Employee Benefit and Stock Plans

Most of our employees are eligible to participate in the KB Home 401(k) Savings Plan (the “401(k) Plan”) under which we partially match employee contributions. The aggregate cost of the 401(k) Plan to us was $3.8 million in 2014, $3.3 million in 2013 and $2.6 million in 2012. The assets of the 401(k) Plan are held by a third-party trustee. The 401(k) Plan participants may direct the investment of their funds among one or more of the several fund options offered by the 401(k) Plan. Effective May 9, 2013, our common stock became one of the investment choices available to participants. Prior to May 9, 2013, a fund composed of units that generally reflected the market value of our common stock was one of the investment choices available to participants. As of November 30, 2014, 2013 and 2012, approximately 6%, 7% and 7%, respectively, of the 401(k) Plan’s net assets were invested in our common stock or in the former unitized fund, as applicable.

Approval of the KB Home 2014 Plan. At our Annual Meeting of Stockholders held on April 3, 2014, our stockholders approved the 2014 Plan, authorizing, among other things, the issuance for grants of stock-based awards to our employees, non-employee directors and consultants of up to 4,800,000 shares of our common stock, plus any shares that were available for grant as of April 3, 2014 under our 2010 Equity Incentive Plan (the “2010 Plan”), and any shares subject to then-outstanding awards under the 2010 Plan that subsequently expire or are canceled, forfeited, tendered or withheld to satisfy tax withholding obligations with respect to full value awards, or settled for cash, subject to the terms of the 2014 Plan. No new awards may be made under the 2010 Plan. As a result, as of April 3, 2014, the 2014 Plan became our only active equity compensation plan. Under the 2014 Plan, grants of stock options and other similar awards reduce the 2014 Plan’s share capacity on a 1-for-1 basis, and grants of restricted stock and other similar “full value” awards reduce the 2014 Plan’s share capacity on a 1.78-for-1 basis. In addition, subject to the 2014 Plan’s terms and conditions, a stock-based award may also be granted under the 2014 Plan to replace an outstanding award granted under another plan of ours (subject to the terms of such other plan) with terms substantially identical to those of the award being replaced.

The 2014 Plan provides that stock options and SARs may be awarded for periods of up to 10 years. The 2014 Plan also enables us to grant cash bonuses and other stock-based awards. As of November 30, 2014, 2013 and 2012, in addition to awards outstanding under the 2014 Plan, we had awards outstanding under the 2010 Plan and our Amended and Restated 1999 Incentive Plan, both of which provided for generally the same types of awards as the 2014 Plan. We also had awards outstanding under our Performance-Based Incentive Plan for Senior Management, which provided for generally the same types of awards as the 2014 Plan, but stock option awards granted under this plan had terms of up to 15 years.

Stock Options. Stock option transactions are summarized as follows:



	Years Ended November 30,
	2014				2013				2012
	Options		Weighted Average Exercise Price		Options		Weighted Average Exercise Price		Options		Weighted Average Exercise Price
Options outstanding at beginning of year	10,531,938		$	21.11	10,105,546		$	21.27	10,160,396		$	21.27
Granted	1,273,647		14.62		550,000		16.63		30,000		9.08
Exercised	(36,665	)	7.92		(118,208	)	13.46		(7,494	)	13.93
Cancelled	(33,878	)	20.25		(5,400	)	24.24		(77,356	)	17.96
Options outstanding at end of year	11,735,042		$	20.45	10,531,938		$	21.11	10,105,546		$	21.27
Options exercisable at end of year	10,103,739		$	21.32	9,414,935		$	22.26	8,533,224		$	23.76
Options available for grant at end of year	3,514,077				746,043				1,721,847

The total intrinsic value of stock options exercised was $.3 million for the year ended November 30, 2014, $1.2 million for the year ended November 30, 2013 and less than $.1 million for the year ended November 30, 2012. The aggregate intrinsic value of stock options outstanding was $35.8 million, $32.3 million and $18.2 million at November 30, 2014, 2013 and 2012, respectively. The intrinsic value of stock options exercisable was $31.7 million at November 30, 2014, $25.5 million at November 30, 2013, and $7.8 million at November 30, 2012. The intrinsic value of a stock option is the amount by which the market value of the underlying stock exceeds the price of the option.

Stock options outstanding and stock options exercisable at November 30, 2014 are summarized as follows:



	Options Outstanding				Options Exercisable
Range of Exercise Price	Options	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life	Options	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life
$ 6.32 to $11.05	1,651,500	$	6.39	6.9	1,646,500	$	6.38
$11.06 to $14.95	3,150,622	13.03		6.7	1,876,975	11.95
$14.96 to $19.90	2,684,134	17.29		5.3	2,331,478	17.40
$19.91 to $33.92	2,120,746	27.01		3.1	2,120,746	27.01
$33.93 to $69.63	2,128,040	39.80		3.4	2,128,040	39.80
$ 6.32 to $69.63	11,735,042	$	20.45	5.1	10,103,739	$	21.32	4.4

The weighted average grant date fair value of stock options granted in 2014, 2013 and 2012 was $5.07, $6.96 and $4.18, respectively. The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:



	Years Ended November 30,
	2014		2013		2012
Risk-free interest rate	1.6	%	1.3	%	.7	%
Expected volatility factor	41.0	%	52.3	%	65.6	%
Expected dividend yield	.7	%	.6	%	1.9	%
Expected term	5 years		5 years		5 years

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

Our stock-based compensation expense related to stock option grants was $3.0 million in 2014, $2.3 million in 2013 and $5.0 million in 2012. As of November 30, 2014, there was $6.2 million of total unrecognized stock-based compensation expense related to unvested stock option awards. This expense is expected to be recognized over a weighted average period of 1.8 years.

We record proceeds from the exercise of stock options as additions to common stock and paid-in capital. The tax shortfalls of $1.2 million in 2014, $.7 million in 2013 and $.3 million in 2012 resulting from the cancellation of stock awards were reflected in paid-in capital. In 2014, 2013 and 2012, in accordance with the cash flow classification requirements of ASC 718, the consolidated statement of cash flows reflected no excess tax benefit associated with the exercise of stock options.

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

Restricted stock transactions are summarized as follows:



	Years Ended November 30,
	2014				2013				2012
	Shares		Weighted Average per Share Grant Date Fair Value		Shares		Weighted Average per Share Grant Date Fair Value		Shares		Weighted Average per Share Grant Date Fair Value
Outstanding at beginning of year	219,628		$	16.23	229,724		$	15.81	338,912		$	15.03
Granted	219,835		15.34		88,000		17.50		207,617		16.23
Vested	(73,908	)	16.52		(91,312	)	15.18		(176,135	)	14.25
Cancelled	(10,261	)	18.55		(6,784	)	17.24		(140,670	)	15.44
Outstanding at end of year	355,294		$	15.81	219,628		$	16.23	229,724		$	15.81

As of November 30, 2014, we had $4.2 million of total unrecognized compensation cost related to restricted stock awards that will be recognized over a weighted average period of approximately three years.

On October 9, 2014, we granted PSUs to certain employees. Each PSU grant corresponds to a target amount of our common stock (the “Award Shares”). Each PSU entitles the recipient to receive a grant of between 0% and 200% of the recipient’s Award Shares, and will vest based on our achieving, over a three-year period commencing on December 1, 2014 and ending on November 30, 2017, specified levels of (a) adjusted cumulative earnings per share (b) average adjusted return on invested capital and (c) revenue growth performance relative to a peer group of high-production public homebuilding companies, subject to the recipient’s continued employment with us through and including the date on which the management development and compensation committee of our board of directors determines performance for each of the measures. The grant date fair value of each such PSU was $14.62.

On October 10, 2013, we granted PSUs to certain employees. Each PSU grant corresponds to a target amount of Award Shares. Each PSU entitles the recipient to receive a grant of between 0% and 200% of the recipient’s Award Shares, and will vest based on our achieving, over a three-year period commencing on December 1, 2013 and ending on November 30, 2016, specified levels of (a) average return on equity performance and (b) revenue growth performance relative to a peer group of high-production public homebuilding companies, subject to the recipient’s continued employment with us through and including the date on which the management development and compensation committee of our board of directors determines performance for each of the measures. The grant date fair value of each such PSU was $16.63.

On November 8, 2012, we granted PSUs to certain employees. Each PSU grant corresponds to a target amount of Award Shares. Each PSU entitles the recipient to receive a grant of between 0% and 200% of the recipient’s Award Shares, and will vest based on our achieving, over a three-year period commencing on December 1, 2012 and ending on November 30, 2015, specified levels of (a) average return on equity performance and (b) revenue growth performance relative to a peer group of high-production public homebuilding companies, subject to the recipient’s continued employment with us through and including the date on which the management development and compensation committee of our board of directors determines performance for each of the measures. The grant date fair value of each such PSU was $16.23.

PSU transactions are summarized as follows:



	Years Ended November 30,
	2014			2013			2012
	Shares	Weighted Average per Share Grant Date Fair Value		Shares	Weighted Average per Share Grant Date Fair Value		Shares	Weighted Average per Share Grant Date Fair Value
Outstanding at beginning of year	385,049	$	16.39	227,049	$	16.23	—	$	—
Granted	243,160	14.62		158,000	16.63		227,049	16.23
Vested	—	—		—	—		—	—
Cancelled	—	—		—	—		—	—
Outstanding at end of year	628,209	$	15.70	385,049	$	16.39	227,049	$	16.23

The number of shares of our common stock actually granted to a recipient, if any, when a PSU vests will depend on the degree of achievement of the applicable performance measures during the applicable three-year period. The PSUs have no dividend or voting rights during the performance period. Compensation cost for PSUs is initially estimated based on target performance achievement and adjusted as appropriate throughout the performance period. Accordingly, future compensation costs associated with outstanding PSUs may increase or decrease based on the probability of achievement with respect to the applicable performance measures. At November 30, 2014, we had $10.0 million of total unrecognized compensation cost related to unvested PSUs, which is expected to be recognized over a weighted-average period of approximately three years.

In 2008, we granted SARs to various employees. These cash-settled awards have been accounted for as liabilities in our consolidated financial statements. Each SAR represents a right to receive a cash payment equal to the positive difference, if any, between the grant price and the market value of a share of our common stock on the date of exercise. The SARs vested in equal annual installments over three years. At November 30, 2014, 2013 and 2012, we had 29,939 SARs outstanding, which are fully vested and will expire in July 2017.

We recognized total compensation expense of $6.1 million in 2014, $3.4 million in 2013 and $1.7 million in 2012 related to restricted stock, PSUs and SARs.

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

For financial reporting purposes, the Trust is consolidated with us, and therefore any dividend transactions between us and the Trust are eliminated. Acquired shares held by the Trust remain valued at the market price on the date of purchase and are shown as a reduction to stockholders’ equity in the consolidated balance sheets. The difference between the Trust share value and the market value on the date shares are released from the Trust is included in paid-in capital. Common stock held in the Trust is not considered outstanding in the computations of earnings (loss) per share. The Trust held 10,335,461 and 10,501,844 shares of common stock at November 30, 2014 and 2013, respectively. The trustee votes shares held by the Trust in accordance with voting directions from eligible employees, as specified in a trust agreement with the trustee.