UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
(X)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
For the
Quarterly Period Ended June 30, 2007
or
( )
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission
File Number
|
001-12822
|
BEAZER HOMES USA,
INC.
(Exact
name of registrant as specified in its charter)
|
|
DELAWARE
|
58-2086934
|
(State
or other jurisdiction of
|
(I.R.S.
employer
|
incorporation
or organization)
|
Identification
no.)
|
|
1000
Abernathy Road, Suite 1200, Atlanta, Georgia 30328
|
(Address
of principal executive offices)
|
(Zip
Code)
|
(770)
829-3700
|
(Registrant’s
telephone number, including area
code)
|
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding twelve months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to the filing
requirements for the past 90 days.
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and smaller
reporting company in Rule 12b-2 of the Exchange Act (Check One):
Large
accelerated filer
|
x
|
Accelerated
filer
|
o
|
Non-accelerated
filer
|
o
|
Smaller
reporting company
|
o
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
|
Class
|
|
|
Outstanding
at April 25, 2008
|
|
|
|
Common
Stock, $0.001 par value
|
39,234,305
shares
|
References
to “we,” “us,” “our,” “Beazer”, “Beazer Homes” and the “Company” in this
quarterly report on Form 10-Q refer to Beazer Homes USA, Inc.
EXPLANATORY
NOTE
Restatement
of Consolidated Financial Results
In April
2007, the Audit Committee of the Board of Directors initiated an independent
investigation of our mortgage origination business through independent legal
counsel and independent forensic accountants. During the course of this
investigation, the Audit Committee determined that our mortgage origination
practices related to certain loans in prior periods violated certain applicable
federal and/or state origination requirements. During the course of the
investigation, the Audit Committee also discovered accounting and financial
reporting errors and/or irregularities that required restatement resulting
primarily from (1) inappropriate accumulation of reserves and/or accrued
liabilities associated with land development and house costs (“Inventory
Reserves”) and the subsequent improper release of such reserves and accrued
liabilities and (2) inaccurate revenue recognition with respect to certain model
home sale-leaseback transactions. In conjunction with the restatement of the
items above, we also made corresponding capitalized interest, capitalized
indirect costs and income tax adjustments to our unaudited condensed
consolidated financial statements as these balances were impacted by the
aforementioned adjustments. We also made other adjustments to our unaudited
condensed consolidated financial statements relating to corrections of
accounting and financial reporting errors and/or irregularities, some errors
previously identified, but historically not considered to be material to require
correction, and some errors and irregularities discovered as part of the
restatement process, consisting of (1) reclassifying model home furnishings and
sales office leasehold improvements from owned inventory to property, plant and
equipment, net in the amount of $47.0 million at September 30, 2006; (2)
reclassifying depreciation and amortization of model home furnishings and sales
office leasehold improvements from home construction and land sales expenses to
depreciation and amortization in the amounts of $7.3 million and $21.3 million
for the three and nine months ended June 30, 2006, respectively; (3) recognizing
total revenue ($11.6 million) and home construction and land sales expenses
($8.7 million) for the nine months ended June 30, 2006 related to inappropriate
revenue recognition timing in the fiscal year ended September 30,
2005 and 2006 first and second quarters for certain home closings in
California; (4) reclassifying the results of operations from our title services
from other income, net ($1.6 million and $4.8 million) to total revenue ($2.5
million and $7.1 million) and selling, general and administrative (“SG&A”)
expenses ($1.0 million and $2.4 million) for the three and nine months ended
June 30, 2006, respectively; (5) reclassifying $5.0 million from restricted cash
at September 30, 2006 to cash and cash equivalents as such amount was determined
not to be restricted; (6) recognizing the reversal of a previously presented
$13.9 million reduction in the Trinity moisture intrusion reserves through home
construction and land sales expenses in the three months ended March 31, 2006
instead of the previously presented reversal of $13.9 million in the three
months ended June 30, 2006; (7) certain other miscellaneous immaterial
adjustments; and (8) the related tax effects of the adjustments described in (1)
through (7) above.
As
discussed in Note 12 to the accompanying unaudited condensed consolidated
financial statements in this Quarterly Report on Form 10-Q for the quarter ended
June 30, 2007, we have restated our unaudited condensed consolidated financial
statements and the related disclosures for the three and nine months ended June
30, 2006 and as of September 30, 2006. Specifically, we have restated our
unaudited condensed consolidated balance sheets as of September 30, 2006, the
related unaudited condensed consolidated statements of operations, including
related disclosures, for the three and nine months ended June 30, 2006 and the
related unaudited condensed consolidated statement of cash flows for the nine
months ended June 30, 2006. The accompanying Management’s Discussion and
Analysis of Financial Condition and Results of Operations in Part I, Item 2, has
been updated to reflect the effects of the restatement.
We are
concurrently filing our Annual Report on Form 10-K for the fiscal year ended
September 30, 2007, the Quarterly Reports on Form 10-Q/A for the fiscal quarters
ended December 31, 2006 and March 31, 2007 with this June 30, 2007 Form 10-Q,
all of which contain restated financial statements for the comparative periods
of fiscal 2007, 2006 and 2005, as applicable.
For
additional discussion of the Audit Committee’s investigation, the accounting
errors and irregularities identified, and the adjustments made as a result of
the restatements, see Notes 8 and 12 to the Unaudited Condensed Consolidated
Financial Statements. For a description of the material
weaknesses identified by management as a result of the investigation and
our internal reviews, and management’s plan to remediate those material
weaknesses, see Part I, Item 4 – Controls and Procedures.
FORWARD-LOOKING
STATEMENTS
This
Quarterly Report on Form 10-Q contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. These
forward-looking statements represent our expectations or beliefs concerning
future events, and it is possible that the results described in this quarterly
report will not be achieved. These forward-looking statements can generally be
identified by the use of statements that include words such as “estimate,”
“project,” “believe,” “expect,” “anticipate,” “intend,” “plan,” “foresee,”
“likely,” “will,” “goal,” “target” or other similar words or phrases. All
forward-looking statements are based upon information available to us on the
date of this quarterly report.
These
forward-looking statements are subject to risks, uncertainties and other
factors, many of which are outside of our control, that could cause actual
results to differ materially from the results discussed in the forward-looking
statements, including, among other things, the matters discussed in this
quarterly report in the section captioned “Management’s Discussion and Analysis
of Financial Condition and Results of Operations.” Additional information about
factors that could lead to material changes in performance is contained in Part
I, Item 1A– Risk Factors of our Annual Report on Form 10-K for the fiscal year
ended September 30, 2007 filed concurrently with this report. Such factors may
include:
|
●
|
the
timing and final outcome of the United States Attorney investigation, the
Securities and Exchange Commission’s (“SEC”) investigation and other state
and federal agency investigations, the putative class action lawsuits, the
derivative claims, multi-party suits and similar proceedings as well as
the results of any other litigation or government
proceedings;
|
|
●
|
material
weaknesses in our internal control over financial
reporting;
|
|
●
|
additional
asset impairment charges or writedowns;
|
|
●
|
economic
changes nationally or in local markets, including changes in consumer
confidence, volatility of mortgage interest rates and
inflation;
|
|
●
|
continued
or increased downturn in the homebuilding industry;
|
|
●
|
estimates
related to homes to be delivered in the future (backlog) are imprecise as
they are subject to various cancellation risks which cannot be fully
controlled;
|
|
●
|
continued
or increased disruption in the availability of mortgage
financing;
|
|
●
|
our
cost of and ability to access capital and otherwise meet our ongoing
liquidity needs including the impact of any further downgrades of our
credit ratings;
|
|
●
|
potential
inability to comply with covenants in our debt
agreements;
|
|
●
|
continued
negative publicity;
|
|
●
|
increased
competition or delays in reacting to changing consumer preference in home
design;
|
|
●
|
shortages
of or increased prices for labor, land or raw materials used in housing
production;
|
|
●
|
factors
affecting margins such as decreased land values underlying land option
agreements, increased land development costs on projects under development
or delays or difficulties in implementing initiatives to reduce production
and overhead cost structure;
|
|
●
|
the
performance of our joint ventures and our joint venture
partners;
|
|
●
|
the
impact of construction defect and home warranty claims and the cost and
availability of insurance, including the availability of insurance for the
presence of moisture intrusion;
|
|
●
|
a
material failure on the part of our subsidiary Trinity Homes LLC to
satisfy the conditions of the class action settlement agreement, including
assessment and remediation with respect to moisture intrusion related
issues;
|
|
●
|
delays
in land development or home construction resulting from adverse weather
conditions;
|
|
●
|
potential
delays or increased costs in obtaining necessary permits as a result of
changes to, or complying with, laws, regulations, or governmental policies
and possible penalties for failure to comply with such laws, regulations
and governmental policies;
|
|
●
|
effects
of changes in accounting policies, standards, guidelines or principles;
or
|
|
●
|
terrorist
acts, acts of war and other factors over which the Company has little or
no control.
|
Any
forward-looking statement speaks only as of the date on which such statement is
made, and, except as required by law, we undertake no obligation to update any
forward-looking statement to reflect events or circumstances after the date on
which such statement is made or to reflect the occurrence of unanticipated
events. New factors emerge from time to time and it is not possible for
management to predict all such factors.
BEAZER
HOMES USA, INC.
FORM
10-Q
INDEX
PART I.
FINANCIAL INFORMATION
|
5
|
Item
1. Financial Statements
|
5
|
Unaudited
Condensed Consolidated Balance Sheets, June 30, 2007 and September 30,
2006 (Restated)
|
5
|
Unaudited
Condensed Consolidated Statements of Operations, Three and Nine Months
Ended June 30, 2007 and 2006 (Restated)
|
6
|
Unaudited
Condensed Consolidated Statements of Cash Flows, Nine Months Ended June
30, 2007 and 2006 (Restated)
|
7
|
Notes
to Unaudited Condensed Consolidated Financial Statements
|
8
|
Item
2. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
|
37
|
Item
3. Quantitative and Qualitative Disclosures about Market
Risk
|
51
|
Item
4. Controls and Procedures
|
51
|
PART
II. OTHER INFORMATION
|
56
|
Item
1. Legal Proceedings
|
56
|
Item
1A. Risk Factors
|
59
|
Item
6. Exhibits
|
59
|
SIGNATURES
|
59
|
PART
I. FINANCIAL INFORMATION
Item
1. Financial Statements
BEAZER
HOMES USA, INC.
UNAUDITED
CONDENSED CONSOLIDATED BALANCE SHEETS
(in
thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June
30,
2007
|
|
|
September
30,
2006
|
|
|
|
|
|
|
As
Restated,
See
Note 12
|
|
ASSETS
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
123,909 |
|
|
$ |
167,570 |
|
Restricted
cash
|
|
|
5,492 |
|
|
|
4,873 |
|
Accounts
receivable
|
|
|
72,941 |
|
|
|
338,033 |
|
Income
tax receivable
|
|
|
42,209 |
|
|
|
- |
|
Inventory
|
|
|
|
|
|
|
|
|
Owned
inventory
|
|
|
2,906,689 |
|
|
|
3,137,021 |
|
Consolidated
inventory not owned
|
|
|
412,533 |
|
|
|
471,441 |
|
Total
Inventory
|
|
|
3,319,222 |
|
|
|
3,608,462 |
|
Residential
mortgage loans available-for-sale
|
|
|
24,354 |
|
|
|
92,157 |
|
Investments
in unconsolidated joint ventures
|
|
|
132,922 |
|
|
|
124,799 |
|
Deferred
tax assets
|
|
|
179,436 |
|
|
|
71,344 |
|
Property,
plant and equipment, net
|
|
|
77,123 |
|
|
|
76,454 |
|
Goodwill
|
|
|
91,616 |
|
|
|
121,368 |
|
Other
assets
|
|
|
122,018 |
|
|
|
109,611 |
|
Total
Assets
|
|
$ |
4,191,242 |
|
|
$ |
4,714,671 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Trade
accounts payable
|
|
$ |
92,061 |
|
|
$ |
140,008 |
|
Other
liabilities
|
|
|
474,440 |
|
|
|
557,754 |
|
Obligations
related to consolidated inventory not owned
|
|
|
263,050 |
|
|
|
330,703 |
|
Senior
Notes (net of discounts of $3,151 and $3,578,
respectively)
|
|
|
1,521,849 |
|
|
|
1,551,422 |
|
Junior
subordinated notes
|
|
|
103,093 |
|
|
|
103,093 |
|
Warehouse
Line
|
|
|
20,774 |
|
|
|
94,881 |
|
Other
secured notes payable
|
|
|
121,372 |
|
|
|
89,264 |
|
Model
home financing obligations
|
|
|
116,522 |
|
|
|
117,079 |
|
Total
Liabilities
|
|
|
2,713,161 |
|
|
|
2,984,204 |
|
|
|
|
|
|
|
|
|
|
Stockholders’
Equity:
|
|
|
|
|
|
|
|
|
Preferred
stock (par value $.01 per share, 5,000,000 shares
|
|
|
|
|
|
|
|
|
authorized,
no shares issued)
|
|
|
- |
|
|
|
- |
|
Common
stock (par value $.001 per share, 80,000,000 shares
|
|
|
|
|
|
|
|
|
authorized,
42,539,215 and 42,318,098 issued and
|
|
|
|
|
|
|
|
|
39,208,887
and 38,889,554 outstanding, respectively)
|
|
|
43 |
|
|
|
42 |
|
Paid-in
capital
|
|
|
538,886 |
|
|
|
529,326 |
|
Retained
earnings
|
|
|
1,123,003 |
|
|
|
1,390,552 |
|
Treasury
stock, at cost (3,330,328 and 3,428,544 shares,
respectively)
|
|
|
(183,851
|
) |
|
|
(189,453
|
) |
Total
Stockholders’ Equity
|
|
|
1,478,081 |
|
|
|
1,730,467 |
|
Total
Liabilities and Stockholders’ Equity
|
|
$ |
4,191,242 |
|
|
$ |
4,714,671 |
|
See Notes
to Unaudited Condensed Consolidated Financial Statements.
BEAZER
HOMES USA, INC.
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in
thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
June
30,
|
|
|
Nine
Months Ended
June
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
As
Restated,
See
Note 12
|
|
|
|
|
|
As
Restated,
See
Note 12
|
|
Total
revenue
|
|
$ |
758,146 |
|
|
$ |
1,191,952 |
|
|
$ |
2,390,014 |
|
|
$ |
3,528,635 |
|
Home
construction and land sales expenses
|
|
|
643,954 |
|
|
|
895,565 |
|
|
|
2,012,150 |
|
|
|
2,602,009 |
|
Inventory
impairments and option contract abandonments
|
|
|
154,244 |
|
|
|
10,721 |
|
|
|
399,856 |
|
|
|
20,352 |
|
Gross
(loss) profit
|
|
|
(40,052
|
) |
|
|
285,666 |
|
|
|
(21,992
|
) |
|
|
906,274 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
104,131 |
|
|
|
151,027 |
|
|
|
325,515 |
|
|
|
429,765 |
|
Depreciation
and amortization
|
|
|
7,880 |
|
|
|
9,919 |
|
|
|
23,169 |
|
|
|
29,038 |
|
Goodwill
impairment
|
|
|
29,752 |
|
|
|
- |
|
|
|
29,752 |
|
|
|
- |
|
Operating
(loss) income
|
|
|
(181,815
|
) |
|
|
124,720 |
|
|
|
(400,428
|
) |
|
|
447,471 |
|
Equity
in (loss) income of unconsolidated joint ventures
|
|
|
(939
|
) |
|
|
1,127 |
|
|
|
(7,012
|
) |
|
|
1,809 |
|
Other
income (loss), net
|
|
|
2,731 |
|
|
|
(73
|
) |
|
|
8,055 |
|
|
|
2,458 |
|
(Loss)
income before income taxes
|
|
|
(180,023
|
) |
|
|
125,774 |
|
|
|
(399,385
|
) |
|
|
451,738 |
|
(Benefit
from) provision for income taxes
|
|
|
(61,276
|
) |
|
|
44,165 |
|
|
|
(143,544
|
) |
|
|
166,609 |
|
Net
(loss) income
|
|
$ |
(118,747 |
) |
|
$ |
81,609 |
|
|
$ |
(255,841 |
) |
|
$ |
285,129 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
38,459 |
|
|
|
39,435 |
|
|
|
38,388 |
|
|
|
40,281 |
|
Diluted
|
|
|
38,459 |
|
|
|
43,929 |
|
|
|
38,388 |
|
|
|
44,909 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
(3.09 |
) |
|
$ |
2.07 |
|
|
$ |
(6.66 |
) |
|
$ |
7.08 |
|
Diluted
|
|
$ |
(3.09 |
) |
|
$ |
1.89 |
|
|
$ |
(6.66 |
) |
|
$ |
6.44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
dividends per share
|
|
$ |
0.10 |
|
|
$ |
0.10 |
|
|
$ |
0.30 |
|
|
$ |
0.30 |
|
See Notes
to Unaudited Condensed Consolidated Financial Statements.
BEAZER
HOMES USA, INC.
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in
thousands)
|
|
|
|
|
|
|
|
|
Nine
Months Ended
June
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
As
Restated,
See
Note 12
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
(loss) income
|
|
$ |
(255,841 |
) |
|
$ |
285,129 |
|
Adjustments
to reconcile net (loss) income to net cash provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
23,169 |
|
|
|
29,038 |
|
Stock-based
compensation expense
|
|
|
7,406 |
|
|
|
11,446 |
|
Inventory
impairments and option contract abandonments
|
|
|
399,856 |
|
|
|
20,352 |
|
Goodwill
impairment
|
|
|
29,752 |
|
|
|
- |
|
Deferred
income tax (benefit) provision
|
|
|
(108,092
|
) |
|
|
22,581 |
|
Tax
benefit from stock transactions
|
|
|
(3,212
|
) |
|
|
(8,438
|
) |
Equity
in loss (income) of unconsolidated joint ventures
|
|
|
7,012 |
|
|
|
(1,809
|
) |
Cash
distributions of income from unconsolidated joint ventures
|
|
|
3,625 |
|
|
|
- |
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Decrease
in accounts receivable
|
|
|
265,092 |
|
|
|
37,625 |
|
Increase
in income tax receivable
|
|
|
(42,209
|
) |
|
|
- |
|
Increase
in inventory
|
|
|
(116,057
|
) |
|
|
(823,012
|
) |
Decrease
(increase) in residential mortgage loans
available-for-sale
|
|
|
67,803 |
|
|
|
(31,267
|
) |
Increase
in other assets
|
|
|
(12,083
|
) |
|
|
(27,705
|
) |
(Decrease)
increase in trade accounts payable
|
|
|
(47,947
|
) |
|
|
5,570 |
|
Decrease
in other liabilities
|
|
|
(97,175
|
) |
|
|
(135,132
|
) |
Other
changes
|
|
|
950 |
|
|
|
(26
|
) |
Net
cash provided by (used in) operating activities
|
|
|
122,049 |
|
|
|
(615,648
|
) |
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(23,948
|
) |
|
|
(39,080
|
) |
Investments
in unconsolidated joint ventures
|
|
|
(18,666
|
) |
|
|
(44,875
|
) |
Changes
in restricted cash
|
|
|
(619
|
) |
|
|
- |
|
Distributions
from unconsolidated joint ventures
|
|
|
1,732 |
|
|
|
3,911 |
|
Net
cash (used in) investing activities
|
|
|
(41,501
|
) |
|
|
(80,044
|
) |
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Borrowings
under credit facilities and warehouse line
|
|
|
130,031 |
|
|
|
1,365,031 |
|
Repayment
of credit facilities and warehouse line
|
|
|
(204,138
|
) |
|
|
(1,313,220
|
) |
Repayment
of other secured notes payable
|
|
|
(14,431
|
) |
|
|
(13,555
|
) |
Borrowings
under senior notes
|
|
|
- |
|
|
|
275,000 |
|
Borrowings
under junior subordinated notes
|
|
|
- |
|
|
|
103,093 |
|
Repurchase
of senior notes
|
|
|
(30,413
|
) |
|
|
- |
|
Borrowings
under model home financing obligations
|
|
|
5,061 |
|
|
|
67,355 |
|
Repayment
of model home financing obligations
|
|
|
(5,618
|
) |
|
|
(286
|
) |
Debt
issuance costs
|
|
|
(324
|
) |
|
|
(5,931
|
) |
Proceeds
from stock option exercises
|
|
|
4,423 |
|
|
|
7,107 |
|
Common
stock redeemed
|
|
|
(304
|
) |
|
|
(1,924
|
) |
Treasury
stock purchases
|
|
|
- |
|
|
|
(183,329
|
) |
Tax
benefit from stock transactions
|
|
|
3,212 |
|
|
|
8,438 |
|
Dividends
paid
|
|
|
(11,708
|
) |
|
|
(12,250
|
) |
Net
change in book overdraft
|
|
|
- |
|
|
|
127,431 |
|
Net
cash (used in) provided by financing activities
|
|
|
(124,209
|
) |
|
|
422,960 |
|
Decrease
in cash and cash equivalents
|
|
|
(43,661
|
) |
|
|
(272,732
|
) |
Cash
and cash equivalents at beginning of period
|
|
|
167,570 |
|
|
|
297,098 |
|
Cash
and cash equivalents at end of period
|
|
$ |
123,909 |
|
|
$ |
24,366 |
|
See Notes
to Unaudited Condensed Consolidated Financial Statements.
BEAZER
HOMES USA, INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1)
Summary of Significant Accounting Policies
The
accompanying unaudited condensed consolidated financial statements of Beazer
Homes USA, Inc. (“Beazer Homes” or “the Company”) have been prepared in
accordance with accounting principles generally accepted in the United States of
America (“GAAP”) for interim financial information and in accordance with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Such financial
statements do not include all of the information and disclosures required by
accounting principles generally accepted in the United States of America for
complete financial statements. In our opinion, all adjustments (consisting
solely of normal recurring accruals) necessary for a fair presentation have been
included in the accompanying financial statements. For further information and a
discussion of our significant accounting policies other than as discussed below,
refer to our audited consolidated financial statements appearing in the Beazer
Homes’ Annual Report on Form 10-K for the fiscal year ended September 30, 2007
(the “2007 Annual Report”) filed concurrently with this Quarterly Report on Form
10-Q.
Reclassifications. Inventory impairments and
option contract abandonments in the amounts of $7.8 million and $20.4 million
for the three and nine months ended June 30, 2006, respectively, have been
reclassified from home construction and land sales expenses to inventory
impairments and option contract abandonments in the accompanying unaudited
condensed consolidated statements of operations to conform to the
current fiscal 2007 presentation. Depreciation and amortization in the
amounts of $2.6 million and $7.7 million for the three and nine months ended
June 30, 2006 have been reclassified from selling, general and administrative
expenses to depreciation and amortization in the accompanying unaudited
condensed consolidated statements of operations to conform to the
current fiscal 2007 presentation.
Stock-Based
Compensation. In
the first quarter of fiscal 2006, we adopted Statement of Financial Accounting
Standards (“SFAS”) 123R, Share-Based Payment. SFAS
123R applies to new awards and to awards modified, repurchased, or cancelled
after October 1, 2005, as well as to the unvested portion of awards outstanding
as of October 1, 2005. We use the Black-Scholes model to value new stock-settled
appreciation rights (“SSARs”) and stock option grants under SFAS 123R, and
applied the “modified prospective method” for existing grants which requires us
to value grants made prior to our adoption of SFAS 123R under the fair value
method and expense the unvested portion over the remaining vesting period. SFAS
123R also requires us to estimate forfeitures in calculating the expense related
to stock-based compensation. In addition, SFAS 123R requires us to reflect the
benefits of tax deductions in excess of recognized compensation cost as a
financing cash inflow and an operating cash outflow.
Nonvested
stock granted to employees is valued based on the market price of the common
stock on the date of the grant. Performance based, nonvested stock granted to
employees is valued using the Monte Carlo valuation method.
A Monte
Carlo simulation model requires the following inputs, as of the modification
date: (1) expected dividend yield on the underlying stock, (2) expected price
volatility of the underlying stock, (3) risk-free interest rate for a period
corresponding with the expected term of the option and (4) fair value of the
underlying stock. The methodology used to determine these assumptions is similar
as for the Black-Scholes Model discussed above; however, the expected term is
determined by the model in the Monte-Carlo simulation.
For
Beazer Homes and each member of the peer group, the following inputs were used
in the Monte Carlo simulation model to determine fair value as of the grant date
for the performance-based, nonvested awards: risk-free interest rate ranging
from 4.54% to 4.8% for 2007 grants and 4.53% to 4.55% for 2006 grants; expected
aggregate discrete dividends during the performance period ($0.10 per quarter
for Company all grants); and expected annualized volatility ranging from 35.16%
to 38.14% for the Company’s 2007 grants and from 34.3% to 42.9% for the
Company’s 2006 grants.
Compensation
cost arising from nonvested stock granted to employees and from non-employee
stock awards is recognized as an expense using the straight-line method over the
vesting period. Unearned compensation is now included in paid-in capital in
accordance with SFAS 123R. As of June 30, 2007, there was $23.6 million of total
unrecognized compensation cost related to nonvested stock. That cost is expected
to be recognized over a weighted average period of 3.9 years. For the three and
nine months ended June 30, 2007, our total stock-based compensation expense,
included in selling, general and administrative expenses (“SG&A”), was
approximately $3.5 million ($2.4 million net of tax) and $7.4 million ($5.0
million net of tax). Stock compensation expense for the three and nine months
ended June 30, 2007 includes the reversal of approximately $550,000 and $3.9
million, respectively, of previously recorded stock compensation expense as a
result of unvested stock-based award forfeitures. Stock-based compensation
expense for the three and nine months ended June 30, 2006 was $5.5 million ($3.7
million net of tax) and $11.4 million ($7.8 million net of tax),
respectively.
Activity
relating to nonvested stock awards for the three and nine months ended June 30,
2007 is as follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
June
30, 2007
|
|
Nine
Months Ended
June
30, 2007
|
|
|
Shares
|
|
Weighted
Average
Grant
Date
Fair
Value
|
|
Shares
|
|
Weighted
Average
Grant
Date
Fair
Value
|
|
Beginning
of period
|
|
|
920,154 |
|
|
$ |
48.85 |
|
|
|
974,457 |
|
|
$ |
50.66 |
|
Granted
|
|
|
105,882 |
|
|
|
34.08 |
|
|
|
287,436 |
|
|
|
39.12 |
|
Vested
|
|
|
(12,108
|
) |
|
|
40.91 |
|
|
|
(35,730
|
) |
|
|
45.87 |
|
Forfeited
|
|
|
(35,891
|
) |
|
|
42.91 |
|
|
|
(248,126
|
) |
|
|
50.19 |
|
End
of period
|
|
|
978,037 |
|
|
$ |
47.57 |
|
|
|
978,037 |
|
|
$ |
47.57 |
|
In
addition, during the three and nine months ended June 30, 2007, employees
surrendered 5,542 and 8,766 shares, respectively, to us in payment of minimum
tax obligations upon the vesting of nonvested stock under our stock incentive
plans. We valued the stock at the market price on the date of surrender, for an
aggregate value of approximately $164,000 and $304,000, or approximately $29.68
and $34.70 per share, respectively.
The fair
value of each grant during the three and nine months ended June 30, 2007
was estimated on the date of grant using the Black-Scholes option-pricing
model. Expected life of options/SSARs granted was computed using the mid-point
between the vesting period and contractual life of the options/SSARs and was a
weighted average of 5.25 years. Expected volatilities were based on the
historical volatility of the Company’s stock and other factors and ranged from
59.8% to 61.7%. Expected discrete dividends of $0.10 per quarter were assumed in
lieu of a continuously compounding dividend yield. The weighted average
risk-free interest rate ranged from 4.54% to 4.76%.
The
following table summarizes stock options and SSARs outstanding as of June 30,
2007, as well as activity during the three and nine months then
ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
June
30, 2007
|
|
|
Nine
Months Ended
June
30, 2007
|
|
|
|
Shares
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Shares
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at beginning of period
|
|
|
1,877,799 |
|
|
$ |
46.39 |
|
|
|
2,135,572 |
|
|
$ |
43.82 |
|
Granted
|
|
|
264,706 |
|
|
|
34.00 |
|
|
|
538,594 |
|
|
|
38.61 |
|
Exercised
|
|
|
(15,000
|
) |
|
|
27.73 |
|
|
|
(312,501
|
) |
|
|
14.15 |
|
Forfeited
|
|
|
(44,747
|
) |
|
|
43.84 |
|
|
|
(278,907
|
) |
|
|
58.20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at end of period
|
|
|
2,082,758 |
|
|
$ |
45.00 |
|
|
|
2,082,758 |
|
|
$ |
45.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at end of period
|
|
|
623,194 |
|
|
$ |
26.41 |
|
|
|
623,194 |
|
|
$ |
26.41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested
and expected to vest in the future
|
|
|
1,728,032 |
|
|
$ |
42.64 |
|
|
|
1,728,032 |
|
|
$ |
42.64 |
|
At June
30, 2007, the weighted-average remaining contractual life for all options/SSARs
outstanding, currently exercisable, and vested or expected to vest in the future
was 5.41 years, 4.43 years and 5.40 years, respectively.
At June
30, 2007, 1,728,032 SSARs/Options were vested or expected to vest in the future
with a weighted average exercise price of $42.64 and a weighted average expected
life of 3.44 years. At June 30, 2007, the aggregate intrinsic value of
SSARs/options outstanding, vested and expected to vest in the future and
SSARs/options exercisable was approximately $1.3 million. The intrinsic value of
a stock option is the amount by which the market value of the underlying stock
exceeds the exercise price of the stock option. The intrinsic value of stock
options exercised during the three and nine months ended June 30, 2007 was
approximately $117,000 and $8.7 million, respectively.
Recent Accounting
Pronouncements. In 2006, the FASB
issued FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes - An Interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48
clarifies the accounting for uncertainty in income taxes recognized in the
financial statements in accordance with SFAS 109, Accounting for Income Taxes.
FIN 48 defines the threshold for recognizing the benefits of tax return
positions as well as guidance regarding the measurement of the resulting tax
benefits. FIN 48 requires a company to recognize for financial statement
purposes the impact of a tax position, if a tax return position is “more likely
than not” to prevail (defined as a likelihood of more than fifty percent of
being sustained upon audit, based on the technical merits of the tax position).
FIN 48 also provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure, and transition. FIN 48 is
effective as of the beginning of our fiscal year ending September 30, 2008, with
the cumulative effect of the change recorded as an adjustment to retained
earnings. We estimate that the cumulative effect upon adoption of FIN 48 will
decrease retained earnings by approximately $10 million.
On
November 29, 2006, the FASB ratified EITF Issue No. 06-8, Applicability of the Assessment of a
Buyer’s Continuing Investment Under FASB Statement No. 66, Accounting for Sales
of Real Estate, for Sales of Condominiums. The EITF states that the
adequacy of the buyer’s continuing investment under SFAS 66 should be assessed
in determining whether to recognize profit under the percentage-of-completion
method on the sale of individual units in a condominium project. This consensus
could require that additional deposits be collected by developers of condominium
projects that wish to recognize profit during the construction period under the
percentage-of-completion method. EITF 06-8 is effective for fiscal years
beginning after March 15, 2007. The adoption of EITF 06-8 will not have a
material impact on our consolidated financial position, results of operations or
cash flows.
In
December 2007, the FASB issued SFAS 141 (revised 2007), Business Combinations. SFAS
141R amends and clarifies the accounting guidance for the acquirer’s recognition
and measurement of assets acquired, liabilities assumed and noncontrolling
interests of an acquiree in a business combination. SFAS 141R is effective for
our fiscal year ended September 30, 2009. We do not expect the adoption of SFAS
141R to have a material impact on our consolidated financial
statements.
In
September 2006, the FASB issued SFAS 157, Fair Value Measurements, SFAS
157 provides guidance for using fair value to measure assets and liabilities.
SFAS 157 applies whenever other standards require (or permit) assets or
liabilities to be measured at fair value but does not expand the use of fair
value in any new circumstances. SFAS 157 includes provisions that require
expanded disclosure of the effect on earnings for items measured using
unobservable data. SFAS 157 is effective for fiscal years beginning after
November 15, 2007 and for interim periods within those fiscal years. In February
2008, the FASB issued FASB Staff Position (“FSP”) 157-2, Effective Date of FASB Statement No.
157, delaying the effective date of certain non-financial assets and
liabilities to fiscal periods beginning after November 15, 2008. We are
currently evaluating the impact of adopting SFAS 157 on our consolidated
financial condition and results of operations; however, it is not expected to
have a material impact on our consolidated financial position, results of
operations or cash flows.
In
February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial
Assets and Financial Liabilities – Including an amendment of FASB Statement No.
115. SFAS 159 permits companies to measure certain financial instruments
and other items at fair value. SFAS 159 is effective for our fiscal year
beginning October 1, 2008. We are currently evaluating the impact of adopting
SFAS 159 on our consolidated financial condition and results of operations;
however, it is not expected to have a material impact on our consolidated
financial position, results of operations or cash flows.
In
December 2007, the FASB issued SFAS 160, Noncontrolling Interests in
Consolidated Financial Statements – an Amendment of ARB 51. SFAS 160
requires that a noncontrolling interest (formerly minority interest) in a
subsidiary be classified as equity and the amount of consolidated net income
specifically attributable to the noncontrolling interest be included in the
consolidated financial statements. SFAS 160 is effective for our fiscal year
beginning October 1, 2009 and its provisions will be applied retrospectively
upon adoption. We are currently evaluating the impact of adopting SFAS 160 on
our consolidated financial condition and results of operations.
In
December 2007, the Securities and Exchange Commission (“SEC”) issued Staff
Accounting Bulletin (“SAB”) 110 which expresses the views of the Staff regarding
the use of the “simplified” method (the mid-point between the vesting period and
contractual life of the option) for “plain vanilla” options in accordance with
SFAS 123R. SAB 110 will allow the use of the “simplified” method beyond December
31, 2007 under certain conditions including a company’s inability to rely on
historical exercise data. We are currently evaluating the impact of adopting SAB
110 on our consolidated financial condition and results of
operations.
Inventory
Valuation – Held for Development. Our homebuilding inventories that are
accounted for as held for development include land and home construction assets
grouped together as communities. Homebuilding inventories held for development
are stated at cost (including direct construction costs, capitalized indirect
costs, capitalized interest and real estate taxes) unless facts and
circumstances indicate that the carrying value of the assets may not be
recoverable. We assess these assets periodically for recoverability in
accordance with the provisions of SFAS 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. SFAS 144 requires that long-lived assets
be reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of
assets is measured by comparing the carrying amount of an asset to future
undiscounted cash flows expected to be generated by the asset. If the expected
undiscounted cash flows generated are expected to be less than its carrying
amount, an impairment charge should be recorded to write down the carrying
amount of such asset to its estimated fair value based on discounted cash
flows.
We
conduct a review of the recoverability of our homebuilding inventory held for
development at the community level as factors indicate that an impairment may
exist. We evaluate, among other things, the following information for each
community:
|
●
|
Actual
“Net Contribution Margin” (defined as homebuilding revenues less
homebuilding costs and direct selling expenses) for homes closed in the
current fiscal quarter, fiscal year to date and prior two fiscal quarters.
Homebuilding costs include land and land development costs (based upon an
allocation of such costs, including costs to complete the development, or
specific lot costs), home construction costs (including an estimate of
costs, if any, to complete home construction), previously capitalized
indirect costs (principally for construction supervision), capitalized
interest and estimated warranty costs;
|
|
●
|
Projected
Net Contribution Margin for homes in backlog;
|
|
●
|
Actual
and trending new orders and cancellation rates;
|
|
●
|
Actual
and trending base home sales prices and sales incentives for home sales
that occurred in the prior two fiscal quarters that remain in backlog at
the end of the fiscal quarter and expected future homes sales prices and
sales incentives and absorption over the expected remaining life of the
community;
|
|
●
|
A
comparison of our community to our competition to include, among other
things, an analysis of various product offerings including, the size and
style of the homes currently offered for sale, community amenity levels,
availability of lots in our community and our competition’s, desirability
and uniqueness of our community and other market factors;
and
|
|
●
|
Other
events that may indicate that the carrying value may not be
recoverable.
|
In
determining the recoverability of the carrying value of the assets of a
community that we have evaluated as requiring a test for impairment, significant
quantitative and qualitative assumptions are made relative to the future home
sales prices, sales incentives, direct and indirect costs of home construction
and land development and the pace of new home orders. In addition, these
assumptions are dependent upon the specific market conditions and competitive
factors for each specific community and may differ greatly between communities
within the same market and communities in different markets. Our estimates are
made using information available at the date of the recoverability test,
however, as facts and circumstances may change in future reporting periods, our
estimates of recoverability are subject to change.
For
assets in communities for which the undiscounted future cash flows are less than
the carrying value, the carrying value of that community is written down to its
then estimated fair value based on discounted cash flows. The carrying value for
assets in communities that were previously impaired and continue to be
classified as held for development is not written up for future estimates of
increases in fair value in future reporting periods.
The fair
value of the assets held for development is estimated using the present value of
the estimated future cash flows using discount rates commensurate with the risk
associated with the underlying community assets. The discount rate used may be
different for each community. The factors considered when determining an
appropriate discount rate for a community include, among others: (1) community
specific factors such as the number of lots in the community, the status of land
development in the community, the competitive factors influencing the sales
performance of the community and (2) overall market factors such as employment
levels, consumer confidence and the existing supply of new and used homes for
sale. As of June 30, 2007, we used discount rates of 17% to 22% in our estimated
discounted cash flow impairment calculations. We recorded impairments on land
held for development and homes under construction of $109.4 million and $306.8
million during the three and nine months ended June 30, 2007. Impairments on
inventory held for development totaled $0.8 million for the nine months ended
June 30, 2006.
Due to
uncertainties in the estimation process, particularly with respect to projected
home sales prices and absorption rate, the timing and amount of the estimated
future cash flows and discount rates, it is reasonably possible that actual
results could differ from the estimates used in our historical analyses. Our
assumptions about future home sales prices and absorption rates require
significant judgment because the residential homebuilding industry is cyclical
and is highly sensitive to changes in economic conditions. We calculated the
estimated fair values of inventory held for development that were evaluated for
impairment based on current market conditions and assumptions made by management
relative to future results. Because the projected cash flows are significantly
impacted by changes in market conditions, it is reasonably possible that actual
results could differ materially from our estimates and result in additional
impairments.
Asset Valuation – Land Held for
Sale. We record assets held for sale at the lower of the carrying value
or fair value less costs to sell in accordance with SFAS 144. The following
criteria are used to determine if land is held for sale:
|
●
|
management
has the authority and commits to a plan to sell the
land;
|
|
|
|
|
●
|
the
land is available for immediate sale in its present
condition;
|
|
|
|
|
●
|
there
is an active program to locate a buyer and the plan to sell the land has
been initiated;
|
|
|
|
|
●
|
the
sale of the land is probable within one year;
|
|
|
|
|
●
|
the
land is being actively marketed at a reasonable sale price relative to its
current fair value; and
|
|
|
|
|
●
|
it
is unlikely that the plan to sell will be withdrawn or that significant
changes to the plan will be made.
|
Additionally,
in certain circumstances, we will re-evaluate the best use of an asset that is
currently being accounted for as held for development. In such instances, we
will review, among other things, the current and projected competitive
circumstances of the community, including the level of supply of new and used
inventory, the level of sales absorptions by us and our competition, the level
of sales incentives required and the number of owned lots remaining in the
community. If, based on this review and the foregoing criteria have been met at
the end of the applicable reporting period, we believe that the best use of the
asset is the sale of all or a portion of the asset in its current condition,
then all or portions of the community are accounted for as held for
sale.
In
determining the fair value of the assets less cost to sell, we considered
factors including current sales prices for comparable assets in the area, recent
market analysis studies, appraisals, any recent legitimate offers, and listing
prices of similar properties. If the estimated fair value less cost to sell of
an asset is less than its current carrying value, the asset is written down to
its estimated fair value less cost to sell. During the nine months ended June
30, 2007, we recorded inventory impairments on land held for sale of $4.0
million. No held for sale inventory impairments were recorded for the three
months ended June 30, 2007 or the three or nine months ended June 30,
2006.
Due to
uncertainties in the estimation process, it is reasonably possible that actual
results could differ from the estimates used in our historical analyses.
Our assumptions about land sales prices require significant judgment because the
current market is highly sensitive to changes in economic conditions. We
calculated the estimated fair values of land held for sale based on current
market conditions and assumptions made by management, which may differ
materially from actual results and may result in additional impairments if
market conditions continue to deteriorate.
Goodwill. Goodwill
represents the excess of the purchase price over the fair value of assets
acquired. We test goodwill for impairment annually as of April 30 or more
frequently if an event occurs or circumstances indicate that the asset might be
impaired. For purposes of goodwill impairment testing, we compare the fair value
of each reporting unit with its carrying amount, including goodwill. Each of our
operating divisions is considered a reporting unit. The fair value of each
reporting unit is determined based on expected discounted future cash flows. If
the carrying amount of a reporting unit exceeds its fair value, the goodwill
within the reporting unit may be potentially impaired. An impairment loss is
recognized if the carrying amount of the goodwill exceeds implied fair value of
that goodwill. The housing market continued to deteriorate during the third
quarter of fiscal 2007. This deterioration has resulted in an oversupply of
inventory, reduced levels of demand, increased cancellation rates, aggressive
price competition and increased incentives for homes sales. Based on our annual
impairment tests and consideration of the current and expected future market
conditions, we determined that goodwill for our Northern California, Nevada, and
Tampa, Florida reporting units was impaired in accordance with Statement of
Financial Accounting Standards (“SFAS”) 142, Goodwill and Other Intangible
Assets and recorded non-cash, pre-tax goodwill impairment charges
totaling $29.8 million during the quarter ended June 30, 2007. Based on our
annual goodwill impairment test as of April 30, 2006, we had no impairment of
goodwill.
Goodwill
impairment charges are reported in Corporate and unallocated and are not
allocated to our homebuilding segments. Goodwill balances by reportable segment
as of September 30, 2006 and June 30, 2007 were as follows:
Goodwill
|
|
September
30,
|
|
|
|
|
|
June
30,
|
|
(in
thousands)
|
|
2006
|
|
|
Impairments
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
West
|
|
$ |
55,452 |
|
|
$ |
(26,418 |
) |
|
$ |
29,034 |
|
Mid-Atlantic
|
|
|
23,286 |
|
|
|
- |
|
|
|
23,286 |
|
Florida
|
|
|
13,740 |
|
|
|
(3,334
|
) |
|
|
10,406 |
|
Southeast
|
|
|
17,641 |
|
|
|
- |
|
|
|
17,641 |
|
Other
homebuilding
|
|
|
11,249 |
|
|
|
- |
|
|
|
11,249 |
|
Consolidated
total
|
|
$ |
121,368 |
|
|
$ |
(29,752 |
) |
|
$ |
91,616 |
|
Inherent
in our fair value determinations are certain judgments and estimates, including
projections of future cash flows, the discount rate reflecting the risk inherent
in future cash flows, the interpretation of current economic indicators and
market valuations and our strategic plans with regard to our operations. A
change in these underlying assumptions would cause a change in the results of
the tests, which could cause the fair value of one or more reporting units to be
more or less than their respective carrying amounts. In addition, to the extent
that there are significant changes in market conditions or overall economic
conditions or our strategic plans change, it is possible that our conclusion
regarding goodwill impairment could change, which could have a material adverse
effect on our financial position and results of operations. Impairment charges
related to reporting units which are not currently impaired may occur in the
future if further market deterioration occurs resulting in a revised analysis of
fair value.
(2)
Supplemental Cash Flow Information
During
the nine months ended June 30, we paid interest of $126.9 million in 2007 and
$95.5 million in 2006. In addition, we paid income taxes of $15.7 million in
2007 and $165.3 million in 2006. We also had the following non-cash activity (in
thousands):
|
|
Nine
Months Ended
June
30,
|
|
|
|
2007
|
|
|
2006
|
|
Supplemental
disclosure of non-cash activity:
|
|
|
|
|
|
|
Increase
in consolidated inventory not owned
|
|
$ |
- |
|
|
$ |
32,582 |
|
Land
acquired through issuance of notes payable
|
|
|
46,539 |
|
|
|
53,266 |
|
Issuance
of stock under deferred bonus stock plans
|
|
|
426 |
|
|
|
- |
|
(3)
Inventory
(in
thousands)
|
|
June
30,
2007
|
|
|
September
30,
2006
|
|
Homes
under construction
|
|
$ |
1,175,302 |
|
|
$ |
1,144,750 |
|
Development
projects in progress
|
|
|
1,511,651 |
|
|
|
1,813,720 |
|
Unimproved
land held for future development
|
|
|
11,240 |
|
|
|
12,213 |
|
Land
Held for Sale
|
|
|
65,747 |
|
|
|
30,074 |
|
Model
homes
|
|
|
142,749 |
|
|
|
136,264 |
|
Total
Owned Inventory
|
|
$ |
2,906,689 |
|
|
$ |
3,137,021 |
|
Homes
under construction includes homes finished and ready for delivery and homes in
various stages of construction. We had 443 ($101.1 million) and 1,197 ($240.8
million) completed homes that were not subject to a sales contract at June 30,
2007 and September 30, 2006, respectively. Development projects in progress
consist principally of land and land improvement costs. Certain of the fully
developed lots in this category are reserved by a deposit or sales
contract.
Total
owned inventory, by reportable segment, is set forth in the table below (in
thousands):
|
|
June
30, 2007
|
|
|
September
30, 2006
|
|
|
|
Held
for Development
|
|
|
Land
Held for
Sale
|
|
|
Total
Owned
Inventory
|
|
|
Held
for Development
|
|
|
Land
Held for
Sale
|
|
|
Total
Owned
Inventory
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
West
Segment
|
|
$ |
926,075 |
|
|
$ |
53,169 |
|
|
$ |
979,244 |
|
|
$ |
1,197,559 |
|
|
$ |
6,411 |
|
|
$ |
1,203,970 |
|
Mid-Atlantic
Segment
|
|
|
501,912 |
|
|
|
691 |
|
|
|
502,603 |
|
|
|
449,909 |
|
|
|
- |
|
|
|
449,909 |
|
Florida
Segment
|
|
|
263,574 |
|
|
|
- |
|
|
|
263,574 |
|
|
|
337,289 |
|
|
|
- |
|
|
|
337,289 |
|
Southeast
Segment
|
|
|
420,120 |
|
|
|
1,787 |
|
|
|
421,907 |
|
|
|
349,598 |
|
|
|
14,058 |
|
|
|
363,656 |
|
Other
|
|
|
473,369 |
|
|
|
10,100 |
|
|
|
483,469 |
|
|
|
559,124 |
|
|
|
9,605 |
|
|
|
568,729 |
|
Unallocated
|
|
|
255,892 |
|
|
|
- |
|
|
|
255,892 |
|
|
|
213,468 |
|
|
|
- |
|
|
|
213,468 |
|
Total
|
|
$ |
2,840,942 |
|
|
$ |
65,747 |
|
|
$ |
2,906,689 |
|
|
$ |
3,106,947 |
|
|
$ |
30,074 |
|
|
$ |
3,137,021 |
|
The
following tables set forth, by reportable segment, the inventory impairments and
lot option abandonment charges recorded (in thousands):
|
|
Quarter
Ended June 30,
|
|
|
Nine
Months Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Development
projects and homes in process (Held for Development)
|
|
|
|
|
|
|
|
|
|
|
West
|
|
$ |
57,623 |
|
|
$ |
- |
|
|
$ |
140,532 |
|
|
$ |
- |
|
Mid-Atlantic
|
|
|
6,516 |
|
|
|
- |
|
|
|
41,495 |
|
|
|
- |
|
Florida
|
|
|
16,931 |
|
|
|
- |
|
|
|
54,904 |
|
|
|
- |
|
Southeast
|
|
|
7,204 |
|
|
|
- |
|
|
|
12,075 |
|
|
|
- |
|
Other
|
|
|
14,960 |
|
|
|
- |
|
|
|
39,450 |
|
|
|
809 |
|
Unallocated
|
|
|
6,194 |
|
|
|
- |
|
|
|
18,389 |
|
|
|
- |
|
Subtotal
|
|
$ |
109,428 |
|
|
$ |
- |
|
|
$ |
306,845 |
|
|
$ |
809 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land
Held for Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
West
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
3,105 |
|
|
$ |
- |
|
Southeast
|
|
|
- |
|
|
|
- |
|
|
|
500 |
|
|
|
- |
|
Other
|
|
|
- |
|
|
|
- |
|
|
|
350 |
|
|
|
- |
|
Subtotal
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
3,955 |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lot
Option Abandonments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
West
|
|
$ |
19,858 |
|
|
$ |
6,951 |
|
|
$ |
31,616 |
|
|
$ |
7,769 |
|
Mid-Atlantic
|
|
|
14,477 |
|
|
|
122 |
|
|
|
19,174 |
|
|
|
370 |
|
Florida
|
|
|
7,209 |
|
|
|
1,332 |
|
|
|
21,481 |
|
|
|
1,538 |
|
Southeast
|
|
|
2,685 |
|
|
|
246 |
|
|
|
5,934 |
|
|
|
3,837 |
|
Other
|
|
|
587 |
|
|
|
2,070 |
|
|
|
10,851 |
|
|
|
6,029 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
$ |
44,816 |
|
|
$ |
10,721 |
|
|
$ |
89,056 |
|
|
$ |
19,543 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
154,244 |
|
|
$ |
10,721 |
|
|
$ |
399,856 |
|
|
$ |
20,352 |
|
The
inventory impaired during the three and nine months ended June 30, 2007
represented 3,498 and 9,131 lots in 45 and 129 communities with an estimated
fair value of $236.0 million and $672.7 million, respectively. The impairments
recorded on our held for development inventory, for all segments, primarily
resulted from the significant decline in the homebuilding environment that
negatively impacted the sales prices of homes and increased the sales incentives
offered to potential homebuyers in our efforts to increase home sales
absorptions. Our West and Florida segments experienced the most significant
amount of inventory impairments as compared to our other homebuilding segments.
Our West and Florida segments comprise approximately 26% and 11%, respectively,
of our total land and lots owned as of June 30, 2007 and approximately 33% and
9%, respectively, of the dollar value of our held for development inventory as
of June 30, 2007. In addition, our homebuilding markets that comprise our West
segment consist of markets that once experienced the most significant home price
appreciation in the nation during the 2004 through 2006 periods which was driven
in large part by speculative purchases and the availability of mortgage credit
during those time periods which are no longer present in the marketplace. The
decline in the availability of mortgage loan products and the exit of
speculators from the market, among other factors, contributed to the significant
increase in the supply of new and used homes on the market for
sale.
The
impairments recorded in our other segments are primarily as a result of
continued price competition brought on by the significant increase in new and
resale home inventory during the three and nine months ended June 30, 2007 that
has resulted in increased sales incentives and home sales price declines as we
attempt to increase new orders and generate cash to the Company.
The
inventory impaired during the nine months ended June 30, 2006 primarily
represented homes in backlog sold at a loss for which a valuation adjustment was
recorded to properly state the inventory at fair value. The homes generally
closed in the following quarter.
We
acquire certain lots by means of option contracts. Option contracts generally
require the payment of cash for the right to acquire lots during a specified
period of time at a certain price. Under option contracts, both with and without
specific performance provisions, purchase of the properties is contingent upon
satisfaction of certain requirements by us and the sellers. Our obligation with
respect to options with specific performance provisions is included in our
consolidated balance sheets in other liabilities. Under option contracts without
specific performance obligations, our liability is generally limited to
forfeiture of the non-refundable deposits, letters of credit and other
non-refundable amounts incurred, which aggregated approximately $249.8 million
at June 30, 2007. This amount includes non-refundable letters of credit of
approximately $35.0 million. The total remaining purchase price, net of cash
deposits, committed under all options was $1.9 billion as of June 30, 2007. Only
$81.6 million of the total remaining purchase price contains specific
performance clauses which may require us to purchase the land or lots upon the
land seller meeting certain obligations.
In
addition, we have also completed a strategic review of all of the markets within
our homebuilding segments and the communities within each of those markets with
an initial focus on the communities for which land has been secured with option
purchase contracts. As a result of this review, we have determined the proper
course of action with respect to a number of communities within each
homebuilding segment was to abandon the remaining lots under option and to
write-off the deposits securing the option takedowns, as well as preacquisition
costs. The total abandonments recorded for the three months and nine months
ended June 30, 2007 were $44.8 million and $89.1 million representing 25 and 92
communities, respectively, with the West and Florida segments containing 35.5%
and 24.1%, respectively, of the nine-month abandonments as the markets in those
segments were among the markets with the highest levels of new and resale home
supply.
We expect
to exercise substantially all of our option contracts with specific performance
obligations and, subject to market conditions, most of our option contracts
without specific performance obligations. Various factors, some of which are
beyond our control, such as market conditions, weather conditions and the timing
of the completion of development activities, will have a significant impact on
the timing of option exercises or whether land options will be
exercised.
Certain
of our option contracts are with sellers who are deemed to be variable interest
entities (“VIE”s) under FASB Interpretation No. 46 (Revised), Consolidation of Variable Interest
Entities, an Interpretation of ARB No. 51 (“FIN 46R”). FIN 46R defines a
VIE as an entity with insufficient equity investment to finance its planned
activities without additional financial support or an entity in which the equity
investors lack certain characteristics of a controlling financial interest.
Pursuant to FIN 46R, an enterprise that absorbs a majority of the expected
losses or receives a majority of the expected residual returns of a VIE is
deemed to be the primary beneficiary of the VIE and must consolidate the
VIE.
We have
determined that we are the primary beneficiary of certain of these option
contracts. Our risk is generally limited to the option deposits that we pay, and
creditors of the sellers generally have no recourse to the general credit of the
Company. Although we do not have legal title to the optioned land, for those
option contracts for which we are the primary beneficiary, we are required to
consolidate the land under option at fair value. We believe that the exercise
prices of our option contracts approximate their fair value. Our consolidated
balance sheets at June 30, 2007 and September 30, 2006 reflect consolidated
inventory not owned of $412.5 million and $471.4 million, respectively. We
consolidated $73.2 million and $146.6 million of lot option agreements as
consolidated inventory not owned pursuant to FIN 46R as of June 30, 2007 and
September 30, 2006, respectively. In addition, as of June 30, 2007 and September
30, 2006, we recorded $339.3 million and $324.8 million, respectively, of land
under the caption “consolidated inventory not owned” related to lot option
agreements in accordance with SFAS 49, Product Financing
Arrangements. Obligations related to consolidated inventory not owned
totaled $263.1 million at June 30, 2007 and $330.7 million at September 30,
2006. The difference between the balances of consolidated inventory not owned
and obligations related to consolidated inventory not owned represents cash
deposits paid under the option agreements.
(4)
Investments in and Advances to Unconsolidated Joint Ventures
As of
June 30, 2007, we participated in 24 land development joint ventures in which
Beazer Homes had less than a controlling interest. Our joint ventures are
typically entered into with developers, other homebuilders and financial
partners to develop finished lots for sale to the joint venture’s members and
other third parties. Equity in (loss) income of unconsolidated joint ventures
was $(0.9) million and $1.1 million for the three months ended June 30,
2007 and 2006 and $(7.0) million and $1.8 million for the nine months ended June
30, 2007 and 2006, respectively. Equity in loss of unconsolidated joint ventures
for nine months ended June 30, 2007 includes the writedown of our investment in
certain of our joint ventures, specifically $3.1 million of impairments of
inventory held within those ventures in accordance with APB 18, The Equity Method of Accounting for
Investments in Common Stock. Our joint ventures typically obtain secured
acquisition and development financing. The following table presents our
investment in and guarantees under our unconsolidated joint ventures, as well as
total equity and outstanding borrowings of these joint ventures as of June 30,
2007 and September 30, 2006:
(in
thousands)
|
|
June
30,
2007
|
|
|
September
30,
2006
|
|
|
|
|
|
|
|
|
Beazer’s
investment in joint ventures
|
|
$ |
132,922 |
|
|
$ |
124,799 |
|
Total
equity of joint ventures
|
|
|
493,291 |
|
|
|
487,726 |
|
Total
outstanding borrowings of joint ventures
|
|
|
764,943 |
|
|
|
753,801 |
|
Beazer’s
portion of loan to maintenance guarantees
|
|
|
7,717 |
|
|
|
20,500 |
|
Beazer’s
portion of repayment guarantees
|
|
|
40,935 |
|
|
|
22,825 |
|
At June
30, 2007 and September 30, 2006, total borrowings outstanding above include
$435.1 million and $460.1 million related to one joint venture in which we are a
2.58% partner. In some instances, Beazer Homes and our joint venture partners
have provided varying levels of guarantees of debt of our unconsolidated joint
ventures. At June 30, 2007, these guarantees included, for certain joint
ventures, construction completion guarantees, loan to value maintenance
agreements, repayment guarantees and environmental indemnities. See Note 8 for
further discussion of these guarantees.
(5)
Interest
The
following table sets forth certain information regarding interest (in
thousands):
|
|
Three
Months Ended
June
30,
|
|
|
Nine
Months Ended
June
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized
interest in inventory, beginning of period
|
|
$ |
93,239 |
|
|
$ |
66,713 |
|
|
$ |
78,996 |
|
|
$ |
50,808 |
|
Interest
incurred and capitalized
|
|
|
37,394 |
|
|
|
32,877 |
|
|
|
112,102 |
|
|
|
86,771 |
|
Capitalized
interest impaired
|
|
|
(3,314
|
) |
|
|
- |
|
|
|
(9,140
|
) |
|
|
- |
|
Capitalized
interest amortized to house construction and land sales
expenses
|
|
|
(30,040
|
) |
|
|
(21,760
|
) |
|
|
(84,679
|
) |
|
|
(59,749
|
) |
Capitalized
interest in inventory, end of period
|
|
$ |
97,279 |
|
|
$ |
77,830 |
|
|
$ |
97,279 |
|
|
$ |
77,830 |
|
(6)
Earnings Per Share and Stockholders’ Equity
Basic and
diluted earnings per share were calculated as follows (in thousands, except per
share amounts):
|
|
Three
Months Ended
June
30,
|
|
|
Nine
Months Ended
June
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income
|
|
$ |
(118,747 |
) |
|
$ |
81,609 |
|
|
$ |
(255,841 |
) |
|
$ |
285,129 |
|
Weighted
average number of common shares outstanding
|
|
|
38,459 |
|
|
|
39,435 |
|
|
|
38,388 |
|
|
|
40,281 |
|
Basic
(loss) earnings per share
|
|
$ |
(3.09 |
) |
|
$ |
2.07 |
|
|
$ |
(6.66 |
) |
|
$ |
7.08 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income
|
|
$ |
(118,747 |
) |
|
$ |
81,609 |
|
|
$ |
(255,841 |
) |
|
$ |
285,129 |
|
Interest
on convertible debt - net of taxes
|
|
|
- |
|
|
|
1,347 |
|
|
|
- |
|
|
|
4,038 |
|
Net
(loss) income available to common shareholders
|
|
$ |
(118,747 |
) |
|
$ |
82,956 |
|
|
$ |
(255,841 |
) |
|
$ |
289,167 |
|
Weighted
average number of common shares outstanding
|
|
|
38,459 |
|
|
|
39,435 |
|
|
|
38,388 |
|
|
|
40,281 |
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
issuable upon conversion of convertible debt
|
|
|
- |
|
|
|
3,499 |
|
|
|
- |
|
|
|
3,499 |
|
Options
to acquire common stock
|
|
|
- |
|
|
|
464 |
|
|
|
- |
|
|
|
538 |
|
Contingent
shares (performance based stock)
|
|
|
- |
|
|
|
72 |
|
|
|
- |
|
|
|
48 |
|
Restricted
stock
|
|
|
- |
|
|
|
459 |
|
|
|
- |
|
|
|
543 |
|
Diluted
weighted average common shares outstanding
|
|
|
38,459 |
|
|
|
43,929 |
|
|
|
38,388 |
|
|
|
44,909 |
|
Diluted
(loss) earnings per share
|
|
$ |
(3.09 |
) |
|
$ |
1.89 |
|
|
$ |
(6.66 |
) |
|
$ |
6.44 |
|
In
computing diluted loss per share for the three and nine months ended June 30,
2007, common stock equivalents were excluded from the computation of diluted
loss per share as a result of their anti-dilutive effect. Options to purchase
947,962 and 400,026 shares of common stock were not included in the computation
of diluted earnings per share for the three and nine months ended June 30, 2006,
respectively, because their inclusion would have been
anti-dilutive.
In June
2006, the Shareholder Rights Plan adopted in June 1996 by the Company’s Board of
Directors expired. No rights issued under this plan were redeemed or exercised
prior to expiration.
(7)
Borrowings
At June
30, 2007 and September 30, 2006 we had the following borrowings (in thousands):
|
Maturity
Date
|
|
June
30, 2007
|
|
|
September
30,
2006
|
|
Warehouse
Line
|
February
2008
|
|
$ |
20,774 |
|
|
$ |
94,881 |
|
Revolving
Credit Facility
|
August
2009
|
|
|
- |
|
|
|
- |
|
8
5/8% Senior Notes*
|
May
2011
|
|
|
180,000 |
|
|
|
200,000 |
|
8
3/8% Senior Notes*
|
April
2012
|
|
|
340,000 |
|
|
|
350,000 |
|
6
1/2% Senior Notes*
|
November
2013
|
|
|
200,000 |
|
|
|
200,000 |
|
6
7/8% Senior Notes*
|
July
2015
|
|
|
350,000 |
|
|
|
350,000 |
|
8
1/8% Senior Notes*
|
June
2016
|
|
|
275,000 |
|
|
|
275,000 |
|
4
5/8% Convertible Senior Notes*
|
June
2024
|
|
|
180,000 |
|
|
|
180,000 |
|
Junior
subordinated notes
|
July
2036
|
|
|
103,093 |
|
|
|
103,093 |
|
Other
secured notes payable
|
Various
Dates
|
|
|
121,372 |
|
|
|
89,264 |
|
Model
home financing obligations
|
Various
Dates
|
|
|
116,522 |
|
|
|
117,079 |
|
Unamortized
debt discounts
|
|
|
|
(3,151
|
) |
|
|
(3,578
|
) |
Total
|
|
|
$ |
1,883,610 |
|
|
$ |
1,955,739 |
|
*
Collectively, the “Senior Notes”
Warehouse Line – Effective
February 7, 2007, Beazer Mortgage amended its 364-day credit agreement (the
“Warehouse Line”) to extend its maturity date to February 8, 2008 and modify the
maximum available borrowing capacity to $100 million, subject to compliance with
the mortgage loan eligibility requirements as defined in the Warehouse Line. The
Warehouse Line was secured by certain mortgage loan sales and related property.
The Warehouse Line was entered into with a number of banks to fund the
origination of residential mortgage loans. The maximum available borrowing
capacity was subsequently reduced through amendments down to $17 million as of
September 30, 2007. The Warehouse Line was not guaranteed by Beazer Homes USA,
Inc. or any of its subsidiaries that are guarantors of the Senior Notes or
Revolving Credit Facility. Borrowings under the Warehouse Line were $20.8
million and bore interest at 6.3% per annum as of June 30, 2007. Effective
November 14, 2007, we terminated the Warehouse Line.
Revolving Credit Facility - In
August 2005, we entered into a new four-year unsecured revolving credit facility
(the “Revolving Credit Facility”) with a group of banks which was expanded in
June 2006 to $1 billion and which matures in August 2009. Our former credit
facility included a $550 million four-year revolving credit facility and a $200
million four-year term loan which would have matured in June 2008. The Revolving
Credit Facility, which replaced our former credit facility, includes a $50
million swing line commitment. We have the option to elect two types of loans
under the Revolving Credit Facility which incur interest as applicable based on
either the Alternative Base Rate or the Applicable Eurodollar Margin (both
defined in the Revolving Credit Facility). The Revolving Credit Facility
contains various operating and financial covenants. Substantially all of our
significant subsidiaries are guarantors of the obligations under the Revolving
Credit Facility (see Note 11).
We
fulfill our short-term cash requirements with cash generated from our operations
and funds available from our Revolving Credit Facility. Available borrowings
under the Revolving Credit Facility are limited to certain percentages of homes
under contract, unsold homes, substantially improved lots, lots under
development, raw land and accounts receivable. There were no borrowings
outstanding under the Revolving Credit Facility at June 30, 2007 or September
30, 2006; however, we had $138.6 million and $145.6 million of letters of credit
outstanding under the Revolving Credit Facility at June 30, 2007 and September
30, 2006, respectively. At June 30, 2007, we had available borrowings of $268.0
million under the Revolving Credit Facility.
In July
2007, we replaced our Revolving Credit Facility with a new $500 million,
four-year unsecured revolving credit facility with a group of banks (the “New
Revolving Credit Facility”), which matures in 2011 and has a $350 million
sublimit for the issuance of standby letters of credit. We have the option to
elect two types of loans under this New Revolving Credit Facility which incur
interest as applicable based on either the Alternative Base Rate or the
Applicable Eurodollar Margin (both defined in the Revolving Credit
Facility).
On
October 10, 2007, we entered into a waiver and amendment of our New Revolving
Credit Facility, waiving events of default through May 15, 2008 under the
facility arising from our failure to file or deliver reports or other
information we would be required to file with the SEC and our decision to
restate our financial statements. Under this and the October 26, 2007
amendments, any obligations under the New Revolving Credit Facility will be
secured by certain assets and our ability to borrow under this facility is
subject to satisfaction of a secured borrowing base. We are permitted to grow
the borrowing base by adding additional cash and/or real estate as collateral
securing the New Revolving Credit Facility. In addition, we obtained additional
flexibility with respect to our financial covenants in the New Revolving Credit
Facility.
Senior Notes - The Senior
Notes are unsecured obligations ranking pari passu with all other existing and
future senior indebtedness. Substantially all of our significant subsidiaries
are full and unconditional guarantors of the Senior Notes and are jointly and
severally liable for obligations under the Senior Notes and the Revolving Credit
Facility. Each guarantor subsidiary is a 100% owned subsidiary of Beazer
Homes.
The
indentures under which the Senior Notes were issued contain certain restrictive
covenants, including limitations on payment of dividends. At June 30, 2007,
under the most restrictive covenants of each indenture, approximately $110.3
million of our retained earnings was available for cash dividends and for share
repurchases. Each indenture provides that, in the event of defined changes in
control or if our consolidated tangible net worth falls below a specified level
or in certain circumstances upon a sale of assets, we are required to offer to
repurchase certain specified amounts of outstanding Senior Notes.
In March
2007, we voluntarily repurchased $10.0 million of our outstanding 8 5/8% Senior
Notes and $10.0 million of our outstanding 8 3/8% Senior Notes on the open
market. The aggregate purchase price was $20.6 million, or an average of 102.9%
of the aggregate principal amount of the notes repurchased, plus accrued and
unpaid interest as of the purchase date. The repurchase of the notes resulted in
a $562,500 pretax loss during the second quarter of fiscal 2007. On March 28,
2007, we repurchased an additional $10.0 million of our outstanding 8 5/8%
Senior Notes which were cash settled on April 2, 2007 at a purchase price of
$9.85 million, or an average of 98.5% of the aggregate principal amount of the
notes repurchased, plus accrued and unpaid interest as of the purchase date. The
repurchase of the notes resulted in a $150,000 pre-tax gain. Gains/losses from
notes repurchased are included in other (loss) income, net in the accompanying
unaudited condensed consolidated statements of operations. Senior Notes
purchased by the Company were cancelled.
In June
2006, we issued $275 million of 8 1/8% Senior Notes due in June 2016.
Interest on the 8 1/8% Senior Notes is payable semi-annually. We may redeem
these notes at any time, in whole or in part, at a redemption price equal to the
principal amount thereof plus an applicable premium, as defined in the 8 1/8%
Senior Notes, plus accrued and unpaid interest.
On
October 26, 2007, we obtained consents from holders of our Senior Notes to
approve amendments of the indentures under which the Senior Notes were issued.
These amendments restrict our ability to secure additional debt in excess of
$700 million until certain conditions are met and enable us to invest up to $50
million in joint ventures. The consents also provided us with a waiver of any
and all defaults under the Senior Notes that may have occurred or may occur on
or prior to May 15, 2008 relating to filing or delivering annual and quarterly
financial statements. Fees and expenses related to obtaining these consents
totaled approximately $21 million.
Junior Subordinated Notes
- On June 15, 2006, we
completed a private placement of $103.1 million of unsecured junior subordinated
notes which mature on July 30, 2036 and are redeemable at par on or after July
30, 2011 and pay a fixed rate of 7.987% for the first ten years ending July 30,
2016. Thereafter, the securities have a floating interest rate equal to
three-month LIBOR plus 2.45% per annum, resetting quarterly. These notes were
issued to Beazer Capital Trust I, which simultaneously issued, in a private
transaction, trust preferred securities and common securities with an aggregate
value of $103.1 million to fund its purchase of these notes. The transaction is
treated as debt in accordance with GAAP. The obligations relating to these notes
and the related securities are subordinated to the Revolving Credit Facility and
the Senior Notes.
On April
30, 2008, we received a default notice from The Bank of New York Trust Company,
National Association, the trustee under the indenture governing these junior
subordinated notes. The notice alleges that we are in default under the
indenture because we have not yet furnished certain required information
(including our annual audited and quarterly unaudited financial statements). The
notice further alleges that this default will become an event of default under
the indenture if not remedied within 30 days. We expect to be able to cure this
default on or before May 15, 2008.
Other Secured Notes Payable -
We periodically acquire land through the issuance of notes payable. As of June
30, 2007 and September 30, 2006, we had outstanding notes payable of $121.4
million and $89.3 million, respectively, primarily related to land acquisitions.
These notes payable expire at various times through 2010 and had fixed and
variable rates ranging from 6.75% to 11.00% at June 30, 2007. These notes are
secured by the real estate to which they relate. During the first six months of
fiscal 2008, we repaid $95 million of these secured notes payable.
Model Home Financing Obligations -
Due to a continuing interest in certain model home sale-leaseback
transactions discussed in Note 12, we have recorded $116.5 million and $117.1
million of debt as of June 30, 2007 and September 30, 2006, respectively,
related to these “financing” transactions in accordance with SFAS 98 (As
amended), Accounting
for Leases.
These model home transactions incur interest at a variable rate of
one-month LIBOR plus 450 basis points, 9.82% as of June 30, 2007, and expire at
various times through 2015.
Other
than the addition of the model home financing obligations discussed above, there
were no material changes to the future maturities of our
borrowings.
(8)
Contingencies
Beazer
Homes and certain of its subsidiaries have been and continue to be named as
defendants in various construction defect claims, complaints and other legal
actions that include claims related to moisture intrusion.
Warranty
Reserves – We
currently provide a limited warranty (ranging from one to two years) covering
workmanship and materials per our defined performance quality standards. In
addition, we provide a limited warranty (generally ranging from a minimum of
five years up to the period covered by the applicable statute of repose)
covering only certain defined construction defects. We also provide a defined
structural element warranty with single-family homes and townhomes in certain
states.
Since we
subcontract our homebuilding work to subcontractors who generally provide us
with an indemnity and a certificate of insurance prior to receiving payments for
their work, claims relating to workmanship and materials are generally the
primary responsibility of the subcontractors.
Our
warranty reserves at June 30, 2007 and 2006 include accruals for Trinity Homes
LLC (“Trinity”) moisture intrusion issues discussed more fully below. Warranty
reserves are included in other liabilities and the provision for warranty
accruals is included in home construction and land sales expenses in the
unaudited condensed consolidated financial statements. We record reserves
covering anticipated warranty expense for each home closed. Management reviews
the adequacy of warranty reserves each reporting period based on historical
experience and management’s estimate of the costs to remediate the claims and
adjusts these provisions accordingly. While we believe that our warranty
reserves are adequate, historical data and trends may not accurately predict
actual warranty costs, or future developments could lead to a significant change
in the reserve. Our warranty reserves, which include amounts related to the
Trinity moisture intrusion issues discussed below, are as follows (in
thousands):
|
|
Three
Months Ended
June
30,
|
|
|
Nine
Months
Ended
June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Balance
at beginning of period
|
|
$ |
87,467 |
|
|
$ |
109,712 |
|
|
$ |
99,030 |
|
|
$ |
136,481 |
|
Provisions
(reductions) (1)
|
|
|
(4,163
|
) |
|
|
4,841 |
|
|
|
6,495 |
|
|
|
2,695 |
|
Payments
|
|
|
(10,124
|
) |
|
|
(13,645
|
) |
|
|
(32,345
|
) |
|
|
(38,268
|
) |
Balance
at end of period
|
|
$ |
73,180 |
|
|
$ |
100,908 |
|
|
$ |
73,180 |
|
|
$ |
100,908 |
|
(1) Upon
review of the adequacy of the warranty reserves, it was determined that the
warranty reserve as of June 30, 2007 and 2006, respectively, contained reserves
in excess of anticipated claims related to the Trinity moisture intrusion
issues. As a result, the provision for warranty reserves was reduced by $6.0
million and $12.0 million for the three and nine months ended June 30, 2007 and
$1.3 million and $21.7 million for the three and nine months ended June 30,
2006, respectively.
Trinity
Claims – Beazer
Homes and certain of our subsidiaries have been and continue to be named as
defendants in various construction defect claims, complaints and other legal
actions that include claims related to moisture intrusion. We have experienced a
significant number of such claims in our Midwest region and particularly with
respect to homes built by Trinity a subsidiary which was acquired in the
Crossmann acquisition in 2002.
As of
June 30, 2007, there were eight pending lawsuits related to such complaints
received by Trinity. All suits are by individual homeowners, and the cost to
resolve these matters is not expected to be material, either individually or in
the aggregate. Additionally, a class action suit was filed in the State of
Indiana in August 2003 against Trinity Homes LLC. The parties in the class
action reached a settlement agreement which was approved by the court on October
20, 2004.
The
settlement class includes, with certain exclusions, the current owners of all
Trinity homes that have brick veneer, where the closing of Trinity’s initial
sale of the home took place between June 1, 1998 and October 31, 2002. The
settlement agreement establishes an agreed protocol and process for assessment
and remediation of any external moisture intrusion issues at the homes which
includes, among other things, that the homes will be repaired at Trinity’s
expense. The settlement agreement also provides for payment of plaintiffs’
attorneys’ fees and for Trinity to pay an agreed amount for engineering
inspection costs for each home for which a claim is filed under the
settlement.
Under the
settlement, subject to Trinity’s timely performance of the specified assessments
and remediation activities for homeowners who file claims, each homeowner
releases Trinity, Beazer Homes Investments, LLC and other affiliated companies,
including Beazer Homes, from the claims asserted in the class action lawsuit,
claims arising out of external moisture intrusion, claims of improper brick
installation, including property damage claims, loss or diminution of property
value claims, and most personal injury claims, among others. No appeals of the
court’s order approving the settlement were received by the court within the
timeframe established by the court. The Company sent out the claims notices on
December 17, 2004, and the class members had until February 15, 2005 to file
claims. A total of 1,311 valid claims were filed (of the 2,161 total class
members), of which 613 complaints had been received prior to our receipt of the
claim notices. Class members who did not file a claim by February 15, 2005 are
no longer able to file a class action claim under the settlement or pursue an
individual claim against Trinity. As of June 30, 2007, we have completed
remediation of 1,410 homes related to 1,808 total Trinity claims.
Our
warranty reserves at June 30, 2007 and September 30, 2006 include accruals for
our estimated costs to assess and remediate all homes for which Trinity had
received complaints related to moisture intrusion. Warranty reserves also
include accruals for class action claims received, pursuant to the settlement
discussed above, from class members who had not previously contacted Trinity
with complaints.
The cost
to assess and remediate a home depends on the extent of moisture damage, if any,
that the home has incurred. Homes for which we receive complaints are classified
into one of three categories: 1) homes with no moisture damage, 2) homes with
isolated moisture damage or 3) homes with extensive moisture
damage.
As of
June 30, 2007 and September 30, 2006, we accrued for our estimated cost to
remediate homes that we had assessed and assigned to one of the above
categories, as well as our estimated cost to remediate those homes for which an
assessment had not yet been performed. For purposes of our accrual, we have
historically assigned homes not yet assessed to categories based on our
expectations about the extent of damage and trends observed from the results of
assessments performed to date. In addition, our cost estimation process
considers the subdivision of the claimant along with the categorization
discussed above. Once a home is categorized, detailed budgets are used as the
basis to prepare our estimated costs to remediate such home.
During
fiscal 2004, we initiated a program under which we offered to repurchase a
limited number of homes from specific homeowners. The program was concluded
during the first quarter of fiscal 2005. We have repurchased a total of 54 homes
under the program. During the nine months ended June 30, 2007, the Company sold
12 of the repurchased homes, bringing the total homes sold to date to 34. The
remaining 20 homes were acquired for an aggregate purchase price of $8.5 million
which is included in owned inventory at estimated fair value less costs to sell.
As of September 30, 2006 there were 32 homes remaining which were acquired for
an aggregate purchase price of $13.2 million.
The
following accruals at June 30, 2007 represent our best estimates of the costs to
resolve all asserted complaints associated with Trinity moisture intrusion
issues. We regularly review our estimate of these costs. Since the commencement
of the remediation program, our remediation cost per home has continued to
decrease as homes requiring more extensive repairs were addressed first and our
internal processes and procedures, including enhanced contractor bid
negotiations and inspections, improved as experience gained in addressing these
issues has yielded meaningful benefits on a per home basis. Changes in the
accrual for Trinity moisture intrusion issues during the period were as follows
(in thousands):
|
|
Three
Months Ended
June
30,
|
|
|
Nine
Months Ended
June
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Balance
at beginning of period
|
|
$ |
36,975 |
|
|
$ |
55,581 |
|
|
$ |
47,704 |
|
|
$ |
80,708 |
|
Reductions
|
|
|
(6,000
|
) |
|
|
(1,300
|
) |
|
|
(12,000
|
) |
|
|
(21,700
|
) |
Payments
|
|
|
(3,309
|
) |
|
|
(2,636
|
) |
|
|
(8,038
|
) |
|
|
(7,363
|
) |
Balance
at end of period
|
|
$ |
27,666 |
|
|
$ |
51,645 |
|
|
$ |
27,666 |
|
|
$ |
51,645 |
|
Actual
costs to assess and remediate homes in each category and subdivision, the extent
of damage to homes not yet assessed, estimates of costs to sell the remaining
repurchased homes, and losses on such sales could differ from our estimates. As
a result, the costs to resolve existing complaints could differ from our
recorded accruals and have a material adverse effect on our earnings in the
periods in which the matters are resolved. Additionally, it is possible that we
will incur additional losses related to these matters, including additional
losses related to homes for which we have not yet received
complaints.
Guarantees
Construction Completion
Guarantees
We and
our joint venture partners are generally obligated to the project lenders to
complete land development improvements and the construction of planned homes if
the joint venture does not perform the required development. Provided the joint
venture and the partners are not in default under any loan provisions, the
project lenders would be obligated to fund these improvements through any
financing commitments available under the applicable loans.
Loan to Value Maintenance
Agreements
We and
our joint venture partners generally provide credit enhancements to acquisition,
development and construction borrowings in the form of loan to value maintenance
agreements, which can limit the amount of additional funding provided by the
lenders (although not generally requiring repayment of the borrowings) to the
extent such borrowings plus construction completion costs exceed a specified
percentage of the value of the property securing the borrowings. During the nine
months ended June 30, 2007 and 2006, we were not required to make any payments
on the loan to value maintenance guarantees. At June 30, 2007, we had total loan
to value maintenance guarantees of $7.7 million related to our unconsolidated
joint venture borrowings.
Repayment
Guarantees
We and
our joint venture partners have repayment guarantees related to certain joint
venture’s borrowings. These repayment guarantees requires the repayment of all
or a portion of the debt of the unconsolidated joint venture in the event the
joint venture defaults on its obligations under the borrowing or files for
bankruptcy. During the nine months ended June 30, 2007 and 2006, we were not
required to make payments related to any portion of the repayment guarantees. At
June 30, 2007, we had repayment guarantees of $40.9 million related to the
borrowings on these applicable unconsolidated joint ventures, some of which are
only triggered upon bankruptcy of the joint venture.
Environmental
Indemnities
Additionally,
we and our joint venture partners generally provide unsecured environmental
indemnities to joint venture project lenders. In each case, we have performed
due diligence on potential environmental risks. These indemnities obligate us to
reimburse the project lenders for claims related to environmental matters for
which they are held responsible. During the three and nine months ended June 30,
2007 and 2006, we were not required to make any payments related to
environmental indemnities.
In
general, we have not recorded a liability for the non-contingent aspect of any
of these guarantees as such amounts are not material. In assessing the need to
record a liability for the contingent aspect of these guarantees in accordance
with FIN 45, Guarantor’s
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, we consider our historical
experience in being required to perform under the guarantees, the fair value of
the collateral underlying these guarantees and the financial condition of the
applicable unconsolidated joint ventures. In addition, we monitor the fair value
of the collateral of these unconsolidated joint ventures to ensure that the
related borrowings do not exceed the specified percentage of the value of the
property securing the borrowings. To date, we have not incurred any obligations
related to the aforementioned guarantees. Based on these considerations, we have
determined that it is remote that we will have to perform under the contingent
aspects of these guarantees and, as a result, have not recorded a liability for
the contingent aspects of these guarantees. To the extent the recording of a
liability related to such guarantees would be required, the recognition of such
liability would result in an increase to the carrying value of our investment in
the associated joint venture.
Other
Contingencies -
We and certain of our subsidiaries have been named as defendants in
various claims, complaints and other legal actions, most relating to
construction defects, moisture intrusion and related mold claims and product
liability. Certain of the liabilities resulting from these actions are covered
in whole or part by insurance. In our opinion, based on our current assessment,
the ultimate resolution of these matters will not have a material adverse effect
on our financial condition, results of operations or cash flows. We have accrued
$19.9 million and $18.5 million in other liabilities related to these matters as
of June 30, 2007 and September 30, 2006, respectively.
Other
Matters
In
November 2003, Beazer Homes received a request for information from the EPA
pursuant to Section 308 of the Clean Water Act seeking information concerning
the nature and extent of storm water discharge practices relating to certain of
our projects completed or under construction. The EPA has since requested
information on additional projects and has conducted site inspections at a
number of locations. In certain instances, the EPA or the equivalent state
agency has issued Administrative Orders identifying alleged instances of
noncompliance and requiring corrective action to address the alleged
deficiencies in storm water management practices. As of the date of filing this
report, no monetary penalties had been imposed in connection with such
Administrative Orders. The EPA has reserved the right to impose monetary
penalties at a later date, the amount of which, if any, cannot currently be
estimated. Beazer Homes has taken action to comply with the requirements of each
of the Administrative Orders and is working to otherwise maintain compliance
with the requirements of the Clean Water Act.
In June
2006, we received an Administrative Order issued by the New Jersey Department of
Environmental Protection alleging certain violations of a wetlands disturbance
permit with respect to a project in New Jersey, and assessing a proposed fine of
$630,000. We met with the Department to discuss their concerns and requested a
hearing on the matter which has not yet been scheduled. We believe that we have
significant defenses to the alleged violations and intend to contest the
agency’s findings and the proposed fine.
In August
2006, we received an Administrative Order issued by the New Jersey Department of
Environmental Protection alleging certain violations of a wetlands disturbance
permit with respect to a second project in New Jersey, and assessing a proposed
fine of $678,000. We met with the Department to discuss their concerns and
requested a hearing on the matter which has not yet been scheduled. We believe
that we have significant defenses to the alleged violations and intend to
contest the agency’s findings and the proposed fine.
We had
performance bonds and outstanding letters of credit of approximately $632.9
million and $92.9 million, respectively, at June 30, 2007 related principally to
our obligations to local governments to construct roads and other improvements
in various developments in addition to the letters of credit of approximately
$59.8 million relating to our land option contracts discussed in Note 3. We do
not believe that any such letters of credit or bonds are likely to be drawn
upon.
Investigations
and Litigation
We and
our subsidiary, Beazer Mortgage Corporation, are under criminal and civil
investigations by the United States Attorney’s office in the Western District of
North Carolina, the SEC and other federal and state agencies. We and certain of
our current and former employees, officers and directors have been named as
defendants in securities class action lawsuits, lawsuits regarding ERISA claims,
and derivative shareholder actions. In addition, certain of our subsidiaries
have been named in class action and multi-party lawsuits regarding claims made
by homebuyers. We cannot predict or determine the timing or final outcome of the
governmental investigations or the lawsuits or the effect that any adverse
findings in the investigations or adverse determinations in the lawsuits may
have on us. While we are cooperating with the governmental investigations,
developments, including the expansion of the scope of the investigations, could
negatively impact us, could divert the efforts and attention of our management
team from the operation of our business, and/or result in further departures of
executives or other employees. An unfavorable determination resulting from any
governmental investigation could result the filing of criminal charges, the
payment of substantial criminal or civil fines, the imposition of injunctions on
our conduct or the imposition of other penalties or consequences, including but
not limited to the Company having to adjust, curtail or terminate the conduct of
certain of our business operations. Any of these outcomes could have a material
adverse effect on our business, financial condition, results of operations and
prospects. An unfavorable determination in any of the lawsuits could result in
the payment by us of substantial monetary damages which may not be fully covered
by insurance. Further, the legal costs associated with the investigations and
the lawsuits and the amount of time required to be spent by management and the
Board of Directors on these matters, even if we are ultimately successful, could
have a material adverse effect on our business, financial condition and results
of operations. See the discussion below for details related to these
investigations and related litigation.
Investigations
United States Attorney, State and
Federal Agency Investigations. Beazer Homes and its subsidiary, Beazer
Mortgage Corporation, are under criminal and civil investigations by the United
States Attorney’s Office in the Western District of North Carolina and other
state and federal agencies concerning the matters that have been the subject of
the independent investigation by the Audit Committee of the Beazer Homes’ Board
of Directors (the “Investigation”) as described in Note 12 and further in this
note. The Company is fully cooperating with these investigations.
Securities and Exchange Commission
Investigation. On July 20, 2007, Beazer Homes received from the SEC a
formal order of private investigation to determine whether Beazer Homes and/or
other persons or entities involved with Beazer Homes have violated federal
securities laws, including, among others, the anti-fraud, books and records,
internal accounting controls, periodic reporting and certification provisions
thereof. The SEC had previously initiated an informal investigation in this
matter in May 2007. The Company is fully cooperating with the SEC
investigation.
Mortgage
Origination Issues
The
Investigation found evidence that employees of the Company’s Beazer Mortgage
Corporation subsidiary violated certain federal and/or state regulations,
including U.S. Department of Housing and Urban Development (“HUD”) regulations.
Areas of concern uncovered by the Investigation include: down payment assistance
programs; the charging of discount points; the closure of certain HUD Licenses;
closing accommodations; and the payment of a number of realtor bonuses and
decorator allowances in certain Federal Housing Administration (“FHA”) insured
loans and non-FHA conventional loans originated by Beazer Mortgage dating back
to at least 2000. The Investigation also uncovered limited improper practices in
relation to the issuance of a number of non-FHA Stated Income Loans. We reviewed
the loan documents and supporting documentation and determined that the assets
were effectively isolated from the seller and its creditors (even in the event
of bankruptcy). Based on that information, management continues to believe that
sale accounting at the time of the transfer of the loans to third parties was
appropriate.
We intend
to attempt to negotiate a settlement with prosecutors and regulatory authorities
that would allow us to quantify our exposure associated with reimbursement of
losses and payment of regulatory and/or criminal fines, if they are imposed. At
this time, we believe that although it is probable that a liability exists
related to this exposure, it is not reasonably estimable and would be
inappropriate to record a liability as of June 30, 2007.
Effective
February 1, 2008, we exited the mortgage origination business and entered into
an exclusive preferred lender arrangement with a national third-party mortgage
provider. This exclusive arrangement will continue to offer our homebuyers the
option of a simplified financing process while enabling us to focus on our core
competency of homebuilding.
Litigation
Securities Class Actions.
Beazer Homes and certain of our current and former executive officers are named
as defendants in a putative class action securities lawsuit filed on March 29,
2007 in the United States District Court for the Northern District of Georgia.
Plaintiffs filed this action on behalf of a purported class of purchasers of
Beazer Homes’ common stock between July 27, 2006 and March 27, 2007. The
complaint alleges that the defendants violated Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder by issuing
materially false and misleading statements regarding our business and prospects
because we did not disclose facts related to alleged improper lending practices
in our mortgage origination business. Plaintiffs seek an unspecified amount of
compensatory damages. Two additional lawsuits were filed subsequently on May 18,
2007 and May 21, 2007 in the United States District Court for the Northern
District of Georgia making similar factual allegations and asserting class
periods of July 28, 2005 through March 27, 2007, and March 30, 2005 through
March 27, 2007, respectively. The court has consolidated these three lawsuits
and plaintiffs are expected to file a consolidated amended complaint within
thirty days after the filing of our fiscal 2007 Form 10-K with the SEC. The
Company intends to vigorously defend against these actions.
Derivative Shareholder
Actions. Certain of Beazer Homes’ current and former executive officers
and directors were named as defendants in a derivative shareholder suit filed on
April 16, 2007 in the United States District Court for the Northern District of
Georgia. The complaint also names Beazer Homes as a nominal defendant. The
complaint, purportedly on behalf of Beazer Homes, alleges that the defendants
(i) violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5
promulgated thereunder; (ii) breached their fiduciary duties and misappropriated
information; (iii) abused their control; (iv) wasted corporate assets; and (v)
were unjustly enriched. Plaintiffs seek an unspecified amount of compensatory
damages against the individual defendants and in favor of Beazer Homes. An
additional lawsuit was filed subsequently on August 29, 2007 in the United
States District Court for the Northern District of Georgia asserting similar
factual allegations. A motion to consolidate the two Georgia derivative actions
is pending, and the plaintiffs are expected to designate the operative complaint
within five days after the Court consolidates the actions. Additionally, on
September 12, 2007, another derivative suit was filed in Delaware Chancery
Court, and the plaintiffs filed an amended complaint on October 26, 2007. The
Delaware complaint raises similar factual and legal claims as those asserted by
the plaintiffs in the Georgia derivative actions. The defendants have moved to
dismiss the Delaware action, or in the alternative, to stay the case pending
resolution of the derivative litigation pending in Georgia. The defendants
intend to vigorously defend against these actions.
ERISA Class Actions. On April
30, 2007, a putative class action complaint was filed on behalf of a purported
class consisting of present and former participants and beneficiaries of the
Beazer Homes 401(k) Plan, naming Beazer Homes, certain of its current and former
officers and directors and the Benefits Administration Committee as defendants.
The complaint was filed in the United States District Court for the Northern
District of Georgia. The complaint alleges breach of fiduciary duties, including
those set forth in the Employee Retirement Income Security Act (“ERISA”) as a
result of the investment of retirement monies held by the 401(k) Plan in common
stock of Beazer Homes at a time when participants were allegedly not provided
timely, accurate and complete information concerning Beazer Homes. Four
additional lawsuits were filed subsequently on May 11, 2007, May 14, 2007, June
15, 2007 and July 27, 2007 in the United States District Court for the Northern
District of Georgia making similar allegations. The court has consolidated these
five lawsuits, and the plaintiffs are expected to file a consolidated amended
complaint within thirty days after the filing of our fiscal 2007 Form 10-K with
the SEC. The Company intends to vigorously defend against these
actions.
Homeowners Class Action Lawsuits and
Multi-Plaintiff Lawsuit. Beazer Homes’ subsidiaries, Beazer Homes Corp.
and Beazer Mortgage Corporation, were named as defendants in a putative class
action lawsuit filed on March 23, 2007 in the General Court of Justice, Superior
Court Division, County of Mecklenburg, North Carolina. The case was removed to
the U.S. District Court for the Western District of North Carolina, Charlotte
Division. The complaint was filed as a putative class action. The purported
class is defined as North Carolina residents who purchased homes in subdivisions
in North Carolina containing homes constructed by the defendants where the
foreclosure rate is allegedly significantly higher than the state-wide average.
The complaint alleged that the defendants utilized unfair trade practices to
allow low-income purchasers to qualify for loans they allegedly could not
afford, resulting in foreclosures that allegedly diminished plaintiffs’ property
values. Plaintiffs sought an unspecified amount of compensatory damages and also
request that any damage award be trebled. On April 25, 2008, the District Court
dismissed all causes of action with prejudice. If Plaintiffs file a motion for
reconsideration of the District Court’s decision or appeal the judgment of the
District Court, the defendants will continue to vigorously defend this
action.
A second
putative homeowner class action lawsuit was filed on April 23, 2007 in the
United States District Court for the District of South Carolina, Columbia
Division. The complaint alleged that Beazer Homes Corp. and Beazer Mortgage
Corporation illegally facilitated the financing of the purchase of homes sold to
low-income purchasers, who allegedly would not have otherwise qualified for the
loans. Certain of the plaintiffs also alleged that the defendants’ practices
resulted in foreclosures that allegedly diminished plaintiffs’ property values.
The complaint demanded an unspecified amount of damages, including damages for
alleged violations of federal RICO statutes and punitive damages. The Company
filed a motion to dismiss and the District Court dismissed all causes of action
with prejudice on September 10, 2007. The plaintiffs subsequently filed a motion
for reconsideration which the District Court denied. The plaintiffs did not file
a notice of appeal and this case is now concluded.
An
additional putative class action was filed on April 8, 2008 in the United States
District Court for the Middle District of North Carolina, Salisbury Division,
against Beazer Homes, U.S.A., Inc., Beazer Homes Corp. and Beazer Mortgage
Corporation. The Complaint alleges that Beazer violated the Real Estate
Settlement Practices Act and North Carolina Gen. Stat. § 75-1.1 by (1)
improperly requiring homebuyers to use Beazer-owned mortgage and settlement
services as part of a down payment assistance program, and (2) illegally
increasing the cost of homes and settlement services sold by Beazer Homes Corp.
Plaintiff also asserts that Beazer was unjustly enriched by these alleged
actions. The purported class consists of all residents of North Carolina who
purchased a home from Beazer, using mortgage financing provided by and through
Beazer that included seller-funded down payment assistance, between January 1,
2000 and October 11, 2007. The Complaint demands an unspecified amount of
damages, various forms of equitable relief, treble damages, attorneys’ fees and
litigation expenses. The defendants have not yet filed a responsive pleading or
motion, but intend to vigorously defend this action.
Beazer
Homes Corp. and Beazer Mortgage Corporation are also named defendants in a
lawsuit filed on July 3, 2007, in the General Court of Justice, Superior Court
Division, County of Mecklenburg, North Carolina. The case was removed to the
U.S. District Court for the Western District of North Carolina, Charlotte
Division, but remanded on April 25, 2008 to the General Court of Justice,
Superior Court Division, County of Mecklenburg, North Carolina. The complaint
was filed on behalf of ten individual homeowners who purchased homes from Beazer
in Mecklenburg County. The complaint alleges certain deceptive conduct by the
defendants and brings various claims under North Carolina statutory and common
law, including a claim for punitive damages. The Company intends to vigorously
defend against this action.
Bond Indenture Trustee
Litigation. On September 10, 2007, we filed an Amended Complaint For
Declaratory Judgment and Injunctive Relief in an action pending in the United
States District Court in Atlanta, Georgia against the trustees under the
indentures governing our outstanding senior and convertible senior notes. We
sought, among other relief, a declaration from the court against the trustees
that the delay in filing with the SEC our Form 10-Q for the quarterly period
ended June 30, 2007 does not constitute a default under the applicable
indentures and that the delay will not give rise to any right of acceleration on
the part of the holders of the senior and convertible senior notes.
On
October 29, 2007, we notified the court and the trustees that we had
successfully concluded a consent solicitation concerning the notes at issue.
Because the consents provide us with a waiver of any and all defaults under the
indentures at issue that may have occurred or may occur prior to May 15, 2008
due to our failure to file or deliver reports or other information we would be
required to file with the SEC, we continue to request the court to rule on our
demand for declaratory judgment. In response to our notice of successful consent
solicitation, the trustees requested the court to deny our request for a ruling
on the merits and dismiss the action, without prejudice, on the ground that
there is no justiciable controversy ripe for determination. We opposed the
trustees’ suggestion of mootness and requested the court to grant us declaratory
judgment.
(9)
Stock Repurchase Program
On
November 18, 2005, as part of an acceleration of Beazer Homes’ comprehensive
plan to enhance stockholder value, our Board of Directors authorized an increase
in our stock repurchase plan to ten million shares of our common stock. Shares
may be purchased for cash in the open market, on the NYSE or in privately
negotiated transactions. We did not repurchase any shares in the open market
during the three or nine months ended June 30, 2007. During the nine months
ended June 30, 2006, we repurchased approximately 3.1 million shares for an
aggregate purchase price of $183.3 million or approximately $59 per share
pursuant to the plan. At June 30, 2007, we are authorized to purchase
approximately 5.4 million additional shares pursuant to the plan. We have
currently suspended our repurchase program and any resumption of such program
will be at the discretion of the Board of Directors, and is unlikely in the
foreseeable future.
(10)
Segment Information
As
defined in SFAS 131, “Disclosures About Segments of an
Enterprise and Related Information”, we have 32 homebuilding operating
segments operating in 21 states and one financial services segment. Revenues in
our homebuilding segments are derived from the sale of homes which we construct
and from land and lot sales. Revenues in our financial services segment are
derived primarily from mortgage originations provided predominantly to customers
of our homebuilding operations. We have aggregated our
homebuilding segments into four reportable segments, described below, for our
homebuilding operations and one reportable segment for our financial services
operations. The segments reported have been determined to have similar economic
characteristics including similar historical and expected future operating
performance, employment trends, land acquisition and land constraints, and
municipality behavior and meet the other aggregation criteria in SFAS 131. The
reportable homebuilding segments, and all other homebuilding operations not
required to be reported separately, include operations conducting business in
the following states:
West:
Arizona, California, Nevada and New Mexico
Mid-Atlantic:
Delaware, Maryland, New Jersey, New York, Pennsylvania, Virginia and West
Virginia
Florida
Southeast:
Georgia, North Carolina, South Carolina and Nashville, Tennessee
Other
Homebuilding: Colorado, Indiana, Kentucky, Ohio, Texas and Memphis,
Tennessee
Management’s
evaluation of segment performance is based on segment operating income, which
for our homebuilding segments is defined as homebuilding and land sale revenues
less the cost of home construction, impairments, if any, land development and
land sales, depreciation and amortization and certain selling, general and
administrative expenses which are incurred by or allocated to our homebuilding
segments. Segment operating income for our Financial Services segment is defined
as revenues less costs associated with our mortgage operations and certain
selling, general and administrative expenses incurred by or allocated to the
Financial Services segment. The accounting policies of our segments are those
described in Note 1 and the notes to the consolidated financial statements in
our 2007 Form 10-K which was concurrently filed with this Form 10-Q. The
following information is in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
June
30,
|
|
|
Nine
Months Ended
June
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
West
|
|
$ |
248,830 |
|
|
|
386,014 |
|
|
$ |
814,792 |
|
|
|
1,212,173 |
|
Mid-Atlantic
|
|
|
113,840 |
|
|
|
228,773 |
|
|
|
309,176 |
|
|
|
651,403 |
|
Florida
|
|
|
72,470 |
|
|
|
108,337 |
|
|
|
270,124 |
|
|
|
418,650 |
|
Southeast
|
|
|
152,121 |
|
|
|
213,178 |
|
|
|
491,359 |
|
|
|
570,139 |
|
Other
homebuilding
|
|
|
164,417 |
|
|
|
247,735 |
|
|
|
482,128 |
|
|
|
647,843 |
|
Financial
Services
|
|
|
10,003 |
|
|
|
14,903 |
|
|
|
32,972 |
|
|
|
43,729 |
|
Intercompany
elimination
|
|
|
(3,535
|
) |
|
|
(6,988
|
) |
|
|
(10,537
|
) |
|
|
(15,302
|
) |
Consolidated
total
|
|
$ |
758,146 |
|
|
$ |
1,191,952 |
|
|
$ |
2,390,014 |
|
|
$ |
3,528,635 |
|
|
|
Three
Months Ended
June
30,
|
|
|
Nine
Months Ended
June
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Operating
(loss) income (a)
|
|
|
|
|
|
|
|
|
|
|
|
|
West
|
|
$ |
(62,394 |
) |
|
$ |
46,389 |
|
|
$ |
(122,582 |
) |
|
$ |
195,280 |
|
Mid-Atlantic
|
|
|
(11,852
|
) |
|
|
49,280 |
|
|
|
(37,205
|
) |
|
|
150,066 |
|
Florida
|
|
|
(20,166
|
) |
|
|
16,979 |
|
|
|
(42,560
|
) |
|
|
83,773 |
|
Southeast
|
|
|
(1,917
|
) |
|
|
17,420 |
|
|
|
17,788 |
|
|
|
44,612 |
|
Other
homebuilding
|
|
|
(14,580
|
) |
|
|
7 |
|
|
|
(52,429
|
) |
|
|
(4,254
|
) |
Financial
Services
|
|
|
1,502 |
|
|
|
3,778 |
|
|
|
7,124 |
|
|
|
10,331 |
|
Segment
operating (loss) income
|
|
|
(109,407
|
) |
|
|
133,853 |
|
|
|
(229,864
|
) |
|
|
479,808 |
|
Corporate
and unallocated (b)
|
|
|
(72,408
|
) |
|
|
(9,133
|
) |
|
|
(170,564
|
) |
|
|
(32,337
|
) |
Total
operating (loss) income
|
|
|
(181,815
|
) |
|
|
124,720 |
|
|
|
(400,428
|
) |
|
|
447,471 |
|
Equity
in (loss) income of unconsolidated joint ventures
|
|
|
(939
|
) |
|
|
1,127 |
|
|
|
(7,012
|
) |
|
|
1,809 |
|
Other
income (loss), net
|
|
|
2,731 |
|
|
|
(73
|
) |
|
|
8,055 |
|
|
|
2,458 |
|
(Loss)
income before income taxes
|
|
$ |
(180,023 |
) |
|
$ |
125,774 |
|
|
$ |
(399,385 |
) |
|
$ |
451,738 |
|
|
|
Three
Months Ended
June
30,
|
|
|
Nine
Months Ended
June
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Depreciation
and Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
West
|
|
$ |
3,037 |
|
|
$ |
2,685 |
|
|
$ |
8,364 |
|
|
$ |
11,117 |
|
Mid-Atlantic
|
|
|
940 |
|
|
|
1,315 |
|
|
|
2,637 |
|
|
|
3,890 |
|
Florida
|
|
|
427 |
|
|
|
446 |
|
|
|
1,320 |
|
|
|
1,661 |
|
Southeast
|
|
|
859 |
|
|
|
1,164 |
|
|
|
2,862 |
|
|
|
3,501 |
|
Other
homebuilding
|
|
|
1,544 |
|
|
|
2,239 |
|
|
|
4,503 |
|
|
|
5,575 |
|
Financial
Services
|
|
|
96 |
|
|
|
117 |
|
|
|
355 |
|
|
|
331 |
|
Corporate
and unallocated
|
|
|
977 |
|
|
|
1,953 |
|
|
|
3,128 |
|
|
|
2,963 |
|
Consolidated
total
|
|
$ |
7,880 |
|
|
$ |
9,919 |
|
|
$ |
23,169 |
|
|
$ |
29,038 |
|
|
|
June
30,
2007
|
|
|
September
30,
2006
|
|
Assets
(c)
|
|
|
|
|
|
|
West
|
|
$ |
1,143,529 |
|
|
$ |
1,410,812 |
|
Mid-Atlantic
|
|
|
620,253 |
|
|
|
564,524 |
|
Florida
|
|
|
325,033 |
|
|
|
418,380 |
|
Southeast
|
|
|
452,595 |
|
|
|
435,771 |
|
Other
homebuilding
|
|
|
521,806 |
|
|
|
643,164 |
|
Financial
Services
|
|
|
122,071 |
|
|
|
205,669 |
|
Corporate
and unallocated (d)
|
|
|
1,005,955 |
|
|
|
1,036,351 |
|
Consolidated
total
|
|
$ |
4,191,242 |
|
|
$ |
4,714,671 |
|
(a)
|
Operating
(loss) income includes charges related to the abandonment of lot option
agreements totaling $44.8 million and $10.7 million for the three months
ended June 30, 2007 and 2006 and $89.1 million and $19.5 million for the
nine months ended June 30, 2007 and 2006, respectively. Operating (loss)
income also includes inventory impairment charges in the amounts of $109.4
million and $310.8 million for the three and nine months ended June 30,
2007 and $0.8 million for the three and nine months ended June
30, 2006, respectively, which have been recorded in the segments to
which the inventory relates (see Note 3).
|
(b)
|
Corporate
and unallocated includes amortization of capitalized interest and numerous
shared services functions that benefit all segments, the costs of which
are not allocated to the operating segments reported above including
information technology, national sourcing and purchasing, treasury,
corporate finance, legal, branding and other national marketing costs.
Corporate and unallocated for the three and nine months ended June 30,
2007 also includes a $29.8 million non-cash goodwill impairment charge to
write-off all of the goodwill allocated to certain underperforming markets
in Florida, Northern California and Nevada.
|
(c)
|
Segment
assets as of both June 30, 2007 and September 30, 2006 include goodwill
assigned from prior acquisitions.
|
(d)
|
Primarily
consists of cash and cash equivalents, consolidated inventory not owned,
deferred taxes, and capitalized interest and other corporate items that
are not allocated to the segments.
|
(11)
Supplemental Guarantor Information
As
discussed in Note 7, our obligation to pay principal, premium, if any, and
interest under certain debt are guaranteed on a joint and several basis by
substantially all of our subsidiaries. The guarantees are full and unconditional
and the guarantor subsidiaries are 100% owned by Beazer Homes. We have
determined that separate, full financial statements of the guarantors would not
be material to investors and, accordingly, supplemental financial information
for the guarantors is presented.
Beazer
Homes USA, Inc.
Condensed
Consolidating Balance Sheet Information
June
30, 2007
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beazer
Homes
USA,
Inc.
|
|
|
Guarantor
Subsidiaries
|
|
|
Beazer
Mortgage
Corp
|
|
|
Non-Guarantor
Subsidiaries
|
|
|
Consolidating
Adjustments
|
|
|
Consolidated
Beazer
Homes
USA,
Inc.
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
176,050 |
|
|
$ |
- |
|
|
$ |
8,811 |
|
|
$ |
237 |
|
|
$ |
(61,189 |
) |
|
$ |
123,909 |
|
Restricted
cash
|
|
|
- |
|
|
|
5,492 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
5,492 |
|
Accounts
receivable
|
|
|
- |
|
|
|
71,885 |
|
|
|
1,034 |
|
|
|
22 |
|
|
|
- |
|
|
|
72,941 |
|
Income
tax receivable
|
|
|
42,209 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
42,209 |
|
Owned
inventory
|
|
|
- |
|
|
|
2,906,689 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2,906,689 |
|
Consolidated
inventory not owned
|
|
|
- |
|
|
|
412,533 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
412,533 |
|
Residential
mortgage loans available-for-sale
|
|
|
- |
|
|
|
- |
|
|
|
24,354 |
|
|
|
- |
|
|
|
- |
|
|
|
24,354 |
|
Investments
in unconsolidated joint ventures
|
|
|
3,093 |
|
|
|
129,829 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
132,922 |
|
|