##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
 For the quarterly period ended August 31, 2008.
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934.
 For the transition period from [          ] to [          ].
 Commission File No. 001-09195
 KB HOME
  Delaware
    
    95-3666267(State of incorporation)
    
    (IRS employer identification number)
 
   þ o
  Large accelerated filer þAccelerated filer oNon-accelerated filer o(Do not check if a smaller reporting company)Smaller reporting company o  o þ




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##### 



KB HOME
FORM 10-Q
INDEX
 PageNumber(s)PART I. FINANCIAL INFORMATIONItem 1. Financial StatementsConsolidated Statements of Operations 
Nine Months and Three Months Ended August 31, 2008 and 2007
    
    3Consolidated Balance Sheets  August 31, 2008 and November 30, 2007
    
    4Consolidated Statements of Cash Flows 
Nine Months Ended August 31, 2008 and 2007
    
    5Notes to Consolidated Financial Statements
    
    6-33Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
    
    34-58Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    58-59Item 4. Controls and Procedures
    
    59PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    60-61Item 1A. Risk Factors
    
    61Item 5. Other Information
    
    61Item 6. Exhibits
    
    62SIGNATURES
    
    63INDEX OF EXHIBITS
    
    64EXHIBIT 10.41EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 
 KB HOME
CONSOLIDATED STATEMENTS OF OPERATIONS
 Nine Months Ended August 31,
    
    
    Three Months Ended August 31,2008
    
    
    2007
    
    
    2008
    
    
    2007Total revenues
    
    $
    2,114,899
    
    
    $
    4,345,946
    
    
    $
    681,610
    
    
    $
    1,543,900Homebuilding:Revenues
    
    $
    2,107,517
    
    
    $
    4,335,242
    
    
    $
    679,115
    
    
    $
    1,540,607Construction and land costs
    
    
    (2,322,213
    )
    
    
    (4,658,065
    )
    
    
    (653,732
    )
    
    
    (2,002,381
    )Selling, general and administrative expenses
    
    
    (379,914
    )
    
    
    (595,971
    )
    
    
    (133,211
    )
    
    
    (197,164
    )Goodwill impairment
    
    
    (24,570
    )
    
    
    (107,926
    )
    
    
    
    
    
    
    (107,926
    )Operating loss
    
    
    (619,180
    )
    
    
    (1,026,720
    )
    
    
    (107,828
    )
    
    
    (766,864
    )Interest income
    
    
    29,240
    
    
    
    18,882
    
    
    
    6,686
    
    
    
    8,614Loss on early redemption of debt
    
    
    (10,388
    )
    
    
    (12,990
    )
    
    
    (10,388
    )
    
    
    (12,990
    )Equity in loss of unconsolidated joint ventures
    
    
    (91,564
    )
    
    
    (62,727
    )
    
    
    (46,203
    )
    
    
    (21,027
    )Homebuilding pretax loss
    
    
    (691,892
    )
    
    
    (1,083,555
    )
    
    
    (157,733
    )
    
    
    (792,267
    )Financial services:Revenues
    
    
    7,382
    
    
    
    10,704
    
    
    
    2,495
    
    
    
    3,293Expenses
    
    
    (3,317
    )
    
    
    (3,524
    )
    
    
    (1,085
    )
    
    
    (1,113
    )Equity in income of unconsolidated joint venture
    
    
    12,880
    
    
    
    14,558
    
    
    
    4,578
    
    
    
    4,367Financial services pretax income
    
    
    16,945
    
    
    
    21,738
    
    
    
    5,988
    
    
    
    6,547Loss from continuing operations before
income taxes
    
    
    (674,947
    )
    
    
    (1,061,817
    )
    
    
    (151,745
    )
    
    
    (785,720
    )Income tax benefit
    
    
    6,100
    
    
    
    419,700
    
    
    
    7,000
    
    
    
    307,100Loss from continuing operations
    
    
    (668,847
    )
    
    
    (642,117
    )
    
    
    (144,745
    )
    
    
    (478,620
    )Income from discontinued operations, net of
income taxes
    
    
    
    
    
    
    47,252
    
    
    
    
    
    
    
    4,904Gain on sale of discontinued operations, net of
income taxes
    
    
    
    
    
    
    438,104
    
    
    
    
    
    
    
    438,104Net loss
    
    $
    (668,847
    )
    
    $
    (156,761
    )
    
    $
    (144,745
    )
    
    $
    (35,612
    )Basic and diluted earnings (loss) per share:Continuing operations
    
    $
    (8.63
    )
    
    $
    (8.32
    )
    
    $
    (1.87
    )
    
    $
    (6.19
    )Discontinued operations
    
    
    
    
    
    
    6.29
    
    
    
    
    
    
    
    5.73Basic and diluted loss per share
    
    $
    (8.63
    )
    
    $
    (2.03
    )
    
    $
    (1.87
    )
    
    $
    (.46
    )Basic and diluted average shares outstanding
    
    
    77,464
    
    
    
    77,120
    
    
    
    77,565
    
    
    
    77,265Cash dividends declared per common share
    
    $
    .75
    
    
    $
    .75
    
    
    $
    
    
    
    $
    .25
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##### Table of Contents



KB HOME
CONSOLIDATED BALANCE SHEETS
 August 31,
    
    
    November 30,2008
    
    
    2007AssetsHomebuilding:Cash and cash equivalents
    
    $
    942,451
    
    
    $
    1,325,255Receivables
    
    
    188,312
    
    
    
    295,739Inventories
    
    
    2,562,682
    
    
    
    3,312,420Investments in unconsolidated joint ventures
    
    
    250,425
    
    
    
    297,010Deferred income taxes
    
    
    222,458
    
    
    
    222,458Goodwill
    
    
    43,400
    
    
    
    67,970Other assets
    
    
    109,943
    
    
    
    140,7124,319,671
    
    
    
    5,661,564Financial services
    
    
    58,274
    
    
    
    44,392Total assets
    
    $
    4,377,945
    
    
    $
    5,705,956Liabilities and stockholders equityHomebuilding:Accounts payable
    
    $
    646,185
    
    
    $
    699,851Accrued expenses and other liabilities
    
    
    705,978
    
    
    
    975,828Mortgages and notes payable
    
    
    1,877,362
    
    
    
    2,161,7943,229,525
    
    
    
    3,837,473Financial services
    
    
    14,650
    
    
    
    17,796Common stock
    
    
    115,108
    
    
    
    114,976Paid-in capital
    
    
    862,556
    
    
    
    851,628Retained earnings
    
    
    1,239,473
    
    
    
    1,968,881Accumulated other comprehensive loss
    
    
    (22,923
    )
    
    
    (22,923
    )Grantor stock ownership trust, at cost
    
    
    (130,620
    )
    
    
    (132,608
    )Treasury stock, at cost
    
    
    (929,824
    )
    
    
    (929,267
    )Total stockholders equity
    
    
    1,133,770
    
    
    
    1,850,687Total liabilities and stockholders equity
    
    $
    4,377,945
    
    
    $
    5,705,956
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KB HOME
CONSOLIDATED STATEMENTS OF CASH FLOWS
 Nine Months Ended August 31,2008
    
    
    2007Cash flows from operating activities:Net loss
    
    $
    (668,847
    )
    
    $
    (156,761
    )Income from discontinued operations, net of income taxes
    
    
    
    
    
    
    (47,252
    )Gain on sale of discontinued operations, net of income taxes
    
    
    
    
    
    
    (438,104
    )Adjustments to reconcile net loss to net cash provided by operating
activities:Equity in loss of unconsolidated joint ventures
    
    
    78,684
    
    
    
    48,169Distributions of earnings from unconsolidated joint ventures
    
    
    9,125
    
    
    
    27,215Amortization of discounts and issuance costs
    
    
    2,942
    
    
    
    1,898Depreciation and amortization
    
    
    7,542
    
    
    
    13,361Loss on early redemption of debt
    
    
    10,388
    
    
    
    12,990Provision for deferred income taxes
    
    
    
    
    
    
    (237,870
    )Tax benefit associated with exercise of stock options
    
    
    2,097
    
    
    
    (714
    )Stock-based compensation expense
    
    
    3,830
    
    
    
    6,103Inventory impairments and land option contract abandonments
    
    
    401,073
    
    
    
    948,534Goodwill impairment
    
    
    24,570
    
    
    
    107,926Changes in assets and liabilities:Receivables
    
    
    109,032
    
    
    
    (3,207
    )Inventories
    
    
    230,307
    
    
    
    205,221Accounts payable, accrued expenses and other liabilities
    
    
    (196,540
    )
    
    
    (498,970
    )Other, net
    
    
    16,040
    
    
    
    33,380Net cash provided by operating activities  continuing operations
    
    
    30,243
    
    
    
    21,919Net cash provided by operating activities  discontinued operations
    
    
    
    
    
    
    297,397Net cash provided by operating activities
    
    
    30,243
    
    
    
    319,316Cash flows from investing activities:Sale of discontinued operations, net of cash divested
    
    
    
    
    
    
    739,764Investments in unconsolidated joint ventures
    
    
    (61,464
    )
    
    
    (56,969
    )Sales (purchases) of property and equipment, net
    
    
    6,124
    
    
    
    (2,582
    )Net cash provided (used) by investing activities  continuing operations
    
    
    (55,340
    )
    
    
    680,213Net cash used by investing activities  discontinued operations
    
    
    
    
    
    
    (12,112
    )Net cash provided (used) by investing activities
    
    
    (55,340
    )
    
    
    668,101Cash flows from financing activities:Redemption of term loan
    
    
    
    
    
    
    (400,000
    )Redemption of senior subordinated notes
    
    
    (305,814
    )
    
    
    (258,968
    )Payments on mortgages, land contracts and other loans
    
    
    (3,066
    )
    
    
    (114,119
    )Issuance of common stock under employee stock plans
    
    
    5,111
    
    
    
    10,823Excess tax benefit associated with exercise of stock options
    
    
    
    
    
    
    714Payments of cash dividends
    
    
    (58,102
    )
    
    
    (57,844
    )Repurchases of common stock
    
    
    (557
    )
    
    
    (4,909
    )Net cash used by financing activities  continuing operations
    
    
    (362,428
    )
    
    
    (824,303
    )Net cash used by financing activities  discontinued operations
    
    
    
    
    
    
    (306,527
    )Net cash used by financing activities
    
    
    (362,428
    )
    
    
    (1,130,830
    )Net decrease in cash and cash equivalents
    
    
    (387,525
    )
    
    
    (143,413
    )Cash and cash equivalents at beginning of period
    
    
    1,343,742
    
    
    
    804,182Cash and cash equivalents at end of period
    
    $
    956,217
    
    
    $
    660,769
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KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 1.
    
    Basis of Presentation and Significant Accounting PoliciesThe accompanying unaudited consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States for interim financial
information and the rules and regulations of the Securities and Exchange Commission (SEC).
Accordingly, certain information and footnote disclosures normally included in the annual
financial statements prepared in accordance with generally accepted accounting principles have
been condensed or omitted.In the opinion of KB Home (the Company), the accompanying unaudited consolidated financial
statements contain all adjustments (consisting only of normal recurring accruals) necessary to
present fairly the Companys consolidated financial position as of August 31, 2008, the results
of its consolidated operations for the nine months and three months ended August 31, 2008 and
2007, and its consolidated cash flows for the nine months ended August 31, 2008 and 2007. The
consolidated balance sheet at November 30, 2007 has been taken from the audited consolidated
financial statements as of that date. These unaudited consolidated financial statements should
be read in conjunction with the audited consolidated financial statements for the year ended
November 30, 2007, which are contained in the Companys Annual Report on Form 10-K for that
period.SeasonalityHistorically, the homebuilding industry has experienced seasonal fluctuations in quarterly
operating results. The Company has also experienced such seasonal fluctuations. Therefore, the
results of the Companys consolidated operations for the nine months and three months ended
August 31, 2008 are not necessarily indicative of the results to be expected for the year ending
November 30, 2008.Earnings (loss) per shareBasic earnings (loss) per share is calculated by dividing net income (loss) by the average
number of common shares outstanding for the period. Diluted earnings (loss) per share is
calculated by dividing net income (loss) by the average number of common shares outstanding
including all potentially dilutive shares issuable under outstanding stock options. All
outstanding stock options were excluded from the diluted loss per share calculation for the nine
months and three months ended August 31, 2008 and 2007 because the effect of their inclusion
would be antidilutive, or would decrease the reported loss per share.Comprehensive lossThe Companys comprehensive loss was $144.7 million and $35.6 million for the three months ended
August 31, 2008 and 2007, respectively, and $668.8 million and $156.8 million for the nine
months ended August 31, 2008 and 2007, respectively.Accumulated other comprehensive lossThe balances of accumulated other comprehensive loss reported in the consolidated balance sheets
as of August 31, 2008 and November 30, 2007 are comprised solely of an adjustment of $22.9
million recorded directly to accumulated other comprehensive loss at the end of 2007 to
initially apply Statement of Financial Accounting Standards No. 158, Employers Accounting for
Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87,
88, 106 and 132(R), which requires an employer to recognize the funded status of a defined
postretirement benefit plan as an asset or liability on the balance sheet and requires any
unrecognized prior service costs and actuarial gains/losses to be recognized in accumulated
other comprehensive income (loss).ReclassificationsCertain amounts in the consolidated financial statements of prior periods have been reclassified
to conform to the 2008 presentation.
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KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 2.
    
    Stock-Based CompensationThe Company adopted the fair value recognition provisions of Statement of Financial Accounting
Standards No. 123(R), Share-Based Payment (SFAS No. 123(R)), using the modified prospective
transition method effective December 1, 2005. SFAS No. 123(R) requires a public entity to
measure compensation cost associated with awards of equity instruments based on the grant-date
fair value of the awards over the requisite service period. SFAS No. 123(R) requires public
entities to initially measure compensation cost associated with awards of liability instruments
based on their current fair value. The fair value of that award is to be remeasured subsequently
at each reporting date through the settlement date. Changes in fair value during the requisite
service period will be recognized as compensation cost over that period.Stock OptionsIn accordance with SFAS No. 123(R), the Company estimates the grant-date fair value of its stock
options using the Black-Scholes option-pricing model, which takes into account assumptions
regarding the dividend yield, the risk-free interest rate, the expected stock-price volatility
and the expected term of the stock options. The following table summarizes the stock options
outstanding as of August 31, 2008 as well as activity during the nine months then ended:
 WeightedAverage ExerciseOptions
    
    
    PriceOptions outstanding at beginning of period
    
    
    8,173,464
    
    
    $
    30.17Exercised
    
    
    (131,354
    )
    
    
    18.88Cancelled
    
    
    (138,861
    )
    
    
    43.54Options outstanding at end of period
    
    
    7,903,249
    
    
    $
    30.13Options exercisable at end of period
    
    
    7,194,279
    
    
    $
    29.14
 As of August 31, 2008, the weighted average remaining contractual lives of stock options
outstanding and stock options exercisable were 9.3 years and 9.4 years, respectively. There was
$3.1 million of total unrecognized compensation cost related to unvested stock option awards as
of August 31, 2008. For the three months ended August 31, 2008 and 2007, stock-based
compensation expense associated with stock options totaled $1.2 million and $2.6 million,
respectively. For the nine months ended August 31, 2008 and 2007, stock-based compensation
expense totaled $3.8 million and $6.1 million, respectively. The aggregate intrinsic value of
both stock options outstanding and stock options exercisable was $9.5 million as of August 31,
2008. (The intrinsic value of a stock option is the amount by which the market value of a share
of the Companys common stock exceeds the exercise price of the stock option.) The aggregate
intrinsic value of stock options exercised during the nine months ended August 31, 2008 was $.9
million.Other Stock-Based AwardsFrom time to time, the Company grants restricted stock, phantom shares and stock appreciation
rights to various employees. The Company recognized total compensation expense of $3.0 million
in the three months ended August 31, 2008 and $1.5 million in the three months ended August 31,
2007 related to these stock-based awards. The Company recognized total compensation expense of
$9.6 million in the nine months ended August 31, 2008 and $3.8 million in the nine months ended
August 31, 2007 related to restricted stock, phantom shares and stock appreciation rights.3.
    
    Segment InformationAs of August 31, 2008, the Company has identified five reporting segments, comprised of four
homebuilding reporting segments and one financial services reporting segment, within its
consolidated operations in
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KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 3.
    
    Segment Information (continued)accordance with Statement of Financial Accounting Standards No. 131, Disclosures about Segments
of an Enterprise and Related Information. As of August 31, 2008, the Companys homebuilding
reporting segments conducted ongoing operations in the following states:West Coast: California
Southwest: Arizona and Nevada
Central: Colorado and Texas
Southeast: Florida, Georgia, North Carolina and South CarolinaThe Companys homebuilding reporting segments are engaged in the acquisition and development of
land primarily for residential purposes and offer a wide variety of homes that are designed to
appeal to first-time, first move-up and active adult buyers.The Companys homebuilding reporting segments were identified based primarily on similarities in
economic and geographic characteristics, as well as similar product type, regulatory
environments, methods used to sell and construct homes and land acquisition characteristics.
The Company evaluates segment performance primarily based on pretax income.The Companys financial services reporting segment provides title and insurance services to the
Companys homebuyers and provided escrow coordination services until the second quarter of 2007,
when the Company terminated the escrow coordination business. The segment also provides mortgage
banking services to the Companys homebuyers indirectly through Countrywide KB Home Loans, LLC
(Countrywide KB Home Loans), a joint venture between a Company subsidiary and CWB Venture
Management Corporation, a subsidiary of Countrywide Financial Corporation. On July 1, 2008,
Bank of America Corporation completed its purchase of Countrywide Financial Corporation. On
October 1, 2008, Bank of America, N.A. purchased 100% of the stock of CWB Venture Management
Corporation. Accordingly, as of October 1, 2008, Countrywide KB Home Loans and CWB Venture
Management Corporation are operating subsidiaries of Bank of America, N.A. At this time, the
Company does not believe that these transactions will have a material effect on the joint
ventures activities. The Companys financial services reporting segment conducts operations in
the same markets as the Companys homebuilding reporting segments.The Companys reporting segments follow the same accounting policies used for the Companys
consolidated financial statements. Operational results of each segment are not necessarily
indicative of the results that would have occurred had the segment operated as an independent,
stand-alone entity during the periods presented and are not necessarily indicative of the
results to be expected for the full year.The following tables present financial information relating to the Companys reporting segments
(in thousands):
 Nine Months Ended August 31,
    
    
    Three Months Ended August 31,2008
    
    
    2007
    
    
    2008
    
    
    2007Revenues:West Coast
    
    $
    700,301
    
    
    $
    1,475,662
    
    
    $
    259,362
    
    
    $
    553,366Southwest
    
    
    459,672
    
    
    
    963,930
    
    
    
    95,471
    
    
    
    292,232Central
    
    
    442,650
    
    
    
    703,456
    
    
    
    142,175
    
    
    
    254,116Southeast
    
    
    504,894
    
    
    
    1,192,194
    
    
    
    182,107
    
    
    
    440,893Total homebuilding revenues
    
    
    2,107,517
    
    
    
    4,335,242
    
    
    
    679,115
    
    
    
    1,540,607Financial services
    
    
    7,382
    
    
    
    10,704
    
    
    
    2,495
    
    
    
    3,293Total revenues
    
    $
    2,114,899
    
    
    $
    4,345,946
    
    
    $
    681,610
    
    
    $
    1,543,900
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KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 3.
    
    Segment Information (continued)
 Nine Months Ended August 31,
    
    
    Three Months Ended August 31,2008
    
    
    2007
    
    
    2008
    
    
    2007Income (loss) from
continuing operations
before income taxes:West Coast
    
    $
    (191,455
    )
    
    $
    (532,802
    )
    
    $
    (18,020
    )
    
    $
    (351,086
    )Southwest
    
    
    (186,634
    )
    
    
    (150,356
    )
    
    
    (68,553
    )
    
    
    (179,930
    )Central
    
    
    (48,850
    )
    
    
    (50,281
    )
    
    
    (7,070
    )
    
    
    (16,876
    )Southeast
    
    
    (185,783
    )
    
    
    (144,945
    )
    
    
    (40,891
    )
    
    
    (106,088
    )Corporate and other (a)
    
    
    (79,170
    )
    
    
    (205,171
    )
    
    
    (23,199
    )
    
    
    (138,287
    )Total homebuilding
loss from continuing
operations before
income taxes
    
    
    (691,892
    )
    
    
    (1,083,555
    )
    
    
    (157,733
    )
    
    
    (792,267
    )Financial services
    
    
    16,945
    
    
    
    21,738
    
    
    
    5,988
    
    
    
    6,547Total loss from
continuing operations
before income taxes
    
    $
    (674,947
    )
    
    $
    (1,061,817
    )
    
    $
    (151,745
    )
    
    $
    (785,720
    )Interest cost:West Coast
    
    $
    30,557
    
    
    $
    33,220
    
    
    $
    14,241
    
    
    $
    19,173Southwest
    
    
    22,856
    
    
    
    30,842
    
    
    
    7,916
    
    
    
    13,577Central
    
    
    17,717
    
    
    
    15,916
    
    
    
    8,292
    
    
    
    4,809Southeast
    
    
    24,863
    
    
    
    26,704
    
    
    
    11,268
    
    
    
    16,977Corporate and other
    
    
    653
    
    
    
    6,266
    
    
    
    31
    
    
    
    4,814Total (b)
    
    $
    96,646
    
    
    $
    112,948
    
    
    $
    41,748
    
    
    $
    59,350Equity in income
(loss) of
unconsolidated joint
ventures:West Coast
    
    $
    (17,346
    )
    
    $
    (10,527
    )
    
    $
    (6,540
    )
    
    $
    (2,767
    )Southwest
    
    
    (24,330
    )
    
    
    1,942
    
    
    
    (18,314
    )
    
    
    (3,327
    )Central
    
    
    (4,519
    )
    
    
    (2,417
    )
    
    
    75
    
    
    
    (677
    )Southeast
    
    
    (45,369
    )
    
    
    (51,725
    )
    
    
    (21,424
    )
    
    
    (14,256
    )Total
    
    $
    (91,564
    )
    
    $
    (62,727
    )
    
    $
    (46,203
    )
    
    $
    (21,027
    )
 
 (a)
    
    Corporate and other includes corporate general and administrative expenses.(b)
    
    Interest cost for the three months ended August 31, 2008 and 2007 represents $31.4 million and $46.4 million, respectively, of interest amortized in construction and land costs. Interest cost for the nine months ended
August 31, 2008 and 2007 represents $86.3 million and $100.0 million, respectively, of interest amortized in construction and land costs. Interest cost for both the three months and nine months ended August 31, 2008
includes $7.1 million related to the loss on early redemption of debt and $3.3 million of unamortized fees that were written off in connection with the amendment of the unsecured revolving credit facility (the Credit
Facility). Interest cost for both the three months and nine months ended August 31, 2007 includes $13.0 million related to the loss on early redemption of debt. 9




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##### Table of Contents



KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 3.
    
    Segment Information (continued)
 Nine Months Ended August 31,
    
    
    Three Months Ended August 31,2008
    
    
    2007
    
    
    2008
    
    
    2007Inventory impairments:West Coast
    
    $
    134,776
    
    
    $
    562,702
    
    
    $
    1,807
    
    
    $
    359,510Southwest
    
    
    140,181
    
    
    
    212,648
    
    
    
    37,318
    
    
    
    183,325Central
    
    
    20,539
    
    
    
    21,485
    
    
    
    
    
    
    
    13,281Southeast
    
    
    77,900
    
    
    
    79,660
    
    
    
    
    
    
    
    54,148Total
    
    $
    373,396
    
    
    $
    876,495
    
    
    $
    39,125
    
    
    $
    610,264Inventory abandonments:West Coast
    
    $
    9,186
    
    
    $
    11,813
    
    
    $
    
    
    
    $
    5,083Southwest
    
    
    187
    
    
    
    10,023
    
    
    
    
    
    
    
    9,920Central
    
    
    
    
    
    
    2,961
    
    
    
    
    
    
    
    1,616Southeast
    
    
    18,304
    
    
    
    47,242
    
    
    
    
    
    
    
    46,076Total
    
    $
    27,677
    
    
    $
    72,039
    
    
    $
    
    
    
    $
    62,695Unconsolidated joint venture impairments:West Coast
    
    $
    13,757
    
    
    $
    3,650
    
    
    $
    5,651
    
    
    $
    Southwest
    
    
    21,311
    
    
    
    3,362
    
    
    
    16,367
    
    
    
    3,362Central
    
    
    2,629
    
    
    
    750
    
    
    
    
    
    
    
    Southeast
    
    
    43,934
    
    
    
    50,673
    
    
    
    21,099
    
    
    
    13,766Total
    
    $
    81,631
    
    
    $
    58,435
    
    
    $
    43,117
    
    
    $
    17,128
 August 31,
    
    
    November 30,2008
    
    
    2007Assets:West Coast
    
    $
    1,258,162
    
    
    $
    1,542,948Southwest
    
    
    623,160
    
    
    
    887,361Central
    
    
    523,268
    
    
    
    643,599Southeast
    
    
    624,412
    
    
    
    845,679Corporate and other
    
    
    1,290,669
    
    
    
    1,741,977Total homebuilding assets
    
    
    4,319,671
    
    
    
    5,661,564Financial services
    
    
    58,274
    
    
    
    44,392Total assets
    
    $
    4,377,945
    
    
    $
    5,705,956Investments in unconsolidated joint ventures:West Coast
    
    $
    71,277
    
    
    $
    63,450Southwest
    
    
    123,752
    
    
    
    134,082Central
    
    
    2,836
    
    
    
    7,230Southeast
    
    
    52,560
    
    
    
    92,248Total
    
    $
    250,425
    
    
    $
    297,010
 4.
    
    Financial ServicesThe following table presents financial information related to the Companys financial services
reporting segment (in thousands):
 10




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##### Table of Contents



KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 4.
    
    Financial Services (continued)
 Nine Months Ended August 31,
    
    
    Three Months Ended August 31,2008
    
    
    2007
    
    
    2008
    
    
    2007RevenuesInterest income
    
    $
    155
    
    
    $
    124
    
    
    $
    50
    
    
    $
    41Title services
    
    
    1,557
    
    
    
    4,169
    
    
    
    574
    
    
    
    1,530Insurance commissions
    
    
    5,670
    
    
    
    5,812
    
    
    
    1,871
    
    
    
    1,712Escrow coordination fees
    
    
    
    
    
    
    599
    
    
    
    
    
    
    
    10Total
    
    
    7,382
    
    
    
    10,704
    
    
    
    2,495
    
    
    
    3,293ExpensesGeneral and administrative
    
    
    (3,317
    )
    
    
    (3,524
    )
    
    
    (1,085
    )
    
    
    (1,113
    )Operating income
    
    
    4,065
    
    
    
    7,180
    
    
    
    1,410
    
    
    
    2,180Equity in income of unconsolidated
joint venture
    
    
    12,880
    
    
    
    14,558
    
    
    
    4,578
    
    
    
    4,367Pretax income
    
    $
    16,945
    
    
    $
    21,738
    
    
    $
    5,988
    
    
    $
    6,547
 August 31,
    
    
    November 30,2008
    
    
    2007AssetsCash and cash equivalents
    
    $
    13,766
    
    
    $
    18,487Receivables
    
    
    1,050
    
    
    
    2,655Investment in unconsolidated joint venture
    
    
    43,379
    
    
    
    23,140Other assets
    
    
    79
    
    
    
    110Total assets
    
    $
    58,274
    
    
    $
    44,392LiabilitiesAccounts payable and accrued expenses
    
    $
    14,650
    
    
    $
    17,796Total liabilities
    
    $
    14,650
    
    
    $
    17,796
 In 2008, Countrywide KB Home Loans, the Companys unconsolidated mortgage banking joint venture,
which is included in the Companys financial services segment, adopted Staff Accounting Bulletin
No. 109, Written Loan Commitments Recorded at Fair Value Through Earnings (SAB No. 109) and
Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities (SFAS No. 159). SAB No. 109 revises and rescinds portions of Staff
Accounting Bulletin No. 105, Application of Accounting Principles to Loan Commitments (SAB
No. 105), and expresses the current view of the SEC that, consistent with the guidance in
Statement of Financial Accounting Standards No. 156, Accounting for Servicing of Financial
Assets (SFAS No. 156) and SFAS No. 159, the expected net future cash flows related to the
associated servicing of loans should be included in the measurement of the fair value of all
written loan commitments that are accounted for at fair value through earnings. SFAS No. 159
permits entities to choose to measure various financial instruments and certain other items at
fair value on a contract-by-contract basis. Under SFAS No. 159, Countrywide KB Home Loans
elected the fair value option for residential mortgage loans held for sale that were originated
subsequent to February 29, 2008. As a result of Countrywide KB Home Loans adoption of SAB No.
109 and SFAS No. 159, the Companys equity in income of unconsolidated joint venture of the
financial services segment increased by $2.1 million in 2008.
 11




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##### Table of Contents



KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 5.
    
    InventoriesInventories consist of the following (in thousands):
 August 31,
    
    
    November 30,2008
    
    
    2007Homes, lots and improvements in production
    
    $
    2,114,420
    
    
    $
    2,473,980Land under development
    
    
    448,262
    
    
    
    838,440Total
    
    $
    2,562,682
    
    
    $
    3,312,420
 The Companys interest costs are as follows (in thousands):
 Nine Months Ended August 31,
    
    
    Three Months Ended August 31,2008
    
    
    2007
    
    
    2008
    
    
    2007Capitalized interest at beginning of period
    
    $
    348,084
    
    
    $
    333,020
    
    
    $
    370,091
    
    
    $
    382,311Interest incurred
    
    
    123,029
    
    
    
    161,410
    
    
    
    46,124
    
    
    
    58,521Loss on early redemption of debt
    
    
    (10,388
    )
    
    
    (12,990
    )
    
    
    (10,388
    )
    
    
    (12,990
    )Interest amortized
    
    
    (86,258
    )
    
    
    (99,958
    )
    
    
    (31,360
    )
    
    
    (46,360
    )Capitalized interest at end of period (a)
    
    $
    374,467
    
    
    $
    381,482
    
    
    $
    374,467
    
    
    $
    381,482
 
 (a)
    
    Inventory impairment charges are recognized against all inventory costs of a community,
such as land, land improvements, cost of home construction and capitalized interest.
Capitalized interest amounts presented in the table reflect the gross amount of capitalized
interest as impairment charges recognized are not generally allocated to specific
components of inventory. 6.
    
    Impairments and AbandonmentsEach parcel or community in the Companys owned inventory is assessed to determine if indicators
of potential impairment exist. If indicators of potential impairment exist for a parcel or
community, the identified inventory is evaluated for recoverability in accordance with Statement
of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets (SFAS No. 144). Impairment indicators are assessed separately for each
parcel or community on a quarterly basis and include, but are not limited to: significant
decreases in sales rates, average selling prices, home delivery volume or gross margins;
significant increases in budgeted land development and construction costs or cancellation rates;
or projected losses on expected future housing or land sales. When an indicator of potential
impairment is identified, the Company tests the asset for recoverability by comparing the
carrying amount of the asset to the undiscounted future net cash flows expected to be generated
by the asset. The undiscounted future net cash flows are impacted by the Companys expectations
related to: market supply and demand, including estimates concerning average selling prices;
sales incentives; sales and cancellation rates; and anticipated land development, construction
and overhead costs to be incurred. These estimates are specific to each community and may vary
among communities.A real estate asset is considered impaired when its carrying amount is greater than the
undiscounted future net cash flows the asset is expected to generate. Impaired real estate
assets are written down to fair value, which is primarily based on the estimated future cash
flows discounted for inherent risk associated with each asset. These discounted cash flows are
impacted by: the risk-free rate of return; expected risk premium based on estimated land
development, construction and delivery timelines; market risk from potential future price
erosion; cost uncertainty due to development or construction cost increases; and other risks
specific to the conditions in the market in which the asset is located at the time an assessment
is made. These factors are specific to each community and may vary among communities.
 12




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##### Table of Contents



KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 6.
    
    Impairments and Abandonments (continued)
      7.
    
    Consolidation of Variable Interest Entities
   13




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KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 7.
    
    Consolidation of Variable Interest Entities (continued)
    8.
    
    Investments in Unconsolidated Joint Ventures
   14




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##### Table of Contents



KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 8.
    
    Investments in Unconsolidated Joint Ventures (continued)
    Nine Months Ended August 31,
    
    
    Three Months Ended August 31,2008
    
    
    2007
    
    
    2008
    
    
    2007Revenues
    
    $
    85,232
    
    
    $
    262,761
    
    
    $
    29,947
    
    
    $
    218,860Construction and land costs
    
    
    (191,910
    )
    
    
    (272,582
    )
    
    
    (41,613
    )
    
    
    (205,336
    )Other expenses, net
    
    
    (38,918
    )
    
    
    (20,775
    )
    
    
    (16,377
    )
    
    
    (7,382
    )Income (loss)
    
    $
    (145,596
    )
    
    $
    (30,596
    )
    
    $
    (28,043
    )
    
    $
    6,142
   August 31,
    
    
    November 30,2008
    
    
    2007AssetsCash
    
    $
    26,202
    
    
    $
    51,249Receivables
    
    
    189,824
    
    
    
    234,265Inventories
    
    
    1,985,786
    
    
    
    2,209,907Other assets
    
    
    57,697
    
    
    
    15,513Total assets
    
    $
    2,259,509
    
    
    $
    2,510,934Liabilities and equityAccounts payable and other liabilities
    
    $
    130,015
    
    
    $
    68,217Mortgages and notes payable
    
    
    1,457,450
    
    
    
    1,540,931Equity
    
    
    672,044
    
    
    
    901,786Total liabilities and equity
    
    $
    2,259,509
    
    
    $
    2,510,934
 15




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##### Table of Contents



KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 8.
    
    Investments in Unconsolidated Joint Ventures (continued)
  August 31,
    
    
    November 30,2008
    
    
    2007Number of investments in unconsolidated joint ventures:With recourse debt (a)
    
    
    1
    
    
    
    1With limited recourse debt (b)
    
    
    6
    
    
    
    7With non-recourse debt (c)
    
    
    12
    
    
    
    14Other (d)
    
    
    11
    
    
    
    13Total
    
    
    30
    
    
    
    35Investments in unconsolidated joint ventures:With recourse debt
    
    $
    2,836
    
    
    $
    1,855With limited recourse debt
    
    
    18,708
    
    
    
    17,342With non-recourse debt
    
    
    71,946
    
    
    
    161,721Other
    
    
    156,935
    
    
    
    116,092Total
    
    $
    250,425
    
    
    $
    297,010Outstanding debt of unconsolidated joint ventures:With recourse debt
    
    $
    3,238
    
    
    $
    6,317With limited recourse debt
    
    
    220,155
    
    
    
    276,553With non-recourse debt
    
    
    860,121
    
    
    
    894,115Other
    
    
    373,936
    
    
    
    363,946Total (e)
    
    $
    1,457,450
    
    
    $
    1,540,931
 
 (a)
    
    This category consists of an unconsolidated joint venture as to which the Company has
entered into a several guaranty with respect to the repayment of a portion of the
unconsolidated joint ventures outstanding debt.(b)
    
    This category consists of unconsolidated joint ventures as to which the Company has
entered into a loan-to-value maintenance guaranty, as that term is described below, with
respect to a portion of each such unconsolidated joint ventures outstanding secured debt.(c)
    
    This category consists of unconsolidated joint ventures as to which the Company has not
entered into a guaranty, and does not otherwise have any obligation, to repay or to support
the value of the collateral underlying such unconsolidated joint ventures respective
outstanding secured debt (excluding any potential responsibility under a carve-out
guaranty, as that term is described below).(d)
    
    In addition to including unconsolidated joint ventures with no outstanding debt, this category
includes an unconsolidated joint venture as to which the Company has entered into a several
guaranty that, by its terms, purports to require the Company to guarantee the repayment of a
portion of the unconsolidated joint ventures outstanding debt in the event an involuntary
bankruptcy proceeding is filed against the unconsolidated joint venture that is not dismissed
within 60 days or for which an order approving relief under bankruptcy law is entered, even if the
unconsolidated joint venture or its partners do not collude in the filing and the unconsolidated
joint venture contests the filing, as further described below.
 16




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##### Table of Contents



KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 8.
    
    Investments in Unconsolidated Joint Ventures (continued)
 In some cases, the Company may have also entered into a completion guaranty and/or a
carve-out guaranty, as those terms are described below, with the lenders for the
unconsolidated joint ventures identified in categories (a) through (d).
 (e)
    
    The Total amounts represent the aggregate outstanding debt of the unconsolidated
joint ventures in which the Company participates. The amounts do not represent the
Companys potential responsibility for such debt, if any. The Companys maximum potential
responsibility for any portion of such debt, if any, is limited to either a specified
maximum amount or an amount equal to its pro rata interest in the relevant unconsolidated
joint venture, as further described below.
     17




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##### Table of Contents



KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 8.
    
    Investments in Unconsolidated Joint Ventures (continued)
    9.
    
    Goodwill
   18




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##### Table of Contents



KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 9.
    
    Goodwill (continued)
      10.
    
    Mortgages and Notes Payable
  August 31,
    
    
    November 30,2008
    
    
    2007Mortgages and land contracts due to land sellers and other loans
    
    $
    32,394
    
    
    $
    19,140Senior subordinated notes due December 15, 2008 at 8 5/8%
    
    
    200,000
    
    
    
    200,000Senior subordinated notes due 2010 at 7 3/4%
    
    
    
    
    
    
    298,273Senior notes due 2011 at 6 3/8%
    
    
    348,816
    
    
    
    348,549Senior notes due 2014 at 5 3/4%
    
    
    249,195
    
    
    
    249,102Senior notes due 2015 at 5 7/8%
    
    
    298,649
    
    
    
    298,521Senior notes due 2015 at 6 1/4%
    
    
    449,643
    
    
    
    449,612Senior notes due 2018 at 7 1/4%
    
    
    298,665
    
    
    
    298,597Total
    
    $
    1,877,362
    
    
    $
    2,161,794
  19




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##### Table of Contents



KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 10.
    
    Mortgages and Notes Payable (continued)
        20




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##### Table of Contents



KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 11.
    
    Commitments and Contingencies
   Nine Months Ended August 31,
    
    
    Three Months Ended August 31,2008
    
    
    2007
    
    
    2008
    
    
    2007Balance at beginning of period
    
    $
    151,525
    
    
    $
    141,060
    
    
    $
    146,050
    
    
    $
    140,675Warranties issued
    
    
    16,952
    
    
    
    40,380
    
    
    
    6,183
    
    
    
    13,902Payments and adjustments
    
    
    (22,645
    )
    
    
    (38,282
    )
    
    
    (6,401
    )
    
    
    (11,419
    )Balance at end of period
    
    $
    145,832
    
    
    $
    143,158
    
    
    $
    145,832
    
    
    $
    143,158
    21




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##### Table of Contents



KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 11.
    
    Commitments and Contingencies (continued)
    12.
    
    Legal Matters
 Derivative Litigation
   22




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##### Table of Contents



KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 12.
    
    Legal Matters (continued)
 Government Investigations
   ERISA Litigation
  Storm Water Matter
  23




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##### Table of Contents



KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 12.
    
    Legal Matters (continued)
  Other Matters
  13.
    
    Stockholders Equity
   14.
    
    Recent Accounting Pronouncements
   24




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##### Table of Contents



KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 14.
    
    Recent Accounting Pronouncements (continued)In May 2008, the FASB issued Statement of Financial Accounting Standards No. 162, The Hierarchy
of Generally Accepted Accounting Principles (SFAS No. 162). SFAS No. 162 identifies the
sources of accounting principles and the framework for selecting the principles to be used in
the preparation of financial statements of nongovernmental entities that are presented in
conformity with generally accepted accounting principles in the United States. The Company does
not expect the adoption of SFAS No. 162 to have a material impact on its consolidated financial
position or results of operations.In May 2008, the FASB issued Statement of Financial Accounting Standards No. 163, Accounting
for Financial Guarantee Insurance Contractsan interpretation of FASB Statement No. 60 (SFAS
No. 163). SFAS No. 163 clarifies how Statement of Financial Accounting Standards No. 60,
Accounting and Reporting by Insurance Enterprises, applies to financial guarantee insurance
contracts, including the recognition and measurement of premium revenue and claim liabilities.
SFAS No. 163 also requires expanded disclosures about financial guarantee insurance contracts.
SFAS No. 163 is effective for financial statements issued for fiscal years and interim periods
beginning after December 15, 2008. The Company is currently evaluating the potential impact of
adopting SFAS No. 163 on its consolidated financial position and results of operations.In June 2008, the FASB issued FASB Staff Position Emerging Issues Task Force 03-6-1,
Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating
Securities (FSP-EITF 03-6-1). Under FSP-EITF 03-6-1, unvested share-based payment awards
that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or
unpaid) are participating securities and shall be included in the computation of earnings per
share pursuant to the two-class method. FSP-EITF 03-6-1 is effective for financial statements
issued for fiscal years beginning after December 15, 2008, and interim periods within those
years and requires retrospective application. The Company is currently evaluating the impact of
adopting FSP-EITF 03-6-1 on its earnings per share.15.
    
    Income TaxesThe Companys income tax benefit from continuing operations totaled $7.0 million in the third
quarter of 2008, compared to $307.1 million in the third quarter of 2007. For the nine months
ended August 31, 2008, the Companys income tax benefit from continuing operations totaled $6.1
million compared to $419.7 million for the nine months ended August 31, 2007. These amounts
represented effective income tax rates from continuing operations of 4.6% and 39.1% for the
three months ended August 31, 2008 and 2007, respectively, and .9% and 39.5% for the nine months
ended August 31, 2008 and 2007, respectively.The significant year-over-year change in the Companys effective tax rate for the three months
and nine months ended August 31, 2008 resulted primarily from the disallowance of tax benefits
related to the Companys current year losses as a result of a full valuation allowance, and
the recognition of a liability for unrecognized tax benefits. In accordance with Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes (SFAS No. 109), the
Company was unable to record deferred tax benefits that would have reduced its net losses in
the three months and nine months ended August 31, 2008 due to the uncertainty of realizing
such deferred tax assets. For the three months ended August 31, 2008, the Company recorded a
valuation allowance of $58.1 million. For the nine months ended August 31, 2008, the
valuation allowance recorded totaled $257.0 million. The income tax benefit reported for the
three months and nine months ended August 31, 2008 was mainly due to the recognition of a $6.0
million tax benefit previously unrecognized under FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes  an interpretation of FASB Statement No. 109 (FASB
Interpretation No. 48). In July 2006, the FASB issued FASB Interpretation No. 48, which
prescribes a recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a tax return.
FASB Interpretation No. 48 also provides guidance on derecognition, classification, interest
and penalties, accounting in interim periods, disclosure and transition. The Company
implemented the provisions of FASB Interpretation No. 48 effective December 1, 2007. The
cumulative effect of the adoption of FASB Interpretation No. 48 was recorded in 2008 as a $2.5
million reduction to beginning retained earnings. Gross unrecognized tax benefits totaled
$37.8 million as of December
 25




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##### Table of Contents



KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 15.
    
    Income Taxes (continued)1, 2007 and $33.1 million as of August 31, 2008. As of the date of its adoption of FASB
Interpretation No. 48, the Companys liability for unrecognized tax benefits was $29.0 million,
which, if recognized, would affect the Companys effective tax rate.During the third quarter of 2008, $6.0 million of unrecognized federal income tax liability
reversed due to the expiration of time to assess tax. Other than this reversal, there have been
no material changes to the components of the Companys total unrecognized tax benefit, including
the amounts which, if recognized, would affect the Companys effective tax rate. The Company
estimates that within 12 months from the date of its adoption of FASB Interpretation No. 48, no
additional unrecognized tax liability will reverse. As of the date of the Companys adoption of
FASB Interpretation No. 48, fiscal years 2003 through 2007 remain subject to examination.As of August 31, 2008, primarily due to the reversal of the $6.0 million, the Companys
liability for unrecognized tax benefits was $24.3 million, which, if recognized, would affect
the Companys tax rate. It is reasonably possible that, within the next 12 months, total
unrecognized tax benefits may decrease as a result of a potential resolution with the Internal
Revenue Service relating to issues stemming from fiscal years 2004 and 2005. However, any such
change cannot be estimated at this time.The Company recognizes accrued interest and penalties related to unrecognized tax benefits in
its consolidated financial statements as a component of the income tax provision consistent with
the Companys historical accounting policy. After the Companys adoption of FASB Interpretation
No. 48 on December 1, 2007, the Companys total gross accrued interest and penalties was $16.5
million. At August 31, 2008, its total gross accrued interest and penalties was $17.0 million.
The Companys liability for unrecognized tax benefits, combined with accrued interest and
penalties, is reflected as a component of accrued expenses and other liabilities in its
consolidated balance sheet.Including the valuation allowances for net deferred tax assets recorded in 2008, the Company has
$779.9 million of net deferred tax assets fully reserved as of August 31, 2008.16.
    
    Supplemental Disclosure to Statements of Cash FlowsThe following are supplemental disclosures to the consolidated statements of cash flows (in
thousands):
 Nine Months Ended August, 31,2008
    
    
    2007Summary of cash and cash equivalents:Homebuilding
    
    $
    942,451
    
    
    $
    645,933Financial services
    
    
    13,766
    
    
    
    14,836Total
    
    $
    956,217
    
    
    $
    660,769Supplemental disclosures of cash flow information:Interest paid, net of amounts capitalized
    
    $
    48,386
    
    
    $
    65,825Income taxes paid (refunded)
    
    
    (105,102
    )
    
    
    22,703Supplemental disclosures of noncash activities:Cost of inventories acquired through seller financing
    
    $
    16,320
    
    
    $
    4,139Decrease in consolidated inventories not owned
    
    
    (134,678
    )
    
    
    (179,829
    )
 
 26




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##### Table of Contents



KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 17.
    
    Supplemental Guarantor InformationThe Companys obligations to pay principal, premium, if any, and interest under certain debt
instruments are guaranteed on a joint and several basis by the Guarantor Subsidiaries. The
guarantees are full and unconditional and the Guarantor Subsidiaries are 100% owned by the
Company. The Company has determined that separate, full financial statements of the Guarantor
Subsidiaries would not be material to investors and, accordingly, supplemental financial
information for the Guarantor Subsidiaries is presented.Condensed Consolidating Statements of Operations
Nine Months Ended August 31, 2008 (in thousands)
 KB Home
    
    
    Guarantor
    
    
    Non-Guarantor
    
    
    ConsolidatingCorporate
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Adjustments
    
    
    TotalRevenues
    
    $
    
    
    
    $
    1,620,364
    
    
    $
    494,535
    
    
    $
    
    
    
    $
    2,114,899Homebuilding:Revenues
    
    $
    
    
    
    $
    1,620,364
    
    
    $
    487,153
    
    
    $
    
    
    
    $
    2,107,517Construction and land costs
    
    
    
    
    
    
    (1,781,778
    )
    
    
    (540,435
    )
    
    
    
    
    
    
    (2,322,213
    )Selling, general and
administrative expenses
    
    
    (59,467
    )
    
    
    (221,123
    )
    
    
    (99,324
    )
    
    
    
    
    
    
    (379,914
    )Goodwill impairment
    
    
    (24,570
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (24,570
    )Operating loss
    
    
    (84,037
    )
    
    
    (382,537
    )
    
    
    (152,606
    )
    
    
    
    
    
    
    (619,180
    )Interest income
    
    
    26,700
    
    
    
    2,231
    
    
    
    309
    
    
    
    
    
    
    
    29,240Loss on early redemption of debt
    
    
    42,542
    
    
    
    (28,368
    )
    
    
    (24,562
    )
    
    
    
    
    
    
    (10,388
    )Equity in loss of
unconsolidated joint ventures
    
    
    
    
    
    
    (6,586
    )
    
    
    (84,978
    )
    
    
    
    
    
    
    (91,564
    )Homebuilding pretax loss
    
    
    (14,795
    )
    
    
    (415,260
    )
    
    
    (261,837
    )
    
    
    
    
    
    
    (691,892
    )Financial services pretax income
    
    
    
    
    
    
    
    
    
    
    16,945
    
    
    
    
    
    
    
    16,945Total pretax loss
    
    
    (14,795
    )
    
    
    (415,260
    )
    
    
    (244,892
    )
    
    
    
    
    
    
    (674,947
    )Income tax benefit
    
    
    100
    
    
    
    3,700
    
    
    
    2,300
    
    
    
    
    
    
    
    6,100Equity in net loss of subsidiaries
    
    
    (654,152
    )
    
    
    
    
    
    
    
    
    
    
    654,152
    
    
    
    Net loss
    
    $
    (668,847
    )
    
    $
    (411,560
    )
    
    $
    (242,592
    )
    
    $
    654,152
    
    
    $
    (668,847
    )
 
 27




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##### Table of Contents



KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 17.
    
    Supplemental Guarantor Information (continued)Condensed Consolidating Statements of Operations
Nine Months Ended August 31, 2007 (in thousands)
 KB Home
    
    
    Guarantor
    
    
    Non-Guarantor
    
    
    ConsolidatingCorporate
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Adjustments
    
    
    TotalRevenues
    
    $
    
    
    
    $
    3,238,642
    
    
    $
    1,107,304
    
    
    $
    
    
    
    $
    4,345,946Homebuilding:Revenues
    
    $
    
    
    
    $
    3,238,642
    
    
    $
    1,096,600
    
    
    $
    
    
    
    $
    4,335,242Construction and land costs
    
    
    
    
    
    
    (3,652,898
    )
    
    
    (1,005,167
    )
    
    
    
    
    
    
    (4,658,065
    )Selling, general and administrative
expenses
    
    
    (86,607
    )
    
    
    (364,705
    )
    
    
    (144,659
    )
    
    
    
    
    
    
    (595,971
    )Goodwill impairment
    
    
    (107,926
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (107,926
    )Operating loss
    
    
    (194,533
    )
    
    
    (778,961
    )
    
    
    (53,226
    )
    
    
    
    
    
    
    (1,026,720
    )Interest income
    
    
    13,856
    
    
    
    4,429
    
    
    
    597
    
    
    
    
    
    
    
    18,882Loss on early redemption of debt
    
    
    130,317
    
    
    
    (111,229
    )
    
    
    (32,078
    )
    
    
    
    
    
    
    (12,990
    )Equity in loss of unconsolidated joint
ventures
    
    
    
    
    
    
    (4,930
    )
    
    
    (57,797
    )
    
    
    
    
    
    
    (62,727
    )Homebuilding pretax loss
    
    
    (50,360
    )
    
    
    (890,691
    )
    
    
    (142,504
    )
    
    
    
    
    
    
    (1,083,555
    )Financial services pretax income
    
    
    
    
    
    
    
    
    
    
    21,738
    
    
    
    
    
    
    
    21,738Loss from continuing operations
before income taxes
    
    
    (50,360
    )
    
    
    (890,691
    )
    
    
    (120,766
    )
    
    
    
    
    
    
    (1,061,817
    )Income tax benefit
    
    
    19,900
    
    
    
    352,100
    
    
    
    47,700
    
    
    
    
    
    
    
    419,700Loss from continuing operations
before equity in net income (loss) of
subsidiaries
    
    
    (30,460
    )
    
    
    (538,591
    )
    
    
    (73,066
    )
    
    
    
    
    
    
    (642,117
    )Income from discontinued operations,
net of income taxes
    
    
    
    
    
    
    
    
    
    
    485,356
    
    
    
    
    
    
    
    485,356Income (loss) before equity in net income
(loss) of subsidiaries
    
    
    (30,460
    )
    
    
    (538,591
    )
    
    
    412,290
    
    
    
    
    
    
    
    (156,761
    )Equity in net income (loss) of subsidiaries:Continuing operations
    
    
    (611,657
    )
    
    
    
    
    
    
    
    
    
    
    611,657
    
    
    
    Discontinued operations
    
    
    485,356
    
    
    
    
    
    
    
    
    
    
    
    (485,356
    )
    
    
    Net income (loss)
    
    $
    (156,761
    )
    
    $
    (538,591
    )
    
    $
    412,290
    
    
    $
    126,301
    
    
    $
    (156,761
    )
 28




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##### Table of Contents



KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 17.
    
    Supplemental Guarantor Information (continued)Condensed Consolidating Statements of Operations
Three Months Ended August 31, 2008 (in thousands)
 KB Home
    
    
    Guarantor
    
    
    Non-Guarantor
    
    
    ConsolidatingCorporate
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Adjustments
    
    
    TotalRevenues
    
    $
    
    
    
    $
    516,431
    
    
    $
    165,179
    
    
    $
    
    
    
    $
    681,610Homebuilding:Revenues
    
    $
    
    
    
    $
    516,431
    
    
    $
    162,684
    
    
    $
    
    
    
    $
    679,115Construction and land costs
    
    
    
    
    
    
    (506,871
    )
    
    
    (146,861
    )
    
    
    
    
    
    
    (653,732
    )Selling, general and
administrative expenses
    
    
    (22,035
    )
    
    
    (79,750
    )
    
    
    (31,426
    )
    
    
    
    
    
    
    (133,211
    )Operating loss
    
    
    (22,035
    )
    
    
    (70,190
    )
    
    
    (15,603
    )
    
    
    
    
    
    
    (107,828
    )Interest income
    
    
    6,234
    
    
    
    337
    
    
    
    115
    
    
    
    
    
    
    
    6,686Loss on early redemption of debt
    
    
    2,480
    
    
    
    (5,914
    )
    
    
    (6,954
    )
    
    
    
    
    
    
    (10,388
    )Equity in loss of
unconsolidated joint ventures
    
    
    
    
    
    
    (2,471
    )
    
    
    (43,732
    )
    
    
    
    
    
    
    (46,203
    )Homebuilding pretax loss
    
    
    (13,321
    )
    
    
    (78,238
    )
    
    
    (66,174
    )
    
    
    
    
    
    
    (157,733
    )Financial services pretax income
    
    
    
    
    
    
    
    
    
    
    5,988
    
    
    
    
    
    
    
    5,988Total pretax loss
    
    
    (13,321
    )
    
    
    (78,238
    )
    
    
    (60,186
    )
    
    
    
    
    
    
    (151,745
    )Income tax benefit
    
    
    600
    
    
    
    3,300
    
    
    
    3,100
    
    
    
    
    
    
    
    7,000Equity in net loss of subsidiaries
    
    
    (132,024
    )
    
    
    
    
    
    
    
    
    
    
    132,024
    
    
    
    Net loss
    
    $
    (144,745
    )
    
    $
    (74,938
    )
    
    $
    (57,086
    )
    
    $
    132,024
    
    
    $
    (144,745
    )
 29




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##### Table of Contents



KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 17.
    
    Supplemental Guarantor Information (continued)Condensed Consolidating Statements of Operations
Three Months Ended August 31, 2007 (in thousands)
 KB Home
    
    
    Guarantor
    
    
    Non-Guarantor
    
    
    ConsolidatingCorporate
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Adjustments
    
    
    TotalRevenues
    
    $
    
    
    
    $
    1,129,929
    
    
    $
    413,971
    
    
    $
    
    
    
    $
    1,543,900Homebuilding:Revenues
    
    $
    
    
    
    $
    1,129,929
    
    
    $
    410,678
    
    
    $
    
    
    
    $
    1,540,607Construction and land costs
    
    
    
    
    
    
    (1,607,808
    )
    
    
    (394,573
    )
    
    
    
    
    
    
    (2,002,381
    )Selling, general and administrative
expenses
    
    
    (27,873
    )
    
    
    (120,839
    )
    
    
    (48,452
    )
    
    
    
    
    
    
    (197,164
    )Goodwill impairment
    
    
    (107,926
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (107,926
    )Operating loss
    
    
    (135,799
    )
    
    
    (598,718
    )
    
    
    (32,347
    )
    
    
    
    
    
    
    (766,864
    )Interest income
    
    
    6,850
    
    
    
    1,590
    
    
    
    174
    
    
    
    
    
    
    
    8,614Loss on early redemption of debt
    
    
    33,586
    
    
    
    (32,364
    )
    
    
    (14,212
    )
    
    
    
    
    
    
    (12,990
    )Equity in loss of unconsolidated joint
ventures
    
    
    
    
    
    
    (6,543
    )
    
    
    (14,484
    )
    
    
    
    
    
    
    (21,027
    )Homebuilding pretax loss
    
    
    (95,363
    )
    
    
    (636,035
    )
    
    
    (60,869
    )
    
    
    
    
    
    
    (792,267
    )Financial services pretax income
    
    
    
    
    
    
    
    
    
    
    6,547
    
    
    
    
    
    
    
    6,547Loss from continuing operations
before income taxes
    
    
    (95,363
    )
    
    
    (636,035
    )
    
    
    (54,322
    )
    
    
    
    
    
    
    (785,720
    )Income tax benefit
    
    
    37,300
    
    
    
    248,600
    
    
    
    21,200
    
    
    
    
    
    
    
    307,100Loss from continuing operations
before equity in net income (loss) of
subsidiaries
    
    
    (58,063
    )
    
    
    (387,435
    )
    
    
    (33,122
    )
    
    
    
    
    
    
    (478,620
    )Income from discontinued operations,
net of income taxes
    
    
    
    
    
    
    
    
    
    
    443,008
    
    
    
    
    
    
    
    443,008Income (loss) before equity in net income
(loss) of subsidiaries
    
    
    (58,063
    )
    
    
    (387,435
    )
    
    
    409,886
    
    
    
    
    
    
    
    (35,612
    )Equity in net income (loss) of subsidiaries:Continuing operations
    
    
    (420,557
    )
    
    
    
    
    
    
    
    
    
    
    420,557
    
    
    
    Discontinued operations
    
    
    443,008
    
    
    
    
    
    
    
    
    
    
    
    (443,008
    )
    
    
    Net income (loss)
    
    $
    (35,612
    )
    
    $
    (387,435
    )
    
    $
    409,886
    
    
    $
    (22,451
    )
    
    $
    (35,612
    )
 30




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##### Table of Contents



KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 17.
    
    Supplemental Guarantor Information (continued)
 
 KB Home
    
    
    Guarantor
    
    
    Non-Guarantor
    
    
    ConsolidatingCorporate
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Adjustments
    
    
    TotalAssetsHomebuilding:Cash and cash equivalents
    
    $
    797,221
    
    
    $
    27,945
    
    
    $
    117,285
    
    
    $
    
    
    
    $
    942,451Receivables
    
    
    27,322
    
    
    
    137,426
    
    
    
    23,564
    
    
    
    
    
    
    
    188,312Inventories
    
    
    
    
    
    
    2,107,889
    
    
    
    454,793
    
    
    
    
    
    
    
    2,562,682Other assets
    
    
    356,091
    
    
    
    208,441
    
    
    
    61,694
    
    
    
    
    
    
    
    626,2261,180,634
    
    
    
    2,481,701
    
    
    
    657,336
    
    
    
    
    
    
    
    4,319,671Financial services
    
    
    
    
    
    
    
    
    
    
    58,274
    
    
    
    
    
    
    
    58,274Investments in subsidiaries
    
    
    (89,304
    )
    
    
    
    
    
    
    
    
    
    
    89,304
    
    
    
    Total assets
    
    $
    1,091,330
    
    
    $
    2,481,701
    
    
    $
    715,610
    
    
    $
    89,304
    
    
    $
    4,377,945Liabilities and stockholders equityHomebuilding:Accounts payable, accrued expenses
and other liabilities
    
    $
    162,568
    
    
    $
    872,550
    
    
    $
    317,045
    
    
    $
    
    
    
    $
    1,352,163Mortgages and notes payable
    
    
    1,844,968
    
    
    
    32,394
    
    
    
    
    
    
    
    
    
    
    
    1,877,3622,007,536
    
    
    
    904,944
    
    
    
    317,045
    
    
    
    
    
    
    
    3,229,525Financial services
    
    
    
    
    
    
    
    
    
    
    14,650
    
    
    
    
    
    
    
    14,650Intercompany
    
    
    (2,049,976
    )
    
    
    1,653,551
    
    
    
    396,425
    
    
    
    
    
    
    
    Stockholders equity
    
    
    1,133,770
    
    
    
    (76,794
    )
    
    
    (12,510
    )
    
    
    89,304
    
    
    
    1,133,770Total liabilities and stockholders equity
    
    $
    1,091,330
    
    
    $
    2,481,701
    
    
    $
    715,610
    
    
    $
    89,304
    
    
    $
    4,377,945
  KB Home
    
    
    Guarantor
    
    
    Non-Guarantor
    
    
    ConsolidatingCorporate
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Adjustments
    
    
    TotalAssetsHomebuilding:Cash and cash equivalents
    
    $
    1,104,429
    
    
    $
    71,519
    
    
    $
    149,307
    
    
    $
    
    
    
    $
    1,325,255Receivables
    
    
    126,531
    
    
    
    151,089
    
    
    
    18,119
    
    
    
    
    
    
    
    295,739Inventories
    
    
    
    
    
    
    2,670,155
    
    
    
    642,265
    
    
    
    
    
    
    
    3,312,420Other assets
    
    
    405,306
    
    
    
    219,146
    
    
    
    103,698
    
    
    
    
    
    
    
    728,1501,636,266
    
    
    
    3,111,909
    
    
    
    913,389
    
    
    
    
    
    
    
    5,661,564Financial services
    
    
    
    
    
    
    
    
    
    
    44,392
    
    
    
    
    
    
    
    44,392Investments in subsidiaries
    
    
    64,148
    
    
    
    
    
    
    
    
    
    
    
    (64,148
    )
    
    
    Total assets
    
    $
    1,700,414
    
    
    $
    3,111,909
    
    
    $
    957,781
    
    
    $
    (64,148
    )
    
    $
    5,705,956Liabilities and stockholders equityHomebuilding:Accounts payable, accrued expenses
and other liabilities
    
    $
    210,697
    
    
    $
    1,130,047
    
    
    $
    334,935
    
    
    $
    
    
    
    $
    1,675,679Mortgages and notes payable
    
    
    2,142,654
    
    
    
    19,140
    
    
    
    
    
    
    
    
    
    
    
    2,161,7942,353,351
    
    
    
    1,149,187
    
    
    
    334,935
    
    
    
    
    
    
    
    3,837,473Financial services
    
    
    
    
    
    
    
    
    
    
    17,796
    
    
    
    
    
    
    
    17,796Intercompany
    
    
    (2,503,624
    )
    
    
    1,962,722
    
    
    
    540,902
    
    
    
    
    
    
    
    Stockholders equity
    
    
    1,850,687
    
    
    
    
    
    
    
    64,148
    
    
    
    (64,148
    )
    
    
    1,850,687Total liabilities and stockholders equity
    
    $
    1,700,414
    
    
    $
    3,111,909
    
    
    $
    957,781
    
    
    $
    (64,148
    )
    
    $
    5,705,956
 31




---



##### Table of Contents



KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 17.
    
    Supplemental Guarantor Information (continued)Condensed Consolidating Statements of Cash Flows Nine Months Ended August 31, 2008 (in thousands)
 KB Home
    
    
    Guarantor
    
    
    Non-Guarantor
    
    
    ConsolidatingCorporate
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Adjustments
    
    
    TotalCash flows from operating activities:Net loss
    
    $
    (668,847
    )
    
    $
    (411,560
    )
    
    $
    (242,592
    )
    
    $
    654,152
    
    
    $
    (668,847
    )Adjustments to reconcile net loss to net cash provided
(used) by operating activities:Inventory impairments and land option
contract abandonments
    
    
    
    
    
    
    303,981
    
    
    
    97,092
    
    
    
    
    
    
    
    401,073Goodwill impairment
    
    
    24,570
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24,570Change in assets and liabilities:Receivables
    
    
    99,209
    
    
    
    13,663
    
    
    
    (3,840
    )
    
    
    
    
    
    
    109,032Inventories
    
    
    
    
    
    
    149,701
    
    
    
    80,606
    
    
    
    
    
    
    
    230,307Accounts payable, accrued expenses and other
liabilities
    
    
    (48,130
    )
    
    
    (132,593
    )
    
    
    (15,817
    )
    
    
    
    
    
    
    (196,540
    )Other, net
    
    
    32,384
    
    
    
    12,555
    
    
    
    85,709
    
    
    
    
    
    
    
    130,648Net cash provided (used) by operating activities
    
    
    (560,814
    )
    
    
    (64,253
    )
    
    
    1,158
    
    
    
    654,152
    
    
    
    30,243Cash flows from investing activities:Investments in unconsolidated joint ventures
    
    
    
    
    
    
    (1,821
    )
    
    
    (59,643
    )
    
    
    
    
    
    
    (61,464
    )Sales (purchases) of property and equipment, net
    
    
    5,869
    
    
    
    (28
    )
    
    
    283
    
    
    
    
    
    
    
    6,124Net cash provided (used) by investing activities
    
    
    5,869
    
    
    
    (1,849
    )
    
    
    (59,360
    )
    
    
    
    
    
    
    (55,340
    )Cash flows from financing activities:Redemption of senior subordinated notes
    
    
    (305,814
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (305,814
    )Payments on mortgages, land contracts and other loans
    
    
    
    
    
    
    (3,066
    )
    
    
    
    
    
    
    
    
    
    
    (3,066
    )Payments of cash dividends
    
    
    (58,102
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (58,102
    )Other, net
    
    
    4,554
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,554Intercompany
    
    
    607,099
    
    
    
    25,594
    
    
    
    21,459
    
    
    
    (654,152
    )
    
    
    Net cash provided (used) by financing activities
    
    
    247,737
    
    
    
    22,528
    
    
    
    21,459
    
    
    
    (654,152
    )
    
    
    (362,428
    )Net decrease in cash and cash equivalents
    
    
    (307,208
    )
    
    
    (43,574
    )
    
    
    (36,743
    )
    
    
    
    
    
    
    (387,525
    )Cash and cash equivalents at beginning of period
    
    
    1,104,429
    
    
    
    71,519
    
    
    
    167,794
    
    
    
    
    
    
    
    1,343,742Cash and cash equivalents at end of period
    
    $
    797,221
    
    
    $
    27,945
    
    
    $
    131,051
    
    
    $
    
    
    
    $
    956,217
 32




---



##### Table of Contents



KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 17.
    
    Supplemental Guarantor Information (continued)Condensed Consolidated Statements of Cash Flows
Nine Months Ended August 31, 2007 (in thousands)
 KB Home
    
    
    Guarantor
    
    
    Non-Guarantor
    
    
    ConsolidatingCorporate
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Adjustments
    
    
    TotalCash flows from operating activities:Net loss
    
    $
    (156,761
    )
    
    $
    (538,591
    )
    
    $
    (73,066
    )
    
    $
    611,657
    
    
    $
    (156,761
    )Income from discontinued operations, net of income taxes
    
    
    
    
    
    
    
    
    
    
    (47,252
    )
    
    
    
    
    
    
    (47,252
    )Gain on sale of discontinued operations, net of income taxes
    
    
    (438,104
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (438,104
    )Adjustments to reconcile net cash provided (used ) by
operating activities:Inventory impairments and land option contract
abandonments
    
    
    
    
    
    
    898,219
    
    
    
    50,315
    
    
    
    
    
    
    
    948,534Goodwill impairment
    
    
    107,926
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    107,926Change in assets and liabilites:Receivables
    
    
    1,630
    
    
    
    1,972
    
    
    
    (6,809
    )
    
    
    
    
    
    
    (3,207
    )Inventories
    
    
    
    
    
    
    (1,356
    )
    
    
    206,577
    
    
    
    
    
    
    
    205,221Accounts payable, accrued expenses and other liabilities
    
    
    (279,497
    )
    
    
    (125,450
    )
    
    
    (94,023
    )
    
    
    
    
    
    
    (498,970
    )Other, net
    
    
    (175,105
    )
    
    
    18,973
    
    
    
    60,664
    
    
    
    
    
    
    
    (95,468
    )Net cash provided (used) by operating activities  continuing
operations
    
    
    (939,911
    )
    
    
    253,767
    
    
    
    96,406
    
    
    
    611,657
    
    
    
    21,919Net cash provided by operating activities  discontinued
operations
    
    
    
    
    
    
    
    
    
    
    297,397
    
    
    
    
    
    
    
    297,397Net cash provided (used) by operating activities
    
    
    (939,911
    )
    
    
    253,767
    
    
    
    393,803
    
    
    
    611,657
    
    
    
    319,316Cash flows from investing activities:Sale of discontinued operations, net of cash divested
    
    
    739,764
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    739,764Investments in unconsolidated joint ventures
    
    
    
    
    
    
    (36,773
    )
    
    
    (20,196
    )
    
    
    
    
    
    
    (56,969
    )Sales (purchases) of property and equipment, net
    
    
    (338
    )
    
    
    (3,577
    )
    
    
    1,333
    
    
    
    
    
    
    
    (2,582
    )Net cash provided (used) by investing activities  continuing
operations
    
    
    739,426
    
    
    
    (40,350
    )
    
    
    (18,863
    )
    
    
    
    
    
    
    680,213Net cash used by investing activities  discontinued
operations
    
    
    
    
    
    
    
    
    
    
    (12,112
    )
    
    
    
    
    
    
    (12,112
    )Net cash provided (used) by investing activities
    
    
    739,426
    
    
    
    (40,350
    )
    
    
    (30,975
    )
    
    
    
    
    
    
    668,101Cash flows from financing activities:Redemption of term loan
    
    
    (400,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (400,000
    )Redemption of senior subordinated notes
    
    
    (258,968
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (258,968
    )Payments on mortgages, land contracts and other loans
    
    
    
    
    
    
    (87,566
    )
    
    
    (26,553
    )
    
    
    
    
    
    
    (114,119
    )Payments of cash dividends
    
    
    (57,844
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (57,844
    )Other, net
    
    
    6,628
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,628Intercompany
    
    
    1,012,888
    
    
    
    (238,005
    )
    
    
    (163,226
    )
    
    
    (611,657
    )
    
    
    Net cash provided (used) by financing activities  continuing
operations
    
    
    302,704
    
    
    
    (325,571
    )
    
    
    (189,779
    )
    
    
    (611,657
    )
    
    
    (824,303
    )Net cash used by financing activities  discontinued
operations
    
    
    
    
    
    
    
    
    
    
    (306,527
    )
    
    
    
    
    
    
    (306,527
    )Net cash provided (used) by financing activities
    
    
    302,704
    
    
    
    (325,571
    )
    
    
    (496,306
    )
    
    
    (611,657
    )
    
    
    (1,130,830
    )Net increase (decrease) in cash and cash equivalents
    
    
    102,219
    
    
    
    (112,154
    )
    
    
    (133,478
    )
    
    
    
    
    
    
    (143,413
    )Cash and cash equivalents at beginning of period
    
    
    447,221
    
    
    
    150,829
    
    
    
    206,132
    
    
    
    
    
    
    
    804,182Cash and cash equivalents at end of period
    
    $
    549,440
    
    
    $
    38,675
    
    
    $
    72,654
    
    
    $
    
    
    
    $
    660,769
 33




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Results of Operations
 OVERVIEW
  Nine Months Ended August 31,
    
    
    Three Months Ended August 31,2008
    
    
    2007
    
    
    2008
    
    
    2007Revenues:Homebuilding
    
    $
    2,107,517
    
    
    $
    4,335,242
    
    
    $
    679,115
    
    
    $
    1,540,607Financial services
    
    
    7,382
    
    
    
    10,704
    
    
    
    2,495
    
    
    
    3,293Total
    
    $
    2,114,899
    
    
    $
    4,345,946
    
    
    $
    681,610
    
    
    $
    1,543,900Pretax income (loss):Homebuilding
    
    $
    (691,892
    )
    
    $
    (1,083,555
    )
    
    $
    (157,733
    )
    
    $
    (792,267
    )Financial services
    
    
    16,945
    
    
    
    21,738
    
    
    
    5,988
    
    
    
    6,547Loss from continuing operations
before income taxes
    
    
    (674,947
    )
    
    
    (1,061,817
    )
    
    
    (151,745
    )
    
    
    (785,720
    )Income tax benefit
    
    
    6,100
    
    
    
    419,700
    
    
    
    7,000
    
    
    
    307,100Loss from continuing operations
    
    
    (668,847
    )
    
    
    (642,117
    )
    
    
    (144,745
    )
    
    
    (478,620
    )Income from discontinued
operations, net of income taxes
    
    
    
    
    
    
    47,252
    
    
    
    
    
    
    
    4,904Gain on sale of discontinued
operations, net of income taxes
    
    
    
    
    
    
    438,104
    
    
    
    
    
    
    
    438,104Net loss
    
    $
    (668,847
    )
    
    $
    (156,761
    )
    
    $
    (144,745
    )
    
    $
    (35,612
    )Diluted earnings (loss) per share:Continuing operations
    
    $
    (8.63
    )
    
    $
    (8.32
    )
    
    $
    (1.87
    )
    
    $
    (6.19
    )Discontinued operations
    
    
    
    
    
    
    6.29
    
    
    
    
    
    
    
    5.73Diluted loss per share
    
    $
    (8.63
    )
    
    $
    (2.03
    )
    
    $
    (1.87
    )
    
    $
    (.46
    )
   34




---



##### Table of Contents



35




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##### Table of Contents



HOMEBUILDING
   Nine Months Ended August 31,
    
    
    Three Months Ended August 31,2008
    
    
    2007
    
    
    2008
    
    
    2007Revenues:Housing
    
    $
    2,031,725
    
    
    $
    4,196,487
    
    
    $
    668,292
    
    
    $
    1,525,863Land
    
    
    75,792
    
    
    
    138,755
    
    
    
    10,823
    
    
    
    14,744Total
    
    
    2,107,517
    
    
    
    4,335,242
    
    
    
    679,115
    
    
    
    1,540,607Costs and expenses:Construction and land costsHousing
    
    
    2,162,558
    
    
    
    4,461,484
    
    
    
    642,467
    
    
    
    1,952,718Land
    
    
    159,655
    
    
    
    196,581
    
    
    
    11,265
    
    
    
    49,663Total
    
    
    2,322,213
    
    
    
    4,658,065
    
    
    
    653,732
    
    
    
    2,002,381Selling, general and
administrative
expenses
    
    
    379,914
    
    
    
    595,971
    
    
    
    133,211
    
    
    
    197,164Goodwill impairment
    
    
    24,570
    
    
    
    107,926
    
    
    
    
    
    
    
    107,926Total
    
    
    2,726,697
    
    
    
    5,361,962
    
    
    
    786,943
    
    
    
    2,307,471Operating loss
    
    $
    (619,180
    )
    
    $
    (1,026,720
    )
    
    $
    (107,828
    )
    
    $
    (766,864
    )
 36




---



##### Table of Contents



Nine Months Ended August 31,

    
    Three Months Ended August 31,2008
    
    2007
    
    2008
    
    2007Homes delivered
    
    
    8,526
    
    
    
    15,611
    
    
    
    2,788
    
    
    
    5,699Average selling price
    
    $
    238,300
    
    
    $
    268,800
    
    
    $
    239,700
    
    
    $
    267,700Housing gross margin
    
    
    -6.4
    %
    
    
    -6.3
    %
    
    
    3.9
    %
    
    
    -28.0
    %Selling, general and
administrative expenses as
a percent of housing revenues
    
    
    18.7
    %
    
    
    14.2
    %
    
    
    19.9
    %
    
    
    12.9
    %Operating loss as a percent of
homebuilding revenues
    
    
    -29.4
    %
    
    
    -23.7
    %
    
    
    -15.9
    %
    
    
    -49.8
    %
  Three Months Ended August 31,Homes Delivered
    
    Net Orders
    
    Cancellation RatesSegment
    
    2008
    
    2007
    
    2008
    
    2007
    
    2008
    
    2007West Coast
    
    
    731
    
    
    
    1,252
    
    
    
    361
    
    
    
    713
    
    
    
    48
    %
    
    
    57
    %Southwest
    
    
    425
    
    
    
    1,133
    
    
    
    282
    
    
    
    604
    
    
    
    37
    %
    
    
    51
    %Central
    
    
    745
    
    
    
    1,433
    
    
    
    506
    
    
    
    1,370
    
    
    
    43
    %
    
    
    47
    %Southeast
    
    
    887
    
    
    
    1,881
    
    
    
    180
    
    
    
    1,220
    
    
    
    74
    %
    
    
    49
    %Total
    
    
    2,788
    
    
    
    5,699
    
    
    
    1,329
    
    
    
    3,907
    
    
    
    51
    %
    
    
    50
    %Unconsolidated joint ventures
    
    
    45
    
    
    
    13
    
    
    
    39
    
    
    
    79
    
    
    
    57
    %
    
    
    43
    %
 Nine Months Ended August 31,Homes Delivered
    
    Net Orders
    
    Cancellation RatesSegment
    
    2008
    
    2007
    
    2008
    
    2007
    
    2008
    
    2007West Coast
    
    
    1,948
    
    
    
    3,097
    
    
    
    1,877
    
    
    
    3,853
    
    
    
    37
    %
    
    
    37
    %Southwest
    
    
    1,699
    
    
    
    3,379
    
    
    
    1,228
    
    
    
    3,149
    
    
    
    33
    %
    
    
    36
    %Central
    
    
    2,507
    
    
    
    4,096
    
    
    
    1,701
    
    
    
    4,606
    
    
    
    44
    %
    
    
    42
    %Southeast
    
    
    2,372
    
    
    
    5,039
    
    
    
    2,172
    
    
    
    5,308
    
    
    
    42
    %
    
    
    38
    %Total
    
    
    8,526
    
    
    
    15,611
    
    
    
    6,978
    
    
    
    16,916
    
    
    
    40
    %
    
    
    38
    %Unconsolidated joint ventures
    
    
    194
    
    
    
    32
    
    
    
    218
    
    
    
    273
    
    
    
    38
    %
    
    
    30
    %
 37




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##### Table of Contents



August 31,Backlog  ValueBacklog  Homes
    
    
    (In Thousands)Segment
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007West Coast
    
    
    1,119
    
    
    
    2,371
    
    
    $
    391,525
    
    
    $
    1,042,194Southwest
    
    
    835
    
    
    
    2,300
    
    
    
    190,279
    
    
    
    590,711Central
    
    
    1,205
    
    
    
    3,565
    
    
    
    230,154
    
    
    
    599,400Southeast
    
    
    1,615
    
    
    
    3,644
    
    
    
    321,321
    
    
    
    834,588Total
    
    
    4,774
    
    
    
    11,880
    
    
    $
    1,133,279
    
    
    $
    3,066,893Unconsolidated joint ventures
    
    
    233
    
    
    
    295
    
    
    $
    136,918
    
    
    $
    108,821
 Revenues
   38




---



##### Table of Contents



Operating loss
     Goodwill impairment
 39




---



##### Table of Contents



Interest Income.
 Loss on Early Redemption of Debt.
  Equity in Loss of Unconsolidated Joint Ventures.
 40




---



##### Table of Contents



HOMEBUILDING SEGMENTS
  Nine Months Ended August 31,
    
    
    Three Months Ended August 31,2008
    
    
    2007
    
    
    2008
    
    
    2007West Coast:Revenues
    
    $
    700,301
    
    
    $
    1,475,662
    
    
    $
    259,362
    
    
    $
    553,366Construction and land costs
    
    
    (794,169
    )
    
    
    (1,863,961
    )
    
    
    (238,564
    )
    
    
    (850,789
    )Selling, general and
administrative expenses
    
    
    (88,761
    )
    
    
    (148,735
    )
    
    
    (32,620
    )
    
    
    (52,422
    )Operating loss
    
    
    (182,629
    )
    
    
    (537,034
    )
    
    
    (11,822
    )
    
    
    (349,845
    )Other, net
    
    
    (8,826
    )
    
    
    4,232
    
    
    
    (6,198
    )
    
    
    (1,241
    )Pretax loss
    
    $
    (191,455
    )
    
    $
    (532,802
    )
    
    $
    (18,020
    )
    
    $
    (351,086
    )Southwest:Revenues
    
    $
    459,672
    
    
    $
    963,930
    
    
    $
    95,471
    
    
    $
    292,232Construction and land costs
    
    
    (566,094
    )
    
    
    (1,019,101
    )
    
    
    (126,402
    )
    
    
    (436,825
    )Selling, general and
administrative
expenses
    
    
    (54,109
    )
    
    
    (90,732
    )
    
    
    (16,693
    )
    
    
    (27,696
    )Operating loss
    
    
    (160,531
    )
    
    
    (145,903
    )
    
    
    (47,624
    )
    
    
    (172,289
    )Other, net
    
    
    (26,103
    )
    
    
    (4,453
    )
    
    
    (20,929
    )
    
    
    (7,641
    )Pretax loss
    
    $
    (186,634
    )
    
    $
    (150,356
    )
    
    $
    (68,553
    )
    
    $
    (179,930
    )Central:Revenues
    
    $
    442,650
    
    
    $
    703,456
    
    
    $
    142,175
    
    
    $
    254,116Construction and land costs
    
    
    (409,674
    )
    
    
    (633,791
    )
    
    
    (123,513
    )
    
    
    (232,717
    )Selling, general and
administrative
expenses
    
    
    (72,790
    )
    
    
    (114,242
    )
    
    
    (23,465
    )
    
    
    (37,400
    )Operating loss
    
    
    (39,814
    )
    
    
    (44,577
    )
    
    
    (4,803
    )
    
    
    (16,001
    )Other, net
    
    
    (9,036
    )
    
    
    (5,704
    )
    
    
    (2,267
    )
    
    
    (875
    )Pretax loss
    
    $
    (48,850
    )
    
    $
    (50,281
    )
    
    $
    (7,070
    )
    
    $
    (16,876
    )
 41




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##### Table of Contents



Nine Months Ended August 31,
    
    
    Three Months Ended August 31,2008
    
    
    2007
    
    
    2008
    
    
    2007Southeast:Revenues
    
    $
    504,894
    
    
    $
    1,192,194
    
    
    $
    182,107
    
    
    $
    440,893Construction and land costs
    
    
    (543,724
    )
    
    
    (1,133,549
    )
    
    
    (161,791
    )
    
    
    (478,163
    )Selling, general and
administrative
expenses
    
    
    (92,159
    )
    
    
    (150,025
    )
    
    
    (34,492
    )
    
    
    (52,025
    )Operating loss
    
    
    (130,989
    )
    
    
    (91,380
    )
    
    
    (14,176
    )
    
    
    (89,295
    )Other, net
    
    
    (54,794
    )
    
    
    (53,565
    )
    
    
    (26,715
    )
    
    
    (16,793
    )Pretax loss
    
    $
    (185,783
    )
    
    $
    (144,945
    )
    
    $
    (40,891
    )
    
    $
    (106,088

    )
 West Coast
    42




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##### Table of Contents



Southwest
    Central
 43




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##### Table of Contents



Southeast
   44




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##### Table of Contents



FINANCIAL SERVICES
   Nine Months Ended August 31,
    
    
    Three Months Ended August 31,2008
    
    
    2007
    
    
    2008
    
    
    2007Revenues
    
    $
    7,382
    
    
    $
    10,704
    
    
    $
    2,495
    
    
    $
    3,293Expenses
    
    
    (3,317
    )
    
    
    (3,524
    )
    
    
    (1,085
    )
    
    
    (1,113
    )Equity in income of unconsolidated
joint venture
    
    
    12,880
    
    
    
    14,558
    
    
    
    4,578
    
    
    
    4,367Pretax income
    
    $
    16,945
    
    
    $
    21,738
    
    
    $
    5,988
    
    
    $
    6,547Total originations (a):Loans
    
    
    7,010
    
    
    
    10,618
    
    
    
    2,215
    
    
    
    4,123Principal
    
    $
    1,454,475
    
    
    $
    2,534,341
    
    
    $
    464,734
    
    
    $
    987,184Retention rate
    
    
    79
    %
    
    
    69
    %
    
    
    80
    %
    
    
    73
    %Loans sold to third parties (a):Loans
    
    
    8,045
    
    
    
    11,461
    
    
    
    2,277
    
    
    
    4,039Principal
    
    $
    1,683,551
    
    
    $
    2,747,379
    
    
    $
    475,524
    
    
    $
    965,237
 45




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##### Table of Contents



(a)
    
    Loan originations and sales are within Countrywide KB Home Loans. Revenues.
 Expenses.
 Equity in Income of Unconsolidated Joint Venture.
  INCOME TAXES
  46




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##### Table of Contents



Liquidity and Capital Resources
 Overview
  Capital Resources
    47




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##### Table of Contents



August 31, 2008Financial Covenant
    
    
    
    
    
    Covenant Requirement
    
    ActualMinimum consolidated tangible net worth
    
    
    
    
    
    $278.2 million
    
    $1.09 billionCoverage Ratio
    
    
    
    
    
    
    (a
    )
    
    
    (a
    )Leverage Ratio (b)
    
    
    
    
    
    
    £1.00
    
    
    
    .56Investment in subsidiaries and joint
ventures as a percent of Adjusted
Consolidated Tangible Net Worth
    
    
    
    
    
    
    <35
    %
    
    
    17
    %Borrowing base in excess of senior
indebtedness (as defined)
    
    
    
    
    
    Greater than zero
    
    $961.4 million
 48




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##### Table of Contents



(a)
    
    Our Coverage Ratio of negative .17 was less than 1.00 to 1.00 as of August 31, 2008.
Because our Leverage Ratio as of August 31, 2008 was below 1.00 to 1.00, we will establish
an Interest Reserve Account of $115.4 million in the fourth quarter of 2008 with the Credit Facilitys
administrative agent to remain in compliance with the terms of the Credit Facility.(b)
    
    The Leverage Ratio requirement varies based on our Coverage Ratio. If our Coverage
Ratio is greater than or equal to 1.50 to 1.00, the Leverage Ratio requirement is less than
2.00 to 1.00. If our Coverage Ratio is between 1.00 and 1.50 to 1.00, the Leverage Ratio
requirement is less than 1.25 to 1.00. If our Coverage Ratio is less than 1.00 to 1.00,
the Leverage Ratio requirement is less than or equal to 1.00 to 1.00.       49




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##### Table of Contents



Consolidated Cash Flows
 Operating Activities
  Investing Activities
 Financing Activities
  50




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##### Table of Contents



Shelf Registration Statement
 Share Repurchase Program
  Off-Balance Sheet Arrangements, Contractual Obligations and Commercial Commitments
      51




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##### Table of Contents



52




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##### Table of Contents



Critical Accounting Policies
  Inventory Impairments and Abandonments
 53




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##### Table of Contents



Goodwill
  54




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##### Table of Contents



Income Taxes
  55




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##### Table of Contents



Outlook
      56




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##### Table of Contents



57




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##### Table of Contents



Forward Looking Statements
   
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
   58




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##### Table of Contents



Weighted AverageFiscal Year of Expected Maturity
    
    Fixed Rate Debt (a)
    
    
    Interest Rate2008
    
    $
    
    
    
    
    
    %2009
    
    
    200,000
    
    
    
    8.62010
    
    
    
    
    
    
    2011
    
    
    348,816
    
    
    
    6.42012
    
    
    
    
    
    
    Thereafter
    
    
    1,296,152
    
    
    
    6.3Total
    
    $
    1,844,968
    
    
    
    6.6
    %Fair market value at August 31,
2008
    
    $
    1,587,628
 
 (a)
    
    Includes senior and senior subordinated notes. The fixed-rate debt expected to mature
in our 2009 fiscal year is scheduled to mature on December 15, 2008.
  
 Item 4. Controls and Procedures
  59




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##### Table of Contents



PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
 Derivative Litigation
   Government Investigations
   ERISA Litigation
  60




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##### Table of Contents



Storm Water Matter
  Other Matters
  
 Item 1A. Risk Factors
  
 Item 5. Other Information
  61




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##### Table of Contents



Item 6. Exhibits
 Exhibits10.40
    
    Fifth Amendment dated August 28, 2008, to Revolving Loan Agreement, dated as of
November 22, 2005, among the Company, as Borrower, the banks party thereto, and Bank of
America, N.A., as Administrative Agent, incorporated by reference to KB Homes Current
Report on Form 8-K dated August 29, 2008.10.41*
    
    KB Home Executive Severance Plan.31.1
    
    Certification of Jeffrey T. Mezger, President and Chief Executive Officer of KB Home
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of William R. Hollinger, Senior Vice President and Chief Accounting
Officer of KB Home Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Jeffrey T. Mezger, President and Chief Executive Officer of KB Home
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.32.2
    
    Certification of William R. Hollinger, Senior Vice President and Chief Accounting
Officer of KB Home Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
 
 *
    
    Management contract or compensatory plan or arrangement in which executive officers are
eligible to participate.
 62




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##### Table of Contents



SIGNATURES
  KB HOMERegistrant Dated October 10, 2008
    /s/ JEFFREY T.  MEZGERJeffrey T. MezgerPresident and Chief Executive
Officer
(Principal Executive Officer) Dated October 10, 2008
    /s/ WILLIAM R. HOLLINGERWilliam R. Hollinger
Senior Vice President and Chief Accounting Officer
(Principal Financial Officer) 63




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##### Table of Contents



INDEX OF EXHIBITS
 10.40
    
    Fifth Amendment, dated August 28, 2008, to Revolving Loan Agreement, dated as of
November 22, 2005, among the Company, as Borrower, the banks party thereto, and Bank of
America, N.A., as Administrative Agent, incorporated by reference to KB Homes Current
Report on Form 8-K dated August 29, 2008.10.41*
    
    KB Home Executive Severance Plan, filed herewith.31.1
    
    Certification of Jeffrey T. Mezger, President and Chief Executive Officer of KB Home
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of William R. Hollinger, Senior Vice President and Chief Accounting
Officer of KB Home Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Jeffrey T. Mezger, President and Chief Executive Officer of KB Home
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.32.2
    
    Certification of William R. Hollinger, Senior Vice President and Chief Accounting
Officer of KB Home Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
 
 *
    
    Management contract or compensatory plan or arrangement in which executive officers are
eligible to participate.
 64