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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 February 28, 2009.
 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 þ
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
  o þ




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##### 



KB HOME
FORM 10-Q
INDEX
 PageNumberPART I. FINANCIAL INFORMATIONItem 1. Financial StatementsConsolidated Statements of Operations 
Three Months Ended February 28, 2009 and February 29, 2008
    
    
    3Consolidated Balance Sheets 
February 28, 2009 and November 30, 2008
    
    
    4Consolidated Statements of Cash Flows 
Three Months Ended February 28, 2009 and February 29, 2008
    
    
    5Notes to Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations
    
    
    30Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    50Item 4. Controls and Procedures
    
    
    50PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    51Item 1A. Risk Factors
    
    
    52Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    52Item 4. Submission of Matters to a Vote of Security Holders
    
    
    52Item 6. Exhibits
    
    
    53SIGNATURES
    
    
    54INDEX OF EXHIBITS
    
    
    55EX-31.1EX-31.2EX-32.1EX-32.2
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PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 KB HOME
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 Three Months EndedFebruary 28,
    
    
    February 29,2009
    
    
    2008Total revenues
    
    $
    307,361
    
    
    $
    794,224Homebuilding:Revenues
    
    $
    305,741
    
    
    $
    791,308Construction and land costs
    
    
    (290,958
    )
    
    
    (912,641
    )Selling, general and administrative expenses
    
    
    (61,175
    )
    
    
    (127,638
    )Operating loss
    
    
    (46,392
    )
    
    
    (248,971
    )Interest income
    
    
    3,513
    
    
    
    13,032Interest expense, net of amounts capitalized
    
    
    (8,652
    )
    
    
    Equity in loss of unconsolidated joint ventures
    
    
    (9,742
    )
    
    
    (39,878
    )Homebuilding pretax loss
    
    
    (61,273
    )
    
    
    (275,817
    )Financial services:Revenues
    
    
    1,620
    
    
    
    2,916Expenses
    
    
    (860
    )
    
    
    (1,119
    )Equity in income of unconsolidated joint venture
    
    
    941
    
    
    
    6,148Financial services pretax income
    
    
    1,701
    
    
    
    7,945Total pretax loss
    
    
    (59,572
    )
    
    
    (267,872
    )Income tax benefit (expense)
    
    
    1,500
    
    
    
    (300
    )Net loss
    
    $
    (58,072
    )
    
    $
    (268,172
    )Basic and diluted loss per share
    
    $
    (.75
    )
    
    $
    (3.47
    )Basic and diluted average shares outstanding
    
    
    77,375
    
    
    
    77,363Cash dividends declared per common share
    
    $
    .0625
    
    
    $
    .25
  3




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KB HOME
 
 CONSOLIDATED BALANCE SHEETS
 February 28,
    
    
    November 30,2009
    
    
    2008AssetsHomebuilding:Cash and cash equivalents
    
    $
    1,020,911
    
    
    $
    1,135,399Restricted cash
    
    
    111,208
    
    
    
    115,404Receivables
    
    
    161,031
    
    
    
    357,719Inventories
    
    
    2,021,765
    
    
    
    2,106,716Investments in unconsolidated joint ventures
    
    
    174,993
    
    
    
    177,649Other assets
    
    
    95,582
    
    
    
    99,2613,585,490
    
    
    
    3,992,148Financial services
    
    
    52,531
    
    
    
    52,152Total assets
    
    $
    3,638,021
    
    
    $
    4,044,300Liabilities and stockholders equityHomebuilding:Accounts payable
    
    $
    477,591
    
    
    $
    541,294Accrued expenses and other liabilities
    
    
    645,960
    
    
    
    721,397Mortgages and notes payable
    
    
    1,737,968
    
    
    
    1,941,5372,861,519
    
    
    
    3,204,228Financial services
    
    
    8,841
    
    
    
    9,467Common stock
    
    
    115,120
    
    
    
    115,120Paid-in capital
    
    
    864,854
    
    
    
    865,123Retained earnings
    
    
    864,496
    
    
    
    927,324Accumulated other comprehensive loss
    
    
    (17,402
    )
    
    
    (17,402
    )Grantor stock ownership trust, at cost
    
    
    (128,557
    )
    
    
    (129,326
    )Treasury stock, at cost
    
    
    (930,850
    )
    
    
    (930,234
    )Total stockholders equity
    
    
    767,661
    
    
    
    830,605Total liabilities and stockholders equity
    
    $
    3,638,021
    
    
    $
    4,044,300
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KB HOME
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 Three Months EndedFebruary 28,
    
    
    February 29,2009
    
    
    2008Cash flows from operating activities:Net loss
    
    $
    (58,072
    )
    
    $
    (268,172
    )Adjustments to reconcile net loss to net cash provided by
operating activities:Equity in loss of unconsolidated joint ventures
    
    
    8,801
    
    
    
    33,730Distributions of earnings from unconsolidated joint ventures
    
    
    662
    
    
    
    6,547Amortization of discounts and issuance costs
    
    
    340
    
    
    
    586Depreciation and amortization
    
    
    1,486
    
    
    
    2,797Tax benefit associated with exercise of stock options
    
    
    1,152
    
    
    
    1,663Stock-based compensation expense
    
    
    468
    
    
    
    1,387Inventory impairments and land option contract abandonments
    
    
    24,670
    
    
    
    187,575Change in assets and liabilities:Receivables
    
    
    197,449
    
    
    
    92,585Inventories
    
    
    57,448
    
    
    
    186,032Accounts payable, accrued expenses and other liabilities
    
    
    (133,016
    )
    
    
    (228,969
    )Other, net
    
    
    2,131
    
    
    
    6,585Net cash provided by operating activities
    
    
    103,519
    
    
    
    22,346Cash flows from investing activities:Change in restricted cash
    
    
    4,196
    
    
    
    Investments in unconsolidated joint ventures
    
    
    (7,748
    )
    
    
    (24,449
    )Sales (purchases) of property and equipment, net
    
    
    (821
    )
    
    
    5,376Net cash used by investing activities
    
    
    (4,373
    )
    
    
    (19,073
    )Cash flows from financing activities:Repayment of senior subordinated notes
    
    
    (200,000
    )
    
    
    Payments on mortgages, land contracts and other loans
    
    
    (8,843
    )
    
    
    (353
    )Issuance of common stock under employee stock plans
    
    
    795
    
    
    
    1,822Payments of cash dividends
    
    
    (4,756
    )
    
    
    (19,355
    )Repurchases of common stock
    
    
    (616
    )
    
    
    (557
    )Net cash used by financing activities
    
    
    (213,420
    )
    
    
    (18,443
    )Net decrease in cash and cash equivalents
    
    
    (114,274
    )
    
    
    (15,170
    )Cash and cash equivalents at beginning of period
    
    
    1,141,518
    
    
    
    1,343,742Cash and cash equivalents at end of period
    
    $
    1,027,244
    
    
    $
    1,328,572
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KB HOME
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Basis of Presentation and Significant Accounting Policies
   Use of Estimates
  Loss per share
  Comprehensive loss
  Reclassifications
  Stock-Based Compensation
  6




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KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Stock-Based Compensation (continued)
  Stock Options
  WeightedAverage ExerciseOptions
    
    
    PriceOptions outstanding at beginning of period
    
    
    7,847,402
    
    
    $
    30.11Granted
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    Cancelled
    
    
    (3,266,860
    )
    
    
    28.39Options outstanding at end of period
    
    
    4,580,542
    
    
    $
    31.33Options exercisable at end of period
    
    
    4,163,826
    
    
    $
    31.03
   Other Stock-Based Awards
  Segment Information
  7




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KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Segment Information (continued)
  
  
   Three Months EndedFebruary 28,
    
    
    February 29,2009
    
    
    2008Revenues:West Coast
    
    $
    108,520
    
    
    $
    241,076Southwest
    
    
    52,273
    
    
    
    241,847Central
    
    
    77,645
    
    
    
    151,889Southeast
    
    
    67,303
    
    
    
    156,496Total homebuilding revenues
    
    
    305,741
    
    
    
    791,308Financial services
    
    
    1,620
    
    
    
    2,916Total revenues
    
    $
    307,361
    
    
    $
    794,224Pretax income (loss):West Coast
    
    $
    (12,322
    )
    
    $
    (71,987
    )Southwest
    
    
    (20,738
    )
    
    
    (55,427
    )Central
    
    
    (6,156
    )
    
    
    (29,942
    )Southeast
    
    
    (13,825
    )
    
    
    (104,112
    )Corporate and other (a)
    
    
    (8,232
    )
    
    
    (14,349
    )Total homebuilding pretax loss
    
    
    (61,273
    )
    
    
    (275,817
    )Financial services
    
    
    1,701
    
    
    
    7,945Total pretax loss
    
    $
    (59,572
    )
    
    $
    (267,872
    )
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KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Segment Information (continued)
  Three Months EndedFebruary 28,
    
    
    February 29,2009
    
    
    2008Equity in income (loss) of unconsolidated joint ventures:West Coast
    
    $
    195
    
    
    $
    (9,374
    )Southwest
    
    
    (7,687
    )
    
    
    (5,175
    )Central
    
    
    21
    
    
    
    (1,514
    )Southeast
    
    
    (2,271
    )
    
    
    (23,815
    )Total
    
    $
    (9,742
    )
    
    $
    (39,878
    )Inventory impairments:West Coast
    
    $
    6,991
    
    
    $
    52,114Southwest
    
    
    11,927
    
    
    
    52,010Central
    
    
    
    
    
    
    17,285Southeast
    
    
    5,469
    
    
    
    58,915Total
    
    $
    24,387
    
    
    $
    180,324Inventory abandonments:West Coast
    
    $
    283
    
    
    $
    Southwest
    
    
    
    
    
    
    187Central
    
    
    
    
    
    
    Southeast
    
    
    
    
    
    
    7,064Total
    
    $
    283
    
    
    $
    7,251Joint venture impairments:West Coast
    
    $
    
    
    
    $
    8,106Southwest
    
    
    5,426
    
    
    
    4,944Central
    
    
    
    
    
    
    471Southeast
    
    
    2,186
    
    
    
    22,835Total
    
    $
    7,612
    
    
    $
    36,356
 February 28,
    
    
    November 30,2009
    
    
    2008Assets:West Coast
    
    $
    1,065,784
    
    
    $
    1,086,503Southwest
    
    
    455,110
    
    
    
    497,034Central
    
    
    428,204
    
    
    
    443,168Southeast
    
    
    430,174
    
    
    
    453,771Corporate and other
    
    
    1,206,218
    
    
    
    1,511,672Total homebuilding assets
    
    
    3,585,490
    
    
    
    3,992,148Financial services
    
    
    52,531
    
    
    
    52,152Total assets
    
    $
    3,638,021
    
    
    $
    4,044,300
 9




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KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Segment Information (continued)
 February 28,
    
    
    November 30,2009
    
    
    2008Investments in unconsolidated joint ventures:West Coast
    
    $
    55,661
    
    
    $
    55,856Southwest
    
    
    110,933
    
    
    
    113,564Central
    
    
    3,360
    
    
    
    3,339Southeast
    
    
    5,039
    
    
    
    4,890Total
    
    $
    174,993
    
    
    $
    177,649
 Financial Services
  Three Months EndedFebruary 28,
    
    
    February 29,2009
    
    
    2008RevenuesInterest income
    
    $
    17
    
    
    $
    47Title services
    
    
    187
    
    
    
    438Insurance commissions
    
    
    1,416
    
    
    
    2,431Total
    
    
    1,620
    
    
    
    2,916ExpensesGeneral and administrative
    
    
    (860
    )
    
    
    (1,119
    )Operating income
    
    
    760
    
    
    
    1,797Equity in income of unconsolidated joint venture
    
    
    941
    
    
    
    6,148Pretax income
    
    $
    1,701
    
    
    $
    7,945
 February 28,
    
    
    November 30,2009
    
    
    2008AssetsCash and cash equivalents
    
    $
    6,333
    
    
    $
    6,119Receivables
    
    
    479
    
    
    
    1,240Investment in unconsolidated joint venture
    
    
    45,674
    
    
    
    44,733Other assets
    
    
    45
    
    
    
    60Total assets
    
    $
    52,531
    
    
    $
    52,152LiabilitiesAccounts payable and accrued expenses
    
    $
    8,841
    
    
    $
    9,467Total liabilities
    
    $
    8,841
    
    
    $
    9,467
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KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 5.
    
    InventoriesInventories consisted of the following (in thousands):
 February 28,
    
    
    November 30,2009
    
    
    2008Homes, lots and improvements in production
    
    $
    1,564,918
    
    
    $
    1,649,838Land under development
    
    
    456,847
    
    
    
    456,878Total
    
    $
    2,021,765
    
    
    $
    2,106,716
 The Companys interest costs are as follows (in thousands):
 Three Months EndedFebruary 28,
    
    
    February 29,2009
    
    
    2008Capitalized interest at beginning of period
    
    $
    361,619
    
    
    $
    348,084Interest incurred
    
    
    29,258
    
    
    
    38,502Interest expensed
    
    
    (8,652
    )
    
    
    Interest amortized
    
    
    (16,892
    )
    
    
    (28,576
    )Capitalized interest at end of period (a)
    
    $
    365,333
    
    
    $
    358,010
 
 (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 generally not allocated to specific components
of inventory. 6.
    
    Inventory Impairments and AbandonmentsEach parcel or community in the Companys owned inventory is assessed to determine if indicators
of potential impairment exist. 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, volume of homes delivered, gross margins on homes delivered
or projected margins on homes in backlog or future housing sales; significant increases in
budgeted land development and construction costs or cancellation rates; or projected losses on
expected future land sales. 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). 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 trends and factors known to the Company at the time they
are calculated and the Companys expectations related to: market supply and demand, including
estimates concerning average selling prices; sales and cancellation rates; and anticipated land
development, construction and overhead costs to be incurred. These estimates, trends and
expectations 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
asset or conditions
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KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 6.
    
    Inventory Impairments and Abandonments (continued)in the market in which the asset is located at the time the assessment is made. These factors are
specific to each community and may vary among communities.Based on the results of its evaluations, the Company recognized pretax, noncash inventory
impairment charges of $24.4 million in the first quarter of 2009 and $180.3 million in the first
quarter of 2008. As of February 28, 2009, the aggregate carrying value of inventory impacted by
pretax, noncash impairment charges was $939.9 million, representing 159 communities and various
other land parcels. As of November 30, 2008, the aggregate carrying value of inventory impacted
by pretax, noncash impairment charges was $1.01 billion, representing 163 communities and various
other land parcels.The Companys optioned inventory is assessed to determine whether it continues to meet the
Companys internal investment standards. Assessments are made separately for each optioned
parcel on a quarterly basis and are affected by, among other factors: current and/or anticipated
sales rates, average selling prices and home delivery volume; estimated land development and
construction costs; and projected profitability on expected future housing or land sales. When a
decision is made not to exercise certain land option contracts due to market conditions and/or
changes in market strategy, the Company writes off the costs, including non-refundable deposits
and pre-acquisition costs, related to the abandoned projects. Based on the results of its
assessments, the Company recognized land option contract abandonment charges of $.3 million in
the first quarter of 2009 and $7.3 million in the first quarter of 2008.The inventory impairment charges and land option contract abandonment charges are included in
construction and land costs in the Companys consolidated statements of operations.Due to the judgment and assumptions applied in the estimation process with respect to impairments
and land option contract abandonments, it is possible that actual results could differ
substantially from those estimated.7.
    
    Fair Value DisclosuresEffective December 1, 2008, the Company adopted Statement of Financial Accounting Standards No.
157, Fair Value Measurements (SFAS No. 157), for its assets and liabilities measured at fair
value on a nonrecurring basis. SFAS No. 157 provides guidance for using fair value to measure
assets and liabilities, defines fair value, establishes a framework for measuring fair value
under generally accepted accounting principles, expands disclosures about fair value
measurements, and establishes a fair value hierarchy that requires an entity to maximize the use
of observable inputs and minimize the use of unobservable inputs when measuring fair value.The fair value hierarchy can be summarized as follows:
 Level 1
    
    Fair value determined based on quoted prices in active markets for identical assets
or liabilities.Level 2
    
    Fair value determined using significant observable inputs, such as quoted prices for
similar assets or liabilities or quoted prices for identical or similar assets or
liabilities in markets that are not active, inputs other than quoted prices that are
observable for the asset or liability, or inputs that are derived principally from or
corroborated by observable market data, by correlation or other means.Level 3
    
    Fair value determined using significant unobservable inputs, such as discounted cash
flows, or similar techniques.
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KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 7.
    
    Fair Value Disclosures (continued)The Companys assets measured at fair value on a nonrecurring basis are summarized below (in
thousands):
 Fair Value Measurements UsingQuoted
    
    
    SignificantThree Months
    
    
    Prices in
    
    
    Other
    
    
    SignificantEnded
    
    
    Active
    
    
    Observable
    
    
    UnobservableFebruary 28,
    
    
    Markets
    
    
    Inputs
    
    
    Inputs
    
    
    Total GainsDescription
    
    2009
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    (Losses)Long-lived assets
held and used
    
    $
    25,650
    
    
    $
    
    
    
    $
    
    
    
    $
    25,650
    
    
    $
    (24,387
    )
 In accordance with the provisions of SFAS No. 144, long-lived assets held and used with a
carrying amount of $50.0 million were written down to their fair value of $25.6 million,
resulting in noncash inventory impairment charges of $24.4 million for the three months ended February 28, 2009. These charges were included
in the Companys construction and land costs in the consolidated statement of operations for the
period.Fair values for long-lived assets held and used are 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 asset or conditions in the market in which the asset is located at the time the
assessment is made. These factors are specific to each community and may vary among communities.8.
    
    Consolidation of Variable Interest EntitiesIn December 2003, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
No. 46(R), Consolidation of Variable Interest Entities (FASB Interpretation No. 46(R)), to
clarify the application of Accounting Research Bulletin No. 51, Consolidated Financial
Statements, to certain entities, called variable interest entities (VIEs), in which equity
investors do not have the characteristics of a controlling interest or do not have sufficient
equity at risk for the entity to finance its activities without additional subordinated financial
support. Under FASB Interpretation No. 46(R), an enterprise that absorbs a majority of the VIEs
expected losses, receives a majority of the VIEs expected residual returns, or both, is
considered to be the primary beneficiary of the VIE and must consolidate the entity in its
financial statements.The Company participates in joint ventures from time to time for the purpose of conducting land
acquisition, development and/or other homebuilding activities. Its investments in these joint
ventures may create a variable interest in a VIE, depending on the contractual terms of the
arrangement. The Company analyzes its joint ventures in accordance with FASB Interpretation
No. 46(R) when they are entered into or upon a reconsideration event. All of the Companys joint
ventures at February 28, 2009 and November 30, 2008 were determined to be unconsolidated joint
ventures either because they were not VIEs or, if they were VIEs, the Company was not the primary
beneficiary of the VIEs.In the ordinary course of its business, the Company enters into land option contracts (or
similar agreements) in order to procure land for the construction of homes. The use of such
option and other contracts generally allows the Company to reduce the risks associated with
direct land ownership and development, reduces the Companys capital and financial
commitments, including interest and other carrying costs, and minimizes the amount of the
Companys land inventories on its consolidated balance sheet. Under such land option
contracts, the Company will pay a specified option deposit or earnest money deposit in
consideration for the right to purchase land in the future, usually at a predetermined price.
Under the requirements of FASB Interpretation No. 46(R), certain of
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KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 8.
    
    Consolidation of Variable Interest Entities (continued)the Companys land option contracts may create a variable interest for the Company, with the land
seller being identified as a VIE.In compliance with FASB Interpretation No. 46(R), the Company analyzes its land option contracts
and other contractual arrangements when they are entered into or upon a reconsideration event,
and as a result has consolidated the fair value of certain VIEs from which the Company is
purchasing land under option contracts. Although the Company does not have legal title to the
land, FASB Interpretation No. 46(R) requires the Company to consolidate the VIE if the Company is
determined to be the primary beneficiary. The consolidation of VIEs in which the Company was
determined to be the primary beneficiary increased its inventories, with a corresponding increase
to accrued expenses and other liabilities, on the Companys consolidated balance sheets by $15.5
million at both February 28, 2009 and November 30, 2008. The liabilities related to the
Companys consolidation of VIEs from which it has arranged to purchase land under option and
other contracts represent the difference between the purchase price of land not yet purchased and
the Companys cash deposits. The Companys cash deposits related to these land option and other
contracts totaled $3.4 million at both February 28, 2009 and November 30, 2008. Creditors, if
any, of these VIEs have no recourse against the Company. As of February 28, 2009, excluding
consolidated VIEs, the Company had cash deposits totaling $24.3 million associated with land
option and other contracts having an aggregate purchase price of $484.6 million.The Companys exposure to loss related to its land option and other contracts with third parties
and unconsolidated entities consisted of its non-refundable deposits totaling $27.7 million at
February 28, 2009 and $33.1 million at November 30, 2008. In addition, the Company posted
letters of credit of $17.9 million at February 28, 2009 and $32.5 million at November 30, 2008 in
lieu of cash deposits under certain land option contracts.The Company also evaluates land option and other contracts in accordance with Statement of
Financial Accounting Standards No. 49, Accounting for Product Financing Arrangements (SFAS
No. 49), and, as a result of its evaluations, increased inventories, with a corresponding
increase to accrued expenses and other liabilities, on its consolidated balance sheets by $73.6
million at February 28, 2009 and $81.5 million at November 30, 2008.9.
    
    Investments in Unconsolidated Joint VenturesThe Company participates in unconsolidated joint ventures that conduct land acquisition,
development and/or other homebuilding activities in various markets, typically where the
Companys homebuilding operations are located. The Companys partners in these unconsolidated
joint ventures are unrelated homebuilders, land developers and other real estate entities, or
commercial enterprises. Through these unconsolidated joint ventures, the Company seeks to reduce
and share market and development risks and to reduce its investment in land inventory, while
potentially increasing the number of homesites it controls or will own. In some instances,
participating in unconsolidated joint ventures enables the Company to acquire and develop land
that it might not otherwise have access to due to a projects size, financing needs, duration of
development or other circumstances. While the Company views its participation in unconsolidated
joint ventures as beneficial to its homebuilding activities, it does not view such participation
as essential.The Company and/or its unconsolidated joint venture partners typically obtain options or enter
into other arrangements to have the right to purchase portions of the land held by the
unconsolidated joint ventures. The prices for these land options or other arrangements are
generally negotiated prices that approximate fair value. When an unconsolidated joint venture
sells land to the Companys homebuilding operations, the Company defers recognition of its share
of such unconsolidated joint venture earnings until a home sale is closed and title passes to a
homebuyer, at which time the Company accounts for those earnings as a reduction of the cost of
purchasing the land from the unconsolidated joint venture.The Company and its unconsolidated joint venture partners make initial or ongoing capital
contributions to these unconsolidated joint ventures, typically on a pro rata basis. The
obligations to make capital contributions are
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KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 9.
    
    Investments in Unconsolidated Joint Ventures (continued)governed by each unconsolidated joint ventures respective operating agreement and related
documents.Each unconsolidated joint venture is obligated to maintain financial statements in accordance
with U.S. generally accepted accounting principles. The Company shares in profits and losses of
these unconsolidated joint ventures generally in accordance with its respective equity interests.The following table presents combined condensed statement of operations information for the
Companys unconsolidated joint ventures (in thousands):
 Three Months EndedFebruary 28,
    
    
    February 29,2009
    
    
    2008Revenues
    
    $
    11,476
    
    
    $
    27,383Construction and land costs
    
    
    (18,501
    )
    
    
    (38,640
    )Other expenses, net
    
    
    (6,135
    )
    
    
    (7,570
    )Loss
    
    $
    (13,160
    )
    
    $
    (18,827
    )
   February 28,
    
    
    November 30,2009
    
    
    2008AssetsCash
    
    $
    17,414
    
    
    $
    29,194Receivables
    
    
    143,635
    
    
    
    143,926Inventories
    
    
    1,025,331
    
    
    
    1,029,306Other assets
    
    
    55,115
    
    
    
    55,289Total assets
    
    $
    1,241,495
    
    
    $
    1,257,715Liabilities and equityAccounts payable and other liabilities
    
    $
    95,248
    
    
    $
    85,064Mortgages and notes payable
    
    
    858,832
    
    
    
    871,279Equity
    
    
    287,415
    
    
    
    301,372Total liabilities and equity
    
    $
    1,241,495
    
    
    $
    1,257,715
 
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KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 9.
    
    Investments in Unconsolidated Joint Ventures (continued)The following table presents information relating to the Companys investments in unconsolidated
joint ventures and the aggregate outstanding debt of its unconsolidated joint ventures as of the
dates specified, categorized by the nature of the Companys potential responsibility under a
guaranty, if any, for such debt (dollars in thousands):
 February 28,
    
    
    November 30,2009
    
    

    2008Number of investments in unconsolidated joint ventures:With recourse debt (a)
    
    
    1
    
    
    
    1With limited recourse debt (b)
    
    
    4
    
    
    
    4With non-recourse debt (c)
    
    
    10
    
    
    
    10Other (d)
    
    
    9
    
    
    
    10Total
    
    
    24
    
    
    
    25Investments in unconsolidated joint ventures:With recourse debt
    
    $
    3,361
    
    
    $
    3,339With limited recourse debt
    
    
    
    
    
    
    1,360With non-recourse debt
    
    
    24,564
    
    
    
    24,590Other
    
    
    147,068
    
    
    
    148,360Total
    
    $
    174,993
    
    
    $
    177,649Outstanding debt of unconsolidated joint ventures:With recourse debt
    
    $
    2,546
    
    
    $
    3,249With limited recourse debt
    
    
    110,550
    
    
    
    112,700With non-recourse debt
    
    
    372,238
    
    
    
    381,393Other
    
    
    373,498
    
    
    
    373,937Total (e)
    
    $
    858,832
    
    
    $
    871,279
 
 (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 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 does not
have a guaranty or any other obligation to repay or to support the value of the collateral
(which collateral includes any letters of credit) underlying such unconsolidated joint
ventures respective outstanding secured debt.(d)
    
    This category consists of unconsolidated joint ventures with no outstanding debt and 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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KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 9.
    
    Investments in Unconsolidated Joint Ventures (continued)
 In most cases, the Company may have also entered into a completion guaranty and/or a
carve-out guaranty 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. In most cases, 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.
 The unconsolidated joint ventures finance land and inventory investments through a variety of
arrangements. To finance their respective land acquisition and development activities, many of
the Companys unconsolidated joint ventures have obtained loans from third-party lenders that are
secured by the underlying property and related project assets. The unconsolidated joint ventures
had outstanding debt, substantially all of which was secured, of approximately $858.8 million at
February 28, 2009 and $871.3 million at November 30, 2008. The unconsolidated joint ventures are
subject to various financial and non-financial covenants in conjunction with their debt,
primarily related to fair value of collateral and minimum land purchase or sale requirements
within a specified period. In a few instances, the financial covenants are based on the Companys
financial position. The inability of an unconsolidated joint venture to comply with its debt
covenants could result in a default and cause lenders to seek to enforce guarantees, if
applicable, as described below.In certain instances, the Company and/or its partner(s) in an unconsolidated joint venture
provide guarantees and indemnities to the unconsolidated joint ventures lenders that may include
one or more of the following: (a) a completion guaranty; (b) a loan-to-value maintenance
guaranty; and/or (c) a carve-out guaranty. A completion guaranty refers to the actual physical
completion of improvements for a project and/or the obligation to contribute equity to an
unconsolidated joint venture to enable it to fund its completion obligations. A loan-to-value
maintenance guaranty refers to the payment of funds to maintain the applicable loan balance at or
below a specific percentage of the value of an unconsolidated joint ventures secured collateral
(generally land and improvements). A carve-out guaranty refers to the payment of (i) losses a
lender suffers due to certain bad acts or omissions by an unconsolidated joint venture or its
partners, such as fraud or misappropriation, or due to environmental liabilities arising with
respect to the relevant project, or (ii) outstanding principal and interest and certain other
amounts owed to lenders upon the filing by an unconsolidated joint venture of a voluntary
bankruptcy petition or the filing of an involuntary bankruptcy petition by creditors of the
unconsolidated joint venture in which an unconsolidated joint venture or its partners collude or
which the unconsolidated joint venture fails to contest.In most cases, the Companys maximum potential responsibility under these guarantees and
indemnities is limited to either a specified maximum dollar amount or an amount equal to its pro
rata interest in the relevant unconsolidated joint venture. In a few cases, the Company has
entered into agreements with its unconsolidated joint venture partners to be reimbursed or
indemnified with respect to the guarantees the Company has provided to an unconsolidated joint
ventures lenders for any amounts the Company may pay pursuant to such guarantees above its pro
rata interest in the unconsolidated joint venture. If the Companys unconsolidated joint venture
partners are unable to fulfill their reimbursement or indemnity obligations, or otherwise fail to
do so, the Company could incur more than its allocable share under the relevant guaranty. Should
there be indications that advances (if made) will not be voluntarily repaid by an unconsolidated
joint venture partner under any such reimbursement arrangements, the Company vigorously pursues
all rights and remedies available to it under the applicable agreements, at law or in equity to
enforce its rights.The Companys potential responsibility under its completion guarantees, if triggered, is highly
dependent on the facts of a particular case. In any event, the Company believes its actual
responsibility under these guarantees is limited to the amount, if any, by which an
unconsolidated joint ventures outstanding borrowings exceed the value of its assets, but may be
substantially less than this amount.At February 28, 2009, the Companys potential responsibility under its loan-to-value maintenance
guarantees totaled approximately $44.3 million, if any liability were determined to be due
thereunder. This amount
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KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 9.
    
    Investments in Unconsolidated Joint Ventures (continued)represents the Companys maximum responsibility under such loan-to-value maintenance guarantees
assuming the underlying collateral has no value and without regard to defenses that could be
available to the Company against attempted enforcement of such guarantees.Notwithstanding these potential responsibilities, at this time the Company does not believe that
its exposure under its existing completion, loan-to-value and carve-out guarantees and
indemnities related to unconsolidated joint venture debt is material to the Companys
consolidated financial position, results of operations or liquidity.The lenders for two of the Companys unconsolidated joint ventures have filed lawsuits against
some of the unconsolidated joint ventures members, and certain of those members parent
companies, seeking to recover damages under completion guarantees, among other claims. The
Company and the other parent companies, together with the members, are defending the lawsuits in
which they have been named. The Company does not believe that these lawsuits will have a material
impact on the Companys consolidated financial position or results of operations.In addition to the above-described guarantees and indemnities, the Company has also provided a
several guaranty to the lenders of one of the Companys unconsolidated joint ventures. By its
terms, the guaranty purports to guarantee the repayment of principal and interest and certain
other amounts owed to the unconsolidated joint ventures lenders when an involuntary bankruptcy
proceeding is filed against the unconsolidated joint venture that is not dismissed within 60 days
or for which an order approving relief under bankruptcy law is entered, even if the
unconsolidated joint venture or its partners do not collude in the filing and the unconsolidated
joint venture contests the filing. The Companys potential responsibility under this several
guaranty fluctuates with the outstanding borrowings against the unconsolidated joint ventures
debt and with the Companys and its partners respective land purchases from the unconsolidated
joint venture. At February 28, 2009, this unconsolidated joint venture had total outstanding
indebtedness of approximately $373.5 million and, if this guaranty were then enforced, the
Companys maximum potential responsibility under the guaranty would have been approximately
$182.7 million, which amount does not account for any offsets or defenses that could be available
to the Company. This unconsolidated joint venture has received notices from its lenders
administrative agent alleging a number of defaults under its loan agreement. The Company is
currently exploring resolutions with the lenders, the lenders administrative agent and the
Companys unconsolidated joint venture partners, but there is no assurance that the Company will
reach a satisfactory resolution with all of the parties involved.Certain of the Companys other unconsolidated joint ventures operating in difficult market
conditions are in default of their debt agreements with their lenders or are at risk of
defaulting. In addition, certain of the Companys unconsolidated joint venture partners have
curtailed funding of their allocable joint venture obligations. The Company is carefully managing
its investments in these particular unconsolidated joint ventures and is working with the
relevant lenders and unconsolidated joint venture partners to reach satisfactory resolutions. In
some instances, the Company may decide to opportunistically purchase its partners interests and
would consolidate the joint venture, which would result in an increase in mortgages and notes
payable on the Companys consolidated balance sheets. However, such purchases may not resolve a
claimed default by the joint venture under its debt agreements. Additionally, the Company may
seek new equity partners to participate in its unconsolidated joint ventures or, based on market
conditions and other strategic considerations, may decide to withdraw from an unconsolidated
joint venture and allow the unconsolidated joint ventures lenders to exercise their remedies
with respect to the underlying collateral (subject to any relevant defenses available to the
Company). Based on the terms and amounts of the debt involved for these particular unconsolidated
joint ventures and the terms of the applicable joint venture operating agreements, the Company
does not believe that its exposure related to any defaults by or with respect to these particular
unconsolidated joint ventures is material to the Companys consolidated financial position,
results of operations or liquidity.
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KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 10.
    
    Mortgages and Notes PayableMortgages and notes payable consisted of the following (in thousands):
 February 28,
    
    
    November 30,2009
    
    

    2008Mortgages and land contracts due to land sellers and
other loans
    
    $
    92,594
    
    
    $
    96,368Senior subordinated notes due December 15, 2008 at 8 5/8%
    
    
    
    
    
    
    200,000Senior notes due 2011 at 6 3/8%
    
    
    349,001
    
    
    
    348,908Senior notes due 2014 at 5 3/4%
    
    
    249,259
    
    
    
    249,227Senior notes due 2015 at 5 7/8%
    
    
    298,737
    
    
    
    298,692Senior notes due 2015 at 6 1/4%
    
    
    449,664
    
    
    
    449,653Senior notes due 2018 at 7 1/4%
    
    
    298,713
    
    
    
    298,689Total
    
    $
    1,737,968
    
    
    $
    1,941,537
 The Company has an unsecured revolving credit facility (the Credit Facility) with a syndicate
of lenders that matures in November 2010. Interest on the Credit Facility is payable monthly at
the London Interbank Offered Rate plus an applicable spread on amounts borrowed. At February 28,
2009, the Company had no cash borrowings outstanding and $208.8 million in letters of credit
outstanding under the Credit Facility. The aggregate commitment under the Credit Facility will
be permanently reduced from $800.0 million to $650.0 million in the second quarter of 2009
because the Companys consolidated tangible net worth was below $800.0 million at February 28,
2009. Under the terms of the Credit Facility, the Company is required, among other things, to
maintain a minimum consolidated tangible net worth and certain financial statement ratios, and is
subject to limitations on acquisitions, inventories and indebtedness.On December 15, 2008, the Company repaid $200.0 million of 8 5/8% senior subordinated notes (the
$200 Million Senior Subordinated Notes) which matured on that date.The Companys indenture governing its senior notes does not contain any financial maintenance
covenants. Subject to specified exceptions, the senior notes indenture contains certain
restrictive covenants that, among other things, limit the Companys ability to incur secured
indebtedness; engage in sale-leaseback transactions involving property or assets above a certain
specified value; or engage in mergers, consolidations, or sales of assets.As of February 28, 2009, the Company was in compliance with the applicable terms of all of its
covenants under its Credit Facility and senior notes indenture. However, the Companys ability to
continue to borrow funds depends in part on its ability to remain in such compliance. The
Companys inability to do so could make it more difficult and expensive to maintain its current
level of external debt financing or to obtain additional financing.11.
    
    Commitments and ContingenciesThe Company provides a limited warranty on all of its homes. The specific terms and conditions
of warranties vary depending upon the market in which the Company does business. The Company
generally provides a structural warranty of 10 years, a warranty on electrical, heating, cooling,
plumbing and other building systems each varying from two to five years based on geographic
market and state law, and a warranty of one year for other components of the home. The Company
estimates the costs that may be incurred under each limited warranty and records a liability in
the amount of such costs at the time the revenue associated with the sale of each home is
recognized. Factors that affect the Companys warranty liability include the number of homes
delivered, historical and anticipated rates of warranty claims, and cost per claim. The
Companys primary assumption in estimating the amounts it accrues for warranty costs is that
historical claims experience is a strong indicator of future claims experience. The Company
periodically assesses the adequacy of its recorded warranty liabilities, which are included in
accrued expenses and other liabilities in the consolidated balance sheets, and adjusts the
amounts as necessary based on its assessment.
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KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 11.
    
    Commitments and Contingencies (continued)The changes in the Companys warranty liability are as follows (in thousands):
 Three Months EndedFebruary 28,
    
    
    February 29,2009
    
    
    2008Balance at beginning of period
    
    $
    145,369
    
    
    $
    151,525Warranties issued
    
    
    1,993
    
    
    
    6,934Payments and adjustments
    
    
    (5,138
    )
    
    
    (7,542
    )Balance at end of period
    
    $
    142,224
    
    
    $
    150,917
 In the normal course of its business, the Company issues certain representations, warranties and
guarantees related to its home sales and land sales that may be affected by FASB Interpretation
No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others. Based on historical evidence, the Company does not
believe any of these representations, warranties or guarantees would result in a material effect
on its consolidated financial position or results of operations.The Company has, and requires the majority of its subcontractors to have, general liability
insurance (including construction defect coverage) and workers compensation insurance. These
insurance policies protect the Company against a portion of its risk of loss from claims related
to its homebuilding activities, subject to certain self-insured retentions, deductibles and other
coverage limits. The Company self-insures a portion of its overall risk through the use of a
captive insurance subsidiary. The Company records expenses and liabilities based on the costs
required to cover its self-insured retention and deductible amounts under its insurance policies,
and on the estimated costs of potential claims and claim adjustment expenses above its coverage
limits or not covered by its policies. These estimated costs are based on an analysis of the
Companys historical claims and include an estimate of construction defect claims incurred but
not yet reported. The Companys estimated liabilities for such items were $105.7 million at
February 28, 2009 and $101.5 million at November 30, 2008. These amounts are included in accrued
expenses and other liabilities in the consolidated balance sheets.The Company is often required to obtain performance bonds and letters of credit in support of its
obligations to various municipalities and other government agencies in connection with community
improvements such as roads, sewers and water. At February 28, 2009, the Company had $706.8
million of performance bonds and $208.8 million of letters of credit outstanding. In the event
any such performance bonds or letters of credit are called, the Company would be obligated to
reimburse the issuer of the performance bond or letter of credit. At this time, the Company does
not believe that a material amount of any currently outstanding performance bonds or letters of
credit will be called. Performance bonds do not have stated expiration dates. Rather, the Company
is released from the performance bonds as the underlying performance is completed. The expiration
dates of letters of credit issued in connection with community improvements coincide with the
expected completion dates of the related projects. If the obligations related to a project are
ongoing, annual extensions of the letters of credit are typically granted on a year-to-year
basis.Borrowings outstanding, if any, and letters of credit issued under the Companys Credit Facility
are guaranteed by certain of the Companys subsidiaries (the Guarantor Subsidiaries).In the ordinary course of its business, the Company enters into land option contracts to procure
land for the construction of homes. At February 28, 2009, the Company had total deposits of $45.6
million, comprised of cash deposits of $27.7 million and letters of credit of $17.9 million, to
purchase land with a total remaining purchase price of $503.5 million. The Companys land option
contracts generally do not contain provisions requiring the Companys specific performance.
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KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 12.
    
    Legal MattersDerivative Litigation and Related ProceedingsIn the summer of 2006, four shareholder derivative lawsuits were filed, ostensibly on behalf of
the Company, alleging, among other things, that the defendants (various current and former
directors and officers of the Company) breached their fiduciary duties to the Company by, among
other things, backdating grants of stock options to various current and former executives in
violation of the Companys stockholder-approved stock option plans. Two of the lawsuits were
state court actions filed in Los Angeles County Superior Court, and two were federal actions
filed in the United States District Court for the Central District of California. The two federal
lawsuits also included substantive claims under the federal securities laws.On December 9, 2008, the Company entered into a global settlement agreement with the plaintiffs
in both the federal court and state court actions. On February 9, 2009, the United States
District Court issued an order approving the settlement agreement and dismissing the federal
lawsuits. On March 9, 2009, the Los Angeles County Superior Court similarly issued an order
dismissing the state lawsuits. As part of the global settlement, the Company resolved all
outstanding issues between it and its former chairman and chief executive officer.  This
resolution included, among other things, a payment of $8.5 million from the former chairman and
chief executive officer to the Company.  This payment is reflected in the Companys consolidated
statement of operations for the first quarter of 2009, and was partially offset by legal and
other expenses incurred during the quarter in connection with the settlement.ERISA LitigationOn March 16, 2007, plaintiffs Reba Bagley and Scott Silver filed an action brought under Section
502 of the Employee Retirement Income Security Act (ERISA), 29 U.S.C. § 1132, Bagley et al., v.
KB Home, et al., in the United States District Court for the Central District of California. The
action was brought against the Company, its directors, and certain of its current and former
officers. After the court allowed leave to file an amended complaint, plaintiffs filed an amended
complaint adding Tolan Beck and Rod Hughes as additional plaintiffs and dismissing certain
individuals as defendants. All four plaintiffs claim to be former employees of the Company who
participated in the KB Home 401(k) Savings Plan (the Plan). Plaintiffs allege on behalf of
themselves and on behalf of all others similarly situated that all defendants breached fiduciary
duties owed to plaintiffs and purported class members under ERISA by failing to disclose
information to and providing misleading information to participants in the Plan about alleged
prior stock option backdating practices of the Company and by failing to remove the Companys
stock as an investment option under the Plan. Plaintiffs allege that this breach of fiduciary
duties caused plaintiffs to earn less on their Plan accounts than they would have earned but for
defendants alleged breach of duties. Plaintiffs seek unspecified money damages and injunctive
and other equitable relief.On November 24, 2008, the court approved a stipulation to stay all discovery and other
proceedings in order to allow the parties time to attempt to settle the claims through mediation.
A mediation session was held on January 27, 2009, but a settlement has not been reached. The
court has tentatively scheduled the trial to begin on November 9, 2010. Plaintiffs have served
discovery requests on the Company, the other defendants and several third parties. The Company
has also served the plaintiffs with discovery requests. While the Company believes it has strong
defenses to the ERISA claims, it has not concluded whether an unfavorable outcome is likely to be
material to its consolidated financial position or results of operations.Other MattersThe Company is also involved in litigation and governmental proceedings incidental to its
business. These cases are in various procedural stages and, based on reports of counsel, the
Company believes that provisions or reserves made for potential losses are adequate and any
liabilities or costs arising out of currently pending litigation should not have a materially
adverse effect on its consolidated financial position or results of operations.
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KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 13.
    
    Stockholders EquityOn January 22, 2009, the Company adopted an amendment to a Rights Agreement between the
Company and ChaseMellon Shareholder Services L.L.C., as rights agent, dated February 4, 1999 (the
1999 Rights Agreement).  The amendment to the 1999 Rights Agreement was designed to preserve
the value of certain of the Companys deferred tax assets.  Under the 1999 Rights Agreement as
amended, under certain circumstances, each preferred share purchase right that was issued
pursuant to the 1999 Rights Agreement as a dividend on March 5, 1999 entitled the holder to
purchase 1/100th of a share of the Companys Series A Participating Cumulative Preferred Stock at
an exercise price of $85.00, subject to adjustment. The terms relating to the exercise and
redemption of these rights is described in the Companys Annual Report on Form 10-K for the year
ended November 30, 2008. These rights expired on March 5, 2009.On January 22, 2009, the Company also adopted a Rights Agreement between the Company and
Mellon Investor Services LLC, as rights agent, dated as of that date (the 2009 Rights
Agreement), and declared a dividend distribution of one preferred share purchase right for each
outstanding share of common stock that was payable to stockholders of record as of the close of
business on March 5, 2009. Subject to the terms, provisions and conditions of the 2009 Rights
Agreement, if these rights become exercisable, each right would initially represent the right to
purchase from the Company 1/100th of a share of its Series A Participating Cumulative Preferred
Stock for a purchase price of $85.00 (the Purchase Price). If issued, each fractional share of
preferred stock would generally give a stockholder approximately the same dividend, voting and
liquidation rights as does one share of the Companys common stock. However, prior to exercise, a
right does not give its holder any rights as a stockholder, including without limitation any
dividend, voting or liquidation rights. The rights will not be exercisable until the earlier of
(i) ten calendar days after a public announcement by the Company that a person or group has
become an Acquiring Person (as that term is defined under the 2009 Rights Agreement) and (ii) ten
business days after the commencement of a tender or exchange offer by a person or group if upon
consummation of the offer the person or group would beneficially own 4.9% or more of the
Companys outstanding common stock.Until these rights become exercisable (the Distribution Date), common stock certificates
will evidence the rights and may contain a notation to that effect. Any transfer of shares of the
Companys common stock prior to the Distribution Date will constitute a transfer of the
associated rights. After the Distribution Date, the rights may be transferred other than in
connection with the transfer of the underlying shares of the Companys common stock. If there is
an Acquiring Person on the Distribution Date or a person or group becomes an Acquiring Person
after the Distribution Date, each holder of a right, other than rights that are or were
beneficially owned by an Acquiring Person, which will be void, will thereafter have the right to
receive upon exercise of a right and payment of the Purchase Price, that number of shares of the
Companys common stock having a market value of two times the Purchase Price. After the later of
the Distribution Date and the time the Company publicly announces that an Acquiring Person has
become such, the Companys board of directors may exchange the rights, other than rights that are
or were beneficially owned by an Acquiring Person, which will be void, in whole or in part, at an
exchange ratio of one share of common stock per right, subject to adjustment.At any time prior to the later of the Distribution Date and the time the Company publicly
announces that an Acquiring Person becomes such, the Companys board of directors may redeem all
of the then-outstanding rights in whole, but not in part, at a price of $0.001 per right, subject
to adjustment (the Redemption Price). The redemption will be effective immediately upon the
board of directors action, unless the action provides that such redemption will be effective at
a subsequent time or upon the occurrence or nonoccurrence of one or more specified events, in
which case the redemption will be effective in accordance with the provisions of the action.
Immediately upon the effectiveness of the redemption of the rights, the right to exercise the
rights will terminate and the only right of the holders of rights will be to receive the
Redemption Price, with interest thereon. With the approval of the 2009 Rights Agreement by the
Companys stockholders at the Companys 2009 Annual Meeting of Stockholders on April 2, 2009, the
rights issued pursuant to the 2009 Rights Agreement will expire on the earliest of (a) the close
of business on March 5, 2019, (b) the time at which the rights are redeemed, (c) the time at
which the rights are exchanged, (d) the time at which the Companys board of directors determines
that a related provision in the Companys Restated Certificate of Incorporation is no longer
necessary, and (e) the close of business on the first day of a taxable year of the Company to
which the Companys board of directors determines that no tax benefits may be carried forward.
 22




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##### Table of Contents



KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 13.
    
    Stockholders Equity (continued)As of February 28, 2009, the Company was authorized to repurchase four million shares under a
board-approved stock repurchase program. The Company did not repurchase any of its common stock
under this program in the first quarter of 2009. The Company acquired $.6 million of common
stock in the first quarter of 2009, which were previously issued shares delivered to the Company
by employees to satisfy withholding taxes on the vesting of restricted stock awards. These
transactions are not considered repurchases under the share repurchase program.On February 9, 2009, in connection with the settlement of the derivative litigation described
above in Note 12. Legal Matters in the Notes to Consolidated Financial Statements in this Form
10-Q, the Companys former chairman and chief executive officer relinquished 1,379,594 shares of
restricted stock to the Company. These shares were transferred to the
Company and are reflected as treasury stock.During the quarter ended February 28, 2009, the Companys board of directors declared a cash
dividend of $.0625 per share of common stock, which was paid on February 19, 2009 to stockholders
of record on February 5, 2009.14.
    
    Recent Accounting PronouncementsIn December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised
2007), Business Combinations (SFAS No. 141(R)). SFAS No. 141(R) amends Statement of Financial
Accounting Standards No. 141, Business Combinations (SFAS No. 141), and provides revised
guidance for recognizing and measuring identifiable assets and goodwill acquired, liabilities
assumed, and any noncontrolling interest in the acquiree. It also provides disclosure
requirements to enable users of the financial statements to evaluate the nature and financial
effects of the business combination. SFAS No. 141(R) is effective for fiscal years beginning
after December 15, 2008 and is to be applied prospectively. The Company is currently evaluating
the potential impact of adopting SFAS No. 141(R) on its consolidated financial position and
results of operations.In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160,
Noncontrolling Interests in Consolidated Financial Statementsan amendment of ARB No. 51
(SFAS No. 160). SFAS No. 160 establishes accounting and reporting standards pertaining to
ownership interests in subsidiaries held by parties other than the parent, the amount of net
income attributable to the parent and to the noncontrolling interest, changes in a parents
ownership interest, and the valuation of any retained noncontrolling equity investment when a
subsidiary is deconsolidated. SFAS No. 160 also establishes disclosure requirements that clearly
identify and distinguish between the interests of the parent and the interests of the
noncontrolling owners. SFAS No. 160 is effective for fiscal years beginning on or after
December 15, 2008. The Company is currently evaluating the potential impact of adopting
SFAS No. 160 on its consolidated financial position and 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 No. EITF 03-6-1, Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating Securities (FSP
No. EITF 03-6-1). Under FSP No. 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 No. EITF 03-6-1 is effective for
 23




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##### Table of Contents



KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 14.
    
    Recent Accounting Pronouncements (continued)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 No. EITF 03-6-1 on its earnings per share.In December 2008, the FASB issued FASB Staff Position No. FAS 140-4 and FIN 46(R)-8, Disclosures
by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable
Interest Entities (FSP No. FAS 140-4 and FIN 46(R)-8). FSP No. FAS 140-4 and FIN 46(R)-8
amends Statement of Financial Accounting Standards No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities (SFAS No. 140), to require
public entities to provide additional disclosures about transfers of financial assets. It also
amends FASB Interpretation No. 46(R), to require public enterprises, including sponsors that have
a variable interest in a VIE, to provide additional disclosures about their involvement with
VIEs. FSP No. FAS 140-4 and FIN 46(R)-8 is related to disclosure only and will not have an impact
on the Companys consolidated financial position or results of operations.15.
    
    Income TaxesThe Companys income tax benefit totaled $1.5 million for the three months ended February 28,
2009, compared to income tax expense of $.3 million for the three months ended February 29, 2008.
The Companys effective income tax benefit rate was 2.5% in the first quarter of 2009 compared
to an effective income tax expense rate of .1% for the first quarter of 2008. The difference in
the Companys effective tax rate for the three months ended February 28, 2009 compared to the
year-earlier quarter resulted primarily from the reversal of a $1.8 million liability for
unrecognized tax benefits based on the current status of federal and state audits.In accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes (SFAS No. 109), the Company evaluates its deferred tax assets quarterly to determine if
valuation allowances are required. SFAS No. 109 requires that companies assess whether valuation
allowances should be established based on the consideration of all available evidence using a
more likely than not standard. To the extent the Company generates taxable income in the
future to utilize these tax benefits, the Company would expect to reverse the valuation allowance
and decrease its effective tax rate on future income. However, to the extent the Company
generates future operating losses, it would be required to increase the valuation allowance on
its net deferred tax assets and its income tax provision would be adversely affected. During the
three months ended February 28, 2009, the Company recorded a valuation allowance of $22.7 million
against the net deferred tax assets generated from the net loss during the period. During the
three months ended February 29, 2008, the Company recorded a similar valuation allowance of
$100.0 million against net deferred tax assets. The Companys net deferred tax assets totaled
$1.1 million at both February 28, 2009 and November 30, 2008. The deferred tax asset valuation
allowance increased to $879.8 million at February 28, 2009 from $878.8 million at November 30,
2008. This increase reflected the net impact of the $22.7 million valuation allowance recorded
during the quarter, offset by a reduction of deferred tax assets due to the forfeiture of certain
equity-based awards.During the first quarter of 2009, the Company had $3.3 million of additions and $5.1 million of
reductions to the its total unrecognized tax benefits as a result of the current status of
federal and state audits. The total amount of unrecognized tax benefits, including interest and
penalties, was $24.3 million as of February 28, 2009. The Company does not anticipate that total
unrecognized tax benefits will significantly increase or decrease during the twelve months from
this reporting date.The benefits of the Companys net operating losses, built-in losses and tax credits would be
reduced or potentially eliminated if the Company experienced an ownership change under Internal
Revenue Code Section 382 (Section 382). Based on an analysis performed under Section 382, as
of February 28, 2009, the Company does not believe it has experienced a change in ownership as
defined by Section 382 and, therefore, the net operating losses, built-in losses and tax credits
the Company has generated should not be subject to a Section 382 limitation.
 24




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##### Table of Contents



KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Supplemental Disclosure to Consolidated Statements of Cash Flows
  Three Months EndedFebruary 28, 
2009
    
    
    February 29, 
2008Summary of cash and cash equivalents:Homebuilding
    
    $
    1,020,911
    
    
    $
    1,316,949Financial services
    
    
    6,333
    
    
    
    11,623Total
    
    $
    1,027,244
    
    
    $
    1,328,572Supplemental disclosures of cash flow information:Interest paid, net of amounts capitalized
    
    $
    42,263
    
    
    $
    35,940Income taxes refunded
    
    
    (231,150
    )
    
    
    (105,885
    )Supplemental disclosures of noncash activities:Cost of inventories acquired through seller financing
    
    $
    5,069
    
    
    $
    Decrease in consolidated inventories not owned
    
    
    (7,902
    )
    
    
    (84,905
    )
 17.
    
    Supplemental Guarantor InformationThe Companys obligation to pay principal, premium, if any and interest under certain debt
instruments are guaranteed on a joint and several basis by certain of 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.
 25




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##### Table of Contents



KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Supplemental Guarantor Information (continued)
 
 KB Home
    
    
    Guarantor
    
    
    Non-Guarantor
    
    
    ConsolidatingCorporate
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Adjustments
    
    
    TotalRevenues
    
    $
    
    
    
    $
    253,831
    
    
    $
    53,530
    
    
    $
    
    
    
    $
    307,361Homebuilding:Revenues
    
    $
    
    
    
    $
    253,831
    
    
    $
    51,910
    
    
    $
    
    
    
    $
    305,741Construction and
land costs
    
    
    
    
    
    
    (239,783
    )
    
    
    (51,175
    )
    
    
    
    
    
    
    (290,958
    )Selling, general
and
administrative
expenses
    
    
    (9,324
    )
    
    
    (39,400
    )
    
    
    (12,451
    )
    
    
    
    
    
    
    (61,175
    )Operating loss
    
    
    (9,324
    )
    
    
    (25,352
    )
    
    
    (11,716
    )
    
    
    
    
    
    
    (46,392
    )Interest income
    
    
    2,993
    
    
    
    176
    
    
    
    344
    
    
    
    
    
    
    
    3,513Interest expense,
net of amounts
capitalized
    
    
    9,127
    
    
    
    (17,647
    )
    
    
    (132
    )
    
    
    
    
    
    
    (8,652
    )Equity in loss of
unconsolidated
joint ventures
    
    
    
    
    
    
    (7,470
    )
    
    
    (2,272
    )
    
    
    
    
    
    
    (9,742
    )Homebuilding
pretax income
(loss)
    
    
    2,796
    
    
    
    (50,293
    )
    
    
    (13,776
    )
    
    
    
    
    
    
    (61,273
    )Financial services
pretax income
    
    
    
    
    
    
    
    
    
    
    1,701
    
    
    
    
    
    
    
    1,701Total pretax income
(loss)
    
    
    2,796
    
    
    
    (50,293
    )
    
    
    (12,075
    )
    
    
    
    
    
    
    (59,572
    )Income tax benefit
(expense)
    
    
    (100
    )
    
    
    1,200
    
    
    
    400
    
    
    
    
    
    
    
    1,500Equity in net loss
of subsidiaries
    
    
    (60,768
    )
    
    
    
    
    
    
    
    
    
    
    60,768
    
    
    
    Net loss
    
    $
    (58,072
    )
    
    $
    (49,093
    )
    
    $
    (11,675
    )
    
    $
    60,768
    
    
    $
    (58,072
    )
 
 KB Home
    
    
    Guarantor
    
    
    Non-Guarantor
    
    
    ConsolidatingCorporate
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Adjustments
    
    
    TotalRevenues
    
    $
    
    
    
    $
    626,450
    
    
    $
    167,774
    
    
    $
    
    
    
    $
    794,224Homebuilding:Revenues
    
    $
    
    
    
    $
    626,450
    
    
    $
    164,858
    
    
    $
    
    
    
    $
    791,308Construction and land costs
    
    
    
    
    
    
    (685,882
    )
    
    
    (226,759
    )
    
    
    
    
    
    
    (912,641
    )Selling, general and administrative expenses
    
    
    (14,693
    )
    
    
    (74,230
    )
    
    
    (38,715
    )
    
    
    
    
    
    
    (127,638
    )Operating loss
    
    
    (14,693
    )
    
    
    (133,662
    )
    
    
    (100,616
    )
    
    
    
    
    
    
    (248,971
    )Interest income
    
    
    11,882
    
    
    
    1,073
    
    
    
    77
    
    
    
    
    
    
    
    13,032Interest expense, net of amounts capitalized
    
    
    18,226
    
    
    
    (8,679
    )
    
    
    (9,547
    )
    
    
    
    
    
    
    Equity in loss of unconsolidated joint
ventures
    
    
    
    
    
    
    (2,566
    )
    
    
    (37,312
    )
    
    
    
    
    
    
    (39,878
    )Homebuilding pretax income (loss)
    
    
    15,415
    
    
    
    (143,834
    )
    
    
    (147,398
    )
    
    
    
    
    
    
    (275,817
    )Financial services pretax income
    
    
    
    
    
    
    
    
    
    
    7,945
    
    
    
    
    
    
    
    7,945Total pretax income (loss)
    
    
    15,415
    
    
    
    (143,834
    )
    
    
    (139,453
    )
    
    
    
    
    
    
    (267,872
    )Income tax expense
    
    
    
    
    
    
    (150
    )
    
    
    (150
    )
    
    
    
    
    
    
    (300
    )Equity in net loss of subsidiaries
    
    
    (283,587
    )
    
    
    
    
    
    
    
    
    
    
    283,587
    
    
    
    Net loss
    
    $
    (268,172
    )
    
    $
    (143,984
    )
    
    $
    (139,603
    )
    
    $
    283,587
    
    
    $
    (268,172
    )
 26




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##### Table of Contents



KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Supplemental Guarantor Information (continued)
 
 KB Home
    
    
    Guarantor
    
    
    Non-Guarantor
    
    
    ConsolidatingCorporate
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Adjustments
    
    
    TotalAssetsHomebuilding:Cash and cash equivalents
    
    $
    883,285
    
    
    $
    19,380
    
    
    $
    118,246
    
    
    $
    
    
    
    $
    1,020,911Restricted cash
    
    
    111,208
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    111,208Receivables
    
    
    16,151
    
    
    
    127,118
    
    
    
    17,762
    
    
    
    
    
    
    
    161,031Inventories
    
    
    
    
    
    
    1,761,212
    
    
    
    260,553
    
    
    
    
    
    
    
    2,021,765Investments in unconsolidated joint ventures
    
    
    
    
    
    
    174,993
    
    
    
    
    
    
    
    
    
    
    
    174,993Other assets
    
    
    79,471
    
    
    
    14,056
    
    
    
    2,055
    
    
    
    
    
    
    
    95,5821,090,115
    
    
    
    2,096,759
    
    
    
    398,616
    
    
    
    
    
    
    
    3,585,490Financial services
    
    
    
    
    
    
    
    
    
    
    52,531
    
    
    
    
    
    
    
    52,531Investments in subsidiaries
    
    
    (9,589
    )
    
    
    
    
    
    
    
    
    
    
    9,589
    
    
    
    Total assets
    
    $
    1,080,526
    
    
    $
    2,096,759
    
    
    $
    451,147
    
    
    $
    9,589
    
    
    $
    3,638,021Liabilities and stockholders equityHomebuilding:Accounts payable, accrued expenses and
other liabilities
    
    $
    148,824
    
    
    $
    779,367
    
    
    $
    195,360
    
    
    $
    
    
    
    $
    1,123,551Mortgages and notes payable
    
    
    1,645,374
    
    
    
    92,594
    
    
    
    
    
    
    
    
    
    
    
    1,737,9681,794,198
    
    
    
    871,961
    
    
    
    195,360
    
    
    
    
    
    
    
    2,861,519Financial services
    
    
    
    
    
    
    
    
    
    
    8,841
    
    
    
    
    
    
    
    8,841Intercompany
    
    
    (1,481,333
    )
    
    
    1,274,672
    
    
    
    206,661
    
    
    
    
    
    
    
    Stockholders equity
    
    
    767,661
    
    
    
    (49,874
    )
    
    
    40,285
    
    
    
    9,589
    
    
    
    767,661Total liabilities and stockholders equity
    
    $
    1,080,526
    
    
    $
    2,096,759
    
    
    $
    451,147
    
    
    $
    9,589
    
    
    $
    3,638,021
  KB Home
    
    
    Guarantor
    
    
    Non-Guarantor
    
    
    ConsolidatingCorporate
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Adjustments
    
    
    TotalAssetsHomebuilding:Cash and cash equivalents
    
    $
    987,057
    
    
    $
    25,067
    
    
    $
    123,275
    
    
    $
    
    
    
    $
    1,135,399Restricted cash
    
    
    115,404
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    115,404Receivables
    
    
    218,600
    
    
    
    126,713
    
    
    
    12,406
    
    
    
    
    
    
    
    357,719Inventories
    
    
    
    
    
    
    1,748,526
    
    
    
    358,190
    
    
    
    
    
    
    
    2,106,716Investments in unconsolidated joint ventures
    
    
    
    
    
    
    176,290
    
    
    
    1,359
    
    
    
    
    
    
    
    177,649Other assets
    
    
    83,028
    
    
    
    13,954
    
    
    
    2,279
    
    
    
    
    
    
    
    99,2611,404,089
    
    
    
    2,090,550
    
    
    
    497,509
    
    
    
    
    
    
    
    3,992,148Financial services
    
    
    
    
    
    
    
    
    
    
    52,152
    
    
    
    
    
    
    
    52,152Investments in subsidiaries
    
    
    51,848
    
    
    
    
    
    
    
    
    
    
    
    (51,848
    )
    
    
    Total assets
    
    $
    1,455,937
    
    
    $
    2,090,550
    
    
    $
    549,661
    
    
    $
    (51,848
    )
    
    $
    4,044,300Liabilities and stockholders equityHomebuilding:Accounts payable, accrued expenses and
other liabilities
    
    $
    190,455
    
    
    $
    786,717
    
    
    $
    285,519
    
    
    $
    
    
    
    $
    1,262,691Mortgages and notes payable
    
    
    1,845,169
    
    
    
    96,368
    
    
    
    
    
    
    
    
    
    
    
    1,941,5372,035,624
    
    
    
    883,085
    
    
    
    285,519
    
    
    
    
    
    
    
    3,204,228Financial services
    
    
    
    
    
    
    
    
    
    
    9,467
    
    
    
    
    
    
    
    9,467Intercompany
    
    
    (1,410,292
    )
    
    
    1,207,465
    
    
    
    202,827
    
    
    
    
    
    
    
    Stockholders equity
    
    
    830,605
    
    
    
    
    
    
    
    51,848
    
    
    
    (51,848
    )
    
    
    830,605Total liabilities and stockholders equity
    
    $
    1,455,937
    
    
    $
    2,090,550
    
    
    $
    549,661
    
    
    $
    (51,848
    )
    
    $
    4,044,300
 27




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##### Table of Contents



KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Supplemental Guarantor Information (continued)
 
 KB Home
    
    
    Guarantor
    
    
    Non-Guarantor
    
    
    ConsolidatingCorporate
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Adjustments
    
    
    TotalCash flows from operating activities:Net loss
    
    $
    (58,072
    )
    
    $
    (49,093
    )
    
    $
    (11,675
    )
    
    $
    60,768
    
    
    $
    (58,072
    )Adjustments to reconcile net loss to net cash provided
(used) by operating activities:Inventory impairments and land option contract
abandonments
    
    
    
    
    
    
    20,885
    
    
    
    3,785
    
    
    
    
    
    
    
    24,670Changes in assets and liabilities:Receivables
    
    
    202,449
    
    
    
    (405
    )
    
    
    (4,595
    )
    
    
    
    
    
    
    197,449Inventories
    
    
    
    
    
    
    (36,367
    )
    
    
    93,815
    
    
    
    
    
    
    
    57,448Accounts payable, accrued expenses and other liabilities
    
    
    (42,783
    )
    
    
    515
    
    
    
    (90,748
    )
    
    
    
    
    
    
    (133,016
    )Other, net
    
    
    4,619
    
    
    
    8,913
    
    
    
    1,508
    
    
    
    
    
    
    
    15,040Net cash provided (used) by operating activities
    
    
    106,213
    
    
    
    (55,552
    )
    
    
    (7,910
    )
    
    
    60,768
    
    
    
    103,519Cash flows from investing activities:Change in restricted cash
    
    
    4,196
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,196Investments in unconsolidated joint ventures
    
    
    
    
    
    
    (6,838
    )
    
    
    (910
    )
    
    
    
    
    
    
    (7,748
    )Sales (purchases) of property and equipment, net
    
    
    
    
    
    
    (885
    )
    
    
    64
    
    
    
    
    
    
    
    (821
    )Net cash provided (used) by investing activities
    
    
    4,196
    
    
    
    (7,723
    )
    
    
    (846
    )
    
    
    
    
    
    
    (4,373
    )Cash flows from financing activities:Repayment of senior subordinated notes
    
    
    (200,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (200,000
    )Payments on mortgages, land contracts and other loans
    
    
    
    
    
    
    (8,843
    )
    
    
    
    
    
    
    
    
    
    
    (8,843
    )Issuance of common stock under employee stock plans
    
    
    795
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    795Payments of cash dividends
    
    
    (4,756
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,756
    )Repurchases of common stock
    
    
    (616
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (616
    )Intercompany
    
    
    18,777
    
    
    
    66,431
    
    
    
    (24,440
    )
    
    
    (60,768
    )
    
    
    Net cash provided (used) by financing activities
    
    
    (185,800
    )
    
    
    57,588
    
    
    
    (24,440
    )
    
    
    (60,768
    )
    
    
    (213,420
    )Net decrease in cash and cash equivalents
    
    
    (75,391
    )
    
    
    (5,687
    )
    
    
    (33,196
    )
    
    
    
    
    
    
    (114,274
    )Cash and cash equivalents at beginning of period
    
    
    987,057
    
    
    
    25,067
    
    
    
    129,394
    
    
    
    
    
    
    
    1,141,518Cash and cash equivalents at end of period
    
    $
    911,666
    
    
    $
    19,380
    
    
    $
    96,198
    
    
    $
    
    
    
    $
    1,027,244
 28




---



##### Table of Contents



KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Supplemental Guarantor Information (continued)
 
 KB Home
    
    
    Guarantor
    
    
    Non-Guarantor
    
    
    ConsolidatingCorporate
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Adjustments
    
    
    TotalCash flows from operating activities:Net loss
    
    $
    (268,172
    )
    
    $
    (143,984
    )
    
    $
    (139,603
    )
    
    $
    283,587
    
    
    $
    (268,172
    )Adjustments to reconcile net loss to net cash provided
(used) by operating activities:Inventory impairments and land option contract
abandonments
    
    
    
    
    
    
    110,605
    
    
    
    76,970
    
    
    
    
    
    
    
    187,575Changes in assets and liabilities:Receivables
    
    
    103,508
    
    
    
    5,793
    
    
    
    (16,716
    )
    
    
    
    
    
    
    92,585Inventories
    
    
    
    
    
    
    160,896
    
    
    
    25,136
    
    
    
    
    
    
    
    186,032Accounts payable, accrued expenses and other liabilities
    
    
    (50,773
    )
    
    
    (150,469
    )
    
    
    (27,727
    )
    
    
    
    
    
    
    (228,969
    )Other, net
    
    
    7,562
    
    
    
    4,075
    
    
    
    41,658
    
    
    
    
    
    
    
    53,295Net cash provided (used) by operating activities
    
    
    (207,875
    )
    
    
    (13,084
    )
    
    
    (40,282
    )
    
    
    283,587
    
    
    
    22,346Cash flows from investing activities:Investments in unconsolidated joint ventures
    
    
    
    
    
    
    (9,887
    )
    
    
    (14,562
    )
    
    
    
    
    
    
    (24,449
    )Sales (purchases) of property and equipment, net
    
    
    6,069
    
    
    
    (710
    )
    
    
    17
    
    
    
    
    
    
    
    5,376Net cash provided (used) by investing activities
    
    
    6,069
    
    
    
    (10,597
    )
    
    
    (14,545
    )
    
    
    
    
    
    
    (19,073
    )Cash flows from financing activities:Payments on mortgages, land contracts and other loans
    
    
    
    
    
    
    (353
    )
    
    
    
    
    
    
    
    
    
    
    (353
    )Issuance of common stock under employee stock plans
    
    
    1,822
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,822Payments of cash dividends
    
    
    (19,355
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (19,355
    )Repurchases of common stock
    
    
    (557
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (557
    )Intercompany
    
    
    302,057
    
    
    
    (25,676
    )
    
    
    7,206
    
    
    
    (283,587
    )
    
    
    Net cash provided (used) by financing activities
    
    
    283,967
    
    
    
    (26,029
    )
    
    
    7,206
    
    
    
    (283,587
    )
    
    
    (18,443
    )Net increase (decrease) in cash and cash equivalents
    
    
    82,161
    
    
    
    (49,710
    )
    
    
    (47,621
    )
    
    
    
    
    
    
    (15,170
    )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
    
    $
    1,186,590
    
    
    $
    21,809
    
    
    $
    120,173
    
    
    $
    
    
    
    $
    1,328,572
 29




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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
  Three Months EndedFebruary 28,
    
    
    February 29,2009
    
    
    2008Revenues:Homebuilding
    
    $
    305,741
    
    
    $
    791,308Financial services
    
    
    1,620
    
    
    
    2,916Total
    
    $
    307,361
    
    
    $
    794,224Pretax income (loss):Homebuilding
    
    $
    (61,273
    )
    
    $
    (275,817
    )Financial services
    
    
    1,701
    
    
    
    7,945Total pretax loss
    
    
    (59,572
    )
    
    
    (267,872
    )Income tax benefit (expense)
    
    
    1,500
    
    
    
    (300
    )Net loss
    
    $
    (58,072
    )
    
    $
    (268,172
    )Basic and diluted loss per share
    
    $
    (.75
    )
    
    $
    (3.47
    )
    30




---



##### Table of Contents



The Open Series The Open Series
 HOMEBUILDING
  31




---



##### Table of Contents



Three Months EndedFebruary 28,
    
    
    February 29,2009
    
    
    2008Revenues:Housing
    
    $
    304,454
    
    
    $
    726,714Land
    
    
    1,287
    
    
    
    64,594Total
    
    
    305,741
    
    
    
    791,308Costs and expenses:Construction and land costsHousing
    
    
    289,423
    
    
    
    771,993Land
    
    
    1,535
    
    
    
    140,648Total
    
    
    290,958
    
    
    
    912,641Selling, general and administrative expenses
    
    
    61,175
    
    
    
    127,638Total
    
    
    352,133
    
    
    
    1,040,279Operating loss
    
    $
    (46,392
    )
    
    $
    (248,971
    )
 Homes delivered
    
    
    1,445
    
    
    
    2,928Average selling price
    
    $
    210,700
    
    
    $
    248,200Housing gross margin
    
    
    4.9
    %
    
    
    -6.2
    %Selling, general and administrative expenses as a percent of
housing revenues
    
    
    20.1
    %
    
    
    17.6
    %Operating loss as a percent of homebuilding revenues
    
    
    -15.2
    %
    
    
    -31.5
    %
  Homes Delivered
    
    Net Orders
    
    Cancellation RatesSegment
    
    2009
    
    2008
    
    2009
    
    2008
    
    2009
    
    2008West Coast
    
    
    351
    
    
    
    614
    
    
    
    459
    
    
    
    539
    
    
    
    26
    %
    
    
    41
    %Southwest
    
    
    267
    
    
    
    740
    
    
    
    222
    
    
    
    186
    
    
    
    27
    
    
    
    56Central
    
    
    447
    
    
    
    899
    
    
    
    622
    
    
    
    231
    
    
    
    29
    
    
    
    70Southeast
    
    
    380
    
    
    
    675
    
    
    
    524
    
    
    
    493
    
    
    
    28
    
    
    
    50Total
    
    
    1,445
    
    
    
    2,928
    
    
    
    1,827
    
    
    
    1,449
    
    
    
    28
    %
    
    
    53
    %Unconsolidated
joint ventures
    
    
    23
    
    
    
    75
    
    
    
    28
    
    
    
    48
    
    
    
    48
    %
    
    
    45
    %
 32




---



##### Table of Contents



Backlog  ValueBacklog  Homes
    
    
    (In Thousands)Segment
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008West Coast
    
    
    689
    
    
    
    1,115
    
    
    $
    214,997
    
    
    $
    438,505Southwest
    
    
    303
    
    
    
    752
    
    
    
    57,169
    
    
    
    179,114Central
    
    
    892
    
    
    
    1,343
    
    
    
    153,538
    
    
    
    236,725Southeast
    
    
    767
    
    
    
    1,633
    
    
    
    134,135
    
    
    
    376,872Total
    
    
    2,651
    
    
    
    4,843
    
    
    $
    559,839
    
    
    $
    1,231,216Unconsolidated joint ventures
    
    
    76
    
    
    
    182
    
    
    $
    30,180
    
    
    $
    77,196
 Revenues
   Operating Loss
  33




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##### Table of Contents



Interest Income
 Interest Expense, Net of Amounts Capitalized
 Equity in Loss of Unconsolidated Joint Ventures
 34




---



##### Table of Contents



HOMEBUILDING SEGMENTS
  Three Months EndedFebruary 28,
    
    
    February 29,2009
    
    
    2008West Coast:Revenues
    
    $
    108,520
    
    
    $
    241,076Construction and land costs
    
    
    (99,625
    )
    
    
    (279,615
    )Selling, general and administrative expenses
    
    
    (16,162
    )
    
    
    (28,780
    )Operating loss
    
    
    (7,267
    )
    
    
    (67,319
    )Other, net
    
    
    (5,055
    )
    
    
    (4,668
    )Pretax loss
    
    $
    (12,322
    )
    
    $
    (71,987
    )Southwest:Revenues
    
    $
    52,273
    
    
    $
    241,847Construction and land costs
    
    
    (57,026
    )
    
    
    (272,291
    )Selling, general and administrative expenses
    
    
    (7,146
    )
    
    
    (21,653
    )Operating loss
    
    
    (11,899
    )
    
    
    (52,097
    )Other, net
    
    
    (8,839
    )
    
    
    (3,330
    )Pretax loss
    
    $
    (20,738
    )
    
    $
    (55,427
    )
 Central:Revenues
    
    $
    77,645
    
    
    $
    151,889Construction and land costs
    
    
    (67,672
    )
    
    
    (152,763
    )Selling, general and administrative expenses
    
    
    (12,855
    )
    
    
    (26,374
    )Operating loss
    
    
    (2,882
    )
    
    
    (27,248
    )Other, net
    
    
    (3,274
    )
    
    
    (2,694
    )Pretax loss
    
    $
    (6,156
    )
    
    $
    (29,942
    )Southeast:Revenues
    
    $
    67,303
    
    
    $
    156,496Construction and land costs
    
    
    (64,368
    )
    
    
    (205,084
    )Selling, general and administrative expenses
    
    
    (11,949
    )
    
    
    (30,913
    )Operating loss
    
    
    (9,014
    )
    
    
    (79,501
    )Other, net
    
    
    (4,811
    )
    
    
    (24,611
    )Pretax loss
    
    $
    (13,825
    )
    
    $
    (104,112
    )
 West Coast
 35




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##### Table of Contents



Southwest
  Central
  Southeast
 36




---



##### Table of Contents



FINANCIAL SERVICES
  Three Months EndedFebruary 28,
    
    
    
    
    
    
    February 29,2009
    
    
    
    
    
    
    2008Revenues
    
    $
    1,620
    
    
    
    
    
    
    $
    2,916Expenses
    
    
    (860
    )
    
    
    
    
    
    
    (1,119
    )Equity in income of unconsolidated joint venture
    
    
    941
    
    
    
    
    
    
    
    6,148Pretax income
    
    $
    1,701
    
    
    
    
    
    
    $
    7,945Total originations (a):Loans
    
    
    1,099
    
    
    
    
    
    
    
    2,511Principal
    
    $
    205,011
    
    
    
    
    
    
    $
    533,575Retention rate
    
    
    78
    %
    
    
    
    
    
    
    79
    %Loans sold to third parties (a):Loans
    
    
    1,112
    
    
    
    
    
    
    
    3,564Principal
    
    $
    210,267
    
    
    
    
    
    
    $
    766,174
 
 (a)
    
    Loan originations and sales occur within Countrywide KB Home Loans. 37




---



##### Table of Contents



Revenues
 Expenses
 Equity in Income of Unconsolidated Joint Venture
 INCOME TAXES
   38




---



##### Table of Contents



Liquidity and Capital Resources
 Overview.
  Capital Resources.
       39




---



##### Table of Contents



February 28, 2009CovenantFinancial Covenant
    
    Requirement
    
    ActualMinimum consolidated tangible net worth
    
    $278.2 million
    
    $765.1 millionCoverage Ratio
    
    
    (a
    )
    
    
    (a
    )Leverage Ratio (b)
    
    
    <1.00
    
    
    
    .44Investment in subsidiaries and joint ventures
as a percent of Adjusted Consolidated
Tangible Net Worth
    
    
    <35
    %
    
    
    15
    %Borrowing base in excess of senior indebtedness
(as defined)
    
    Greater than zero
    
    $654.2 million
 
 (a)
    
    Our Coverage Ratio of negative .08 was less than 1.00 to 1.00 as of February 28, 2009.
With our Leverage Ratio as of November 30, 2008 below 1.00 to 1.00, we maintained an
Interest Reserve Account to remain in compliance with the terms of the Credit Facility. The
Interest Reserve Account had a balance of $111.2 million at February 28, 2009. With our
Leverage Ratio as of February 28, 2009 below 1.00 to 1.00, we will continue to maintain the
Interest Reserve Account in the second quarter of 2009, but the balance is expected to be
reduced to $102.2 million by the end of that period.(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.  November 30, 2008CovenantFinancial Covenant
    
    Requirement
    
    ActualMinimum consolidated tangible net worth
    
    $278.2 million
    
    $827.9 millionCoverage Ratio
    
    
    (a
    )
    
    
    (a
    )Leverage Ratio
    
    
    <1.00
    
    
    
    .47Investment in subsidiaries and joint ventures
as a percent of Adjusted Consolidated
Tangible Net Worth
    
    
    <35
    %
    
    
    15
    %Borrowing base in excess of senior indebtedness
(as defined)
    
    Greater than zero
    
    $825.0 million
 
 (a)
    
    Our Coverage Ratio of negative .27 was less than 1.00 to 1.00 as of November 30, 2008.
With our Leverage Ratio as of August 31, 2008 below 1.00 to 1.00, we established an Interest
Reserve Account of $115.4 million in the fourth quarter of 2008 to remain in compliance with
the terms of the Credit Facility. The Interest Reserve Account had a balance of $115.4
million at November 30, 2008.  40




---



##### Table of Contents



Consolidated Cash Flows.
 Operating Activities
  41




---



##### Table of Contents



Investing Activities
 Financing Activities
  Shelf Registration Statement.
 Share
Repurchase Program.
  Off-Balance Sheet Arrangements, Contractual Obligations and Commercial Commitments
   42




---



##### Table of Contents



43




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##### Table of Contents



44




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##### Table of Contents



Critical Accounting Policies
  Inventory Impairments and Abandonments
     45




---



##### Table of Contents



Warranty Costs
  Insurance
  46




---



##### Table of Contents



Outlook
  The Open Series The Open
Series
     47




---



##### Table of Contents



The Open Series The Open Series
   Forward-Looking Statements
   48




---



##### Table of Contents



49




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures About Market Risk
   Weighted AverageFiscal Year of Expected Maturity
    
    Fixed Rate Debt
    
    
    Interest Rate2009
    
    $
    
    
    
    
    
    %2010
    
    
    
    
    
    
    2011
    
    
    349,001
    
    
    
    6.42012
    
    
    
    
    
    
    2013
    
    
    
    
    
    
    Thereafter
    
    
    1,296,373
    
    
    
    6.3Total
    
    $
    1,645,374
    
    
    
    6.3
    %Fair value at February 28, 2009
    
    $
    1,281,901
  
 Item 4. Controls and Procedures
  50




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##### Table of Contents



PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
 Derivative Litigation
   ERISA Litigation
 Bagley et al., v. KB Home, et al.
  Other Matters
  51




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##### Table of Contents



Item 1A. Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  MaximumTotal Number of
    
    
    Number of SharesShares Purchased
    
    
    That May Yet beTotal Number
    
    
    
    
    
    
    as Part of Publicly
    
    
    Purchased Underof Shares
    
    
    Average Price Paid
    
    
    Announced Plans
    
    
    the Plans orPeriod
    
    Purchased
    
    
    per Share
    
    
    or Programs
    
    
    ProgramsDecember 1  31
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    4,000,000January 1  31
    
    
    48,486
    
    
    
    12.72
    
    
    
    
    
    
    
    4,000,000February 1  28
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,000,000Total
    
    
    48,486
    
    
    $
    12.72
    
    
    
    
  
 Item 4. Submission of Matters to a Vote of Security Holders
  (1)
    
    By receiving a majority of votes cast for their election, each nominee listed below was
elected as a director with the respective votes set forth opposite the directors name:
 Nominee
    
    For
    
    Against
    
    AbstainMr. Stephen F. Bollenbach
    
    
    72,801,253
    
    
    
    4,746,545
    
    
    
    164,890Mr. Timothy W. Finchem
    
    
    72,730,168
    
    
    
    4,806,739
    
    
    
    175,781Mr. Kenneth M. Jastrow, II
    
    
    72,813,088
    
    
    
    4,723,616
    
    
    
    175,984Mr. Robert L. Johnson
    
    
    76,685,005
    
    
    
    843,252
    
    
    
    184,431Ms. Melissa Lora
    
    
    75,207,310
    
    
    
    2,330,817
    
    
    
    174,561Mr. Michael G. McCaffrey
    
    
    72,721,427
    
    
    
    4,811,948
    
    
    
    179,313Mr. Jeffrey T. Mezger
    
    
    76,630,988
    
    
    
    893,283
    
    
    
    188,417
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(2)
    
    A majority of the shares of our common stock present or represented at the meeting and
entitled to vote on the matter approved the ratification of the appointment of Ernst & Young
LLP as our independent registered public accounting firm for the fiscal year ending November
30, 2009, with 77,232,383 votes for ratification, 420,273 votes against and 60,032 votes
abstaining.
 (3)
    
    A majority of the outstanding shares of our common stock approved the adoption of the
Protective Amendment to our Restated Certificate of Incorporation, with 74,184,892 votes for
adoption, 3,422,560 votes against and 105,236 votes abstaining.
 (4)
    
    A majority of the shares of our common stock present or represented at the meeting and
entitled to vote on the matter approved the Successor Rights Plan, with 45,559,873 votes for
approval, 23,499,871 votes against and 185,948 votes abstaining.
 (5)
    
    A majority of the shares of our common stock present or represented at the meeting and
entitled to vote on the matter approved the KB Home Annual Incentive Plan for Executive
Officers, with 75,061,858 votes for approval, 2,483,180 votes against and 167,650 votes
abstaining.
 (6)
    
    A majority of the shares of our common stock present or represented at the meeting and
entitled to vote on the matter did not approve a stockholder proposal relating to executive
compensation, with 24,600,460 votes for the proposal, 43,927,358 votes against and 717,874
votes abstaining.
 (7)
    
    A majority of the shares of our common stock present or represented at the meeting and
entitled to vote on the matter did not approve a stockholder proposal relating to an
advisory vote on named executive officer compensation with 30,530,501 votes for the
proposal, 28,410,114 votes against and 10,305,077 votes abstaining.
 (8)
    
    A majority of the shares of our common stock present or represented at the meeting and
entitled to vote on the matter did not approve a stockholder proposal relating to health
care reform principles, with 2,482,646 votes for the proposal, 51,106,590 votes against and
15,656,456 votes abstaining.
 
 Item 6. Exhibits
 Exhibits
 3.4
    
    Restated Certificate of Incorporation, as amended, filed as an exhibit to the Companys
Current Report on Form 8-K dated April 7, 2009, is incorporated by reference herein.10.51
    
    KB Home Annual Incentive Plan for Executive Officers, filed as Attachment C to the
Companys Proxy Statement on Schedule 14A for the 2009 Annual Meeting of Stockholders, is
incorporated by reference herein.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.
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SIGNATURES
  KB HOMERegistrantDated April 9, 2009

    
    /s/ JEFFREY T. MEZGERJeffrey T. Mezger
President and Chief Executive Officer
(Principal Executive Officer)Dated April 9, 2009
    
    /s/ WILLIAM R. HOLLINGERWilliam R. Hollinger
Senior Vice President and Chief Accounting Officer
(Principal Financial Officer)
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##### Table of Contents



INDEX OF EXHIBITS
    
    Page of SequentiallyNumbered Pages
 3.4
    
    Restated Certificate of Incorporation, as amended, filed as an exhibit to the Companys
Current Report on Form 8-K dated April 7, 2009, is incorporated by reference herein.10.51
    
    KB Home Annual Incentive Plan for Executive Officers, filed as Attachment C to
the Companys Proxy Statement on Schedule 14A for the 2009 Annual Meeting
of Stockholders, is incorporated by reference herein.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.
    
    
    5631.2
    
    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.
    
    
    5732.1
    
    Certification of Jeffrey T. Mezger, President and Chief Executive Officer of KB Home 58
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
    
    
    5832.2
    
    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.
    
    
    59
 55