-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OogpCgs7vcSwC5dqMuVFoFZmZBzomxbsb7LwdAZbhx88AgG9I21PoYnWEwtbgMSm cfyUNG13O4WHdcO5O0PB9Q== 0000950148-96-000247.txt : 19960228 0000950148-96-000247.hdr.sgml : 19960228 ACCESSION NUMBER: 0000950148-96-000247 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19951130 FILED AS OF DATE: 19960223 SROS: NYSE SROS: PHLX FILER: COMPANY DATA: COMPANY CONFORMED NAME: KAUFMAN & BROAD HOME CORP CENTRAL INDEX KEY: 0000795266 STANDARD INDUSTRIAL CLASSIFICATION: OPERATIVE BUILDERS [1531] IRS NUMBER: 953666267 STATE OF INCORPORATION: DE FISCAL YEAR END: 1130 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-09195 FILM NUMBER: 96525054 BUSINESS ADDRESS: STREET 1: 10990 WILSHIRE BLVD CITY: LOS ANGELES STATE: CA ZIP: 90024 BUSINESS PHONE: 3104438000 10-K 1 ANNUAL REPORT FOR FISCAL YEAR ENDED 11/30/95 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED NOVEMBER 30, 1995 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO . COMMISSION FILE NO. 1-9195 KAUFMAN AND BROAD HOME CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) INCORPORATED IN DELAWARE 95-3666267 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 10990 WILSHIRE BOULEVARD, LOS ANGELES, CALIFORNIA 90024 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (310) 231-4000 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED COMMON STOCK (PAR VALUE $1.00 PER SHARE) NEW YORK STOCK EXCHANGE RIGHTS TO PURCHASE SERIES A PARTICIPATING CUMULATIVE NEW YORK STOCK EXCHANGE PREFERRED STOCK DEPOSITARY SHARES, EACH REPRESENTING ONE-FIFTH OF A NEW YORK STOCK EXCHANGE SHARE OF SERIES B MANDATORY CONVERSION PREMIUM DIVIDEND PREFERRED STOCK (PAR VALUE $1.00 PER SHARE) 10 3/8% SENIOR NOTES DUE 1999 NEW YORK STOCK EXCHANGE 9 3/8% SENIOR SUBORDINATED NOTES DUE 2003 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 X 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 REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K. /X/ THE AGGREGATE MARKET VALUE OF VOTING STOCK HELD BY NON-AFFILIATES OF THE COMPANY ON JANUARY 31, 1996 WAS $510,923,456. THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S CLASSES OF COMMON STOCK ON JANUARY 31, 1996 WAS AS FOLLOWS: Common Stock (par value $1.00 per share) 32,352,736 shares DOCUMENTS INCORPORATED BY REFERENCE 1995 Annual Report to Shareholders (incorporated into Part II). Notice of 1996 Annual Meeting of Stockholders and Proxy Statement (incorporated into Part III). - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 PART I ITEM 1. BUSINESS GENERAL The Company is a builder of single-family homes with domestic operations in six western states, and international operations in France, Canada and Mexico. The Company is the largest home builder in the western United States and among the largest builders in greater metropolitan Paris, France. The Company builds and markets innovatively designed homes, generally in medium-sized developments close to major metropolitan areas, that cater primarily to first-time home buyers. In France, the Company is also a developer of commercial projects and high-density residential properties, such as condominium and apartment complexes. The Company also provides mortgage banking services to its domestic home buyers through its wholly owned subsidiary, Kaufman and Broad Mortgage Company ("KBMC"). The Company's business originated in 1957 and was operated through various subsidiaries of SunAmerica Inc. ("SunAmerica"), previously known as Kaufman and Broad Inc. or Broad Inc., until 1986. At that time, SunAmerica transferred to the Company all of the outstanding stock of the subsidiaries then conducting SunAmerica's on-site housing businesses as well as the stock of KBMC. The Company shortly thereafter completed an initial public offering of its common stock, after which SunAmerica continued to own approximately 92.6% of the Company's outstanding common stock. In 1989, SunAmerica distributed substantially all of its holdings in the Company's common stock pro-rata to holders of SunAmerica's common stock. SunAmerica, through one of its wholly owned subsidiaries, continued to hold certain warrants to purchase shares of the Company's special common stock, which were subsequently either exercised by the subsidiary of SunAmerica or repurchased by the Company. No securities were held by SunAmerica or any of its subsidiaries as of December 1993. The Company is a Delaware corporation and maintains its principal executive offices at 10990 Wilshire Boulevard, Los Angeles, California 90024. Its telephone number is (310) 231-4000. As used herein, the term "Company" refers to Kaufman and Broad Home Corporation and its subsidiaries, unless the context indicates otherwise. MARKETS The Company's three principal geographic markets are California, other United States (Nevada, Arizona, Colorado, New Mexico and Utah) and the greater metropolitan area of Paris, France. To a lesser extent, the Company builds single-family homes in Toronto, Canada. The Company delivered its first homes in California in 1963, France in 1970, Toronto in 1971, Nevada in 1993, Arizona and Colorado in 1994 and New Mexico and Utah in 1995. The Company expects to deliver its first homes in Dallas and San Antonio, Texas in 1996, as recent domestic expansion activities have included the purchase of land parcels in Dallas and the signing of a definitive agreement on January 22, 1996, to acquire San Antonio, Texas-based Rayco, Ltd. and certain affiliates. Rayco Ltd. is the largest single-family homebuilder in San Antonio. Although the Rayco, Ltd. transaction remains subject to certain conditions, completion of the acquisition is expected to occur on March 1, 1996. The Company also anticipates delivery of its first homes from its start-up housing operation in Mexico in 1996, as it has begun to generate a modest level of orders from its project near Mexico City. To enhance its operating capabilities in regional submarkets, the Company conducted its domestic homebuilding business in 1995 through eleven divisional offices and two satellite offices in California and one divisional office in each of Nevada, Arizona, Colorado, New Mexico and Utah. California. During the 1980s, the Company benefited from the relative strength and growth of the California housing market. However, in five of the last six years, new housing permits issued in the state have declined. The California housing market was soft in 1995, with new housing permits issued decreasing approximately 12% in 1995 from 1994. While the Company had generally maintained a trend of increasing deliveries in California in spite of declines in housing permits issued, in 1995, for the first time in five years the Company's deliveries in California fell below prior year levels. The Company delivered 5,430 new homes in California in 1995, a decrease of approximately 13% from 1994. This decrease was due to severe weather conditions in California early in the year combined with the state's 1 3 generally weak economy. In spite of the weak economic conditions in California, the Company has maintained approximately an eight percent share of the California housing market since 1993. In Southern California, the Company concentrates its home building activity in Los Angeles, Kern, San Bernardino, Riverside, Orange and San Diego counties. In Northern California, the Company's activities are concentrated in the San Francisco Bay-San Jose, Monterey Bay, Sacramento, Central Valley and Fresno regions. Most of the communities developed by the Company consist of single-family detached homes primarily focused on the entry-level housing market. These homes ranged in size from 854 to 4,050 square feet in 1995 and sold at an average price of $176,800, well below the statewide new home average of $224,100, as a result of the Company's emphasis on the entry-level market. The Company's 1995 average selling price in California increased from the prior year reflecting a shift in mix to higher-priced homes and an increase in first-time move-up sales. Other United States. The prolonged economic downturn in California, the Company's largest market, has caused the Company to look for opportunities to expand its domestic operations outside the state. The Company began to implement its expansion strategy in 1993 with the opening of its Nevada division and since that time has developed a track record of profitable growth outside of California. The Company's operations outside of California accounted for approximately 25% of domestic home deliveries in 1995, a percentage which is expected to increase as these domestic divisions further establish and solidify their market positions. Recent developments in the Company's expansion strategy include its entry into Texas. The Company recently acquired land parcels in Dallas and has also signed a definitive agreement to acquire Rayco, Ltd. of San Antonio for approximately $110 million, comprised of $80 million cash and the assumption of $30 million of debt. Rayco, Ltd., San Antonio's largest single-family homebuilder, commanded a market share of approximately 45% in 1995. For the year ended December 31, 1995, Rayco, Ltd. delivered 2,585 homes, generating revenues of approximately $235 million. It is expected that the Rayco, Ltd. transaction will be completed on March 1, 1996. If this acquisition had been included in the Company's operations during the 1995 year, the Company's other United States deliveries would have represented approximately 45% of domestic deliveries in 1995. France. The French residential and commercial real estate markets, particularly within the greater metropolitan Paris region, where the Company's operations are concentrated, experienced substantial growth through the second half of the 1980s, as a strong economy and approaching European market unification fueled business expansion and individual home purchases. In the early 1990s, however, the French economy experienced a significant recession reflecting low consumer confidence, high unemployment and declines in both consumer and business investments in real estate. The French housing market continued to prove difficult in 1995 as turbulent economic conditions continued and home buyers deferred purchases until a key government support program was instituted in October 1995. Despite the current tenuous economic climate in France, the Company continues to believe that the greater Paris metropolitan area, which is the principal population, economic and government center of France, continues to offer long-term potential for growth in both the Company's residential and commercial operations. In 1995, the Company's French operations had a break even year with housing deliveries decreasing approximately 16% to 574 units in 1995 from 1994, as the French economy remained weak and high unemployment continued during the economically disruptive election year. The French home building operations focused primarily on single-family detached and attached homes in 1995, ranging in size from 807 to 2,691 square feet with an average selling price of $203,700. The French commercial operation which has been engaged, directly and through joint ventures, in developing commercial office buildings in Paris for sale to institutional investors has become a smaller segment of the French operations in recent years. With the completion of large projects in prior years, the level of commercial operations has declined as the market absorbed existing commercial properties. Although commercial development revenues increased modestly in 1995, the Company does not expect a significant increase from these levels in 1996 as high vacancy rates are expected to persist in the French commercial market. The Company's involvement in its most significant commercial project is as a member of a consortium, consisting of eight of France's largest financial institutions and three development firms, that was selected in 1992 to acquire and redevelop the former Paris headquarters of Esso, the French subsidiary of the Exxon Corporation, located in the prestigious La Defense quarter of metropolitan Paris. The Company, with a 7% interest in the project, is a minority partner in the joint venture and one of the three managing contractors for the redevelopment work for which it will receive a contractor's fee. Development of this project has been postponed as the consortium made the decision to await the recovery of the commercial market and the financial institutions study other alternatives. However, the Company has 2 4 recently entered into negotiations with the financial institutions whereby the Company would no longer be part of the consortium or have any involvement or obligations for the development of the project. Canada. In addition to its principal markets in the western United States and France, the Company operates a housing division in Toronto, Canada, which has been slowly winding down over the past few years. The Company has engaged in negotiations and expects to enter into a definitive agreement pursuant to which it will sell all of the issued and outstanding shares of Victoria Wood Development Corporation Inc., its Canadian subsidiary. If executed as anticipated, the share purchase and sale agreement will remain subject to the buyer's due diligence review and certain other conditions. Mexico. In 1993, the Company determined that the projected growth in the Mexican economy and a shortage of housing in that country's major metropolitan areas would represent a unique opportunity for the Company, and on that basis established a new housing operation in Mexico City. However, recent economic events, particularly the continuing decline in value of the peso and the resulting economic recession, have seriously hampered the new home market in Mexico. These events have slowed an already complex regulatory process and heightened market uncertainties for new home sales. As a result, although the Company has opened a single-family home project near Mexico City and has begun to generate a modest number of orders for homes expected to be delivered in 1996, the Company remains cautious regarding its Mexican operations and continues to reassess its level of activity in Mexico and the desirability of expanding its market presence there. Unconsolidated Joint Ventures. The Company currently participates in the development, construction and sale of residential properties and commercial projects through a number of unconsolidated joint ventures. These include joint ventures in the Los Angeles, Paris and Toronto metropolitan areas. Selected Market Data. The following table sets forth, for each of the Company's markets, unit deliveries, average selling price of homes and total construction revenues for the years ended November 30, 1995, 1994 and 1993 (excluding the effect of unconsolidated joint ventures).
YEARS ENDED NOVEMBER 30, --------------------------------- 1995 1994 1993 --------- --------- --------- California: Unit deliveries............................................. 5,430 6,238 5,745 Average selling price....................................... $ 176,800 $ 165,900 $ 163,100 Total construction revenues (in millions)(1)................ $ 971.1 $ 1,048.1 $ 938.3 Other United States: Unit deliveries............................................. 1,800 834 207 Average selling price....................................... $ 136,300 $ 114,900 $ 109,300 Total construction revenues (in millions)(1)................ $ 247.0 $ 101.1 $ 22.6 France: Unit deliveries............................................. 574 685 657 Average selling price(2).................................... $ 203,700 $ 182,300 $ 187,800 Total construction revenues (in millions)(1)(2)............. $ 138.6 $ 143.4 $ 219.8 Canada: Unit deliveries............................................. 53 67 155 Average selling price(2).................................... $ 99,400 $ 97,300 $ 88,300 Total construction revenues (in millions)(1)(2)............. $ 10.2 $ 15.0 $ 19.1 Total: Unit deliveries............................................. 7,857 7,824 6,764 Average selling price(2).................................... $ 168,900 $ 161,300 $ 162,100 Total construction revenues (in millions)(1)(2)............. $ 1,366.9 $ 1,307.6 $ 1,199.8
- ------------ (1) Total construction revenues include revenues from commercial and residential development activities and land sales. (2) Average selling prices and total construction revenues for France and Canada have been translated into U.S. dollars using weighted average exchange rates for each period. 3 5 LOCAL EXPERTISE Management believes that its 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 customer tastes in specific markets and to assess the regulatory environment. The Company's divisional structure is designed to utilize local market expertise. The Company has experienced management teams in each of its regional submarkets. Although the Company has centralized certain functions, such as marketing, materials purchasing and product development to benefit from economies of scale, local management continues to exercise considerable autonomy in identifying land acquisition opportunities, developing sales strategies, conducting production operations and controlling costs. In France, the Company has assembled a management team which is highly experienced in the financing, development, construction and rehabilitation of commercial and high-density residential projects, as well as single-family housing. This expertise includes knowledge of local markets and the regulatory environment. INNOVATIVE DESIGN AND MARKETING STRATEGY The Company believes that it has been and continues to be an innovator in the design of entry-level homes for the first-time buyer. The Company's in-house architectural services group, whose plans are protected by copyright, has been successful in creating distinctive design features that are not typically found in comparably priced homes. The Company is typically able to offer as standard features vaulted ceilings, kitchen islands, kitchens that open to family rooms, wall-to-wall carpeting and front-yard landscaping. To an even greater extent than in the past, the Company is emphasizing space-efficient functionality. One example of this is the broader use of the Company's unique L'Office(TM) computer workstation area. The L'Office(TM) (a combination of "loft" and "office") areas are designed to meet most families' home office needs without using up valuable bedroom or family room space. In France, the Company created a village concept through the elimination of front-yard walls and the extensive use of landscaping. It 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. The Company believes that in each of its residential markets, its value engineering enables it to offer appealing and well-designed homes without increasing construction costs. In all of its residential markets, the sale of homes is carried out by the Company's in-house sales force. The Company markets its homes principally through the use of fully furnished and landscaped model homes which are decorated to emphasize the distinctive design features. The Company also markets its homes through various types of media, including newspaper advertisements, highway signs and direct mail. In addition, the Company extends its marketing programs beyond these traditional real estate avenues through the use of television advertising, off-site telemarketing, and large-scale promotions. Since 1985, the Company's California divisions have utilized an umbrella marketing concept, The California Series(R). This concept seeks to increase brand identification by incorporating certain common features in the marketing programs of its different development communities and by using "California" in the names of these communities. The Company has registered this trademark name and features The California Series(R) designs in its sales brochures and other promotional material. In 1995, the Company introduced a television advertising campaign featuring its celebrity spokesperson, award-winning actor Tom Skerritt, to millions of potential homebuyers in the western United States. Skerritt is perhaps best known for his leading role in the CBS television series "Picket Fences" and movie roles in "Top Gun" and "A River Runs Through It." 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 in the past ranged from six to 20 months in California and from 12 to 30 months in France. The development cycle varies depending on the extent of government approvals required, the size of the development, the site preparation necessary and marketing results. 4 6 The Company attempts to acquire finished lots within its pricing parameters, where available, enabling it to deliver completed homes shortly after acquisition. The total number of lots in the Company's domestic new home communities vary significantly but typically are comprised of 50 to 250 lots. These domestic developments usually include three different home designs, and in 1995 generally offered lot sizes ranging from 3,500 to 8,500 square feet. The Company, in prior years, has also acquired certain developments with total lots significantly in excess of 250 lots. Such developments are not consistent with the Company's current investment strategy. Strategies to reduce or eliminate such developments may be considered. In France, typical single-family developments are smaller, consisting of approximately 40 lots, with lot sizes generally ranging from 2,500 to 6,500 square feet. Land Acquisition and Development. The Company utilizes 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 the Company's market strategy. In acquiring land, the Company considers such factors as: current market conditions, with an emphasis on the prices of comparable homes in the particular market; proximity to metropolitan areas; population, industrial and commercial growth patterns; estimated costs of completed lot development; customer preferences; and environmental matters. Senior corporate management controls the commitment of the Company's resources for land acquisition and utilizes a series of specific financial and budgetary controls in approving acquisition opportunities identified by division land acquisition personnel. During 1995, the Company implemented stricter standards for assessing all proposed land purchases based, in part, upon discounted after tax cash flow internal rate of return requirements. In addition, all operating divisions are measured for the first time based upon overall return on investment. Among other things, this focus will likely result in reductions in new land purchases and inventory investment in California during 1996 as a step toward improving the Company's overall return on equity over time. Cash flow available from reduced California investment will be used to fund the Company's expansion into other western states as well as reduce overall leverage as measured by the ratio of debt to total capital. The following table shows the number of lots owned by the Company in various stages of development and under option contract in its principal markets as of November 30, 1995. The following table does not include acreage which has not yet been approved for subdivision into lots. This excluded acreage includes 1,089 acres owned in the United States and 223 acres owned in other areas.
TOTAL LOTS HOMES/LOTS IN LAND UNDER LOTS UNDER OWNED OR PRODUCTION DEVELOPMENT OPTION UNDER OPTION ------------- ------------- ---------- ------------ California........................ 9,698 11,331 10,338 31,367 Other United States............... 2,046 825 2,515 5,386 France............................ 694 547 373 1,614 Canada and other.................. 153 158 -- 311 ------------- ------------- ---------- ------------ Total................... 12,591 12,861 13,226 38,678 =========== ========== ======== ==========
The Company has focused its domestic efforts on acquiring finished or partially improved lots, usually under options which are exercised as the lots are needed. The purchase of finished lots generally allows the Company to begin delivery of finished homes within six months of the purchase of such lots and reduces the risks of unforeseen improvement costs and volatile market conditions. During the early 1990s, the Company made a number of advantageous purchases of finished lots in California, as many builders were unable to proceed with projects due to the tight restrictions on the availability of capital imposed by financial institutions. Although such opportunities were not as prevalent in the Company's domestic markets in 1995, the Company expects to continue this strategy into the immediate future to the extent such opportunities remain available. While the Company has significantly reduced the proportion of unentitled and unimproved land purchases, when all acquired property is considered, the Company has and expects to continue to purchase raw land under options which require little or no initial payments, or pursuant to purchase agreements in which the Company's obligations are contingent upon the Company being satisfied with the feasibility of developing and selling homes. During the option period of its acquisition agreements, the Company performs technical, environmental, engineering and entitlement feasibility studies and seeks to obtain necessary government approvals. The use of option arrangements allows the Company to evaluate and obtain regulatory approvals for a project, to reduce its financial commitments, including interest and other carrying costs, and to minimize land inventories. It also improves the Company's capacity to estimate costs accurately, an important element in planning communities and pricing homes. Generally, the Company purchases only amounts sufficient for its expected production needs and does not purchase land for speculative investment. 5 7 In France, as a result of the continued uncertainty in the French real estate market, the Company is employing a number of recession-conscious strategies, including a greater emphasis on the entry-level market segment and generally more restrictive policies regarding new land acquisition. Home Construction and Sale. Following the purchase of land and, if necessary, the completion of the entitlement process, the Company typically begins marketing the homes and constructing several model homes. The construction of production homes is generally contingent upon customer orders to minimize the costs and risks of standing inventory. Due to the Company's continued domestic expansion overall inventory levels increased in 1995. The Company acts as the general contractor for its communities and hires subcontractors for all production. The use of subcontractors enables the Company to reduce its investment in direct labor costs, equipment and facilities. Where practical, the Company uses mass production techniques, construction on contiguous lots, and prepackaged, standardized components and materials to streamline the on-site production phase. During the early 1990s, the Company developed a system of national 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, the Company's own administrative and on-site supervisory personnel coordinate the activities of subcontractors and subject their work to quality and cost controls. The Company generally prices its homes only after it has entered into contracts for the construction of such homes with subcontractors, an approach which improves its ability to estimate costs accurately. The Company provides customers with a limited home warranty program operated by the personnel in each of its divisions to give customers prompt and efficient post-delivery service. The warranty program covers certain repairs which may be necessary following new home construction and covers structural integrity for a period of ten years. In the aggregate, the costs associated with the Company's warranty program are not material to its operations. CYCLICALITY The Company's business, and the housing industry in general, are cyclical. The Company's operations and markets are affected by local and regional factors such as local economies, demographic demand for housing, population growth, property taxes and energy costs, and by national factors such as short and long-term interest rates, federal mortgage financing programs, federal income tax provisions and general economic trends. In addition homebuilders are subject to various risks including availability and cost of land, conditions of supply and demand in local markets, weather conditions, delays in construction schedules and the entitlement process. Net orders often vary on a seasonal basis, with the lowest sales activity typically occurring in the winter months. The Company's 1995 financial results were particularly affected by certain factors, including but not limited to the weak economic conditions in California and France, severe weather conditions in California in early 1995 and a lack of urgency among potential homebuyers in many of the Company's markets. BACKLOG Sales of the Company's 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. The Company generally permits 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 the Company has entered into a sales contract but which it has 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, the Company's cancellation rates have increased during difficult economic periods. In addition, as demonstrated by the table below, deliveries of new homes have typically increased from the first to the fourth quarter in any year. Accordingly, the Company usually experiences a relatively low backlog of orders at year end. 6 8 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, 1995.
NET UNIT ENDING ORDERS DELIVERIES BACKLOG ------ ---------- ------- Fiscal 1995: First Quarter.......................... 1,636 1,367 1,285 Second Quarter......................... 2,241 1,875 1,651 Third Quarter.......................... 2,311 2,111 1,851 Fourth Quarter......................... 2,065 2,504 1,412 Fiscal 1994: First Quarter.......................... 1,684 1,539 1,204 Second Quarter......................... 2,035 1,954 1,285 Third Quarter.......................... 2,078 2,082 1,281 Fourth Quarter......................... 1,984 2,249 1,016 Fiscal 1993: First Quarter.......................... 1,387 1,067 1,451 Second Quarter......................... 1,752 1,558 1,645 Third Quarter.......................... 1,717 1,885 1,477 Fourth Quarter......................... 1,836 2,254 1,059
LAND AND RAW MATERIALS Management believes that the Company's current supply of land is sufficient for its reasonably anticipated needs, and that it will be able to acquire land on acceptable terms for future housing developments. The principal raw materials used in the construction of homes are concrete and forest products. In addition, the Company uses a variety of other construction materials, including sheetrock and glass. The Company attempts to maintain efficient operations by utilizing standardized materials which are commercially available on competitive terms from a variety of sources. Since 1992, the Company has increasingly utilized centralized purchasing of certain building materials, appliances and fixtures, enabling it to benefit from large quantity purchase discounts for its domestic operations. The Company makes bulk purchases of such products at favorable prices from suppliers and instructs subcontractors to submit bids based on such prices. The principal materials used in the construction of French commercial buildings are steel, concrete and glass. LAND SALES In the normal course of its business, the Company sells land which can be sold at an advantageous price due to market conditions or does not meet its marketing needs. This 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 the Company may consider its inventory to be excessive. The Company's decisions to maintain or decrease its land ownership position in certain markets may be impacted by 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's housing divisions, and prevailing market conditions. CUSTOMER FINANCING -- KAUFMAN AND BROAD MORTGAGE COMPANY At the Company's communities in the United States, on-site personnel facilitate sales by offering to arrange financing for prospective customers through KBMC. Management believes 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. The Company typically assists customers in arranging for guaranteed maximum interest rates at the time of sale even though delivery may take place in the future. KBMC's business consists of providing the Company's domestic customers with competitive financing and coordinating and expediting the loan origination transaction through the steps of loan application, loan approval and closing. KBMC has its headquarters in Los Angeles and operates branch offices in Anaheim, Dublin, Fremont, Fresno, Los 7 9 Angeles, Modesto, Newport Beach, Palmdale, Sacramento, Salinas and San Diego, California; Las Vegas, Nevada; Phoenix, Arizona; Denver, Colorado; Albuquerque, New Mexico; and Salt Lake City, Utah. KBMC's principal sources of revenues are: (i) interest income earned on mortgage loans during the period they are held by KBMC 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. KBMC 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 KBMC (i.e., loans other than those insured by FHA or guaranteed by VA) qualify for inclusion in loan guarantee programs sponsored by the Federal National Mortgage Association ("FNMA") or the Federal Home Loan Mortgage Corporation ("FHLMC"). KBMC 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 fiscal 1995, approximately 44% of the mortgages originated for the Company's customers were conventional, (most of which conformed to FNMA and FHLMC guidelines) 36% were FHA-insured or VA-guaranteed, a portion of which are adjustable rate loans, 15% were funded by mortgage revenue bond programs and 5% were adjustable rate mortgages ("ARMs") primarily 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 1995, KBMC originated loans for 80% of the Company's domestic home deliveries. Generally, KBMC receives an origination fee of approximately 1% of the principal amount of the loan. KBMC is a delegated underwriter under the FHA Direct Endorsement and VA Automatic programs in accordance with criteria established by such agencies. Additionally, KBMC has delegated underwriting authority from FNMA and FHLMC. As a delegated underwriter, KBMC may underwrite and close mortgage loans under programs sponsored by these agencies without their prior approval, which expedites the loan origination process. KBMC, like other mortgage bankers, customarily sells nearly all of the loans that it originates. Loans are sold either individually or in pools to GNMA, FNMA or FHLMC or against forward commitments to institutional investors, including banks and savings and loan associations. For a small percentage of loans, and to the extent required for loans being held for sale to investors, KBMC 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. KBMC receives fees for servicing mortgage loans, generally ranging from .20% per annum to .50% per annum on the declining principal balances of the loans. KBMC typically sells servicing rights on a regular basis. The Company also assists its customers in France by arranging financing through third party lenders, primarily major French banks with which the Company 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 home buyer in France may also have a third mortgage provided through credit unions or other employee groups. EMPLOYEES The Company employs 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, 1996, the Company had approximately 1,220 full-time employees in its operations, including approximately 130 in KBMC's operations. COMPETITION AND OTHER FACTORS The Company's business is highly competitive. It competes primarily on the basis of price, location, financing, design, reputation, quality and amenities with numerous housing producers ranging from regional and national firms to 8 10 small builders. Resales of housing provide additional competition. In certain markets and at times when housing demand is high, the Company also competes with other builders to hire subcontractors. KBMC competes with other mortgage lenders, including mortgage bankers, savings and loan associations and other financial institutions, in the origination, sale and servicing of mortgage loans. Increases in interest rates typically have a negative impact on the Company's operations in that such increases adversely affect the availability of home financing to, or qualification for such financing by, the Company's customers. Conversely, significant reductions in interest rates typically have a positive effect on the Company's operations. The Company does not generally finance the development of its domestic communities with proceeds of loans specifically obtained for, or secured by, particular communities, i.e., project financing. Instead, financing of the Company's domestic operations has been primarily generated from results of operations, public debt and equity financing and borrowings under its $500 million unsecured revolving credit facility with a consortium of domestic and foreign banks. This revolving credit facility includes a $200 million sublimit for the Company's mortgage banking operations. Financing of its French operations has been primarily generated from results of operations and borrowings from its aggregate $140 million unsecured committed credit lines from a series of foreign banks. As a result of these diverse external sources of financing, the Company was not adversely affected by the tight credit conditions that much of the homebuilding industry experienced during the recent recession, both domestically and in France. REGULATION AND ENVIRONMENTAL MATTERS The housing industry is subject to extensive and complex regulations. The Company and its subcontractors must comply with various federal, state and local laws, ordinances, rules and regulations concerning zoning, building design, construction and similar matters. The operations of the Company are affected by environmental laws and regulations, including regulations pertaining to availability of water, municipal sewage treatment capacity, land use, protection of endangered species, population density and preservation of the natural terrain and coastlines. These and other requirements could become more restrictive in the future, resulting in additional time and expense to obtain approvals for the development of communities. The Company is also subject to regulations and restrictions by the governments of France, Canada and Mexico concerning investments in business operations in those countries by United States companies, none of which has to date had a material adverse effect on the Company's consolidated operations. The Company's foreign operations are subject to exchange rate fluctuations, which affect the Company's financial statements and the reporting of profits and payment of dividends from foreign subsidiaries, to restrictive foreign government regulations which may be in effect from time to time and to the terms of the Foreign Corrupt Practices Act with which it is the strict policy of the Company to comply. In addition, the Company has received dividends from its French and Canadian operations without burdensome restrictions, although tax considerations have limited the amount of such dividends. KBMC is subject to numerous federal, state and local laws, ordinances, rules and regulations concerning loans to purchasers of homes as well as Company eligibility for participation in programs of the VA, FHA, GNMA, FNMA and FHLMC. The Company entered into a consent order with the Federal Trade Commission ("FTC") in 1979 pursuant to which the Company agreed to provide explicit warranties on the quality and workmanship of its new homes, follow certain guidelines in advertising and provide certain disclosures to any prospective purchaser who visits Company sales offices or model homes. In 1991, the Company reached a monetary settlement with the FTC, covering alleged violations of the Company's consent order. The FTC acknowledged that the Company did not admit any of the allegations and did not impose any additional requirements on the Company. The Company currently has policies of using outside environmental specialists to investigate land considered for acquisition for environmental risks and requiring disclosure from land sellers of known environmental risks. Despite these activities, there can be no assurance that the Company 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 the Company. Costs associated with the use of environmental consultants are not material to the Company's results of operations. No estimate of such potential liabilities can be made although the Company may, from time to time, purchase property which requires modest environmental clean-up costs after appropriate due diligence. In such instances, 9 11 the Company takes steps prior to acquisition to assure itself 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 costs have occurred in the past, the Company believes it may be able to recover such 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, the Company anticipates that it is not likely that environmental clean-up costs will have a material effect on future results of operations or the Company's financial position. The Company has not been notified by any governmental agency of any claim that any of the properties owned or formerly owned by the Company 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 future results of operations or the Company's financial position. ITEM 2. PROPERTIES The Company's executive offices are in leased premises at 10990 Wilshire Boulevard, Los Angeles, California. The Company's housing operations are principally conducted from leased premises located in Anaheim, Bakersfield, Dublin, Fremont, Fresno, Los Angeles, Modesto, Newport Beach, Palmdale, Pleasanton, Sacramento, Salinas and San Diego, California; Las Vegas, Nevada; Phoenix, Arizona; Denver, Colorado; Albuquerque, New Mexico; Salt Lake City, Utah; Paris, France; Toronto, Canada; and Mexico City, Mexico. The Company's mortgage banking subsidiaries lease executive offices in Los Angeles, California and branch offices in Anaheim, Dublin, Fremont, Fresno, Los Angeles, Modesto, Newport Beach, Palmdale, Sacramento, Salinas and San Diego, California; Las Vegas, Nevada; Phoenix, Arizona; Denver, Colorado; Albuquerque, New Mexico; and Salt Lake City, Utah. The Company believes that such properties, including the equipment located therein, are suitable and adequate to meet the requirements of its businesses. ITEM 3. LEGAL PROCEEDINGS In August 1992, homeowners from the Company's California Meadows community in Riverside County filed a lawsuit against the Company in Riverside County Superior Court seeking compensatory and punitive damages and alleging, among other things, defective construction, breach of warranty, negligence and fraud. The owners of approximately 115 homes are currently involved in the litigation. In February 1994, the Company filed cross-complaints against relevant subcontractors and certain other third parties. The Company believes that it has acted fairly and responsibly toward all homeowners at that community. Based upon its thorough investigation of the site, the Company believes that the most serious allegations in this lawsuit are substantially without merit and has contested such claims. The Company is involved in other litigation incidental to its business. These cases are in various stages of development and, based on reports of counsel, it is management's opinion that provisions made for potential losses in the California Meadows and other matters are adequate and any further liabilities and costs arising out of currently pending litigation will not have a materially adverse effect upon the Company's 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 1995 to a vote of security holders, through the solicitation of proxies or otherwise. 10 12 EXECUTIVE OFFICERS OF THE COMPANY The following sets forth certain information regarding the executive officers of the Company as of January 31, 1996:
YEAR ASSUMED OTHER POSITIONS AND OTHER PRESENT POSITION AT PRESENT BUSINESS EXPERIENCE WITHIN NAME AGE JANUARY 31, 1996 POSITION THE LAST FIVE YEARS(1) FROM - TO - ---------------------- --- ------------------------------ -------- ----------------------------------------- --------------- Bruce Karatz 50 Chairman, President and 1993 President and Chief Executive Officer 1986 - 1993 Chief Executive Officer Roger B. Menard 54 Executive Vice President 1993 Executive Vice President and President 1992 - 1993 and President of United of California Operations States Operations President of Kaufman and Broad-South 1985 - 1992 Bay, Inc. Guy Nafilyan 51 Executive Vice President 1992 President and Chief Executive Officer 1983 - Present and President of European of Kaufman and Broad France Operations Senior Vice President 1987 - 1992 Michael F. Henn 47 Senior Vice President and 1994 Executive Vice President, Chief Financial 1986-1994 Chief Financial Officer and Administrative Officer, The Vons Companies, Inc. Alan Kaye 42 Senior Vice President, 1996 Vice President, Human Resources 1991 - 1996 Human Resources and and Organizational Planning Organizational Planning Senior Vice President for 1988 - 1991 Human Resources and Corporate Services, Columbia Savings & Loan Association Barton P. Pachino 36 Senior Vice President 1993 Vice President and Corporate Counsel 1991 - 1993 and General Counsel Associate Corporate Counsel 1987 - 1991 Albert Z. Praw 47 Senior Vice President, 1994 Partner in law firm of Sidley & Austin 1992-1994 Real Estate Senior Vice President, General 1989-1992 Counsel and Secretary Michael L. Woodley 38 Senior Vice President, 1992 Vice President, Architecture 1989 - 1992 Architecture William R. Hollinger 37 Vice President 1992 Director of Accounting 1988 - 1992 and Controller Dennis Welsch 39 Vice President 1995 Vice President and Controller 1995 and Treasurer of Kaufman and Broad - South Bay, Inc. Controller of Kaufman and Broad - 1993-1994 South Bay, Inc. Vice President, Treasurer A-M Homes 1986-1993
- --------------- (1) All positions described were with the Company, unless otherwise indicated. 11 13 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS As of January 31, 1996, there were 2,186 holders of record of the Company's common stock. Information as to the Company's quarterly stock prices is included on the inside back cover of the Company's 1995 Annual Report to Stockholders, which is included as part of Exhibit 13 and is incorporated in this Annual Report on Form 10-K. Information as to the principal markets on which the Company's common stock is being traded and quarterly cash dividends is included on the inside back cover of the Company's 1995 Annual Report to Stockholders, which is included as part of Exhibit 13 and is incorporated in this Annual Report on Form 10-K. ITEM 6. SELECTED FINANCIAL DATA The Five Year Summary of Kaufman and Broad Home Corporation and its consolidated subsidiaries for the five-year period ended November 30, 1995 is included on page 24 in the Company's 1995 Annual Report to Stockholders, which is included as part of Exhibit 13 and is incorporated in this Annual Report on Form 10-K. It should be read in conjunction with the consolidated financial statements included in the Company's 1995 Annual Report to Stockholders which are also included as part of Exhibit 13. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's Discussion and Analysis of Financial Condition and Results of Operations of Kaufman and Broad Home Corporation is included on pages 25 through 32 in the Company's 1995 Annual Report to Stockholders, which are included as part of Exhibit 13 and are incorporated in this Annual Report on Form 10-K. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements of Kaufman and Broad Home Corporation are included on pages 33 through 45 in the Company's 1995 Annual Report to Stockholders, which are included as part of Exhibit 13 and are incorporated in this Annual Report on Form 10-K. Reference is made to the Index to Financial Statements on page F-1 herein. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III The Notice of 1996 Annual Meeting of Stockholders and Proxy Statement, filed pursuant to Regulation 14A under the Securities Exchange Act of 1934, incorporated by reference in this Annual Report on Form 10-K pursuant to General Instruction G(3) of Form 10-K, provides the information required under Part III (Items 10, 11, 12 and 13) except for the information regarding the executive officers of the Company, which is included in Part I on page 11 herein. 12 14 PART IV ITEM 14. FINANCIAL STATEMENTS, EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K FINANCIAL STATEMENTS Reference is made to the index set forth on page F-1 of this Annual Report on Form 10-K. EXHIBITS
EXHIBIT NO. DESCRIPTION ------- ------------------------------------------------------------------------ 3.1 Amended Certificate of Incorporation, filed as an exhibit to the Company's 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 Company's 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 Company's 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 Company's Registration Statement No. 33-59516 on Form S-3, is incorporated by reference herein. 3.5 Amended Certificate of Designation of Series B Mandatory Conversion Premium Dividend Preferred Stock, filed as an exhibit to the Company's Registration Statement No. 33-59516 on Form S-3, is incorporated by reference herein. 3.6 By-Laws, filed as an exhibit to the Company's Registration Statement No. 33-30140 on Form S-1, is incorporated by reference herein. 4.1 Amended Certificate of Incorporation, filed as an exhibit to the Company's 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 Company's Registration Statement No. 33-30140 on Form S-1, is incorporated by reference herein. 4.3 By-Laws, filed as an exhibit to the Company's Registration Statement No. 33-30140 on Form S-1, is incorporated by reference herein. 4.4 Rights Agreement between the Company and Bank of America National Trust and Savings Association, successor-by-merger to Security Pacific National Bank, as Rights Agent, dated February 21, 1989, filed as an exhibit to the Company's 1989 Annual Report on Form 10-K, is incorporated by reference herein. 4.5 Indenture relating to 10 3/8% Senior Notes due 1999 between the Company and NBD Bank, N.A., dated September 1, 1992, filed as an exhibit to the Company's Registration Statement No. 33-50732 on Form S-3, is incorporated by reference herein. 4.6 Specimen of 10 3/8% Senior Notes filed as an exhibit to the Company's Current Report on Form 8-K, reporting certain exhibits in connection with the Company's Registration Statement No. 33-50732 on Form S-3 filed by the Company relating to the registration of 10 3/8% Senior Notes due 1999, is incorporated by reference herein. 4.7 Indenture relating to 9 3/8% Senior Subordinated Notes due 2003 between the Company and First National Bank of Boston, dated May 1, 1993, filed as an exhibit to the Company's Registration Statement No. 33-59516 on Form S-3, is incorporated by reference herein.
13 15
EXHIBIT NO. DESCRIPTION ------- ------------------------------------------------------------------------ 4.8 Specimen of 9 3/8% Senior Subordinated Notes filed as an exhibit to the Registration Statement No. 33-59516 on Form S-3 filed by the Company relating to the registration of 9 3/8% Senior Subordinated Notes due 2003, is incorporated by reference herein. 10.1 Employment Contract of Bruce Karatz, dated January 4, 1988, filed as an exhibit to the Company's 1987 Annual Report on Form 10-K, is incorporated by reference herein. 10.2 1986 Stock Option Plan, filed as an exhibit to the Company's Registration Statement No. 33-6471 on Form S-1, is incorporated by reference herein. 10.3 1988 Employee Stock Plan, filed as an exhibit to the definitive Joint Proxy Statement for the Company's 1989 Special Meeting of Shareholders, is incorporated by reference herein. 10.4 Consent Order, Federal Trade Commission Docket No. C-2954, dated February 12, 1979, filed as an exhibit to the Company's Registration Statement No. 33-6471 on Form S-1, is incorporated by reference herein. 10.5 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. 10.6 Directors' Deferred Compensation Plan established effective July 27, 1989, filed as an exhibit to the Company's 1989 Annual Report on Form 10-K, is incorporated by reference herein. 10.7 Settlement with Federal Trade Commission of June 27, 1991, filed as an exhibit to the Company's Current Report on Form 8-K, dated June 28, 1991, is incorporated by reference herein. 10.8 Indenture relating to 10 3/8% Senior Notes due 1999 between the Company and NBD Bank, N.A., dated September 1, 1992, filed as an exhibit to the Company's Registration Statement No. 33-50732 on Form S-3, is incorporated by reference herein. 10.9 Indenture relating to 9 3/8% Senior Subordinated Notes due 2003 between the Company and First National Bank of Boston, dated May 1, 1993, filed as an exhibit to the Company's Registration Statement No. 33-59516 on Form S-3, is incorporated by reference herein. 10.10 Employment Contract of Roger B. Menard, dated April 6, 1992, filed as an exhibit to the Company's 1992 Annual Report on Form 10-K, is incorporated by reference herein. 10.11 1993 Directors' Stock Plan, approved April 1, 1993, filed as an exhibit to the definitive Proxy Statement for the Company's 1993 Annual Meeting of Shareholders, is incorporated by reference herein. 10.12 Amendments to the Kaufman and Broad Home Corporation 1988 Employee Stock Plan dated January 27, 1994, filed as an exhibit to the Company's 1994 Annual Report on Form 10-K, is incorporated by reference herein. 10.13 Employment Agreement of Albert Z. Praw, dated February 20, 1994, filed as an exhibit to the Company's 1994 Annual Report on Form 10-K, is incorporated by reference herein. 10.14 Employment Agreement of Michael F. Henn, dated June 7, 1994, filed as an exhibit to the Company's 1994 Annual Report on Form 10-K, is incorporated by reference herein. 10.15 Third Amended and Restated Loan Agreement among the Company, Bank of America National Trust and Savings Association, and the First National Bank of Chicago, as managing agents, and the banks listed therein, dated November 21, 1994, filed as an exhibit to the Company's 1994 Annual Report on Form 10-K, is incorporated by reference herein. 10.16 Letter dated February 16, 1995 amending Employment Contract of Bruce Karatz, filed as an exhibit to the Company's 1994 Annual Report on Form 10-K, is incorporated by reference herein.
14 16
EXHIBIT NO. DESCRIPTION ------- ------------------------------------------------------------------------ 10.17 Letter dated February 27, 1995 amending Employment Contract of Roger B. Menard, filed as an exhibit to the Company's 1994 Annual Report on Form 10-K, is incorporated by reference herein. 10.18 Kaufman and Broad Home Corporation Performance-Based Incentive Plan for Senior Management, approved by Stockholders on March 23, 1995. 10.19 Form of Stock Option Agreement under Kaufman and Broad Home Corporation Performance-Based Incentive Plan for Senior Management. 10.20 Employment Contract of Bruce Karatz, dated December 1, 1995. 10.21 Kaufman and Broad Home Corporation Directors' Restricted Stock Plan. 10.22 Kaufman and Broad Home Corporation Directors' Legacy Program. 11 Statement of Computation of Per Share Earnings. 13 Pages 24 through 45 and the inside back cover of the Company's 1995 Annual Report to Stockholders. 22 Subsidiaries of the Company. 24 Consent of Independent Auditors. 27 Financial Data Schedule.
FINANCIAL STATEMENT SCHEDULES Financial statement schedules have been omitted because they are not applicable or the required information is shown in the consolidated financial statements and notes thereto. REPORTS ON FORM 8-K No reports on Form 8-K were filed during the fourth quarter of 1995. 15 17 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. KAUFMAN AND BROAD HOME CORPORATION By: MICHAEL F. HENN ------------------------------------- Michael F. Henn Senior Vice President and Chief Financial Officer Dated: February 22, 1996 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:
SIGNATURE TITLE DATE --------- ----- ---- BRUCE KARATZ Chairman, President February 22, 1996 - ---------------------------------------------- and Chief Executive Bruce Karatz Officer MICHAEL F. HENN Senior Vice President February 22, 1996 - ---------------------------------------------- and Chief Financial Officer Michael F. Henn RONALD W. BURKLE Director February 22, 1996 - --------------------------------------------- Ronald W. Burkle JANE EVANS Director February 22, 1996 - --------------------------------------------- Jane Evans DR. RAY R. IRANI Director February 22, 1996 - --------------------------------------------- Dr. Ray R. Irani ANTOINE JEANCOURT-GALIGNANI Director February 22, 1996 - --------------------------------------------- Antoine Jeancourt-Galignani JAMES A. JOHNSON Director February 22, 1996 - --------------------------------------------- James A. Johnson GUY NAFILYAN Director February 22, 1996 - --------------------------------------------- Guy Nafilyan LUIS G. NOGALES Director February 22, 1996 - --------------------------------------------- Luis G. Nogales LESTER POLLACK Director February 22, 1996 - --------------------------------------------- Lester Pollack SANFORD C. SIGOLOFF Director February 22, 1996 - --------------------------------------------- Sanford C. Sigoloff
16 18 KAUFMAN AND BROAD HOME CORPORATION AND CONSOLIDATED SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS The consolidated financial statements, together with the report thereon of Ernst & Young LLP, dated January 4, 1996, except as to Note 13, as to which the date is January 22, 1996, all appearing on pages 33 through 45 in the 1995 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 1995 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 the Company's 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. ------------------------
PAGE NO. IN ANNUAL REPORT TO SHAREHOLDERS ----------------- KAUFMAN AND BROAD HOME CORPORATION Report of Independent Auditors............................................ 45 Consolidated Statements of Income for the years ended November 30, 1995, 1994 and 1993.......................................................... 33 Consolidated Balance Sheets as of November 30, 1995 and 1994.............. 34 Consolidated Statements of Stockholders' Equity for the years ended November 30, 1995, 1994 and 1993....................................... 35 Consolidated Statements of Cash Flows for the years ended November 30, 1995, 1994 and 1993.................................................... 36 Notes to Consolidated Financial Statements................................ 37 through 44
The following pages represent pages 24 through 45 and the inside back cover of the 1995 Annual Report to Stockholders of Kaufman and Broad Home Corporation, and include the Five Year Summary, Management's Discussion and Analysis of Financial Condition and Results of Operations, the Consolidated Financial Statements and related notes thereto, the Report of Independent Auditors, Stockholder Information and Quarterly Stock Prices. These pages were filed with the Securities and Exchange Commission as Exhibit 13 to this Annual Report on Form 10-K. F-1 19 SELECTED FINANCIAL INFORMATION
Years ended November 30, - ------------------------------------------------------------------------------------------------------------------------------ In thousands, except per share amounts 1995 1994 1993 1992 1991 ============================================================================================================================== CONSTRUCTION: Revenues $1,366,866 $1,307,570 $1,199,776 $1,052,525 $1,176,386 Operating income 65,531 88,323 86,609 58,897 76,037 Total assets 1,269,208 1,167,136 983,442 987,104 916,002 Mortgages and notes payable 639,575 565,020 313,357 258,147 230,580 =================================================================== MORTGAGE BANKING: Revenues $ 29,660 $ 28,701 $ 38,078 $ 41,643 $ 44,609 Operating income 9,348 6,003 7,534 4,556 4,436 Total assets 304,971 287,324 355,936 444,656 457,021 Notes payable 151,000 125,000 138,500 143,700 84,000 Collateralized mortgage obligations 84,764 96,731 144,143 222,948 300,894 =================================================================== CONSOLIDATED: Revenues $1,396,526 $1,336,271 $1,237,854 $1,094,168 $1,220,995 Operating income 74,879 94,326 94,143 63,453 80,473 Net income 29,059 46,550 39,921 28,198 26,520 Total assets 1,574,179 1,454,460 1,339,378 1,431,760 1,373,023 Mortgages and notes payable 790,575 690,020 451,857 401,847 314,580 Collateralized mortgage obligations 84,764 96,731 144,143 222,948 300,894 Convertible subordinated notes 162,022 149,798 Stockholders' equity 415,478 404,747 444,340 318,433 258,106 =================================================================== EARNINGS PER SHARE $ .73 $ 1.16 $ .96 $ .78 $ .80 CASH DIVIDENDS PER COMMON SHARE .30 .30 .30 .30 .30 ==============================================================================================================================
24 20 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS OVERVIEW Revenues are generated from the Company's housing operations in the western United States, France and Canada; commercial development activities in France; and domestic mortgage banking operations. The Company's start-up housing operation in Mexico has yet to produce revenues. Operating results in 1995 were adversely affected by weak housing markets in California and France as well as severe weather conditions in California in early 1995. Beyond these markets, the Company continued its profitable expansion of domestic housing operations in five other western states. Divisions in New Mexico and Utah -- the Company's fourth and fifth entries into new U.S. markets in three years -- delivered their first homes in 1995, contributing to a 115.8% year-over-year increase in domestic housing deliveries from operations outside of California. During 1995, the Company continued strategic efforts to reduce overhead costs and improve operating efficiency. As a result, gross margin and selling, general and administrative expense ratios improved in each of the last three quarters of the year. Total revenues increased to $1.40 billion in 1995, up 4.5% from $1.34 billion in 1994, which had increased 8.0% from revenues of $1.24 billion in 1993. The increase in 1995 reflected higher housing revenues, partially offset by a decline in revenues from land sales. In 1994, revenues rose due to higher housing revenues, partially offset by a significant decline in French commercial development revenues. Included in total revenues are mortgage banking revenues of $29.7 million in 1995, $28.7 million in 1994 and $38.1 million in 1993. Net income decreased 37.6% in 1995 to $29.1 million from $46.6 million in 1994, which had increased 16.6% from the prior year's $39.9 million. Net income fell in 1995 due to lower earnings from housing operations, as a decline in earnings from California operations, primarily stemming from continued weakness in the state's housing market, was only partially offset by an increase in earnings from domestic operations outside the state. In 1994, the improvement in net income reflected increased housing volume in the United States and improved results from French housing operations compared to the year earlier. Earnings per share decreased to $.73 in 1995, reflecting lower net income. Earnings per share increased to $1.16 in 1994 from $.96 in 1993 on higher earnings and a lower average number of shares outstanding. The Company's buyback of special common stock and warrants in December 1993 and its exchange and cancellation of the remaining shares of special common stock on various dates throughout 1994 reduced the number of shares outstanding for 1994. CONSTRUCTION REVENUES Construction revenues increased in 1995 to $1.37 billion from $1.31 billion in 1994, which had increased from $1.20 billion in 1993. The increase in 1995 primarily reflected higher domestic housing revenues, as a decline in California housing revenues was more than offset by increased housing revenues from other U.S. operations (including the Company's first deliveries in New Mexico and Utah). In 1994, revenues improved primarily due to increased domestic housing revenues, including initial contributions from the Company's then newly established divisions in Arizona and Colorado, partially offset by a reduction in French commercial revenues. Housing revenues totaled $1.33 billion in 1995, $1.26 billion in 1994 and $1.10 billion in 1993. The Company's 1995 increase in housing revenues reflected a 4.7% increase in the Company's average selling price as well as a modest increase in unit volume. In 1994, housing revenues increased on higher unit volume while the average selling price decreased slightly. California housing operations accounted for 72.3% of housing revenues in 1995, down from 82.0% in 1994, due to the Company's expansion into New Mexico and Utah during the year, combined with the maturation of the Nevada, Arizona and Colorado divisions and the still-stagnant economic conditions in California. California housing revenues were $959.8 million in 1995, down from $1.03 billion in 1994, while other U.S. housing revenues increased to $245.4 million in 1995 from $95.8 million in 1994. In 1994, the Company's California-generated revenues as a percentage of total housing revenues decreased from 85.4% in 1993 primarily due to the Company's diversification of its domestic housing business to Nevada, Arizona, and Colorado. Housing deliveries increased by 33 units to 7,857 units in 1995, exceeding the previous Company-wide record of 7,824 units set in 1994. Deliveries in the United States increased 2.2%, more than offsetting a 16.2% decline in French deliveries. The increase in domestic unit volume reflected continued expansion outside of California, with non-California deliveries increasing to 1,800 units in 1995 from 834 units in 1994, partially offset by a decline in deliveries from California's soft housing market. California deliveries, which decreased 13.0% to 5,430 units in 1995 from 6,238 units in 1994, were severely hampered by poor weather early in the year, the effects of which carried into the second quarter. French unit volume remained depressed by that country's adverse economic climate as well as the deferral of home purchases by many buyers anticipating new government incentive programs which did not take effect until October 1995. 25 21 RESIDENTIAL QUARTERLY UNIT AND BACKLOG DATA
Unit Other Deliveries California United States France Canada Total ============================================================================================================================ 1995 First 972 293 102 1,367 Second 1,295 446 110 24 1,875 Third 1,454 511 133 13 2,111 Fourth 1,709 550 229 16 2,504 ------------------------------------------------------------------------- Total 5,430 1,800 574 53 7,857 ========================================================================= 1994 First 1,281 136 110 12 1,539 Second 1,560 245 139 10 1,954 Third 1,694 194 176 18 2,082 Fourth 1,703 259 260 27 2,249 ------------------------------------------------------------------------- Total 6,238 834 685 67 7,824 =========================================================================
Net Other Orders California United States France Canada Total ============================================================================================================================ 1995 First 1,101 374 152 9 1,636 Second 1,397 698 134 12 2,241 Third 1,588 572 138 13 2,311 Fourth 1,342 503 210 10 2,065 ------------------------------------------------------------------------- Total 5,428 2,147 634 44 8,253 ========================================================================= 1994 First 1,277 227 171 9 1,684 Second 1,642 180 194 19 2,035 Third 1,683 241 137 17 2,078 Fourth 1,494 248 215 27 1,984 ------------------------------------------------------------------------- Total 6,096 896 717 72 7,781 =========================================================================
Ending Backlog-- Other Units California United States France Canada Total ============================================================================================================================ 1995 First 757 280 219 29 1,285 Second 859 532 243 17 1,651 Third 993 593 248 17 1,851 Fourth 626 546 229 11 1,412 ======================================================================= 1994 First 766 228 198 12 1,204 Second 848 163 253 21 1,285 Third 837 210 214 20 1,281 Fourth 628 199 169 20 1,016 =======================================================================
Ending Backlog-- Other Value California United States France Canada Total ============================================================================================================================ In thousands 1995 First $125,870 $38,971 $44,820 $2,958 $212,619 Second 149,796 75,455 48,658 1,666 275,575 Third 191,182 86,096 54,560 1,683 333,521 Fourth 114,207 78,436 50,044 1,122 243,809 ============================================================================ 1994 First $125,045 $22,704 $32,875 $948 $181,572 Second 132,917 18,428 45,113 2,079 198,537 Third 137,289 27,548 41,546 2,000 208,383 Fourth 104,711 26,743 30,075 2,060 163,589 ============================================================================
Housing deliveries increased in 1994 from 6,764 units in 1993, with U.S. deliveries up 18.8% and French deliveries up 4.3%. The improvement in domestic unit volume reflected the Company's expansion in the western United States. In France, higher unit volume resulted from increased market demand for the Company's entry-level products in a modestly improved, but still weak French economy. The Company's average new home price increased 4.7% to $168,900 in 1995 from $161,300 in 1994, which had decreased .5% from $162,100 in 1993. The 1995 increase was due to higher average selling prices in both the United States and France, reflecting a shift in product mix to higher priced, urban in-fill locations and first time move-up sales. In 1994, a modest decline in the average selling price was primarily due to a reduction in the Company's domestic average selling price. In California, the Company's average selling price rose 6.6% to $176,800 in 1995 from $165,900 in 1994 which increased 1.7% from $163,100 in 1993. The increase in both years reflected a shift in mix toward higher-priced homes. Average selling prices in other U.S. markets were $136,300 in 1995, $114,900 in 1994 and $109,300 in 1993. These increases were the result of the Company's entry into new, higher-priced states in 1995 and 1994. Average selling prices in France have also fluctuated during the past two years with changes in product mix. The Company's average selling price in France increased to $203,700 in 1995 from $182,300 in 1994, which had decreased from $187,800 in 1993. Revenues from the development of commercial buildings, all of which are located in metropolitan Paris, totaled $20.5 million in 1995, $17.4 million in 1994 and $94.2 million in 1993. Although commercial development revenues increased modestly in 1995, the Company does not expect a significant increase from these levels in 1996 as high vacancy rates are expected to persist in the French commercial market. In 1994, the significant decrease in commercial revenues primarily reflected the Company's completion of large projects in prior years. Land sale revenues totaled $18.2 million in 1995, $27.2 million in 1994 and $8.0 million in 1993. Land sale revenues in these periods have fluctuated based on the Company's decisions to maintain or decrease its land ownership position in certain markets; 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's housing divisions; and prevailing market conditions. OPERATING INCOME Operating income decreased by $22.8 million to $65.5 million in 1995 from $88.3 million in 1994. Operating income, net of minority interests in pretax income of consol- 26 22 idated joint ventures, decreased by $22.5 million to $64.9 million in 1995 from $87.4 million in 1994. This decline reflected lower gross profits from commercial activities and land sales as well as an increase in selling, general and administrative expenses. Housing gross profits in 1995 were essentially flat compared to 1994 on slightly higher unit volume offset by a lower housing gross margin. Gross profits (excluding profits from land sales) in 1995 decreased by $8.5 million to $242.2 million from $250.7 million in 1994, largely due to lower gross profits from French commercial operations resulting from a lower commercial gross profit margin. As a percentage of related revenues, the Company's gross profit margin (excluding profits from land sales) was 18.0% in 1995, down from 19.6% in the prior year. The Company's housing gross margin decreased to 17.9% in 1995 from 19.0% in the prior year, primarily reflecting a lower gross margin in California. The lower gross margin from California operations stemmed from the severe and prolonged winter rain storms in early 1995 which reduced sales volumes and slowed production and from the large sales incentives which continued to be required throughout the year to stimulate buying activity in a generally stagnant market. Higher mortgage interest rates in early 1995 also depressed Company performance. Despite these obstacles, the Company's California housing gross margin showed steady improvement from the first through the fourth quarters of 1995 as a rising proportion of deliveries was generated from more recently opened higher-margin communities. Assuming market conditions in California do not deteriorate further, the Company expects its California gross margin to continue to improve in 1996 on a year-over-year basis as strategies to enhance profitability implemented during the course of 1995 are anticipated to have a favorable impact on operating results. Company-wide profits from land sales decreased by $3.2 million to $5.3 million in 1995 from $8.5 million in 1994 with profit margins from these sales also down slightly. Selling, general and administrative expenses increased by $11.0 million in 1995. As a percentage of housing revenues, to which these expenses are most closely correlated, selling, general and administrative expenses increased to 13.7% in 1995 from 13.5% in 1994. Selling, general and administrative expenses rose mainly due to the continued expansion of the Company's domestic operations outside of California and increased financing incentives and sales commissions. These increases were partially offset by ongoing cost reduction programs which contributed to an improving expense ratio in each of the last three quarters of 1995. In the first quarter of 1995, selling, general and administrative expenses were 14.6% of housing revenues, gradually declining to 13.3% by the fourth quarter. With benefits of these cost-cutting initiatives anticipated to continue, and assuming market conditions in the Company's principal markets do not deteriorate further, the Company believes its 1996 selling, general and administrative expense ratio will be lower than the 1995 level. In 1994, operating income increased slightly by $1.7 million to $88.3 million from $86.6 million in 1993. Operating income, net of minority interests, increased by $11.0 million to $87.4 million in 1994 from $76.5 million in 1993. This improvement reflected higher gross profits from housing sales and land sales, partially offset by higher selling, general and administrative expenses. Gross profits (excluding profits from land sales) rose by $22.6 million to $250.7 million in 1994 from $228.1 million in 1993, due to higher housing unit volume in the United States, partially offset by a decline in commercial development gross profits. As a percentage of related revenues, the Company's gross profit margin (excluding profits from land sales) was 19.6% in 1994, up from 19.1% a year earlier, on a higher residential gross margin and, to a lesser extent, a higher commercial gross margin. The Company's housing gross margin increased to 19.0% in 1994 from 18.4% in 1993 primarily reflecting gross margin improvement in France. The French housing gross margin improved in 1994 largely due to a lower land-cost basis and a modest strengthening of the French economy. Company-wide profits from land sales increased to $8.5 million in 1994 from $1.1 million in 1993. Selling, general and administrative expenses increased by $28.4 million in 1994, as the Company expanded its operations in the western United States and commenced operations in Mexico. In addition, higher marketing and advertising costs and sales incentives were required in the latter half of 1994 to maintain sales momentum in the face of persistent mortgage rate increases triggered by actions of the Federal Reserve Board. These actions caused the average thirty-year fixed rate mortgage to increase by more than two percentage points during the year. In France, the Company continued to reduce selling, general and administrative expenses to levels commensurate with its significantly reduced commercial operations. Company-wide selling, general and administrative expenses as a percentage of housing revenues increased to 13.5% in 1994 from 13.0% in 1993. INTEREST INCOME AND EXPENSE Interest income, which is generated from mortgages receivable, principally from land sales, and from short-term investments, amounted to $2.1 million in 1995, $2.0 million in 1994 and $3.5 million in 1993. Interest income remained stable in 1995 compared to 1994 reflecting little change in the interest bearing average balances of short- 27 23 term investments and mortgages receivable. The reduction in interest income in 1994 from 1993 reflected lower average balances of short-term investments and mortgages receivable and the fluctuation in interest rates. Interest expense results principally from borrowings to finance land purchases, housing inventory, and other operating and capital needs. In 1995, interest expense, net of amounts capitalized, increased to $27.5 million from $17.8 million in 1994, reflecting higher average indebtedness, a higher overall effective borrowing rate than in 1994 and a lower percentage of interest capitalized. The Company's average debt level increased as inventory levels grew due to continued expansion. In addition, the Company's effective borrowing rate rose as a result of interest rate increases implemented by the Federal Reserve Board throughout 1994 and into early 1995. In 1994, interest expense, net of amounts capitalized, increased to $17.8 million from $16.8 million in the prior year, reflecting higher average indebtedness and a higher overall effective borrowing rate than in 1993. The average debt level rose as the Company increased inventory levels in conjunction with continued domestic expansion and executed the buyback of special common stock and warrants in December 1993. MINORITY INTERESTS IN PRETAX INCOME OF CONSOLIDATED JOINT VENTURES The Company conducts a portion of both its residential and commercial development activities through majority-owned partnerships, primarily in France, which are fully consolidated in the accompanying financial statements. As a result, operating income has been reduced by minority interests in the pretax income of these partnerships of $.6 million in 1995, $.9 million in 1994 and $10.2 million in 1993. Minority interests decreased both years on declining profit contributions from the Company's consolidated commercial development projects. Minority interests are expected to remain at low levels in 1996, consistent with the Company's reduced level of development activities in a generally depressed French commercial market. EQUITY IN PRETAX LOSS OF UNCONSOLIDATED JOINT VENTURES The Company's unconsolidated joint venture activities, located in the Los Angeles, Paris and Toronto metropolitan areas, posted combined revenues of $33.9 million in 1995, $82.7 million in 1994 and $6.4 million in 1993. Of these amounts, revenues from commercial activities in France accounted for $5.9 million in 1995, $34.0 million in 1994 and $2.6 million in 1993. These unconsolidated joint ventures generated combined pretax losses of $20.5 million in 1995, $35.7 million in 1994 and $30.8 million in 1993. The losses in 1995 and 1994 primarily consisted of selling, general, administrative and interest expenses from a single French multi-family residential project, as well as reserves taken in 1995 on a commercial development project. The loss in 1993 primarily resulted from selling, general, administrative and interest expenses incurred on a large project under construction prior to the recognition of related revenues. The Company's share of pretax losses from these joint ventures totaled $3.5 million in 1995, $3.7 million in 1994, and $6.3 million in 1993. These amounts have declined over the three year period due to the combined effect of changes in joint venture activity and the Company's proportionate share of related losses, as well as the amount and timing of management fees recognized. MORTGAGE BANKING INTEREST INCOME AND EXPENSE The Company's mortgage banking operations principally consist of providing financing to purchasers of homes sold by the Company's domestic housing operations through the origination of residential mortgages. The mortgage banking operations also realize revenues from the sale of such mortgages and related servicing rights to outside financial institutions. Prior to 1989, substantially all such mortgages were pledged for collateralized mortgage obligations. Accordingly, interest income is earned primarily from mortgage-backed securities held for long-term investment as collateral, while interest expense results mainly from the associated collateralized mortgage obligations. Interest income decreased to $15.6 million in 1995 from $17.0 million in 1994, and $24.2 million in 1993, while interest expense also declined to $14.8 million in 1995 from $17.2 million in 1994, and $25.1 million in 1993. These amounts decreased primarily due to the declining balances of outstanding mortgage-backed securities and related collateralized mortgage obligations, stemming from both regularly scheduled, monthly principal amortization and the prepayment of mortgage collateral. These balances, and the related interest income and expense, will continue to decline, as the Company's practice of participating in collateralized mortgage financings was discontinued in 1988 due to market conditions and tax law changes. Combined interest income and expense resulted in net interest income of $.8 million in 1995 and net interest expense of $.2 million in 1994 and $.9 million in 1993. 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, totaled $14.1 million in 1995, $11.7 million in 1994 and 28 24 $13.9 million in 1993. The increase in these revenues in 1995 reflected higher gains on the sales of mortgages and servicing rights due to a higher volume of mortgage originations -- resulting from higher housing unit volume in the United States -- and a more favorable mix of fixed to variable rate loans. In 1994, the decrease in other mortgage banking revenues primarily reflected lower gains on the sales of both servicing rights and mortgages. GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses for mortgage banking operations amounted to $5.5 million in 1995 and 1994, and $5.4 million in 1993. Despite increased mortgage production volume in 1995, general and administrative expenses remained flat compared to 1994 levels due to the Company's successful cost containment efforts which extended to lending operations. General and administrative expenses increased in 1994 largely due to higher mortgage production levels, which rose in line with domestic unit deliveries, and the opening of new branches as part of the Company's domestic expansion. INCOME TAXES The Company's income tax expense totaled $16.4 million in 1995, $27.3 million in 1994 and $24.4 million in 1993. These amounts represented effective income tax rates of approximately 36.1% in 1995, 37.0% in 1994 and 37.9% in 1993. The effective tax rate declined over the two-year period as a result of greater utilization of affordable housing investment 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 affordable housing credits. In 1993, the Company adopted the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." The impact of the adoption on the Company's financial position and results of operations was not significant. 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. In 1995, operating, investing and financing activities used net cash of $11.4 million; in 1994, these activities used net cash of $20.3 million. Operating activities in 1995 used $52.9 million, while 1994 operating activities used $111.1 million. The Company's uses of cash in 1995 included a net investment of $80.3 million in inventories (excluding $36.1 million of inventories acquired through seller financing), an increase of $14.7 million in receivables and $18.8 million of other operating uses. The use of cash was partially offset by earnings of $29.1 million, various noncash items deducted from net income and a $26.7 million increase in accounts payable, accrued expenses and other liabilities. Consistent with its continued domestic expansion, inventories increased, primarily in the United States, where they rose 11.6% to $901.4 million at November 30, 1995 from $807.5 million at year-end 1994. In 1994, the use of operating cash included net investments of $137.6 million in inventories (excluding $27.1 million of inventories acquired through seller financing) and $26.3 million in payments to reduce accounts payable, accrued expenses and other liabilities. The use of cash was partially offset by earnings of $46.6 million and various noncash items deducted from net income. In 1994, inventories substantially increased, principally in the United States, rising to $807.5 million at November 30, 1994 from $633.0 million at year-end 1993, as the Company accelerated its domestic expansion, while sales rates slowed in the latter half of the year. Cash provided by investing activities totaled $10.0 million in 1995 and $37.5 million in 1994, primarily from $13.8 million and $49.7 million, respectively, in proceeds from mortgage-backed securities paid off during the year within the mortgage banking operations. These proceeds were used largely to pay down the collateralized mortgage obligations for which the mortgage-backed securities had served as collateral. Financing activities in 1995 and 1994 resulted in a net cash inflow of $31.5 million and $53.3 million, respectively. In 1995, cash was provided by $64.3 million in net proceeds from borrowings. These cash inflows were partially offset by payments on collateralized mortgage obligations of $13.3 million, the funds for which were provided by receipts on mortgage-backed securities; and $19.6 million of cash dividend payments. The Company's debt-to-capital ratio increased to 60.6% in 1995 from 58.3% in 1994 reflecting additional financing required for the higher level of inventories resulting from domestic expansion. Financing activities in 1994 provided $211.0 million in net proceeds from borrowings, partially offset by the purchase of the Company's special common stock and warrants for $73.7 million; payments on collateralized mortgage obligations of $49.3 million, the funds for which were provided by receipts on mortgage-backed securities; and $19.6 million of cash dividend payments. In order to simplify its capital structure, the Company commenced a tender offer in 1993 to purchase all of the 5.1 29 25 million outstanding shares of its special common stock at a price of $19 per share. The offer expired on December 7, 1993 with 2.3 million shares tendered. In addition, on December 23, 1993, the Company purchased the remaining 2.4 million warrants to purchase shares of special common stock at a price equal to the tender offer price per share less the $6.96 per warrant exercise price. Subsequent to the expiration of the tender offer, the remaining 2.8 million outstanding shares of special common stock were exchanged by the Company at a ratio of .95 shares of common stock for each share of special common stock on various dates in 1994. There were no outstanding shares of special common stock at November 30, 1994. The purchase of special common stock and warrants was largely responsible for an increase in the Company's debt-to-capital ratio to 58.3% in 1994 from 41.4% in 1993. External sources of financing for the Company's construction activities include its domestic unsecured revolving 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 Company's future use, if required, and are centered mainly in its domestic unsecured revolving credit facility. Terms under this facility, as amended in November 1994, provide for a $500 million commitment with a $200 million sublimit for the Company's mortgage banking operations through December 31, 1997. As of November 30, 1995, there was $197.0 million available under the revolving credit facility for the Company's future use. In addition, under the Company's French unsecured financing agreements, $81.3 million was available in the aggregate at November 30, 1995. Depending upon available terms, the Company also finances certain land acquisitions with borrowings from land sellers and other third parties. At November 30, 1995, the Company had outstanding seller-financed notes payable of $43.7 million secured primarily by the underlying property which had a carrying value of $73.3 million. The Company uses 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 carefully managing the timing of the production process. The Company's inventories are geographically diverse and primarily located in desirable areas within targeted growth markets principally oriented toward entry-level purchasers. In 1995, the Company focused on continued expansion of its domestic operations outside of California, while becoming more selective with regard to investment in California where the economy remains weak. During 1995, the Company implemented stricter standards for assessing all proposed land purchases based in part upon discounted after tax cash flow internal rate of return requirements. In addition, all operating divisions are measured for the first time based upon overall return on investment. Among other things, this focus will likely result in reductions in new land purchases and inventory investment in California during 1996 as a step toward improving the Company's overall return on equity over time. Cash flow available from reduced California investment will be used to fund the Company's expansion into other western states as well as reduce overall leverage as measured by the ratio of debt to total capital. The principal sources of liquidity for the Company's 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 $200 million sublimit within the Company's $500 million revolving credit facility and a $120 million asset-backed commercial paper facility. The $200 million sublimit on the revolving credit facility is available to fund mortgage banking operations only to the extent that borrowings under the agreement for construction operations do not exceed $300 million. Debt service on the Company's 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 believes it has adequate resources and sufficient credit line facilities to satisfy its current and reasonably anticipated future requirements for funds to acquire capital assets and land, to construct homes, to fund its mortgage banking operations, and to meet other needs of its business, both on a short and long-term basis. NEW ACCOUNTING PRONOUNCEMENT In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. This new pronouncement is effective for fiscal years beginning after December 15, 1995. 30 26 The Company plans to adopt the provisions of this pronouncement during 1996. The Company has not analyzed the impact of this pronouncement on the financial statements, although adoption may result in a non-cash charge to earnings which may have a material effect on the Company's financial position or results of operations. OUTLOOK The Company's domestic operating results in 1995 reflected its ongoing expansion outside of California and included the Company's first housing deliveries from new divisions based in Albuquerque, New Mexico and Salt Lake City, Utah. Operations outside of California have generally produced successful results as evidenced by rapidly growing contributions from the Company's five non-California housing divisions. These operations produced 24.9% of domestic deliveries in 1995, up sharply from 11.8% in 1994. The Company expects to further expand and re-position its domestic operations in 1996 through more selective investment in California, where the housing market remains soft, as well as continued investment in other western states where the Company has developed a recent track record of profitable growth. Overall, the Company believes domestic operating results will improve in 1996 as its newer divisions develop market positions and existing operations further penetrate their markets. Nonetheless, significant challenges remain within the domestic operating environment. These include a continuing weak housing market in California, where approximately two-thirds of the Company's 1995 deliveries were generated, and a lack of urgency among potential home buyers in many of the Company's markets. The Company is cautiously optimistic that economic conditions for housing in California will improve based on more favorable general economic and employment forecasts; however, in view of the last five years of adverse conditions, any California housing recovery will likely be slow to develop. In addition, the timing of any such improvements in California's new housing market remains uncertain. To better position itself domestically, particularly in California, the Company implemented a series of initiatives in 1995 designed to improve overall domestic profitability in 1996 and beyond. These initiatives, which were intended to improve gross margins and reduce overhead expenses, included a greater focus on maximizing rates of return in lieu of maximizing market share, more selective investment in land in California and greater emphasis on the sale of high-margin amenities. The Company also consolidated several divisions in California during 1995 and reduced staffing levels where appropriate. Other initiatives involved the continued simplification and standardization of home designs to lower construction costs, better regulation of quarterly production cycles and benchmarking of overhead costs. In general, the Company intends to maintain its rigorous pursuit of greater operating efficiencies, a leaner cost structure and an emphasis on return-on-investment concepts in assessing new investments. The initial results of these efforts were apparent in the Company's improving quarterly gross margins and expense ratios as the 1995 year progressed, trends which the Company believes will continue during 1996. The French housing market proved difficult in 1995 as the economy was plagued by recession and high unemployment during an economically disruptive election year, while home buyers deferred purchases through much of the year in anticipation of a key government support program to assist home buyers introduced in October 1995. Although the general uncertainty surrounding the direction of the French economy continued into early 1996, the installation of a new French government in mid-1995 followed by the implementation of the new government program could improve the Company's housing sales volumes and housing profitability in Paris during 1996. French commercial activities are likely to remain at or below 1995 levels as the market continues to absorb existing properties in a period of high vacancy rates. Notwithstanding the possibilities of a more favorable economic climate, generally weak market conditions may persist in France throughout 1996 and the Company remains cautious in its business outlook. In Mexico, where a start-up operation has yet to deliver its first homes, the Company continues to closely monitor the unsettled economic environment. The new home market in Mexico remains seriously hampered by the continuing decline in value of the peso and the economic recession this devaluation has created. These events have slowed an already complex regulatory process and heightened consumer concerns about new home purchases. In spite of these turbulent conditions, demand for housing in Mexico remains substantial and the Company has begun to generate a modest level of orders which it believes should result in 1996 deliveries. Nevertheless, the Company remains cautious regarding these operations and continues to reassess its level of activity in Mexico and the desirability of expanding its market presence there. The Company continues to benefit in all of its operations from the strength of its capital position, which has allowed it to finance expansion, re-engineer product lines and diversify into strong new home building markets. The Company's strong capital position has also helped enable it to maintain overall profitability during troubled economic times in California and France, where the lingering effects of severe recessions continue 31 27 to inhibit demand for affordable new housing. The Company believes it is particularly well-positioned to capitalize on any sustained improvement in the economies of California and France and has established strategies to help maximize future performance even under continued challenging economic conditions. At November 30, 1995, the Company had outstanding sales contracts of 1,412 units in residential backlog, representing aggregate future revenues of approximately $243.8 million. Year-end 1995 backlog levels increased from the 1,016 units in residential backlog representing aggregate future revenues of $163.6 million at year-end 1994. Substantially all homes included in backlog are expected to be delivered during 1996. However, cancellations could occur, particularly if market conditions deteriorate or interest rates rise, thereby decreasing backlog and related future revenues. In the United States, the Company's residential backlog at November 30, 1995 totaled 1,172 units, up 41.7% from 827 units at year-end 1994. This increase was primarily attributable to domestic operations outside of California. In California, residential unit backlog was essentially flat at 626 units compared to 628 units a year earlier, while non-California backlog rose 174.4% to 546 units at November 30, 1995 from 199 units at November 30, 1994. Net orders for non-California U.S. operations increased to 503 units in the fourth quarter of 1995, from 248 units in the year-earlier quarter. Net orders in California decreased 10.2% during the same period. Since year end, net order rates have improved sharply in California, up 17.7% in the first two months of 1996 compared to the same period of 1995. Total domestic net orders for the first two months of 1996 increased 25.8% versus the same period of 1995. In France, the residential backlog at November 30, 1995 totaled 229 units, up 35.5% from 169 units at year-end 1994. Net orders in the fourth quarter of 1995 were comparable to the year-earlier period at 210 versus 215 units. For the year, however, net orders decreased 11.6% to 634 units from 717 units in 1994. In the first two months of 1996, net orders in France declined 35.2% compared to the same period a year ago. Given the decreased level of the Company's commercial development activities, the backlog associated with these operations declined to a value of approximately $10.8 million at November 30, 1995 from $31.1 million at year-end 1994. In light of higher year-end backlog levels, improved recent domestic order trends and the maturation of the Company's non-California domestic divisions, the Company currently anticipates higher overall delivery volumes for full year 1996 when compared to full year 1995. Assuming stable or improving business conditions, interest rates and consumer confidence in its major markets, the Company believes an anticipated increase in delivery volumes coupled with the ongoing benefits of its strategic profitability and cost control initiatives will result in improved operating income and earnings per share in 1996 compared to 1995. POTENTIAL ACQUISITION On January 22, 1996, the Company entered into a definitive agreement to acquire San Antonio, Texas-based Rayco, Ltd. and certain affiliates for approximately $110 million, comprised of $80 million cash and the assumption of $30 million of debt. Rayco, Ltd., San Antonio's largest single-family homebuilder, currently commands approximately a 45% market share. For the year ended December 31, 1995, Rayco, Ltd. delivered 2,585 homes, generating revenues of approximately $235 million. Although the transaction remains subject to certain conditions, completion of this acquisition is expected to occur on March 1, 1996. If the acquisition is consummated as anticipated, the results of Rayco Ltd.'s operations will be included in the Company's consolidated financial statements from the date of acquisition, with the Company expecting the transaction to be accretive to earnings per share beginning in the second quarter. The acquisition of Rayco, Ltd. represents a major stride forward in the Company's expansion strategy -- Texas would be the Company's sixth non-California U.S. market. San Antonio is the ninth largest city in the United States and has ranked among the top ten cities in the nation in both job creation and economic growth for the past several years. IMPACT OF INFLATION The Company's business is significantly affected by general economic conditions, particularly by the impact of inflation and the generally associated adverse effect on interest rates. Although inflation rates have been low in recent years, rising inflation would likely have a long-term impact on the Company's 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, however, inflation has had no significant adverse impact on the Company, as cost increases have not exceeded the average rate of inflation. 32 28 CONSOLIDATED STATEMENTS OF INCOME
Years ended November 30, - ------------------------------------------------------------------------------------------------------------------- In thousands, except per share amounts 1995 1994 1993 =================================================================================================================== TOTAL REVENUES $1,396,526 $1,336,271 $1,237,854 ========================================== CONSTRUCTION: Revenues $1,366,866 $1,307,570 $1,199,776 Construction and land costs (1,119,405) (1,048,323) (970,595) Selling, general and administrative expenses (181,930) (170,924) (142,572) ------------------------------------------ Operating income 65,531 88,323 86,609 Interest income 2,140 2,026 3,477 Interest expense, net of amounts capitalized (27,501) (17,849) (16,840) Minority interests in pretax income of consolidated joint ventures (584) (917) (10,156) Equity in pretax loss of unconsolidated joint ventures (3,475) (3,736) (6,303) ------------------------------------------ Construction pretax income 36,111 67,847 56,787 ------------------------------------------ MORTGAGE BANKING: Revenues: Interest income 15,555 16,978 24,188 Other 14,105 11,723 13,890 ------------------------------------------ 29,660 28,701 38,078 Expenses: Interest (14,821) (17,151) (25,147) General and administrative (5,491) (5,547) (5,397) ------------------------------------------ Mortgage banking pretax income 9,348 6,003 7,534 ------------------------------------------ Total pretax income 45,459 73,850 64,321 Income taxes (16,400) (27,300) (24,400) ------------------------------------------ NET INCOME $ 29,059 $ 46,550 $ 39,921 ========================================== EARNINGS PER SHARE $ .73 $ 1.16 $ .96 ===================================================================================================================
See accompanying notes. 33 29 CONSOLIDATED BALANCE SHEETS
November 30, - ----------------------------------------------------------------------------------------------------------------- In thousands, except shares 1995 1994 ================================================================================================================= ASSETS CONSTRUCTION: Cash and cash equivalents $24,793 $49,497 Trade and other receivables 111,620 114,921 Inventories 1,059,179 942,713 Investments in unconsolidated joint ventures 21,154 25,314 Other assets 52,462 34,691 -------------------------------- 1,269,208 1,167,136 -------------------------------- MORTGAGE BANKING: Cash and cash equivalents 18,589 5,311 Receivables First mortgages and mortgage-backed securities 97,672 110,223 First mortgages held under commitment of sale and other receivables 181,764 164,365 Other assets 6,946 7,425 -------------------------------- 304,971 287,324 -------------------------------- TOTAL ASSETS $1,574,179 $1,454,460 ================================ LIABILITIES AND STOCKHOLDERS' EQUITY CONSTRUCTION: Accounts payable $156,097 $146,179 Accrued expenses and other liabilities 90,237 72,845 Mortgages and notes payable 639,575 565,020 -------------------------------- 885,909 784,044 -------------------------------- MORTGAGE BANKING: Accounts payable and accrued expenses 9,661 10,293 Notes payable 151,000 125,000 Collateralized mortgage obligations secured by mortgage-backed securities 84,764 96,731 -------------------------------- 245,425 232,024 -------------------------------- Deferred income taxes 24,448 31,373 -------------------------------- Minority interests in consolidated joint ventures 2,919 2,272 -------------------------------- STOCKHOLDERS' EQUITY: Preferred stock--$1.00 par value; authorized, 10,000,000 shares: Series A participating cumulative preferred stock; none outstanding Series B convertible preferred stock; 1,300,000 shares outstanding 1,300 1,300 Common stock--$1.00 par value; authorized, 100,000,000 shares; 32,346,736 and 32,378,217 shares outstanding at November 30, 1995 and 1994, respectively 32,347 32,378 Paid-in capital 188,839 188,970 Retained earnings 190,749 181,282 Cumulative foreign currency translation adjustments 2,243 817 -------------------------------- TOTAL STOCKHOLDERS' EQUITY 415,478 404,747 -------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,574,179 $1,454,460 =================================================================================================================
See accompanying notes. 34 30 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended November 30, 1995, 1994 and 1993 --------------------------------------------------------------------------------------------- Series B Convertible Special Foreign Total Preferred Common Common Paid-in Retained Currency Stockholders' In thousands Stock Stock Stock Capital Earnings Translation Equity =================================================================================================================================== Balance at November 30, 1992 $29,488 $5,123 $150,536 $129,761 $3,525 $318,433 Net income 39,921 39,921 Dividends on Series B convertible preferred stock (4,940) (4,940) Dividends on common and special common stock (10,404) (10,404) Issuance of Series B convertible preferred stock $1,300 107,870 109,170 Exercise of employee stock options 223 1,669 1,892 Cancellation of restricted stock (110) (1,305) (1,415) Foreign currency translation adjustments (8,317) (8,317) ----------------------------------------------------------------------------------------- Balance at November 30, 1993 1,300 29,601 5,123 258,770 154,338 (4,792) 444,340 ----------------------------------------------------------------------------------------- Net income 46,550 46,550 Dividends on Series B convertible preferred stock (9,880) (9,880) Dividends on common and special common stock (9,726) (9,726) Exercise of employee stock options 125 1,406 1,531 Purchase of special common stock and warrants (2,332) (71,345) (73,677) Exchange of special common stock for common stock 2,652 (2,791) 139 Foreign currency translation adjustments 5,609 5,609 ----------------------------------------------------------------------------------------- Balance at November 30, 1994 1,300 32,378 188,970 181,282 817 404,747 ----------------------------------------------------------------------------------------- Net income 29,059 29,059 Dividends on Series B convertible preferred stock (9,880) (9,880) Dividends on common stock (9,712) (9,712) Exercise of employee stock options 17 103 120 Cancellation of restricted stock (48) (234) (282) Foreign currency translation adjustments 1,426 1,426 ----------------------------------------------------------------------------------------- Balance at November 30, 1995 $1,300 $32,347 $ $188,839 $190,749 $2,243 $415,478 ===================================================================================================================================
See accompanying notes. 35 31 CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended November 30, - ------------------------------------------------------------------------------------------------------------------------------- In thousands 1995 1994 1993 =============================================================================================================================== CASH FLOWS FROM OPERATING ACTIVITIES: Net income $29,059 $46,550 $39,921 Adjustments to reconcile net income to net cash provided (used) by operating activities: Equity in pretax loss of unconsolidated joint ventures 3,475 3,736 6,303 Minority interests in pretax income of consolidated joint ventures 584 917 10,156 Amortization of discounts and issuance costs 1,765 2,276 9,680 Depreciation and amortization 6,274 3,408 2,617 Provision for deferred income taxes (6,925) 4,498 (42,057) Change in: Receivables (14,664) (13,836) 63,874 Inventories (80,317) (137,594) (44,151) Accounts payable, accrued expenses and other liabilities 26,680 (26,314) 15,684 Other, net (18,801) 5,279 (5,099) -------------------------------------- Net cash provided (used) by operating activities (52,870) (111,080) 56,928 -------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Investments in unconsolidated joint ventures 685 (5,329) (1,233) Net originations of mortgages held for long-term investment (253) (442) (1,538) Payments received on first mortgages and mortgage-backed securities 13,786 49,687 84,015 Other, net (4,252) (6,447) (2,499) ------------------------------------- Net cash provided by investing activities 9,966 37,469 78,745 ------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from (payments on) credit agreements and other short-term borrowings 92,358 215,476 (51,114) Proceeds from issuance of senior subordinated notes 173,603 Payments on collateralized mortgage obligations (13,296) (49,259) (81,363) Payments on mortgages, land contracts and other loans (28,055) (4,460) (81,429) Redemption of convertible subordinated notes (168,760) Payments from (to) minority interests in consolidated joint ventures 63 (15,177) (11,254) Proceeds from issuance of Series B convertible preferred stock 109,170 Purchase of special common stock and warrants (73,677) Payments of cash dividends (19,592) (19,606) (15,344) ------------------------------------- Net cash provided (used) for financing activities 31,478 53,297 (126,491) ------------------------------------- Net increase (decrease) in cash and cash equivalents (11,426) (20,314) 9,182 Cash and cash equivalents at beginning of year 54,808 75,122 65,940 ------------------------------------- Cash and cash equivalents at end of year $43,382 $54,808 $75,122 ===================================== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest paid, net of amounts capitalized $42,032 $36,034 $39,319 Income taxes paid 17,275 45,270 23,230 ===================================== SUPPLEMENTAL DISCLOSURES OF NONCASH ACTIVITIES: Cost of inventories acquired through seller financing $36,149 $27,054 $8,900 ==============================================================================================================================
See accompanying notes. 36 32 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES OPERATIONS Kaufman and Broad Home Corporation (the Company) is a regional builder of single-family homes with domestic operations throughout the western United States, and international operations in France, Canada and Mexico. In France, the Company is also a developer of commercial and high-density residential projects. Through its mortgage banking subsidiary, Kaufman and Broad Mortgage Company, the Company provides mortgage banking services to its domestic home buyers. BASIS OF PRESENTATION The consolidated financial statements include the accounts of the Company and all significant majority-owned or controlled subsidiaries and joint ventures. All significant 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. 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. CONSTRUCTION OPERATIONS Inventories are stated at the lower of cost or estimated net realizable value for each parcel or subdivision. Estimated net realizable value is based upon the net sales proceeds anticipated in the normal course of business, less estimated costs to complete or improve the property to the condition used in determining the estimated selling price. Housing and other real estate sales are recognized when all conditions precedent to closing have been fulfilled. In France, sales of apartments, condominiums and commercial buildings to investors 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 billed are classified as receivables. Amounts received from investors 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 generally allocated equally 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. MORTGAGE BANKING OPERATIONS 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. First mortgages and mortgage-backed securities consist of securities held for long-term investment and are valued at amortized cost. First mortgages held under commitment 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. INCOME TAXES In 1993, the Company adopted the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." The impact of the adoption on the Company's financial position and results of operations was not significant. 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 which are not expected to be reinvested indefinitely. EARNINGS PER SHARE The computation of earnings per share is based on the weighted average number of common shares, special common shares, equivalent Series B Convertible Preferred Shares and common share equivalents outstanding during each year. The Series B Convertible Preferred Shares are considered common stock due to their mandatory conversion into common stock, and the related dividends are not deducted from net income for purposes of calculating earnings per share. Common share equivalents include dilutive stock options and warrants using the treasury stock method. Earnings per share were based on the weighted average number of common shares, special common shares, equivalent Series B Convertible Preferred Shares and common share equivalents outstanding of 39,757,000 in 1995, 40,026,000 in 1994 and 41,547,000 in 1993. If, for purposes of calculating earnings per share, the Series B Convertible Preferred Shares were excluded from the weighted average shares outstanding and the related dividends deducted from net income, the computation would have resulted in earnings per share of $.58 in 1995, $1.09 in 1994 and $.93 in 1993. 37 33 RECENT ACCOUNTING PRONOUNCEMENTS In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. The provisions of this statement are effective for fiscal years beginning after December 15, 1995. The Company has not assessed the impact on the financial statements. However, the future adoption of this statement may have a material effect on the Company's financial position or results of operations. RECLASSSIFICATIONS Certain amounts in the consolidated financial statements of prior years have been reclassified to conform to the 1995 presentation. NOTE 2. RECEIVABLES CONSTRUCTION Trade receivables amounted to $48,699,000 and $43,057,000 at November 30, 1995 and 1994, respectively. Included in these amounts are unbilled receivables due from investors on French apartment, condominium and commercial building sales accounted for using the percentage of completion method, totaling $8,478,000 at November 30, 1995 and $14,267,000 at November 30, 1994. The investors are contractually obligated to remit payments against their unbilled balances. Other receivables of $62,921,000 at November 30, 1995 and $71,864,000 at November 30, 1994 included mortgages receivable, escrow deposits and amounts due from municipalities and utility companies. At November 30, 1995 and 1994, receivables were net of allowances for doubtful accounts of $3,034,000 and $3,269,000, respectively. MORTGAGE BANKING First mortgages and mortgage-backed securities consisted of loans of $7,187,000 at November 30, 1995 and $6,934,000 at November 30, 1994 and mortgage-backed securities of $90,485,000 and $103,289,000 at November 30, 1995 and 1994, respectively. The mortgage-backed securities serve as collateral for related collateralized mortgage obligations. The property 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 Federal National Mortgage Association. The first mortgages and mortgage-backed securities bore interest at an average rate of 8-3/5% and 8-7/8% at November 30, 1995 and 1994, respectively (with rates ranging from 7% to 13% for both years). Mortgages were net of discounts of $4,353,000 at November 30, 1995 and $6,243,000 at November 30, 1994. These discounts, which primarily represent loan origination discount points and acquisition price discounts, are deferred as an adjustment to the carrying value of the related first mortgages and mortgage-backed securities and amortized into interest income using the interest method. The Company adopted the provisions of Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" effective December 1, 1994. In accordance with this pronouncement, the Company's 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 premiums and accretion of discounts to maturity. Such amortization is included in interest income. There was no impact on the Company's financial position or results of operations from the adoption of this pronouncement. The total gross unrealized gains and gross unrealized losses on the mortgage-backed securities were $6,175,000 and $0, respectively at November 30, 1995. NOTE 3. INVENTORIES Inventories consist of the following:
November 30, - ----------------------------------------------------------------------------------------------------- In thousands 1995 1994 ===================================================================================================== Homes, lots and improvements in production $ 803,926 $712,563 Land under development 255,253 230,150 ------------------------------- Total inventories $1,059,179 $942,713 =====================================================================================================
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:
Years ended November 30, - ------------------------------------------------------------------------------------------------------------------------ In thousands 1995 1994 1993 ======================================================================================================================== Interest incurred $64,629 $45,410 $41,272 Interest expensed (27,501) (17,849) (16,840) --------------------------------------------- Interest capitalized 37,128 27,561 24,432 Interest amortized (18,508) (16,156) (17,617) --------------------------------------------- Net impact on consolidated pretax income $18,620 $11,405 $ 6,815 ========================================================================================================================
38 34 NOTE 4. 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 are based primarily in France and Canada and are engaged in the development, construction and sale of residential properties and commercial projects. Combined condensed financial information concerning the Company's unconsolidated joint venture activities follows:
November 30, - ----------------------------------------------------------------------------------------------------- In thousands 1995 1994 ===================================================================================================== Cash $ 2,426 $ 5,530 Receivables 9,407 16,987 Inventories 874,624 856,239 Other assets 5,854 5,955 ----------------------------- Total assets $892,311 $884,711 ============================= Mortgages and notes payable $630,006 $631,353 Other liabilities 98,539 142,619 Equity of: The Company 21,154 25,314 Others 142,612 85,425 ----------------------------- Total liabilities and equity $892,311 $884,711 =====================================================================================================
The joint ventures finance land and inventory investments primarily through a variety of borrowing arrangements. The Company typically does not guarantee these financing arrangements.
Years ended November 30, - ------------------------------------------------------------------------------------------------------------------------- In thousands 1995 1994 1993 ========================================================================================================================= Revenues $ 33,917 $ 82,734 $ 6,404 Cost of sales (49,289) (102,981) (16,160) Other expenses, net (5,108) (15,434) (20,992) ---------------------------------------------- Total pretax loss $(20,480) $(35,681) $(30,748) ============================================== The Company's share of pretax loss $ (3,475) $ (3,736) $ (6,303) =========================================================================================================================
The Company's share of pretax loss includes management fees earned from the unconsolidated joint ventures. NOTE 5. MORTGAGES AND NOTES PAYABLE CONSTRUCTION Mortgages and notes payable consist of the following (interest rates are as of November 30):
November 30, - ----------------------------------------------------------------------------------------------------- In thousands 1995 1994 ===================================================================================================== Unsecured domestic borrowings with banks under a revolving credit agreement (7% to 7-1/10% in 1995 and 6-4/5% in 1994) $250,000 $100,000 Other unsecured domestic borrowings with banks due within one year (6-3/5% to 6-7/8% in 1995 and 6-1/8% to 6-5/8% in 1994) 13,000 110,100 Unsecured French borrowings (6-3/8% to 7-1/5% in 1995 and 6% to 7% in 1994) 59,011 45,553 Mortgages and land contracts due to land sellers and other loans (6-3/5% to 59-2/5% in 1995 and 6% to 26-3/10% in 1994) 43,715 35,621 Senior notes due 1999 at 10-3/8% 100,000 100,000 Senior subordinated notes due 2003 at 9-3/8% 173,849 173,746 ----------------------------- Total mortgages and notes payable $639,575 $565,020 =====================================================================================================
Terms under the domestic unsecured revolving credit agreement with various banks dated December 24, 1992 and scheduled to expire in 1995 provided for a $350,000,000 commitment. On November 21, 1994, the agreement was amended, increasing the revolving credit facility to $500,000,000 with a $200,000,000 sublimit for the Company's mortgage banking operations. This facility has a three-year term expiring on December 31, 1997. As of November 30, 1995, the entire amount of the revolving credit facility was committed and $197,000,000 was available for the Company's future use. The agreement provides for interest on borrowings at either the applicable bank reference rate or the London Interbank Offered Rate plus an applicable spread and an annual commitment fee based on the unused portion of the commitment. Under the terms of the revolving credit agreement, the Company is required, among other things, to maintain certain financial statement ratios and a minimum net worth and is subject to limitations on acquisitions, inventories, indebtedness, dividend payments and repurchases of stock. Under the conditions of the agreement, retained earnings of $71,554,000 were available for payment of cash dividends or stock repurchases at November 30, 1995. 39 35 The Company's French subsidiaries have lines of credit with various banks which totaled $140,339,000 at November 30, 1995 and have various committed expiration dates through December 1996. 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. The weighted average interest rate on aggregate unsecured borrowings, excluding the senior and senior subordinated notes, was 6-9/10% and 6-1/2% at November 30, 1995 and 1994, respectively. On August 11, 1992, the Company filed a registration statement with the Securities and Exchange Commission under which the Company could offer for sale from time to time up to $200,000,000 of unsecured debt securities. On September 8, 1992, the Company, pursuant to this registration statement, issued $100,000,000 of 10-3/8% senior notes, due September 1, 1999, with interest payable semi-annually. The Company may redeem, in whole or in part, at any time on or after September 1, 1997, 100% of the principal amount of the notes. On April 26, 1993, the Company issued $175,000,000 principal amount of 9-3/8% senior subordinated notes at 99.202%. The notes are due May 1, 2003 with interest payable semi-annually. The notes represent unsecured obligations of the Company and are subordinated to all existing and future senior indebtedness of the Company. The Company may redeem the notes, in whole or in part, at any time on or after May 1, 2000 at 100% of their principal amount. The 10-3/8% senior notes and 9-3/8% 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. Principal payments on senior and senior subordinated notes, mortgages, land contracts and other loans are due as follows: 1996, $33,025,000; 1997, $1,761,000; 1998, $1,067,000; 1999, $100,068,000; 2000, $158,000; and thereafter, $181,485,000. Assets (primarily inventories) having a carrying value of approximately $73,338,000 are pledged to collateralize mortgages, land contracts and other secured loans. MORTGAGE BANKING Notes payable include the following (interest rates are as of November 30):
November 30, ----------------------------- In thousands 1995 1994 - ----------------------------------------------------------------------------------------------------- Notes payable secured by trust deed notes (7-1/8% in 1995 and 6-4/5% in 1994) $40,000 $21,000 Advances under asset-backed commercial paper facility (5-9/10% in 1995 and 5-3/4% in 1994) 111,000 104,000 ----------------------------- Total notes payable $151,000 $125,000 =====================================================================================================
First mortgages receivable have historically been financed through a $230,000,000 collateralized revolving warehouse credit facility and a $120,000,000 asset-backed commercial paper facility (the Commercial Paper Facility). On November 21, 1994, the collateralized revolving warehouse credit facility was replaced with the amended revolving credit agreement which contains a $200,000,000 sublimit (the Revolving Warehouse Facility) for financing the mortgage banking operations. This Revolving Warehouse Facility provides for interest on borrowings at either the applicable bank reference rate or the Federal Funds rate plus an applicable spread and an annual commitment fee based on the unused portion of the commitment. The Commercial Paper Facility expires on September 15, 1997 and provides for an annual commitment fee based on the unused portion of the commitment. Interest rates charged under the Commercial Paper Facility reflect those available in commercial paper markets plus an applicable spread on amounts borrowed. There are no compensating balance requirements under either facility. These facilities are collateralized by first mortgages held under commitment of sale and are repayable from proceeds on the sales of first mortgages. The terms of these facilities include financial covenants which, among other things, require the maintenance of certain financial statement ratios and a minimum tangible net worth and limit indebtedness of the mortgage banking operations (excluding indebtedness to the Company) to a maximum of $320,000,000. This maximum may be further limited as the $200,000,000 sublimit on the Revolving Warehouse Facility is available to fund mortgage banking operations only to the extent that borrowings under the amended revolving credit agreement for construction operations do not exceed $300,000,000. Collateralized mortgage obligations represent bonds issued to third parties which are collateralized by mortgage-backed 40 36 securities with substantially the same terms. At November 30, 1995, the collateralized mortgage obligations bore interest at rates ranging from 8% to 12-1/4% with stated 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 6. FAIR VALUES OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments," requires companies to disclose the estimated fair value of their financial instruments. The estimated fair value of financial instruments has been determined based on available market information and appropriate valuation methodologies. However, judgement 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. The carrying values and fair values of the Company's financial instruments, except for those financial instruments for which the carrying values approximate fair values, are summarized as follows:
November 30, -------------------------------------------------------------- 1995 1994 - --------------------------------------------------------------------------------------------------------------------------------- Carrying Fair Carrying Fair In thousands Value Value Value Value ================================================================================================================================= Construction: Financial liabilities 10-3/8% Senior notes $100,000 $101,875 $100,000 $ 99,000 9-3/8% Senior subordinated notes 173,849 171,063 173,746 155,094 Mortgage banking: Financial assets Mortgage-backed securities 90,485 96,660 103,289 104,149 Financial liabilities Collateralized mortgage obligations secured by mortgage-backed securities 84,764 97,597 96,731 97,395 =================================================================================================================================
The Company used the following methods and assumptions in estimating fair values: Cash and cash equivalents; borrowings under the domestic revolving credit facility, French lines of credit and Commercial Paper Facility; first mortgages and first mortgages held under commitment of sale and other receivables: The carrying amounts reported approximate fair values. Senior notes and senior subordinated notes: The fair values of the Company's 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 were based on quoted market prices for the same or similar issues. NOTE 7. COMMITMENTS AND CONTINGENCIES Commitments and contingencies include the usual obligations of housing producers 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 Company's financial position or results of operations. NOTE 8. STOCKHOLDERS' EQUITY PREFERRED STOCK On January 11, 1989, the Company adopted a Stockholder Rights Plan and declared a dividend distribution of one preferred share purchase right for each outstanding share of common stock. Under certain circumstances, each right entitles the holder to purchase 1/100th of a share of a new Series A Participating Cumulative Preferred Stock at a price of $30.00, 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 20% or more of the aggregate votes entitled from all shares of common stock and special common stock or (ii) 10 days following the commencement of a tender offer for 20% or more of the aggregate votes entitled from all shares of common stock and special common stock. In the event the Company is acquired in a merger or other business combination transaction, or 50% or more of the Company's assets or earning power is sold, each right will entitle its holder to receive, upon exercise, common stock of the acquiring company having a market value of twice the exercisable price of the right. At the option of the Company, the rights are redeemable prior to becoming exercisable at $.01 per right. Unless previously redeemed, the rights will expire on March 7, 1999. 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. In 1993, the Company issued 6,500,000 depositary shares, each representing a one-fifth ownership interest in a share of Series B Mandatory Conversion Premium Dividend Preferred Stock (the Series B Convertible Preferred Shares). Dividends are cumulative and payable quarterly in arrears at an annual dividend rate of $1.52 per depositary share. On the 41 37 mandatory conversion date of April 1, 1996, each of the outstanding depositary shares will convert, upon the automatic conversion of the Series B Convertible Preferred Shares, into one share of the Company's common stock, subject to adjustment in certain events. The Company may call any or all of the outstanding depositary shares prior to the mandatory conversion date at a call price initially equal to $27.12, declining to $23.66 by February 1, 1996, and equal to $23.46 thereafter, payable in shares of common stock having a market price equal to the applicable call price, plus an amount in cash equal to all accrued and unpaid dividends. The depositary shares are not convertible into common stock at the holders' option. The depositary shares were issued at $17.375 per share and have a liquidation preference price per depositary share equal to the issuance price. SPECIAL COMMON STOCK In connection with its restructuring in 1989, the Company issued warrants (the Warrants) to certain subsidiaries of SunAmerica Inc., the Company's former parent. The Warrants give the holder the right to purchase, at any time prior to March 1, 1999, up to 7,500,000 shares of special common stock at an exercise price of $6.96 per share. The rights of the special common stock are generally identical to the rights of the common stock except that the holder of special common stock is entitled to one-tenth of a vote per share on all matters to be voted on by stockholders. In 1992, the Company issued in a public offering 5,123,000 shares of the special common stock in connection with the exercise of the Warrants. On November 8, 1993, the Company commenced a tender offer to purchase all of the outstanding shares of its special common stock at a price of $19 per share. The offer expired on December 7, 1993 with 2,331,785 shares of special common stock tendered. In addition, on December 23, 1993, the Company purchased the remaining 2,377,000 Warrants at a price equal to the tender offer price per share less the $6.96 per Warrant exercise price. The total consideration paid for these transactions was $73,677,000, including related costs. The remaining 2,791,215 outstanding shares of special common stock were exchanged by the Company at a ratio of .95 shares of common stock for each share of special common stock on various dates throughout 1994. NOTE 9. EMPLOYEE BENEFIT AND STOCK PLANS Benefits are provided to most employees under the Company's 401(k) Savings Plan under which contributions by employees are partially matched by the Company. The aggregate cost of this plan to the Company was $1,795,000 in 1995, $1,734,000 in 1994 and $1,135,000 in 1993. The Kaufman and Broad Home Corporation 1988 Employee Stock Plan (the 1988 Plan) provides that stock options, associated limited stock appreciation rights, restricted shares of common stock and stock units may be awarded to eligible individuals for periods of up to 15 years. The 1988 Plan replaced all existing employee stock plans. Stock option transactions are summarized as follows:
Years ended November 30, ----------------------------------------------- 1995 1994 1993 ======================================================================================================== Options outstanding at beginning of year 2,044,718 2,191,268 2,154,568 Granted 512,000 52,000 331,000 Exercised (17,000) (125,000) (223,000) Cancelled (133,000) (73,550) (71,300) ----------------------------------------------- Options outstanding at end of year 2,406,718 2,044,718 2,191,268 =============================================== Options exercisable at end of year 1,646,768 1,614,068 1,604,418 Options available for grant at end of year 1,268,581 954,100 1,443,600 Price range of options exercised $3.50-$12.38 $3.50-$16.13 $3.50-$16.13 Price range of options outstanding $3.50-$22.94 $3.50-$22.94 $3.50-$19.06 ========================================================================================================
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 stock awards issued in 1991 totaled 575,000 shares with 48,000 and 110,000 of these shares being cancelled in 1995 and 1993, respectively. 42 38 NOTE 10. INCOME TAXES The components of pretax income are as follows:
Years ended November 30, - ----------------------------------------------------------------------------------------------- In thousands 1995 1994 1993 =============================================================================================== Domestic $45,393 $72,352 $72,295 Foreign 66 1,498 (7,974) --------------------------------------- Total pretax income $45,459 $73,850 $64,321 ===============================================================================================
The components of the provisions for income taxes are as follows:
In thousands Total Federal State Foreign ================================================================================================== 1995 Currently payable $22,569 $16,700 $2,634 $ 3,235 Deferred (6,169) (3,729) (2,440) ------------------------------------------------ Total income tax expense $16,400 $12,971 $2,634 $795 ================================================ 1994 Currently payable $30,835 $24,931 $5,000 $904 Deferred (3,535) (3,603) 68 ------------------------------------------------ Total income tax expense $27,300 $21,328 $5,000 $972 ================================================ 1993 Currently payable $45,078 $22,789 $4,084 $18,205 Deferred (20,678) 171 (20,849) ------------------------------------------------ Total income tax expense $24,400 $22,960 $4,084 $(2,644) ==================================================================================================
Deferred income taxes result from temporary differences in the financial and tax bases of assets and liabilities. Significant components of the Company's deferred tax liabilities and assets are as follows:
November 30, ------------------------------ In thousands 1995 1994 =============================================================================================================== Deferred tax liabilities: Installment sales $ 4,840 $ 2,678 Bad debt and other reserves 1,758 4,046 Depreciation and amortization 5,465 6,273 Capitalized expenses 23,479 22,460 Partnerships and joint ventures 4,511 4,041 Computer equipment leases 6,573 10,040 Repatriation of foreign subsidiaries 25,961 30,638 Other 3,579 4,643 ----------------------------- Total deferred tax liabilities 76,166 84,819 ----------------------------- Deferred tax assets: Warranty, legal and other accruals 9,194 6,772 Depreciation and amortization 1,281 475 Capitalized expenses 8,383 6,723 Affordable housing credits 2,111 2,111 Foreign tax credits 38,339 43,345 Net operating losses 943 596 Other 4,243 6,626 Valuation allowance (12,776) (13,202) ----------------------------- Total deferred tax assets 51,718 53,446 ----------------------------- Net deferred tax liabilities $24,448 $31,373 ===============================================================================================================
Net operating loss carryforwards expire in 1999 and 2000. The Company expects that the entire deferred tax benefit of the tax loss carryforwards will be recognized in future periods. Income taxes computed at the statutory United States federal income tax rate and income tax expense provided in the financial statements differ as follows:
Years ended November 30, ------------------------------------- In thousands 1995 1994 1993 ============================================================================================================ Amount computed at statutory rate $15,911 $25,848 $22,461 Increase (decrease) resulting from: California franchise taxes, net of federal income tax benefit 1,712 3,250 2,658 Differences in foreign tax rates 2,042 550 430 Intercompany dividends 391 139 Affordable housing credits (2,387) (1,179) (1,005) Other, net (878) (1,560) (283) ------------------------------------- Total income tax expense $16,400 $27,300 $24,400 ============================================================================================================
The Company has commitments to invest $5,732,000 over three years in affordable housing partnerships which are scheduled to provide tax credits. The Company had foreign tax credit carryforwards at November 30, 1995 of $5,421,000 for United States federal income tax purposes which expire in 1996 through 2000. 43 39 The undistributed earnings of foreign subsidiaries, which the Company plans to invest indefinitely and for which no United States federal income taxes have been provided, totaled $42,030,000 at November 30, 1995. If these earnings were currently distributed, the resulting withholding taxes payable would be $3,024,000. NOTE 11. GEOGRAPHICAL AND SEGMENT INFORMATION Geographical and segment information follows:
Operating Identifiable In thousands Revenues Income Assets ================================================================================================================ 1995 Construction: California $ 971,132 $51,428 $ 852,753 Other United States 246,958 12,308 139,875 France 138,616 4,700 235,031 Other 10,160 (2,905) 41,549 -------------------------------------------------------- Total construction 1,366,866 65,531 1,269,208 Mortgage banking 29,660 9,348 304,971 -------------------------------------------------------- Total $1,396,526 $74,879 $1,574,179 ======================================================== 1994 Construction: California $1,048,050 $81,149 $ 836,783 Other United States 101,129 4,145 69,448 France 143,422 5,019 210,686 Other 14,969 (1,990) 50,219 -------------------------------------------------------- Total construction 1,307,570 88,323 1,167,136 Mortgage banking 28,701 6,003 287,324 -------------------------------------------------------- Total $1,336,271 $94,326 $1,454,460 ======================================================== 1993 Construction: California $ 938,561 $78,323 $ 714,358 Other United States 22,623 627 22,529 France 219,802 8,082 210,328 Other 18,790 (423) 36,227 -------------------------------------------------------- Total construction 1,199,776 86,609 983,442 Mortgage banking 38,078 7,534 355,936 -------------------------------------------------------- Total $1,237,854 $94,143 $1,339,378 ================================================================================================================
A director of the Company served between 1981 and 1993 as chairman and chief executive officer of a French bank, which in 1989 formed a joint venture controlled by the Company. The joint venture acquired and subsequently sold, to a group of international investors, a commercial building in Paris, France, under a five-year redevelopment agreement, with the bank financing the acquisition and redevelopment of the property. The project, completed in 1993, generated commercial revenues of $63,141,000 in 1993, representing 5% of total revenues. NOTE 12. QUARTERLY RESULTS (UNAUDITED) Quarterly results for the years ended November 30, 1995 and 1994 follow:
In thousands, except per share amounts First Second Third Fourth ================================================================================================================== 1995 Revenues $229,832 $315,493 $372,314 $478,887 Operating income 5,922 13,102 19,269 36,586 Pretax income 685 6,091 10,863 27,820 Net income 435 3,841 6,863 17,920 Earnings per share .01 .10 .17 .45 =================================================== 1994 Revenues $256,879 $326,021 $348,850 $404,521 Operating income 17,819 23,005 22,954 30,548 Pretax income 14,054 17,847 17,084 24,865 Net income 8,854 11,247 10,784 15,665 Earnings per share .22 .28 .27 .39 ==================================================================================================================
NOTE 13. SUBSEQUENT EVENT On January 22, 1996, the Company entered into a definitive agreement to acquire Rayco, Ltd. and certain affiliates for approximately $110,000,000, comprised of $80,000,000 in cash and the assumption of $30,000,000 in debt. Rayco, Ltd., a regional builder of single-family homes in San Antonio, Texas, delivered 2,585 homes, generating revenues of approximately $235,000,000 for the year ended December 31, 1995. Although the transaction remains subject to certain conditions, completion of this acquisition is expected on March 1, 1996. If the acquisition is consummated as anticipated, the results of Rayco, Ltd.'s operations will be included in the Company's consolidated financial statements from the date of acquisition. 44 40 REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Stockholders' of Kaufman and Broad Home Corporation We have audited the accompanying consolidated balance sheets of Kaufman and Broad Home Corporation as of November 30, 1995 and 1994, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended November 30, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. 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 Kaufman and Broad Home Corporation at November 30, 1995 and 1994, and the consolidated results of its operations and its cash flows for each of the three years in the period ended November 30, 1995, in conformity with generally accepted accounting principles. /s/ ERNST & YOUNG LLP Los Angeles, California January 4, 1996, except as to Note 13, as to which the date is January 22, 1996 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 Company employs a staff of internal auditors whose work 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/ MICHAEL F. HENN Michael F. Henn Senior Vice President and Chief Financial Officer January 4, 1996 45 41 STOCKHOLDER INFORMATION
Special Common Stock Common Stock -------------------------------------------- Stock Prices High Low High Low ============================================================================================ 1995 First Quarter $14-3/4 $12-1/8 Second Quarter 15-7/8 11-1/8 Third Quarter 16 13-1/8 Fourth Quarter 13-3/8 10-7/8 ============================================ 1994 First Quarter $25-1/2 $20 $22-1/4 $18-1/2 Second Quarter 24-5/8 16-1/4 21-3/4 14 Third Quarter 16-1/4 13 * * Fourth Quarter 16-1/2 12-1/4 ============================================================================================
*Following the suspension of trading on the New York Stock Exchange on May 31, 1994, the special common stock was de-listed by the New York Stock Exchange and de-registered by the Securities and Exchange Commission on August 9, 1994. Subsequently, the Company completed the exchange for all remaining outstanding shares. DIVIDEND DATA Kaufman and Broad Home Corporation paid a quarterly cash dividend of $.075 per common share in 1995 and 1994. ANNUAL STOCKHOLDERS' MEETING The annual stockholders' meeting will be held in the Dynasty Room at the Westwood Marquis Hotel in Los Angeles, California, at 9:00 a.m. on Thursday, March 28, 1996. STOCK EXCHANGE LISTINGS The common stock (ticker symbol: KBH) is listed on the New York Stock Exchange and is also traded on the Boston, Cincinnati, Midwest, Pacific and Philadelphia Exchanges. TRANSFER AGENT Chemical Mellon Shareholder Services Los Angeles, California INDEPENDENT AUDITORS Ernst & Young LLP Los Angeles, California FORM 10-K The Company's Form 10-K filed with the Securities and Exchange Commission may be obtained without charge by writing to the Investor Relations Department, Kaufman and Broad Home Corporation. HEADQUARTERS Kaufman and Broad Home Corporation 10990 Wilshire Boulevard Los Angeles, California 90024 (310) 231-4000 Fax (310) 231-4222 42 LIST OF EXHIBITS FILED
SEQUENTIAL EXHIBIT PAGE NUMBER DESCRIPTION NUMBER - ------ ------------------------------------------------------------------ --------------- 10.18 Kaufman and Broad Home Corporation Performance-Based Incentive Plan for Senior Management, approved by Stockholders on March 23, 1995.............................................................. 10.19 Form of Stock Option Agreement under Kaufman and Broad Home Corporation Performance-Based Incentive Plan for Senior Management........................................................ 10.20 Employment Contract of Bruce Karatz, dated December 1, 1995....... 10.21 Kaufman and Broad Home Corporation Directors' Restricted Stock Plan.............................................................. 10.22 Kaufman and Broad Home Corporation Directors' Legacy Program...... 11 Statement of Computation of Per Share Earnings.................... 13 Pages 24 through 45 and the inside back cover of the Company's 1995 Annual Report to Stockholders..................................... 22 Subsidiaries of the Company....................................... 24 Consent of Independent Auditors................................... 27 Financial Data Schedule...........................................
EX-10.18 2 EXHIBIT 10.18 1 EXHIBIT 10.18 KAUFMAN AND BROAD HOME CORPORATION PERFORMANCE-BASED INCENTIVE PLAN FOR SENIOR MANAGEMENT SECTION 1. Purpose. The purposes of the Kaufman and Broad Home Corporation Performance-Based Incentive Plan for Senior Management are to promote the interests of Kaufman and Broad Home Corporation (the "Company") and its stockholders by (i) attracting and retaining exceptional executive personnel and other key employees of the Company and its Affiliates, as defined below; (ii) motivating such employees by means of performance-related incentives to achieve long-range performance goals; (iii) enabling such employees to participate in the long-term growth and financial success of the Company; and (iv) qualifying compensation paid under the Plan for deductibility under Section 162(m) of the Internal Revenue Code. SECTION 2. Definitions. As used in the Plan, the following terms shall have the meanings set forth below: "Affiliate" shall mean (i) any entity that, directly or indirectly, is controlled by the Company and (ii) any entity in which the Company has a significant equity interest, in either case as determined by the Committee. "Award" shall mean any Performance-Based Bonus opportunity granted under the Plan, as well as any Option, Stock Appreciation Right, award of Restricted Stock, Restricted Stock Units or Other Stock-Based Award granted under the Plan or granted in payment or settlement of a Performance-Based Bonus. "Award Agreement" shall mean any written agreement, contract, or other instrument or document (which may include, if so designated by the Committee, an Employment Agreement, as defined herein) evidencing any Award, which may, but need not, be executed or acknowledged by a Participant. "Board" shall mean the Board of Directors of the Company. "Change of Ownership" shall be deemed to have occurred if either (1) individuals who, as of the effective date of this Plan, constitute the Board of the Company (as of the date hereof, the "Incumbent Board") cease for any reason to constitute at least a majority of the directors constituting the Board, provided that any person becoming a director subsequent to the effective date of this Plan whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least three-quarters (3/4) of the then directors who are members of the Incumbent Board (other than an election or nomination of an individual whose initial assumption of office is (A) in connection with the acquisition by a third person, including a "group" as such term is used in Section 13(d)(3) of the Exchange Act, of beneficial ownership, directly or indirectly, of 20% or more of the combined voting securities ordinarily having the right to vote for the election of directors of the Company (unless such acquisition of beneficial ownership was approved by a majority of the Board who are members of the Incumbent Board), or (B) in connection with an actual or threatened election contest relating to the election of the directors of the Company, as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) shall be, for purposes of this Plan, considered as though such person were a member of the Incumbent Board, or (2) the Board (a majority of which shall consist of directors who are members of the Incumbent Board) has determined that a Change of Ownership, for purposes of this Plan, shall have occurred. If any of the events enumerated in clauses (1) or (2) occur, the Board shall determine the effective date of the Change of Ownership resulting therefrom, for purposes of the Plan. "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. "Committee" shall mean a committee of the Board designated by the Board to administer the Plan and composed of not less than the minimum number of persons from time to time required by Rule 16b-3, each of whom (i) to the extent necessary to comply with Rule 16b-3 only, is a "disinterested person" within the 2 meaning of Rule 16b-3 and (ii) to the extent necessary to comply with Section 162(m) only, is an "outside director" within the meaning of Section 162(m). Until otherwise determined by the Board, the Compensation Committee designated by the Board shall be the Committee under the Plan. "Company" shall mean Kaufman and Broad Home Corporation, together with any successor thereto. "Employment Agreement" shall mean (i) with respect to Awards relating to performance in fiscal year 1995, an agreement between the Company and a Participant, the effectiveness or continuing effectiveness of which is contingent upon approval, or approval of the Plan, by the Company's stockholders, which approval shall satisfy all applicable requirements of Section 162(m) and (ii) with respect to Awards relating to performance in any fiscal year of the Company after fiscal year 1995, an agreement between the Company and a Participant entered into prior to the end of the first fiscal quarter of such fiscal year. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. "Fair Market Value" shall mean the fair market value of the property or other item being valued, as determined by the Committee in its sole discretion. "Incentive Stock Option" shall mean a right to purchase Shares from the Company that is granted under Section 7 of the Plan and that is intended to meet the requirements of Section 422 of the Code or any successor provision thereto. "Non-Qualified Stock Option" shall mean a right to purchase Shares from the Company that is granted under Section 7 of the Plan and that is not intended to be an Incentive Stock Option. "Officer" shall mean, at any time, an individual who is an officer of the Company or any of its subsidiaries. "Option" shall mean an Incentive Stock Option or a Non-Qualified Stock Option and shall include a Restoration Option. "Other Stock-Based Award" shall mean any right granted under Section 10 of the Plan. "Participant" shall mean any Officer selected by the Committee to receive an Award under the Plan. "Performance-Based Bonus" shall mean a bonus opportunity awarded in accordance with Section 6 of the Plan. "Person" shall mean any individual, corporation, partnership, association, joint-stock company, trust, unincorporated organization, government or political subdivision thereof or other entity. "Plan" shall mean this Kaufman and Broad Home Corporation Performance-Based Incentive Plan for Senior Management. "QDRO" shall mean a qualified domestic relations order meeting such requirements as the Committee shall determine, in its sole discretion. "Restoration Option" shall mean an Option granted pursuant to Section 7(e) of the Plan. "Restricted Stock" shall mean any Share granted under Section 9 of the Plan. "Restricted Stock Unit" shall mean any unit granted under Section 9 of the Plan. "Rule 16b-3" shall mean Rule 16b-3 as promulgated and interpreted by the SEC under the Exchange Act, or any successor rule or regulation thereto as in effect from time to time. 3 "Section 162(m)" shall mean Section 162(m) of the Code and the rules and other authorities thereunder promulgated by the Internal Revenue Service of the Department of the Treasury. "SEC" shall mean the Securities and Exchange Commission or any successor thereto and shall include the Staff thereof. "Shares" shall mean shares of the Common Stock, $1 par value, of the Company, or such other securities of the Company as may be designated by the Committee from time to time. "Stock Appreciation Right" shall mean any right granted under Section 8 of the Plan. "Substitute Awards" shall mean Awards granted in assumption of, or in substitution for, outstanding awards previously granted by a company acquired by the Company or with which the Company combines. SECTION 3. Administration. (a) Authority of Committee. The Plan shall be administered by the Committee. Subject to the terms of the Plan and applicable law, and in addition to other express powers and authorizations conferred on the Committee by the Plan, the Committee shall have full power and authority to: (i) designate Participants; (ii) determine the type or types of Awards to be granted to an eligible Officer; (iii) determine the number of Shares to be covered by, or with respect to which payments, rights, or other matters are to be calculated in connection with, Awards; (iv) determine the terms and conditions of any Award; (v) determine whether, to what extent, and under what circumstances Awards may be settled or exercised in cash, Shares, other securities, other Awards or other property, or canceled, forfeited, or suspended and the method or methods by which Awards may be settled, exercised, canceled, forfeited, or suspended; (vi) determine whether, to what extent, and under what circumstances cash, Shares, other securities, other Awards, other property, and other amounts payable with respect to an Award shall be deferred either automatically or at the election of the holder thereof or of the Committee; (vii) interpret and administer the Plan and any instrument or agreement relating to, or Award made under, the Plan; (viii) recommend to the Board any amendment, alteration, suspension, discontinuance or termination of the Plan, and subject to the shareholder approval requirement set forth in Section 11(a) to take any such action not required by applicable law to be taken by the Board, (ix) establish, amend, suspend, or waive such rules and regulations and appoint such agents as it shall deem appropriate for the proper administration of the Plan; and (x) make any other determination and take any other action that the Committee deems necessary or desirable for the administration of the Plan. (b) Committee Discretion Binding. Unless otherwise expressly provided in the Plan, all designations, determinations, interpretations, and other decisions under or with respect to the Plan or any Award shall be within the sole discretion of the Committee, may be made at any time and shall be final, conclusive, and binding upon all Persons, including the Company, any Affiliate, any Participant, any holder or beneficiary of any Award, any stockholder and any Officer. 4 SECTION 4. Award Limits. (a) Plan Shares. Subject to adjustment as provided in Section 4(c), the number of Shares with respect to which Awards may be granted under the Plan shall be 1,000,000. If, after the effective date of the Plan, any Shares covered by an Award denominated in Shares granted under the Plan, or to which such an Award relates, are forfeited, or if such an Award is settled for cash or otherwise terminates or is canceled without the delivery of Shares, then the Shares covered by such Award, or to which such Award relates, or the number of Shares otherwise counted against the aggregate number of Shares with respect to which Awards may be granted, to the extent of any such settlement, forfeiture, termination or cancellation, shall again become Shares with respect to which Awards may be granted. In the event that any Option or other Award granted hereunder is exercised through the delivery of Shares or in the event that withholding tax liabilities arising from such Award are satisfied by the withholding of Shares by the Company, the number of Shares available for Awards under the Plan shall be increased by the number of Shares so surrendered or withheld. (b) Individual Stock-Based Awards. Subject to adjustment as provided in Section 4(c), no Participant may receive stock-based Awards under the Plan in any calendar year that relate to more than 100,000 Shares (which number shall not be subject to reduction by any Restoration Options granted to such Participant during such calendar year); provided, however, that such number may be increased with respect to any Participant by any Shares available for grant to such Participant in accordance with this Paragraph 4(b) in any prior years that were not granted in such prior years. No provision of this Paragraph 4(b) shall be construed as limiting the amount of any cash-based Award which may be granted to any Participant. (c) Adjustments. In the event that the Committee determines that any dividend or other distribution (whether in the form of cash, Shares, other securities, or other property), recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase, or exchange of Shares or other securities of the Company, issuance of warrants or other rights to purchase Shares or other securities of the Company, or other similar corporate transaction or event affects the Shares such that an adjustment is determined by the Committee to be appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan, then the Committee shall, in such manner as it may deem equitable, adjust any or all of (i) the number of Shares or other securities of the Company (or number and kind of other securities or property) with respect to which Awards may be granted, (ii) the number of Shares or other securities of the Company (or number and kind of other securities or property) subject to outstanding Awards, and (iii) the grant or exercise price with respect to any Award, or, if deemed appropriate, make provision for a cash payment to the holder of an outstanding Award; provided, in each case, that (A) with respect to Awards of Incentive Stock Options no such adjustment shall be authorized to the extent that such authority would cause the Plan to fail to qualify under Section 422(b)(1) of the Code, as from time to time amended and (B) with respect to any Award no such adjustment shall be authorized to the extent that such authority would be inconsistent with the Plan's meeting the requirements of Section 162(m) of the Code, as from time to time amended. (d) Substitute Awards. Any Shares underlying Substitute Awards shall not, except in the case of Shares with respect to which Substitute Awards are granted to individuals who are officers or directors of the Company for purposes of Section 16 of the Exchange Act or any successor section thereto, be counted against the Shares available for Awards under the Plan. (e) Sources of Shares Deliverable Under Awards. Any Shares delivered pursuant to an Award may consist, in whole or in part, of authorized and unissued Shares or of Shares acquired by the Company on the open market or otherwise. (f) Cash Award Limits. (i) Any Participant who is the Chief Executive Officer at the time of payment of an Award (other than a stock-based Award) shall be eligible to be paid in any calendar year an amount not in excess of $3,000,000 in respect of any such cash Award under the Plan, (ii) no Participant other than a Participant described in clause (i) of this Paragraph 4(f) shall be eligible to be paid in any calendar year more than $2,000,000 in respect of any such cash Award. No provision of this Paragraph 4(f) shall be construed as limiting the number of stock-based Awards that a Participant may receive. 5 SECTION 5. Eligibility. Any Officer, including any Officer who is a director of the Company or any Affiliate, who is not a member of the Committee, shall be eligible to be designated a Participant. SECTION 6. Performance-Based Bonuses. (a) At such times and in such manner as may be prescribed by Section 162(m), the Committee may select Participants and award to such Participants the opportunity to earn a Performance-Based Bonus, which will be contingent upon the Company's attainment of performance goals selected by the Committee. (b) Performance goals which may be employed by the Committee for purposes of a Performance-Based Bonus awarded under Paragraph (a) will include pre-tax income, after-tax income, cash flow, return on equity, return on capital, earnings per share, unit volume, net sales or service quality, as determined in accordance with GAAP, if applicable, which goals may relate to the Company as a whole or, if applicable, to the performance of one or more specific divisions or Affiliates. (c) Notwithstanding Paragraphs (a) and (b), the formula for determining a Performance-Based Bonus to any Participant may, if so determined by the Committee, be governed by the terms of an Employment Agreement applicable to such Participant. (d) Performance-Based Bonuses awarded under Paragraph (a) may be paid in cash, other Awards or any combination thereof, and the form of payment may be governed, as to any Participant, by an Employment Agreement applicable to such Participant. SECTION 7. Stock Options. (a) Grant. Subject to the provisions of the Plan, the Committee shall have sole and complete authority to determine the Officers to whom Options shall be granted, the number of Shares to be covered by each Option, the option price therefor and the conditions and limitations applicable to the exercise of the Option. The Committee shall have the authority to grant Incentive Stock Options, or to grant Non-Qualified Stock Options, or to grant both types of options. In the case of Incentive Stock Options, the terms and conditions of such grants shall be subject to and comply with such rules as may be prescribed by Section 422 of the Code, as from time to time amended, and any regulations implementing such statute. (b) Exercise Price. The Committee in its sole discretion shall establish the exercise price at the time each Option is granted, which exercise price shall be not less than the Fair Market Value of the Shares subject to the Option on the date of grant of the Option. (c) Exercise. Each Option shall be exercisable at such times and subject to such terms and conditions as the Committee may, in its sole discretion, specify in the applicable Award Agreement or thereafter. The Committee may impose such conditions with respect to the exercise of Options, including without limitation, any relating to the application of federal or state securities laws, as it may deem necessary or advisable. (d) Payment. No Shares shall be delivered pursuant to any exercise of an Option until payment in full of the option price therefor is received by the Company. Such payment may be made in cash, or its equivalent, or, if and to the extent permitted by the Committee, by exchanging Shares owned by the Participant (which are not the subject of any pledge or other security interest), or by a combination of the foregoing, provided that the combined value of all cash and cash equivalents and the Fair Market Value of any such Shares so tendered to the Company as of the date of such tender is at least equal to such option price plus the related amount of any taxes required to be withheld by the Company in connection with such exercise, to the extent such withholding taxes are then ascertainable. If the amount of such taxes is not ascertainable at the time of the notice of exercise, such amount shall be tendered by you to the Company as soon as the same shall become ascertainable and shall be communicated to you by the Company. 6 (e) Restoration Options. In the event that any Participant delivers Shares in payment of the exercise price of any Option granted hereunder in accordance with Section 7(d), or in the event that the withholding tax liability arising upon exercise of any Option by a Participant is satisfied through the withholding by the Company of Shares otherwise deliverable upon exercise of the Option, the Committee shall have the authority to grant or provide for the automatic grant of a Restoration Option to such Participant. The grant of a Restoration Option shall be subject to the satisfaction of such conditions or criteria as the Committee in its sole discretion shall establish from time to time. A Restoration Option shall entitle the holder thereof to purchase a number of Shares equal to the number of such Shares so delivered or withheld upon exercise of the original Option, in the discretion of the Committee. A Restoration Option shall have a per share exercise price of not less than the Fair Market Value of the Shares subject to such Restoration Option on the date of grant thereof and such other terms and conditions as the Committee in its sole discretion shall determine. SECTION 8. Stock Appreciation Rights. (a) Grant. Subject to the provisions of the Plan, the Committee shall have sole and complete authority to determine the Officers to whom Stock Appreciation Rights shall be granted, the number of Shares to be covered by each Stock Appreciation Right Award, the grant price thereof and the conditions and limitations applicable to the exercise thereof. Stock Appreciation Rights may be granted in tandem with another Award, in addition to another Award, or freestanding and unrelated to another Award. Stock Appreciation Rights granted in tandem with or in addition to an Award may be granted either at the same time as the Award or at a later time. (b) Exercise and Payment. A Stock Appreciation Right shall entitle the Participant to receive an amount equal to the excess of the Fair Market Value of a Share on the date of exercise of the Stock Appreciation Right over the grant price thereof, provided that the Committee may for administrative convenience determine that, with respect to any Stock Appreciation Right which is not related to an Incentive Stock Option and which can only be exercised for cash during limited periods of time in order to satisfy the conditions of Rule 16b-3, the exercise of such Stock Appreciation Right for cash during such limited period shall be deemed to occur for all purposes hereunder on the day during such limited period on which the Fair Market Value of the Shares is the highest. Any such determination by the Committee may be changed by the Committee from time to time and may govern the exercise of Stock Appreciation Rights granted prior to such determination as well as Stock Appreciation Rights thereafter granted. The Committee shall determine whether a Stock Appreciation Right shall be settled in cash, Shares or a combination of cash and Shares. (c) Other Terms and Conditions. Subject to the terms of the Plan and any applicable Award Agreement, the Committee shall determine, at or after the grant of a Stock Appreciation Right, the term, methods of exercise, methods and form of settlement, and any other terms and conditions of any Stock Appreciation Right. Any such determination by the Committee may be changed by the Committee from time to time and may govern the exercise of Stock Appreciation Rights granted or exercised prior to such determination as well as Stock Appreciation Rights granted or exercised thereafter. The Committee may impose such conditions or restrictions on the exercise of any Stock Appreciation Right as it shall deem appropriate. SECTION 9. Restricted Stock. (a) Grant. Subject to the provisions of the Plan, the Committee shall have sole and complete authority to determine the Officers to whom Shares of Restricted Stock shall be granted, the number of Shares of Restricted Stock to be granted to each Participant, the duration of the period during which, and the conditions under which, the Restricted Stock may be forfeited to the Company, and the other terms and conditions of such Awards. Notwithstanding any other provision of this Plan to the contrary, the period during which such Awards may be forfeited to the Company shall not terminate prior to the third anniversary of the date of grant of such Award; provided, however, that the Committee may determine to have such period terminate after the first anniversary of the date of grant of any such Award if the Committee has established conditions for the earning of such Award that relate to performance of the Company or one or more divisions or units thereof. Subject to the preceding sentence, once established, such performance vesting criteria may be changed, adjusted or amended during the term of an Award. 7 (b) Transfer Restrictions. Shares of Restricted Stock may not be sold, assigned, transferred, pledged or otherwise encumbered, except as provided in the Plan or the applicable Award Agreements. Certificates issued in respect of Shares of Restricted Stock shall be registered in the name of the Participant and deposited by such Participant, together with a stock power endorsed in blank, with the Company. Upon the lapse of the restrictions applicable to such Shares of Restricted Stock, the Company shall deliver such certificates to the Participant or the Participant's legal representative. (c) Dividends and Distributions. Dividends and other distributions paid on or in respect of any Shares of Restricted Stock may be paid directly to the Participant, or may be reinvested in additional Shares of Restricted Stock, as determined by the Committee in its sole discretion. SECTION 10. Change of Ownership. Notwithstanding anything to the contrary in this Plan, unless otherwise specifically determined by the Committee at the time of grant, all Options theretofore granted and not fully exercisable shall become exercisable in full and the restrictions on any other outstanding Awards shall lapse upon the occurrence of a Change of Ownership. SECTION 11. Other Stock-Based Awards. The Committee shall have authority to grant to any Officer an "Other Stock-Based Award", which shall consist of any right which is (i) not an Award described in Sections 6 through 9 above and (ii) an Award of Shares or an Award denominated or payable in, valued in whole or in part by reference to, or otherwise based on or related to, Shares (including, without limitation, securities convertible into Shares), as deemed by the Committee to be consistent with the purposes of the Plan; provided that any such rights must comply, to the extent deemed desirable by the Committee, with Rule 16b-3 and applicable law. Subject to the terms of the Plan and any applicable Award Agreement, the Committee shall determine the terms and conditions of any such Other Stock-Based Award. SECTION 12. Amendment and Termination. (a) Amendments to the Plan. Subject to the authority of the Committee as set forth in Section 3, the Board may amend, alter, suspend, discontinue, or terminate the Plan or any portion thereof at any time; provided that no such amendment, alteration, suspension, discontinuation or termination shall be made without shareholder approval if such approval is necessary to comply with any tax or regulatory requirement, including for these purposes any approval requirement which is a prerequisite for exemptive relief from Section 16(b) of the Exchange Act, for which or with which the Board deems it necessary or desirable to qualify or comply. Notwithstanding anything to the contrary herein, the Committee may amend the Plan in such manner as may be necessary so as to have the Plan conform with local rules and regulations in any jurisdiction outside the United States. (b) Amendments to Awards. The Committee may waive any conditions or rights under, amend any terms of, or alter, suspend, discontinue, cancel or terminate, any Award theretofore granted, prospectively or retroactively; provided that any such waiver, amendment, alteration, suspension, discontinuance, cancellation or termination that would adversely affect the rights of any Participant or any holder or beneficiary of any Award theretofore granted shall not to that extent be effective without the consent of the affected Participant, holder or beneficiary; and provided further that no outstanding Option may be amended to decrease the per Share exercise price thereof, except in accordance with Section 4(c). (c) Adjustment of Awards Upon the Occurrence of Certain Unusual or Nonrecurring Events. The Committee is hereby authorized to make adjustments in the terms and conditions of, and the criteria included in, Awards in recognition of unusual or nonrecurring events (including, without limitation, the events described in Section 4(c) hereof) affecting the Company, any Affiliate, or the financial statements of the Company or any Affiliate, or of changes in applicable laws, regulations, or accounting principles, whenever the Committee determines that such adjustments are appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan; provided that no such adjustment shall be authorized to the extent that such authority would be inconsistent with the Plan's meeting the requirements of Section 162(m) of the Code, as from time to time amended. 8 (d) Cancellation. Any provision of this Plan or any Award Agreement to the contrary notwithstanding, the Committee may cause any Award granted hereunder to be canceled in consideration of a cash payment or alternative Award made to the holder of such canceled Award equal in value to the Fair Market Value of such canceled Award. SECTION 13. General Provisions. (a) Dividend Equivalents. In the sole and complete discretion of the Committee, an Award, whether made as an Other Stock-Based Award under Section 10 or as an Award granted pursuant to Sections 6 through 9 hereof, may provide the Participant with dividends or dividend equivalents, payable in cash, Shares, other securities or other property on a current or deferred basis. (b) Nontransferability. No Award shall be assigned, alienated, pledged, attached, sold or otherwise transferred or encumbered by a Participant, except by will or the laws of descent and distribution, provided, however, that an Award may be transferable, to the extent set forth in the applicable Award Agreement, (i) if such Award Agreement provisions do not disqualify such Award for exemption under Rule 16b-3, or (ii) if such Award is not intended to qualify for exemption under such rule. (c) No Rights to Awards. Except as may be provided in an Employment Agreement, no Officer, Participant or other Person shall have any claim to be granted any Award, and there is no obligation for uniformity of treatment of Employees, Participants, or holders or beneficiaries of Awards. The terms and conditions of Awards need not be the same with respect to each recipient. (d) Share Certificates. All certificates for Shares or other securities of the Company or any Affiliate delivered under the Plan pursuant to any Award or the exercise thereof shall be subject to such stop transfer orders and other restrictions as the Committee may deem advisable under the Plan or the rules, regulations, and other requirements of the Securities and Exchange Commission, any stock exchange upon which such Shares or other securities are then listed, and any applicable Federal or state laws, and the Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions. (e) Delegation. Subject to the terms of the Plan and applicable law, the Committee may delegate to one or more officers or managers of the Company or any Affiliate, or to a committee of such officers or managers, the authority, subject to such terms and limitations as the Committee shall determine, to grant Awards to, or to cancel, modify or waive rights with respect to, or to alter, discontinue, suspend, or terminate Awards held by, Officers who are not officers or directors of the Company for purposes of Section 16 of the Exchange Act, or any successor section thereto, or who are otherwise not subject to such Section. (f) Withholding. A Participant may be required to pay to the Company or any Affiliate and the Company or any Affiliate shall have the right and is hereby authorized to withhold from any Award, from any payment due or transfer made under any Award or under the Plan or from any compensation or other amount owing to a Participant the amount (in cash, Shares, other securities, other Awards or other property) of any applicable withholding taxes in respect of an Award, its exercise, or any payment or transfer under an Award or under the Plan and to take such other action as may be necessary in the opinion of the Company to satisfy all obligations for the payment of such taxes. The Committee may provide for additional cash payments to holders of Awards to defray or offset any tax arising from the grant, vesting, exercise or payments of any Award. 9 (g) Award Agreements. Each Award hereunder shall be evidenced by an Award Agreement which shall be delivered to the Participant and shall specify the terms and conditions of the Award and any rules applicable thereto, including but not limited to the effect on such Award of the death, retirement or other termination of employment of a Participant. (h) No Limit on Other Compensation Arrangements. Nothing contained in the Plan shall prevent the Company or any Affiliate from adopting or continuing in effect other compensation arrangements, which may, but need not, provide for the grant of bonuses, options, restricted stock, Shares and other types of Awards provided for hereunder (subject to shareholder approval if such approval is required), and such arrangements may be either generally applicable or applicable only in specific cases. (i) No Right to Employment. The grant of an Award shall not be construed as giving a Participant the right to be retained in the employ of the Company or any Affiliate. Further, the Company or an Affiliate may at any time dismiss a Participant from employment, free from any liability or any claim under the Plan, unless otherwise expressly provided in the Plan or in any Award Agreement. (j) No Rights as Stockholder. Subject to the provisions of the applicable Award, no Participant or holder or beneficiary of any Award shall have any rights as a stockholder with respect to any Shares to be distributed under the Plan until he or she has become the holder of such Shares. Notwithstanding the foregoing, in connection with each grant of Restricted Stock hereunder, the applicable Award shall specify if and to what extent the Participant shall not be entitled to the rights of a stockholder in respect of such Restricted Stock. (k) Governing Law. The validity, construction, and effect of the Plan and any rules and regulations relating to the Plan and any Award Agreement shall be determined in accordance with the laws of the State of California, except to the extent that the General Corporation Law of the State of Delaware shall be applicable to the Company. (l) Severability. If any provision of the Plan or any Award is or becomes or is deemed to be invalid, illegal, or unenforceable in any jurisdiction or as to any Person or Award, or would disqualify the Plan or any Award under any law deemed applicable by the Committee, such provision shall be construed or deemed amended to conform the applicable laws, or if it cannot be construed or deemed amended without, in the determination of the Committee, materially altering the intent of the Plan or the Award, such provision shall be stricken as to such jurisdiction, Person or Award and the remainder of the Plan and any such Award shall remain in full force and effect. (m) Other Laws. The Committee may refuse to issue or transfer any Shares or other consideration under an Award if, acting in its sole discretion, it determines that the issuance or transfer of such Shares or such other consideration might violate any applicable law or regulation or entitle the Company to recover the same under Section 16(b) of the Exchange Act, and any payment tendered to the Company by a Participant, other holder or beneficiary in connection with the exercise of such Award shall be promptly refunded to the relevant Participant, holder or beneficiary. Without limiting the generality of the foregoing, no Award granted hereunder shall be construed as an offer to sell securities of the Company, and no such offer shall be outstanding, unless and until the Committee in its sole discretion has determined that any such offer, if made, would be in compliance with all applicable requirements of the U.S. federal securities laws and any other laws to which such offer, if made, would be subject. (n) No Trust or Fund Created. Neither the Plan nor any Award shall create or be construed to create a trust or separate fund of any kind or a fiduciary relationship between the Company or any Affiliate and a Participant or any other Person. To the extent that any Person acquires a right to receive payments from the Company or any Affiliate pursuant to an Award, such right shall be no greater than the right of any unsecured general creditor of the Company or any Affiliate. (o) No Fractional Shares. No fractional Shares shall be issued or delivered pursuant to the Plan or any Award, and the Committee shall determine whether cash, other securities, or other property shall be paid or transferred in lieu of any fractional Shares or whether such fractional Shares or any rights thereto shall be canceled, 10 terminated, or otherwise eliminated. (p) Headings. Headings are given to the Sections and subsections of the Plan solely as a convenience to facilitate reference. Such headings shall not be deemed in any way material or relevant to the construction or interpretation of the Plan or any provision thereof. SECTION 13. Term of the Plan. (a) Effective Date. The Plan shall be effective as of December 1, 1994, subject to approval by the shareholders of the Company within one year thereafter. (b) Expiration Date. No Incentive Stock Option shall be granted under the Plan after November 30, 2004. Unless otherwise expressly provided in the Plan or in an applicable Award Agreement, any Award granted hereunder may, and the authority of the Board or the Committee to amend, alter, adjust, suspend, discontinue, or terminate any such Award or to waive any conditions or rights under any such Award shall, continue after the authority for grant of new Awards hereunder has been exhausted. EX-10.19 3 EXHIBIT 10.19 1 EXHIBIT 10.19 KAUFMAN AND BROAD HOME CORPORATION PERFORMANCE BASED INCENTIVE PLAN FOR SENIOR MANAGEMENT STOCK OPTION AGREEMENT This agreement dated the ___ of: ___________, 199__ WITNESSETH: 1. Pursuant to the provisions of the Kaufman and Broad Home Corporation Performance- Based Incentive Plan for Senior Management (the "Plan"), Kaufman and Broad Home Corporation (the "Company") on the date set forth above has granted to ____________________ (the "Optionee"), an option (the "Option") to purchase from the Company an aggregate of __________ shares of Common Stock, $1.00 par value, of the Company ("Common Stock"), at the purchase price of $________ per share, the Option to be exercisable as hereinafter provided. A copy of the Plan is attached hereto and made a part hereof. 2. Subject to the terms and conditions of the Plan and action taken pursuant to the Plan, both of which may modify the terms hereof, the shares may be purchased in accordance with the following schedule. If the Optionee is employed by the Company or its subsidiaries on the date indicated:
On or After Shares Subject to Purchase ----------- -------------------------- ___________________ 20% of Grant ___________________ 20% of Grant ___________________ 20% of Grant ___________________ 20% of Grant ___________________ 20% of Grant
Any exercise of the Option shall be made by giving the Company written notice of exercise specifying the number of shares to be purchased. The notice of exercise shall be accompanied by tender to the Company of cash, or its equivalent, or of shares of the Company stock owned by the Optionee (which are not the subject of any pledge or other security interest), or of a combination of the foregoing, provided that the combined value of all such cash and cash equivalents and the fair market value of any such stock so tendered to the Company, valued as of the date of such tender, is equal to the full purchase price of said shares plus the related amount of any taxes required to be withheld by the Company in connection with such exercise, to the extent such withholding taxes are then ascertainable. If the amount of such taxes is not ascertainable at the time of the notice of exercise, such amount shall be tendered by the Optionee to the Company as soon as the same shall become ascertainable and shall be communicated to the Optionee by the Company. 2 3. Without limiting the generality of paragraph 1 hereof, it is understood and agreed that the Option is subject to the following conditions: (a) the Option shall not in any event be exercisable after the earlier of (1) the close of business on __________ or (2) three months after the termination of the Optionee's employment with the Company or its subsidiaries. (b) the Option shall not be transferred except by will or the laws of descent and distribution and, during the lifetime of the Optionee, shall be exercised only by the Optionee; and (c) neither the Optionee nor any legal representative, legatee, or distributee of the Optionee shall be deemed to be a holder of or possess any stockholder rights with respect to any shares subject to the Option prior to the issuance of such shares upon exercise of the Option. (d) Notwithstanding subparagraph (a) of this paragraph, in the event of the death of the Optionee while the Optionee is employed by KBHC or its subsidiaries or three months thereafter, the option herein will terminate one year from the date of death. 4. Neither the execution and delivery hereof nor the granting of the Option shall constitute or be evidence of any agreement or understanding, express or implied, on the part of the Company or any of its subsidiaries to employ or continue the employment of the Optionee for any period. 5. In the event of any merger, reorganization, consolidation, recapitalization, stock dividend, or other change in corporate structure affecting the Common Stock of the Company, such adjustment shall be made in the number and option price of the shares subject to the Option as may be determined to be appropriate by the Committee. 6. The Optionee agrees that prior to any sale of the shares purchased pursuant to the Option, the Optionee will notify the Company in order to enable it to take any steps required by the Securities Act of 1933 in connection with such sale and further agrees that he will not complete any such sale until he has been advised by the Company that such steps have been taken. 7. Any notice given hereunder to the Company shall be addressed to the Company, attention Vice President, Human Resources, and any notice given hereunder to the Optionee shall be addressed to him at his address as shown on the records of the Company. 8. The Optionee agrees to be bound by the terms and conditions hereof and of the Plan. 3 IN WITNESS WHEREOF, the Company, by its duly authorized officer, and the Optionee have executed this Agreement in duplicate as of the day and year first above written. KAUFMAN AND BROAD HOME CORPORATION By________________________________ [ ] OPTIONEE ___________________________________ [ ] EX-10.20 4 EXHIBIT 10.20 1 EXHIBIT 10.20 [KAUFMAN & BROAD LOGO] December 1, 1995 Mr. Bruce Karatz Chairman, President and Chief Executive Officer Kaufman and Broad Home Corporation 10990 Wilshire Boulevard, 7th Floor Los Angeles, California 90024 Re: Employment Agreement Dear Bruce: This letter will confirm our agreement concerning your continued employment with Kaufman and Broad Home Corporation (the "Company") as follows: 1. Employment. The Company hereby employs you and you hereby accept employment by the Company in accordance with the terms and provisions of this Agreement. You shall be an employee exclusively of the Company and shall serve the Company to the best of your abilities, devoting your full productive time, energies, and abilities to the fulfillment of your obligations hereunder. All improvements, discoveries, business relationships, corporate opportunities, management procedures, and goodwill conceived, divested, established, developed, or perfected by you during the period of your employment and related in any way to the business of the Company or any of its affiliates shall promptly be disclosed to and be the exclusive property of the Company. 2. Term. The term of this Agreement shall commence on December 1, 1995, and, subject to earlier termination as provided herein, shall continue for a term of six years, expiring November 30, 2001, to be automatically extended year to year thereafter, unless either party shall have given six months' prior written notice of an intention not to extend. 3. Duties and Responsibilities. You shall be employed as the Chairman, President and Chief Executive Officer of Kaufman and Broad Home Corporation, and as such shall have responsibility for the supervision and management of the world-wide activities of the Company and its subsidiaries. You shall manage such activities and perform such duties in accordance with your judgment and in the best interests of the Company and its stockholders, subject to such policies and directives as promulgated by the Board of Directors of the Company. 2 Mr. Bruce Karatz December 1, 1995 Page 2 4. Compensation. For all services to be rendered by you to the Company and its affiliates hereunder, including without limitation, services as an officer, director, or member of any committee, you shall be compensated as follows: (a) Base Salary. You shall receive a fixed base salary, which shall be payable in semi-monthly installments, in accordance with the customary payroll practices of the Company. For the period December 1, 1995 to November 30, 1996, your base salary shall be at an annual rate of $650,000, and, commencing December 1, 1996 and annually thereafter, your salary shall be adjusted in accordance with the judgment and discretion of the Board of Directors of the Company, provided that in no event shall your base salary during the term of this Agreement be less than at the annual rate of $650,000. (b) Incentive Compensation. You shall be entitled to earn annual incentive compensation for the fiscal year ending November 30, 1996, and each subsequent fiscal year during the term hereof. All incentive compensation, including restricted stock awards to which you are entitled under this paragraph, shall be made under and subject to the terms of the Performance-Based Incentive Plan for Senior Management (the "Plan") which is attached as Appendix A. The incentive compensation you shall be entitled to earn is as follows: (i) An annual cash incentive compensation equal to 1.25% of the pretax, preincentive income ("PPI") of the Company, as defined in Appendix B, provided: (aa) No such incentive shall be payable with regard to any fiscal year in which the pretax return on equity ("ROE") of the Company, as defined in Appendix B, is not equal to or greater than ten percent (10%); and (bb) In no event shall the amount of the cash incentive to be paid under this subparagraph (i) be greater in any fiscal year than $3,000,000; and (cc) As in the past, this formula may be adjusted from time to time. (ii) An annual special grant of restricted stock where the number of restricted shares to be awarded shall be determined by dividing the product of .50% times (PPI minus $50,000,000) by the average share price determined by averaging the high and the low price of the shares of the common stock of the Company on the New York Stock Exchange on the date of the grant. This restricted stock shall vest upon your fifty-fifth birthday provided you are still employed by the Company at that time and shall vest earlier upon your termination of employment due to death, disability (as defined in Section 5(b)), involuntary termination of employment by the Company without "Cause" (as defined in Section 6(d)), or voluntary termination of employment for "Good Reason" (as defined in Section 6(e)) or upon a sale of the Company (as defined in Section 6(a)). 3 Mr. Bruce Karatz December 1, 1995 Page 3 Except as provided above, restricted stock granted under this subparagraph (ii) shall be forfeited upon your voluntary termination of employment without "Good Reason" before your fifty-fifth birthday. The terms and conditions of the restricted stock are more fully defined in Appendix C. No fractional shares shall be issued hereunder. No special restricted shares shall be issued with regard to any fiscal year in which the Company does not have PPI in excess of $50,000,000. This limitation shall not apply to any restricted stock grants which you may be entitled to receive pursuant to Section 4(c). (aa) In no event shall the aggregate number of shares awarded pursuant to an annual special grant of restricted stock under this subparagraph (ii) during any fiscal year exceed 100,000 shares, plus the Carryover Restricted Stock Amount. The "Carryover Restricted Stock Amount" is 100,000 shares for each fiscal year commencing on or after December 1, 1995 and ending prior to the fiscal year for which the special grant of restricted stock is being made, reduced by the number of shares of stock covered by special grants of restricted stock previously made during any fiscal year commencing on or after December 1, 1995. (bb) The limits on the aggregate number of shares which may be awarded under subparagraph (ii)(aa) above shall be appropriately adjusted to reflect any change in the shares of the stock of the Company as a result of any stock split, stock dividend, recapitalization, merger, consolidation, reorganization, spin-off, other distribution of stock or property, partial or complete liquidation, or other similar corporate transaction. (iii) A defined benefit supplemental retirement plan ("SERP") which will provide an annual retirement benefit of $492,000 per year for twenty-five years if you retire at age sixty. The terms and conditions of this SERP are more fully defined in Appendix D. The SERP will be funded with a rabbi trust which may own a life insurance policy on your life as described in Appendix D. The Company will contribute $250,000 to the rabbi trust during each fiscal year while you are employed by the Company. The Company shall be obligated to pay the SERP benefits in accordance with the terms and conditions of the SERP as set forth in Appendix D, irrespective of whether or not the annual amounts contributed by the Company to fund the SERP are sufficient to meet the Company's entire obligation to pay SERP benefits. (iv) By no later than February 1, 1997, and each anniversary thereof, the Personnel, Compensation and Stock Plan Committee of the Company's Board of Directors, or its successor committee (the "Committee"), will certify the amount of incentive compensation to which you are entitled, if any, for the preceding fiscal year under subpargraphs (i) and (ii) above. The grant date of any restricted stock awarded 4 Mr. Bruce Karatz December 1, 1995 Page 4 under subparagraph (ii) shall be the effective date of such Committee certification. Promptly following the effective date of the certification, the Company will deliver any cash award earned under subparagraph (i) and prepare an agreement substantially in the form of Appendix C evidencing any restricted stock award earned under subparagraph (ii). (c) Employment Benefits. You shall also be entitled to receive during the term of this Agreement all other employee benefits, including reimbursement for bona fide business expenses, a car leased by you and paid for by the Company, all automobile expenses, vacations, life and medical insurance, key man motivational programs, the deferred profit sharing program, and stock option, restricted stock and similar plans as may be offered by the Company to its key executive personnel. You shall further be entitled to receive up to $35,000 per year to pay for personal financial management services. This payment will be in addition to tax and financial counseling services which will be offered to you on the same basis as offered by the Company to its key executives. (d) Extension of Restricted Stock and Stock Options. Upon your retirement after you attain age 55, all unvested restricted stock whenever granted and held by you shall vest. Upon your retirement after you attain age 55, all stock options granted after January 1, 1996 and held by you shall not be forfeited but shall be retained by you and shall continue to vest in accordance with their terms as though you were still employed by the Company for a period of five years following your retirement. All such outstanding stock options will expire at the earlier of their original expiration dates or five years following your retirement. 5. Termination. (a) Death. In the event of your death, this Agreement and all your unearned rights hereunder shall terminate immediately. In such event, the Company shall promptly pay to your estate all earned but unpaid incentive compensation. In addition, the Company shall pay your estate the current year incentive compensation as if you survived until November 30 and any amounts due under the SERP defined in Appendix D. Any unvested stock options or restricted stock which you then hold shall become vested upon your death. Lastly, the Company shall pay to your estate an additional death benefit equal to two times the sum of your average annual base salary and the "value of the incentive compensation earned" (as defined below) for the prior three fiscal years, which will be payable by the Company in a lump sum to your estate. For purposes of Sections 5(a), 5(b), 6(a) and 6(b) of this Agreement, the "value of the incentive compensation earned" for a fiscal year shall be determined by multiplying 1.75% times PPI (as defined in Appendix B) for the applicable fiscal year, provided that the ROE of the Company was equal to or greater than ten percent (10%) for the applicable fiscal year. The "value of the incentive compensation earned" for any fiscal year shall be deemed to be zero if the 5 Mr. Bruce Karatz December 1, 1995 Page 5 ROE of the Company was less than ten percent (10%) for the applicable fiscal year. In lieu of payments to your estate following your death, you may designate a beneficiary or beneficiaries to whom all payments which may be due under this Agreement and the SERP will be made in the event of your death. Such designation shall be made on a form, substantially similar to Appendix E hereto, delivered to the Company. You shall have the right to change or revoke any such designation from time to time by filing a new designation or notice of revocation with the Company, and no notice to any beneficiary nor consent by any beneficiary shall be required to effect any such change or revocation. If you shall fail to designate a beneficiary before your death, or if no designated beneficiary survives you, any payments which may be due under this Agreement following your death will be paid to your estate. (b) Disability. In the event you shall become unable to perform the services contemplated by this Agreement due to a physical or mental disability for a continuous period of eight weeks or an aggregate of more than 90 days in any 120 day period, the Company may, to the extent consistent with the federal Family and Medical Leave Act and the California Family Rights Act, terminate this Agreement by giving written notice of such termination to you. In the event of any such termination by the Company, the Company shall promptly pay to you all earned but unpaid incentive compensation. In addition, the Company shall pay you the current year incentive compensation as if the disability did not occur until November 30. Lastly, the Company shall pay to you an amount equal to two times the sum of your average annual base salary and the "value of the incentive compensation earned" (as defined in Section 5(a)) for the prior three fiscal years, reduced by amounts paid under a Company disability or income replacement plan, in twelve monthly installments following this termination. The Company may condition the payments set forth above upon securing from you an appropriate release of claims under the federal Family and Medical Leave Act and the California Family Rights Act. 6. Payment on Sale of Company; Severance Payments. (a) Sale of the Company. If a "Change of Ownership" (as defined below) of the Company occurs during the term of this Agreement, the Company shall pay you promptly in cash an amount equal to two times the sum of your average annual base salary and the "value of the incentive compensation earned" (as defined in Section 5(a)) for the prior three fiscal years preceding the fiscal year in which the "Change of Ownership" occurs. In the event payment is made under this subparagraph (a), no amount shall be payable under subparagraph (b) below. (b) Severance Payment. If the Company shall terminate your employment without "Cause" (as defined below) or you shall terminate your employment for "Good Reason" (as defined below), the Company shall, unless payment has been previously made to you under subparagraph (a) above, pay you promptly in cash an amount equal to two times the sum of your average annual base salary and the "value of the incentive compensation earned" (as defined in 6 Mr. Bruce Karatz December 1, 1995 Page 6 Section 5(a)) for the prior three fiscal years preceding the termination of your employment. (c) Change of Ownership. A "Change of Ownership" 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 date hereof, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the "Act"); provided that, without limitation, such a "Change of Ownership" 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 20% 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 of Directors of the Company (the "Board" generally and as of the date hereof 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 Agreement, considered as though such person were a member of the Incumbent Board. For purposes of any incentive compensation paid to you pursuant to this Agreement, the definition of "Change of Ownership" set forth herein shall prevail over the definition of "Change in Ownership", or any similar term, contained in the Plan, or any other employee compensation plan, under which such incentive compensation may be granted. (d) Cause. "Cause" shall mean (i) an act or acts of dishonesty taken by you and intended to result in your substantial personal enrichment at the expense of the Company or (ii) repeated violations by you of your obligations under this Agreement which are demonstrably willful and deliberate and which result in material injury to the Company. (e) Good Reason. "Good Reason" shall mean (i) a material diminution in your position or responsibilities, (ii) a material diminution of your salary, aggregate incentive compensation opportunities (excluding any reduction in incentive compensation awards due to the economic performance of the Company) or aggregate benefits or (iii) any required relocation 7 Mr. Bruce Karatz December 1, 1995 Page 7 of your office beyond a 50 mile radius from the present location of your office. 7. Exclusive Benefit. You and the Company have agreed that a primary material element of this contract is the desire of the Company to insure to itself and its affiliates the sole and exclusive right to receive the full benefit of your time, skill, and opportunities until November 30, 2001 or any later date of termination of this Agreement, as the same may be extended. Subject only to the Company's payment to you of the compensation provided hereunder, you have agreed that until said date you will not, as a director, officer, agent, employee, partner, owner, 5 or more percent shareholder, or otherwise, enter into or conduct any business venture which may be competitive, directly or indirectly, with that of the Company or any affiliate. A business or activity shall be deemed to be competitive if it is substantially similar to one engaged in or conducted by the Company or any affiliate and is conducted within a radius of 150 miles from any location in which such business or activity is engaged in or conducted by the Company or an affiliate. It is understood that passive investments in income producing properties are permitted by this paragraph. Furthermore, you have agreed that you will not, during the term of this Agreement or for a period of two years thereafter, employ or seek to employ any person employed by the Company or any of its affiliates in connection with any business activities in which you may engage. During the performance of your duties on behalf of the Company, you shall receive and be entrusted with certain confidential and/or secret information of a proprietary nature. You shall not discuss or use, during the term of this employment agreement or any time thereafter, any such information which is not otherwise publicly available. You acknowledge that your extensive experience and knowledge of the Company and relationship with its employees make the services to be performed by you hereunder of a special, unusual, and peculiar value to the Company, not readily replaceable, and that by reason of your continued employment you will continue to acquire additional confidential information and trade secrets. The loss of your services hereunder or the disclosure of such confidential information and trade secrets or solicitation by you of employees of the Company cannot be reasonably or adequately compensated for in money damages. Accordingly, we have agreed that in addition to any other legal remedies available, the Company shall be entitled to seek equitable relief to enjoin any violation by you of this Agreement. 8. Miscellaneous. (a) The waiver of either party hereto of a breach of any provision of this Agreement by the other party shall not operate or be construed to operate as a waiver of any subsequent breach by the other party. (b) This Agreement contains the entire agreement between you and the Company 8 Mr. Bruce Karatz December 1, 1995 Page 8 concerning your employment during the term hereof. It may not be changed orally but only by an agreement, in writing, signed by you and approved by the Board of Directors of the Company. Notwithstanding the foregoing, it is understood that you shall be entitled to receive base salary and incentive compensation for the fiscal year ending November 30, 1995 in accordance with your prior Employment Agreement entered into with the Company dated January 4, 1988, as amended on February 16, 1995. (c) If any of the provisions of this Agreement shall be unlawful, void, or for any reason unenforceable, they shall be deemed separate from and in no way affect the validity or enforceability of the remaining provisions of the Agreement. (d) This Agreement is entered into in Los Angeles, California and shall be construed and enforced under the laws of the State of California. (e) In the event any legal action or arbitration shall be brought for the enforcement of this Agreement, or because of any alleged dispute, breach, or default hereunder, the successful or prevailing party or parties shall be entitled to recover reasonable attorneys' fees and other costs incurred in such legal action or arbitration, in addition to any other relief to which it or he may be entitled. Nothing hereunder, however, shall be construed to authorize filing suit in court with regard to any dispute which is to be resolved by arbitration pursuant to Section 9 of this Agreement. (f) The Agreement shall bind and benefit the Company, its successors and assigns and shall insure to the benefit of and be binding on you, your heirs, executors and administrators, provided that your duties and responsibilities hereunder may not be assigned or delegated by you. (g) All payments made by the Company under this Agreement shall be subject to normal deductions and withholding to the extent required by law. 9. Arbitration. In the event that any controversy or dispute between you and the Company arising out of or relating to the employment relationship, including, but not limited to any disputes in connection with the validity, construction, application or enforcement of the terms of this Agreement or the SERP, occurs, any such controversy or dispute shall be submitted to final and binding arbitration pursuant to the then most applicable Rules of the American Arbitration Association; provided, however, that unless the parties otherwise agree, the arbitration shall be before a single arbitrator selected either by mutual agreement or, failing agreement, from a list of seven arbitrators provided by AAA, four of whom shall be retired judges of the Superior or Appellate Courts of California who are residents of Los Angeles or Orange County and, if such list exists at the time of the dispute, who are members of the Independent List of Retired Judges and three of whom shall be members of the National 9 Mr. Bruce Karatz December 1, 1995 Page 9 Academy of Arbitrators, resident in Los Angeles or Orange Counties. In the event the parties are unable to agree upon such an arbitrator from such list of seven, each party shall strike one name in turn with the first to strike being chosen by lot. When only one name remains, that person shall be the parties' arbitrator. The parties hereto expressly waive their rights, if any, to have such matters heard by a jury or a judge, whether in state or federal court. The cost of the arbitration, including, but not limited to, any reasonable legal fees or other expenses incident thereto incurred in connection with such arbitration, shall be determined by the arbitrator(s) and shall be borne by the nonprevailing party. During the pendency of any arbitration concerning the propriety of your termination and up to the date of the arbitrator's award, you shall participate in all employee benefit programs of the Company (other than the 401(k) plan) as provided in Section 4(c) above. The Company agrees to pay interest on any amounts payable to you under this Agreement which are not paid within sixty (60) days after the date when due and on any money judgment which is awarded to you following a proceeding to enforce any portion of the Agreement from the date that payments should have been made under this Agreement. Such interest shall be calculated at the prime rate offered by Bank of America, or its successor, from the date that payments should have been made under this Agreement to the time of actual payment. Very truly yours, /s/ James A. Johnson --------------------------------------- James A. Johnson, Chairman Personnel, Compensation and Stock Plan Committee Agreed this 16th day of November, 1995. /s/ Bruce Karatz - --------------------------- Bruce Karatz 10 APPENDIX A KAUFMAN AND BROAD HOME CORPORATION PERFORMANCE-BASED INCENTIVE PLAN FOR SENIOR MANAGEMENT SECTION 1. Purpose. The purposes of the Kaufman and Broad Home Corporation Performance-Based Incentive Plan for Senior Management are to promote the interests of Kaufman and Broad Home Corporation (the "Company") and its stockholders by (i) attracting and retaining exceptional executive personnel and other key employees of the Company and its Affiliates, as defined below; (ii) motivating such employees by means of performance-related incentives to achieve long-range performance goals; (iii) enabling such employees to participate in the long-term growth and financial success of the Company; and (iv) qualifying compensation paid under the Plan for deductibility under Section 162(m) of the Internal Revenue Code. SECTION 2. Definitions. As used in the Plan, the following terms shall have the meanings set forth below: "Affiliate" shall mean (i) any entity that, directly or indirectly, is controlled by the Company and (ii) any entity in which the Company has a significant equity interest, in either case as determined by the Committee. "Award" shall mean any Performance-Based Bonus opportunity granted under the Plan, as well as any Option, Stock Appreciation Right, award of Restricted Stock, Restricted Stock Units or Other Stock-Based Award granted under the Plan or granted in payment or settlement of a Performance-Based Bonus. "Award Agreement" shall mean any written agreement, contract, or other instrument or document (which may include, if so designated by the Committee, an Employment Agreement, as defined herein) evidencing any Award, which may, but need not, be executed or acknowledged by a Participant. "Board" shall mean the Board of Directors of the Company. "Change of Ownership" shall be deemed to have occurred if either (1) individuals who, as of the effective date of this Plan, constitute the Board of the Company (as of the date hereof, the "Incumbent Board") cease for any reason to constitute at least a majority of the directors constituting the Board, provided that any person becoming a director subsequent to the effective date of this Plan whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least three-quarters (3/4) of the then directors who are members of the Incumbent Board (other than an election or nomination of an individual whose initial assumption of office is (A) in connection with the acquisition by a third person, including a "group" as such term is used in Section 13(d)(3) of the Exchange Act, of beneficial ownership, directly or indirectly, of 20% or more of the combined voting securities ordinarily having the right to vote for the election of directors of the Company (unless such acquisition of beneficial ownership was approved by a 11 majority of the Board who are members of the Incumbent Board), or (B) in connection with an actual or threatened election contest relating to the election of the directors of the Company, as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) shall be, for purposes of this Plan, considered as though such person were a member of the Incumbent Board, or (2) the Board (a majority of which shall consist of directors who are members of the Incumbent Board) has determined that a Change of Ownership, for purposes of this Plan, shall have occurred. If any of the events enumerated in clauses (1) or (2) occur, the Board shall determine the effective date of the Change of Ownership resulting therefrom, for purposes of the Plan. "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. "Committee" shall mean a committee of the Board designated by the Board to administer the Plan and composed of not less than the minimum number of persons from time to time required by Rule 16b-3, each of whom (i) to the extent necessary to comply with Rule 16b-3 only, is a "disinterested person" within the meaning of Rule 16b-3 and (ii) to the extent necessary to comply with Section 162(m) only, is an "outside director" within the meaning of Section 162(m). Until otherwise determined by the Board, the Compensation Committee designated by the Board shall be the Committee under the Plan. "Company" shall mean Kaufman and Broad Home Corporation, together with any successor thereto. "Employment Agreement" shall mean (i) with respect to Awards relating to performance in fiscal year 1995, an agreement between the Company and a Participant, the effectiveness or continuing effectiveness of which is contingent upon approval, or approval of the Plan, by the Company's stockholders, which approval shall satisfy all applicable requirements of Section 162(m) and (ii) with respect to Awards relating to performance in any fiscal year of the Company after fiscal year 1995, an agreement between the Company and a Participant entered into prior to the end of the first fiscal quarter of such fiscal year. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. "Fair Market Value" shall mean the fair market value of the property or other item being valued, as determined by the Committee in its sole discretion. "Incentive Stock Option" shall mean a right to purchase Shares from the Company that is granted under Section 7 of the Plan and that is intended to meet the requirements of Section 422 of the Code or any successor provision thereto. "Non-Qualified Stock Option" shall mean a right to purchase Shares from the Company that is granted under Section 7 of the Plan and that is not intended to be an Incentive Stock Option. 12 "Officer" shall mean, at any time, an individual who is an officer of the Company or any of its subsidiaries. "Option" shall mean an Incentive Stock Option or a Non-Qualified Stock Option and shall include a Restoration Option. "Other Stock-Based Award" shall mean any right granted under Section 10 of the Plan. "Participant" shall mean any Officer selected by the Committee to receive an Award under the Plan. "Performance-Based Bonus" shall mean a bonus opportunity awarded in accordance with Section 6 of the Plan. "Person" shall mean any individual, corporation, partnership, association, joint-stock company, trust, unincorporated organization, government or political subdivision thereof or other entity. "Plan" shall mean this Kaufman and Broad Home Corporation Performance-Based Incentive Plan for Senior Management. "QDRO" shall mean a qualified domestic relations order meeting such requirements as the Committee shall determine, in its sole discretion. "Restoration Option" shall mean an Option granted pursuant to Section 7(e) of the Plan. "Restricted Stock" shall mean any Share granted under Section 9 of the Plan. "Restricted Stock Unit" shall mean any unit granted under Section 9 of the Plan. "Rule 16b-3" shall mean Rule 16b-3 as promulgated and interpreted by the SEC under the Exchange Act, or any successor rule or regulation thereto as in effect from time to time. "Section 162(m)" shall mean Section 162(m) of the Code and the rules and other authorities thereunder promulgated by the Internal Revenue Service of the Department of the Treasury. "SEC" shall mean the Securities and Exchange Commission or any successor thereto and shall include the Staff thereof. "Shares" shall mean shares of the Common Stock, 13 $1 par value, of the Company, or such other securities of the Company as may be designated by the Committee from time to time. "Stock Appreciation Right" shall mean any right granted under Section 8 of the Plan. "Substitute Awards" shall mean Awards granted in assumption of, or in substitution for, outstanding awards previously granted by a company acquired by the Company or with which the Company combines. SECTION 3. Administration. (a) Authority of Committee. The Plan shall be administered by the Committee. Subject to the terms of the Plan and applicable law, and in addition to other express powers and authorizations conferred on the Committee by the Plan, the Committee shall have full power and authority to: (i) designate Participants; (ii) determine the type or types of Awards to be granted to an eligible Officer; (iii) determine the number of Shares to be covered by, or with respect to which payments, rights, or other matters are to be calculated in connection with, Awards; (iv) determine the terms and conditions of any Award; (v) determine whether, to what extent, and under what circumstances Awards may be settled or exercised in cash, Shares, other securities, other Awards or other property, or canceled, forfeited, or suspended and the method or methods by which Awards may be settled, exercised, canceled, forfeited, or suspended; (vi) determine whether, to what extent, and under what circumstances cash, Shares, other securities, other Awards, other property, and other amounts payable with respect to an Award shall be deferred either automatically or at the election of the holder thereof or of the Committee; (vii) interpret and administer the Plan and any instrument or agreement relating to, or Award made under, the Plan; (viii) recommend to the Board any amendment, alteration, suspension, discontinuance or termination of the Plan, and subject to the shareholder approval requirement set forth in Section 11(a) to take any such action not required by applicable law to be taken by the Board, (ix) establish, amend, suspend, or waive such rules and regulations and appoint such agents as it shall deem appropriate for the proper administration of the Plan; and (x) make any other determination and take any other action that the Committee deems necessary or desirable for the administration of the Plan. (b) Committee Discretion Binding. Unless otherwise expressly provided in the Plan, all designations, determinations, interpretations, and other decisions under or with respect to the Plan or any Award shall be within the sole discretion of the Committee, may be made at any time and shall be final, conclusive, and binding upon all Persons, including the Company, any Affiliate, any Participant, any holder or beneficiary of any Award, any stockholder and any Officer. 14 SECTION 4. Award Limits. (a) Plan Shares. Subject to adjustment as provided in Section 4(c), the number of Shares with respect to which Awards may be granted under the Plan shall be 1,000,000. If, after the effective date of the Plan, any Shares covered by an Award denominated in Shares granted under the Plan, or to which such an Award relates, are forfeited, or if such an Award is settled for cash or otherwise terminates or is canceled without the delivery of Shares, then the Shares covered by such Award, or to which such Award relates, or the number of Shares otherwise counted against the aggregate number of Shares with respect to which Awards may be granted, to the extent of any such settlement, forfeiture, termination or cancellation, shall again become Shares with respect to which Awards may be granted. In the event that any Option or other Award granted hereunder is exercised through the delivery of Shares or in the event that withholding tax liabilities arising from such Award are satisfied by the withholding of Shares by the Company, the number of Shares available for Awards under the Plan shall be increased by the number of Shares so surrendered or withheld. (b) Individual Stock-Based Awards. Subject to adjustment as provided in Section 4(c), no Participant may receive stock-based Awards under the Plan in any calendar year that relate to more than 100,000 Shares (which number shall not be subject to reduction by any Restoration Options granted to such Participant during such calendar year); provided, however, that such number may be increased with respect to any Participant by any Shares available for grant to such Participant in accordance with this Paragraph 4(b) in any prior years that were not granted in such prior years. No provision of this Paragraph 4(b) shall be construed as limiting the amount of any cash-based Award which may be granted to any Participant. (c) Adjustments. In the event that the Committee determines that any dividend or other distribution (whether in the form of cash, Shares, other securities, or other property), recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase, or exchange of Shares or other securities of the Company, issuance of warrants or other rights to purchase Shares or other securities of the Company, or other similar corporate transaction or event affects the Shares such that an adjustment is determined by the Committee to be appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan, then the Committee shall, in such manner as it may deem equitable, adjust any or all of (i) the number of Shares or other securities of the Company (or number and kind of other securities or property) with respect to which Awards may be granted, (ii) the number of Shares or other securities of the Company (or number and kind of other securities or property) subject to outstanding Awards, and (iii) the grant or exercise price with respect to any Award, or, if deemed appropriate, make provision for a cash payment to the holder of an outstanding Award; provided, in each case, that (A) with respect to Awards of Incentive Stock Options no such adjustment shall be authorized to the extent that such authority would cause the Plan to fail to qualify under Section 422(b)(1) of the Code, as from time to time amended and (B) with respect to any Award no such adjustment shall be authorized to the extent that such authority would be inconsistent with the Plan's meeting the requirements of Section 162(m) of the Code, as from time to time amended. 15 (d) Substitute Awards. Any Shares underlying Substitute Awards shall not, except in the case of Shares with respect to which Substitute Awards are granted to individuals who are officers or directors of the Company for purposes of Section 16 of the Exchange Act or any successor section thereto, be counted against the Shares available for Awards under the Plan. (e) Sources of Shares Deliverable Under Awards. Any Shares delivered pursuant to an Award may consist, in whole or in part, of authorized and unissued Shares or of Shares acquired by the Company on the open market or otherwise. (f) Cash Award Limits. (i) Any Participant who is the Chief Executive Officer at the time of payment of an Award (other than a stock-based Award) shall be eligible to be paid in any calendar year an amount not in excess of $3,000,000 in respect of any such cash Award under the Plan, (ii) no Participant other than a Participant described in clause (i) of this Paragraph 4(f) shall be eligible to be paid in any calendar year more than $2,000,000 in respect of any such cash Award. No provision of this Paragraph 4(f) shall be construed as limiting the number of stock-based Awards that a Participant may receive. SECTION 5. Eligibility. Any Officer, including any Officer who is a director of the Company or any Affiliate, who is not a member of the Committee, shall be eligible to be designated a Participant. SECTION 6. Performance-Based Bonuses. (a) At such times and in such manner as may be prescribed by Section 162(m), the Committee may select Participants and award to such Participants the opportunity to earn a Performance-Based Bonus, which will be contingent upon the Company's attainment of performance goals selected by the Committee. (b) Performance goals which may be employed by the Committee for purposes of a Performance-Based Bonus awarded under Paragraph (a) will include pre-tax income, after-tax income, cash flow, return on equity, return on capital, earnings per share, unit volume, net sales or service quality, as determined in accordance with GAAP, if applicable, which goals may relate to the Company as a whole or, if applicable, to the performance of one or more specific divisions or Affiliates. (c) Notwithstanding Paragraphs (a) and (b), the formula for determining a Performance-Based Bonus to any Participant may, if so determined by the Committee, be governed by the terms of an Employment Agreement applicable to such Participant. (d) Performance-Based Bonuses awarded under Paragraph (a) may be paid in cash, other Awards or any combination thereof, and the form of payment may be governed, as to any Participant, by an Employment Agreement applicable to such Participant. 16 SECTION 7. Stock Options. (a) Grant. Subject to the provisions of the Plan, the Committee shall have sole and complete authority to determine the Officers to whom Options shall be granted, the number of Shares to be covered by each Option, the option price therefor and the conditions and limitations applicable to the exercise of the Option. The Committee shall have the authority to grant Incentive Stock Options, or to grant Non-Qualified Stock Options, or to grant both types of options. In the case of Incentive Stock Options, the terms and conditions of such grants shall be subject to and comply with such rules as may be prescribed by Section 422 of the Code, as from time to time amended, and any regulations implementing such statute. (b) Exercise Price. The Committee in its sole discretion shall establish the exercise price at the time each Option is granted, which exercise price shall be not less than the Fair Market Value of the Shares subject to the Option on the date of grant of the Option. (c) Exercise. Each Option shall be exercisable at such times and subject to such terms and conditions as the Committee may, in its sole discretion, specify in the applicable Award Agreement or thereafter. The Committee may impose such conditions with respect to the exercise of Options, including without limitation, any relating to the application of federal or state securities laws, as it may deem necessary or advisable. (d) Payment. No Shares shall be delivered pursuant to any exercise of an Option until payment in full of the option price therefor is received by the Company. Such payment may be made in cash, or its equivalent, or, if and to the extent permitted by the Committee, by exchanging Shares owned by the Participant (which are not the subject of any pledge or other security interest), or by a combination of the foregoing, provided that the combined value of all cash and cash equivalents and the Fair Market Value of any such Shares so tendered to the Company as of the date of such tender is at least equal to such option price plus the related amount of any taxes required to be withheld by the Company in connection with such exercise, to the extent such withholding taxes are then ascertainable. If the amount of such taxes is not ascertainable at the time of the notice of exercise, such amount shall be tendered by you to the Company as soon as the same shall become ascertainable and shall be communicated to you by the Company. (e) Restoration Options. In the event that any Participant delivers Shares in payment of the exercise price of any Option granted hereunder in accordance with Section 7(d), or in the event that the withholding tax liability arising upon exercise of any Option by a Participant is satisfied through the withholding by the Company of Shares otherwise deliverable upon exercise of the Option, the Committee shall have the authority to grant or provide for the automatic grant of a Restoration Option to such Participant. The grant of a Restoration Option shall be subject to the satisfaction of such conditions or criteria as the Committee in its sole discretion shall establish from time to time. A Restoration Option shall entitle the holder thereof to purchase a number of Shares equal to the number of such Shares so delivered or withheld upon exercise of the original Option, in the discretion of the Committee. A Restoration Option shall have a per share exercise price of not less than the Fair Market Value of the Shares subject to such Restoration Option on the date of 17 grant thereof and such other terms and conditions as the Committee in its sole discretion shall determine. SECTION 8. Stock Appreciation Rights. (a) Grant. Subject to the provisions of the Plan, the Committee shall have sole and complete authority to determine the Officers to whom Stock Appreciation Rights shall be granted, the number of Shares to be covered by each Stock Appreciation Right Award, the grant price thereof and the conditions and limitations applicable to the exercise thereof. Stock Appreciation Rights may be granted in tandem with another Award, in addition to another Award, or freestanding and unrelated to another Award. Stock Appreciation Rights granted in tandem with or in addition to an Award may be granted either at the same time as the Award or at a later time. (b) Exercise and Payment. A Stock Appreciation Right shall entitle the Participant to receive an amount equal to the excess of the Fair Market Value of a Share on the date of exercise of the Stock Appreciation Right over the grant price thereof, provided that the Committee may for administrative convenience determine that, with respect to any Stock Appreciation Right which is not related to an Incentive Stock Option and which can only be exercised for cash during limited periods of time in order to satisfy the conditions of Rule 16b-3, the exercise of such Stock Appreciation Right for cash during such limited period shall be deemed to occur for all purposes hereunder on the day during such limited period on which the Fair Market Value of the Shares is the highest. Any such determination by the Committee may be changed by the Committee from time to time and may govern the exercise of Stock Appreciation Rights granted prior to such determination as well as Stock Appreciation Rights thereafter granted. The Committee shall determine whether a Stock Appreciation Right shall be settled in cash, Shares or a combination of cash and Shares. (c) Other Terms and Conditions. Subject to the terms of the Plan and any applicable Award Agreement, the Committee shall determine, at or after the grant of a Stock Appreciation Right, the term, methods of exercise, methods and form of settlement, and any other terms and conditions of any Stock Appreciation Right. Any such determination by the Committee may be changed by the Committee from time to time and may govern the exercise of Stock Appreciation Rights granted or exercised prior to such determination as well as Stock Appreciation Rights granted or exercised thereafter. The Committee may impose such conditions or restrictions on the exercise of any Stock Appreciation Right as it shall deem appropriate. SECTION 9. Restricted Stock. (a) Grant. Subject to the provisions of the Plan, the Committee shall have sole and complete authority to determine the Officers to whom Shares of Restricted Stock shall be granted, the number of Shares of Restricted Stock to be granted to each Participant, the duration of the period during which, and the conditions under which, the Restricted Stock may be forfeited to the Company, and the other terms and conditions of such Awards. Notwithstanding any other provision of this Plan to the contrary, the period during which such Awards may be forfeited to the 18 Company shall not terminate prior to the third anniversary of the date of grant of such Award; provided, however, that the Committee may determine to have such period terminate after the first anniversary of the date of grant of any such Award if the Committee has established conditions for the earning of such Award that relate to performance of the Company or one or more divisions or units thereof. Subject to the preceding sentence, once established, such performance vesting criteria may be changed, adjusted or amended during the term of an Award. (b) Transfer Restrictions. Shares of Restricted Stock may not be sold, assigned, transferred, pledged or otherwise encumbered, except as provided in the Plan or the applicable Award Agreements. Certificates issued in respect of Shares of Restricted Stock shall be registered in the name of the Participant and deposited by such Participant, together with a stock power endorsed in blank, with the Company. Upon the lapse of the restrictions applicable to such Shares of Restricted Stock, the Company shall deliver such certificates to the Participant or the Participant's legal representative. (c) Dividends and Distributions. Dividends and other distributions paid on or in respect of any Shares of Restricted Stock may be paid directly to the Participant, or may be reinvested in additional Shares of Restricted Stock, as determined by the Committee in its sole discretion. SECTION 10. Change of Ownership. Notwithstanding anything to the contrary in this Plan, unless otherwise specifically determined by the Committee at the time of grant, all Options theretofore granted and not fully exercisable shall become exercisable in full and the restrictions on any other outstanding Awards shall lapse upon the occurrence of a Change of Ownership. SECTION 11. Other Stock-Based Awards. The Committee shall have authority to grant to any Officer an "Other Stock-Based Award", which shall consist of any right which is (i) not an Award described in Sections 6 through 9 above and (ii) an Award of Shares or an Award denominated or payable in, valued in whole or in part by reference to, or otherwise based on or related to, Shares (including, without limitation, securities convertible into Shares), as deemed by the Committee to be consistent with the purposes of the Plan; provided that any such rights must comply, to the extent deemed desirable by the Committee, with Rule 16b-3 and applicable law. Subject to the terms of the Plan and any applicable Award Agreement, the Committee shall determine the terms and conditions of any such Other Stock-Based Award. SECTION 12. Amendment and Termination. (a) Amendments to the Plan. Subject to the authority of the Committee as set forth in Section 3, the Board may amend, alter, suspend, discontinue, or terminate the Plan or any portion thereof at any time; provided that no such amendment, alteration, suspension, discontinuation or termination shall be made without shareholder approval if such approval is necessary to comply with any tax or regulatory requirement, including for these purposes any approval requirement which is a prerequisite for exemptive relief from Section 16(b) of the Exchange Act, for which or 19 with which the Board deems it necessary or desirable to qualify or comply. Notwithstanding anything to the contrary herein, the Committee may amend the Plan in such manner as may be necessary so as to have the Plan conform with local rules and regulations in any jurisdiction outside the United States. (b) Amendments to Awards. The Committee may waive any conditions or rights under, amend any terms of, or alter, suspend, discontinue, cancel or terminate, any Award theretofore granted, prospectively or retroactively; provided that any such waiver, amendment, alteration, suspension, discontinuance, cancellation or termination that would adversely affect the rights of any Participant or any holder or beneficiary of any Award theretofore granted shall not to that extent be effective without the consent of the affected Participant, holder or beneficiary; and provided further that no outstanding Option may be amended to decrease the per Share exercise price thereof, except in accordance with Section 4(c). (c) Adjustment of Awards Upon the Occurrence of Certain Unusual or Nonrecurring Events. The Committee is hereby authorized to make adjustments in the terms and conditions of, and the criteria included in, Awards in recognition of unusual or nonrecurring events (including, without limitation, the events described in Section 4(c) hereof) affecting the Company, any Affiliate, or the financial statements of the Company or any Affiliate, or of changes in applicable laws, regulations, or accounting principles, whenever the Committee determines that such adjustments are appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan; provided that no such adjustment shall be authorized to the extent that such authority would be inconsistent with the Plan's meeting the requirements of Section 162(m) of the Code, as from time to time amended. (d) Cancellation. Any provision of this Plan or any Award Agreement to the contrary notwithstanding, the Committee may cause any Award granted hereunder to be canceled in consideration of a cash payment or alternative Award made to the holder of such canceled Award equal in value to the Fair Market Value of such canceled Award. SECTION 13. General Provisions. (a) Dividend Equivalents. In the sole and complete discretion of the Committee, an Award, whether made as an Other Stock-Based Award under Section 10 or as an Award granted pursuant to Sections 6 through 9 hereof, may provide the Participant with dividends or dividend equivalents, payable in cash, Shares, other securities or other property on a current or deferred basis. (b) Nontransferability. No Award shall be assigned, alienated, pledged, attached, sold or otherwise transferred or encumbered by a Participant, except by will or the laws of descent and distribution, provided, however, that an Award may be transferable, to the extent set forth in the applicable Award Agreement, (i) if such Award Agreement provisions do not disqualify such Award for exemption under Rule 16b-3, or (ii) if such Award is not intended to qualify for exemption under such rule. 20 (c) No Rights to Awards. Except as may be provided in an Employment Agreement, no Officer, Participant or other Person shall have any claim to be granted any Award, and there is no obligation for uniformity of treatment of Employees, Participants, or holders or beneficiaries of Awards. The terms and conditions of Awards need not be the same with respect to each recipient. (d) Share Certificates. All certificates for Shares or other securities of the Company or any Affiliate delivered under the Plan pursuant to any Award or the exercise thereof shall be subject to such stop transfer orders and other restrictions as the Committee may deem advisable under the Plan or the rules, regulations, and other requirements of the Securities and Exchange Commission, any stock exchange upon which such Shares or other securities are then listed, and any applicable Federal or state laws, and the Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions. (e) Delegation. Subject to the terms of the Plan and applicable law, the Committee may delegate to one or more officers or managers of the Company or any Affiliate, or to a committee of such officers or managers, the authority, subject to such terms and limitations as the Committee shall determine, to grant Awards to, or to cancel, modify or waive rights with respect to, or to alter, discontinue, suspend, or terminate Awards held by, Officers who are not officers or directors of the Company for purposes of Section 16 of the Exchange Act, or any successor section thereto, or who are otherwise not subject to such Section. (f) Withholding. A Participant may be required to pay to the Company or any Affiliate and the Company or any Affiliate shall have the right and is hereby authorized to withhold from any Award, from any payment due or transfer made under any Award or under the Plan or from any compensation or other amount owing to a Participant the amount (in cash, Shares, other securities, other Awards or other property) of any applicable withholding taxes in respect of an Award, its exercise, or any payment or transfer under an Award or under the Plan and to take such other action as may be necessary in the opinion of the Company to satisfy all obligations for the payment of such taxes. The Committee may provide for additional cash payments to holders of Awards to defray or offset any tax arising from the grant, vesting, exercise or payments of any Award. (g) Award Agreements. Each Award hereunder shall be evidenced by an Award Agreement which shall be delivered to the Participant and shall specify the terms and conditions of the Award and any rules applicable thereto, including but not limited to the effect on such Award of the death, retirement or other termination of employment of a Participant. (h) No Limit on Other Compensation Arrangements. Nothing contained in the Plan shall prevent the Company or any Affiliate from adopting or continuing in effect other compensation arrangements, which may, but need not, provide for the grant of bonuses, options, restricted stock, Shares and other types of Awards provided for hereunder (subject to shareholder 21 approval if such approval is required), and such arrangements may be either generally applicable or applicable only in specific cases. (i) No Right to Employment. The grant of an Award shall not be construed as giving a Participant the right to be retained in the employ of the Company or any Affiliate. Further, the Company or an Affiliate may at any time dismiss a Participant from employment, free from any liability or any claim under the Plan, unless otherwise expressly provided in the Plan or in any Award Agreement. (j) No Rights as Stockholder. Subject to the provisions of the applicable Award, no Participant or holder or beneficiary of any Award shall have any rights as a stockholder with respect to any Shares to be distributed under the Plan until he or she has become the holder of such Shares. Notwithstanding the foregoing, in connection with each grant of Restricted Stock hereunder, the applicable Award shall specify if and to what extent the Participant shall not be entitled to the rights of a stockholder in respect of such Restricted Stock. (k) Governing Law. The validity, construction, and effect of the Plan and any rules and regulations relating to the Plan and any Award Agreement shall be determined in accordance with the laws of the State of California, except to the extent that the General Corporation Law of the State of Delaware shall be applicable to the Company. (l) Severability. If any provision of the Plan or any Award is or becomes or is deemed to be invalid, illegal, or unenforceable in any jurisdiction or as to any Person or Award, or would disqualify the Plan or any Award under any law deemed applicable by the Committee, such provision shall be construed or deemed amended to conform the applicable laws, or if it cannot be construed or deemed amended without, in the determination of the Committee, materially altering the intent of the Plan or the Award, such provision shall be stricken as to such jurisdiction, Person or Award and the remainder of the Plan and any such Award shall remain in full force and effect. (m) Other Laws. The Committee may refuse to issue or transfer any Shares or other consideration under an Award if, acting in its sole discretion, it determines that the issuance or transfer of such Shares or such other consideration might violate any applicable law or regulation or entitle the Company to recover the same under Section 16(b) of the Exchange Act, and any payment tendered to the Company by a Participant, other holder or beneficiary in connection with the exercise of such Award shall be promptly refunded to the relevant Participant, holder or beneficiary. Without limiting the generality of the foregoing, no Award granted hereunder shall be construed as an offer to sell securities of the Company, and no such offer shall be outstanding, unless and until the Committee in its sole discretion has determined that any such offer, if made, would be in compliance with all applicable requirements of the U.S. federal securities laws and any other laws to which such offer, if made, would be subject. (n) No Trust or Fund Created. Neither the Plan nor any Award shall create or be construed to create a trust or separate fund of any kind or a fiduciary relationship between the Company or any Affiliate and a Participant or any other Person. To the extent that any Person 22 acquires a right to receive payments from the Company or any Affiliate pursuant to an Award, such right shall be no greater than the right of any unsecured general creditor of the Company or any Affiliate. (o) No Fractional Shares. No fractional Shares shall be issued or delivered pursuant to the Plan or any Award, and the Committee shall determine whether cash, other securities, or other property shall be paid or transferred in lieu of any fractional Shares or whether such fractional Shares or any rights thereto shall be canceled, terminated, or otherwise eliminated. (p) Headings. Headings are given to the Sections and subsections of the Plan solely as a convenience to facilitate reference. Such headings shall not be deemed in any way material or relevant to the construction or interpretation of the Plan or any provision thereof. SECTION 13. Term of the Plan. (a) Effective Date. The Plan shall be effective as of December 1, 1994, subject to approval by the shareholders of the Company within one year thereafter. (b) Expiration Date. No Incentive Stock Option shall be granted under the Plan after November 30, 2004. Unless otherwise expressly provided in the Plan or in an applicable Award Agreement, any Award granted hereunder may, and the authority of the Board or the Committee to amend, alter, adjust, suspend, discontinue, or terminate any such Award or to waive any conditions or rights under any such Award shall, continue after the authority for grant of new Awards hereunder has been exhausted. 23 APPENDIX B PPI. Total consolidated revenues of the Company and related entities less total associated consolidated expenses for a given fiscal year determined in accordance with generally accepted accounting principles, exclusive of all income taxes and incentive compensation costs. ROE. A ratio, stated as a percentage, which measures the Company's return on equity, or the Company's profitability for a given period as it relates to its shareholders' capital investments. The percentage is calculated by dividing the Company's consolidated pretax income for a given fiscal year by the average consolidated shareholders' equity balance. The average consolidated shareholders' equity balance is one-half the sum of the Company's consolidated shareholders' equity balance at the beginning of the given year plus the Company's consolidated shareholders' equity balance at the end of the same year. 24 APPENDIX C STOCK RESTRICTION AGREEMENT THIS STOCK RESTRICTION AGREEMENT (this "Agreement") is made as of _________, ____ (herein the "Effective Date") by and between KAUFMAN AND BROAD HOME CORPORATION, a Delaware corporation (the "Company") and Bruce Karatz (the "Participant") pursuant to the terms and conditions of the EMPLOYMENT AGREEMENT dated December 1, 1995 by and between the Company and Participant (the "Employment Agreement") and the KAUFMAN AND BROAD HOME CORPORATION PERFORMANCE-BASED INCENTIVE PLAN FOR SENIOR MANAGEMENT (the "Plan"). R E C I T A L Pursuant to a performance-based formula set forth in Subsection 4 (b)(iii) of the Employment Agreement, the Company has agreed to make certain annual awards of the Company's common stock, par value $1.00 per share ("Stock"), to Participant, subject to certain restrictions set forth herein, in the Employment Agreement and in the Plan. By action of the Personnel, Compensation and Stock Plan Committee (the "Committee"), in accord with the formula set forth in the Employment Agreement, the Company desires to award the Participant shares of Stock under the Plan. A G R E E M E N T In consideration of the provisions contained in this Agreement and with reference to the foregoing Recital, the Company and the Participant agree as follows: 1. AWARD. Concurrently with the execution of this Agreement, the Company shall issue to Participant ______ shares of Stock (the "Award"), subject to the terms and conditions set forth in this Agreement. The certificate(s) representing shares of Stock granted pursuant to the Award shall not be delivered to the Participant until the lapse of the restrictions on transferability in accordance with Paragraph 2 of this Agreement and Subsection 4(b)(iii) of the Employment Agreement. Prior to such lapse, the certificate(s) shall be held by the Company in escrow pursuant to Section 9(b) of the Plan, together with a stock power duly endorsed in blank by Participant. Following the lapse of the restrictions, the Company shall deliver to the Participant as soon as practicable certificate(s) representing those shares as to which restrictions have lapsed. 2. LAPSE OF RESTRICTIONS/FORFEITURE. The restrictions imposed by this Agreement and the Employment Agreement with respect to the shares of Stock covered by this Award shall lapse on October 10, 2000, the fifty-fifth (55th) birthday of Participant, provided that he is still employed by the Company at that time; such restrictions shall lapse earlier upon Participant's 25 termination of employment due to death, disability (as defined in Section 5(b) of the Employment Agreement), involuntary termination of employment by the Company without "Cause" (as defined in Section 6(d) of the Employment Agreement), voluntary termination of employment for "Good Reason" (as defined in Section 6(e) of the Employment Agreement) or upon a sale of the Company (as defined in Section 6(a) of the Employment Agreement). The shares of Stock covered by this Award shall be forfeited upon the Participant's voluntary termination of employment without "Good Reason" before Participant's fifty-fifth (55th) birthday. 3. DIVIDENDS. Cash dividends or other distributions paid on or in respect of any shares of Stock subject to the Award shall be paid directly to Participant at the same time any such dividends or distributions are paid to holders of shares of Stock that are not restricted and are freely tradeable ("Other Holders"). Any stock or other non-cash distributions issued on or in respect of any shares of Stock subject to the Award shall be issued at the same time any such distributions are issued to Other Holders, but shall be held in escrow and shall be subject to the same restrictions as the shares of Stock subject to the Award. 4. TAX WITHHOLDING ELECTION. At Participant's discretion, he may direct the Company to withhold shares of Stock otherwise deliverable upon the lapse of restrictions on the Award to satisfy any withholding tax liability that may arise upon such lapse of restrictions, provided that such Stock withholding complies with Section 16(b) of the Securities Exchange Act of 1934, as amended, and the rules promulgated thereunder. 5. ADJUSTMENTS. As contemplated Subsection 4(b)(ii)(bb) of the Employment Agreement and Section 4(c) of the Plan, in the event of any merger, reorganization, consolidation, recapitalization, stock dividend, or other change in corporate structure affecting the Stock, such adjustment shall be made in the number of shares of Stock granted pursuant to the Award as may be determined to be appropriate by the Company's Board of Directors, or the Personnel, Compensation and Stock Plan Committee of the Company's Board of Directors, or any successor committee. 6. INTERPRETATION. The Award made to the Participant hereunder made is pursuant to and subject to the terms of the Plan and the Employment Agreement, both of which are incorporated herein by this reference. Nothing herein shall be construed as amending or otherwise contradicting the terms of the Employment Agreement or the Plan; in the event of a contradiction between the terms of this Agreement and the terms of the Employment Agreement or the Plan, the terms of Employment Agreement or the Plan, as the case may be, shall prevail. 7. NO ASSIGNMENT. This Agreement may not be assigned by Participant by operation of law or otherwise. Notwithstanding, this Agreement shall be binding upon and shall inure to the benefit of the personal representatives, heirs, legatees, successors and assigns of the Company and Participant. 26 8. GOVERNING LAW. This Agreement and the legal relations between the parties shall be governed by and construed in accordance with the laws of the State of California. 9. NOTICES. Any notice given hereunder to the Company shall be addressed to the Company, attention Vice President, Human Resources, and any notice given hereunder to the Participant shall be addressed to him at his address as shown on the records of the Company. IN WITNESS WHEREOF, the Company, by its duly authorized officer, and the Participant have duly executed and delivered this Agreement as of the date first above written. KAUFMAN AND BROAD HOME CORPORATION By: -------------------------------- [Name] [Title] PARTICIPANT ----------------------------------- Bruce Karatz Social Security Number: ###-##-#### 27 APPENDIX D KAUFMAN AND BROAD HOME CORPORATION SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN (Effective December 1, 1995) 28 KAUFMAN AND BROAD HOME CORPORATION SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN (Effective December 1, 1995)
CONTENTS - -------------------------------------------------------------------------------- SECTION PAGE ARTICLE I. THE PLAN 1.1 Establishment of the Plan 1 1.2 Purpose 1 ARTICLE II. DEFINITIONS 2.1 Definitions 2 2.2 Gender and Number 3 ARTICLE III. PARTICIPATION 3.1 Eligibility for Participation 4 3.2 Date of Participation 4 3.3 Duration of Participation 4 ARTICLE IV. SUPPLEMENTAL RETIREMENT BENEFITS 4.1 Supplemental Retirement Benefits 5 4.2 Determination of Normal, Postponed, and Early Retirement Benefits 5 4.3 Determination of Vested Retirement Benefits 5 4.4 Commencement, Form, and Duration 6 ARTICLE V. DISABILITY BENEFITS 5.1 Eligibility 7 5.2 Amount of Disability Benefit 7 ARTICLE VI. PRE-RETIREMENT DEATH BENEFITS 6.1 Eligibility 8 6.2 Amount of Pre-Retirement Death Benefit 8
i 29 KAUFMAN AND BROAD HOME CORPORATION SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN (Effective December 1, 1995)
CONTENTS - -------------------------------------------------------------------------------- SECTION PAGE ARTICLE VII. OPTIONAL FORMS OF BENEFIT 7.1 Lump Sum Option 9 7.2 Payment Upon Financial Hardship 9 ARTICLE VIII. CHANGE IN CONTROL 8.1 Lump Sum Option Upon Change in Control 10 8.2 Amount of Lump Sum Benefit 10 8.3 Definition 10 ARTICLE IX. TRUST 9.1 Establishment of the Trust 12 9.2 Contributions 12 9.3 Payment of Benefits 12 ARTICLE X. ADMINISTRATION 10.1 Administration 13 10.2 Decisions and Actions of Committee 13 10.3 Rules and Records of the Committee 13 10.4 Employment of Agents 13 10.5 Agent for Service of Legal Process 13 10.6 Plan Expenses 14 10.7 Indemnification 14 10.8 Tax Withholding 14 10.9 Claims Procedure 14 ARTICLE XI. MISCELLANEOUS 11.1 Rights Against the Company 16 11.2 Rights Under the Company's Retirement Plans 16 11.3 Payment of Benefits to Incompetent 16 11.4 Missing Person 16 11.5 Amendment or Termination 17
ii 30 KAUFMAN AND BROAD HOME CORPORATION SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN (Effective December 1, 1995)
CONTENTS - -------------------------------------------------------------------------------- SECTION PAGE 11.6 Merger or Consolidation of Plan and Trust 17 11.7 Controlling Law/Arbitration 17 11.8 Rights to Trust Fund Assets 17 11.9 Nontransferability 18 11.10 Illegality of Particular Provision 18 EXHIBIT I Annual Retirement and Disability Benefits 19 EXHIBIT II Annual Termination Benefits Starting at Age 55 Lump Sum Amount at Termination of Employment 20 EXHIBIT III Lump Sum Benefits 21 EXHIBIT IV Death and Disability Benefits Before Early Retirement Age 22
iii 31 ARTICLE I. THE PLAN 1.1 ESTABLISHMENT OF THE PLAN Kaufman and Broad Home Corporation hereby establishes an unfunded supplemental executive retirement plan for the benefit of Mr. Bruce Karatz, the Chairman, President, and Chief Executive Officer of Kaufman and Broad Home Corporation. This plan is effective as of December 1, 1995 and shall be known as the Kaufman and Broad Home Corporation Supplemental Executive Retirement Plan. 1.2 PURPOSE The purpose of this Plan is to provide retirement income to Mr. Karatz to supplement the benefits provided under the tax-qualified retirement plans maintained by the Kaufman and Broad Home Corporation. This Plan is intended to satisfy the supplemental retirement provisions of section 4(b)(iii) of the employment agreement between Mr. Karatz and the Kaufman and Broad Home Corporation dated December 1, 1995. 1 32 ARTICLE II. DEFINITIONS 2.1 DEFINITIONS Whenever capitalized in this document, the following terms shall have the meanings set forth below unless otherwise expressly provided. (a) "ACTUARIAL EQUIVALENT" shall mean a single sum value of a monthly benefit amount otherwise payable, calculated using an interest rate assumption of seven percent. (b) "BENEFICIARY" shall mean the person or persons designated by the Participant to receive benefits in the event of the death of the Participant. In the event that the Participant failed to designate a beneficiary, or if for any reason such designation shall be legally ineffective, or if all designated beneficiaries predecease him or die simultaneously with him, distribution to which the Participant would have been entitled shall be made to the Participant's surviving spouse or, if none, to the Participant's estate. (c) "BOARD" shall mean the Board of Directors of Kaufman and Broad Home Corporation. (d) "CHANGE IN CONTROL" shall mean a change in ownership of the Company, as described in Article VIII. (e) "CODE" shall mean the Internal Revenue Code of 1986, as amended. (f) "COMMITTEE" shall mean the Personnel, Compensation and Stock Plan Committee of the Board which shall administer the Plan. (g) "COMPANY" shall mean Kaufman and Broad Home Corporation, and any successor thereto. (h) "DISABILITY" shall mean any physical or mental condition which occurs for a continuous period of at least eight weeks, or an aggregate of more than 90 days in any 120-day period, and which results in a Termination of Employment of the Participant. (i) "EARLY RETIREMENT AGE" shall mean the Participant's fifty-fifth birthday. (j) "NORMAL RETIREMENT AGE" shall mean the Participant's sixtieth birthday. (k) "PARTICIPANT" shall mean Mr. Bruce Karatz, Chairman, President, and Chief Executive Officer of the Company. (l) "PLAN" shall mean the Kaufman and Broad Home Corporation Supplemental Executive Retirement Plan. (m) "TERMINATION OF EMPLOYMENT" shall mean termination of employment with the Company, whether voluntary or involuntary. The Participant's termination of employment will be deemed to occur when the Participant ceases to be a full-time employee of the 2 33 Company, even though the Participant may continue to serve as Chairman of the Board or as a consultant to the Company. (n) "TRUST" shall mean the legal entity organized pursuant to the Trust Agreement between the Company and the Trustee to hold and administer the Trust Fund in which any contributions made by the Company are to be held, invested, and disbursed to, or for the benefit of, the Participant or his Beneficiary. (o) "TRUST AGREEMENT" shall mean the agreement in the nature of a trust entered into between the Company and Trustee. (p) "TRUST FUND" shall mean the assets of every kind and description held in the Trust pursuant to the Trust Agreement. (q) "TRUSTEE" shall mean the entity, not affiliated with the Company, acting as the trustee under the Trust Agreement at the time of reference. 2.2 GENDER AND NUMBER Unless the context clearly requires otherwise, the masculine pronoun whenever used shall include the feminine pronoun, and the singular shall include the plural. 3 34 ARTICLE III. PARTICIPATION 3.1 ELIGIBILITY FOR PARTICIPATION Mr. Bruce Karatz shall the only employee of the Company eligible to participate in this Plan. 3.2 DATE OF PARTICIPATION Participation shall commence December 1, 1995. 3.3 DURATION OF PARTICIPATION Subject to the provisions of section 11.5, participation in this Plan shall continue while the Participant is an employee of the Company, whether or not there is in effect an employment agreement between the Participant and the Company, and thereafter for so long as he is entitled to receive any benefits hereunder. 4 35 ARTICLE IV. SUPPLEMENTAL RETIREMENT BENEFITS 4.1 SUPPLEMENTAL RETIREMENT BENEFITS Upon Termination of Employment with the Company for reasons other than death or disability, the Participant shall be entitled to a retirement benefit under this Plan. (a) NORMAL RETIREMENT. If the Participant has a Termination of Employment at his Normal Retirement Age, he shall be entitled to a normal retirement benefit from this Plan, determined in accordance with section 4.2. (b) POSTPONED RETIREMENT. If the Participant continues employment beyond his Normal Retirement Age, he shall upon his Termination of Employment be entitled to a postponed retirement benefit from this Plan, determined in accordance with section 4.2. (c) EARLY RETIREMENT. If the Participant has a Termination of Employment at or after his Early Retirement Age but before his Normal Retirement Age, he shall be entitled to an early retirement benefit from this Plan, determined in accordance with section 4.2. (d) VESTED RETIREMENT. If the Participant has a Termination of Employment prior to his Early Retirement Age, he shall be entitled to a vested retirement benefit from this Plan, determined in accordance with section 4.3. 4.2 DETERMINATION OF NORMAL, POSTPONED, AND EARLY RETIREMENT BENEFITS The monthly amount of the Participant's normal retirement benefit, postponed retirement benefit, or early retirement benefit shall be one-twelfth of the amount determined pursuant to Exhibit I, based on the Participant's actual age at commencement of benefits. 4.3 DETERMINATION OF VESTED RETIREMENT BENEFITS The monthly amount of the Participant's vested retirement benefit shall be one-twelfth of the amount determined pursuant to Exhibit II, based on the Participant's actual age at Termination of Employment. In the event of Termination of Employment prior to attaining age 52, the Participant shall receive a lump sum amount determined pursuant to Exhibit II, which shall be payable within 30 days of the Participant's Termination of Employment. 5 36 4.4 COMMENCEMENT, FORM, AND DURATION Retirement benefit payments under this Plan shall commence upon the first of the month following the later of Termination of Employment or attainment of Early Retirement Age. Benefit payments shall be made monthly for a period of 25 years (300 monthly payments). In the event of the Participant's death while receiving monthly payments, the remaining payments shall be made monthly to the Participant's Beneficiary. 6 37 ARTICLE V. DISABILITY BENEFITS 5.1 ELIGIBILITY If the Participant incurs a Disability while employed by the Company, he shall be entitled to a disability benefit from this Plan, determined in accordance with section 5.2. 5.2 AMOUNT OF DISABILITY BENEFIT (a) DISABILITY PRIOR TO EARLY RETIREMENT AGE. If the Participant incurs a Disability prior to Early Retirement Age, the amount of his disability benefit shall be determined pursuant to Exhibit IV, based on the Participant's actual age at his Termination of Employment due to Disability. The benefit shall be paid to the Participant in a lump sum, within 30 days of the Participant's Termination of Employment. (b) DISABILITY ON OR AFTER EARLY RETIREMENT AGE. If the Participant incurs a Disability on or after Early Retirement Age, the amount of his disability benefit shall be determined pursuant to Exhibit I, based on the Participant's actual age at his Termination of Employment due to Disability. The payment of benefits shall commence upon the first of the month following the Participant's Termination of Employment. Benefit payments shall be made monthly for a period of 25 years (300 monthly payments). In the event of the Participant's death while receiving monthly payments, the remaining payments shall be made monthly to the Participant's Beneficiary. 7 38 ARTICLE VI. PRE-RETIREMENT DEATH BENEFITS 6.1 ELIGIBILITY If the Participant dies while employed by the Company, his Beneficiary shall be entitled to a death benefit from this Plan, determined in accordance with section 6.2. 6.2 AMOUNT OF PRE-RETIREMENT DEATH BENEFIT (a) DEATH PRIOR TO EARLY RETIREMENT AGE. If the Participant dies prior to Early Retirement Age, the amount of death benefit payable to his Beneficiary shall be determined pursuant to Exhibit IV, based on the Participant's actual age at death. The benefit shall be paid to the Beneficiary in a lump sum, within 30 days of the Participant's death. (b) DEATH ON OR AFTER EARLY RETIREMENT AGE. If the Participant dies on or after Early Retirement Age, the amount of death benefit payable to his Beneficiary shall be determined pursuant to Exhibit I, based on the Participant's actual age at death. The payment of benefits to his Beneficiary shall commence upon the first of the month following the Participant's death and shall be made monthly for a period of 25 years (300 monthly payments). 8 39 ARTICLE VII. OPTIONAL FORMS OF BENEFIT 7.1 LUMP SUM OPTION (a) ELECTION. In lieu of the monthly benefits otherwise payable to the Participant or his Beneficiary under section 4.2, section 4.3, section 5.2(b), or section 6.2(b), the Participant or his Beneficiary, as applicable, may elect to receive a lump sum payment. Such election may be made prior to the commencement of monthly benefits or at any time during the period of monthly payments. This election will result in a significant penalty to the Participant or his Beneficiary, since the amount of the lump sum payment determined under section 7.1(b) is substantially less than the Actuarial Equivalent of the monthly benefits which would otherwise be payable to the Participant or his Beneficiary. (b) AMOUNT. The lump sum amount shall be determined using Exhibit III. The lump sum amount shall be based on (i) the actual age of the Participant at the earlier of his Termination of Employment or death, and (ii) the actual age of the Participant at the time he elects the lump sum option, or if the election is made by the Beneficiary following the Participant's death, the age the Participant would have attained had he survived to the date of the election by the Beneficiary. (c) PAYMENT. The lump sum benefit shall be paid within 30 days of the election by the Participant or Beneficiary. 7.2 PAYMENT UPON FINANCIAL HARDSHIP In the event that the Participant incurs a financial hardship after the commencement of monthly benefits under section 4.4 or section 5.2(b), he may request that the Committee authorize payment of his remaining benefits in a lump sum. The Committee shall not authorize such payment unless it determines that there is an unforeseeable emergency that is caused by an event beyond the control of the Participant, and such emergency would result in severe financial hardship to the Participant if the lump sum payment is not authorized. If authorized, the amount of the lump sum payment shall be the Actuarial Equivalent value of the remaining monthly payments. Such lump sum payment shall be paid to the Participant as soon as practicable following authorization by the Committee. 9 40 ARTICLE VIII. CHANGE IN CONTROL 8.1 LUMP SUM OPTION UPON CHANGE IN CONTROL In the event of a Change in Control (as defined below) prior to the commencement of payment of benefits under this Plan, the Participant may elect to receive an immediate lump sum payment in lieu of all benefits otherwise payable to the Participant or his Beneficiary under this Plan. Such election may be made at any time prior to commencement of payment of benefits under this Plan. This election will result in a significant penalty to the Participant, since the amount of the lump sum benefit provided under section 8.2 is substantially less than the Actuarial Equivalent of the monthly benefits which may otherwise be payable to the Participant. 8.2 AMOUNT OF LUMP SUM BENEFIT The amount of the lump sum benefit payable to the Participant pursuant to section 8.1 shall be the amount determined pursuant to Exhibit III, based on the Participant's actual age at the time of the Participant's election to receive a lump sum benefit, which age shall also be considered the Participant's termination age for the purpose of applying Exhibit III to this benefit. The lump sum benefit shall be paid to the Participant within 30 days of the election by the Participant. 8.3 DEFINITION For purposes of this Article VIII, the following definition applies: (a) CHANGE IN CONTROL. 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 December 1, 1995, pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Act"); provided that, without limitation, such a "Change of Ownership" shall be deemed to have occurred if: (1) a third person, including a "group" as such term is used in section 13(d)(3) of the Act, becomes the beneficial owner, directly or indirectly, of 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 (2) below); or 10 41 (2) individuals who, as of December 1, 1995, constitute the Board (as of December 1, 1995, 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 December 1, 1995 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. 11 42 ARTICLE IX. TRUST 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 shall be treated as the owner of the Trust. It is intended that the Trust shall be in such form as may be necessary for the Plan to be deemed unfunded for purposes of the Employee Retirement Income Security Act of 1974, as amended. The Trust shall maintain a Trust Fund. The administration and management of the Trust Fund shall be set forth in the Trust Agreement, the terms of which shall be consistent with the provisions of this Plan. Nothing in the Trust Agreement shall impair the rights of the Participant and his Beneficiary nor shall the agreement limit the obligations of the Company under this Plan. 9.2 CONTRIBUTIONS The Company shall make an annual contribution to the Trust Fund of $250,000. The first contribution shall be made January 1, 1996 and thereafter a contribution shall be made each January 1 (including, if necessary, years after the Participant has a Termination of Employment) until the Trust Fund holds assets sufficient to satisfy all obligations for benefits under this Plan. 9.3 PAYMENT OF BENEFITS The benefits under this Plan shall be paid from the Trust Fund. To the extent the Trust Fund is insufficient to pay all required benefits under the Plan, payment of benefits shall be made from the general assets of the Company. 12 43 ARTICLE X. ADMINISTRATION 10.1 ADMINISTRATION The Plan shall be administered by the Committee. The Committee shall be authorized to construe and interpret all of the provisions of the Plan, to adopt procedures and practices concerning the administration of the Plan, and to make any determinations necessary hereunder, which shall be binding and conclusive on all parties. The Committee may appoint one or more individuals and delegate such of its power and duties as it deems desirable to any such individual, in which case every reference herein made to the Committee shall be deemed to mean or include the individuals as to matters within their jurisdiction. 10.2 DECISIONS AND ACTIONS OF COMMITTEE The Committee may act at a meeting or in writing without a meeting. All decisions and actions of the Committee shall be made by vote of the majority, including actions in writing taken without a meeting. 10.3 RULES AND RECORDS OF THE COMMITTEE The Committee may make such rules and regulations in connection with its administration of the Plan as are consistent with the terms and provisions hereof. The Committee shall keep a record of the Participant's name, address, social security number, benefit commencement date, and the amount of benefit. 10.4 EMPLOYMENT OF AGENTS The Committee may employ agents, including without limitation, accountants, actuaries, consultants, or attorneys, to exercise and perform the powers and duties of the Committee as the Committee delegates to them, and to render such services to the Committee as the Committee may determine, and the Committee may enter into agreements setting forth the terms and conditions of such service. 10.5 AGENT FOR SERVICE OF LEGAL PROCESS The Chairman of the Committee shall serve as agent for service of legal process. 13 44 10.6 PLAN EXPENSES The Company shall pay all expenses reasonably incurred in the administration of the Plan and Trust; provided, however, that the Trustee may pay such expenses from the assets of the Trust, to the extent such expenses have not been paid by the Company. In such event the Company shall reimburse the Trustee promptly for any such expenses paid by the Trustee from the Trust. The members of the Committee shall serve without compensation for their services as such, but all expenses of the Committee shall be paid by the Company. No employee of the Company shall receive compensation from the Plan regardless of the nature of his services to the Plan. 10.7 INDEMNIFICATION To the extent permitted by law, the Committee and all agents and representatives of the Committee shall be indemnified by the Company and saved harmless against any claims, and the expenses of defending against such claims, resulting from any action or conduct relating to the administration of the Plan except claims arising from gross negligence, willful neglect, or willful misconduct. 10.8 TAX WITHHOLDING The Company or Trustee shall withhold from any payment to the Participant or Beneficiary any federal, state, or local taxes required by law to be withheld with respect to such payment. 10.9 CLAIMS PROCEDURE (a) SUBMISSION OF CLAIMS. Claims for benefits under the Plan shall be submitted in writing to the Committee or to an individual designated by the Committee for this purpose. (b) DENIAL OF CLAIM. If any claim for benefits is wholly or partially denied, the claimant shall be given written notice within 90 days following the date on which the claim is filed, which notice shall set forth (1) the specific reason or reasons for the denial; (2) specific reference to pertinent Plan and Trust provisions on which the denial is based; (3) a description of any additional material or information necessary for the claimant to perfect the claim and an explanation of why such material or information is necessary; and (4) an explanation of the Plan's claim review procedure. 14 45 If special circumstances require an extension of time for processing the claim, written notice of an extension shall be furnished to the claimant prior to the end of the initial period of 90 days following the date on which the claim is filed. Such an extension may not exceed a period of 90 days beyond the end of said initial period. If the claim has not been granted, and if written notice of the denial of the claim is not furnished within 90 days following the date on which the claim is filed, the claim shall be deemed denied for the purpose of proceeding to the claim review procedure. (c) CLAIM REVIEW PROCEDURE. The claimant or his authorized representative shall have 60 days after receipt of written notification of denial of a claim to request a review of the denial by making written request to the Committee (or its delegate), and may review pertinent documents and submit issues and comments in writing within such 60-day period. Not later than 60 days after receipt of the request for review, the Committee shall render and furnish to the claimant a written decision which shall include specific reasons for the decision, and shall make specific references to pertinent Plan and Trust provisions on which it is based. If special circumstances require an extension of time for processing, the decision shall be rendered as soon as possible, but not later than 120 days after receipt of the request for review, provided that written notice and explanation of the delay are given to the claimant prior to commencement of the extension. Such decision by the Committee shall not be subject to further review. If a decision on review is not furnished to a claimant within the specified time period, the claim shall be deemed to have been denied on review. 15 46 ARTICLE XI. MISCELLANEOUS 11.1 RIGHTS AGAINST THE COMPANY Neither the establishment of the Plan, nor any modification thereof, nor any payments hereunder, shall be construed to give the Participant the right to be retained in the employ of the Company or to interfere with the right of the Company to discharge the Participant at any time, subject to the terms of any employment agreement between the Participant and the Company. 11.2 RIGHTS UNDER THE COMPANY'S OTHER RETIREMENT PLANS Nothing in this Plan shall be construed to limit, broaden, restrict, grant, or otherwise affect any rights of the Participant or a Beneficiary under the Company's other retirement plans, nor grant any additional rights or benefits to the Participant or a Beneficiary under the Company's other retirement plans, nor in any way to limit, modify, repeal, or otherwise affect the Company's or its Board's right to amend or modify any such retirement plan. 11.3 PAYMENT OF BENEFITS TO INCOMPETENT If the Committee receives evidence that (a) a person entitled to receive any benefit under the Plan is legally, physically, or mentally incompetent to receive such benefit and to give a valid release therefore, and (b) another person or an institution is then maintaining or has custody of such person and no guardian, committee, or other representative of the estate of such person has been duly appointed by a court of competent jurisdiction, the payment of such benefit may be made to such other person or institution as the Committee may determine. Any such payment shall be a payment on behalf of such person and shall, to the extent thereof, be a complete discharge of any liability under the Plan to such person, and neither the Company, the Trustee, nor any member of the Board or the Committee shall be liable to any person or individual by reason of such payment. 11.4 MISSING PERSON In the event any benefit shall become payable to any person or upon his death to his legal representative and, if after written notice from the Committee mailed to such person's last-known address as shown in the Company's records, such person or his legal representative shall not have 16 47 presented himself to the Committee within six years after the mailing of such notice, then the Committee may, in its sole discretion, distribute such amount, including any benefit thereafter becoming due to such person or legal representative, among the spouse and blood relatives of such person. Payments made in good faith to any person, to a person's legal representative, or to any individual(s) who have, on the presentation of reasonable proof, established to the satisfaction of the Committee that he is the spouse or blood relative of such person, shall, to the extent of such payments, be a complete discharge of all obligations arising pursuant to the Plan, and neither the Company, the Trustee, nor any member of the Board or the Committee shall be liable to any person or individual by reasons of such payments. 11.5 AMENDMENT OR TERMINATION The Plan may be amended or terminated, in whole or in part, at any time by written action of the Board and with the prior written consent of the Participant (or his Beneficiary or Beneficiaries following the Participant's death). No such amendment or termination shall reduce or diminish the right of the Participant or Beneficiary to receive any benefit accrued hereunder prior to the date of such amendment or termination. 11.6 MERGER OR CONSOLIDATION OF PLAN AND TRUST Neither the Plan nor the Trust may be merged or consolidated with, nor may its assets or liabilities be transferred to, any other plan or trust without the prior written consent of the Participant (or his Beneficiary or Beneficiaries following the Participant's death). 11.7 CONTROLLING LAW/ARBITRATION Any disputes under the Plan shall be settled in accordance with the provisions of the employment agreement then in effect between the Company and the Participant or, if the Participant has had a Termination of Employment from the Company, the most recent employment agreement in effect between the Company and the Participant. The provisions of the Plan shall be construed, interpreted, administered, and enforced according to the laws of the State of California and all applicable Federal laws. 11.8 RIGHTS TO TRUST FUND ASSETS The Participant shall not have any right to, or interest in, any assets of the Trust Fund upon his Termination of Employment or otherwise, except as provided in the Plan, and then only to the extent of the benefits payable under the Plan out of the assets of the Trust Fund. 17 48 11.9 NONTRANSFERABILITY In no event shall the Company or Trustee make any payment under this Plan to any assignee or creditor of the Participant or Beneficiary, except as otherwise required by law. Prior to the time of a payment hereunder, the Participant or Beneficiary shall have no rights by way of anticipation or otherwise to assign or otherwise dispose of any interest under this Plan, nor shall rights be assigned or transferred by operation of law. 11.10 ILLEGALITY OF PARTICULAR PROVISION The illegality of any particular provision of this document shall not affect the other provisions, and the document shall be construed in all respects as if such invalid provision were omitted. 18 49
EXHIBIT I ANNUAL RETIREMENT AND DISABILITY BENEFITS Annual Benefit Age (000) --- ------- 55 $ 137 56 203 57 262 58 329 59 410 60 492 61 576 62 662 63 767 64 879 65 974 66 1,085 67 1,219 68 1,379 69 1,561 70 1,772 Interpolate between ages.
19 50
EXHIBIT II ANNUAL TERMINATION BENEFITS STARTING AT AGE 55 Annual Benefit Age (000) --- ------- 52 $ 48 53 77 54 107 55 137 Interpolate between ages.
LUMP SUM AMOUNT AT TERMINATION OF EMPLOYMENT Lump Sum Age (000) --- ----- 50 $106 51 410 52 500 Interpolate between ages.
20 51 EXHIBIT III Lump Sum Benefits (000)
Termination Lump Sum Election Age (000) Age 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 --- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- 50 $101 $108 $116 $124 $132 $142 $139 $137 $134 $132 $129 $126 $122 $119 $115 51 360 385 412 441 472 465 457 448 439 429 419 407 395 383 52 411 440 470 503 495 487 478 468 456 446 435 422 408 53 705 755 808 795 781 767 751 734 716 697 677 655 54 1,049 1,122 1,104 1,086 1,065 1,043 1,020 995 969 940 910 55 1,437 1,414 1,390 1,364 1,336 1,306 1,274 1,240 1,204 1,165 56 2,129 2,095 2,059 2,021 1,980 1,936 1,888 1,838 1,784 57 2,748 2,704 2,658 2,608 2,555 2,498 2,437 2,372 58 3,451 3,396 3,338 3,275 3,208 3,137 3,060 59 4,300 4,232 4,159 4,082 3,998 3,909 60 5,160 5,079 4,991 4,898 4,798 61 6,041 5,946 5,844 5,734 62 6,943 6,833 6,716 63 8,044 7,917 64 9,219 65 66 67 68 69 70 Termination Lump Sum Election Age Age 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 --- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- 50 $111 $106 $102 $97 $91 $85 $79 $73 $65 $58 $50 $41 $32 $22 $11 51 369 354 338 322 304 284 264 242 218 193 166 137 106 73 38 52 393 378 361 343 324 303 281 258 233 206 177 146 113 78 40 53 631 606 579 550 520 487 452 414 373 330 284 235 182 125 65 54 877 842 805 765 722 676 627 575 519 459 395 326 253 174 90 55 1,123 1,078 1,030 979 925 866 803 736 664 588 506 418 324 223 115 56 1,726 1,664 1,598 1,527 1,451 1,370 1,283 1,190 1,091 985 871 749 619 479 330 57 2,302 2,228 2,148 2,062 1,971 1,873 1,768 1,656 1,536 1,408 1,271 1,124 967 799 619 58 2,978 2,891 2,797 2,697 2,590 2,475 2,352 2,220 2,080 1,929 1,768 1,596 1,411 1,214 1,003 59 3,814 3,712 3,603 3,486 3,361 3,227 3,084 2,931 2,767 2,592 2,404 2,203 1,989 1,759 1,513 60 4,691 4,577 4,454 4,323 4,183 4,033 3,872 3,701 3,517 3,320 3,110 2,885 2,644 2,386 2,111 61 5,617 5,492 5,358 5,215 5,061 4,897 4,722 4,534 4,333 4,117 3,887 3,641 3,377 3,096 2,794 62 6,590 6,456 6,312 6,158 5,993 5,817 5,628 5,426 5,211 4,979 4,732 4,468 4,185 3,882 3,558 63 7,781 7,636 7,480 7,313 7,135 6,944 6,740 6,521 6,287 6,037 5,769 5,483 5,176 4,848 4,497 64 9,073 8,917 8,751 8,572 8,381 8,176 7,958 7,724 7,473 7,205 6,919 6,612 6,283 5,932 5,556 65 10,216 10,054 9,881 9,696 9,498 9,287 9,060 8,818 8,558 8,281 7,984 7,666 7,326 6,963 6,573 66 11,380 11,200 11,007 10,801 10,581 10,345 10,093 9,823 9,534 9,225 8,894 8,540 8,161 7,756 67 12,785 12,583 12,367 12,135 11,888 11,623 11,339 11,036 10,711 10,364 9,992 9,595 9,169 68 14,463 14,235 13,990 13,728 13,448 13,148 12,828 12,484 12,117 11,724 11,304 10,854 69 16,372 16,113 15,836 15,540 15,223 14,884 14,520 14,132 13,716 13,272 12,796 70 18,585 18,291 17,977 17,640 17,280 16,895 16,483 16,042 15,570 15,066 Termination Lump Sum Election Age Age 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 --- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- 50 51 52 53 54 55 56 171 57 426 220 58 777 535 277 59 1,250 968 667 345 60 1,816 1,500 1,162 801 414 61 2,471 2,126 1,756 1,360 937 484 62 3,211 2,840 2,443 2,018 1,564 1,077 557 63 4,122 3,720 3,290 2,830 2,338 1,812 1,248 645 64 5,154 4,724 4,263 3,771 3,244 2,680 2,076 1,430 739 65 6,157 5,711 5,234 4,724 4,178 3,594 2,969 2,300 1,585 819 66 7,322 6,859 6,362 5,831 5,263 4,655 4,004 3,308 2,563 1,766 913 67 8,714 8,227 7,706 7,148 6,551 5,913 5,229 4,498 3,716 2,879 1,984 1,025 68 10,373 9,858 9,307 8,717 8,086 7,411 6,689 5,916 5,089 4,204 3,257 2,244 1,160 69 12,287 11,742 11,159 10,535 9,867 9,153 8,389 7,571 6,697 5,760 4,759 3,687 2,540 1,313 70 14,525 13,947 13,329 12,667 11,959 11,201 10,390 9,523 8,595 7,602 6,539 5,402 4,185 2,883 1,490
Interpolate between ages. 21 52
EXHIBIT IV DEATH AND DISABILITY BENEFITS BEFORE EARLY RETIREMENT AGE Lump Sum Age (000) --- -------- 50 $ 259 51 536 52 832 53 1,149 54 1,488 55 1,851 Interpolate between ages.
22 53 APPENDIX E DESIGNATION OF BENEFICIARY In the event of my death, I, Bruce Karatz, hereby designate the Bruce and Janet Karatz Trust dated January 14, 1988, Bruce E. Karatz and Janet D. Karatz Trustees, my beneficiary to whom shall be transferred all payments or other benefits to which I may be entitled under my employment agreement dated December 1, 1995 with Kaufman and Broad Home Corporation ("KBHC") and under the KBHC Supplemental Executive Retirement Plan. In the event my designated beneficiary cannot receive such a payment, I hereby designate Janet Karatz as my alternate beneficiary. In the event there shall arise a conflict between the terms of this designation and any other expression of my testamentary intent, I understand and agree that KBHC may determine to transfer all of the above-referenced payments or benefits to my estate rather than the beneficiary designated herein. I have hereunto set my hand this 1st day of December, 1995. /s/Bruce Karatz -------------------------------------- Bruce Karatz /s/Michael F. Henn -------------------------------------- Witness (signature) Michael F. Henn -------------------------------------- Witness (print name) 12/1/95 -------------------------------------- Date KAUFMAN AND BROAD HOME CORPORATION Acknowledged: /s/Alan Kaye - ------------------------------ Name:ALAN KAYE Title:VICE PRESIDENT, HUMAN RESOURCES Date:DECEMBER 1, 1995 EX-10.21 5 EXHIBIT 10.21 1 EXHIBIT 10.21 KAUFMAN AND BROAD HOME CORPORATION DIRECTORS' RESTRICTED STOCK PLAN SECTION 1. PURPOSE. The purpose of the Kaufman and Broad Home Corporation Directors' Restricted Stock Plan (the "Plan") is to promote the success of Kaufman and Broad Home Corporation (the "Company") and enhancing the stock ownership of directors of the Company by providing a method whereby directors who are not employees of the Company or any of its affiliated companies (a "Participant") may elect to receive their annual Board and Committee Chairman retainers (an "Annual Retainer") and/or meeting fees ("Meeting Fees") in restricted shares of the Company's Common Stock, par value $1.00 per share ("Common Stock"). SECTION 2. FEES. Each Participant shall be given an opportunity by the Company on an annual basis to elect (an "Annual Election") to receive his or her Annual Retainer and/or Meeting Fees in restricted shares of Common Stock as follows: A. ANNUAL RETAINER. If selected, the value of the restricted shares of Common Stock payable in lieu of an Annual Retainer shall equal 110% of the amount of the Annual Retainer and shall be paid in one grant as soon as practicable after the Company's Annual Meeting of Stockholders at the beginning of the Director Year, with the number of shares granted determined by the Fair Market Value (as defined in Section 5 hereof) on the date of such Annual Meeting of the Stockholders. B. MEETING FEES. If selected, the value of shares of Common Stock payable in lieu of the Meeting Fees earned during a Director Year shall equal 110% of the amount of such Meetings Fees and shall be paid as soon as practicable after the Company's Annual Meeting of Stockholders at the end of the Director Year, with the number of shares granted being determined by the Fair Market Value on the date of said Annual Meeting of Stockholders. C. ALL FEES. If a Participant elects to receive his or her Annual Retainer and Meeting Fees in shares of Common Stock, the number of such shares shall be determined as provided in this Section 2, and will be paid in one grant as soon as possible after each Annual Meeting of Stockholders, with the Annual Retainer being paid for the ensuing Director Year and the Meeting Fees being paid for the preceding Director Year. 2 SECTION 3. SHARE RESTRICTIONS. All Restricted Shares issued to a Participant in lieu of cash payments for the Annual Retainer and/or Meeting Fees shall be subject to the restriction that they may not be sold or transferred until the earliest to occur of the following: A. five years shall lapse from the date the applicable shares are credited to the Participant's account (the "Restriction Period"); B. the Participant's death or disability; C. the Participant retires from the Board at the mandatory retirement age; D. the Participant, after being nominated to the Board, is not elected by the shareholders in an election for the Board; E. the Board determines that the Participant will not be nominated for election to the Board; F. the Participant's service on the Board terminates because of his or her resignation at the request of the Nominating Committee of the Board or his or her removal by action of the Company's stockholders; G. the Participant's service on the Board terminates because the Participant has taken a position with a governmental agency in public service that does not permit membership on the board of directors of a publicly-held corporation; or H. the occurrence of a Change in Ownership as defined in the Company's 1988 Employee Stock Plan, or any successor plan thereto. All shares of Common Stock subject to the forgoing restrictions are herein referred to as "Restricted Shares." SECTION 4. LAPSING AND FORFEITURE. In the event the restrictions on Restricted Shares lapse upon the occurrence of any of the events specified in Section 3 hereof, a certificate for the applicable shares of Common Stock, free and clear of all restrictions, will be delivered to the Participant soon as practicable thereafter. If the Participant's service on the Board terminates prior to the end of the Restriction Period for any reason other than those identified in Section 3 hereof, including voluntary resignation, the Participant shall immediately forfeit the shares to the Company. 3 SECTION 5. SHARE CERTIFICATES, VOTING AND OTHER RIGHTS. A. SHARE CERTIFICATES. The certificates for Restricted Shares issued under Section 4 hereof may be registered in the name of the Participant, or in the name of the Participant and one other individual as joint tenants, and shall be held by the Company during the Restriction Period. Any dividends, or distributions, payable in cash or in kind with respect to the Restricted Shares that have been issued, shall be paid to the Participant. All Restricted Shares issued hereunder shall be fully paid and non-assessable and the Participant shall have all voting rights with respect thereto. The Company shall pay all original issue taxes with respect to the issue of shares and all other fees and expenses necessarily incurred by Company in connection therewith. B. FAIR MARKET VALUE. "Fair Market Value" means, as of any valuation date, the median of the high and low trading price of Kaufman and Broad Home Corporation Common Stock, par value $1.00 per share, as quoted in the New York Stock Exchange Composite Transactions on such date, as reported in the Wall Street Journal (or, if there is no reported sale on such date, on the last preceding date on which any reported sale occurred). C. FRACTIONS OF SHARES. The Company shall not issue fractions of shares. Whenever under the terms of the Plan, a fractional share would otherwise be required to be issued, the Participant shall be paid in cash for such fractional share; or for Participants electing to receive Meeting Fees in stock, the unpaid amount shall be added to the fees for the next quarterly period. D. GENERAL RESTRICTIONS. The issuance of Common Stock underlying the Restricted Shares or the delivery of certificates for such shares to Participants under the Plan shall be subject to the requirement that, if at any time the General Counsel or Corporate Secretary of the Company shall reasonably determine, in his or her discretion, that the listing, registration, or qualification of such Common Stock upon any securities exchange or under any state or federal law, or the consent or approval of any governmental body, is necessary or desirable as a condition of, or on connection with, the issuance or payment or delivery shall not take place unless such listing, registration, qualification, consent or approval shall have been effected or obtained free of any conditions not reasonably acceptable to the General Counsel or Corporate Secretary. E. SHARES AVAILABLE. Shares of Common Stock issuable under the Plan shall be acquired by the Company on the open market or shall be taken from authorized but unissued or treasury shares of the Company, as shall from time to time be necessary for issuance pursuant to the Plan. 4 F. CHANGE IN CAPITAL STRUCTURE. In the event of any change in the Common Stock by reason of any stock dividend, split, combination of shares, exchange of shares, warrants or rights offering to purchase Common Stock at a price below its fair market value, reclassification, recapitalization, merger, consolidation or other change in capitalization, appropriate adjustment shall be made by the Company in the number and kind of shares subject to the Plan and any other relevant provisions of the Plan, whose determination shall be binding and conclusive on all persons. SECTION 6. TAXES. No income will be recognized by a Participant at the time of issuance of Restricted Shares, unless an election under Internal Revenue Code Section 83(b) is made by the Participant. The Company shall be authorized to withhold from any payment due under the Plan the amount of withholding taxes, if any, due in respect of an award hereunder, unless other provisions satisfactory to the Company shall have been made for the payment of such taxes. SECTION 7. MISCELLANEOUS A. ADMINISTRATION. Except as may be specifically provided elsewhere herein, the Plan shall be administered by the Nominating and Corporate Governance Committee of the Board (the "Nominating Committee"), which shall have full authority to construe and interpret the Plan, to establish, amend and rescind rules and regulations relating to the Plan, and to take all such actions and make all such determinations in connection with the Plan as it may deem necessary or desirable. The Nominating Committee may from time to time make such amendments to the Plan, or an award made hereunder, as it may deem proper, necessary, and in the best interests of the Company. B. RIGHTS OF DIRECTORS. Nothing in the plan shall confer upon any Participant any right to serve on the Board for any period of time or to continue his or her current or any other rate of compensation. C. GOVERNING LAW. The Plan and all actions taken thereunder shall be governed and construed in accordance with the laws of the State of Delaware. EX-10.22 6 EXHIBIT 10.22 1 EXHIBIT 10.22 KAUFMAN AND BROAD HOME CORPORATION DIRECTORS' LEGACY PROGRAM 1. PURPOSE OF THE PROGRAM The Kaufman and Broad Home Corporation Director's Charitable Award Program (the "Program") allows each eligible Director of Kaufman and Broad Home Corporation (the "Company") to recommend that the Company make a donation of up to $500,000 to the eligible tax-exempt organization(s) (the "Donee(s)") selected by the Director, with the donation to be made in the Director's name in ten equal annual installments, with the first installment to be made as soon as is practicable after the Director's death. The purpose of the Program is to recognize the interest of the Company and its Directors in supporting worthy educational institutions and other charitable organizations. 2. ELIGIBILITY All persons who were serving as Directors of the Company as of January 1, 1995, shall be eligible to participate in the Program. All Directors who join the Company's Board of Directors after that date shall be immediately eligible to participate in the Program upon election to the Board. However, the Nominating Committee of the Board of Directors may, in its good faith discretion, deny participation to a Director if it determines that it would not be in the Company's best interest for the Director to participate, whether due to excessive cost or other circumstances. 3. RECOMMENDATION OF DONATION When a Director becomes eligible to participate in the Program, he or she shall make a written recommendation to the Company, on a form approved by the Company for this purpose, designating the Donee(s) which he or she intends to be the recipient(s) of the Company donation to be made on his or her behalf. A Director may revise or revoke any such recommendation prior to this or her death by singing a new recommendation form and submitting it to the Company. 4. AMOUNT AND TIMING OF DONATION Each eligible Director may choose one organization to receive a Company donation of $500,000 or up to five organizations to receive donations aggregating $500,000. Each recommended organization must be recommended to receive a donation of at least $100,000. The donation will be made by the Company in ten equal annual installments, with the first installment to be made as soon as is practicable after the Director's death. If a Director recommends more than one organization to receive a donation, each will receive a prorate portion of each annual installment. Each annual installment payment will be 2 divided among the recommended organizations in the same proportions as the total donation amount has been allocated among the organizations by the Director. 5. DONEES In order to be eligible to receive a donation, a recommended organization must initially, and at the time a donation is to be made, qualify to receive tax deductible donations under the Internal Revenue Code, and be reviewed and approved by the Nominating Committee of the Board of Directors of the Company. A recommendation will be approved unless it is determined, in the exercise of good faith judgment, that a donation to the organization would be detrimental to the best interests of the Company. A Director's private foundation is not eligible to receive donations under the Program. If an organization recommended by a Director ceases to qualify as a Donee, and if the Director does not submit a form to change the recommendation before his or her death, the amount recommended to be donated to the organization will instead be donated to the Director's remaining recommended qualified Donee(s) on a prorated basis. If none of the recommended organizations qualify, the donation will be made to the organization(s) selected by the Company. 6. VESTING The amount of the donation made on a Director's behalf will be determined based on the Directors' months of Board service, in accordance with the following vesting schedule:
Months of Service Donation Amount ----------------- --------------- Less than 12 $ 0 12-23 100,000 24-35 200,000 36-47 300,000 48-59 400,000 60 or more 500,000
Notwithstanding this vesting schedule, a Director will be entitled to a donation amount of $500,000 in the event (a) he or she dies or becomes disabled while serving as a Director, (b) if not an employee of the Company, he or she retires at the recommended retirement age for non-employee directors, or (c) if an employee of the Company, he or she retires on or after his or her normal retirement date. 3 For persons who were serving as Directors as of January 1, 1995, Board service prior to that date will count as vesting service. If a Director recommends more than one organization to receive aggregate donations of $500,000, and if the applicable vested donation amount is less than $500,000, the actual donation amount will be divided among those organizations in the same proportions as the total donation amount has been allocated among the organizations by the Director. 7. FUNDING AND PROGRAM ASSETS The Company may fund the Program or it may choose not to fund the Program. If the Company elects to fund the Program in any manner, neither the Directors nor their recommended Donee(s) shall have any rights or interests in any assets of the Company identified for such purpose. Nothing contained in the Program shall create, or be deemed to create, a trust, actual or constructive, for the benefit of a Director or any Donee recommended by a Director to receive a donation, or shall give, or be deemed to give, any Director or recommended Donee any interest in any assets of the Program or the Company. If the Company elects to fund the Program through life insurance policies, a participating Director agrees to cooperate and fulfill the enrollment requirements necessary to obtain insurance on his or her life. 8. AMENDMENT OR TERMINATION The Board of Directors of the Company may, at any time, without the consent of the Directors participating in the Program, amend, suspend, or terminate the Program. 9. CHANGE OF OWNERSHIP Notwithstanding any contrary provisions in Section 7 or Section 8, if there is a Change of Ownership of the Company, all participants serving as Directors at the time of the Change of Ownership shall immediately become vested in the Program, and the Program shall thereafter be irrevocable with respect to all participants in the Program at the time of the Change of Ownership. In addition, the Company shall immediately create an irrevocable trust to make the anticipated Program donations, and shall immediately transfer to the trust sufficient assets (which may include insurance policies) to make all the Program donations in respect to the individuals who were participants immediately before the of Ownership. For the purpose of the Program, the term "Change of Ownership" shall have the same meaning as is defined for the term in Section 9 of the Company's 1988 Employee Stock Plan, or any successor plan thereto. 4 10. ADMINISTRATION The Program shall be administered by the Nominating Committee of the Board of Directors of the Company. The Committee shall have plenary authority in its discretion, but subject to the provisions of the Program, to prescribe, amend, and rescind rules, regulations and procedures relating to the Program. The determinations of the Committee on the foregoing matters shall be conclusive and binding on all interested parties. 11. GOVERNING LAW The Program shall be construed and enforced according to the laws of California, and all provisions thereof shall be administered according to the laws of said state. 12. EFFECTIVE DATE The Program effective date is January 1, 1995. The recommendation of a Director will not be effective until he or she completes the Program enrollment requirements. EX-11 7 EXHIBIT 11 1 EXHIBIT 11 KAUFMAN AND BROAD HOME CORPORATION AND CONSOLIDATED SUBSIDIARIES STATEMENT OF COMPUTATION OF PER SHARE EARNINGS
YEARS ENDED NOVEMBER 30, --------------------------------------- 1995 1994 1993 ----------- ----------- ----------- PRIMARY: Net income.............................................. $29,059,000 $46,550,000 $39,921,000 ========== ========== ========== Weighted average common shares outstanding.............. 32,386,000 32,449,000 34,606,000 Weighted average Series B convertible preferred shares(1)............................................. 6,500,000 6,500,000 4,345,000 Common share equivalents: Stock options......................................... 871,000 1,077,000 1,234,000 Warrants.............................................. 1,362,000 ----------- ----------- ----------- 39,757,000 40,026,000 41,547,000 ========== ========== ========== PRIMARY EARNINGS PER SHARE(3)........................... $ .73 $ 1.16 $ .96 ========== ========== ========== FULLY DILUTED: Net income.............................................. $29,059,000 $46,550,000 $39,921,000 ========== ========== ========== Weighted average common shares outstanding.............. 32,386,000 32,449,000 34,606,000 Weighted average Series B convertible preferred shares(1)............................................. 6,500,000 6,500,000 4,345,000 Common share equivalents: Stock options......................................... 871,000 1,077,000 1,310,000 Warrants.............................................. 1,501,000 ----------- ----------- ----------- 39,757,000 40,026,000 41,762,000 ========== ========== ========== FULLY DILUTED EARNINGS PER SHARE(2)(3).................. $ .73 $ 1.16 $ .96 ========== ========== ==========
- ------------ (1) Each of the 1,300,000 Series B convertible preferred shares is convertible into five shares of common stock. The 6,500,000 equivalent shares of common stock are weighted for the period outstanding. (2) Fully diluted earnings per share is not disclosed in the Company's consolidated financial statements since the maximum dilutive effect is not material. (3) If, for purposes of calculating primary and fully diluted earnings per share, the Series B convertible preferred shares were excluded from the weighted average shares outstanding and the related dividends deducted from net income, the computations would have resulted in both primary and fully diluted earnings per share of $.58 in 1995, $1.09 in 1994 and $.93 in 1993. EX-13 8 EXHIBIT 13 1 EXHIBIT 13 KAUFMAN AND BROAD HOME CORPORATION AND CONSOLIDATED SUBSIDIARIES PAGES 24 THROUGH 45 AND THE INSIDE BACK COVER OF THE COMPANY'S 1995 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. EX-22 9 EXHIBIT 22 1 EXHIBIT 22 KAUFMAN AND BROAD HOME CORPORATION AND CONSOLIDATED SUBSIDIARIES SUBSIDIARIES OF THE COMPANY The following subsidiaries of the Company were included in the November 30, 1995 consolidated financial statements:
PERCENTAGE OF VOTING SECURITIES OWNED BY THE COMPANY OR A SUBSIDIARY NAME OF COMPANY OF THE COMPANY ------------------------ Arizona Corporations Kaufman and Broad of Arizona, Inc. .................. 100 Kaufman and Broad Home Sales of Arizona, Inc. ....... 100 California Corporations Affordable Multi-Family, Inc. ....................... 100 BKJ Construction Company, Inc. ...................... 100 Cable Associates, Inc. .............................. 100 Custom Decor, Inc. .................................. 100 First Northern Builders Servicing, Inc. ............. 100 Fullerton Affordable Housing, Inc. .................. 100 KBASW Mortgage Acceptance Corporation................ 100 KBI/Mortgage Acceptance Corporation.................. 100 KBRAC IV Mortgage Acceptance Corporation............. 100 K&B Multi-Housing Advisors, Inc. .................... 100 KBMH Construction, Inc. ............................. 100 Kaufman and Broad -- Central Valley, Inc. ........... 100 Kaufman and Broad Coastal, Inc. ..................... 100 Kaufman and Broad Communities, Inc. ................. 100 Kaufman and Broad Development Group.................. 100 Kaufman and Broad Embarcadero, Inc. ................. 100 Kaufman and Broad of Fresno, Inc. ................... 100 Kaufman and Broad Home Sales, Inc. .................. 100 Kaufman and Broad Insurance Agency, Inc. ............ 100 Kaufman and Broad International, Inc. ............... 100 Kaufman and Broad Land Company....................... 100 Kaufman and Broad Land Development Venture, Inc. ..................................... 100 Kaufman and Broad -- Monterey Bay, Inc............... 100 Kaufman and Broad -- Moreno/Perris Valleys, Inc. .... 100 Kaufman and Broad Multi-Family, Inc. ................ 100 Kaufman and Broad Multi-Housing Advisors, Inc........ 100 Kaufman and Broad Multi-Housing Group, Inc........... 100 Kaufman and Broad of Northern California, Inc. ...... 100 Kaufman and Broad North Stockton, Inc. .............. 100 Kaufman and Broad Properties......................... 100 Kaufman and Broad of Sacramento, Inc. ............... 100 Kaufman and Broad of San Diego, Inc. ................ 100 Kaufman and Broad -- South Bay, Inc. ................ 100
2
PERCENTAGE OF VOTING SECURITIES OWNED BY THE COMPANY OR A SUBSIDIARY NAME OF COMPANY OF THE COMPANY ------------------------ Kaufman and Broad of Southern California, Inc. ...... 100 Kaufman and Broad of Texas, Inc. .................... 100 Kaufman and Broad of Utah, Inc....................... 100 Kent Land Company.................................... 100 Kingsbay Escrow Company.............................. 100 Multi-Housing Investments, Inc. ..................... 100 Colorado Corporation Kaufman and Broad of Colorado, Inc. ................. 100 Delaware Corporations International Mortgage Acceptance Corporation........ 100 Kaufman and Broad Development Company................ 100 Kaufman and Broad Limited............................ 100 Illinois Corporations Kaufman and Broad of Illinois, Inc. ................. 100 Kaufman and Broad Mortgage Company................... 100 Massachusetts Corporation Kaufman and Broad Homes, Inc. ....................... 100 Michigan Corporation Keywick, Inc. ....................................... 100 Minnesota Corporation Kaufman and Broad Custom Homes, Inc.................. 100 Nevada Corporation Kaufman and Broad of Nevada, Inc. ................... 100 New Mexico Corporations Mesa Vista Homes, Inc. .............................. 100 Oppel Jenkins of Albuquerque, Inc. .................. 100 New York Corporation Kaufman and Broad Homes of Long Island, Inc. ........ 100 Texas Corporations Oppel Jenkins Development, Inc. ..................... 100 Oppel Jenkins of El Paso, Inc. ...................... 100
3
PERCENTAGE OF VOTING SECURITIES OWNED BY THE COMPANY OR A SUBSIDIARY NAME OF COMPANY OF THE COMPANY ------------------------ Canadian Corporations Davisville Investments Co., Ltd...................... 100 Heatherwoods Development Corporation ................ 100 Hillside Village Limited ............................ 100 Margreen Investments, Inc............................ 100 Meadowstream Development Limited .................... 100 Mississauga Management Ltd. ......................... 100 Victoria Wood Development Corporation, Inc. (Milton) .......................................... 100 Victoria Wood Development Corporation, Inc. (Ontario) ......................................... 100 Victoria Wood Development Corporation, Inc. (Pickering) ....................................... 100 Victoria Wood Development Corporation, Inc. (York)... 100 Victoria Wood Limited ............................... 100 806628 Ontario, Inc.................................. 100 French Corporations Bati Service Development S.A.R.L. ................... 100 Bati Service Promotion S.A. ......................... 100 GIE KB............................................... 100 Kaufman and Broad Developpement S.A. ................ 99.4 Kaufman and Broad France S.A......................... 100 Kaufman and Broad Investissements S.A.R.L............ 100 Kaufman and Broad Liberty S.A.R.L.................... 100 Kaufman and Broad Maisons Individuelles S.A.......... 99.94 Kaufman and Broad Rehabilitation S.A.R.L............. 99.94 Kaufman and Broad Renovation S.A..................... 99.4 Kaufman and Broad Residences S.A.R.L................. 100 Millet S.A........................................... 100 LMP Chancy S.A....................................... 100 German Corporation Kaufman and Broad GmbH............................... 100 Mexican Corporations Kaufman y Broad de Mexico............................ 100 Kaufman y Broad Asesoria Administrativa.............. 100
The following subsidiary of the Company was not consolidated in the November 30, 1995 consolidated financial statements, but rather was carried on the equity method of accounting: Canadian Corporation Barchester Investments Limited....................... 50
EX-24 10 EXHIBIT 24 1 EXHIBIT 24 KAUFMAN AND BROAD HOME CORPORATION AND CONSOLIDATED SUBSIDIARIES CONSENT OF INDEPENDENT AUDITORS To the Board of Directors and Stockholders of Kaufman and Broad Home Corporation 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) and the 1988 Employee Stock Plan (No. 33-28624) of Kaufman and Broad Home Corporation of our report dated January 4, 1996, except as to Note 13, as to which the date is January 22, 1996 with respect to the consolidated financial statements of Kaufman and Broad Home Corporation included in the Annual Report (Form 10-K) for the year ended November 30, 1995. ERNST & YOUNG LLP Los Angeles, California February 22, 1996 EX-27 11 EXHIBIT 27 - FINANCIAL DATA SCHEDULE
5 1,000 YEAR NOV-30-1995 DEC-01-1994 NOV-30-1995 43,382 97,672 293,384 0 1,059,179 0 0 0 1,574,179 0 358,613 0 1,300 32,347 381,831 1,574,179 1,366,866 1,396,526 1,119,405 1,134,226 187,421 0 27,501 45,459 16,400 29,059 0 0 0 29,059 0.73 0 Marketable securities are comprised of first mortgages and mortgage-backed securities which are held for long-term investment. The mortgage-backed securities serve as collateral for related collateralized mortgage obligations. Bonds are comprised of senior and senior subordinated notes and collateralized mortgage obligations. Total Costs include interest expense on the collateralized mortgage obligations, as the associated interest income generated from the mortgage-backed securities is included in Total Revenues. Other Expenses are comprised of selling, general and administrative expenses. Fully diluted earnings per share is not disclosed in the Company's consolidated financial statements since the maximum dilutive effect is not material.
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