CEO of KB Home resigns over options dating

Growing scandal also forces two others out

November 14, 2006|By Bloomberg News

LOS ANGELES -- KB Home, the fifth-largest U.S. homebuilder, said Chief Executive Officer Bruce Karatz has resigned, the latest among more than 50 officials to leave publicly traded companies in the widening scandal over stock-options backdating.

Human Resources head Gary Ray was fired and Chief Legal Officer Richard Hirst resigned, the company said Sunday. Karatz and Ray picked the grant dates under KB Home's option plan and Karatz will repay $13 million to cover gains he should not have received. Karatz was paid about $38 million last year, not including options, according CoreData Inc.

"Unfortunately, the resignations are only the end of a chapter, not the book," said Stephen East, an analyst with Susquehanna Financial Group LLP, in a report yesterday. "KB Home will still endure an investigation, as well as potential fines and lawsuits.'

Karatz is leaving as the end of a five-year U.S. housing boom swells unsold inventory. Shares have tumbled 40 percent this year, in part because of the continuing investigations. At least 176 U.S. companies have disclosed internal or government investigations into the timing of executives' stock-options awards.

KB Home in August started reviewing options awarded in 1999 to Karatz, 61. The company found that options awarded from 1998 to 2005 were dated incorrectly. Consequently, it may have to restate some earlier earnings reports. The incorrect option dating will result in a noncash compensation-related expense of as much as $50 million, KB Home said. None of KB Home's other top executives was involved in improper dating of options, the company said.

Karatz spent 34 years at KB Home and has been its only CEO since the company went public. He was also chairman and a director. He owned about 4.4 percent of the company's common stock as of February 2006, according to an SEC filing.

Karatz, who also is on the board of Honeywell International Inc. and Edison International, was awarded 250,000 stock options in fiscal 2005 at an exercise price of $62.34, according to the filing. They had a value $9.8 million if the stock price rose 5 percent a year during the option term. If the stock rose 10 percent a year, they would be worth $24.8 million, the filing said.

KB Home said in September that it expects its earnings per share to fall 11 percent to 16 percent this year.

Jeffrey Mezger, who has been responsible for the company's U.S. homebuilding operations, will succeed Karatz, KB Home said. Mezger, 51, was appointed chief operating officer in October 1999. He will also serve as president and be a company director.

Mezger's compensation excluding stock option grants last year was $12.8 million.

KB Home said it created the position of non-executive chairman and is conducting a search to fill the post. Until the job is filled, Temple-Inland Inc. CEO Kenneth Jastrow, a KB Home director since 2001, will assume the new position of lead director.

KB Home grew under Karatz's leadership. The company had 3,700 employees and revenue of $4.6 billion in 2001, according to Bloomberg data, compared with 6,700 employees and revenue of $9.4 billion last year.

Shares of KB Home rose 93 cents, or 2.1 percent, to close at $44.25 yesterday on the New York Stock Exchange.

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