SECTION 1. Purpose
. The purpose of the 1986 Stock Option Plan
(the Plan) is to
promote the success of KB Home
(the Company) by providing a method whereby key employees of the
Company and its subsidiaries may be encouraged to invest in the Common Stock of the Company
(Common Stock) and thereby increase their proprietary interest in its business, encourage them to
remain in the employ of the Company or its subsidiaries, and increase their personal interest in
the continued success and progress of the Company.
SECTION 2. Administration. (a) The Board of Directors of the Company shall designate
a committee of not less than three Directors (the Committee). No individual shall become a
member of the Committee if he shall have been eligible to receive options to acquire shares of
capital stock of the Company or any subsidiary at any time during the 12-month period prior to his
becoming a member and no member of the Committee shall be eligible to receive options. The
Committee shall have full power and authority, subject to such orders or resolutions not
inconsistent with the provisions of the Plan as may from time to time be issued or adopted by the
Board of Directors, to grant to eligible persons options to purchase shares of Common Stock
pursuant to the provisions of the Plan, to fix the exercise price of such options, to interpret the
provisions of the Plan and any option agreements issued under the Plan, and to supervise the
administration of the Plan.
(b) All decisions made by the Committee pursuant to the provisions of the Plan and related
orders or resolutions of the Board of Directors shall be final, conclusive and binding on all
persons, including the Company, stockholders, employees and optionees.
SECTION 3. Stock Options. (a) Grant of Options. Stock options on shares of Common
Stock may be granted to participants by the Committee from time to time at its sole discretion.
Each option shall be evidenced by an option agreement which shall contain such terms and conditions
as may be approved by the Committee and shall be signed by an officer of the Company and the
optionee. Neither the execution of any option agreement nor the granting of any option evidenced
thereby shall constitute or be evidence of any agreement or other understanding, express or
implied, on the part of the Company or any Subsidiary to employ an individual for any specific
(b) Shares Subject to the Plan. (1) The shares to be delivered upon exercise of options
granted under the Plan may be made available from the authorized but unissued shares of the Company
or from shares reacquired by the Company, including shares purchased in the open market or in
(2) Subject to adjustments made pursuant to the provisions of paragraph (3) of this Section
3(b), (i) the aggregate number of shares to be delivered upon exercise of all options which may be
granted under the Plan shall not exceed 2,000,000 shares of Common Stock, $1.00 par value, of the
Company. If an option granted under the Plan shall expire or terminate for any
reason, the shares subject to, but not delivered under, such option shall be available for
other options to the same employee or other employees.
(3) In the event of any merger, reorganization, consolidation, recapitalization, stock
dividend, or other change in corporate structure affecting the Common Stock of the Company, the
Committee shall make appropriate proportional adjustments to any or all of the aggregate number of
shares which may be delivered under the Plan and the number and option price of shares subject to
the outstanding options granted under the Plan (provided that the number of shares subject to any
option shall always be a whole number). Any adjustment under this Section 3(b)(3) shall be made
only to the extent that such adjustment will not cause a violation of the requirements of Section
409A of the Internal Revenue Code.
SECTION 4. Eligibility and Extent of Participation. (a) The employees eligible to
receive options under the Plan shall consist of key employees of the Company and its subsidiaries.
For the purpose of the Plan, the term subsidiary means a corporation 50% or more of the voting
power of which is owned by the Company directly or indirectly through one or more subsidiaries.
(b) Subject to the limitations of the Plan, the Committee shall, after such consultation with
and consideration of the recommendations of management as the Committee considers desirable, select
from eligible employees those to be granted options and determine the time when each option shall
be granted and the number of shares subject to each option. Subject to the provisions of paragraph
(b) of Section 3, more than one option may be granted to the same person.
SECTION 5. Option Price. The price at which shares may be purchased upon exercise of
a particular option shall be as specified by the Committee, in its sole discretion, at the time
such option is granted and shall be set forth in the applicable option agreement.
SECTION 6. Exercise of Options. (a) Subject to the provisions of the Plan with
respect to death, retirement and termination of employment, the period during which each option may
be exercised shall be fixed by the Committee in its sole discretion at the time such option is
granted, but in no event shall such period expire later than fifteen years from the date the option
(b) No option granted under the Plan may be exercised until the expiration of one year of
continued employment by the Company or any of its subsidiaries or affiliates immediately following
the date the option is granted and, except as provided in Section 9, only during the continuance of
the optionees employment with the Company or any of its subsidiaries or affiliates. Subject to
the foregoing limitations and unless cancelled prior to exercise, each option shall be exercisable
in installments on a cumulative basis pursuant to the following schedule, subject to such different
or additional terms and conditions as the Committee may, in its sole discretion, specify in the
applicable option agreement or thereafter:
(1) 20% on and after the first anniversary of the grant of the option,
(2) an additional 20% on and after the second anniversary of the grant of the option,
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(3) an additional 20% on and after the third anniversary of the grant of the option,
(4) an additional 20% on and after the fourth anniversary of the grant of the option,
(5) the remaining 20% on and after the fifth anniversary of the grant of the option.
(c) The Committee may impose such other conditions with respect to the exercise of options,
including without limitation any conditions relating to the application of federal or state
securities laws, as it may deem necessary or advisable.
(d) No shares shall be delivered pursuant to any exercise of an option until payment in full
of the option price therefor is received by the Company. Such payment may be made in cash, or its
equivalent, or by exchanging shares of Company stock owned by the optionee (which are not the
subject of any pledge or other security interest), or by a combination of the foregoing, provided
that the combined value of all cash and cash equivalents and the fair market value of any such
stock so tendered to the Company, valued as of the date of such tender, is equal to such option
price. No optionee or the legal representative, legatee or distributee of an optionee, shall be
deemed to be a holder of any shares subject to any option prior to the issuance of such shares upon
exercise of such option.
(e) Notwithstanding the foregoing, unless otherwise specifically determined by the Committee
at the time of grant, all options theretofore granted and not fully exercisable shall become
exercisable in full upon the happening of any of the following events: (i) a tender or exchange
offer for Common Stock (other than such an offer by the Company) shall have been consummated and
following the consummation thereof the offeror (or any group, as defined in Section 13(d)(3) of
the Securities Exchange Act, of which the offeror is a member) shall be the owner of shares of the
Company with respect to which 25% or more of the total number of votes for the election of
directors may be cast, (ii) the shareholders of the Company shall have approved an agreement
providing for a transaction for the exchange of at least a majority of the outstanding Common Stock
for cash or property or securities (other than common stock of the Company) or for the sale or
other disposition of all or substantially all of the assets of the Company. Options which become
fully exercisable by reason of events specified in clauses (i) or (ii) shall remain exercisable for
90 days following the date on which they become so exercisable, after which they will revert to
being exercisable in accordance with their other terms, provided, however, that no option which has
previously been exercised or has expired or otherwise terminated shall become exercisable by virtue
of this paragraph nor shall this paragraph permit exercise of any option during the portion, if
any, of such 90 day period which follows the termination or expiration of any such option. As used
in this paragraph, the term offeror includes any person controlling, controlled by or under
common control with the offeror.
(f) Anything herein to the contrary notwithstanding, no shares shall be issued pursuant to any
exercise of an option to the extent that upon issuance of such shares the Company would cease to be
an includible corporation in an affiliated group of which KB Home
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is also an includible corporation (all as described in Section 1504 of the Internal Revenue
Code). To the extent that the Company shall be so precluded from issuing shares upon the exercise
of an option, the optionee shall be entitled to receive either (i) shares reacquired by the Company
as contemplated by Section 3(b) hereof, (ii) a cash sum equal to the amount by which the fair
market value of the shares which the optionee would otherwise be entitled to receive, valued as of
the date of such exercise, exceeds the option price of such shares, net of applicable withholding
taxes, plus any amount tendered by the optionee at the time of exercise, or (iii) a combination of
(i) and (ii), as the Committee shall determine in its sole discretion.
SECTION 7. Financing of Shares Upon Exercise. If requested by the optionee at the
time of exercise of an option, the Committee may in its sole discretion provide financing by the
Company to the optionee for the purchase of such shares. Unless otherwise determined by the
Committee in accordance with subparagraph 7(g), such financing shall be upon the following terms
(a) Amount. Loans may be made in an amount no greater than the lesser of (i) the
exercise price, or (ii) 50% of the fair market value of the Common Stock purchased on the date of
exercise of the option, or (iii) such amount as may be permitted by law or regulation.
(b) Interest Rate
. The principal amount of each such loan shall bear interest at a
floating rate equal to 1% over the minimum commercial lending rate charged by Morgan Guaranty Trust
Company of New York
, as the same may change from time to time, or any lesser rate required by
(c) Repayment. A payment on account of interest shall be due on the November 30
following the borrowing in an amount equal to the lesser of (i) 3% per annum on the then
outstanding balance of such loan or (ii) the aggregate amount of all cash dividends received by the
optionee on the Common Stock so financed during the period from date of option exercise. Accrued
unpaid interest on December 1 of each year shall be added to principal of the loan. Principal and
all accrued unpaid interest thereon shall be due and payable upon the first to occur of (1) the
date the optionee sells or otherwise transfers such shares, (2) the date the optionee ceases
employment with the Company or any subsidiary or affiliate, or (3) the expiration of 12 months from
the date of the borrowing.
(d) Security. Such loans shall be recourse obligations of the optionee secured by the
pledge of the shares so financed.
(e) Documentation. In connection with such loan, the optionee shall execute such
documents, promissory notes and pledge and security agreements with the Company and shall take such
further and other action as the Committee may deem necessary or appropriate.
(f) General Restrictions. Such financing shall be subject to all legal requirements
and restrictions pertinent thereto, including, if applicable, Regulation G as promulgated by the
Federal Reserve Board. The grant of any option by the Committee shall in no way obligate the
Company or the Committee to provide any financing whatsoever upon the exercise of any option.
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(g) Amendments. Subject only to the restrictions set forth in subparagraph 7(f), the
Committee may, in its sole discretion, provide Company financing, or assist in arranging other
financing, for optionees upon the exercise of options upon such other terms and conditions as it
may deem to be appropriate or advisable.
SECTION 8. Transferability of Options. An option granted under the Plan may not be
transferred except by will or the laws of descent and distribution and, during the lifetime of the
person to whom granted, may be exercised only by such person.
SECTION 9. Death, Retirement and Termination of employment. Subject to the condition
that no option may be exercised in whole or in part after the expiration of the option period
specified in the applicable option agreement:
(a) Upon the death of any optionee while employed or within the three-month period referred to
in clause (b) below, the person or persons to whom such optionees right, under the option are
transferred by will or the laws of descent and distribution may, prior to the expiration of twelve
months after the date of such optionees death, purchase any or all of the shares with respect to
which such optionee was entitled to exercise such option immediately prior to his death;
(b) Upon termination of employment for any reason, including retirement, an optionee may,
prior to the expiration of three months after the date of such termination, purchase any or all of
the shares with respect to which such optionee was entitled to exercise such option immediately
prior to such termination; and
(c) Upon expiration of the twelve month or three month periods described in subparagraphs 9(a)
and 9(b), as the case may be, the options of an optionee who has died or terminated employment
shall be cancelled to the extent not theretofore cancelled or exercised.
(d) For purposes of this Plan, termination of employment shall not be deemed to occur upon the
transfer of any optionee from the employ of the Company to the employ of any subsidiary or
affiliate. For purposes of this subparagraph 9(d), affiliate means (1) any entity 50% or more of
the voting interest in which is owned, directly or indirectly, by an entity which owns, directly or
indirectly, 50% or more of the voting interest in the Company and (2) any entity which owns,
directly or indirectly, 50% or more of the voting interest in the Company.
SECTION 10. Delivery of Shares. No shares shall be delivered pursuant to any exercise
of an option until the requirements of such laws and regulations as may be deemed by the Committee
to be applicable thereto are satisfied.
SECTION 11. Withholding. Prior to the delivery of certificates for shares, the
Company shall have the right to require a payment from a participant to cover any applicable
withholding taxes due in connection with the exercise of an option.
SECTION 12. Amendments, Suspension or Discontinuance. The Board of Directors may
amend, suspend, or discontinue the Plan, and may, except upon the happening of an event described
in Section 6(e), cancel any option granted pursuant to the Plan prior to the time any portion of
such option becomes exercisable pursuant to the applicable option
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agreement, but except as permitted by paragraph (b) (3) of Section 3, may not, without the
prior approval of the stockholders of the Company, make any amendment which operates (a) to abolish
the Committee, change the qualification of its members or withdraw the administration of the Plan
from its supervision, (b) to make any material change in the class of eligible employees as defined
in the Plan, (c) to increase the total number of shares which may be delivered on exercise of
options granted under the Plan, or (d) to extend the maximum option period or the period during
which options may be granted under the Plan.
SECTION 13. Term of Plan. The Plan shall become effective on the date it is approved
and adopted by the Board of Directors of the Company, subject to the approval of the Plan by
shareholders of the Company. No award shall be granted under the Plan after the date that is ten
(10) years after the date on which the Plan was approved by the Companys shareholders or after
such earlier date as the Committee may decide, in its sole discretion.
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