Employee Benefit and Stock Plans

12 Months Ended

Nov. 30, 2011

Employee Benefit and Stock Plans [Abstract]

Employee Benefit and Stock Plans

Note 17.    Employee Benefit and Stock Plans

Most of the Company’s employees are eligible to participate in the KB Home 401(k) Savings Plan (the “401(k) Plan”) under which contributions by employees are partially matched by the Company. The aggregate cost of the 401(k) Plan to the Company was $2.8 million in 2011, $3.2 million in 2010 and $3.2 million in 2009. The assets of the 401(k) Plan are held by a third-party trustee. The 401(k) plan participants may direct the investment of their funds among one or more of the several fund options offered by the 401(k) Plan. A fund consisting of the Company’s common stock is one of the investment choices available to participants. As of November 30, 2011, 2010 and 2009, approximately 4%, 5% and 6%, respectively, of the 401(k) Plan’s net assets were invested in the fund consisting of the Company’s common stock.

At the Company’s Annual Meeting of Stockholders held on April 1, 2010, the Company’s stockholders approved the KB Home 2010 Equity Incentive Plan (the “2010 Plan”), authorizing, among other things, the issuance of up to 3,500,000 shares of the Company’s common stock for grants of stock-based awards to employees, non-employee directors and consultants of the Company. This pool of shares includes all of the shares that were available for grant as of April 1, 2010 under the Company’s 2001 Stock Incentive Plan, under which no new awards may be made. Accordingly, as of April 1, 2010, the 2010 Plan became the Company’s only active equity compensation plan. Under the 2010 Plan, grants of stock options and other similar awards reduce the 2010 Plan’s share capacity on a 1-for-1 basis, and grants of restricted stock and other similar “full value” awards reduce the 2010 Plan’s share capacity on a 1.78-for-1 basis. In addition, subject to the 2010 Plan’s terms and conditions, a stock-based award may also be granted under the 2010 Plan to replace an outstanding award granted under another Company plan (subject to the terms of such other plan) with terms substantially identical to those of the award being replaced.

At the Company’s Annual Meeting of Stockholders held on April 7, 2011, the Company’s stockholders approved an amendment to the KB Home 2010 Equity Incentive Plan (the “Plan Amendment”) to increase the number of shares of the Company’s common stock that may be issued under the KB Home 2010 Equity Incentive Plan by an additional 4,000,000 shares. The Plan Amendment was filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended February 28, 2011.

The Company’s 2010 Plan provides that stock options, performance stock, restricted stock and stock units may be awarded to any employee of the Company for periods of up to 10 years. The 2010 Plan also enables the Company to grant cash bonuses, SARs and other stock-based awards. In addition to awards outstanding under the 2010 Plan, the Company has awards outstanding under its Amended and Restated 1999 Incentive Plan (the “1999 Plan”), which provides for generally the same types of awards as the 2010 Plan. The Company also has awards outstanding under its 1988 Employee Stock Plan and its Performance-Based Incentive Plan for Senior Management, each of which provides for generally the same types of awards as the 2010 Plan, but stock option awards granted under these plans have terms of up to 15 years.

Stock Options. Stock option transactions are summarized as follows:

	Years Ended November 30,
	2011					2010					2009
	Options			Weighted Average Exercise Price		Options			Weighted Average Exercise Price		Options			Weighted Average Exercise Price
Options outstanding at beginning of year		8,798,613		$	24.19		5,711,701		$	27.39		7,847,402		$	30.11
Granted		1,716,000			6.36		3,572,237			18.71		1,403,141			15.44
Exercised		—			—		(28,281	)		13.00		—			—
Cancelled		(354,217	)		21.47		(457,044	)		22.05		(3,538,842	)		28.69
Options outstanding at end of year		10,160,396		$	21.27		8,798,613		$	24.19		5,711,701		$	27.39
Options exercisable at end of year		7,142,568		$	26.43		6,146,605		$	28.73		4,046,027		$	31.05
Options available for grant at end of year		2,477,219					21,703					1,714,650

The total intrinsic value of stock options exercised during the year ended November 30, 2010 was $.1 million. There were no stock options exercised during the years ended November 30, 2011 and 2009. The aggregate intrinsic value of stock options outstanding was $1.7 million, $.3 million and $.1 million at November 30, 2011, 2010 and 2009, respectively. Stock options exercisable had no intrinsic value at November 30, 2011. The intrinsic value of stock options exercisable was less than $.1 million at November 30, 2010 and $.1 million at November 30, 2009. The intrinsic value of a stock option is the amount by which the market value of the underlying stock exceeds the price of the option. In 2009, in connection with the settlement of certain stockholder derivative litigation, the Company’s former chairman and chief executive officer relinquished 3,011,452 stock options to the Company and those stock options were cancelled.

On August 13, 2010, the Company consummated an exchange offer (the “August 2010 Exchange Offer”) pursuant to which eligible employees of the Company had the opportunity to exchange their outstanding cash-settled SARs granted on October 2, 2008 and January 22, 2009 for non-qualified options to purchase shares of the Company’s common stock granted under the 2010 Plan.

On November 9, 2010, the Company consummated a separate exchange offer (the “November 2010 Exchange Offer”) pursuant to which eligible employees of the Company had the opportunity to exchange their outstanding cash-settled SARs granted on July 12, 2007 and October 4, 2007 for non-qualified options to purchase shares of the Company’s common stock granted under the 2010 Plan.

Pursuant to both the August 2010 Exchange Offer and the November 2010 Exchange Offer, each stock option granted in exchange for a SAR had an exercise price equal to the SAR’s exercise price and the same number of underlying shares, vesting schedule and expiration date as each such SAR. The August 2010 Exchange Offer and the November 2010 Exchange Offer did not include a re-pricing or any other changes impacting the value to the employees. The Company conducted the August 2010 Exchange Offer and November 2010 Exchange Offer in an effort to reduce the overall degree of variability in the expense recorded for employee equity-based compensation by replacing the SARs, which are accounted for as liability awards, with stock options, which are accounted for as equity awards.

Pursuant to the August 2010 Exchange Offer, 19 eligible employees returned a total of 1,116,030 SARs to the Company, and those SARs were cancelled on August 13, 2010 in exchange for corresponding grants of stock options to 18 of those employees to purchase an aggregate of 1,073,737 shares of the Company’s common stock at $19.90 per share and one grant of stock options to one employee to purchase 42,293 shares of the Company’s common stock at $11.25 per share.

Pursuant to the November 2010 Exchange Offer, nine eligible employees returned a total of 925,705 SARs to the Company, and those SARs were cancelled on November 9, 2010 in exchange for corresponding grants of stock options to those employees to purchase an aggregate of 732,170 shares of the Company’s common stock at $28.10 per share and grants of stock options to seven of those employees to purchase an aggregate of 193,535 shares of the Company’s common stock at $36.19 per share.

The stock options granted pursuant to the August 2010 Exchange Offer and the November 2010 Exchange Offer are included in the stock options granted total in the above table.

On October 6, 2011, the Company’s president and chief executive officer was granted an award of performance-based stock options to purchase an aggregate of 365,000 shares of the Company’s common stock at the purchase price of $6.32 per share. The performance-based stock options shall vest and become exercisable if the Company’s president and chief executive officer does not experience a termination of service prior to the applicable dates described in his performance option agreement, and if the performance goal, as set forth in that agreement, has been satisfied. The number of performance-based stock options that ultimately vests depends on the achievement of one of the following three performance metrics: positive cumulative operating margin; relative operating margin; and customer satisfaction, as set forth in the agreement. In accordance with ASC 718, the Company used the Black-Scholes option-pricing model to estimate the grant-date fair value per performance-based stock option of $2.54.

On October 7, 2010, the Company’s president and chief executive officer was granted an award of performance-based stock options to purchase an aggregate of 260,000 shares of the Company’s common stock at the purchase price of $11.06 per share. The performance-based stock options shall vest and become exercisable if the Company’s president and chief executive officer does not experience a termination of service prior to the applicable dates described in his performance option agreement, and if the performance goal, as set forth in that agreement, has been satisfied. The number of performance-based stock options that ultimately vests depends on the achievement of one of the following three performance metrics: positive cumulative operating margin; relative operating margin; and relative customer satisfaction, as set forth in the agreement. In accordance with ASC 718, the Company used the Black-Scholes option-pricing model to estimate the grant-date fair value per performance-based stock option of $4.59.

Stock options outstanding and stock options exercisable at November 30, 2011 are as follows:

	Options Outstanding						Options Exercisable
Range of Exercise Price	Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life		Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life
$  6.32 to $10.54		1,699,998	$	6.38		9.8		13,998	$	9.47
$10.55 to $14.96		2,057,882		12.06		7.6		1,070,462		12.64
$14.97 to $20.08		2,220,510		17.68		7.3		1,876,102		18.09
$20.09 to $33.92		2,035,785		27.35		6.1		2,035,785		27.35
$33.93 to $69.63		2,146,221		39.85		6.4		2,146,221		39.85
$  6.32 to $69.63		10,160,396	$	21.27		7.3		7,142,568	$	26.43		6.5

The weighted average fair value of stock options granted in 2011, 2010 and 2009 was $2.56, $2.81 and $7.16, respectively. The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:

	Years Ended November 30,
	2011		2010		2009
Risk-free interest rate		.9%		.7%		1.9%
Expected volatility factor		65.6%		61.7%		64.3%
Expected dividend yield		3.9%		2.2%		1.6%
Expected term		5 years		3 years		4 years

The risk-free interest rate assumption is determined based on observed interest rates appropriate for the expected term of the Company’s stock options. The expected volatility factor is based on a combination of the historical volatility of the Company’s common stock and the implied volatility of publicly traded options on the Company’s stock. The expected dividend yield assumption is based on the Company’s history of dividend payouts. The expected term of employee stock options is estimated using historical data.

The Company’s stock-based compensation expense related to stock option grants was $5.9 million in 2011, $5.8 million in 2010 and $2.6 million in 2009. As of November 30, 2011, there was $5.7 million of total unrecognized stock-based compensation expense related to unvested stock option awards. This expense is expected to be recognized over a weighted average period of 1.6 years.

The Company records proceeds from the exercise of stock options as additions to common stock and paid-in capital. As there were no stock option exercises in 2011, the Company realized no tax deduction. A tax shortfall of $1.0 million in 2011, $2.8 million in 2010 and $4.1 million in 2009 was reflected in paid-in capital from the cancellation of stock awards. In 2011 and 2009, the consolidated statement of cash flows reflected no excess tax benefit associated with the exercise of stock options since December 1, 2005, in accordance with the cash flow classification requirements of ASC 718. In 2010, the consolidated statement of cash flows reflected $.6 million of excess tax benefit associated with the exercise of stock options.

Other Stock-Based Awards. From time to time, the Company grants restricted common stock to various employees as a compensation benefit. During the restriction periods, the employees are entitled to vote and receive dividends on such shares. The restrictions imposed with respect to the shares granted lapse over periods of three or eight years if certain conditions are met.

Restricted stock transactions are summarized as follows:

	Years Ended November 30,
	2011					2010
	Shares			Weighted Average per Share Grant Date Fair Value		Shares			Weighted Average per Share Grant Date Fair Value
Outstanding at beginning of year		402,477		$	15.09		445,831		$	15.44
Granted		—			—		51,023			12.58
Vested		(10,930	)		13.49		—			—
Cancelled		(52,635	)		15.44		(94,377	)		15.36
Outstanding at end of year		338,912		$	15.03		402,477		$	15.09

On July 12, 2007, the Company awarded 54,000 shares of restricted common stock that was subject to a market condition (“Performance Shares”) to its president and chief executive officer subject to the terms of the 1999 Plan, the president and chief executive officer’s Performance Stock Agreement dated July 12, 2007 and his Employment Agreement dated February 28, 2007. Depending on the Company’s total shareholder return over the three-year period ending on November 30, 2009 relative to a group of peer companies, zero to 150% of the Performance Shares would vest and become unrestricted. In accordance with ASC 718, the Company used a Monte Carlo simulation model to estimate the grant-date fair value of the Performance Shares. The total grant-date fair value of $2.0 million was recognized over the requisite service period. On January 21, 2010, the management development and compensation committee of the Company’s board of directors certified the Company’s relative total shareholder return over the performance period associated with the Performance Shares and determined that the vesting restrictions lapsed with respect to 48,492 Performance Shares effective on that date.

In 2009 and 2008, the Company granted phantom shares to various employees. In 2008, the Company also granted SARs to various employees. Both phantom shares and SARs are accounted for as liabilities in the Company’s consolidated financial statements because such awards provide for settlement in cash. Each phantom share represents the right to receive a cash payment equal to the closing price of the Company’s common stock on the applicable vesting date. Each SAR represents a right to receive a cash payment equal to the positive difference, if any, between the grant price and the market value of a share of the Company’s common stock on the date of exercise. The phantom shares vest in full at the end of three years, while the SARs vest in equal annual installments over three years. As of November 30, 2011, there were 5,556 phantom shares and 29,939 SARs outstanding, compared to 268,762 phantom shares and 37,517 SARs outstanding as of November 30, 2010 and 926,705 phantom shares and 2,292,537 SARs outstanding as of November 30, 2009. The year-over-year decrease in the number of outstanding SARs in 2010 from 2009 reflects the impact of the August 2010 Exchange Offer and the November 2010 Exchange Offer.

The Company recognized total compensation expense of $1.2 million in 2011, $.7 million in 2010 and $8.9 million in 2009 related to restricted common stock, the Performance Shares, phantom shares and SARs.

Grantor Stock Ownership Trust. On August 27, 1999, the Company established a grantor stock ownership trust (the “Trust”) into which certain shares repurchased in 2000 and 1999 were transferred. The Trust, administered by a third-party trustee, holds and distributes the shares of common stock acquired to support certain employee compensation and employee benefit obligations of the Company under its existing stock option, the 401(k) Plan and other employee benefit plans. The existence of the Trust has no impact on the amount of benefits or compensation that is paid under these plans.

For financial reporting purposes, the Trust is consolidated with the Company, and therefore any dividend transactions between the Company and the Trust are eliminated. Acquired shares held by the Trust remain valued at the market price at the date of purchase and are shown as a reduction to stockholders’ equity in the consolidated balance sheets. The difference between the Trust share value and the market value on the date shares are released from the Trust is included in paid-in capital. Common stock held in the Trust is not considered outstanding in the computations of earnings (loss) per share. The Trust held 10,884,151 and 11,082,723 shares of common stock at November 30, 2011 and 2010, respectively. The trustee votes shares held by the Trust in accordance with voting directions from eligible employees, as specified in a trust agreement with the trustee.