Results of Operations
OVERVIEW
Revenues are generated from our homebuilding operations and our financial
services operations. The following table presents a summary of our results for
the three months ended February 28, 2009 and February 29, 2008 (in thousands,
except per share amounts):

                                                   Three Months Ended
                                             February 28,       February 29,
                                                 2009               2008
         Revenues:
         Homebuilding                       $      305,741     $      791,308
         Financial services                          1,620              2,916


         Total                              $      307,361     $      794,224


         Pretax income (loss):
         Homebuilding                       $      (61,273 )   $     (275,817 )
         Financial services                          1,701              7,945


         Total pretax loss                         (59,572 )         (267,872 )
         Income tax benefit (expense)                1,500               (300 )


         Net loss                           $      (58,072 )   $     (268,172 )


         Basic and diluted loss per share   $         (.75 )   $        (3.47 )

Throughout our first quarter ended February 28, 2009, housing market conditions were extremely challenging. An oversupply of new and resale homes, rising foreclosure activity, tightened lending standards and deteriorating consumer confidence together heightened competition for home sales and intensified downward pressure on selling prices and land values. These conditions, which have persisted to varying degrees since 2006, were exacerbated in the first quarter by a contracting economy and rising unemployment. Our results for the period reflect the difficult operating environment, but they also demonstrate the progress we have made on our three primary operating goals: preserving a strong cash position and balance sheet; restoring our homebuilding operations to profitability; and positioning our business to capitalize on a housing market recovery when it occurs.
Our first quarter results also reflected the strategic actions we have taken over the past several quarters to reduce our inventory levels and the number of active communities we operate. We have made these reductions in each of our homebuilding segments to align our business operations with the significantly reduced home sales activity we have experienced relative to peak levels of a few years ago, and with our expectations for lower future sales. In the first quarter of 2009, we operated 46% fewer active communities than in the year-earlier quarter. "Active communities" are those that deliver five or more homes in a particular reporting period. Our inventory balance of $2.02 billion at February 28, 2009 was 29% lower than the $2.85 billion balance at February 29, 2008, reflecting the impact of various operational consolidations, market exits and land sales we made between the periods. These strategic inventory and community count reductions contributed to year-over-year decreases in the number of homes we delivered and in the revenues we generated during the first quarter of 2009. Our revenues also decreased due to targeted price reductions we implemented in response to intense competition and our ongoing roll-out of product at lower price points. Looking forward, we anticipate that continued difficult market conditions and our business strategies will result in our reporting fewer homes delivered and lower revenues on a year-over-year basis through the remainder of our 2009 fiscal year.
Our total revenues of $307.4 million for the quarter ended February 28, 2009 decreased 61% from $794.2 million for the year-earlier quarter, primarily due to a decline in our housing revenues. First-quarter housing revenues of $304.4 million declined 58% from $726.7 million in the first quarter of 2008, reflecting a 51% decrease in homes delivered and a 15% decrease in the average selling price. We use the term "home" in this discussion and analysis to refer to a single-family residence, whether it is a single-family home or other type of residential

property. We delivered 1,445 homes at an average selling price of $210,700 in the first quarter of 2009, compared with 2,928 homes at an average selling price of $248,200 in the year-earlier quarter.
The number of homes we delivered declined in the first quarter of 2009 largely due to the 46% reduction in the number of active communities we operated. We have reduced our overall community count over the past several quarters, primarily by exiting underperforming markets, operating fewer communities in weaker markets and curtailing land acquisitions and development activities. An ongoing, strategic product transition also lowered our year-over-year active community count in the first quarter as implementing the transition temporarily curbed deliveries in some communities. Included in our total revenues were financial services revenues of $1.6 million in the three months ended February 28, 2009 and $2.9 million in the three months ended February 29, 2008. Financial services revenues decreased in the first quarter of 2009 mainly due to the reduction in the number of homes we delivered in the period compared to a year ago, which reduced the title and insurance services generated by our financial services segment.
We reported a net loss of $58.1 million, or $.75 per diluted share, in the first quarter of 2009, compared to a net loss of $268.2 million, or $3.47 per diluted share, in the first quarter of 2008. The improvement in our reported net loss largely reflects a substantial reduction in charges for asset impairments and inventory abandonments, as well as lower selling, general and administrative expenses. Our net loss for the quarter ended February 28, 2009 included pretax, noncash charges of $32.3 million for asset impairments and land option contract abandonments. In the year-earlier quarter, our net loss included $223.9 million of similar charges. Our selling, general and administrative expenses in the first quarter of 2009 decreased 52% to $61.2 million, down from $127.6 million in the year-earlier period, primarily due to actions we have taken over the past several quarters to reduce our overhead costs.
We generated $103.5 million of positive cash flow from operating activities in the first quarter of 2009. We ended the quarter with $1.13 billion of cash and cash equivalents and restricted cash, down $118.7 million from year-end 2008. Our debt balance at February 28, 2009 was $1.74 billion, down $203.6 million from year-end 2008 mainly due to the maturity of our $200 Million Senior Subordinated Notes on December 15, 2008.
Our company-wide backlog at February 28, 2009 was comprised of 2,651 homes, representing projected future housing revenues of approximately $559.8 million. These backlog measures decreased 45% and 55%, respectively, from 4,843 homes, representing approximately $1.23 billion in projected future housing revenues, at February 29, 2008. Our lower backlog at the end of the first quarter of 2009 reflected reduced inventory levels, a reduced active community count, the impact of lower year-over-year net order comparisons in the latter half of 2008, and lower average selling prices. Our net orders in the first quarter of 2009 increased on a year-over-year basis for the first time in 13 quarters. Our homebuilding operations generated 1,827 net orders in the period, up 26% from the first quarter of 2008, in part due to the continuing roll-out of our new The Open Series™ product line. This new line of homes is designed to offer our core homebuyers greater value given today's markets. These homes provide homebuyers with a variety of flexible floor plan options and a broad array of design choices, with prices that are more affordable than the product being replaced. At the same time, our engineering of The Open Series has made these homes more cost-effective for us to build than the product it is replacing. Our first-quarter net orders also increased because of an improvement in our cancellation rate relative to gross orders. As a percentage of gross orders, our first-quarter cancellation rate was 28%, compared to 46% in the fourth quarter of 2008 and 53% in the first quarter of 2008. Our cancellation rates against gross orders improved in each of our homebuilding segments in the first quarter of 2009. As a percentage of beginning backlog, the cancellation rate was 31% in the first quarter of 2009, 23% in the fourth quarter of 2008 and 26% in the first quarter of 2008.
HOMEBUILDING
We have grouped our homebuilding activities into four reportable segments, which we refer to as West Coast, Southwest, Central and Southeast. As of February 28, 2009, our reportable homebuilding segments consisted of ongoing operations located in the following states: West Coast - California; Southwest - Arizona and Nevada; Central - Colorado and Texas; and Southeast - Florida, North Carolina and South Carolina.

The following table presents a summary of certain financial and operational data for our homebuilding operations (dollars in thousands, except average selling price):

                                                         Three Months Ended
                                                   February 28,       February 29,
                                                       2009               2008
   Revenues:
   Housing                                        $      304,454     $      726,714
   Land                                                    1,287             64,594


   Total                                                 305,741            791,308


   Costs and expenses:
   Construction and land costs
   Housing                                               289,423            771,993
   Land                                                    1,535            140,648

   Total                                                 290,958            912,641
   Selling, general and administrative expenses           61,175            127,638


   Total                                                 352,133          1,040,279


   Operating loss                                 $      (46,392 )   $     (248,971 )




Homes delivered                                                       1,445            2,928
Average selling price                                             $ 210,700        $ 248,200
Housing gross margin                                                    4.9 %           -6.2 %

Selling, general and administrative expenses as a percent of
housing revenues                                                       20.1 %           17.6 %

Operating loss as a percent of homebuilding revenues                  -15.2 %          -31.5 %

The following tables present homes delivered, net orders, cancellation rates (based on gross orders) and ending backlog by reporting segment and with respect to our unconsolidated joint ventures for the three-month periods ended February 28, 2009 and February 29, 2008:

                                Homes Delivered                  Net Orders                 Cancellation Rates
Segment                       2009           2008           2009           2008            2009            2008
West Coast                      351            614            459            539             26 %            41 %

Southwest                       267            740            222            186             27              56

Central                         447            899            622            231             29              70

Southeast                       380            675            524            493             28              50


Total                         1,445          2,928          1,827          1,449             28 %            53 %


Unconsolidated joint
ventures                         23             75             28             48             48 %            45 %

                                                                    Backlog - Value
                                        Backlog - Homes             (In Thousands)
      Segment                           2009        2008         2009           2008
      West Coast                           689       1,115     $ 214,997     $   438,505

      Southwest                            303         752        57,169         179,114

      Central                              892       1,343       153,538         236,725

      Southeast                            767       1,633       134,135         376,872


      Total                              2,651       4,843     $ 559,839     $ 1,231,216


      Unconsolidated joint ventures         76         182     $  30,180     $    77,196

Revenues. Homebuilding revenues decreased by $485.6 million, or 61%, to $305.7 million in the quarter ended February 28, 2009 from $791.3 million in the year-earlier quarter due to decreases in housing and land sale revenues. Housing revenues of $304.4 million for the quarter ended February 28, 2009 decreased $422.3 million, or 58%, from $726.7 million in the year-earlier quarter, due to a 51% decrease in homes delivered and a 15% decline in the average selling price. We delivered 1,445 homes in the first quarter of 2009, down from 2,928 homes delivered in the year-earlier quarter, largely due to a 46% reduction in our active community count. We have strategically reduced our community count over the past several quarters in line with diminished housing market activity stemming from the persistent housing market downturn. We expect our lower active community count to reduce the number of homes we deliver and the amount of revenues we generate from our housing operations on a year-over-year basis for the remainder of our 2009 fiscal year.
Our overall average selling price decreased to $210,700 in the first quarter of 2009 from $248,200 in the year-earlier quarter. Year-over-year, average selling prices declined 21% in our West Coast segment, 19% in our Southwest segment, and 24% in our Southeast segment due to downward pricing pressures. These pressures included, to varying degrees, difficult market conditions, intense competition from homebuilders and sellers of existing and foreclosed homes, and our roll-out of value-engineered product at lower price points to meet consumer demand for more affordable homes. Our average selling price increased 3% in the Central segment, primarily due to changes in product mix. We expect our overall average selling price to decrease further in 2009 as fierce price competition and foreclosure activity is likely to persist, and we continue the roll out of the new product line at lower price points.
Revenues from land sales totaled $1.3 million in the quarter ended February 28, 2009 and $64.6 million in the year-earlier quarter. Generally, land sale revenues fluctuate with our decisions to maintain or decrease our land ownership position in certain markets based upon the volume of our holdings, our marketing strategy, the strength and number of competing developers entering particular markets at given points in time, the availability of land in markets we serve and prevailing market conditions. Land sale revenues decreased in the first quarter of 2009 compared to the first quarter of 2008 as we sold a greater volume of land in the year-earlier period that no longer fit our marketing strategy, rather than hold it for future development.
Operating Loss. Our homebuilding business generated operating losses of $46.4 million for the three months ended February 28, 2009 and $249.0 million for the three months ended February 29, 2008 mainly due to losses from housing operations. Our homebuilding operating losses represented negative 15.2% of homebuilding revenues in the first quarter of 2009 and negative 31.5% of homebuilding revenues in the first quarter of 2008. The homebuilding operating loss decreased on a percentage basis in the three months ended February 28, 2009 compared to the year-earlier quarter due to improvement in our housing gross margin, partly offset by an increase in our selling, general and administrative expenses as a percent of revenues.
Within housing operations, our first quarter 2009 operating loss decreased from the year-earlier quarter, largely due to lower pretax, noncash charges for inventory impairments and land option contract abandonments and lower selling, general and administrative expenses. Inventory impairment and land option contract abandonment charges totaled $24.7 million in the first quarter of 2009, down from $110.3 million in the first quarter of 2008. Of the inventory-related charges recorded in the 2009 first quarter, 30% were associated with our West Coast segment, 48% related to the Southwest segment and 22% related to the Southeast segment. Our Central segment had no inventory-related charges in the quarter.

The inventory impairments we recorded in the first quarters of 2009 and 2008 reflected declining asset values in certain markets due to the difficult conditions in both periods, including a persistent oversupply of new and resale homes, rising foreclosure activity, heightened competition for sales, reduced affordability relative to consumer income levels, turmoil in the consumer mortgage lending and other credit markets, and deteriorating consumer confidence. Land option contract abandonments reflected our termination of land option contracts on projects that no longer met our investment standards. Our housing gross margin, including inventory-related noncash charges, improved 11.1 percentage points to positive 4.9% in the first quarter of 2009 from negative 6.2% in the year-earlier quarter. Excluding these inventory-related charges of $24.7 million in the first quarter of 2009 and $110.3 million in the first quarter of 2008, our first-quarter housing gross margin would have been positive 13.0% in 2009 and positive 9.0% in 2008. The improvement reflects the benefits our core homebuilding business has experienced from our initiatives to roll-out more cost-effective product, reduce direct construction costs and increase operating efficiencies, consistent with our KBnxt operational business model. To a lesser extent, our margins were favorably impacted by the inventory-related charges we took in prior quarters.
Our land sales generated a loss of $.2 million in the first quarter of 2009 compared to a loss of $76.1 million in the first quarter of 2008, which included pretax, noncash impairment charges of $77.2 million. There were no pretax, noncash impairment charges related to land sales in the first quarter of 2009. As of February 28, 2009, the aggregate carrying value of inventory that had been impacted by pretax, noncash impairment charges was $939.9 million, representing 159 communities and various other land parcels. As of November 30, 2008, the aggregate carrying value of inventory that had been impacted by pretax, noncash impairment charges was $1.01 billion, representing 163 communities and various other land parcels.
Selling, general and administrative expenses in the first quarter of 2009 decreased by $66.4 million, or 52%, to $61.2 million from $127.6 million in the year-earlier quarter. The year-over-year decrease was driven by ongoing actions to calibrate our operations to the reduced volume of homes we are delivering compared to prior periods and our lower future sales expectations, which included reductions in marketing expenses, salaries and other payroll-related expenses, and compensation plan expenses. As a percent of housing revenues, selling, general and administrative expenses increased to 20.1% in the first quarter of 2009 from 17.6% in the first quarter of 2008, largely due to the substantial year-over-year decline in our housing revenues.
Interest Income. Interest income, which is generated from short-term investments and mortgages receivable, totaled $3.5 million in the first quarter of 2009 and $13.0 million in the first quarter of 2008. Generally, increases and decreases in interest income are attributable to changes in the interest-bearing average balances of short-term investments and mortgages receivable, as well as fluctuations in interest rates. Interest income decreased in the first quarter of 2009 compared to the year-earlier quarter, due to a decrease in the average balance of cash and cash equivalents we maintained and lower interest rates. The lower interest rates reflect in part the investment of the majority of cash and cash equivalents in money market accounts that are covered by the U.S. Treasury's Temporary Guarantee Program and U.S. government securities. Interest Expense, Net of Amounts Capitalized. Interest expense results principally from borrowings to finance land purchases, housing inventory and other operating and capital needs. Our interest expense, net of amounts capitalized, totaled $8.7 million in the three months ended February 28, 2009. In the year-earlier quarter, all of our interest was capitalized and consequently, we had no interest expense, net of amounts capitalized. The percentage of interest capitalized decreased to 70% in the first quarter of 2009 from the year-earlier quarter because the amount of inventory qualifying for interest capitalization was below our debt level, reflecting the inventory reduction strategies we have implemented over the past several quarters, and our suspension of land development in certain communities. Gross interest incurred decreased to $29.3 million in the first quarter of 2009 from $38.5 million in the corresponding quarter of 2008 as a result of our lower debt level in 2009. We expect to incur interest expense, net of amounts capitalized, throughout 2009.
Equity in Loss of Unconsolidated Joint Ventures. Our equity in loss of unconsolidated joint ventures totaled $9.7 million in the three months ended February 28, 2009 compared to $39.9 million in the three months ended February 29, 2008. Our equity in loss of unconsolidated joint ventures included noncash charges of $7.6 million in the first quarter of 2009 and $36.4 million in the first quarter of 2008 to recognize the impairment of certain unconsolidated joint venture investments. Our unconsolidated joint ventures posted combined revenues of $11.5 million in the first quarter of 2009 compared to $27.4 million in the year-earlier quarter primarily due to a decrease in homes delivered from unconsolidated joint ventures in 2009. Activities performed by our unconsolidated joint ventures generally include buying, developing and selling land, and, in some cases, constructing and delivering homes. Our unconsolidated joint ventures delivered 23 homes in the first three

months of 2009 and 75 homes in the first three months of 2008. Unconsolidated joint ventures generated combined losses of $13.2 million in the first quarter of 2009 and $18.8 million in the corresponding quarter of 2008.

HOMEBUILDING SEGMENTS
The following table sets forth financial information related to our homebuilding
reporting segments for the periods indicated (in thousands):

                                                         Three Months Ended
                                                   February 28,       February 29,
                                                       2009               2008
   West Coast:
   Revenues                                       $      108,520     $      241,076
   Construction and land costs                           (99,625 )         (279,615 )
   Selling, general and administrative expenses          (16,162 )          (28,780 )

   Operating loss                                         (7,267 )          (67,319 )
   Other, net                                             (5,055 )           (4,668 )


   Pretax loss                                    $      (12,322 )   $      (71,987 )


   Southwest:
   Revenues                                       $       52,273     $      241,847
   Construction and land costs                           (57,026 )         (272,291 )
   Selling, general and administrative expenses           (7,146 )          (21,653 )

   Operating loss                                        (11,899 )          (52,097 )
   Other, net                                             (8,839 )           (3,330 )


   Pretax loss                                    $      (20,738 )   $      (55,427 )




       Central:
       Revenues                                       $  77,645     $  151,889
       Construction and land costs                      (67,672 )     (152,763 )
       Selling, general and administrative expenses     (12,855 )      (26,374 )

       Operating loss                                    (2,882 )      (27,248 )
       Other, net                                        (3,274 )       (2,694 )


       Pretax loss                                    $  (6,156 )   $  (29,942 )


       Southeast:
       Revenues                                       $  67,303     $  156,496
       Construction and land costs                      (64,368 )     (205,084 )
       Selling, general and administrative expenses     (11,949 )      (30,913 )

       Operating loss                                    (9,014 )      (79,501 )
       Other, net                                        (4,811 )      (24,611 )


       Pretax loss                                    $ (13,825 )   $ (104,112 )

West Coast - Our West Coast segment generated total revenues of $108.5 million in the first quarter of 2009, down 55% from $241.1 million in the year-earlier quarter. All of the West Coast revenues in the first quarters of 2009 and 2008 were from housing operations. The year-over-year decrease in revenues was due to a 43% decrease in homes delivered and a 21% decline in the average selling price. Homes delivered fell to 351 in the first quarter of 2009 from 614 in the year-earlier quarter, largely due to a 34% decrease in the average number of active communities we operated. The average selling price decreased to $309,200 in the quarter ended February 28, 2009 from $392,600 in the year-earlier quarter, due to pricing pressures from highly competitive conditions and rising foreclosures, and our roll-out of value-engineered product at lower price points.

Our West Coast segment posted pretax losses of $12.3 million for the quarter ended February 28, 2009 and $72.0 million for the quarter ended February 29, 2008. Pretax results improved in the first quarter of 2009 compared to the year-earlier quarter largely due to lower inventory-related valuation charges. These charges totaled $7.3 million in the first quarter of 2009 and $52.1 million in the year-earlier quarter. As a percentage of revenues, inventory valuation charges were 7% in the first quarter of 2009 compared to 22% in the first quarter of 2008. The gross margin improved to positive 8.2% in the first quarter of 2009 from negative 16.0% in the first quarter of 2008, reflecting the lower level of inventory-related valuation charges, the roll-out of value-engineered product and the results of our efforts to reduce direct construction costs. Selling, general and administrative expenses decreased by $12.6 million, or 44%, to $16.2 million in the first quarter of 2009 from $28.8 million in the first quarter of 2008 as a result of operational . . .