, taken together, constituted a firm and
unconditional guarantee by the Company of the KBHC Trusts obligations under the
capital securities. Distributions of $11,385,000, $15,180,000 and $15,180,000
were included as minority interests in the Companys results of operations for
each of the years ended November 30, 2001, 2000 and 1999, respectively.
On August 16, 2001, all of the Companys Feline Prides mandatorily converted
into 5,977,109 shares of the Companys common stock. In connection with the
conversion, all of the 8% Debentures held by the KBHC Trust were retired and
the KBHC Trust was subsequently dissolved.
NOTE 9. FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair values of financial instruments have been determined based on
available market information and appropriate valuation methodologies. However,
judgment is necessarily required in interpreting market data to develop the
estimates of fair value. In that regard, the estimates presented herein are not
necessarily indicative of the amounts that the Company could realize in a
current market exchange.
56
The carrying values and estimated fair values of the Companys financial
instruments, except for those for which the carrying values approximate fair
values, are summarized as follows:
The Company used the following methods and assumptions in estimating fair
values:
Cash and cash equivalents; first mortgages held under commitments of sale and
other receivables; borrowings under the unsecured credit facilities, Shareholder
Notes, French lines of credit, Mortgage Warehouse Facility and Master Loan and
Security Agreement: The carrying amounts reported approximate fair values.
Senior notes and senior subordinated notes: The fair values of the Companys
senior notes and senior subordinated notes are estimated based on quoted market
prices.
Mortgage-backed securities and collateralized mortgage obligations secured by
mortgage-backed securities: The fair values of these financial instruments are
estimated based on quoted market prices for the same or similar issues.
Company obligated mandatorily redeemable preferred securities of subsidiary
trust holding solely debentures of the Company: The fair values of these
financial instruments are based on quoted market prices on the New York Stock
Exchange.
NOTE 10. COMMITMENTS AND CONTINGENCIES
Commitments and contingencies include the usual obligations of homebuilders for
the completion of contracts and those incurred in the ordinary course of
business. The Company is also involved in litigation incidental to its business,
the disposition of which should have no material effect on the Companys
financial position or results of operations.
57
NOTE 11. STOCKHOLDERSEQUITY
PREFERRED STOCK
On February 4, 1999, the Company adopted a new Stockholder
Rights Plan to replace its preexisting shareholder rights plan adopted in 1989
(the 1989 Rights Plan) and declared a dividend distribution of one preferred
share purchase right for each outstanding share of common stock; such rights
were issued on March 7, 1999, simultaneously with the expiration of the rights
issued under the 1989 Rights Plan. Under certain circumstances, each right
entitles the holder to purchase 1/100th of a share of the Companys Series
A Participating Cumulative Preferred Stock at a price of $135.00, subject to
certain antidilution provisions. The rights are not exercisable until the
earlier to occur of (i) 10 days following a public announcement that a person or
group has acquired Company stock representing 15% or more of the aggregate votes
entitled to be cast by all shares of common stock or (ii) 10 days following the
commencement of a tender offer for Company stock representing 15% or more of
the aggregate votes entitled to be cast by all shares of common stock. If,
without approval of the Board of Directors, the Company is acquired in a merger
or other business combination transaction, or 50% or more of the Companys
assets or earning power is sold, each right will entitle its holder to receive,
upon exercise, common stock of the acquiring company having a market value of
twice the exercise price of the right; and if, without approval of the Board of
Directors, any person or group acquires Company stock representing 15% or more
of the aggregate votes entitled to be cast by all shares of common stock, each
right will entitle its holder to receive, upon exercise, common stock of the
Company having a market value of twice the exercise price of the right. At the
option of the Company, the rights are redeemable prior to becoming exercisable
at $.005 per right. Unless previously redeemed, the rights will expire on March
7, 2009. Until a right is exercised, the holder will have no rights as a
stockholder of the Company, including the right to vote or receive dividends.
NOTE 12. EMPLOYEE BENEFIT AND STOCK PLANS
Benefits are provided to most employees under the Companys 401(k) Savings Plan
under which contributions by employees are partially matched by the Company. The
aggregate cost of this plan to the Company was $4,296,000 in 2001, $4,513,000 in
2000 and $3,937,000 in 1999.
The Companys 1999 Incentive Plan (the 1999 Plan) provides that stock options,
associated limited stock appreciation rights, restricted shares of common stock,
stock units and other securities may be awarded to eligible individuals for
periods of up to 15 years. The Company also has a Performance-Based Incentive
Plan for Senior Management (the Incentive Plan), a 1998 Stock Incentive Plan
(the 1998 Plan) and a 2001 Stock Incentive Plan (the 2001 Plan), each of
which provide for the same awards as may be made under the 1999 Plan, but
require that such awards be subject to certain conditions which are designed to
enable the Company to pay annual compensation in excess of $1,000,000 to
participating executives and maintain tax deductibility for such compensation
for the Company. The 1999 Plan and the 2001 Plan are the Companys primary
existing employee stock plans.
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation, (SFAS No. 123), issued in October 1995, established financial
accounting and reporting standards for stock-based employee compensation plans.
As permitted by SFAS No. 123, the Company elected to continue to use APB Opinion
No. 25 and related interpretations in accounting for its stock options. Had
compensation expense for the Companys stock option plans been determined based
on the fair value at the grant date for awards in 2001, 2000 and 1999 consistent
with the provisions of SFAS No. 123, the Companys net income and diluted
earnings per share would have been reduced to the pro forma amounts indicated
below:
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions used for
grants in 2001, 2000 and 1999, respectively: a risk free interest rate of 3.68%,
5.44% and 6.14%; an expected volatility factor for the market price of the
Companys common stock of 48.88%, 44.82% and 43.14%; a dividend yield of .90%,
1.00% and 1.36%; and an expected life of 4 years, 4 years and 4 years. The
weighted average fair value of options granted in 2001, 2000 and 1999 was $9.09,
$7.70 and $6.92, respectively.
58
Stock option transactions are summarized as follows:
Stock options outstanding at November 30, 2001 are as follows:
The Company records proceeds from the exercise of stock options as additions to
common stock and paid-in capital. The tax benefit, if any, is recorded as
additional paid-in capital.
In 1991, the Board of Directors approved the issuance of restricted stock awards
under the 1988 Plan of up to an aggregate 600,000 shares of common stock to
certain officers and key employees. Restrictions lapse each year through May 10,
2005 on specified portions of the shares awarded to each participant so long as
the participant has remained in the continuous employ of the Company. Restricted
shares under this grant outstanding at the end of the year totaled 86,664 in
2001, 108,331 in 2000 and 129,998 in 1999.
Effective July 11, 2001, the Company awarded 350,000 shares of restricted common
stock to its Chairman and Chief Executive Officer in accordance with the terms
and conditions of his amended and restated employment agreement. The
restrictions imposed with respect to the shares covered by the award lapse on
December 31, 2008 if certain conditions are met. During the restriction period,
the executive is entitled to vote and receive dividends on such shares. Upon
issuance of the 350,000 shares, a deferred compensation expense equivalent to
the market value of the shares on the date of grant was charged to
stockholdersequity and is being amortized over the restriction period. The
compensation expense with respect to the restricted shares during the year ended
November 30, 2001 was $550,000.
On August 4, 1999, the Companys Board of Directors authorized a share
repurchase program which allowed the Company to purchase shares of its common
stock at prices that did not exceed $28 per share. At November 30, 2000, through
a series of authorizations, the Board of Directors had authorized the repurchase
of a total of 14,500,000 shares. The Company had repurchased 14,500,000 shares
and 3,750,100 shares, respectively, under the repurchase program as of
November 30, 2000 and 1999.
59
On October 4, 2001, the Companys Board of Directors approved a new stock
repurchase authorization for up to 4,000,000 additional shares of the Companys
common stock. The authorization positions management to opportunistically
purchase common shares from time to time on the open market or in privately
negotiated transactions. No shares had been repurchased under this authorization
as of November 30, 2001.
In connection with its share repurchase program, on August 27, 1999, the Company
established a grantor stock ownership trust (the Trust) into which certain
shares repurchased in 2000 and 1999 were transferred. The Trust, administered by
an independent trustee, acquires, holds and distributes the shares of common
stock for the purpose of funding certain employee compensation and employee
benefit obligations of the Company under its existing stock option, 401(k) and
other employee benefit plans. The existence of the Trust has no impact on the
amount of benefits or compensation that is paid under these plans.
For financial reporting purposes, the Trust is consolidated with the Company.
Any dividend transactions between the Company and the Trust are eliminated.
Acquired shares held by the Trust remain valued at the market price at the date
of purchase and are shown as a reduction to stockholdersequity in the
consolidated balance sheet. The difference between the Trust share value and the
fair market value on the date shares are released from the Trust, for the
benefit of employees, is included in additional paid-in capital. Common stock
held in the Trust is not considered outstanding in the computation of earnings
per share. The Trust held 8,142,831, 8,782,252 and 3,750,100 shares of common
stock at November 30, 2001, 2000 and 1999, respectively. The trustee votes
shares held by the Trust in accordance with voting directions from eligible
employees, as specified in a trust agreement with the trustee.
NOTE 13. INCOME TAXES
The components of pretax income are as follows:
The components of income taxes are as follows:
60
Deferred income taxes result from temporary differences in the financial and tax
bases of assets and liabilities. Significant components of the Companys
deferred tax liabilities and assets are as follows:
Income taxes computed at the statutory United States federal income tax rate and
income tax expense provided in the financial statements differ as follows:
The Company has commitments to invest $2,396,000 over four years in affordable
housing partnerships which are scheduled to provide tax credits.
61
NOTE 14. GEOGRAPHICAL INFORMATION
The following table presents information about the Company by geographic area.
62
NOTE 15. QUARTERLY RESULTS (UNAUDITED)
Quarterly results for the years ended November 30, 2001 and 2000 follow:
Quarterly and year-to-date computations of per share amounts are made
independently. Therefore, the sum of per share amounts for the quarters may not
agree with per share amounts for the year.
NOTE 16. SUBSEQUENT EVENTS (UNAUDITED)
On December 14, 2001, pursuant to the 1997 Shelf Registration, the Company
issued $200,000,000 of 8-5/8% senior subordinated notes at 100% of the
principal amount of the notes. The notes, which are due December 15, 2008, with
interest payable semi-annually, represent unsecured obligations of the Company
and are subordinated to all existing and future senior indebtedness of the
Company. Before December 15, 2004, the Company may redeem up to 35% of the
aggregate principal amount of the notes with the net proceeds of one or more
public or private equity offerings at a redemption price of 108.625% of their
principal amount, together with accrued and unpaid interest. The notes are not
otherwise redeemable at the option of the Company. The Company used $175,000,000
of the net proceeds from the issuance of the notes to redeem all of its
outstanding 9-3/8% senior subordinated notes due 2003. The remaining net
proceeds were used for general corporate purposes.
The 2001 Shelf Registration for $500,000,000 filed on October 15, 2001 was at
that time intended to combine with $250,000,000 of capacity then remaining under
the 1997 Shelf Registration to provide the Company with a total issuance
capacity of $750,000,000. However, the issuance of the $200,000,000 8-5/8%
senior subordinated notes in December 2001 reduced the remaining capacity under
the 1997 Shelf Registration to $50,000,000. Following the issuance of the
$200,000,000 8-5/8% senior subordinated notes, the Company increased the 2001
Shelf Registration to $700,000,000. The 2001 Shelf Registration was subsequently
declared effective on January 28, 2002, at which time the remaining capacity
under the 1997 Shelf Registration was rolled in, thereby providing the Company
with a total issuance capacity of $750,000,000 as originally contemplated.
63
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of KB Home:
We have audited the accompanying consolidated balance sheets of KB Home as of
November 30, 2001 and 2000, and the related consolidated statements of income,
stockholdersequity, and cash flows for each of the three years in the period
ended November 30, 2001. These financial statements are the responsibility of
the Companys management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of KB Home at
November 30, 2001 and 2000, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended November 30,
2001, in conformity with accounting principles generally accepted in the
United States.
/s/ ERNST & YOUNG LLP
Los Angeles, California
REPORT ON FINANCIAL STATEMENTS
The accompanying consolidated financial statements are the responsibility of
management. The statements have been prepared in conformity with generally
accepted accounting principles. Estimates and judgments of management based on
its current knowledge of anticipated transactions and events are made to prepare
the financial statements as required by generally accepted accounting
principles. Management relies on internal accounting controls, among other
things, to produce records suitable for the preparation of financial statements.
The responsibility of our external auditors for the financial statements is
limited to their expressed opinion on the fairness of the consolidated financial
statements taken as a whole. Their examination is performed in accordance with
generally accepted auditing standards which include tests of our accounting
records and internal accounting controls and evaluation of estimates and
judgments used to prepare the financial statements. The Companys internal audit
function includes evaluating and testing internal accounting controls.
An audit committee of outside members of the Board of Directors periodically
meets with management, the external auditors and the internal auditors to
evaluate the scope of auditing activities and review results. Both the external
and internal auditors have the unrestricted opportunity to communicate privately
with the audit committee.
/s/ WILLIAM R. HOLLINGER
William R. Hollinger
64
STOCKHOLDER INFORMATION
COMMON STOCK PRICES
DIVIDEND DATA
KB Home paid a quarterly cash dividend of $.075 per common share in 2001 and
2000.
ANNUAL STOCKHOLDERS MEETING
The 2002 Annual Stockholders meeting will be held at The W Hotel, 930 Hilgard
Avenue, in Los Angeles, California, at 9:00 a.m. on Thursday, April 11, 2002.
STOCK EXCHANGE LISTINGS
KB Homes common stock is listed on the New York Stock Exchange and is also
traded on the Boston, Chicago, Cincinnati, Midwest, Pacific and Philadelphia
Exchanges. The ticker symbol is KBH.
Kaufman & Broad S.A. is listed on the ParisBourse. The ticker symbol is
KOF. Kaufman & Broad S.A.s Web site address is ketb.com.
TRANSFER AGENT
INDEPENDENT AUDITORS
STOCKHOLDER INFORMATION
The Companys common stock is traded on the New York Stock Exchange under the
symbol KBH. There were 52,237,167 shares of common stock outstanding as of
February 1, 2002.
FORM 10-K
The Companys 2001 Report on Form 10-K filed with the Securities and Exchange
Commission may be obtained without charge by writing to the Companys Investor
Relations department, or by visiting the Companys Web site at kbhome.com.
HEADQUARTERS
INVESTOR CONTACT
BONDHOLDER SERVICES ADDRESS
& PHONE NUMBER
68
LIST OF EXHIBITS FILED
YEARS ENDED NOVEMBER 30,
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
2001
2000
1999
$
4,574,184
$
3,930,858
$
3,836,295
$
4,501,715
$
3,870,488
$
3,772,121
(3,612,936
)
(3,123,869
)
(3,051,698
)
(536,463
)
(458,010
)
(461,316
)
352,316
288,609
259,107
3,559
5,782
7,806
(41,072
)
(31,479
)
(28,340
)
(27,932
)
(31,640
)
(29,392
)
3,875
2,926
224
39,630
290,746
273,828
209,405
21,935
21,130
19,186
50,534
39,240
44,988
72,469
60,370
64,174
(18,436
)
(19,374
)
(16,941
)
(20,262
)
(17,164
)
(11,614
)
(18,155
)
33,771
23,832
17,464
324,517
297,660
226,869
(110,300
)
(87,700
)
(79,400
)
$
214,217
$
209,960
$
147,469
$
5.72
$
5.39
$
3.16
$
5.50
$
5.24
$
3.08
YEARS ENDED NOVEMBER 30,
IN THOUSANDS, EXCEPT SHARES
2001
2000
$
266,195
$
21,385
423,057
294,760
13,986
11,821
1,884,761
1,657,401
8,844
10,407
118,584
73,842
190,785
202,177
77,310
89,975
2,983,522
2,361,768
15,138
11,696
30,912
43,137
655,491
403,165
7,803
9,155
709,344
467,153
$
3,692,866
$
2,828,921
$
446,279
$
311,537
351,144
201,672
1,088,615
987,980
1,886,038
1,501,189
33,289
11,135
595,035
385,294
22,359
29,928
650,683
426,357
63,664
56,866
189,750
63,664
246,616
51,825
44,397
458,089
240,761
801,408
598,374
(3,084
)
(9,564
)
(10,444
)
(176,976
)
(190,872
)
(28,337
)
(28,337
)
1,092,481
654,759
$
3,692,866
$
2,828,921
YEARS ENDED NOVEMBER 30,
2001, 2000 AND 1999
NUMBER OF SHARES
GRANTOR
STOCK
COMMON
OWNERSHIP
TREASURY
COMMON
PAID-IN
RETAINED
IN THOUSANDS
STOCK
TRUST
STOCK
STOCK
CAPITAL
EARNINGS
39,992
$
39,992
$
193,520
$
243,356
147,469
(14,199
)
212
212
3,686
7,887
7,887
138,118
(3,750
)
48,091
(3,750
)
48,091
335,324
376,626
209,960
(11,465
)
306
306
5,445
(4,000
)
(4,000
)
(100,000
)
(5,032
)
(8
)
(1,448
)
23,253
44,397
(8,782
)
(1,448
)
44,397
240,761
598,374
214,217
(11,183
)
1,451
1,451
27,365
5,977
5,977
183,773
639
6,190
51,825
(8,143
)
(1,448
)
$
51,825
$
458,089
$
801,408
YEARS ENDED NOVEMBER 30,
2001, 2000 AND 1999
ACCUMULATED
GRANTOR
OTHER
STOCK
TOTAL
COMPREHENSIVE
DEFERRED
OWNERSHIP
TREASURY
STOCKHOLDERS'
IN THOUSANDS
INCOME
COMPENSATION
TRUST
STOCK
EQUITY
$
(2,357
)
$
474,511
147,469
773
773
148,242
(14,199
)
3,898
146,005
$
(81,874
)
(81,874
)
(1,584
)
(81,874
)
676,583
209,960
(7,980
)
(7,980
)
201,980
(11,465
)
5,751
(104,000
)
(108,998
)
(109,006
)
$
(28,337
)
(28,337
)
23,253
(9,564
)
(190,872
)
(28,337
)
654,759
214,217
2,594
2,594
3,886
3,886
220,697
(11,183
)
28,816
189,750
$
(10,444
)
(10,444
)
13,896
20,086
$
(3,084
)
$
(10,444
)
$
(176,976
)
$
(28,337
)
$
1,092,481
YEARS ENDED NOVEMBER 30,
IN THOUSANDS
2001
2000
1999
$
214,217
$
209,960
$
147,469
(3,875
)
(2,926
)
(224
)
27,932
31,640
29,392
(39,630
)
1,284
1,012
1,501
43,858
41,298
38,251
(44,742
)
25,677
(25,913
)
(372,852
)
(53,935
)
(184,116
)
(137,103
)
(96,078
)
(38,761
)
295,856
(54,970
)
130,257
21,345
(9,140
)
5,014
45,920
52,908
102,870
(53,724
)
(24,292
)
(11,646
)
5,438
13,885
(15,022
)
4,270
(2,645
)
(2,756
)
7,955
6,615
14,629
(12,189
)
(18,500
)
(19,160
)
(48,250
)
(24,937
)
(33,955
)
31,336
84,984
119,425
247,500
113,118
(7,569
)
(6,312
)
(14,098
)
(26,277
)
(25,857
)
(73,329
)
37,909
11,636
3,897
(21,134
)
(20,133
)
(43,723
)
(11,183
)
(11,465
)
(14,199
)
(169,228
)
(81,874
)
250,582
(23,257
)
(103,901
)
248,252
4,714
(34,986
)
33,081
28,367
63,353
$
281,333
$
33,081
$
28,367
$
54,128
$
50,042
$
43,014
61,033
40,818
64,554
$
54,550
$
25,054
$
43,529
189,750
78,000
146,005
303,239
YEARS ENDED NOVEMBER 30,
IN THOUSANDS
2001
2000
1999
37,465
38,931
46,730
1,454
1,138
1,101
38,919
40,069
47,831
NOVEMBER 30,
IN THOUSANDS
2001
2000
$
1,433,880
$
1,115,824
450,881
541,577
$
1,884,761
$
1,657,401
YEARS ENDED NOVEMBER 30,
IN THOUSANDS
2001
2000
1999
$
103,046
$
94,201
$
78,041
(41,072
)
(31,479
)
(28,340
)
61,974
62,722
49,701
(64,025
)
(40,679
)
(44,257
)
$
(2,051
)
$
22,043
$
5,444
NOVEMBER 30,
IN THOUSANDS
2001
2000
$
10,136
$
9,151
16,905
11,440
35,565
36,100
1,066
166
$
63,672
$
56,857
$
18,373
$
17,522
21,517
14,936
8,844
10,407
14,938
13,992
$
63,672
$
56,857
YEARS ENDED NOVEMBER 30,
IN THOUSANDS
2001
2000
1999
$
82,122
$
116,837
$
13,889
(56,969
)
(85,383
)
(9,842
)
(18,668
)
(26,533
)
(426
)
$
6,485
$
4,921
$
3,621
$
3,875
$
2,926
$
224
NOVEMBER 30,
IN THOUSANDS
2001
2000
$
120,000
$
137,730
125,135
167,950
160,950
78,000
58,586
29,780
175,000
175,000
174,714
174,534
124,635
124,581
250,000
$
1,088,615
$
987,980
NOVEMBER 30,
IN THOUSANDS
2001
2000
$
280,863
$
228,922
314,172
156,372
$
595,035
$
385,294
NOVEMBER 30,
IN THOUSANDS
2001
2000
CARRYING
ESTIMATED
CARRYING
ESTIMATED
VALUE
FAIR VALUE
VALUE
FAIR VALUE
$
175,000
$
177,013
$
175,000
$
164,745
174,714
176,750
174,534
173,110
124,635
131,288
124,581
122,388
250,000
263,600
23,448
24,508
31,403
32,003
22,359
23,578
29,928
30,982
189,750
175,000
YEARS ENDED NOVEMBER 30,
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
2001
2000
1999
$
214,217
$
209,960
$
147,469
207,254
205,652
142,816
5.50
5.24
3.08
5.23
5.10
2.99
2001
2000
1999
WEIGHTED
WEIGHTED
WEIGHTED
AVERAGE
AVERAGE
AVERAGE
EXERCISE
EXERCISE
EXERCISE
OPTIONS
PRICE
OPTIONS
PRICE
OPTIONS
PRICE
5,738,732
$
19.13
4,849,822
$
17.26
2,965,067
$
15.22
2,138,700
28.24
1,615,176
24.74
2,241,736
20.12
(1,456,188
)
11.90
(306,628
)
16.46
(211,925
)
16.43
(176,152
)
24.74
(419,638
)
21.08
(145,056
)
21.00
6,245,092
$
23.78
5,738,732
$
19.13
4,849,822
$
17.26
2,843,650
$
21.51
2,773,254
$
15.60
2,041,106
$
13.83
3,909,248
1,671,996
2,867,334
OPTIONS OUTSTANDING
OPTIONS EXERCISABLE
WEIGHTED
AVERAGE
WEIGHTED
WEIGHTED
REMAINING
AVERAGE
AVERAGE
CONTRACTUAL
EXERCISE
EXERCISE
RANGE OF EXERCISE PRICE
OPTIONS
LIFE
PRICE
OPTIONS
PRICE
1,362,768
11.68
$
16.78
991,320
$
16.35
1,332,488
11.62
22.42
1,106,589
22.42
1,501,577
13.84
25.06
534,982
25.07
2,048,259
14.80
28.37
210,759
32.02
6,245,092
13.21
$
23.78
2,843,650
$
21.51
YEARS ENDED NOVEMBER 30,
IN THOUSANDS
2001
2000
1999
$
286,629
$
263,266
$
200,272
37,888
34,394
26,597
$
324,517
$
297,660
$
226,869
IN THOUSANDS
TOTAL
FEDERAL
STATE
FOREIGN
$
156,051
$
134,755
$
17,500
$
3,796
(45,751
)
(57,321
)
11,570
$
110,300
$
77,434
$
17,500
$
15,366
$
70,818
$
43,776
$
17,000
$
10,042
16,882
11,586
5,296
$
87,700
$
55,362
$
17,000
$
15,338
$
87,428
$
65,557
$
11,755
$
10,116
(8,028
)
(12,411
)
4,383
$
79,400
$
53,146
$
11,755
$
14,499
NOVEMBER 30,
IN THOUSANDS
2001
2000
$
30,934
$
15,763
343
468
15,147
21,970
1,237
5,220
1,912
3,917
53,556
43,355
29,850
25,092
18,779
19,328
20,518
14,928
31,623
11,812
17,799
12,947
7,168
6,400
7,108
2,327
20,347
31,890
4,625
2,782
4,016
172,142
117,197
$
118,586
$
73,842
YEARS ENDED NOVEMBER 30,
IN THOUSANDS
2001
2000
1999
$
113,581
$
104,181
$
79,404
11,375
11,050
7,641
640
853
4,379
5,019
(2,537
)
1,153
(26,314
)
(24,211
)
(11,329
)
5,999
(1,636
)
(1,848
)
$
110,300
$
87,700
$
79,400
OPERATING
IDENTIFIABLE
IN THOUSANDS
REVENUES
INCOME
ASSETS
$
1,605,917
$
101,367
$
995,826
992,949
88,787
494,519
1,326,133
117,248
697,692
576,716
44,914
795,485
4,501,715
352,316
2,983,522
72,469
33,771
709,344
$
4,574,184
$
386,087
$
3,692,866
$
1,466,418
$
95,243
$
907,956
862,822
67,899
427,347
1,065,803
90,018
531,074
475,445
35,449
495,391
3,870,488
288,609
2,361,768
60,370
23,832
467,153
$
3,930,858
$
312,441
$
2,828,921
$
1,579,226
$
115,515
$
905,890
830,418
58,434
481,997
950,177
59,488
505,144
412,300
25,670
321,045
3,772,121
259,107
2,214,076
64,174
17,464
450,159
$
3,836,295
$
276,571
$
2,664,235
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
FIRST
SECOND
THIRD
FOURTH
$
821,065
$
1,066,945
$
1,235,313
$
1,450,861
53,501
73,743
109,235
149,608
39,118
59,904
91,487
134,008
25,818
39,504
60,387
88,508
.74
1.11
1.63
2.10
.70
1.07
1.58
2.03
$
799,585
$
906,182
$
981,024
$
1,244,067
47,275
53,678
81,964
129,524
77,414
42,700
66,439
111,107
64,214
27,700
44,639
73,407
1.51
.70
1.17
2.10
1.47
.68
1.14
2.00
December 20, 2001
Senior Vice President and Controller
December 20, 2001
2001
2000
HIGH
LOW
HIGH
LOW
$
38-5/16
$
25-1/2
$
24-13/16
$
18-3/4
33-1/4
24-13/16
22-3/8
16-13/16
36-1/4
25-1/16
25-3/8
16-15/16
34-1/2
24-11/16
32-13/16
23-15/16
Mellon Investor Services LLC
P.O. Box 3315
South Hackensack, New Jersey 07606-1915
(800) 356-2017
www.mellon-investor.com
Ernst & Young LLP
Los Angeles, California
KB Home
10990 Wilshire Boulevard, Seventh Floor
Los Angeles, California 90024
(310) 231-4000
(310) 231-4222 Fax
Location and Community Information:
kbhome.com
(888) KB-HOMES
Clem Teng
Director, Investor Relations
KB Home
10990 Wilshire Boulevard, Seventh Floor
Los Angeles, California 90024
(310) 231-4000
cteng@kbhome.com
7-3/4% $175,000,000 Notes Due 10/15/04
9-5/8% $125,000,000 Notes Due 11/15/06
8-5/8% $200,000,000 Notes Due 12/15/08
9-1/2% $250,000,000 Notes Due 2/15/11
Trustee:
Sun Trust Bank
Corporate Trust Division
Mail Code 008
25 Park Place, 24th Floor
Atlanta, Georgia 30303-2900
muriel.shaw@suntrust.com
(404) 588-7067
Sequential
Exhibit
Page
Number
Description
Number
10.21
KB Home Nonqualified Deferred Compensation Plan
10.22
KB Home 2001 Stock Incentive Plan
10.23
KB Home Change in Control Severance Plan
10.24
KB Home Death Benefit Only Plan
13
Pages 32 through 64 and page 68 of
KB Homes 2001 Annual Report to Stockholders
22
Subsidiaries of the Registrant
24
Consent of Independent Auditors
EXHIBIT 10.21
[KB HOME LOGO]
Nonqualified Deferred Compensation Plan
Master Plan Document
NONQUALIFIED DEFERRED COMPENSATION PLAN
EFFECTIVE MARCH 1, 2001
COPYRIGHT (C) 2000
BY COMPENSATION RESOURCE GROUP
ALL RIGHTS RESERVED
TABLE OF CONTENTS
PAGE ---- Purpose ..............................................................................1 ARTICLE 1 Definitions...................................................................1 ARTICLE 2 Selection, Enrollment, Eligibility............................................8 2.1 Selection by Committee.........................................................8 2.2 Enrollment Requirements........................................................8 2.3 Eligibility; Commencement of Participation.....................................8 2.4 Termination of Participation and/or Deferrals..................................8 ARTICLE 3 Deferral Commitments/Company Matching/Crediting/Taxes.........................9 3.1 Minimum Deferrals..............................................................9 3.2 Maximum Deferrals.............................................................10 3.3 Election to Defer; Effect of Election Form....................................10 3.4 Withholding of Annual Deferral Amounts........................................12 3.5 Annual Company Contribution Amount............................................12 3.6 Annual Company Matching Amount................................................12 3.7 Stock Option Amount...........................................................12 3.8 Restricted Stock Amount.......................................................13 3.9 Rollover Amount...............................................................13 3.10 Investment of Trust Assets....................................................13 3.11 Sources of Stock..............................................................13 3.12 Vesting.......................................................................13 3.13 Crediting/Debiting of Account Balances........................................14 3.14 FICA and Other Taxes..........................................................16 3.15 Distribution..................................................................17 ARTICLE 4 Short-Term Payout; Unforeseeable Financial Emergencies; Withdrawal Election..17 4.1 Short-Term Payout.............................................................17 4.2 Other Benefits Take Precedence Over Short-Term................................17 4.3 Withdrawal Payout/Suspensions for Unforeseeable Financial Emergencies.........18 4.4 Withdrawal Election...........................................................18 ARTICLE 5 Retirement Benefit...........................................................18 5.1 Retirement Benefit............................................................18 5.2 Payment of Retirement Benefit.................................................18 |
5.3 Death Prior to Completion of Retirement Benefit...............................19 ARTICLE 6 Pre-Retirement Survivor Benefit..............................................19 6.1 Pre-Retirement Survivor Benefit...............................................19 6.2 Payment of Pre-Retirement Survivor Benefit....................................19 ARTICLE 7 Termination Benefit..........................................................20 7.1 Termination Benefit...........................................................20 7.2 Payment of Termination Benefit................................................20 ARTICLE 8 Disability Waiver and Benefit................................................20 8.1 Disability Waiver.............................................................20 8.2 Continued Eligibility; Disability Benefit.....................................21 ARTICLE 9 Beneficiary Designation......................................................21 9.1 Beneficiary...................................................................21 9.2 Beneficiary Designation; Change; Spousal Consent..............................21 9.3 Acknowledgement...............................................................21 9.4 No Beneficiary Designation....................................................21 9.5 Doubt as to Beneficiary.......................................................22 9.6 Discharge of Obligations......................................................22 ARTICLE 10 Leave of Absence.............................................................22 10.1 Paid Leave of Absence.........................................................22 10.2 Unpaid Leave of Absence.......................................................22 ARTICLE 11 Termination, Amendment or Modification.......................................22 11.1 Termination...................................................................22 11.2 Amendment.....................................................................23 11.3 Plan Agreement................................................................23 11.4 Effect of Payment.............................................................23 ARTICLE 12 Administration...............................................................23 12.1 Committee Duties..............................................................23 12.2 Administration Upon Change In Control.........................................24 12.3 Agents........................................................................24 12.4 Binding Effect of Decisions...................................................24 12.5 Indemnity of Committee........................................................25 12.6 Employer Information..........................................................25 |
PAGE ---- ARTICLE 13 Other Benefits and Agreements................................................25 13.1 Coordination with Other Benefits..............................................25 ARTICLE 14 Claims Procedures............................................................25 14.1 Presentation of Claim.........................................................25 14.2 Notification of Decision......................................................25 14.3 Review of a Denied Claim......................................................26 14.4 Decision on Review............................................................26 14.5 Legal Action..................................................................26 ARTICLE 15 Trust........................................................................26 15.1 Establishment of the Trust....................................................26 15.2 Interrelationship of the Plan and the Trust...................................27 15.3 Distributions From the Trust..................................................27 15.4 Stock Transferred to the Trust................................................27 ARTICLE 16 Miscellaneous................................................................27 16.1 Status of Plan................................................................27 16.2 Unsecured General Creditor....................................................27 16.3 Employer's Liability..........................................................27 16.4 Nonassignability..............................................................28 16.5 Not a Contract of Employment..................................................28 16.6 Furnishing Information........................................................28 16.7 Terms.........................................................................28 16.8 Captions......................................................................28 16.9 Governing Law.................................................................28 16.10 Notice........................................................................28 16.11 Successors....................................................................29 16.12 Spouse's Interest.............................................................29 16.13 Validity......................................................................29 16.14 Incompetent...................................................................29 16.15 Court Order...................................................................29 16.16 Distribution in the Event of Taxation.........................................30 16.17 Insurance.....................................................................30 16.18 Legal Fees To Enforce Rights After Change in Control..........................30 |
KB HOME
NONQUALIFIED DEFERRED COMPENSATION PLAN
Effective March 1, 2001
PURPOSE
The purpose of this Plan is to provide specified benefits to a select group of management and highly compensated Employees who contribute materially to the continued growth, development and future business success of KB Home, a Delaware corporation, and its subsidiaries, if any, that sponsor this Plan. This Plan shall be unfunded for tax purposes and for purposes of Title I of ERISA.
ARTICLE 1
DEFINITIONS
For purposes of this Plan, unless otherwise clearly apparent from the context, the following phrases or terms shall have the following indicated meanings:
1.1 "Account Balance" shall mean, with respect to a Participant, a credit on the records of the Employer equal to the sum of (i) the Deferral Account balance, (ii) the vested Company Contribution Account balance, (iii) the vested Company Matching Account balance, (iv) the Stock Option Account balance, (v) the Restricted Stock Account balance and (vi) the Rollover Account balance. The Account Balance, and each other specified account balance, shall be a bookkeeping entry only and shall be utilized solely as a device for the measurement and determination of the amounts to be paid to a Participant, or his or her designated Beneficiary, pursuant to this Plan.
1.2 "Annual Base Salary" shall mean the annual cash compensation relating to
services performed during any calendar year, whether or not paid in such
calendar year or included on the Federal Income Tax Form W-2 for such
calendar year, excluding bonuses, commissions, overtime, fringe
benefits, stock options, relocation expenses, incentive payments,
non-monetary awards, directors fees and other fees, automobile and other
allowances paid to a Participant for employment services rendered
(whether or not such allowances are included in the Employee's gross
income). As provided in Section 3.3 notwithstanding anything in this
Plan to the contrary, a Participant's deferrals under this Plan in each
year shall not commence with respect to any portion of his/her Annual
Base Salary unless and until that Participant has deferred into the
401(k) Plan the maximum amount authorized by Section 402(g).
1.3 "Annual Bonus" shall mean any compensation, in addition to Annual Base Salary relating to services performed during any calendar year, whether or not paid in such calendar year or included on the Federal Income Tax Form W-2 for such calendar year, payable to a Participant as an Employee under any Employer's annual bonus or cash incentive plans, excluding stock options, restricted stock based upon the performance of services during such calendar year, and commissions.
1.4 "Annual Company Contribution Amount" shall mean, for any one Plan Year, the amount determined in accordance with Section 3.5. 1.5 "Annual Company Matching Amount" shall mean, for any one Plan Year, the amount determined in accordance with Section 3.6. 1.6 "Annual Deferral Amount" shall mean that portion of a Participant's Annual Base Salary or Annual Bonus, as applicable, that a Participant elects to have, and is deferred, in accordance with Article 3, for any one Plan Year. In the event of a Participant's Retirement, Disability (if deferrals cease in accordance with Section 8.1), death or a Termination of Employment prior to the end of a Plan Year, such year's Annual Deferral Amount shall be the actual amount withheld prior to such event. 1.7 "Annual Installment Method" shall be an annual installment payment over the number of years selected by the Participant in accordance with this Plan, calculated as follows: The Account Balance of the Participant shall be calculated as of the most recent Valuation Date. The annual installment shall be calculated by multiplying this balance by a fraction, the numerator of which is one, and the denominator of which is the remaining number of annual payments due the Participant. By way of example, if the Participant elects a 10-year Annual Installment Method, the first payment shall be 1/10 of the Account Balance as of the most recent Valuation Date. The following year, the payment shall be 1/9 of the Account Balance as of the most recent Valuation Date. Each annual installment shall be paid on or as soon as practicable after the amount is calculated. 1.8 "Annual Restricted Stock Amount" shall mean, with respect to a Participant for any one Plan Year, the value of unvested restricted stock under any Company stock incentive plan, deferred in accordance with Section 3.8 of this Plan. 1.9 "Annual Stock Option Amount" shall mean, with respect to a Participant for any one Plan Year, the amount of Qualifying Gains deferred on Eligible Stock Option exercise in accordance with Section 3.7 of this Plan, calculated using the closing price of Stock as of the end of the business day closest to the date of such Eligible Stock Option exercise. 1.10 "Beneficiary" shall mean one or more persons, trusts, estates or other entities, designated in accordance with Article 9, or entitled under Article 9 in the absence of a designation, that are entitled to receive benefits under this Plan upon the death of a Participant. 1.11 "Beneficiary Designation Form" shall mean the form established from time to time by the Committee that a Participant completes, signs and returns to the Committee to designate one or more Beneficiaries. 1.12 "Board" shall mean the board of directors of the Company. 1.13 "Change in Control" shall mean the first to occur of either of the |
following events:
(a) individuals who, as of the effective date of this Plan, constitute the Board of Directors of the Company (as of the date hereof the "Incumbent Board") cease for any reason to constitute at least a majority of the directors constituting the Board of Directors, provided that any person becoming a director subsequent to the effective date of this Plan whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least three-quarters (3/4) of the then directors who are members of the Incumbent Board (other than an election or nomination of an individual whose initial assumption of office is (i) in connection with the acquisition by a third person, including a "group" as such term is used in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended (the "Act"), of beneficial ownership, directly or indirectly, of 20% or more of the combined voting securities ordinarily having the right to vote for the election of directors of the Company (unless such acquisition of beneficial ownership was approved by a majority of the Board of Directors who are members of the Incumbent Board), or (ii) in connection with an actual or threatened election contest relating to the election of the directors of the Company, as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Act) shall be, for purposes of this Plan, considered as though such person were a member of the Incumbent Board; or
(b) the Board of Directors (a majority of which shall consist of
directors who are members of the Incumbent Board) has determined that a Change in Control shall have occurred. 1.14 "Claimant" shall have the meaning set forth in Section 14.1. 1.15 "Code" shall mean the Internal Revenue Code of 1986, as it may be amended from time to time. 1.16 "Committee" shall mean the committee described in Article 12. 1.17 "Company" shall mean KB Home, a Delaware corporation, and any successor to all or substantially all of the Company's assets or business. 1.18 "Company Contribution Account" shall mean (i) the sum of the Participant's Annual Company Contribution Amounts, plus (ii) amounts credited (net of amounts debited) in accordance with all the applicable crediting provisions of this Plan that relate to the Participant's Company Contribution Account, less (iii) all distributions made to the Participant or his or her Beneficiary pursuant to this Plan that relate to the Participant's Company Contribution Account. 1.19 "Company Matching Account" shall mean (i) the sum of all of a Participant's Annual Company Matching Amounts, plus (ii) amounts credited (net of amounts debited) in accordance with all the applicable provisions of this Plan that relate to the Participant's Company Matching Account, less (iii) all distributions made to the Participant or his or her Beneficiary pursuant to this Plan that relate to the Participant's Company Matching Account. |
1.20 "Deduction Limitation" shall mean the following described limitation on a benefit that may otherwise be distributable pursuant to the provisions of this Plan. Except as otherwise provided, this limitation shall be applied to all distributions that are "subject to the Deduction Limitation" under this Plan. If an Employer determines in good faith prior to a Change in Control that there is a reasonable likelihood that any compensation paid to a Participant for a taxable year of the Employer would not be deductible by the Employer solely by reason of the limitation under Code Section 162(m), then to the extent deemed necessary by the Employer to ensure that the entire amount of any distribution to the Participant pursuant to this Plan prior to the Change in Control is deductible, the Employer may defer all or any portion of a distribution under this Plan. Any amounts deferred pursuant to this limitation shall continue to be credited and debited with additional amounts in accordance with Section 3.13 below, even if such amount is being paid out in installments. The amounts so deferred and amounts credited (net of amounts debited) thereon shall be distributed to the Participant or his or her Beneficiary (in the event of the Participant's death) at the earliest possible date, as determined by the Employer in good faith, on which the deductibility of compensation paid or payable to the Participant for the taxable year of the Employer during which the distribution is made will not be limited by Section 162(m), or if earlier, the effective date of a Change in Control. Notwithstanding anything to the contrary in this Plan, the Deduction Limitation shall not apply to any distributions made after a Change in Control. 1.21 "Deferral Account" shall mean (i) the sum of all of a Participant's Annual Deferral Amounts, plus (ii) amounts credited (net of amounts debited) in accordance with all the applicable provisions of this Plan that relate to the Participant's Deferral Account, less (iii) all distributions made to the Participant or his or her Beneficiary pursuant to this Plan that relate to his or her Deferral Account. 1.22 "Disability" shall mean a period of disability during which a Participant qualifies for permanent disability benefits under the KB Home Long-term Disability Plan, or, if a Participant does not participate in such plan, a period of disability during which the Participant would have qualified for permanent disability benefits under such plan had the Participant been a participant in such plan, as determined in the sole discretion of the Committee. If the Participant's Employer does not sponsor such plan, or discontinues to sponsor such plan, Disability shall be determined by the Committee in its sole discretion. 1.23 "Disability Benefit" shall mean the benefit set forth in Article 8. 1.24 "Election Form" shall mean the form established from time to time by the Committee that a Participant completes, signs and returns to the Committee to make an election under the Plan. 1.25 "Eligible Stock Option" shall mean one or more non-qualified stock option(s) selected by the Committee in its sole discretion and exercisable under a plan or arrangement of any Employer permitting a Participant under this Plan to defer gain with respect to such option. 1.26 "Employee" shall mean a person who is an employee of any Employer. |
1.27 "Employer" shall mean the Company or any of its subsidiaries (now in existence or hereafter formed or acquired) that have been selected by the Board to participate in the Plan and have adopted the Plan. 1.28 "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as it may be amended from time to time. 1.29 "First Plan Year" shall mean the period beginning March 1, 2001 and ending December 31, 2001. 1.30 "401(k) Plan" shall be that certain Kaufman and Broad Home Corporation, Inc. 401(k) Savings Plan adopted by the Company, as it may be amended from time to time. 1.31 "Participant" shall mean any Employee (i) who is selected by the Board (or a committee to which the Board has delegated such authority) from among the highly compensated and management employees of the Employer to participate in the Plan, (ii) who elects to participate in the Plan, (iii) who signs a Plan Agreement, an Election Form and a Beneficiary Designation Form, (iv) whose signed Plan Agreement, Election Form and Beneficiary Designation Form are accepted by the Committee, (v) who commences participation in the Plan, and (vi) whose Plan Agreement has not terminated. A spouse or former spouse of a Participant shall not be treated as a Participant in the Plan or have an account balance under the Plan, even if he or she has an interest in the Participant's benefits under the Plan as a result of applicable law or property settlements resulting from legal separation or divorce. 1.32 "Plan" shall mean the KB HOME NONQUALIFIED DEFERRED COMPENSATION PLAN, effective March 1, 2001 which shall be evidenced by this instrument and by each Plan Agreement, as they may be amended from time to time. 1.33 "Plan Agreement" shall mean a written agreement, as may be amended from time to time, which is entered into by and between an Employer and a Participant. Each Plan Agreement executed by a Participant and the Participant's Employer shall provide for the entire benefit to which such Participant is entitled under the Plan; should there be more than one Plan Agreement, the Plan Agreement bearing the latest date of acceptance by the Employer shall supersede all previous Plan Agreements in their entirety and shall govern such entitlement. The terms of any Plan Agreement may be different for any Participant, and any Plan Agreement may provide additional benefits not set forth in the Plan or limit the benefits otherwise provided under the Plan; provided, however, that any such additional benefits or benefit limitations must be agreed to by both the Employer and the Participant. 1.34 "Plan Year" shall, for the first Plan Year, begin on March 1, 2001, and end on December 31, 2001. For each Plan Year thereafter, the Plan Year shall mean a period beginning on January 1 of each calendar year and continuing through December 31 of such calendar year. 1.35 "Pre-Retirement Survivor Benefit" shall mean the benefit set forth in Article 6. |
1.36 "Qualifying Gain" shall mean the value accrued upon exercise of an Eligible Stock Option (i) using a Stock-for-Stock payment method and (ii) having an aggregate fair market value in excess of the total Stock purchase price necessary to exercise the option. In other words, the Qualifying Gain upon exercise of an Eligible Stock Option equals the total market value of the shares (or share equivalent units) as to which the option is exercised minus the total exercise price for such shares under the option. For example, assume a Participant elects to defer the Qualifying Gain accrued upon exercise of an Eligible Stock Option to purchase 1000 shares of Stock at an exercise price of $20 per share, when Stock has a current fair market value of $25 per share. Using the Stock-for-Stock payment method, the Participant would deliver 800 shares of Stock (worth $20,000) to exercise the Eligible Stock Option and receive, in return, 800 shares of Stock plus a Qualifying Gain (in this case, in the form of an unfunded and unsecured promise to pay money or property in the future) equal to $5,000 (i.e., the current value of the remaining 200 shares of Stock). 1.37 "Restricted Stock" shall mean unvested shares of restricted stock awarded to the Participant under any Company stock incentive plan. 1.38 "Restricted Stock Account" shall mean (i) the sum of the Participant's Annual Restricted Stock Amounts, plus (ii) amounts credited (net of amounts debited) in accordance with all the applicable provisions of this Plan that relate to the Participant's Restricted Stock Account, less (iii) all distributions made to the Participant or his or her Beneficiary pursuant to this Plan that relate to the Participant's Restricted Stock Account. 1.39 "Restricted Stock Amount" shall mean, for any grant of Restricted Stock, the amount of such Restricted Stock deferred in accordance with Section 3.8 of this Plan, calculated using the closing price of Stock as of the end of the business day closest to the date such Restricted Stock would otherwise vest, but for the election to defer. 1.40 "Retirement", "Retire(s)" or "Retired" shall mean, with respect to an Employee, severance from employment from all Employers for any reason other than a leave of absence, death or Disability at such time as the sum of the Employee's age and Years of Service equals at least sixty-five (65) or more, provided that the Employee is then at least fifty-five (55) years of age. 1.41 "Retirement Benefit" shall mean the benefit set forth in Article 5. 1.42 "Rollover Account" shall mean (i) the sum of the Participant's Rollover Amount, plus (ii) amounts credited (net of amounts debited) in accordance with all the applicable provisions of this Plan that relate to the Participant's Rollover Account, less (iii) all distributions made to the Participant or his or her Beneficiary pursuant to this Plan that relate to the Participant's Rollover Account. 1.43 "Rollover Amount" shall mean the amount determined in accordance with Section 3.9. 1.44 "Short-Term Payout" shall mean the payout set forth in Section 4.1. |
1.45 "Stock" shall mean KB Home common stock, $1.00 par value, or any other equity securities of the Company designated by the Committee. 1.46 "Stock Option Account" shall mean the sum of (i) the Participant's Annual Stock Option Amounts, plus (ii) amounts credited (net of amounts debited) in accordance with all the applicable provisions of this Plan that relate to the Participant's Stock Option Account, less (iii) all distributions made to the Participant or his or her Beneficiary pursuant to this Plan that relate to the Participant's Stock Option Account. 1.47 "Stock Option Amount" shall mean, for any Eligible Stock Option, the amount of Qualifying Gains deferred in accordance with Section 3.7 of this Plan, calculated using the closing price of Stock as of the end of the business day closest to the date of exercise of such Eligible Stock Option. 1.48 "Supplemental Deferral Plan" shall mean the Kaufman and Broad Home Corporation, Inc. Supplemental Deferral plan heretofore adopted by the Company 1.49 "Termination Benefit" shall mean the benefit set forth in Article 7. 1.50 "Termination of Employment" shall mean the severing of employment with an Employer, voluntarily or involuntarily, for any reason other than Retirement, Disability, death or an authorized leave of absence. Termination of Employment shall not be deemed to occur, however, upon the transfer of a Participant from the employ of the Company or another Employer to the employ of any subsidiary or affiliate, regardless of whether that subsidiary or affiliate is an Employer under the Plan. For purposes of this Plan, "affiliate" means (1) any entity 50% or more of the voting interest in which is owned, directly or indirectly, by an entity which owns, directly or indirectly, 50% or more of the voting interest in the Company and (2) any entity which owns, directly or indirectly, 50% or more of the voting interest in the Company. 1.51 "Trust" shall mean one or more trusts established pursuant to that certain Master Trust Agreement, dated as of March 1, 2000 between the Company and the trustee named therein, as amended from time to time. 1.52 "Unforeseeable Financial Emergency" shall mean an unanticipated emergency that is caused by an event beyond the control of the Participant that would result in severe financial hardship to the Participant resulting from (i) a sudden and unexpected illness or accident of the Participant or a dependent of the Participant, (ii) a loss of the Participant's property due to casualty, or (iii) another extraordinary and unforeseeable circumstance arising as a result of events beyond the control of the Participant, all as determined in the sole discretion of the Committee. 1.53 "Valuation Date" shall mean the last day of each Plan Year or any other date as of which the Committee, in its sole discretion, designates as a Valuation Date. |
1.54 "Years of Plan Participation" shall mean the total number of full Plan Years a Participant has been selected for participation in the Plan prior to his or her Termination of Employment (determined without regard to whether deferral elections have been made by the Participant for any Plan Year). Any partial year shall not be counted. Notwithstanding the previous sentence, a Participant's first Plan Year of participation shall be treated as a full Plan Year for purposes of this definition, even if it is only a partial Plan Year of participation. 1.55 "Years of Service" shall mean the total number of full years in which a Participant has been employed by one or more Employers. A year of employment shall be a 365-day period (or 366-day period in the case of a leap year) that, for the first year of employment, commences on the Employee's date of hiring and that, for any subsequent year, commences on an anniversary of that hiring date. Any partial year of employment shall not be counted. Notwithstanding any provision of this Plan that may be construed to the contrary, for purposes of this definition, the Committee may, in its sole and absolute discretion, deem a Participant to be credited with additional Years of Service. |
ARTICLE 2
SELECTION, ENROLLMENT, ELIGIBILITY
2.1 SELECTION BY COMMITTEE. Participation in the Plan shall be limited to a select group of Employees of the Employers, each of whom is a member of management or is highly compensated. From the group of Employees who are management or highly compensated, the Committee shall select, in its sole discretion, Employees to participate in the Plan.
2.2 ENROLLMENT REQUIREMENTS. As a condition to participation, each selected Employee shall complete, execute and return to the Committee a Plan Agreement, an Election Form and a Beneficiary Designation Form, all within the number of days specified by the Committee after he or she is selected to participate in the Plan. In addition, the Committee may establish from time to time such other enrollment requirements as it determines in its sole discretion are necessary.
2.3 ELIGIBILITY; COMMENCEMENT OF PARTICIPATION. Provided an Employee selected to participate in the Plan has met all enrollment requirements set forth in this Plan and required by the Committee, including returning all required documents to the Committee within the specified time period, that Employee shall commence participation in the Plan on the first day of the month following the month in which the Employee completes all enrollment requirements. If an Employee fails to meet all such requirements within the period required, in accordance with Section 2.2, that Employee shall not be eligible to participate in the Plan until the first day of the Plan Year following the delivery to and acceptance by the Committee of the required documents.
2.4 TERMINATION OF PARTICIPATION AND/OR DEFERRALS. If the Committee determines in good faith that a Participant no longer qualifies as a member of a select group of management or highly compensated employees, as membership in such group is determined in accordance with
Sections 201(2), 301(a)(3) and 401(a)(1) of ERISA, the Committee shall have the right, in its sole discretion, to (i) terminate any deferral election the Participant has made for the remainder of the Plan Year in which the Participant's membership status changes, and (ii) prevent the Participant from making future deferral elections or, in the Committee's discretion, may also (iii) immediately distribute the Participant's then Account Balance as a Termination Benefit and terminate the Participant's participation in the Plan.
ARTICLE 3
DEFERRAL COMMITMENTS/COMPANY MATCHING/CREDITING/TAXES
3.1 MINIMUM DEFERRALS.
(a) ANNUAL BASE SALARY AND ANNUAL BONUS. For each Plan Year, a Participant may elect to defer, as his or her Annual Deferral Amount, Annual Base Salary or Annual Bonus, or both, in the following minimum amounts for each deferral elected:
------------------------------------------------------ DEFERRAL MINIMUM AMOUNT ------------------------------------------------------ Annual Base Salary $2,000 ------------------------------------------------------ Annual Bonus $2,000 ------------------------------------------------------ |
If an election is made for less than stated minimum amounts, or if no election is made, the amount deferred shall be zero.
(b) SHORT PLAN YEAR. Notwithstanding the foregoing, if a Participant first becomes a Participant after the first day of a Plan Year, or in the case of the first Plan Year of the Plan itself, the minimum Annual Base Salary deferral shall be an amount equal to the minimum set forth above, multiplied by a fraction, the numerator of which is the number of complete months remaining in the Plan Year and the denominator of which is 12.
(c) STOCK OPTION AMOUNT. For each Eligible Stock Option, a Participant may elect to defer, as his or her Stock Option Amount, the receipt of shares of Stock to which the Participant is entitled upon exercise of such option, provided that the election pertains to at least the number of shares having following minimum percentage of Qualifying Gain (as a percentage of all of the Qualifying Gain with respect to exercise of the Eligible Stock Option:
------------------------------------------------------ DEFERRAL MINIMUM PERCENTAGE ------------------------------------------------------ Qualifying Gain 25% ------------------------------------------------------ |
provided, however, that such Stock Option Amount shall be no less than the lesser of $50,000 or 100% of such Qualifying Gain.
(d) RESTRICTED STOCK AMOUNT. For Restricted Stock, a Participant may elect to defer, as his or her Restricted Stock Amount, the following minimum percentage of the Participant's Restricted Stock as to which the condition to vesting is lapsing at that time:
------------------------------------------------------ DEFERRAL MINIMUM PERCENTAGE ------------------------------------------------------ Restricted Stock 25% ------------------------------------------------------ |
provided, however, that the Annual Restricted Stock Amount shall be no less than the lesser of $50,000 or 100% of the Participant's Restricted Stock then vesting.
3.2 MAXIMUM DEFERRAL.
(a) ANNUAL BASE SALARY AND ANNUAL BONUS. For each Plan Year, a Participant may elect to defer, as his or her Annual Deferral Amount, Annual Base Salary and Annual Bonus up to the following maximum percentages for each deferral elected:
------------------------------------------------------ DEFERRAL MAXIMUM PERCENTAGE ------------------------------------------------------ Annual Base Salary 75% ------------------------------------------------------ Annual Bonus 75% ------------------------------------------------------ |
(b) Notwithstanding the foregoing, if a Participant first becomes a Participant after the first day of a Plan Year, or in the case of the first Plan Year of the Plan itself, the maximum Annual Deferral Amount, with respect to Annual Base Salary and Annual Bonus shall be limited to the amount of compensation not yet earned by the Participant as of the date the Participant submits a Plan Agreement and Election Form to the Committee for acceptance.
(c) For each Eligible Stock Option, a Participant may elect to defer, as his or her Stock Option Amount, receipt of Stock having Qualifying Gain up to the following maximum percentage with respect to exercise of the Eligible Stock Option:
------------------------------------------------------ DEFERRAL MAXIMUM PERCENTAGE ------------------------------------------------------ Qualifying Gain 100% ------------------------------------------------------ |
(d) Stock Option Amounts may also be limited by other terms or conditions set forth in the stock option plan or agreement under which such options are granted.
(e) A Participant may elect to defer up to 100% of his or her Restricted Stock as to which restrictions lapse.
3.3 ELECTION TO DEFER; EFFECT OF ELECTION FORM.
(a) FIRST PLAN YEAR. Within thirty days after being designated by the Committee for participation in the Plan, the Participant shall make an irrevocable deferral election for the Plan Year in which the Participant commences participation, along with such other elections as the Committee deems necessary or desirable under the Plan. Notwithstanding anything in this Plan to the contrary, a Participant may not defer any portion of his/her Annual Base Salary to the Plan unless and until that Participant has deferred into the 401(k) Plan for the calendar year the maximum amount authorized by Section 402(g). For these elections to be valid, the Election Form must be completed and signed by the Participant, timely delivered to the Committee (in accordance with Section 2.2 above) and accepted by the Committee. Notwithstanding a timely filed election, deferrals of a Participant's Annual Base Salary under this Plan shall not be effected in any calendar year until such time as the aggregate amount deferred under the 401(k) Plan from Annual Base Salary and Annual Bonus in that calendar year equals the maximum amount authorized by Section 402(g) for that calendar year.
(b) SUBSEQUENT PLAN YEARS. For each succeeding Plan Year, an irrevocable deferral election for that Plan Year, and such other elections as the Committee deems necessary or desirable under the Plan, shall be made by timely delivering to the Committee, in accordance with its rules and procedures, before the end of the Plan Year preceding the Plan Year for which the election is made, a new Election Form. If no such Election Form is timely delivered for a Plan Year, the Annual Deferral Amount shall be zero for that Plan Year. Notwithstanding anything in this Plan to the contrary, a Participant may not defer any portion of his/her Annual Base Salary to the Plan unless and until that Participant has deferred into the 401(k) Plan the maximum amount authorized by Section 402(g). Notwithstanding a timely filed election, deferrals of a Participant's Annual Base Salary under this Plan shall not be effected in any calendar year until such time as the aggregate amount deferred under the 401(k) Plan from Annual Base Salary and Annual Bonus in that calendar year equals the maximum amount authorized by Section 402(g) for that calendar year.
(c) STOCK OPTION DEFERRAL. For an election to defer gain upon an Eligible Stock Option exercise to be valid: (i) a separate irrevocable Election Form must be completed and signed by the Participant with respect to the Eligible Stock Option; (ii) the Election Form must be timely delivered to the Committee and accepted by the Committee at least six (6) months prior to the date the Participant elects to exercise the Eligible Stock Option; (iii) the Eligible Stock Option must be exercised using an actual or phantom Stock-for-Stock payment method; and (iv) the Stock actually or constructively delivered by the Participant to exercise the Eligible Stock Option must have been owned by the Participant during the entire six (6) month period prior to its delivery.
(d) RESTRICTED STOCK. For an election to defer Restricted Stock Amounts to be valid: (i) a separate irrevocable Election Form must be completed and signed by the Participant, with respect to such Restricted Stock; and (ii) such Election Form must be timely delivered to the Committee and accepted by the Committee at least six (6) months prior
to the date such Restricted Stock vests under the terms of the Company's stock incentive plan.
3.4 WITHHOLDING OF ANNUAL DEFERRAL AMOUNTS. For each Plan Year, for each Participant, the Annual Base Salary portion of the Annual Deferral Amount shall be withheld from each regularly scheduled Annual Base Salary payroll in equal amounts after the 401(k) Plan has been funded to the 402(g) limit for that Participant, as adjusted from time to time for increases and decreases in Annual Base Salary. The Annual Bonus portion of the Annual Deferral Amount shall be withheld at the time the Annual Bonus is or otherwise would be paid to the Participant, provided this is after the 401(k) Plan has been funded to the 402(g) limit for that Participant, whether or not this occurs during the Plan Year itself.
3.5 ANNUAL COMPANY CONTRIBUTION AMOUNT. For each Plan Year, an Employer, in its sole discretion, may, but is not required to, credit any amount it desires to any Participant's Company Contribution Account under this Plan, which amount shall be for that Participant the Annual Company Contribution Amount for that Plan Year. The amount so credited to a Participant may be smaller or larger than the amount credited to any other Participant, and the amount credited to any Participant for a Plan Year may be zero, even though one or more other Participants receive an Annual Company Contribution Amount for that Plan Year. The Annual Company Contribution Amount, if any, shall be credited as of the last day of the Plan Year. If a Participant is not employed by an Employer as of the last day of a Plan Year for a reason other than his or her Retirement or death while employed, the Annual Company Contribution Amount for that Plan Year shall be zero.
3.6 ANNUAL COMPANY MATCHING AMOUNT. A Participant's Annual Company Matching Amount for any Plan Year shall be the sum of all Pay Period Company Matching Contributions for the Plan Year. For this purpose, a Pay Period Company Matching Contribution shall mean an amount which, when added to the matching contribution allocated to the Participant's account under the 401(k) Plan for the same pay period, equals the match the Participant would have received under the 401(k) Plan during the corresponding plan year of the 401(k) Plan, if the portion of Annual Base Salary elected to be deferred had instead been elected and contributed as a salary deferral contribution under the 401(k) Plan (determined as if the 401(k) Plan was not subject to the limitations imposed under Code Sections 401(a)(17), 401(k)(3), 402(g) and 415). The Annual Company Matching Amount shall be credited during the Plan Year on a pay period-by-pay period basis. Notwithstanding any provision of this Plan to the contrary, the Company shall have the right, in its sole and absolute discretion, to alter the manner in which the Annual Company Matching Amount is calculated and/or to terminate the Annual Company Matching Amount.
3.7 STOCK OPTION AMOUNT. Subject to any terms and conditions imposed by the Committee, Participants may elect to defer, under the Plan, receipt of Stock to which they are entitled as a result of an Eligible Stock Option exercise. Stock Option Amounts, equal to the Qualifying Gains attributable to the Stock as to which receipt is deferred shall be credited to the Participant
on the books of the Employer at the time Stock would otherwise have been delivered to the Participant pursuant to the Eligible Stock Option exercise, but for the election to defer. 3.8 RESTRICTED STOCK AMOUNT. Subject to any terms and conditions imposed by the Committee, Participants may elect to defer, under the Plan, receipt of Restricted Stock. Restricted Stock Amounts shall be credited to the Participant on the books of the Employer in connection with such an election at the time the Restricted Stock would otherwise vest (i.e., the restrictions on such Stock would otherwise lapse) under the terms of the Company's stock incentive plan, but for the election to defer, and the certificates representing such shares of Stock, if previously delivered to the Participant, shall be returned to the Employer before such time. 3.9 ROLLOVER AMOUNT. If an Employee has an account balance in the Supplemental Deferral Plan, the Company will specify a Transfer Date on which the Employee's Supplemental Deferral Plan account balance, as determined as of the Transfer Date, shall be transferred and added to the Participant's Account Balance under this Plan, and shall thereafter be governed by the terms and conditions of this Plan and shall be referred to as the "Rollover Amount." All elections made by a Participant with respect to his or her account balance under the Supplemental Deferral Plan shall apply to his or her Rollover Amount under this Plan. 3.10 INVESTMENT OF TRUST ASSETS. The Trustee of the Trust shall be authorized, upon written instructions received from the Committee or investment manager appointed by the Committee, to invest and reinvest the assets of the Trust in accordance with the applicable Trust Agreement, including the disposition of Stock and reinvestment of the proceeds in one or more investment vehicles designated by the Committee. 3.11 SOURCES OF STOCK. If Stock is credited under the Plan in the Trust in connection with an Eligible Stock Option exercise or in connection with a deferral of Restricted Stock, the shares so credited shall be deemed to have originated, and shall be counted against the number of shares reserved, under such other plan, program or arrangement. 3.12 VESTING. (a) A Participant shall at all times be 100% vested in his or her Deferral Account, Stock Option Account, Restricted Stock Account and Rollover Account. (b) A Participant shall be vested in his or her Company Contribution Account in accordance with the vesting schedules established by the Committee, in its sole and absolute discretion, for each Annual Company Contribution Amount (and amounts credited or debited thereon) at the time each such Annual Company Contribution Amount is first credited to the Participant's Account Balance under the Plan. The vesting schedules established by the Committee for each Annual Company Contribution Amount may be different for different Participants. |
(c) A Participant shall be vested in his or her Annual Company Matching Amount in accordance with the following schedule:
----------------------------------------------------------------------------- YEARS OF SERVICE ON DATE VESTED PERCENTAGE OF ANNUAL COMPANY OF TERMINATION OF EMPLOYMENT MATCHING ACCOUNT ----------------------------------------------------------------------------- Less than 1 year 0% ----------------------------------------------------------------------------- 1 year or more, but less than 2 10% ----------------------------------------------------------------------------- 2 years or more, but less than 3 25% ----------------------------------------------------------------------------- 3 years or more, but less than 4 50% ----------------------------------------------------------------------------- 4 years or more, but less than 5 75% ----------------------------------------------------------------------------- 5 years or more 100% ----------------------------------------------------------------------------- |
(d) Notwithstanding anything to the contrary contained in this
Section 3.12, except as provided in subsection (d) below, in the
event of a Change in Control, a Participant's Company
Contribution Account and Company Matching Account shall
immediately become 100% vested (without regard to whether it is
already vested in accordance with the above vesting schedules).
(e) Notwithstanding subsection (d) in this Section 3.12, the vesting
schedule for a Participant's Company Contribution Account shall not be accelerated to the extent that the Committee determines that such acceleration would cause the deduction limitations of Section 280G of the Code to become effective. In the event that any portion of a Participant's Company Contribution Account is not vested pursuant to such a determination, the Participant may request independent verification of the Committee's calculations with respect to the application of Section 280G. In such case, the Committee must provide to the Participant within 15 business days of such a request an opinion from a nationally recognized accounting firm selected by the Participant (the "Accounting Firm"), to the effect that, in the Accounting Firm's opinion that any limitation in the vested percentage hereunder is necessary to avoid the limits of Section 280G, and containing supporting calculations, or, in the absence of such an opinion, shall cause the relevant portion of the Participant's Company Contribution Account to become vested. The cost of such opinion shall be paid for by the Company. 3.13 CREDITING/DEBITING OF ACCOUNT BALANCES. In accordance with, and subject to, the rules and procedures that are established from time to time by the Committee, in its sole discretion, amounts shall be credited or debited to a Participant's Account Balance in accordance with the following rules: (a) ELECTION OF MEASUREMENT FUNDS. Subject to Section 3.13(f) below, a Participant, in connection with his or her initial deferral election in accordance with Section 3.3(a) above, shall elect, on the Election Form, one or more Measurement Fund(s) to be used to determine the additional amounts to be credited to his or her Account Balance for the first business day in which the Participant commences participation in the Plan and continuing thereafter for each subsequent day in which the Participant participates in the |
Plan, unless changed in accordance with the next sentence. Subject to Section 3.13(f) below, commencing with the first business day that follows the Participant's commencement of participation in the Plan and continuing thereafter for each subsequent day in which the Participant participates in the Plan, the Participant may (but is not required to) elect, by submitting an Election Form to the Committee that is accepted by the Committee, to add or delete one or more Measurement Fund(s) to be used to determine the additional amounts to be credited to his or her Account Balance, or to change the portion of his or her Account Balance allocated to each previously or newly elected Measurement Fund. If an election is made in accordance with the previous sentence, it shall apply to the next business day and continue thereafter for each subsequent day in which the Participant participates in the Plan, unless changed in accordance with the previous sentence.
(b) PROPORTIONATE ALLOCATION. In making any election described in
Section 3.13(a) above, the Participant shall specify on the
Election Form, in increments of five percentage points (5%), the
percentage of his or her Account Balance to have gains and losses
measured by a Measurement Fund.
(c) MEASUREMENT FUNDS. From time to time, the Committee in its sole discretion shall select and announce to Participants its selection of mutual funds, insurance company separate accounts, indexed rates or other methods, one of which shall be the Stock (each, a "Measurement Fund"), for the purpose of providing the basis on which gains and losses shall be attributed to Account Balances under the Plan. The Committee may, in its sole discretion, discontinue, substitute or add a Measurement Fund at any time, provided, however, that the Committee may never discontinue or substitute the Company Stock Measurement Fund. Each such action will take effect as of the first day of the calendar quarter that follows by thirty (30) days the day on which the Committee gives Participants advance written notice of such change.
(d) CREDITING OR DEBITING METHOD. The performance of each elected
Measurement Fund (either positive or negative) will be determined
by the Committee, in its reasonable discretion, based on
available reports of the performance of the Measurement Funds. A
Participant's Account Balance shall be credited or debited on a
daily basis based on the performance of each Measurement Fund
selected by the Participant, as determined by the Committee in
its sole discretion, as though (i) a Participant's Account
Balance were invested in the Measurement Fund(s) selected by the
Participant, in the percentages applicable to such day, as of the
close of business on such day, at the closing price on such date;
(ii) the portion of the Annual Deferral Amount that was actually
deferred during any day were invested in the Measurement Fund(s)
selected by the Participant, in the percentages applicable to
such day, no later than the close of business on the first
business day after the day on which such amounts are actually
deferred from the Participant's Annual Base Salary through
reductions in his or her payroll, at the closing price on such
date; and (iii) any distribution made to a Participant that
decreases such
Participant's Account Balance ceased being invested in the Measurement Fund(s), in the percentages applicable to such day, no earlier than one business day prior to the distribution, at the closing price on such date. The Participant's Annual Stock Option Amount(s) shall be credited to his or her Stock Option Account no later than the close of business on the first business day after the day on which the Eligible Stock Option was exercised. The Participant's Annual Restricted Stock Amounts shall be credited to his or her Restricted Stock Account no later than the close of business on the first business day after the day on which the Restricted Stock to which it relates would have vested, but for the election to defer.
(e) NO ACTUAL INVESTMENT. Notwithstanding any other provision of this Plan that may be interpreted to the contrary, the Measurement Funds are to be used for measurement purposes only, and a Participant's election of any such Measurement Fund, the allocation to his or her Account Balance thereto, the calculation of additional amounts and the crediting or debiting of such amounts to a Participant's Account Balance shall not be considered or construed in any manner as an actual investment of his or her Account Balance in any such Measurement Fund. In the event that the Company or the Trustee (as that term is defined in the Trust), in its own discretion, decides to invest funds in any or all of the Measurement Funds, no Participant shall have any rights in or to such investments themselves. Without limiting the foregoing, a Participant's Account Balance shall at all times be a bookkeeping entry only and shall not represent any investment made on his or her behalf by the Company or the Trust; the Participant shall at all times remain an unsecured creditor of the Company.
(f) STOCK OPTION ACCOUNT AND RESTRICTED STOCK ACCOUNT MUST BE ALLOCATED TO COMPANY STOCK MEASUREMENT FUND. Notwithstanding any provision of this Plan that may be construed to the contrary, a Participant's Stock Option Account and Restricted Stock Account must always be allocated to the Company Stock Measurement Fund, may never be reallocated to any other Measurement Fund and must be distributed from this Plan in the form of actual shares of Stock.
3.14 FICA AND OTHER TAXES.
(a) ANNUAL DEFERRAL AMOUNTS. For each Plan Year in which an Annual Deferral Amount is being withheld from a Participant, the Participant's Employer(s) shall withhold from that portion of the Participant's Annual Base Salary or Annual Bonus that is not being deferred, in a manner determined by the Employer(s), the Participant's share of FICA, other employment taxes and other employee contributions on such Annual Deferral Amount. If necessary, the Committee may reduce the Annual Deferral Amount in order to comply with this Section 3.14.
(b) COMPANY MATCHING AMOUNTS. When a participant becomes vested in a portion of his or her Company Matching Account, the Participant's Employer(s) shall withhold from the Participant's Annual Base Salary or Annual Bonus that is not deferred, in a manner
determined by the Employer(s), the Participant's share of FICA and other employment taxes. If necessary, the Committee may reduce the vested portion of the Participant's Company Matching Account in order to comply with this Section 3.14.
(c) ANNUAL STOCK OPTION AMOUNTS AND ANNUAL RESTRICTED STOCK AMOUNTS.
For each Plan Year in which an Annual Stock Option Amount or Annual Restricted Stock Amount is being first withheld from a Participant, the Participant's Employer(s) shall withhold from that portion of the Participant's Annual Base Salary or Annual Bonus that is not being deferred, in a manner determined by the Employer(s), the Participant's share of FICA and other employment taxes on such Annual Stock Option Amount or Annual Restricted Stock Amount. If necessary, the Committee may reduce the Annual Deferral Amount in order to comply with this Section 3.14. 3.15 DISTRIBUTIONS. The Participant's Employer(s), or the trustee of the Trust, shall withhold from any payments made to a Participant under this Plan all federal, state and local income, employment and other taxes required to be withheld by the Employer(s), or the trustee of the Trust, in connection with such payments, in amounts and in a manner to be determined in the sole discretion of the Employer(s) and the trustee of the Trust, respectively (whichever is making the payment). |
ARTICLE 4
SHORT-TERM PAYOUT; UNFORESEEABLE FINANCIAL EMERGENCIES;
WITHDRAWAL ELECTION
4.1 SHORT-TERM PAYOUT. In connection with each election to defer an Annual Deferral Amount, a Participant may irrevocably elect to receive a future "Short-Term Payout" from the Plan with respect to such Annual Deferral Amount. Subject to the Deduction Limitation, the Short-Term Payout shall be a lump sum payment in an amount that is equal to the Annual Deferral (or a specified portion thereof) plus amounts credited or debited in the manner provided in Section 3.13 above on that amount, determined at the time that the Short-Term Payout becomes payable (rather than the date of a Termination of Employment) or, alternatively if so elected by the Participant, a fixed stated sum, up to the total Account. Subject to the Deduction Limitation and the other terms and conditions of this Plan, each Short-Term Payout elected shall be paid out during a 60 day period commencing immediately after the last day of any Plan Year designated by the Participant that is at least three Plan Years after the Plan Year in which the Annual Deferral Amount is actually deferred.
4.2 OTHER BENEFITS TAKE PRECEDENCE OVER SHORT-TERM. Should an event occur that triggers a benefit under Article 5, 6, 7 or 8, any Annual Deferral Amount, plus amounts credited or debited thereon, that is subject to a Short-Term Payout election under Section 4.1 shall not be paid in accordance with Section 4.1 but shall be paid in accordance with the other applicable Article.
4.3 WITHDRAWAL PAYOUT/SUSPENSIONS FOR UNFORESEEABLE FINANCIAL EMERGENCIES. If the Participant experiences an Unforeseeable Financial Emergency, the Participant may petition the Committee to (i) suspend any deferrals required to be made by a Participant or (ii) receive a partial or full payout from the Plan. The payout shall not exceed the lesser of the Participant's Account Balance, calculated as if such Participant were receiving a Termination Benefit, or the amount reasonably needed to satisfy the Unforeseeable Financial Emergency. If, subject to the sole discretion of the Committee, the petition for a suspension and/or payout is approved, suspension shall take effect upon the date of approval and any payout shall be made within 60 days of the date of approval. The payment of any amount under this Section 4.3 shall not be subject to the Deduction Limitation.
4.4 WITHDRAWAL ELECTION. A Participant (or, after a Participant's death, his or her Beneficiary) may elect, at any time, to withdraw a portion or all of his or her Account Balance, calculated as if there had occurred a Termination of Employment as of the day of the election, less a withdrawal penalty equal to 10% of the amount withdrawn (the net amount shall be referred to as the "Withdrawal Amount"). This election can be made at any time, before or after Retirement, Disability, death or Termination of Employment, and whether or not the Participant (or Beneficiary) is in the process of being paid pursuant to an installment payment schedule. If made before Retirement, Disability or death, a Participant's Withdrawal Amount shall be his or her Account Balance (or portion of his or her Account Balance elected by the Participant) calculated as if there had occurred a Termination of Employment as of the day of the election. Notwithstanding anything in this Section or the Plan to the contrary, a Participant may not elect a Withdrawal Amount less than $5,000. The Participant (or his or her Beneficiary) shall make this election by giving the Committee advance written notice of the election in a form determined from time to time by the Committee. The Participant (or his or her Beneficiary) shall be paid the Withdrawal Amount within 60 days of his or her election and the Participant's Account shall concurrently be reduced by the Withdrawal Amount plus the 10% penalty. The payment of this Withdrawal Amount shall not be subject to the Deduction Limitation.
ARTICLE 5
RETIREMENT BENEFIT
5.1 RETIREMENT BENEFIT. Subject to the Deduction Limitation, a Participant who Retires shall receive, as a Retirement Benefit, his or her Account Balance.
5.2 PAYMENT OF RETIREMENT BENEFIT. A Participant, in connection with his or her commencement of participation in the Plan, shall elect on an Election Form the form in which the Retirement Benefit will be paid, if that benefit becomes payable under the terms of the Plan, which form shall be a lump sum or an Annual Installment Method of 5, 10, or 15 years. The Participant may annually change his or her election to an allowable alternative payout period by submitting a new Election Form to the Committee, provided that the last such Election Form that is submitted at least 1 year prior to the Participant's Retirement and is accepted by the Committee
in its sole discretion shall be the governing Election Form as to this matter. If a Participant does not make any election with respect to the payment of the Retirement Benefit, then such benefit shall be payable in a lump sum. The lump sum payment shall be made, or installment payments shall commence, no later than 60 days after the Participant Retires. Any payment made shall be subject to the Deduction Limitation.
5.3 DEATH PRIOR TO COMPLETION OF RETIREMENT BENEFIT. If a Participant dies after Retirement but before the Retirement Benefit is paid in full, the Participant's unpaid Retirement Benefit payments shall continue and shall be paid to the Participant's Beneficiary (a) over the remaining number of years and in the same amounts as that benefit would have been paid to the Participant had the Participant survived, or (b) in a lump sum, if requested by the Beneficiary and allowed in the sole discretion of the Committee, that is equal to the Participant's unpaid remaining Account Balance.
ARTICLE 6
PRE-RETIREMENT SURVIVOR BENEFIT
6.1 PRE-RETIREMENT SURVIVOR BENEFIT. Subject to the Deduction Limitation, the Participant's Beneficiary shall receive a Pre-Retirement Survivor Benefit equal to the Participant's Account Balance if the Participant dies before he or she Retires, experiences a Termination of Employment or suffers a Disability.
6.2 PAYMENT OF PRE-RETIREMENT SURVIVOR BENEFIT. A Participant, in connection with his or her commencement of participation in the Plan, shall elect on an Election Form whether the Pre-Retirement Survivor Benefit shall be received by his or her Beneficiary in a lump sum or pursuant to an Annual Installment Method of 5, 10 or 15 years. The Participant may annually change this election to an allowable alternative payout period by submitting a new Election Form to the Committee, which form must be accepted by the Committee in its sole discretion. The Election Form most recently accepted by the Committee prior to the Participant's death shall govern the payout of the Participant's Pre-Retirement Survivor Benefit. If a Participant does not make any election with respect to the payment of the Pre-Retirement Survivor Benefit, then such benefit shall be paid in a lump sum. Despite the foregoing, if the Participant's Account Balance at the time of his or her death is less than $25,000, payment of the Pre-Retirement Survivor Benefit may be made, in the sole discretion of the Committee, in a lump sum or pursuant to an Annual Installment Method of not more than 5 years. The lump sum payment shall be made, or installment payments shall commence, no later than 60 days after the Committee is provided with proof that is satisfactory to the Committee of the Participant's death. Any payment made shall be subject to the Deduction Limitation.
ARTICLE 7
TERMINATION BENEFIT
7.1 TERMINATION BENEFIT. Subject to the Deduction Limitation, the Participant shall receive a Termination Benefit, which shall be equal to the Participant's Account Balance if a Participant experiences a Termination of Employment prior to his or her Retirement, death or Disability.
7.2 PAYMENT OF TERMINATION BENEFIT. The Termination Benefit shall be paid to a Participant in a lump sum. Notwithstanding the foregoing or anything in this Plan to the contrary, to the extent a Participant's Account Balance is equal to or greater than $25,000 at the time of Termination of Employment, the Participant may request that the Committee cause the Termination Benefit to be paid pursuant to a method other than lump sum. The Committee may, in its sole discretion, accept, modify or reject the request of a Participant to pay the Termination Benefit pursuant to a method other than lump sum. The lump sum payment shall be made, or installment payments shall commence, no later than 60 days after Participant terminates his or her employment. Notwithstanding anything in this Section 7.2 or the Plan to the contrary, a Participant may request that the Company pay the lump sum payment or commence the installment payments 60 days after the end of the Plan Year in which the Participant terminates his or her employment. The Committee may, in its sole discretion, accept or reject such a request from a Participant.
ARTICLE 8
DISABILITY WAIVER AND BENEFIT
8.1 DISABILITY WAIVER.
(a) WAIVER OF DEFERRAL. A Participant who is determined by the Committee to be suffering from a Disability shall (i) have no further deferrals of the Annual Deferral Amount that would otherwise have been withheld from a Participant's Annual Base Salary or Annual Bonus for the Plan Year during which the Participant first suffers a Disability and (ii) have no deferral of any unvested Restricted Stock Amount or unexercised Stock Option Amount as to which the Participant had previously elected deferral. During the period of Disability, the Participant shall not be allowed to make any additional deferral elections, but will continue to be considered a Participant for all other purposes of this Plan.
(b) RETURN TO WORK. If a Participant returns to employment with an Employer, after a Disability ceases, the Participant may elect to defer an Annual Deferral Amount, Stock Option Amount and Restricted Stock Amount for the Plan Year following his or her return to employment or service and for every Plan Year thereafter while a Participant in the Plan; provided such deferral elections are otherwise allowed and an Election Form is delivered to and accepted by the Committee for each such election in accordance with Section 3.3 above.
8.2 CONTINUED ELIGIBILITY; DISABILITY BENEFIT. A Participant suffering a
Disability shall, for benefit purposes under this Plan, continue to be
considered to be employed and shall be eligible for the benefits
provided for in Articles 4, 5, 6 or 7 in accordance with the provisions
of those Articles. Notwithstanding the above, the Committee shall have
the right to, in its sole and absolute discretion and for purposes of
this Plan only, and must in the case of a Participant who is otherwise
eligible to Retire, deem the Participant to have experienced a
Termination of Employment, or in the case of a Participant who is
eligible to Retire, to have Retired, at any time (or in the case of a
Participant who is eligible to Retire, as soon as practicable) after
such Participant is determined to be suffering a Disability, in which
case the Participant shall receive a Disability Benefit equal to his or
her Account Balance at the time of the Committee's determination;
provided, however, that should the Participant otherwise have been
eligible to Retire, he or she shall be paid in accordance with Article
5. The Disability Benefit shall be paid in a lump sum within 60 days of
the Committee's exercise of such right. Any payment made shall be
subject to the Deduction Limitation.
ARTICLE 9
BENEFICIARY DESIGNATION
9.1 BENEFICIARY. Each Participant shall have the right, at any time, to designate his or her Beneficiary(ies) (both primary and contingent) to receive any benefits payable under the Plan to a beneficiary upon the death of a Participant. The Beneficiary designated under this Plan may be the same as or different from the Beneficiary designation under any other plan of an Employer in which the Participant participates.
9.2 BENEFICIARY DESIGNATION; CHANGE; SPOUSAL CONSENT. A Participant shall designate his or her Beneficiary by completing and signing the Beneficiary Designation Form, and returning it to the Committee or its designated agent. A Participant shall have the right to change a Beneficiary by completing, signing and otherwise complying with the terms of the Beneficiary Designation Form and the Committee's rules and procedures, as in effect from time to time. A Participant may name someone other than his or her spouse as a Beneficiary only if a spousal consent, in the form designated by the Committee, is signed by that Participant's spouse and returned to the Committee. Upon the acceptance by the Committee of a new Beneficiary Designation Form, all Beneficiary designations previously filed shall be canceled. The Committee shall be entitled to rely on the last Beneficiary Designation Form filed by the Participant and accepted by the Committee prior to his or her death.
9.3 ACKNOWLEDGMENT. No designation or change in designation of a Beneficiary shall be effective until received and acknowledged in writing by the Committee or its designated agent.
9.4 NO BENEFICIARY DESIGNATION. If a Participant fails to designate a Beneficiary as provided in Sections 9.1, 9.2 and 9.3 above or, if all designated Beneficiaries predecease the Participant or die prior to complete distribution of the Participant's benefits, then the Participant's designated Beneficiary shall be deemed to be his or her surviving spouse. If the Participant has no
surviving spouse, the Participant's designated Beneficiary shall be deemed to be the Participant's estate.
9.5 DOUBT AS TO BENEFICIARY. If the Committee has any doubt as to the proper Beneficiary to receive payments pursuant to this Plan, the Committee shall have the right, exercisable in its discretion, to cause the Participant's Employer to withhold such payments until this matter is resolved to the Committee's satisfaction.
9.6 DISCHARGE OF OBLIGATIONS. The payment of benefits under the Plan to a Beneficiary shall fully and completely discharge all Employers and the Committee from all further obligations under this Plan with respect to the Participant, and that Participant's Plan Agreement shall terminate upon such full payment of benefits.
ARTICLE 10
LEAVE OF ABSENCE
10.1 PAID LEAVE OF ABSENCE. If a Participant is authorized by the Participant's Employer for any reason to take a paid leave of absence from the employment of the Employer, the Participant shall continue to be considered employed by the Employer and the Annual Deferral Amount shall continue to be withheld during such paid leave of absence in accordance with Section 3.3. 10.2 UNPAID LEAVE OF ABSENCE. If a Participant is authorized by the Participant's Employer for any reason to take an unpaid leave of absence from the employment of the Employer, the Participant shall continue to be considered employed by the Employer and deferrals shall not be made, in the absence of compensation. Upon such expiration of the unpaid leave and resumption of entitlement to compensation, deferrals shall resume for the remaining portion of the Plan Year in which the return occurs, based on the deferral election, if any, made for that Plan Year. If no election was made for that Plan Year, no deferral shall be withheld. |
ARTICLE 11
TERMINATION, AMENDMENT OR MODIFICATION
11.1 TERMINATION. Although the Company anticipates that it will continue the Plan for an indefinite period of time, there is no guarantee that the Company will continue the Plan or will not terminate the Plan at any time in the future. Accordingly, the Company reserves the right to discontinue its sponsorship of the Plan and to terminate the Plan at any time with respect to any or all of its participating Employees, by action of its Board of Directors. Upon the termination of the Plan, the Plan Agreements of the affected Participants shall terminate and their Account Balances, determined as if they had experienced a Termination of Employment on the date of Plan termination or, if Plan termination occurs after the date upon which a Participant was eligible to Retire, then with respect to that Participant as if he or she had Retired on the date of Plan termination, shall be paid to the Participants as follows: Prior to a Change in Control, if the Plan is terminated with respect to all of its Participants, the Company shall have the right, in its sole discretion, and notwithstanding any elections made by the Participant, to pay such |
benefits in a lump sum or pursuant to an Annual Installment Method of up to 15 years, with amounts credited and debited during the installment period as provided herein. Prior to a Change in Control, if the Plan is terminated with respect to less than all of its Participants, the Company shall be required to pay such benefits in a lump sum. After a Change in Control, the Company shall be required to pay such benefits in a lump sum. The termination of the Plan shall not adversely affect any Participant or Beneficiary who has become entitled to the payment of any benefits under the Plan as of the date of termination; provided however, that the Company shall have the right to accelerate installment payments without a premium or prepayment penalty by paying the Account Balance in a lump sum or pursuant to an Annual Installment Method using fewer years. 11.2 AMENDMENT. The Company may, at any time, amend or modify the Plan in whole or in part by the action of its Board of Directors; provided, however, that: (i) no amendment or modification shall be effective to decrease or restrict the value of a Participant's Account Balance in existence at the time the amendment or modification is made, calculated as if the Participant had experienced a Termination of Employment as of the effective date of the amendment or modification or, if the amendment or modification occurs after the date upon which the Participant was eligible to Retire, the Participant had Retired as of the effective date of the amendment or modification, (ii) no amendment or modification shall be effective upon or after a Change in Control without the prior written consent of a majority of the Participants, and (iii) no amendment or modification of this Section 11.2 or Section 12.2 of the Plan shall be effective. The amendment or modification of the Plan shall not affect any Participant or Beneficiary who has become entitled to the payment of benefits under the Plan as of the date of the amendment or modification; provided, however, that the Employer shall have the right to accelerate installment payments by paying the Account Balance in a lump sum or pursuant to an Annual Installment Method using fewer years (provided that the present value of all payments that will have been received by a Participant at any given point of time under the different payment schedule shall equal or exceed the present value of all payments that would have been received at that point in time under the original payment schedule). 11.3 PLAN AGREEMENT. Despite the provisions of Sections 11.1 and 11.2 above, if a Participant's Plan Agreement contains benefits or limitations that are not in this Plan document, the Company may only amend or terminate such provisions with the consent of the Participant. 11.4 EFFECT OF PAYMENT. The full payment of the applicable benefit under Articles 4, 5, 6, 7 or 8 of the Plan shall completely discharge all obligations to a Participant and his or her designated Beneficiaries under this Plan and the Participant's Plan Agreement shall terminate. |
ARTICLE 12
ADMINISTRATION
12.1 COMMITTEE DUTIES. Except as otherwise provided in this Article 12, this Plan shall be administered by a Committee, which shall consist of the Board, or such committee as the Board shall appoint. Members of the Committee may be Participants under this Plan. The Committee |
shall also have the discretion and authority to (i) make, amend, interpret, and enforce all appropriate rules and regulations for the administration of this Plan and (ii) decide or resolve any and all questions including interpretations of this Plan, as may arise in connection with the Plan. Any individual serving on the Committee who is a Participant shall not vote or act on any matter relating solely to himself or herself. When making a determination or calculation, the Committee shall be entitled to rely on information furnished by a Participant, the Company or any Employer. 12.2 ADMINISTRATION UPON CHANGE IN CONTROL. For purposes of this Plan, the Company shall be the "Administrator" at all times prior to the occurrence of a Change in Control. Upon and after the occurrence of a Change in Control, the "Administrator" shall be an independent third party selected by the Trustee and approved by the individual who, immediately prior to such event, was the Company's Chief Executive Officer or, if not so identified, the Company's highest ranking officer (the "Ex-CEO"). The Administrator shall have the discretionary power to determine all questions arising in connection with the administration of the Plan and the interpretation of the Plan and Trust including, but not limited to benefit entitlement determinations; provided, however, upon and after the occurrence of a Change in Control, the Administrator shall have no power to direct the investment of Plan or Trust assets or select any investment manager or custodial firm for the Plan or Trust. Upon and after the occurrence of a Change in Control, the Company must: (1) pay all reasonable administrative expenses and fees of the Administrator; (2) indemnify the Administrator against any costs, expenses and liabilities including, without limitation, attorney's fees and expenses arising in connection with the performance of the Administrator hereunder, except with respect to matters resulting from the gross negligence or willful misconduct of the Administrator or its employees or agents; and (3) supply full and timely information to the Administrator or all matters relating to the Plan, the Trust, the Participants and their Beneficiaries, the Account Balances of the Participants, the date of circumstances of the Retirement, Disability, death or Termination of Employment of the Participants, and such other pertinent information as the Administrator may reasonably require. Upon and after a Change in Control, the Administrator may be terminated (and a replacement appointed) by the Trustee only with the approval of the Ex-CEO. Upon and after a Change in Control, the Administrator may not be terminated by the Company. 12.3 AGENTS. In the administration of this Plan, the Committee and the Administrator may, from time to time, employ agents and delegate to them such of their respective administrative duties as they see fit (including acting through a duly appointed representative) and may from time to time consult with counsel who may be counsel to any Employer. 12.4 BINDING EFFECT OF DECISIONS. The decision or action of the Administrator with respect to any question arising out of or in connection with the administration, interpretation and application of the Plan and the rules and regulations promulgated hereunder shall be final and conclusive and binding upon all persons having any interest in the Plan. |
12.5 INDEMNITY OF COMMITTEE. All Employers shall indemnify and hold harmless the members of the Committee, and any Employee to whom the duties of the Committee may be delegated, and the Administrator against any and all claims, losses, damages, expenses or liabilities arising from any action or failure to act with respect to this Plan, except in the case of willful misconduct by the Committee, any of its members, any such Employee or the Administrator. 12.6 EMPLOYER INFORMATION. To enable the Committee and Administrator to perform their respective functions, the Company and each Employer shall supply full and timely information to the Committee or Administrator, as the case may be, on all matters relating to the compensation of its Participants, the date and circumstances of the Retirement, Disability, death or Termination of Employment of its Participants, and such other pertinent information as the Committee or Administrator may reasonably require. |
ARTICLE 13
OTHER BENEFITS AND AGREEMENTS
13.1 COORDINATION WITH OTHER BENEFITS. The benefits provided for a Participant and Participant's Beneficiary under the Plan are in addition to any other benefits available to such Participant under any other plan or program for employees of the Participant's Employer. The Plan shall supplement and shall not supersede, modify or amend any other such plan or program except as may otherwise be expressly provided. |
ARTICLE 14
CLAIMS PROCEDURES
14.1 PRESENTATION OF CLAIM. Any Participant or Beneficiary of a deceased Participant (such Participant or Beneficiary being referred to below as a "Claimant") may deliver to the Committee a written claim for a determination with respect to the amounts distributable to such Claimant from the Plan. If such a claim relates to the contents of a notice received by the Claimant, the claim must be made within 60 days after such notice was received by the Claimant. All other claims must be made within 180 days of the date on which the event that caused the claim to arise occurred. The claim must state with particularity the determination desired by the Claimant. 14.2 NOTIFICATION OF DECISION. The Committee shall consider a Claimant's claim within a reasonable time, and shall notify the Claimant in writing: (a) that the Claimant's requested determination has been made, and that the claim has been allowed in full; or (b) that the Committee has reached a conclusion contrary, in whole or in part, to the Claimant's requested determination, and such notice must set forth in a manner calculated to be understood by |
the Claimant:
(i) the specific reason(s) for the denial of the claim, or any part of it;
(ii) specific reference(s) to pertinent provisions of the Plan upon which such denial was based;
(iii) a description of any additional material or information necessary for the Claimant to perfect the claim, and an explanation of why such material or information is necessary; and
(iv) an explanation of the claim review procedure set forth in
Section 14.3 below.
14.3 REVIEW OF A DENIED CLAIM. Within 60 days after receiving a notice from the Committee that a claim has been denied, in whole or in part, a Claimant (or the Claimant's duly authorized representative) may file with the Committee a written request for a review of the denial of the claim. Thereafter, but not later than 30 days after the review procedure |
began, the Claimant (or the Claimant's duly authorized representative):
(a) may review pertinent documents;
(b) may submit written comments or other documents; and/or
(c) may request a hearing, which the Committee, in its sole
discretion, may grant. 14.4 DECISION ON REVIEW. The Committee shall render its decision on review promptly, and not later than 60 days after the filing of a written request for review of the denial, unless a hearing is held or other special circumstances require additional time, in which case the Committee's decision must be rendered within 120 days after such date. Such decision must be written in a manner calculated to be understood by |
the Claimant, and it must contain:
(a) specific reasons for the decision;
(b) specific reference(s) to the pertinent Plan provisions upon which the decision was based; and
(c) such other matters as the Committee deems relevant.
14.5 LEGAL ACTION. A Claimant's compliance with the foregoing provisions of this Article 14 is a mandatory prerequisite to a Claimant's right to commence any legal action with respect to any claim for benefits under this Plan. |
ARTICLE 15
TRUST
15.1 ESTABLISHMENT OF THE TRUST. The Company may establish the Trust, and each Employer may transfer over to the Trust such assets as the Employer determines, in its sole discretion, to |
provide for its respective future liabilities created with respect to the Annual Deferral Amounts, Annual Company Contribution Amounts, Company Matching Amounts, Annual Stock Option Amounts and Annual Restricted Stock Amounts for such Employer's Participants for all periods prior to the transfer, as well as any debits and credits to the Participants' Account Balances for all periods prior to the transfer, taking into consideration the value of the assets in the trust at the time of the transfer. 15.2 INTERRELATIONSHIP OF THE PLAN AND THE TRUST. The provisions of the Plan and the Plan Agreement shall govern the rights of a Participant to receive distributions pursuant to the Plan. The provisions of the Trust shall govern the rights of the Employers, Participants and the other creditors of the Employers to the assets transferred to the Trust. Each Employer shall at all times remain liable to carry out its obligations under the Plan. 15.3 DISTRIBUTIONS FROM THE TRUST. Each Employer's obligations under the Plan may be satisfied with Trust assets distributed pursuant to the terms of the Trust, and any such distribution shall reduce the Employer's obligations under this Plan. 15.4 STOCK TRANSFERRED TO THE TRUST. Notwithstanding any other provision of this Plan or the Trust, if assets are distributed to a Participant in a distribution which reduces the Participant's Stock Option Account balance or Restricted Stock Account balance under this Plan, such distribution must be made in the form of Stock. |
ARTICLE 16
MISCELLANEOUS
16.1 STATUS OF PLAN. The Plan is intended to be a plan that is not qualified within the meaning of Code Section 401(a) and that "is unfunded and is maintained by an employer primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees" within the meaning of ERISA Sections 201(2), 301(a)(3) and 401(a)(1). The Plan shall be administered and interpreted to the extent possible in a manner consistent with that intent. 16.2 UNSECURED GENERAL CREDITOR. Participants and their Beneficiaries, heirs, successors and assigns shall have no legal or equitable rights, interests or claims in any property or assets of an Employer. For purposes of the payment of benefits under this Plan, the Employer's assets shall be, and remain, neither pledged nor restricted under or as a result of this Plan. An Employer's obligation under the Plan shall be merely that of an unfunded and unsecured promise to pay money in the future. 16.3 EMPLOYER'S LIABILITY. An Employer's liability for the payment of benefits shall be defined only by the Plan and the Plan Agreement, as entered into between the Employer and a Participant. An Employer shall have no obligation to a Participant under the Plan except as expressly provided in the Plan and his or her Plan Agreement. |
16.4 NONASSIGNABILITY. Neither a Participant nor any other person shall have any right to commute, sell, assign, transfer, pledge, anticipate, mortgage or otherwise encumber, transfer, hypothecate, alienate or convey in advance of actual receipt, the amounts, if any, payable hereunder, or any part thereof, which are, and all rights to which are expressly declared to be, unassignable and non-transferable. No part of the amounts payable shall, prior to actual payment, be subject to seizure, attachment, garnishment or sequestration for the payment of any debts, judgments, alimony or separate maintenance owed by a Participant or any other person, be transferable by operation of law in the event of a Participant's or any other person's bankruptcy or insolvency or be transferable to a spouse as a result of a property settlement or otherwise. 16.5 NOT A CONTRACT OF EMPLOYMENT. The terms and conditions of this Plan shall not be deemed to constitute a contract of employment between any Employer and the Participant. Such employment is hereby acknowledged to be an "at will" employment relationship that can be terminated at any time for any reason, or no reason, with or without cause, and with or without notice, except to the extent expressly provided in a written employment agreement, if any. Nothing in this Plan shall be deemed to give a Participant the right to be retained in the service of any Employer or to interfere with the right of any Employer to discipline or discharge the Participant at any time. 16.6 FURNISHING INFORMATION. A Participant or his or her Beneficiary, as a condition to entitlement to benefits hereunder, shall cooperate with the Committee by furnishing any and all information requested by the Committee and take such other actions as may be requested in order to facilitate the administration of the Plan and the payments of benefits hereunder, including but not limited to taking such physical examinations as the Committee may deem necessary. 16.7 TERMS. Whenever any words are used herein in the masculine, they shall be construed as though they were in the feminine in all cases where they would so apply; and whenever any words are used herein in the singular or in the plural, they shall be construed as though they were used in the plural or the singular, as the case may be, in all cases where they would so apply. 16.8 CAPTIONS. The captions of the articles, sections and paragraphs of this Plan are for convenience only and shall not control or affect the meaning or construction of any of its provisions. 16.9 GOVERNING LAW. Subject to ERISA, the provisions of this Plan shall be construed and interpreted according to the internal laws of the State of California without regard to its conflicts of laws principles. 16.10 NOTICE. Any notice or filing required or permitted to be given to the Committee under this Plan shall be sufficient if in writing and hand-delivered, or sent by registered or certified mail, to the address |
below:
Vice President, Taxation ------------------------------------ Kaufman and Broad Home Corporation, Inc. ------------------------------------ 10990 Wilshire Boulevard ------------------------------------ Los Angeles, California 90024 ------------------------------------ Such notice shall be deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark on the receipt for registration or certification. Any notice or filing required or permitted to be given to a Participant under this Plan shall be sufficient if in writing and hand-delivered, or sent by mail, to the last address of the Participant shown on the records of the Company. 16.11 SUCCESSORS. The provisions of this Plan shall bind and inure to the benefit of the Participant's Employer and its successors and assigns and the Participant and the Participant's designated Beneficiaries. 16.12 SPOUSE'S INTEREST. The interest in the benefits hereunder of a spouse of a Participant who has predeceased the Participant shall automatically pass to the Participant and shall not be transferable by such spouse in any manner, including but not limited to such spouse's will, nor shall such interest pass under the laws of intestate succession. 16.13 VALIDITY. In case any provision of this Plan shall be illegal or invalid for any reason, said illegality or invalidity shall not affect the remaining parts hereof, but this Plan shall be construed and enforced as if such illegal or invalid provision had never been inserted herein. 16.14 INCOMPETENT. If the Committee determines in its discretion that a benefit under this Plan is to be paid to a minor, a person declared incompetent or to a person incapable of handling the disposition of that person's property, the Committee may direct payment of such benefit to the guardian, legal representative or person having the care and custody of such minor, incompetent or incapable person. The Committee may require proof of minority, incompetence, incapacity or guardianship, as it may deem appropriate prior to distribution of the benefit. Any payment of a benefit shall be a payment for the account of the Participant and the Participant's Beneficiary, as the case may be, and shall be a complete discharge of any liability under the Plan for such payment amount. 16.15 COURT ORDER. The Committee is authorized to cause the Company or any Employer to make any payments directed by court order in any action in which the Plan or the Committee has been named as a party. In addition, if a court determines that a spouse or former spouse of a Participant has an interest in the Participant's benefits under the Plan in connection with a property settlement or otherwise, the Committee, in its sole discretion, shall have the right, notwithstanding any election made by a Participant, to immediately cause the Company or any |
Employer to distribute the spouse's or former spouse's interest in the Participant's benefits under the Plan to that spouse or former spouse.
16.16 DISTRIBUTION IN THE EVENT OF TAXATION.
(a) IN GENERAL. If, for any reason, all or any portion of a Participant's benefits under this Plan becomes taxable to the Participant prior to receipt, a Participant may petition the Committee before a Change in Control, or the trustee of the Trust after a Change in Control, for a distribution of that portion of his or her benefit that has become taxable. Upon the grant of such a petition, which grant shall not be unreasonably withheld (and, after a Change in Control, shall be granted), a Participant's Employer shall distribute to the Participant immediately available funds in an amount equal to the taxable portion of his or her benefit (which amount shall not exceed a Participant's unpaid Account Balance under the Plan). If the petition is granted, the tax liability distribution shall be made within 90 days of the date when the Participant's petition is granted. Such a distribution shall affect and reduce the benefits to be paid under this Plan.
(b) TRUST. If the Trust terminates in accordance with its terms and
benefits are distributed from the Trust to a Participant in accordance with that Section, the Participant's Account, and accordingly the benefits under this Plan, shall be reduced to the extent of such distributions. 16.17 INSURANCE. The Employers, on their own behalf or on behalf of the trustee of the Trust, and, in their sole discretion, may apply for and procure insurance on the life of the Participants, in such amounts and in such forms as the Trust may choose. The Employers or the trustee of the Trust, as the case may be, shall be the sole owner and beneficiary of any such insurance. The Participants shall have no interest whatsoever in any such policy or policies, and at the request of the Employers shall submit to medical examinations and supply such information and execute such documents as may be required by the insurance company or companies to whom the Employers have applied for insurance. 16.18 LEGAL FEES TO ENFORCE RIGHTS AFTER CHANGE IN CONTROL. The Company and each Employer is aware that upon the occurrence of a Change in Control, the Board or the board of directors of a Participant's Employer (which might then be composed of new members) or a shareholder of the Company or the Participant's Employer, or of any successor corporation might then cause or attempt to cause the Company, the Participant's Employer or such successor to refuse to comply with its obligations under the Plan and might cause or attempt to cause the Company or the Participant's Employer to institute, or may institute, litigation |
seeking to deny Participants the benefits intended under the Plan. In these circumstances, the purpose of the Plan could be frustrated. Accordingly, if, following a Change in Control, it should appear to any Participant that the Company, the Participant's Employer or any successor corporation has failed to comply with any of its obligations under the Plan or any agreement thereunder or, if the Company, such Employer or any other person takes any action to declare the Plan void or unenforceable or institutes any litigation or other legal action designed to deny, diminish or to
recover from any Participant the benefits intended to be provided, then the Company and the Participant's Employer irrevocably authorize such Participant to retain counsel of his or her choice at the expense of the Company and the Participant's Employer (who shall be jointly and severally liable) to represent such Participant in connection with the initiation or defense of any litigation or other legal action, whether by or against the Company, the Participant's Employer or any director, officer, shareholder or other person affiliated with the Company, the Participant's Employer or any successor thereto in any jurisdiction.
IN WITNESS WHEREOF, the Company has signed this Plan document as of March 1, 2001.
"Company"
KB Home, a Delaware corporation
By: /s/ Cory F. Cohen ----------------------------- Title: Vice President, Tax -------------------------- |
EXHIBIT 10.22
KB HOME
2001 STOCK INCENTIVE PLAN
SECTION 1. PURPOSE. The purpose of the 2001 Stock Incentive Plan (the "Plan") is to promote the success of KB HOME (the "Company") by providing a method whereby employees of the Company and its subsidiaries and other eligible participants may be encouraged to invest in the Common Stock, $1.00 par value, of the Company ("Common Stock"), increase their proprietary interest in its business, remain in the employ of the Company or its subsidiaries, and increase their personal interests in the continued success and progress of the Company. The Plan provides for the grant of Options that satisfy the requirements for treatment as Incentive Stock Options ("ISOs") as defined under Section 422 of the Code or that are not intended to satisfy such requirements ("Non-qualified Options"), as well as for certain other "Awards," as defined below.
SECTION 2. DEFINITIONS. As used in this Plan, the following terms shall have the indicated meanings:
(a) Award: An award under this Plan of a Performance Stock Award, Restricted Stock Award, or Stock Unit Award.
(b) Board: The board of directors of KB HOME.
(c) Code: The Internal Revenue Code of 1986, as amended.
(d) Committee: The Committee specified in Section 3(a) of this Plan.
(e) Company: KB HOME and its Subsidiaries.
(f) Exchange Act: The Securities Exchange Act of 1934, as amended.
(g) Limited Stock Appreciation Right: A right granted pursuant to
Section 6(b) to receive cash in certain circumstances with respect to a related
Option.
(h) Option: An Option is a right granted under Section 6(a) to purchase a number of shares of Common Stock at such exercise price, at such times, and on such other terms and conditions as are specified in or determined pursuant to the document(s) evidencing the Award.
(i) Participant: An individual eligible under Section 5(a) to participate in this Plan.
(j) Performance Objectives: With reference to a particular Option or Award, the objectives established by the Committee under various criteria, the satisfaction of which may result in the grant, issuance, retention and/or vesting of an Option, a Performance Stock Award or Stock Unit Award, or which may accelerate the release of shares of Common Stock from the restrictions of a Restricted Stock Award. The Performance Objectives may differ from Participant to Participant and from Award to Award, as determined by the Committee and specified in the applicable Award. For purposes of an Award that is intended to qualify as "performance-based compensation" under Code Section 162(m), the term "Performance Objective" shall mean any one or more of the following performance criteria, either individually, alternatively or in any combination, applied to either the Company as a whole or to a business unit or subsidiary, either individually, alternatively or in any combination, and measured either annually or cumulatively over a period of years, on an absolute basis or relative to a pre-established target, to previous years' results or to a designated comparison group, in each case as specified by the Committee in the Award: (i) pre-tax income, (ii) after-tax income, (iii) cash flow, (iv) return on equity, (v) return on capital, (vi) earnings per share (including earnings before interest, taxes, depreciation and amortization), (vii) unit volume, (viii) net sales, (ix) service quality or (v) total shareholder return, in each case as determined in accordance with Generally Accepted Accounting Principles, if applicable.
(k) Performance Stock Award: Performance Stock is an award of shares of Common Stock made under Section 7(a), the grant, issuance, retention and/or vesting of which is subject to such performance and other conditions as are expressed in the document(s) evidencing the Award.
(l) Plan: The KB HOME 2001 Stock Incentive Plan, as it may be amended from time to time.
(m) Restricted Stock Award: Restricted Stock is a right granted under
Section 7(b) to shares of Common Stock issued or issuable under the Plan but
subject during specified periods of time to such conditions on vesting,
restrictions on transferability and/or repurchase rights as are expressed in the
document(s) evidencing the Award.
(n) Stock Unit Award: An award granted under Section 8 of this Plan.
(o) Subsidiary: Any corporation of which the Corporation owns, directly or indirectly, fifty percent (50%) or more of the voting or capital stock, or any partnership or other entity of which the Company owns, directly or indirectly, a fifty percent (50%) or more participating interest or the general partner of which is a Subsidiary.
(p) Tax Date: The date on which taxes of any kind are required by law to be withheld with respect to shares of Common Stock subject to an Option or Award.
SECTION 3. ADMINISTRATION.
(a) The Plan shall be administered by the Board and/or by a committee of the Board, as appointed from time to time by the Board (the "Committee"). The Board shall fill vacancies on, and from time to time may remove or add members to, the Committee. The Committee shall act pursuant to a majority vote or unanimous written consent. Notwithstanding the foregoing, with respect to any Award that is not intended to satisfy the conditions of Rule 16b-3 under the Exchange Act or Section 162(m)(4)(C) of the Code, the Committee may appoint one or more separate committees (any such committee, a "Subcommittee") composed of one or more directors of the Corporation (who may but need not be members of the Committee) and may delegate to any such Subcommittee(s) the authority to grant Options, Limited Stock Appreciation Rights and/or Awards under the Plan, to determine all terms of such Options, Limited Stock Appreciation Rights and/or Awards, and to administer the Plan or any aspect of it. Any action by any such Subcommittee shall be deemed for all purposes to have been taken by the Committee. The Committee may designate the Secretary of the Corporation or other Company employees to assist the Committee in the administration of the Plan, and may grant authority to such persons to issue and/or execute agreements or other documents under this Plan on behalf of the Committee or the Company.
(b) The Committee shall have full power and authority, subject to such orders or resolutions not inconsistent with the provisions of the Plan as may from time to time be issued or adopted by the Board, to grant to eligible persons Options, Limited Stock Appreciation Rights and Awards pursuant to the provisions of the Plan, to fix the exercise price and other terms of Options, to fix the terms of any Performance Stock Award and/or Restricted Stock Award in a manner consistent with the terms of Section 7, to fix the terms of any Stock Unit Award in a manner consistent with the terms of Section 8, to prescribe, amend and rescind rules and regulations, if any, relating to the Plan, to interpret the provisions of the Plan, Options, Limited Stock Appreciation Rights and Awards issued under the Plan, to amend such Options, Limited Stock Appreciation Rights and Awards from time to time subject to the provisions of the Plan, and to supervise the administration of the Plan. All decisions made by the Committee pursuant to the provisions of the Plan and related orders or resolutions of the Board shall be final, conclusive and binding on all persons, including the Company, stockholders, employees and optionees.
(c) Each person who is or shall have been a member of the Committee or of the Board shall be indemnified and held harmless by the Company from any loss, cost, liability or expense that may be imposed upon or reasonably incurred by him or her in connection with any claim, action, suit or proceeding to which he or she may be a party by reason of any action taken or any failure to act under the Plan. The foregoing right of indemnification shall not be exclusive of any other rights of indemnification to which
such persons may be entitled under the Company's Articles of Incorporation or Bylaws, or as a matter of law, or otherwise, or any power that the Company may have to indemnify them or hold them harmless.
SECTION 4. SHARES SUBJECT TO THE PLAN.
(a) The shares to be delivered upon exercise of Options or Limited Stock Appreciation Rights granted under the Plan or pursuant to Awards, may be made available from the authorized but unissued shares of the Company or from shares reacquired by the Company, including shares purchased in the open market or in private transactions.
(b) Subject to adjustments made pursuant to the provisions of Section 4(d) and this Section 4(b), the aggregate number of shares reserved for issuance upon the exercise of Options and pursuant to Awards which may be granted under the Plan shall not exceed 4,200,000 shares of Common Stock. The aggregate number of shares of Common Stock issued under this Plan shall equal only the number of shares actually issued upon exercise or settlement of an Option or vesting or settlement of any Award and not returned to the Company upon cancellation, expiration or forfeiture of Options and Awards or delivered (either actually or by attestation) in payment or satisfaction of the exercise price, purchase price or tax obligation of Options and Awards.
(c) The aggregate number of shares of Common Stock issued and issuable pursuant to ISOs may not exceed 4,200,000 shares. The maximum number of shares of Common Stock subject to Options granted during any calendar year to any one Participant shall not exceed 1,000,000. The maximum number of shares of Common Stock subject to Awards (other than Stock Units issued or issuable upon exercise of Options) that may be granted during any calendar year to any one Participant shall not exceed 500,000 in the aggregate.
(d) In the event that the Committee shall determine that any stock dividend, extraordinary cash dividend, recapitalization, reorganization, merger, consolidation, split-up, spin-off, combination, exchange of shares, warrants or rights offering to purchase Common Stock at a price substantially below fair market value, or other similar corporate event affects the Common Stock such that an adjustment is required in order to preserve the benefits or potential benefits intended to be made available to Participants under this Plan, then the Committee may, in its sole discretion and in such manner as the Committee may deem equitable, adjust any or all of (1) the number and kind of shares which thereafter may be awarded or optioned and sold or made the subject of Limited Stock Appreciation Rights under the Plan, (2) the number and kind of shares subject to outstanding Options and Awards, and Limited Stock Appreciation Rights, and (3) the option price with respect to any of the foregoing and/or, if deemed
appropriate, make provision for a cash payment to a Participant, including to reflect such an event occurring prior to an Option or Award, the grant of which was intentionally deferred in anticipation of such event; provided, however, that the number of shares subject to any Option or Award shall always be a whole number.
SECTION 5. ELIGIBILITY AND EXTENT OF PARTICIPATION.
(a) The persons eligible to receive Awards, Options and associated Limited Stock Appreciation Rights under the Plan shall consist of employees or prospective employees of the Company and consultants or advisors of the Company who, in the Committee's judgment, can make substantial contributions to the Company's long-term profitability and value. For purposes of the administration of previously granted Options and Awards, the term "Participant" shall also include a former Participant and any permitted transferee (including any trust, partnership or estate) of a Participant or former Participant.
(b) Subject to the limitations of the Plan, the Committee shall, after such consultation with and consideration of the recommendations of management as the Committee considers desirable, select from eligible persons those Participants to be granted Options and Awards and determine the time when each Option and Award shall be granted, the number of shares subject to each Option and Award and whether Limited Stock Appreciation Rights should be granted in connection with such Option, the number of shares for each Award and the restrictions associated with such Award. Subject to the provisions of Section 4, both Options and Awards may be granted to the same Participant.
SECTION 6. GRANTS OF OPTIONS AND LIMITED STOCK APPRECIATION RIGHTS.
(a) Grant of Options. Options on shares of Common Stock may be granted to Participants by the Committee from time to time at its sole discretion. Options intended to qualify as ISOs pursuant to Code Section 422 and Non-Qualified Options which are not intended to qualify as ISOs may be granted as the Committee in its sole discretion shall determine. Each Option grant shall contain such terms and conditions as may be approved by the Committee. Subject to the terms of the Plan, the Committee may establish provisions regarding (1) the number of shares of Common Stock which may be issued upon exercise of the Option, (2) the purchase price of the shares of Common Stock and the means of payment for the shares of Common Stock, (3) the term of the Option, (4) such terms and conditions of exercisability as may be determined from time to time by the Committee, (5) restrictions on the transfer of the Option and forfeiture provisions, and (6) such further terms and conditions, in each case not inconsistent with the Plan as may be determined from time to time by the Committee. The grant of an Option shall not constitute or be evidence of any agreement or other understanding,
express or implied, on the part of the Company or any Subsidiary to employ an individual for any specific period.
(b) Grant of Limited Stock Appreciation Rights in the Event of Change of Ownership. If deemed by the Committee to be in the best interests of the Company, any Option granted on or after the effective date of the Plan may include a Limited Stock Appreciation Right at the time of grant of the Option; also, the Committee may grant a Limited Stock Appreciation Right with respect to any unexercised Option at any time after granting such Option prior to the end of its term, provided such Option was granted after the effective date of the Plan. Unless otherwise specified, any reference in this Plan to an Option or Options shall include any associated Limited Stock Appreciation Right. Such Limited Stock Appreciation Rights shall be subject to such terms and conditions not inconsistent with the Plan as the Committee shall impose, provided that:
(1) A Limited Stock Appreciation Right shall be exercisable only during
the ninety-one (91) day period specified in the last sentence of
Section 9(a), provided, however, that except in connection with a
Change of Ownership, no Limited Stock Appreciation Right granted to
a Participant who is subject to Section 16 of the Exchange Act shall
be exercisable within six (6) months of the date of its grant; and
(2) A Limited Stock Appreciation Right shall, upon its exercise, entitle the optionee to whom such Limited Stock Appreciation Right was granted to receive an amount of cash equal to the amount by which the "Offer Price per Share" (as such term is hereinafter defined) shall exceed the exercise price of the associated Option, multiplied by the number of shares of Common Stock with respect to which such Limited Stock Appreciation Right shall have been exercised. Upon the exercise of a Limited Stock Appreciation Right, any associated Option shall cease to be exercisable to the extent of the shares of Common Stock with respect to which such Limited Stock Appreciation Right was exercised. Upon the exercise or termination of an associated Option, any related Limited Stock Appreciation Right shall terminate to the extent of the shares of Common Stock with respect to which such associated Option was exercised or terminated.
The term "Offer Price per Share" as used in this Section 6(b) shall mean with respect to a Limited Stock Appreciation Right the higher of (i) the fair market value per share of Common Stock on the date of exercise of such Limited Stock Appreciation Right or (ii) the highest price per share for Common Stock paid or to be paid in the transaction, if any, giving rise to
the event specified in clauses (1) or (2) (as the case may be) of
Section 9(a) which triggered the exercisability of such Limited
Stock Appreciation Right. For purposes of clause (ii) above, any
securities or property which are part of the consideration paid or
to be paid in such transactions shall be valued in determining the
Offer Price per Share at the highest of (A) the valuation placed on
such securities or property by the company, person or other entity
engaging in such transaction, or (B) the valuation placed on such
securities or property by the Committee.
(c) Option Price.
(1) The price at which each share of Common Stock may be purchased upon
exercise of a particular Option shall be as specified by the
Committee, in its sole discretion, but in no event shall the
exercise price be less than 100% of the fair market value of a share
of Common Stock at the time such Option is granted, except that (i)
in the event that an optionee is required to make a payment or to
forego the receipt of other compensation pursuant to paragraph
(c)(3) below prior to receiving such Option, the exercise price per
share of Common Stock of such Option shall not be less than 100% of
the fair market value of a share of Common Stock at the time such
Option is granted less the purchase price per share of Common Stock
of such Option, and (ii) the Committee may specifically provide that
the exercise price of an Option may be higher or lower in the case
of an Option granted to employees of a company acquired by the
Company in assumption and substitution of options held by such
employees at the time such company is acquired.
(2) Unless approved by shareholders and subject to adjustment pursuant to Section 4(d), the exercise price of any Option previously awarded under the Plan may not be adjusted downward, whether through amendment, cancellation or replacement grants, or by any other means.
(3) If the Committee, in its discretion, shall deem it desirable, the grant of an Option may be made conditional upon the receipt of a payment therefor by the optionee or upon the optionee agreeing to forego receipt of an amount of other compensation. Such condition and the terms and conditions as to its satisfaction may also provide for the reimbursement to the optionee of any part or all of such payment under such circumstances as the Committee may specify.
(d) Exercise.
(1) Each Option shall be exercisable at such times and subject to such
terms and conditions as the Committee may, in its sole discretion,
specify, provided, however, that except in connection with a Change
of Ownership, (i) Options granted to Participants who are subject to
Section 16 of the Exchange Act shall not become exercisable within
six (6) months from the date of grant and (ii) in no event may any
Option granted hereunder be exercisable after the expiration of 15
years from the date of such grant. Subject to the foregoing, each
Option grant shall specify the effect thereon of the death,
retirement or other termination of employment of the optionee. In
addition, the Committee may impose such other conditions with
respect to the exercise of Options, including without limitation,
any relating to the application of Federal or state securities laws,
as it may deem necessary or advisable.
(2) No shares shall be delivered pursuant to any exercise of an Option
until the Participant has made payment in full of the option price
therefor or provision for such payment satisfactory to the
Committee. The exercise price of an Option may be paid in cash or
certified or cashiers' check or by delivery (either actually or by
attestation) of shares of Common Stock that have been acquired or
held by the Participant in such manner as to not result in an
accounting charge. To the extent authorized by the Committee, either
at the time of grant or at the time of exercise of an Option, the
exercise price of an Option also may be paid through one of more of
the following: (i) shares of capital stock of the Corporation, (ii)
other property deemed acceptable by the Committee, (iii) a reduction
in the number of shares or other property otherwise issuable
pursuant to such Option, (iv) a promissory note of or other
commitment to pay by the Participant or of a third party, the terms
and conditions of which shall be determined by the Committee, or
(vi) any combination of the foregoing. No optionee or the legal
representative, legatee or distributee of an optionee shall be
deemed to be a holder of any shares subject to any Option prior to
the issuance of such shares upon exercise of such Option.
(e) Transferability of Options. Unless the documents evidencing the grant of an Option (or an amendment thereto authorized by the Committee) expressly states that the Option is transferable as provided hereunder, no Option granted under the Plan may be sold, assigned, conveyed, gifted, pledged, hypothecated or otherwise transferred in any manner, other than by will or the laws of descent and distribution. The Committee may in its sole discretion grant an Option or amend an outstanding Option to provide that the Option is transferable or assignable to a member or members
of the Participant's "immediate family," as such term is defined under Exchange Act Rule 16a-1(e), or to a trust for the benefit solely of a member or members of the Participant's immediate family, or to a partnership or other entity whose only owners are members of the Participant's family, provided that (1) no consideration is given in connection with the transfer of such Option, and (2) following any such transfer or assignment the Option will remain subject to substantially the same terms applicable to the Option while held by the Participant, as modified as the Committee in its sole discretion shall determine appropriate, and the transferee shall agree to be bound by such terms.
SECTION 7. PERFORMANCE STOCK AWARDS AND RESTRICTED STOCK AWARDS.
(a) Performance Stock Awards. Subject to the terms of this Plan,
Performance Stock Awards may be granted to Participants by the Committee from
time to time at its sole discretion. Performance Stock Awards shall consist of
an award of shares of Common Stock, the grant, issuance, retention and/or
vesting of which shall be subject to such Performance Objectives, and to such
further terms and conditions as the Committee deems appropriate. Each
Performance Stock Award shall contain provisions regarding (1) the number of
shares of Common Stock subject to such Award or a formula for determining such,
(2) the performance criteria and level of achievement versus these criteria
which shall determine the number of shares of Common Stock granted, issued,
retainable and/or vested, (3) the period as to which performance shall be
measured for determining achievement of such performance criteria (a
"Performance Period"), (4) forfeiture provisions, and (5) such further terms and
conditions, in each case not inconsistent with the Plan as may be determined
from time to time by the Committee. The grant, issuance, retention and/or
vesting of each Performance Stock Award shall be subject to such performance
criteria and level of achievement versus these criteria as the Committee shall
determine, which criteria may be based on financial performance and/or personal
performance evaluations. Notwithstanding anything to the contrary herein, the
performance criteria for any Performance Stock that is intended by the Committee
to satisfy the requirements for "performance-based compensation" under Code
Section 162(m) shall be a measure based on one or more Performance Objectives
selected by the Committee and specified at the time the Performance Stock Award
is granted. Notwithstanding anything in this Plan to the contrary, Performance
Stock Awards may provide that upon satisfaction of Performance Objectives the
shares subject to the Award are subject to such further holding periods and/or
restrictions on transferability as the Committee may provide.
(b) Restricted Stock Awards. Subject to the terms of this Plan, Restricted Stock Awards may be granted to Participants by the Committee from time to time at its sole discretion. Restricted Stock consists of shares of Common Stock which are registered or are issuable by the Company in the name of a Participant in exchange for such cash or
other consideration, if any, as determined by the Committee. Restricted Stock shall be subject during specified periods of time to such conditions to vesting, to restrictions on their sale or other transfer by the Participant and/or to repurchase rights as may be determined by the Committee, consistent with the terms of the Plan. The transfer and sale of shares of Common Stock pursuant to Restricted Stock Awards shall be subject to the following terms and conditions:
(1) The number of shares of Common Stock to be transferred or sold by the Company to a Participant pursuant to a Restricted Stock award shall be determined by the Committee.
(2) Subject to the requirements of applicable law, the Committee shall determine the price, if any, at which shares of Restricted Stock shall be sold or awarded to a Participant, which may vary from time to time and among Participants and which may be below the fair market value of such Shares at the date of grant or issuance.
(3) All shares of Common Stock transferred or sold as Restricted Stock hereunder shall be subject to such restrictions or conditions as the Committee may determine, including, without limitation any or all of the following: (i) a prohibition against the sale, transfer, pledge or other encumbrance of the Shares, such prohibition to lapse at such time or times as the Committee shall determine (whether in annual or more frequent installments, at the time of the death, disability or retirement of the holder of such Shares, or otherwise); (ii) a requirement that the holder of shares of Common Stock forfeit or resell back to the Company at a price specified by the Committee (which price may be more than the price, if any, paid by the Participant for such Shares) all or part of such shares of Common Stock in the event of termination of employment during any period in which such shares of Common Stock are subject to conditions; (iii) such other conditions or restrictions as the Committee may deem advisable; and (iv) any applicable Performance Objectives which, if achieved, shall cause acceleration of the lapsing of restrictions imposed upon all or part of the shares covered by the Restricted Stock Award.
Notwithstanding anything else in this Plan to the contrary, the restrictions set forth in Section 7(b)(3) shall not lapse with respect to a Restricted Stock Award before the second anniversary of the date of grant of such Restricted Stock Award, provided, however, that the Committee, in its sole discretion, may designate that such restrictions shall lapse upon the achievement of Performance Objectives. Subject to the preceding sentence, once established, Performance Objectives and the terms under which the lapsing of restrictions may be accelerated may be changed, adjusted or amended by the
Committee in its sole discretion. Notwithstanding anything in this Plan to the contrary, Restricted Stock Awards may provide that upon the lapsing of restrictions set forth above, the shares subject to the Award may be subject to such further holding periods and/or restrictions on transferability as the Committee may provide.
(c) Rights with Respect to Shares. Unless the terms of the Award provide otherwise, unless and until forfeited pursuant to the terms of this Plan or the Award, a Participant shall have the right to vote and to receive dividends and other distributions on shares subject to a Performance Stock Award or Restricted Stock Award, subject, however, to the terms, conditions and restrictions described in this Plan and the Award.
(d) Escrow. Shares of Common Stock issued pursuant to a Performance Stock Award or Restricted Stock Award may be held in escrow by the Company until such time as the Committee shall have determined that the restrictions set forth in Section 7 have lapsed or until the shares subject to such Performance Stock Award or Restricted Stock Award are forfeited pursuant to their terms.
(e) Restrictive Legends. Certificates for shares of Common Stock delivered pursuant to Performance Stock Awards or Restricted Stock Awards may bear an appropriate legend referring to the terms, conditions and restrictions described in this Plan and in the applicable Award. Any attempt to dispose of any such shares of Common Stock in contravention of the terms, conditions and restrictions described in this Plan or in the applicable Award shall be ineffective. Any shares of Common Stock of the Company or other property, including cash, received by a Participant as a dividend or as a result of any stock split, combination, exchange of shares, reorganization, merger, consolidation or similar event with respect to shares of Common Stock received pursuant to a Performance Stock Award or Restrictive Stock Award shall have the same status and bear the same legend and be held in escrow pursuant to Section 7(d) as the shares received pursuant to the Performance Stock Award or Restricted Stock Award unless otherwise determined by the Committee at the time of such event.
(f) Designation of Beneficiaries. A Participant may designate a beneficiary or beneficiaries to receive such Participant's Common Stock hereunder in the event of such Participant's death, and may, at any time and from time to time, change any such beneficiary designation. All beneficiary designations and changes therein shall be in writing and shall be effective if and when delivered to the Committee during the lifetime of the Participant.
(g) Discretionary Adjustments. Notwithstanding satisfaction of any Performance Objectives, the number of shares of Common Stock granted, issued, retainable and/or vested under a Performance Stock Award on account of either financial performance or
personal performance evaluations may be reduced by the Committee on the basis of such further considerations as the Committee in its sole discretion shall determine. The Committee may make adjustments or modifications, and its determination thereof shall be conclusive, in any applicable Performance Objectives to give effect to the intent of this Plan in connection with any event affecting the performance criteria established as the Performance Objectives, including without limitation, any reorganization, recapitalization, merger, consolidation, offering of additional shares of Common Stock or other change in the Company's shareholders' equity by means other than earnings, or any similar event. The grant of an Award shall not constitute or be evidence of any agreement or other understanding, express or implied, on the part of the Company or any Subsidiary to employ an individual for any specific period.
SECTION 8. STOCK UNIT AWARDS.
(a) Grant of Stock Unit Awards. The Committee shall have authority to grant to Participants Stock Unit Awards, the value of which is based, in whole or in part, on the value of Common Stock. Each "Stock Unit" shall consist of a bookkeeping entry representing an amount equivalent to the fair market value of one share of Common Stock. Such Stock Units represent an unfunded and unsecured obligation of the Company, except as otherwise provided for by the Committee. Stock Units may be granted as additional compensation or in lieu of any other compensation, as specified by the Committee, or may be issued upon exercise of Options, or in lieu of a Performance Stock Award or Restricted Stock Award, provided that for any Common Stock to be purchased in connection with a Stock Unit Award other than upon exercise of an Option or in settlement of a Performance Stock Award or Restricted Stock Award, the purchase price or the amount of consideration paid or of other compensation foregone shall be equal to at least 100% of the fair market value of such Common Stock on the date such Award is granted. Subject to the provisions of the Plan, Stock Unit Awards shall be subject to such terms, restrictions, conditions, vesting requirements and payment rules as the Committee may determine in its sole discretion.
(b) Transferability of Stock Units. Unless the Stock Unit Award (or an amendment thereto authorized by the Committee) expressly states otherwise, any shares of Common Stock which are part of a Stock Unit Award shall not be assigned, sold transferred, pledged or otherwise encumbered before the date on which the shares are issued.
(c) Settlement of Stock Units. Unless provided otherwise by the Committee at the time of grant, settlement of Stock Units shall be made by issuance of Common Stock and shall occur within 60 days after a Participant's termination of employment for any reason. The Committee may provide in the terms of the Stock Unit Award for Stock Units to be settled in cash (at the election of the Company or the Participant, as
specified by the Committee) and to be made at such other times as it determines appropriate or as it permits a Participant to choose. The amount of shares of Common Stock, or other settlement medium, to be so distributed may be increased by an interest factor or by dividend equivalents, which may be valued as if reinvested in Common Stock. Until a Stock Unit is settled, the number of shares of Common Stock represented by a Stock Unit shall be subject to adjustment pursuant to Section 4(d).
SECTION 9. SPECIAL RULES.
(a) Notwithstanding anything to the contrary in this Plan, unless
otherwise specifically determined by the Committee at the time of grant, all
Options theretofore granted and not fully exercisable shall become exercisable
in full and the restrictions on all outstanding Awards shall lapse upon the
occurrence of a Change of Ownership. A "Change of Ownership" shall be deemed to
have occurred if either (1) individuals who, as of the effective date of this
Plan, constitute the Board of Directors of the Company (the "Board of Directors"
generally and as of the date hereof the "Incumbent Board") cease for any reason
to constitute at least a majority of the directors constituting the Board of
Directors, provided that any person becoming a director subsequent to the
effective date of this Plan whose election, or nomination for election by the
Company's shareholders, was approved by a vote of at least three-quarters (3/4)
of the then directors who are members of the Incumbent Board (other than an
election or nomination of an individual whose initial assumption of office is
(i) in connection with the acquisition by a third person, including a "group" as
such term is used in Section 13(d)(3) of the Securities Exchange Act of 1934, as
amended (the "Act"), of beneficial ownership, directly or indirectly, of 20% or
more of the combined voting securities ordinarily having the right to vote for
the election of directors of the Company (unless such acquisition of beneficial
ownership was approved by a majority of the Board of Directors who are members
of the Incumbent Board), or (ii) in connection with an actual or threatened
election contest relating to the election of the directors of the Company, as
such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Act)
shall be, for purposes of this Plan, considered as though such person were a
member of the Incumbent Board, or (2) the Board of Directors (a majority of
which shall consist of directors who are members of the Incumbent Board) has
determined that a Change of Ownership triggering the exercisability of Options
and the lapse of restrictions on Awards as described in this Section 10 shall
have occurred. Options which become fully exercisable by reason of events
specified in clauses (1) or (2) shall remain exercisable for 90 days following
the date on which they become so exercisable, after which they will revert to
being exercisable in accordance with their original terms, provided, however,
that no Option which has previously been exercised or has expired or otherwise
terminated shall become exercisable by virtue of this Section nor shall this
Section permit exercise of any option during the portion, if any, of such 90 day
period which follows the termination or expiration of any such Option.
(b) For purposes of this Plan and any Option or Award hereunder, termination of employment shall not be deemed to occur upon the transfer of any optionee from the employ of the Company to the employ of any Subsidiary or affiliate. For purposes of
this Plan, "affiliate" means (1) any entity 50% or more of the voting interest in which is owned, directly or indirectly, by an entity which owns, directly or indirectly, 50% or more of the voting interest in the Company and (2) any entity which owns, directly or indirectly, 50% or more of the voting interest in the Company.
(c) Either at the time an Award is granted or by subsequent action, the Committee may impose such restrictions, conditions or limitations as it determines appropriate as to the timing and manner of any resales by a Participant or other subsequent transfers by a Participant of any shares issued under an Award, including without limitation (i) restrictions under an insider trading policy, (ii) restrictions designed to delay and/or coordinate the timing and manner of sales by Participants, and (iii) restrictions as to the use of a specified brokerage firm for such resales or other transfers.
(d) The existence of outstanding Awards (including any Options) shall not affect in any way the right or power of the Company or its stockholders to make or authorize any or all adjustments, recapitalizations, reorganizations, exchanges, or other changes in the Company's capital structure or its business, or any merger or consolidation of the Company, or any issuance of shares or other securities or subscription rights thereto, or any issuance of bonds, debentures, preferred or prior preference stock ahead of or affecting the shares or the rights thereof, or the dissolution or liquidation of the Company, or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding, whether of a similar character or otherwise. Further, except as herein expressly provided, (i) the issuance by the Company of shares of stock or any class of securities convertible into shares of stock of any class, for cash, property, labor or services, upon direct sale, upon the exercise of rights or warrants to subscribe therefor, or upon conversion of shares or obligations of the Company convertible into such shares or other securities, (ii) the payment of a dividend in property other than Common Stock, or (iii) the occurrence of any similar transaction, and in any case whether or not for fair value, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number of shares subject to Options theretofore granted or the purchase price per share, unless the Committee shall determine in its sole discretion that an adjustment is necessary to provide equitable treatment to Participant.
SECTION 10. DELIVERY OF SHARES. No shares of Common Stock shall be delivered pursuant to an Award or any exercise of an Option until the requirements of such laws and regulations as may be deemed by the Committee to be applicable thereto are satisfied.
SECTION 11. FINANCING AND WITHHOLDING.
(a) Withholding of Taxes. As a condition to the making of an Award, to the lapse of the restrictions pertaining to an Award, to the transfer of shares issued under an Award or to the delivery of shares in connection with the exercise of an Option, the Company may require the Participant to pay to the Company, or make arrangements satisfactory to the Committee regarding payment of, any taxes of any kind required by law to be withheld with respect to such shares of Common Stock.
(b) Financing. If requested by a Participant who exercises an Option or who has received shares of Common Stock pursuant to an Award, the Committee may in its discretion provide financing to the Participant in a principal amount sufficient for the purchase of shares of Common Stock pursuant to such Option exercise or under such Award, and/or to pay the amount of taxes required by law to be withheld with respect to such Option exercise or such receipt of shares of Common Stock. Any such loan shall be subject to all legal requirements, and restrictions pertinent thereto, including if applicable, Regulation G promulgated by the Federal Reserve Board. The grant of an Option or Award shall in no way obligate the Company or the Committee to provide any financing whatsoever upon the lapse of restrictions on shares or the exercise of such Option.
(c) Withholding of Shares.
(1) If requested by a Participant who acquires shares of Common Stock upon the exercise of an Option or who has received Common Stock pursuant to an Award with respect to which the restrictions shall have lapsed, the Committee may in its discretion permit the Participant to satisfy any tax withholding obligations, in whole or in part, by having the Company withhold a portion of such shares with a value equal to the amount of taxes required by law to be withheld.
(2) Requests by a Participant to have shares of Common Stock withheld shall be (i) made prior to the Tax Date and (ii) irrevocable.
SECTION 12. AMENDMENTS, SUSPENSION OR DISCONTINUANCE. The Board of
Directors may amend, suspend or discontinue the Plan or any Option or Award
granted under the Plan. Notwithstanding the foregoing, except as permitted by
Section 4(c), the Board may not, without prior approval of the shareholders of
the Company, make any amendment which operates (a) to reduce the exercise price
of outstanding Options or amend the provisions of Section 6(c)(2) relating to
repricing Options, (b) to materially increase the total number of shares of
Common Stock which may be delivered in respect of Awards or on exercise of
Options granted under the Plan, (c) to
extend the maximum option period or the period which Options or Awards may be granted under the Plan or (d) to reduce the minimum permissible Option exercise price.
SECTION 13. TERM OF PLAN. The Plan shall become effective on the date it is approved and adopted by the Board, subject to its subsequent approval by shareholders of the Company. No Option or Award shall be granted under the Plan after the date that is ten (10) years after the date on which the Plan is approved by the Company's shareholders or after such earlier date as the Committee may decide, in its sole discretion.
SECTION 14. OPTION GRANTS BY SUBSIDIARIES. In the case of a grant of an option to any Participant by a Subsidiary, such grant may, if the Committee so directs, be implemented by the Corporation issuing any subject shares to the Subsidiary, for such lawful consideration as the Committee may determine, upon the condition or understanding that the Subsidiary will transfer the shares to the optionholder in accordance with the terms of the option specified by the Committee pursuant to the provisions of the Plan. Notwithstanding any other provision hereof, such option may be issued by and in the name of the Subsidiary and shall be deemed granted on such date as the Committee shall determine.
SECTION 15. LIABILITY OF COMPANY. The Company and any Affiliate which is in existence or hereafter comes into existence shall not be liable to a Participant, an Eligible Person or other persons as to:
(a) The Non-Issuance of Shares. The non-issuance or sale of shares as to which the Company has been unable to obtain from any regulatory body having jurisdiction the authority deemed by the Company's counsel to be necessary to the lawful issuance and sale of any shares hereunder; and
(b) Tax Consequences. Any tax consequence expected, but not realized, by any Participant, Eligible Person or other person due to the receipt, exercise or settlement of any option or other Award granted hereunder.
SECTION 16. NON-EXCLUSIVITY OF THE PLAN. Neither the adoption of the Plan by the Board nor the submission of the Plan to the shareholders of the Company for approval shall be construed as creating any limitations on the power of the Board or the Committee to adopt such other incentive arrangements as it or they may deem desirable, including without limitation, the granting of restricted stock or stock options otherwise than under the Plan, and such arrangements may be either generally applicable or applicable only in specific cases.
Exhibit 10.23
KB HOME
CHANGE IN CONTROL SEVERANCE PLAN
KB HOME, a Delaware corporation (the "Company"), has adopted this Change in Control Severance Plan (the "Plan"), effective as of October 4, 2001, for the benefit of certain key employees of the Company.
The purposes of the Plan are as follows:
(1) To reinforce and encourage the continued attention and dedication of members of the Company's management to their assigned duties without the distraction arising from the possibility of a change in control of the Company;
(2) To enable and encourage the Company's management to focus their attention on obtaining the best possible deal for the Company's shareholders and to make an independent evaluation of all possible transactions, without being diverted by their personal concerns regarding the possible impact of various transactions on the security of their jobs and benefits; and
(3) To provide severance benefits to any Participant (as defined below) who incurs a termination of employment under the circumstances described herein within a certain period following a Change in Control (as defined below).
1. DEFINED TERMS. For purposes of the Plan, the following terms shall have the meanings indicated below:
(A) "Act" shall mean the Securities Exchange Act of 1934, as amended from time to time.
(B) "Affiliate" shall have the meaning set forth in Rule 12b-2 promulgated under Section 12 of the Act.
(C) "Board" shall mean the Board of Directors of the Company.
(D) "Cause" shall mean (i) acts of fraud or misappropriation committed by the Participant and intended to result in substantial personal enrichment at the expense of the Company or (ii) repeated violations by the Participant of the Participant's obligations to the Company which are demonstrably willful and deliberate and which result in material injury to the Company; provided that, in each case, the Participant has received written notice of the described activity, has been afforded a period of 20 days to cure or correct the activity described in the notice, and has failed to cure, correct or cease the activity, as appropriate.
(E) A "Change in Control" shall mean any change in control of the Company of a nature that would be required to be reported in response to Item 1(a) of the Current Report on Form 10-K, as in effect on the Effective Date, pursuant to Section 13 or 15(d) of the Act; provided that, without limitation, such a "Change in Control" shall be deemed to have occurred if:
(i) a third person, including a "group" as such term is used in Section 13(d)(3) of the Act, becomes the beneficial owner, directly or indirectly, of 15% or more of the combined voting power of the Company's outstanding voting securities ordinarily having the right to vote for the election of directors of the Company, unless such acquisition of beneficial ownership is approved by a majority of the Incumbent Board (as such term is defined in clause (ii) below); or
(ii) individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board, provided that any person becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least three-quarters of the directors comprising the Incumbent Board (other than an election or nomination of an individual whose initial assumption of office is in connection with an actual or threatened election contest relating to the election of the Directors of the Company, as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Act) shall be, for purposes of this provision, considered as though such person were a member of the Incumbent Board.
(F) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time.
(G) "Committee" shall mean the committee responsible for administering the Plan, as described in Section 3 hereof.
(H) "Company" shall mean KB HOME, a Delaware corporation, and, except in determining under Section 1(E) hereof whether or not any Change in Control of the Company has occurred, shall include any successor to its business and/or assets.
(I) "Disability" shall mean the Participant's incapacity due to physical or mental illness to perform his or her full-time duties with the Company for a continuous period of three months or an aggregate of six months in any eighteen-month period.
(J) "Good Reason" shall mean, without the consent of the Participant,
(i) any changes in the duties and responsibilities of the Participant which are
materially inconsistent with the duties and responsibilities of the Participant
within the Company immediately prior to the Change in Control, (ii) any
reduction of the Participant's salary, aggregate incentive compensation
opportunities (excluding any reduction in incentive compensation awards due to
the economic performance of the Company) or aggregate benefits, (iii) any
required relocation of the Participant's office beyond a 50 mile radius from the
location of the Participant's office immediately prior to the Change in Control,
(iv) any failure by the Company to obtain the assumption of the Plan by a
successor of the Company, or (v) the Company's requiring the Participant to
travel materially in excess of the Participant's business travel obligations
prior to the Change in Control.
(K) "Participants" shall mean those persons who are expressly designated in writing by the Committee from time to time and identified as "Group A Participants" or "Group B Participants," as the case may be.
(L) "Protected Period" shall mean the period beginning on the date of a Change in Control and ending on the date which is eighteen months after the date of such Change in Control.
2. EFFECTIVE DATE OF PLAN. The effective date of the Plan shall be October 4, 2001 (the "Effective Date"). The Plan shall remain in effect until the earlier of (i) such time as the Company has discharged all of its obligations hereunder, or (ii) the date of the termination of the Plan pursuant to Section 10.3 hereof.
3. ADMINISTRATION.
(A) Prior to the date of a Change in Control, the Plan shall be interpreted, administered and operated by the Personnel, Compensation and Stock Plan Committee of the Board; on and after the date of a Change in Control, the Plan shall be interpreted, administered and operated by a committee appointed by a committee of individuals appointed by the Personnel, Compensation and Stock Plan Committee of the Board as such Committee is constituted immediately prior to the Change in Control. In each case, subject to the terms of the Plan, the Committee shall have complete authority, in its sole discretion subject to the express provisions of the Plan, to determine who shall be a Participant, to interpret the Plan, to prescribe, amend and rescind rules and regulations relating to it, and to make all other determinations necessary or advisable for the administration of the Plan. Notwithstanding the foregoing, the Committee may delegate any of its duties hereunder to such person or persons from time to time as it may designate.
(B) All expenses and liabilities which members of the Committee incur in connection with the administration of the Plan shall be borne by the Company. The Committee may employ attorneys, consultants, accountants, appraisers, brokers, or other persons, and the Committee, the Company and the Company's officers and directors shall be entitled to rely upon the advice, opinions or valuations of any such persons. No member of the Committee or the Board shall be personally liable for any action, determination or interpretation made in good faith with respect
to the Plan, and all members of the Committee shall be fully protected by the Company in respect of any such action, determination or interpretation.
4. BENEFITS PROVIDED.
4.1 Termination After Change in Control. Subject to Section 4.2 hereof,
if a Participant's employment with the Company is terminated during the
Protected Period (a) by the Company other than for Cause or Disability, or (b)
by the Participant for Good Reason, the Company shall, in lieu of any other
severance payments or benefits payable by the Company to the Participant (except
as otherwise expressly provided in a written agreement between the Company and
the Participant that such severance payments or benefits are to be paid in
addition to any payment or benefit described herein), pay to each Participant
within ten (10) business days after the Participant's Date of Termination a
severance payment (the "Severance Payment") in an amount determined as follows:
(i) in the case of each Group A Participant, a lump sum payment in an amount
equal to two (2) times the sum of the Participant's average annual base salary
and the Participant's average actual annual cash bonus under the Company's
incentive compensation plan, in each case, for the three fiscal years prior to
the fiscal year in which the Change in Control occurs and (ii) in the case of
each Group B Participant, a lump sum payment in an amount equal to one (1) times
the sum of the Participant's average annual base salary and the Participant's
average actual annual cash bonus under the Company's Incentive Compensation
Plan, in each case, for the three fiscal years prior to the fiscal year in which
the Change in Control occurs. In addition, notwithstanding any provisions of the
Company's stock option plans, incentive plans, or other similar plans, all
outstanding options, if any, granted to a Participant under any of the Company's
stock option plans, incentive plans, or other similar plans (or options
substituted therefor covering the stock of a successor corporation) shall become
fully vested and exercisable upon a "Change in Control" or "Change of
Ownership," as such terms are defined in the applicable plan or agreement
thereunder, as to all shares of stock covered thereby, and the restricted period
with respect to any restricted stock or any other equity award granted to a
Participant thereunder shall lapse immediately upon such "Change in Control" or
Change of Ownership." In addition, notwithstanding any provisions of the
Company's Death Benefit Only Life Insurance Plan, each Participant's interest in
such plan shall become fully vested upon a Change in Control. The Severance
Payment and other benefits described herein shall be conditioned upon the
execution by the Participant of the Company's standard form general release.
4.2 Section 280G. (A) Notwithstanding anything in this Plan to the contrary, in the event that it shall be determined that any payment or benefit to a Group A Participant, whether pursuant to the terms of this Plan or otherwise (a "Payment"), would constitute an "excess parachute payment" within the meaning of Section 280G of the Code, the Group A Participant shall be paid an additional amount (a "Gross-Up Payment") such that the net amount retained by the Group A Participant after deduction of any excise tax imposed under Section 4999 of the Code, and any federal, state and local income and employment taxes and excise tax, including
any interest and penalties with respect thereto, imposed upon the Gross-Up Payment shall be equal to the Payment. For purposes of determining the amount of the Gross-Up Payment, the Group A Participant shall be deemed to pay federal income tax and employment taxes at the highest marginal rate of federal income and employment taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of the Group A Participant's residence on the date the Payment is made, net of the reduction in federal income taxes that the Group A Participant may obtain from the deduction of such state and local income taxes. Group B Participants shall not be eligible to receive a Gross-Up Payment under this Plan.
(B) All determinations to be made under this Section 4.2 shall be made by the Company's independent public accountant immediately prior to the date the Payment is made (the "Accounting Firm"), which firm shall provide its determinations and any supporting calculations and workpapers both to the Company and the Group A Participant within ten (10) days of such date. Any such determination by the Accounting Firm shall be binding upon the Company and the Group A Participant. Within five days after receipt of the Accounting Firm's determination, the Company shall pay to the Group A Participant the Gross-Up Payment determined by the Accounting Firm.
(C) In the event that upon any audit by the Internal Revenue Service, or by a state or local taxing authority, of a Payment or Gross-Up Payment, a change is finally determined to be required in the amount of taxes paid by the Group A Participant, appropriate adjustments shall be made under this Section 4.2 such that the net amount which is payable to the Group A Participant after taking into account the provisions of Section 4999 of the Code and any interest and penalties shall reflect the intent of the parties as expressed in paragraph (A) of this Section 4.2, in the manner determined by the Accounting Firm. The Group A Participant shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of a Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten (10) business days after the Group A Participant is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Group A Participant shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Group A Participant in writing prior to the expiration of such period that it desires to contest such claim, the Group A Participant shall: (i) give the Company any information reasonably requested by the Company relating to such claim; (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company; (iii) cooperate with the Company in good faith in order effectively to contest such claim; and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and
penalties) incurred in connection with such contest and shall indemnify and hold the Group A Participant harmless, on an after-tax basis, for any excise tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 4.2, the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may contest the claim in any permissible manner, and the Group A Participant agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine. The Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Group A Participant shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority.
(D) All of the fees and expenses of the Accounting Firm in performing
the determinations referred to in paragraphs (B) and (C) of this Section 4.2
shall be borne solely by the Company. The Company agrees to indemnify and hold
harmless the Accounting Firm from any and all claims, damages and expenses
resulting from or relating to its determinations pursuant to paragraphs (B) and
(C) of this Section 4.2, except for claims, damages or expenses resulting from
the gross negligence or willful misconduct of the Accounting Firm.
5. TERMINATION PROCEDURES.
5.1 Notice of Termination. Any purported termination of a Participant's employment following a Change in Control (other than by reason of death) shall be communicated by written Notice of Termination from one party to the other party in accordance with Section 8 hereof. For purposes of this Plan, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Plan relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Participant's employment under the provision so indicated. Further, no termination for Cause shall be effective without (i) reasonable notice to the Participant setting forth the reasons for the Company's intention to terminate, and (ii) an opportunity for the Participant to cure or correct any such breach within twenty (20) days after receipt of such notice. Notwithstanding anything contained herein, no termination for Good Reason shall be effective unless (i) the Participant has delivered to the Company a Notice of Termination in accordance with this Section 5.1 within thirty (30) days after the occurrence of the event or circumstance which constitutes Good Reason under Section 1(J) hereof, and (ii) the Company has been afforded an opportunity to cure or correct such event or circumstance within twenty (20) days after receipt of such notice.
5.2 Date of Termination. "Date of Termination," with respect to any purported termination of a Participant's employment (other than by reason of the Participant's death or
Disability), shall mean the date specified in the Notice of Termination (which shall be within thirty (30) days from the date such Notice of Termination is given).
5.3 Covenants. The Participant agrees that, in order for the Participant to be eligible to receive the Severance Payment and other benefits described herein, the Participant must comply with the covenants set forth in paragraphs (A) and (B) of this Section 5.3. In the event that a Participant breaches or violates any provision of paragraphs (A) and (B) of this Section 5.3, the Participant shall forfeit any right and interest of the Participant to receive any Severance Payment or other benefit described herein and the Participant shall promptly refund to the Company all payments received under Section 4.1.
(A) The Participant hereby agrees that, upon termination of the Participant's employment with the Company, the Participant shall not discuss or use any confidential and/or secret information of a proprietary nature which is not otherwise publicly available.
(B) The Participant hereby agrees that, for a period commencing on the Date of Termination and terminating on the first anniversary thereof, the Participant shall not, either on the Participant's own account or jointly with or as a manager, agent, officer, employee, consultant, partner, joint venturer, owner or shareholder or otherwise on behalf of any other person, firm or corporation, directly or indirectly solicit or attempt to solicit away from the Company any of its officers or employees; provided, however, that a general advertisement to which an employee of the Company responds shall in no event be deemed to result in a breach of this Section 5.3(B).
6. NO MITIGATION. The Company agrees that, in order for a Participant to be eligible to receive the Severance Payment and other benefits described herein, the Participant is not required to seek other employment or to attempt in any way to reduce any amounts payable to the Participant by the Company pursuant to Section 4 hereof. Further, the amount of any payment or benefit provided for in this Plan hereof shall not be reduced by any compensation or income earned by the Participant as the result of employment by another employer or self-employment, by retirement benefits, by offset against any amount claimed to be owed by the Participant to the Company, or otherwise.
7. SUCCESSORS.
7.1 (A) The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume this Plan and all obligations of the Company hereunder in the same manner and to the same extent that the Company would be so obligated if no such succession had taken place.
(B) This Plan shall inure to the benefit of and shall be binding upon the Company, its successors and assigns, but without the prior written consent of the Participants this Plan may not be assigned other than in connection with the merger or sale of substantially all of the business and/or assets of the Company or similar transaction in which the successor or assignee assumes (whether by operation of law or express assumption) all obligations of the Company hereunder.
7.2 This Plan shall inure to the benefit of and be enforceable by the Participant's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees, legatees or other beneficiaries. If a Participant shall die while any amount would still be payable to such Participant hereunder (other than amounts which, by their terms, terminate upon the death of the Participant) if such Participant had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Plan to the executors, personal representatives or administrators of such Participant's estate.
8. NOTICES. For the purpose of this Plan, notices and all other communications provided for in the Plan shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed, if to a Participant, to the address on file with the Company and, if to the Company, to the address set forth below, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon actual receipt:
To the Company:
KB Home
10990 Wilshire Boulevard
Los Angeles, California 90024
Attention: Senior Vice President, Human Resources
9. CLAIMS PROCEDURES; EXPENSES.
9.1 Claim for Benefits. A Participant may file with the Committee a written claim for benefits under the Plan if the Participant believes that the Company has not paid the Participant all amounts due under the Plan. The Committee shall, within a reasonable time not to exceed ninety (90) days, unless special circumstances require an extension of time of not more than an additional ninety (90) days (in which event a Participant will be notified of the delay during the first ninety (90) day period), provide adequate notice in writing to any Participant whose claim for benefits shall have been denied, setting forth the following in a manner calculated to be understood by the Participant: (i) the specific reason or reasons for the denial; (ii) specific reference to the provision or provisions of the Plan on which the denial is based; (iii) a description of any additional material or information required to perfect the claim, and an
explanation of why such material or information is necessary; and (iv) information as to the steps to be taken in order that the denial of the claim may be reviewed. If written notice of the denial of a claim has not been furnished to a Participant, and such claim has not been granted within the time prescribed in this Section 9.1 (including any applicable extension), the claim for benefits shall be deemed denied.
9.2 Appeal of Denial. (A) A Participant whose claim for benefits shall have been denied in whole or in part, may, within sixty (60) days from either the receipt of the denial of the claim or from the time the claim is deemed denied (unless the notice of denial grants a longer period within which to respond), appeal such denial to Committee. In the event of a claim, the Participant may, upon request, at this time review documents pertinent to his claim and may submit written issues and comments.
(B) The Committee shall notify a Participant of its decision within
sixty (60) days after an appeal is received, unless special circumstances
require an extension of time of not more than an additional sixty (60) days (in
which event a Participant will be notified of the delay during the first sixty
(60) day period). Such decision shall be given in writing in a manner calculated
to be understood by the Participant and shall include the following: (i)
specific reasons for the decision; and (ii) specific reference to the provision
or provisions of the Plan on which the decision is based.
9.3 Expenses, Legal Fees. If a Participant commences a legal action to enforce any of the obligations of the Company under this Plan and it is ultimately determined that the Participant is entitled to any payments or benefits under this Plan, the Company shall pay the Participant the amount necessary to reimburse the Participant in full for all reasonable expenses (including reasonable attorneys' fees and legal expenses) incurred by the Participant with respect to such action.
10. MISCELLANEOUS.
10.1 No Waiver. No waiver by the Company or any Participant, as the case may be, at any time of any breach by the other party of, or of any lack of compliance with, any condition or provision of this Plan to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. All other plans, policies and arrangements of the Company in which the Participant participates during the term of this Plan shall be interpreted so as to avoid the duplication of benefits paid hereunder.
10.2 No Right to Employment. Nothing contained in this Plan or any documents relating to the Plan shall (i) confer upon any Participant any right to continue in the employ of the Company or a subsidiary, (ii) constitute any contract or agreement of employment, or (iii) interfere in any way with the right of the Company to terminate the Participant's employment at any time, with or without Cause.
10.3 Termination and Amendment of Plan. Prior to a Change in Control, the Board shall have the right to amend or terminate the Plan and to add or remove Participants from time to time, in its sole and absolute discretion. From and after the date of a Change in Control, the Board shall not have the right to terminate the Plan or amend it any manner which adversely affects the rights of any Participant unless the Company has obtained the prior written consent of each affected Participant. Notwithstanding the foregoing, the Plan shall automatically terminate on the date following the termination of the Protected Period, provided that all obligations accrued by Participants prior to such termination of the Plan must be satisfied in full in accordance with the terms hereof.
10.4 Benefits not Assignable. Except as otherwise provided herein or by law, no right or interest of any Participant under the Plan shall be assignable or transferable, in whole or in part, either directly or by operation of law or otherwise, including without limitation by execution, levy, garnishment, attachment, pledge or in any manner; no attempted assignment or transfer thereof shall be effective; and no right or interest of any Participant under the Plan shall be liable for, or subject to, any obligation or liability of such Participant. When a payment is due under this Plan to a Participant who is unable to care for his or her affairs, payment may be made directly to his or her legal guardian or personal representative.
10.5 Tax Withholding. All amounts payable hereunder shall be subject to applicable federal, state and local tax withholding.
10.6 Delaware Law. This Plan shall be construed, interpreted and the rights of the parties determined in accordance with the laws of the State of Delaware (without regard to the conflicts of laws principles thereof), to the extent not preempted by federal law, which shall otherwise control.
10.7. Validity. The invalidity or unenforceability of any provision of this Plan shall not affect the validity or enforceability of any other provision of this Plan, which shall remain in full force and effect. If this Plan shall for any reason be or become unenforceable by either party, this Plan shall thereupon terminate and become unenforceable by the other party as well.
EXHIBIT 10.24
KB HOME
DEATH BENEFIT ONLY PLAN
November 1, 2001
TABLE OF CONTENTS
PAGE ARTICLE I PURPOSE AND SPECIFICATIONS...................................1 ARTICLE II DEFINITIONS..................................................1 ARTICLE III PARTICIPATION................................................3 ARTICLE IV BENEFICIARIES................................................3 ARTICLE V PLAN BENEFITS................................................4 ARTICLE VI ADMINISTRATION OF THE PLAN...................................5 ARTICLE VII AMENDMENT OR TERMINATION OF PLAN.............................7 ARTICLE VIII MISCELLANEOUS PROVISIONS.....................................8 ARTICLE IX ESTABLISHMENT OF TRUST AND SPECIAL PROVISIONS IN THE EVENT OF A CHANGE IN CONTROL.........................10 |
ARTICLE I PURPOSE AND SPECIFICATIONS
The purpose of this Death Benefit Only Plan (the "Plan") is to provide selected employees of KB Home (the "Company") with an employment benefit similar to term life insurance. The Plan is effective as of November 1, 2001.
ARTICLE II DEFINITIONS
2.1 "Affiliated Employer" means any corporation which is a member of a controlled group (as defined in Code Sections 414(b) and 1563(a)) that includes the Company, any trade or business (whether or not incorporated) that is under common control (as defined in Code Sections 414(c) and 1563(a)) with the Company, any organization (whether or not incorporated) that is a member of an affiliated service group (as defined in Code Section 414(m)) that includes the Company, and any other entity required to be aggregated with the Company pursuant to Code Section 414(o) and the Regulations thereunder.
2.2 "Basic Benefit" is either $1,000,000 (Tier 1) or $500,000 (Tier 2).
2.3 "Beneficiary" means the person(s) described in Article IV who is entitled to receive benefits under the Plan after the death of a Participant.
2.4 "Change in Control" shall mean any change in control of the Company of a nature that would be required to be reported in response to Item 1(a) of the Current Report on Form 10-K, as in effect on November 1, 2001, pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Act"); provided that, without limitation, such a "Change in Control" shall be deemed to have occurred if:
(a) a third person, including a "group" as such term is used in section 13(d)(3) of the Act, becomes the beneficial owner, directly or indirectly, of 20 percent or more of the combined voting power of the Company's outstanding voting securities ordinarily having the right to vote for the election of directors of the Company unless such acquisition of beneficial ownership is approved by a majority of the Incumbent Board (as such term is defined in paragraph (b) below); or
(b) individuals who, as of November 1, 2001, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board, provided that any person becoming a director subsequent to November 1, 2001 whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least three-quarters of the directors comprising the Incumbent Board (other than an election or nomination of an individual whose initial assumption of office is in connection with an actual or threatened election contest relating to the election of the Directors of the Company, as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Act) shall be, for purposes of this Article, considered as though such person were a member of the Incumbent Board.
2.5 "Code" means the Internal Revenue Code of 1986, as amended from time to time. Reference to any section or subsection of the Code includes reference to any comparable or succeeding provisions of any legislation that amends, supplements or replaces such section or subsection.
2.6 The "Committee" means the Committee with the responsibilities set forth herein. The Committee shall be appointed by the Company, acting through its Chief Executive Officer or a delegate of such officer.
2.7 "Employee" means any individual employed by the Company or an Employer.
2.8 "Employer" means the Company, any Affiliated Employer that adopts the Plan, any predecessor employer named in the Plan, and any successor employer that may adopt the Plan. By its adoption of the Plan an Affiliated Employer agrees to pay whatever payments are necessary under the Plan to provide the benefits promised under the Plan to its current and former Employees and their Beneficiaries.
2.9 "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time. Reference to any section or subsection of ERISA includes reference to any comparable or succeeding provisions of any legislation that amends, supplements or replaces such section or subsection.
2.10 "Participant" means any Employee who participates in this Plan in accordance with Article III.
2.11 "Plan Year" means a calendar year.
2.12 "Supplemental Benefit" means the amount payable in addition to the Basic Benefit in accordance with Article V.
2.13 "Totally Disabled" means the inability to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months. The permanence and degree of such impairment shall be supported by medical evidence.
2.14 "Vested" means that a Participant has completed (a) 10 Years of Service, including (b) five consecutive Years of Service while a Participant in the Plan.
(a) "Years of Service" shall be measured from the date of a Participant's initial employment by the Company and shall continue so long as the Participant is treated as an employee on Company's records. In the case of an Employee who is terminated and rehired, periods of service shall be added together to determine the total Years of Service. The Committee, in its complete discretion, may determine to award additional Years of Service to a Participant.
(b) For the purpose of determining Years of Service, employment with any company that is an Affiliated Employer will be included.
ARTICLE III PARTICIPATION
3.1 Commencement of Participation. The Committee shall select the Employees who shall participate under the Plan. Employees shall only be eligible for selection if they constitute part of a "select group of management or highly compensated employees" within the meaning of such phrase as it is used in Subtitle B of Title I of ERISA. At the time of selection a Participant shall be selected by the Committee to be eligible for either the Tier 1 or Tier 2 Basic Benefit. Once the Participant has been selected for the initial tier, such selection may not be revoked or modified, except that the Committee may subsequently determine that a Tier 2 Participant may become eligible for a Tier 1 Basic Benefit, which subsequent selection may not be revoked.
3.2 Cessation of Participation. A Participant shall cease to be a Participant, so that his or her Beneficiary shall no longer be entitled to benefits only (a) if the Participant terminates employment before he or she is Vested or (b), in the case of a Participant who is not Vested, the Plan is terminated under the circumstances set forth in Article VII.
3.3 Reinstatement of Former Participant. A former Participant who is reemployed by the Company shall only become a Participant again on the date he or she is reemployed if he or she is affirmatively selected to participate again by the Committee.
3.4 Required Documentation and Related Conditions to Eligibility. In no event shall an Employee become a Participant before filling out all documentation and taking any other steps required by the Committee as a condition of participating in the Plan. Such steps shall include the filling out of a Life Insurance Consent Card and may include the taking of a physical examination or such other steps as are required as a condition to the Company's purchase of life insurance on the life of the Participant.
Notwithstanding any other provisions of this Plan, the eligibility of an Employee to participate in the Plan is conditioned on a determination that life insurance on the life of such Participant can be purchased at standard rates. If an Employee cannot be insured at standard rates, then, notwithstanding the initial selection of such Employee (or any subsequent determination that the Participant shall be increased from a Tier 2 to a Tier 1 Basic Benefit), the Committee may determine in its complete discretion that the Employee shall not participate in the Plan.
ARTICLE IV BENEFICIARIES
4.1 Designation. Each Participant shall have the right to designate, on forms provided by the Committee, a Beneficiary to receive the benefits provided under the Plan in the event of the Participant's death, and shall have the right at any time to revoke such
designation or to substitute another such Beneficiary. Any such change shall be effective on the date of written notice from the Participant naming a new or additional Beneficiary. Such notice shall be delivered to the Committee.
4.2 Absence of Valid Designation. If, upon the death of a Participant, there is no valid designation of Beneficiary on file with the Committee, the Committee shall designate the Participant's surviving spouse as Beneficiary, or if there is no surviving spouse, the Participant's estate.
ARTICLE V PLAN BENEFITS
5.1 Basic Benefit. In the event of a Participant's death, the Company shall pay the applicable Basic Benefit directly to the Participant's Beneficiary within 90 days after the date of death.
5.2 Supplemental Benefit. The Supplemental Benefit is intended to offset the income tax liability incurred by the Beneficiary as a result of receiving the Basic Benefit and shall be paid by the Company directly to the Participant's Beneficiary concurrently with the payment of the Basic Benefit. The Supplemental Benefit is an attribute of the Basic Benefit, so that, like the Basic Benefit, the right to the Supplemental Benefit cannot be altered to the same extent that the Basic Benefit cannot be altered.
The Committee shall determine the amount of the Supplemental Benefit based on the highest combined federal and state net effective income tax rate in effect the year the Basic Benefit is paid. Assuming that the federal rate is X and the state rate is Y, the Supplemental Benefit equals (Basic Benefit divided by Z) minus the Basic Benefit, where Z equals (1-X) times (1-Y). For example, if the Basic Benefit is $1,000,000, X is .4 (i.e., the highest marginal federal tax rate is 40%), and Y is .1 (i.e., the highest marginal state tax rate is 10%), the Supplemental Benefit would be $851,851.85. The state income tax rate shall be based on the state of residence of the beneficiary, as ascertained by the Committee in its sole discretion.
In addition, to the extent that the Basic Benefit or Supplemental Benefit is subject to payroll taxes, the Committee may in its complete discretion determine to increase the amount of the Supplemental Benefit by an additional amount up to X. X is an amount equal to such payroll taxes, after taking into account the reduction of X by any federal or state income taxes (computed as described in the first paragraph of this section) or payroll taxes attributable to X.
5.3 Permanent Disability. If a Participant becomes Totally Disabled after completing three Years of Service and such individual remains Totally Disabled at all times until his or her death, the Company shall pay the Basic Benefit and the Supplemental Benefit directly to the former Participant's Beneficiary within 90 days after the date of death; provided, however, that the Basic Benefit shall be determined as of the time the Participant became Totally Disabled.
5.4 Certain Limitations. The Company has purchased certain life insurance policies on the lives of Participants. Notwithstanding any other provision of the Plan, no benefits shall be payable under the Plan if death occurs under circumstances such that the policy on the life of a Participant does not pay a full death benefit, as will occur, for example, in the case of suicide within two years after the policy date.
ARTICLE VI ADMINISTRATION OF THE PLAN
6.1 Selection of the Committee
There shall be created a "Committee," consisting of one or more members who shall be selected by Company and who shall serve at its pleasure. A Committee member may resign by delivering his or her written resignation to Company or be removed by Company by delivery of written notice of removal, to take effect on the date specified therein. Vacancies due to resignation, death, removal or other causes shall be filled promptly by Company. The Trustee may rely on the latest certification as to the membership of the Committee. At the direction of Company, each member of the Committee shall be bonded in accordance with Section 412 of ERISA.
6.2 Action by the Committee
A majority of the members of the Committee shall constitute a quorum, and any action by the majority present at a meeting at which a quorum is present, or by all of the members in writing or electronically without a meeting, shall constitute the action of the Committee. Any action taken in good faith by the Committee in the exercise of authority conferred upon it by this Article shall be conclusive and binding upon Participants and their Beneficiaries. All discretions conferred upon the Committee shall be absolute. The Committee may designate one or more of its members or alternate members to transmit its decisions and instructions to the Trustee or other interested parties.
6.3 Allocation and Delegation of Responsibilities
If the Committee is comprised of more than one member, the responsibilities of each member may be specified by Company and accepted in writing by each member. In the event that no such delegation is made by Company, the members may allocate the responsibilities among themselves, in which event the members shall notify Company in writing of such action and shall specify the responsibilities of each member.
6.4 Powers and Duties of the Committee
The Committee shall have the duty to manage and administer the Plan in accordance with the terms and provisions of this Article, and shall have the power:
(a) To construe and interpret the terms and provisions of the Plan;
(b) To compute the amount and determine the kind of benefits payable to Participants or their Beneficiaries;
(c) To employ such persons or organizations, including without limitation, actuaries, attorneys, accountants, independent fiduciaries, and administrative consultants, to render advice or perform services with respect to the responsibilities of the Committee under the Plan;
(d) To make and publish such rules for the administration of the Plan as are not inconsistent with the terms hereof.
6.5 Indemnification by Company
Company shall indemnify and hold harmless the members of the Committee and any other persons to whom any fiduciary responsibility with respect to the Plan is allocated or delegated, from and against any and all liabilities, costs and expenses incurred by such persons as a result of any act or omission to act in connection with the performance of their duties, responsibilities and obligations under the Plan and under ERISA or the Code, other than such liabilities, costs and expenses as may result from the bad faith or criminal acts of such persons.
6.6 Records and Reports
The Committee shall keep a record of all actions taken and shall keep all other books of account, records, and other data that may be necessary for proper administration of the Plan and shall be responsible for supplying all information and reports to the Internal Revenue Service, Department of Labor, Participants, Beneficiaries, and others as required by law.
6.7 Payment of Expenses
All expenses of administration may be paid by the Company. Such expenses shall include any expenses incident to the functioning of the Committee, including, but not limited to, fees of accountants, legal counsel, and other specialists and their agents, and other costs of administering the Plan.
6.8 Claims Procedure and Review
Claims for benefits under the Plan shall be filed on forms supplied by Company. Written or electronic notice of the disposition of a claim shall be furnished to the claimant within 90 days after the application therefor is filed, unless special circumstances require an extension of time (not to exceed 90 additional days) for processing the claim. In the event the claim is denied, the reasons for the denial shall be specifically set forth, pertinent provisions of the Plan shall be cited and, where appropriate, an explanation as to how the claimant can perfect the claim and whether further material or information is necessary.
Any Employee, former Employee, or Beneficiary, who has been denied a benefit or feels aggrieved by any other action of Company shall be entitled upon written request to Company to
receive a written or electronic notice of such action, together with a full and clear statement of the reasons for the action.
If the claimant wishes further consideration of his or her position, he or she may obtain a form from Company on which to request a hearing. Such form, together with a written statement of the claimant's position, shall be filed with Company no later than 60 days after receipt of the written notification provided for in the paragraph above and in the paragraph preceding it. The claimant or his or her duly authorized representative may review pertinent documents and submit issues and comments in writing.
The Committee shall schedule an opportunity for a full and fair hearing of the issue by the Committee or a person designated by the Committee within the next 60 days unless special circumstances (including but not limited to, the need to hold a hearing) require an extension of time for processing, in which case a decision shall be rendered as soon as possible, but not later than 120 days after receipt of the request for review. If such an extension is necessary, written or electronic notice of the extension shall be furnished to the claimant prior to the commencement of the extension.
The decisions on review shall be furnished to the claimant within the time limit described in the preceding paragraph. It shall include specific reasons for the decision, expressed in a manner calculated to be understood by the claimant and shall specifically refer to pertinent Plan provisions on which it is based. The claimant shall be advised that if he or she wishes to pursue his or her claim further, he or she may file suit in federal or state court and that the court will decide who should pay court costs and legal fees.
6.9 Correction of Administrative Errors. If an error is made in the administration of the Plan, the Committee shall promptly correct the error upon its discovery. For this purpose, "administration" shall encompass the entire operation of the Plan, including but not limited to, eligibility, participation and benefit calculation and distribution. If a Beneficiary has been denied a benefit distribution due to such administrative oversight, the Committee shall determine the correct interest of the Beneficiary and shall disburse an amount to the Beneficiary as is necessary to rectify the error, without payment of interest or penalty. If an excessive distribution has been made to a Beneficiary, the Committee shall advise the party who received the distribution of the error and shall take such actions on the Plan's behalf as are necessary to recover the excessive payment.
ARTICLE VII AMENDMENT OR TERMINATION OF PLAN
In its discretion and acting in a nonfiduciary capacity, the Committee shall have the right to amend the Plan at any time, and to amend or cancel any such action. Plan amendments shall be stated in an instrument executed by the Company in the same manner as the Plan, and the Plan shall be deemed to have been amended in the manner and at the time therein set forth, and all Participants and Beneficiaries shall be bound thereby. Notwithstanding the preceding sentence, no plan amendment shall modify the right of a Participant to a death benefit nor reduce the amount of the Basic Benefit and Supplemental
Benefit, as such rights are set forth in Articles III and V. Moreover, no amendment shall be effective that lessens the benefits hereunder to Participants and Beneficiaries if adopted at any time after the date that is six months prior to a Change in Control. For the purpose of the preceding sentences, both an amendment to the definition of "Change in Control" and modifying the consequences of a Change in Control shall be treated as permissible so long as such amendment is adopted prior to the date that is six months before a Change in Control.
The Committee shall have the right to terminate the Plan at any time. In the case of a Vested Participant, such termination shall not, however, lessen any of the rights of such Participant to a death benefit nor reduce the amount of the Basic Benefit and Supplemental Benefit, as such rights are set forth in Articles III and V. Such termination shall eliminate any rights hereunder of a Participant who is not Vested as of the date of termination; provided, however, that the rights of a non-Vested Participant shall not be eliminated if the Company and/or an Employer adopts a plan within six months after the date that a resolution terminating this Plan is adopted if the new plan (a "successor plan") provides benefits to any of the Participants in this Plan that are substantially equivalent to the benefits previously provided under this Plan. If such successor plan is adopted, a non-Vested Participant shall remain entitled to benefits under this Plan as if it had not been terminated.
ARTICLE VIII MISCELLANEOUS PROVISIONS
8.1 Information to be Furnished. Participants and Beneficiaries shall provide the Committee with such information and evidence, and shall sign such documents, as may reasonably be requested from time to time for the purpose of administration of the Plan.
8.2 Limitation on Participants' Rights. Participation in the Plan shall not give any Employee the right to be retained in the Company's employ, or any right or interest in the benefits provided under the Plan other than as herein provided. The Company reserves the right to dismiss any Employee without any liability for any claim either against the Plan, except to the extent herein provided, or against the Company.
8.3 Governing Law. The Plan shall be construed, administered and enforced according to the laws of the state of California, except to the extent the law of such state is superseded by ERISA or other federal laws.
8.4 Receipt and Release. Any payment to any Beneficiary in accordance with the provisions of the Plan shall be, to the extent thereof, in full satisfaction of all claims against the Committee and the Company; and the Company may require such Beneficiary, as a condition precedent to such payment, to execute a receipt and release to such effect.
8.5 Nonassignability. None of the benefits, payments, proceeds or claims of any Participant or Beneficiary shall be subject to any claim of any creditor of any Participant or Beneficiary and, in particular, the same shall not be subject to attachment or garnishment or
other legal process by any creditor of such person, nor shall any Participant or Beneficiary have any right to alienate, anticipate, commute, pledge, encumber or assign any of the benefits or payments or proceeds which may be payable under the Plan.
8.6 Incompetency. Every person receiving or claiming benefits under the Plan shall be conclusively presumed to be mentally competent and of age until the date on which the Committee receives a written notice, in a form and manner acceptable to the Committee, that such person is incompetent or a minor, for whom a guardian or other person legally vested with the care of his person or estate has been appointed; provided, however, that if the Committee shall find that any person to whom a benefit is payable under the Plan is unable to care for his affairs because of incompetency, or is a minor, any payment due (unless a prior claim therefore shall have been made by a duly appointed legal representative) may be paid to the spouse, a child, a parent or a brother or sister, or to any person or institution deemed by the Committee to have incurred expense for such person otherwise entitled to payment. To the extent permitted by law, any such payment so made shall be a complete discharge of liability therefor under the Plan.
8.7 Benefits Solely from General Assets. The benefits provided by the Plan shall be paid solely from the general assets of the Company. No Participant, Beneficiary or other person shall have any claim against, right to, or security or other interest in, any specific fund, account, insurance policy, or other asset of the Company with respect to benefits under the Plan.
8.8 Notices. Any notice or other communication required or permitted to be given under the Plan shall be given in writing and shall be delivered by hand or by registered or certified mail, postage prepaid, return receipt requested and shall be delivered to the address set forth below or to such other addresses as may be designed by the parties in a notice given pursuant to this Section. If to the Company or the Committee:
KB Home
Attn.:
Corporate Offices
10990 Wilshire Blvd.
7th Floor
Los Angeles, CA 90024
If to the Participant or Beneficiary:
At the last known address of such Participant or
Beneficiary as reflected in the records of
the Company.
Any notice or communication given in conformity with this Section shall be deemed effective when received by the addressee if delivered by hand and five days after mailing if mailed.
8.9 Tax Withholding. Any benefits payable to a Beneficiary under the Plan shall be reduced to the extent of any withholding of the Beneficiary's income taxes by the Company as required by law.
ARTICLE IX ESTABLISHMENT OF TRUST AND SPECIAL PROVISIONS IN THE EVENT OF A CHANGE IN CONTROL
9.1 Establishment of the Trust. The Company shall establish a Trust as a part of the Plan in order to implement and carry out the provisions of the Plan and to finance the benefits under the Plan. The Company shall establish the Trust by entering into a Trust Agreement with a Trustee selected by the Committee. The Trust shall be an irrevocable grantor trust within the meaning of Code sections 671 through 677, and the Company and/or each Employer shall be treated as the owner of the Trust in a manner consistent with the grantor trust rules. It is intended that the Trust shall be in such form as may be necessary for the Plan to be deemed unfunded for purposes of the ERISA.
The Trust shall maintain a Trust Fund. The administration and management of the Trust Fund shall be set forth in the Trust Agreement, the terms of which shall be consistent with the provisions of this Plan. Nothing in the Trust Agreement shall impair the rights of the Participant and his Beneficiary nor shall the agreement limit the obligations of the Company under this Plan.
9.2 Trust Assets and Contributions. The Trust shall hold any insurance policies that are purchased on the lives of Participants under the Plan. The Company and/or each Employer shall make contributions to the Trust in an amount at least equal to that amount necessary to maintain such policies. The terms of the Trust shall provide that, absent a Change in Control, the death benefits under the policies shall be payable to the Trust.
Notwithstanding the foregoing, within 30 days of a Change in Control, the Company and/or Employer shall pay the additional contributions to the Trust set forth in this section on behalf of each Participant in the Plan as of the date of the Change in Control. The additional contribution shall consist of two components, A and B, each of which shall be computed on a Participant-by-Participant basis.
The A component for each Participant equals the premium payment on the life insurance policy maintained on the life of that Participant required in order for the policy to be fully paid up. As used in this paragraph, the term "fully paid up" means that, after the payment described in the preceding sentence is paid as premium to the insurer, the value of the policy is such that the policy is projected to be able to pay at least the Basic Benefit applicable to the Participant if the Participant dies at any time after the Change in Control and during the period ending when the Participant would attain age 100. For this purpose the amount to be paid shall be calculated by assuming that the future investment return on the policy will equal the guaranteed investment division rate quoted by the insurer (or, if the insurer, does not have a "guaranteed investment division rate," the rate most analogous to such rate) at the time of the Change in Control.
The B component is the "Gross-Up Payment." It equals the amount, such that the net amount retained by the Employee from the Gross-Up Payment, after deducting any U.S. federal,
state, and/or local income or payroll tax upon the Gross-up Payment, equals the total of all federal, state, and/or local income or payroll taxes imposed because of the distribution of the policy described in this section. For the purpose of the preceding sentence, "income taxes" shall also include excise taxes imposed on the Participant as a result of the distribution, including the excise tax under Section 4999 of the Code (or any successor thereto), if applicable.
The Participant may elect that the determination of the A and B
component shall be made by a nationally recognized certified public accounting
firm as may be designated by the Participant (the "Accounting Firm") which shall
provide detailed supporting calculations both to the Company and the Participant
within 15 business days of the receipt of notice from the Participant that there
has been a Change in Control, or such earlier time as is requested by the
Company. All fees and expenses of the Accounting Firm shall be borne solely by
the Company. The necessary payments to the Trust shall be paid by the Company
and/or Employer within five days of the receipt of the Accounting Firm's
determination. Any determination by the Accounting Firm that is supported by its
unqualified opinion shall be binding upon the Company and the Participant. As a
result of the uncertainty of the application of Section 4999 of the Code at the
time of the initial determination by the Accounting Firm hereunder, it is
possible that payments will not have been made by the Company and/or Employer
that should have been made as part of the B component ("Underpayment"). In the
event that the Participant is required to make any payment of excise tax under
Section 4999 that was not contemplated as part of the initial B component, the
Accounting Firm shall determine the amount of the Underpayment that has occurred
and any such Underpayment shall be promptly paid by the Company and/or Employer
to or for the benefit of the Participant. Such underpayment shall be calculated
in a manner that takes into account any interest or penalties imposed upon the
Participant and any taxes (calculated as described above) imposed upon the
Underpayment, with the result that, after receipt of the Underpayment, the
Participant is in the same position that he or she would have been in if the
fully paid up policy had been distributed free of any tax consequences.
Immediately after receiving the A and B components, the trustee of the Trust shall transmit the A component to the insurer and then cause the policy on the life of the Participant and an amount equal to the B component to be paid to the Participant. To the extent the B component is paid directly to the Participant, the obligation to pay such amount to the Trust shall be treated as discharged.
In addition to the payments previously described in this section, the Trust may provide for additional contributions to a reserve to fund any necessary expenses of the trustee, including expenses relating to the enforcement of the right of the Trust to receive payments hereunder.
9.3 Payment of Benefits. The benefits under this Plan shall be paid from the Trust Fund except to the extent paid by the Company and/or Employer and, to the extent of such payment, shall discharge any obligation of the Company and/or Employer hereunder. To the extent the payment of required benefits under the Plan is not paid from the Trust, payment of benefits shall be made from the general assets of the Company.
TO RECORD THE ADOPTION OF THIS PLAN, the Company has caused this document to be executed in its name as of the first day of November 1, 2001, by its officer thereunto duly authorized.
KB Home
By: /s/ CORY F. COHEN ------------------------------ |
EXHIBIT 13
KB HOME AND CONSOLIDATED SUBSIDIARIES
PAGES 32 THROUGH 64 AND PAGE 68 OF KB HOME'S
2001 ANNUAL REPORT TO STOCKHOLDERS
This exhibit is incorporated in this Annual Report on Form 10-K between page F-1 and the List of Exhibits Filed.
EXHIBIT 22
KB HOME AND CONSOLIDATED
SUBSIDIARIES
SUBSIDIARIES OF THE REGISTRANT
The following subsidiaries of the KB Home
were included in the November 30, 2001 consolidated
financial statements:
Percentage of Voting
Securities Owned by the
Registrant or a Subsidiary
of the Registrant
Name of Company
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
Percentage of Voting
Securities Owned by the
Registrant or a Subsidiary
of the Registrant
Name of Company
100
100
100
100
100
100
100
100
100
100
100
100
100
95
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
Percentage of Voting
Securities Owned by the
Registrant or a Subsidiary
of the Registrant
Name of Company
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
EXHIBIT 24
KB HOME AND CONSOLIDATED SUBSIDIARIES
CONSENT OF INDEPENDENT AUDITORS
To the Board of Directors and
We consent to the incorporation by reference in the Registration Statements on Form S-8 pertaining to the 1986 Stock Option Plan (No. 33-11692), the 1988 Employee Stock Plan (No. 33-28624 and No. 333-49311), the 1998 Stock Incentive Plan, the Performance-Based Incentive Plan for Senior Management and the resale of certain shares by officers of the Company (No. 333-49309), the 401(k) Savings Plan (No. 333-49307), and the Registration Statements on Form S-3 (No. 333-14977, No. 333-41549, No. 333-51825, No. 333-51825-01 and No. 333-71630), as amended, of KB Home of our report dated December 20, 2001, with respect to the consolidated financial statements of KB Home included in the Annual Report (Form 10-K) for the year ended November 30, 2001.
Ernst & Young LLP |
Los Angeles, California