The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. for interim financial information and the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted.

In our opinion, the accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) necessary to present fairly our consolidated financial position as of August 31, 2013, the results of our consolidated operations for the three months and nine months ended August 31, 2013 and 2012, and our consolidated cash flows for the nine months ended August 31, 2013 and 2012. The results of our consolidated operations for the three months and nine months ended August 31, 2013 are not necessarily indicative of the results to be expected for the full year due to seasonal variations in operating results and other factors. The consolidated balance sheet at November 30, 2012 has been taken from the audited consolidated financial statements as of that date. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended November 30, 2012, which are contained in our Annual Report on Form 10-K for that period.

Unless the context indicates otherwise, the terms “we,” “our,” and “us” used in this report refer to KB Home, a Delaware corporation, and its subsidiaries.

Use of Estimates. The accompanying unaudited consolidated financial statements have been prepared in conformity with GAAP and, therefore, include amounts based on informed estimates and judgments of management. Actual results could differ from these estimates.

Cash and Cash Equivalents and Restricted Cash. We consider all highly liquid short-term investments purchased with an original maturity of three months or less to be cash equivalents. Our cash equivalents totaled $260.8 million at August 31, 2013 and $396.3 million at November 30, 2012. The majority of our cash and cash equivalents were invested in money market funds and interest-bearing bank deposit accounts.

Restricted cash of $41.6 million at August 31, 2013 and $42.4 million at November 30, 2012 consisted of cash deposited with various financial institutions that was required as collateral for our cash-collateralized letter of credit facilities (“LOC Facilities”).

Earnings (Loss) Per Share. Basic and diluted earnings (loss) per share were calculated as follows (in thousands, except per share amounts):



	Nine Months Ended August 31,						Three Months Ended August 31,
	2013			2012			2013			2012
Numerator:
Net income (loss)	$	11,847		$	(66,677	)	$	27,278		$	3,261
Less: Distributed earnings allocated to nonvested restricted stock	(18		)	—			(6		)	(8		)
Less: Undistributed earnings allocated to nonvested restricted stock	(16		)	—			(73		)	(5		)
Numerator for basic earnings (loss) per share	11,813			(66,677		)	27,199			3,248
Effect of dilutive securities:
Interest expense and amortization of debt issuance costs associated with convertible senior notes, net of taxes	—			—			667			—
Add: Undistributed earnings allocated to nonvested restricted stock	16			—			73			5
Less: Undistributed earnings reallocated to nonvested restricted stock	(14		)	—			(65		)	(4		)
Numerator for diluted earnings (loss) per share	$	11,815		$	(66,677	)	$	27,874		$	3,249
Denominator:
Denominator for basic earnings (loss) per share — basic average shares outstanding	82,261			77,107			83,714			77,127
Effect of dilutive securities:
Share-based payments	2,028			—			1,931			231
Convertible senior notes	—			—			8,402			—
Denominator for diluted earnings (loss) per share — diluted average shares outstanding	84,289			77,107			94,047			77,358
Basic earnings (loss) per share	$	.14		$	(.86	)	$	.32		$	.04
Diluted earnings (loss) per share	$	.14		$	(.86	)	$	.30		$	.04

We compute earnings (loss) per share using the two-class method in accordance with Accounting Standards Codification Standards Topic No. 260, “Earnings Per Share.” The two-class method is an allocation of earnings between the holders of common stock and a company’s participating security holders. Our outstanding nonvested shares of restricted stock contain non-forfeitable rights to dividends and, therefore, are considered participating securities for purposes of computing earnings per share pursuant to the two-class method. We had no other participating securities at August 31, 2013 or 2012.

In the first quarter of 2013, we issued $230.0 million in aggregate principal amount of 1.375% convertible senior notes due 2019 (the “$230 Million Convertible Senior Notes”), which are initially convertible into shares of our common stock at a conversion rate of 36.5297 shares for each $1,000 principal amount of the notes. The impact of the $230 Million Convertible Senior Notes was excluded from the diluted earnings per share calculation for the nine months ended August 31, 2013 because the effect would have been antidilutive.

Outstanding stock options to purchase 5.2 million shares of common stock were excluded from the diluted earnings per share calculation for the three months and nine months ended August 31, 2013 and outstanding stock options to purchase 8.5 million shares of common stock were excluded from the diluted earnings per share calculation for the three months ended August 31, 2012 because their effect would have been antidilutive. All outstanding stock options were excluded from the diluted loss per share calculation for the nine months ended August 31, 2012 because their effect would have been antidilutive or decreased the loss per share. Contingently issuable shares associated with outstanding performance-based restricted stock units (each a “PSU”) issued in November 2012 were not included in the earnings per share calculations for the three months and nine months ended August 31, 2013 as the vesting conditions had not been satisfied.

Comprehensive Income (Loss). Our comprehensive income for the three months ended August 31, 2013 and 2012 was $27.3 million and $3.3 million, respectively. For the nine months ended August 31, 2013, our comprehensive income was $11.8 million. For the nine months ended August 31, 2012, our comprehensive loss was $66.7 million. Our comprehensive income (loss) for each of the three-month and nine-month periods ended August 31, 2013 and 2012 was equal to our net income (loss) for the same periods. The accumulated other comprehensive loss in our consolidated balance sheets as of August 31, 2013 and November 30, 2012 was comprised solely of adjustments recorded directly to accumulated other comprehensive loss in accordance with Accounting Standards Codification Topic No. 715, “Compensation – Retirement Benefits” (“ASC 715”). Such adjustments are made annually as of November 30, when our benefit plan obligations are remeasured. ASC 715 requires an employer to recognize the funded status of defined postretirement benefit plans as an asset or liability on the balance sheet and requires any unrecognized prior service costs and actuarial gains/losses to be recognized in accumulated other comprehensive income (loss).

Revisions/Reclassifications. Effective December 1, 2012, we elected to reclassify closing cost allowances given to certain homebuyers from selling, general and administrative expenses to construction and land costs in our consolidated statements of operations. These allowances are used to cover a portion of non-recurring third-party fees, such as escrow fees, title costs, recording fees, finance processing fees, and prepaid property taxes and insurance costs that are charged to a homebuyer in connection with the closing of the sale of a home. This reclassification reduced both our housing gross profits and selling, general and administrative expenses for the three months ended August 31, 2013 and 2012 by $2.6 million and $3.4 million, respectively, which represented .5% and .8% of housing revenues, respectively. For the nine months ended August 31, 2013 and 2012, the reclassification reduced both our housing gross profits and selling, general and administrative expenses by $6.9 million and $11.3 million, respectively, which represented .5% and 1.2% of housing revenues, respectively. The reclassification had no impact on the homebuilding operating income (loss) or net income (loss) amounts previously reported. All prior period amounts have been reclassified to conform to the 2013 presentation.

The format of the condensed consolidating financial statements presented in Note 19. Supplemental Guarantor Information has been revised for the periods previously reported in our annual and quarterly reports to reflect (a) the transfer of certain of our subsidiaries from non-guarantor subsidiaries to guarantor subsidiaries as a result of such subsidiaries becoming guarantor subsidiaries during the second quarter of 2013 as further discussed in Note 12. Mortgages and Notes Payable, and (b) an elective reclassification of guarantor and non-guarantor intercompany receivables and payables with corresponding offsets in the consolidating adjustments column. These intercompany receivables and payables had previously been presented on a net basis. This revised presentation of the condensed consolidating financial statements in Note 19. Supplemental Guarantor Information had no impact or effect on our consolidated financial statements for any periods presented, including our consolidated balance sheets, consolidated statements of operations and consolidated statements of cash flows.