KB Home CEO Steps Down after Options Investigation

KB Home has announced the results of the company's options investigation and a series of changes in its executive leadership.

These actions are being taken in connection with the substantial completion of an independent investigation into the company's past stock option granting practices. The investigation has been led by members of the Audit and Compliance Committee of the company's board of directors, in conjunction with independent legal counsel from Irell & Manella LLP and accounting assistance from FTI Consulting.

The investigation has concluded that the company used incorrect measurement dates for financial reporting purposes for annual stock option grants during the period from 1998 to 2005. The company expects that the incremental non-cash compensation expense arising from these errors is not likely to exceed an aggregate of $50 million, spread over the vesting periods of the options in question. The errors may also require an increased tax provision. The company is evaluating using independent auditors, whether a restatement of certain previously-filed financial statements will be required.

The company has cooperated and will continue to cooperate with the inquiry of the SEC and other government agencies.

Bruce Karatz has retired as chairperson of the board, director and chief executive officer (CEO), effective immediately. Karatz has served the company for 34 years and had been the only CEO during its existence as a public company. The board expressed its appreciation for Karatz's contributions to the company and the value he has helped to create for shareholders, employees and customers of KB Home.

Karatz has voluntarily agreed to pay the company the difference between the initial strike price and the closing price on the new measurement date, for options he has exercised that were incorrectly priced. In addition, with respect to unexercised options, Karatz has agreed that each new strike price will be the closing price on the new measurement date. This is expected to involve an aggregate voluntary value transfer from Karatz to the company of approximately $13 million. The company and Karatz have not agreed upon the other terms of his departure from the company and have entered into an agreement under which both parties reserve all rights.

The Board has elected Jeffrey T. Mezger to succeed Karatz as president, CEO and a director. Mezger joined the company in 1993 and has been the company's executive vice president and chief operating officer since 1999. In this capacity Mezger has been responsible for U.S. homebuilding operations.

The board has created the position of independent non-executive chairperson of the KB Home Board and will conduct a search to fill this position. In the interim, the board created the position of lead director and elected Kenneth M. Jastrow II, a director of KB Home since 2001 and chairperson and CEO of Temple-Inland Inc., to serve as Lead Director until this position is filled.

"Jeff Mezger has been instrumental in KB Home's growth and success as the company's chief operating officer," said Jastrow on behalf of the board. "Jeff's broad-based expertise in all facets of the business, together with his outstanding management and leadership skills, are invaluable assets that will serve our company well. The board has full confidence in the company under Jeff's leadership."

The board has also terminated the employment of Gary A. Ray, the company's head of Human Resources.

Richard B. Hirst has resigned as executive vice president and chief legal officer, effective immediately.

Based on the report of the investigative committee, the board of directors concluded that Karatz and Ray selected grant dates under the company's stock option plans. Additionally, the investigative committee concluded that the board of directors, Mezger and the other current senior executives of the company had no role in establishing incorrect grant dates. The board also acted to create the positions of chief compliance officer and risk assessment officer. These officers will report within the management team and will also have reporting obligations to the Audit and Compliance Committee of the board. The company will conduct a search to fill these positions.