Commission File Number

001-12822

 

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)

 

YES

x

NO

o

 

Large accelerated filer

x

Accelerated filer

o

Non-accelerated filer

o

Smaller reporting company

o

 

YES

o

NO

x

	Class			Outstanding at May 9, 2008
Common Stock, $0.001 par value			39,234,305 shares

 

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 December 31, 2007, there was $18.6 million of total unrecognized compensation cost related to nonvested stock.  That cost is expected to be recognized over a weighted average period of 3.6 years.  For the three months ended December 31, 2007 and 2006, our total stock-based compensation expense, included in selling, general and administrative expenses (“SG&A”), was $1.9 million ($1.4 million net of tax) and $3.7 million ($2.6 million net of tax), respectively.

Activity relating to nonvested stock awards for the three months ended December 31, 2007 is as follows.

 

		Shares				Weighted Average Grant Date Fair Value
Beginning of period			905,898			$	48.42
Granted			26,411				8.49
Vested			(28,531	)			47.75
Forfeited			(49,565	)			45.16
End of period			854,213			$	47.39

 

In addition, during the three months ended December 31, 2007, employees surrendered 3,146 shares 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 $27,000, or approximately $8.58 per share.

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The fair value of each option/SSAR grant is estimated on the date of grant using the Black-Scholes option-pricing model. Expected life of options and SSARs granted is generally computed using the mid-point between the vesting period and contractual life of the options/SSARs granted.  Expected volatilities are based on the historical volatility of the Beazer Homes’ stock and other factors.  Expected discrete dividends of $0.00 per quarter (previously $0.10 per quarter as of September 30, 2007) are assumed in lieu of a continuously compounding dividend yield.  There were no option or SSAR grants in the quarter ended December 31, 2007.

The following table summarizes stock options and SSARs outstanding as of December 31, 2007, as well as activity during the three months then ended:

 

		Shares				Weighted- Average Exercise Price
Outstanding at beginning of period			2,052,379			$	45.01
Granted			-				-
Exercised			-				-
Forfeited			(102,146	)			43.09
Outstanding at end of period			1,950,233			$	45.11
Exercisable at end of period			769,129			$	28.88
Vested or expected to vest in the future			1,594,044			$	41.93

 

At December 31, 2007, the weighted-average remaining contractual life for all options/SSARs outstanding, currently exercisable, and vested or expected to vest in the future was 4.90 years, 3.96 years and 4.8 years, respectively.

At December 31, 2007, 1,594,044 options/SSARs were vested or expected to vest in the future with a weighted average exercise price of $41.93 and a weighted average expected life of 2.94 years.  At December 31, 2007, the aggregate intrinsic value of options/SSARs outstanding, vested and expected to vest in the future and options/SSARs exercisable was approximately $19,000.  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 option.  There were no stock option exercises during the three months ended December 31, 2007.

Recently Adopted Accounting Pronouncements.  On October 1, 2007, the Company adopted the provisions of Emerging Issues Task Force (“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.  EITF 06-8 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 requires 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 did not have a material impact on our consolidated financial position, results of operations or cash flows.

As described in Note 8, on October 1, 2007, the Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes – An Interpretation of FASB Statement No. 109.

Recent Accounting Pronouncements Not Yet Adopted.  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.

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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.

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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 December 31, 2007, we used discount rates of 18% to 22% in our estimated discounted cash flow impairment calculations.  We recorded impairments on inventory held for development and homes under construction of $108.1 million and $115.2 million during the quarters ended December 31, 2007 and December 31, 2006, respectively.

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 quarter ended December 31, 2007, we recorded inventory impairments on land held for sale of approximately $33.4 million.  No held for sale inventory impairments were recorded for the three months ended December 31, 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.

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(2) Supplemental Cash Flow Information

During the quarters ended December 31, we paid interest of $57.3 million in fiscal 2008 and $53.6 million in fiscal 2007.  In addition, we paid income taxes of approximately $140,000 in fiscal 2008 and $13.2 million in fiscal 2007.  The Company’s adoption of FIN 48 on October 1, 2007 was treated as a non-cash item in the consolidated statement of cash flows. The adoption of FIN 48 resulted in a $64.6 million increase to deferred income taxes, a $74.7 million increase in other liabilities and a $10.1 million reduction in stockholders’ equity in the first quarter of fiscal year 2008 (See Note 8).  We also had the following non-cash activity (in thousands):

 

		Quarter ended December 31,
		2007				2006
Supplemental disclosure of non-cash activity:
(Decrease) increase in consolidated   inventory not owned		$	(40,298	)		$	59,390
Land acquired through issuance of   notes payable			9,506				24,510
Issuance of stock under deferred   bonus stock plans			94				-

 

 (3) Inventory

 

		December 31,				September 30,
(in thousands)		2007				2007
Homes under construction		$	726,103			$	787,102
Development projects in progress			1,275,699				1,546,389
Unimproved land held for future development			10,133				11,101
Land Held for Sale			144,394				49,473
Model homes			133,757				143,726
Total Owned Inventory		$	2,290,086			$	2,537,791

 

Homes under construction includes homes finished and ready for delivery and homes in various stages of construction.  We had 679 ($161.3 million) and 862 ($179.4 million) completed homes that were not subject to a sales contract at December 31, 2007 and September 30, 2007, 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):

 

		December 31, 2007												September 30, 2007
		Held for Development				Land Held for Sale				Total Owned Inventory				Held for Development				Land Held for Sale				Total Owned Inventory
West Segment		$	760,892			$	19,875			$	780,767			$	868,675			$	35,578			$	904,253
Mid-Atlantic Segment			403,097				30,872				433,969				439,712				-				439,712
Florida Segment			179,726				4,497				184,223				203,417				-				203,417
Southeast Segment			275,529				57,477				333,006				373,111				1,407				374,518
Other			329,650				31,673				361,323				407,194				12,488				419,682
Unallocated			196,798				-				196,798				196,209				-				196,209
Total		$	2,145,692			$	144,394			$	2,290,086			$	2,488,318			$	49,473			$	2,537,791

 

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The following tables set forth, by reportable segment, the inventory impairments and lot option abandonment charges recorded (in thousands):

 

		Quarter Ended December 31,
		2007				2006
Development projects and homes
in process (Held for Development)
West		$	65,446			$	50,423
Mid-Atlantic			23,001				11,170
Florida			3,093				34,632
Southeast			7,543				2,673
Other			1,099				8,940
Unallocated			7,889				7,354
Subtotal		$	108,071			$	115,192
Land held for sale
Southeast		$	14,473			$	-
Other			18,967				-
Subtotal		$	33,440			$	-
Lot Option Abandonments
West		$	45			$	2,756
Mid-Atlantic			1,796				2,287
Florida			475				10,511
Southeast			23,425				961
Other			1,260				8,660
Subtotal		$	27,001			$	25,175
Total		$	168,512			$	140,367

The inventory impaired during the quarter ended December 31, 2007 represented 2,886 lots in 62 communities with an estimated fair value of $186.5 million. The impairments recorded on our held for development inventory, for all segments, primarily resulted from the continued 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 segment experienced the most significant amount of inventory impairments as compared to our other homebuilding segments due to the fact that the number of owned land and lots in the West segment comprise approximately 26% of our total land and lots owned as of December 31, 2007 and approximately 37.4% of the dollar value of our held for development inventory as of December 31, 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 quarter ended December 31, 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.

 

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 $131.4 million at December 31, 2007.  This amount includes non-refundable letters of credit of approximately $25.7 million. The total remaining purchase price, net of cash deposits, committed under all options was $1.3 billion as of December 31, 2007.  Only $77.1 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.

 

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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 ended December 31, 2007 were $27.0 million which represented 28 communities with the Southeast segment comprising 93% of the abandonments.

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 December 31, 2007 and September 30, 2007 reflect consolidated inventory not owned of $193.3 million and $237.4 million, respectively.  We consolidated $70.6 million and $92.3 million of lot option agreements as consolidated inventory not owned pursuant to FIN 46R as of December 31, 2007 and September 30, 2007, respectively.  In addition, as of December 31, 2007 and September 30, 2007, we recorded $122.7 million and $145.1 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 $137.6 million at December 31, 2007 and $177.9 million at September 30, 2007.  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 Unconsolidated Joint Ventures

 

As of December 31, 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 of unconsolidated joint ventures was approximately $16.1 million and $2.4 million for the three months ended December 31, 2007 and 2006, respectively.  Equity in loss of unconsolidated joint ventures for the three months ended December 31, 2007 includes the writedown of our investment in certain of our joint ventures, reflecting $12.8 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 December 31, 2007 and September 30, 2007:

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(in thousands)		December 31, 2007				September 30, 2007
Beazer's investment in joint ventures		$	99,426			$	109,143
Total equity of joint ventures			445,484				523,597
Total outstanding borrowings of joint ventures			714,196				785,437
Beazer's portion of loan to value maintenance guarantees			6,075				7,717
Beazer's portion of repayment guarantees			38,802				42,307

At December 31, 2007 and September 30, 2007, total outstanding borrowings of joint ventures above include $320.4 million and $450.6 million related to one joint venture in which we are a 2.58% partner.

 

During the three months ended March 31, 2008, the lender to one of the Company’s joint ventures, in which the Company has a 2.58% partnership interest, has notified the joint venture partners that it believes the joint venture is in default of certain joint venture loan agreement as a result of certain of the Company’s joint venture partners not complying with all aspects of the joint ventures’ loan agreements. The lender has not taken any action against the joint venture or the Company at this time. The joint venture partners are currently in discussions with the lender. The Company's share of the debt is approximately $9.5 million at March 31, 2008 with a total repayment guarantee of $15.1 million. Our equity interest at March 31, 2008 was $7.9 million in this joint venture.

 

In some instances, Beazer Homes and our joint venture partners have provided varying levels of guarantees of debt of our unconsolidated joint ventures. At December 31, 2007, these guarantees included, for certain joint ventures, construction completion guarantees, loan to value maintenance agreements, repayment guarantees and environmental indemnities.  See Note 9 for further discussion of these guarantees.

 

 (5) Interest

 

The following table sets forth certain information regarding interest (in thousands):

 

		Three Months Ended
		December 31,
		2007				2006
Capitalized interest in inventory,    beginning of period		$	87,560			$	78,996
Interest incurred and capitalized			29,104				36,809
Capitalized interest impaired			(4,952	)			(2,861	)
Capitalized interest amortized to house    construction and land sales expenses			(24,850	)			(23,343	)
Capitalized interest in inventory, end   of period		$	86,862			$	89,601

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(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
		December 31,
		2007				2006
Basic:
Net loss		$	(138,236	)		$	(79,903	)
Weighted average number of common shares outstanding			38,539				38,280
Basic loss per share		$	(3.59	)		$	(2.09	)
Diluted:
Net loss		$	(138,236	)		$	(79,903	)
Diluted weighted average common shares outstanding			38,539				38,280
Diluted loss per share		$	(3.59	)		$	(2.09	)

In computing diluted loss per share for the three months ended December 31, 2007 and 2006, all common stock equivalents were excluded from the computation of diluted loss per share as a result of their anti-dilutive effect.

(7) Borrowings

 

At December 31, 2007 and September 30, 2007 we had the following borrowings (in thousands):

 

	Maturity Date		December 31, 2007				September 30, 2007
Revolving Credit Facility	August 2011		$	-			$	-
8 5/8% Senior Notes*	May 2011			180,000				180,000
8 3/8% Senior Notes*	April 2012			340,000				340,000
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			44,524				118,073
Model home financing obligations	Various Dates			112,287				114,116
Unamortized debt discounts				(2,916	)			(3,033	)
Total			$	1,781,988			$	1,857,249
* 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. We had no borrowings outstanding under the Warehouse Line 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.  Effective November 14, 2007, we terminated the Warehouse Line, at which time there were no borrowings outstanding.

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Revolving Credit Facility - In July 2007, we replaced our former credit facility with a new $500 million, four-year unsecured revolving credit facility (the “Revolving Credit Facility”) with a group of banks, which matures in 2011.  The former credit facility included a $1 billion four-year revolving credit facility which would have matured in August 2009.  The Revolving Credit Facility has a $350 million sublimit for the issuance of standby letters of credit.  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.  There were no amounts outstanding under the Revolving Credit Facility at December 31, 2007 or September 30, 2007; however, we had $91.1 million and $133.2 million of letters of credit outstanding under the Revolving Credit Facility at December 31, 2007 and September 30, 2007, respectively.

On October 10, 2007, we entered into a waiver and amendment of our 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 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 Revolving Credit Facility.  In addition, we obtained additional flexibility with respect to our financial covenants in the Revolving Credit Facility. At December 31, 2007, we had available borrowings of $1.3 million under the Revolving Credit Facility.  On May 9, 2008, we secured additional assets under the facility which increased our borrowing capacity to approximately $55.0 million.

On May 13, 2008, we obtained a limited waiver which relaxed, through June 30, 2008, our minimum consolidated tangible net worth and maximum leverage ratio requirements under our Revolving Credit Facility.  During the term of the waiver, the minimum consolidated tangible net worth requirement shall not be less than $700 million and the leverage ratio shall not exceed 2.50 to 1.00. We are currently negotiating an amended covenant package with our bank group and expect to enter into an amendment prior to finalizing our financial statements for the fiscal quarter ending June 30, 2008.

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 December 31, 2007, under the most restrictive covenants of each indenture, no portion of our retained earnings was available for cash dividends or 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 102.8% 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 (expense) income, net in the accompanying unaudited condensed consolidated statements of operations.  Senior Notes purchased by the Company were cancelled.

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. Such fees and expenses have been deferred and will be amortized as an adjustment to interest expense in accordance with EITF 96-19 “Debtor’s Accounting for a Modification or Exchange of Debt Instruments.”

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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 December 31, 2007 and September 30, 2007, we had outstanding notes payable of $44.5 million and $118.1 million, respectively, primarily related to land acquisitions.  These notes payable expire at various times through 2010 and had fixed and variable rates ranging from 6.84% to 8.00% at December 31, 2007.  These notes are secured by the real estate to which they relate.  During the three months ended December 31, 2007, we repaid approximately $83 million of these secured notes payable.

Model Home Financing Obligations - Due to a continuing interest in certain model home sale-leaseback transactions, we have recorded $112.3 million and $114.1 million of debt as of December 31, 2007 and September 30, 2007, 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 (9.13% as of December 31, 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) Income Taxes

On October 1, 2007 the Company adopted 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.  The cumulative effect of the adoption of FIN 48 was recorded as a $10.1 million reduction to retained earnings as of October 1, 2007.  The total amount of gross unrecognized tax benefits as of October 1, 2007 was $72.5 million (which excludes interest, penalties, and the tax benefit relating to the deductibility of interest and state income tax).  The adoption of FIN 48 also increased our gross deferred tax assets by approximately $65 million. The total amount of unrecognized tax benefits that, if recognized, would affect the Company’s effective tax rate was $26.5 million, as of October 1, 2007.

Since the adoption of FIN 48 on October 1, 2007, there have been no material changes to the components of the Company’s total unrecognized tax benefit, including the amounts that, if recognized, would affect the Company’s effective tax rate.  It is reasonably possible that, within the next 12 months, total unrecognized tax benefits may decrease as a result of the potential resolution with the IRS relating to issues stemming from fiscal year 2003 and 2004 federal income tax returns, in addition to the resolution of various state income tax audits and/or appeals.  The change that could occur within the next 12 months, however, cannot be estimated at this time.  The statute of limitations for the Company’s major tax jurisdictions remains open for examination for fiscal years 2003 through 2007.

The Company recognizes accrued interest and penalties related to unrecognized tax benefits in the financial statements as a component of the income tax provision, consistent with the Company’s historical accounting policy.  After the adoption of FIN 48, the total amount of gross accrued interest and penalties was $19.3 million.  The Company recorded an additional $0.9 million of gross interest and penalties during the three months ended December 31, 2007, in accordance with FIN 48, resulting in a $20.2 million accrued balance at December 31, 2007.  The Company’s liability for unrecognized tax benefits combined with accrued interest and penalties is reflected as a component of other liabilities.

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Primarily as a result of recording significant inventory impairment charges during fiscal 2007 and in the quarter ended December 31, 2007, the balance of our deferred tax assets increased substantially. The net deferred tax asset of  $341.5 million as of December 31, 2007 assumes that the value of these assets will be realized. In assessing the recoverability of deferred tax assets, we analyze all evidence, both positive and negative. As of December 31, 2007, the positive evidence we considered included (1) the cyclical nature of the homebuilding industry; (2) our long history of profitability; (3) the determination that we are not in a cumulative loss position; (4) our experience that no NOLs have expired unutilized; (5) our ability to carryback NOLs; and (6) the steps we are taking to improve our future profitability. As of December 31, 2007, we considered the negative evidence including (1) our first quarter fiscal 2008 loss and the expectation of losses in the remainder of fiscal 2008 and (2) the uncertainty as to the timing of when the homebuilding industry will rebound.  After consideration of this evidence, we believe that as of December 31, 2007, it is more likely than not that our net deferred tax assets are recoverable. If market conditions within the homebuilding industry do not improve or continue to worsen and/or our assessment of the positive and negative evidence changes, it may affect our ability to fully realize the value of these assets, which may require a valuation adjustment and additional income tax expense in our consolidated statements of operations, and such expense could be material.

Our income tax receivable was $100.8 million and $64.0 million as of December 31, 2007 and September 30, 2007, respectively. This receivable relates primarily to the carryback of losses in fiscal 2007 and the first quarter of fiscal 2008 to open tax years in which we previously paid significant income taxes.

(9) 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 the primary responsibility of the subcontractors.

Our warranty reserves at December 31, 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
		December 31,
		2007				2006
Balance at beginning of period		$	57,053			$	99,030
Provisions			1,408				6,197
Payments			(9,505	)			(11,387	)
Balance at end of period		$	48,956			$	93,840

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.

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As of December 31, 2007, there were four 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 Investment Corp. 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 December 31, 2007, we have completed remediation of 1,611 homes related to 1,833 total Trinity claims.

Our warranty reserves at December 31, 2007 and September 30, 2007 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 December 31, 2007 and September 30, 2007, 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 three months ended December 31, 2007, the Company sold one of the repurchased homes, bringing the total homes sold to date to 38.  The remaining 16 homes were acquired for an aggregate purchase price of $5.1 million and are included in owned inventory at estimated fair value less costs to sell.

The following accruals at December 31, 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):

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		Three Months Ended December 31,
		2007				2006
Balance at beginning of period		$	12,116			$	47,704
Reductions		$	(612	)		$	-
Payments			(3,043	)			(1,993	)
Balance at end of period		$	8,461			$	45,711

 

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 quarters ended December 31, 2007 and 2006, we were not required to make any payments on the loan-to-value maintenance guarantees.  At December 31, 2007, we had total loan-to-value maintenance guarantees of $6.1 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 require 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 quarters ended December 31, 2007 and December 31, 2006, we were not required to make payments related to any portion of the repayment guarantees.  At December 31, 2007, we had repayment guarantees of $38.8 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 quarters ended December 31, 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.

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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 $17.5 million and $17.6 million in other liabilities related to these matters as of December 31, 2007 and September 30, 2007, 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 December 31, 2007, no monetary penalties have 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 2006, we received two Administrative Orders issued by the New Jersey Department of Environmental Protection.  The Orders allege certain violations of wetlands disturbance permits.  The two Orders assess proposed fines of $630,000 and $678,000, respectively. We have met with the Department to discuss their concerns on the two affected projects and have requested hearings on both matters.  We believe that we have significant defenses to the alleged violations and intend to contest the agency’s findings and the proposed fines.  We are currently pursuing settlement discussions with the Department.  A hearing before the judge has been postponed pending settlement discussions.

We had performance bonds and outstanding letters of credit of approximately $523.3 million and $88.3 million, respectively, at December 31, 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 $25.7 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 in 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 were the subject of the independent investigation by the Audit Committee of the Beazer Homes’ Board of Directors as more fully described below and in Notes 14 and 17 to the consolidated financial statements included in Item 8 of our 2007 Form 10-K. The Company is fully cooperating with these investigations.

 

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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.

Independent Investigation.The Audit Committee of the Beazer Homes Board of Directors has completed an independent investigation (the “Investigation”) of Beazer Homes' mortgage origination business, including, among other things, investigating certain evidence that the Company's subsidiary, Beazer Mortgage Corporation, violated U.S. Department of Housing and Urban Development (“HUD”) regulations and may have violated certain other laws and regulations in connection with certain of its mortgage origination activities. The results of the Investigation are fully described in Notes 14 and 17 to the consolidated financial statements included in Item 8 of our 2007 Form 10-K.

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 documentations 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.  See Notes 14 and 17 to the consolidated financial statements included in Item 8 of our 2007 Form 10-K for additional discussion of this matter.  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 December 31, 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 May 12, 2008, the date we filed our fiscal 2007 Form 10-K with the SEC.  The Company intends to vigorously defend against these actions.

 

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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 May 12, 2008, the date we filed 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 requested that any damage award be trebled.  On April 25, 2008, the District Court dismissed all causes of action with prejudice.

 

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 complaint was filed on behalf of ten individual homeowners who purchased homes from Beazer in Mecklenburg County. The case was removed to the U.S. District Court for the Western District of North Carolina, Charlotte Division, but remanded on April 23, 2008 to the General Court of Justice, Superior Court Division, County of Mecklenburg, North Carolina.  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.

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Beazer Homes’ subsidiaries, Beazer Homes Holdings Corp. and Beazer Mortgage Corporation, were named as defendants in a putative class action lawsuit filed on March 12, 2008 in the Superior Court of the State of California, County of Placer. The purported class is defined as all residential mortgage borrowers, who within four years of the filing of the complaint, purchased homes from Beazer with the assistance of a federally related mortgage loan in which Beazer accepted a fee or something of value from an affiliated or recommended title insurance company. The complaint alleges that the defendants violated the Real Estate Settlement Procedures Act ("RESPA") and asserts claims under a number of state statutes alleging that defendants engaged in a uniform and systematic practice of giving and/or accepting fees and kickbacks to affiliated businesses including affiliated and/or recommended title insurance companies. The complaint also alleges a number of common law claims. Plaintiffs seek an unspecified amount of damages under RESPA, unspecified compensatory and punitive damages and injunctive and declaratory relief, as well as attorneys' fees and costs.  The defendants have not yet been served in this action. We will 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 continued 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.

 

(10)  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 quarters ended December 31, 2007 and 2006.  At December 31, 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.

 (11)  Segment Information

As defined in SFAS 131, “Disclosures About Segments of an Enterprise and Related Information”, we have 31 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

 

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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 herein and the notes to the consolidated financial statements included in Item 8 of our 2007 Form 10-K.  The following information is in thousands:

 

		Three Months Ended December 31,
		2007				2006
Revenue
West		$	117,888			$	297,906
Mid-Atlantic			92,020				91,266
Florida			55,328				91,245
Southeast			97,495				155,612
Other homebuilding			136,621				158,155
Financial Services			5,436				11,743
Intercompany elimination			(1,640	)			(3,392	)
Consolidated total		$	503,148			$	802,535

 

		Three Months Ended December 31,
		2007				2006
Operating (loss) income (a)
West		$	(60,205	)		$	(26,326	)
Mid-Atlantic			(20,547	)			(9,528	)
Florida			(643	)			(30,701	)
Southeast			(43,255	)			8,311
Other homebuilding			(20,240	)			(18,888	)
Financial Services			(333	)			3,230
Segment operating loss			(145,223	)			(73,902	)
Corporate and unallocated (b)			(54,044	)			(53,557	)
Total operating loss			(199,267	)			(127,459	)
Equity in loss of    unconsolidated joint ventures			(16,140	)			(2,360	)
Other income, net			(2,818	)			2,161
Loss before income taxes		$	(218,225	)		$	(127,658	)

 

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		Three Months Ended December 31,
		2007				2006
Depreciation and Amortization
West		$	1,321			$	2,710
Mid-Atlantic			828				833
Florida			529				387
Southeast			920				898
Other homebuilding			1,486				1,463
Financial Services			87				130
Corporate and unallocated			887				1,137
Consolidated total		$	6,058			$	7,558

 

		December 31, 2007				September 30, 2007
Assets (c)
West		$	857,466			$	940,161
Mid-Atlantic			521,837				546,182
Florida			239,008				242,733
Southeast			361,122				403,472
Other homebuilding			396,431				469,520
Financial Services			95,795				99,710
Corporate and unallocated (d)			1,186,234				1,228,243
Consolidated total		$	3,657,893			$	3,930,021

 

(a)

Operating loss for the three months ended December 31, 2007 and 2006 include $27.0 million and $25.2 million, respectively, of charges related to the abandonment of lot option agreements.  Operating loss for the three months ended December 31, 2007 and 2006 also includes $141.5 million and $115.2 million, respectively, of inventory impairments 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.  In addition, for the three months ended December 31, 2007, corporate and unallocated also includes $7.5 million of investigation and related restatement expenses.

(c)

Segment assets as of both December 31, 2007 and September 30, 2007 include goodwill assigned from prior acquisitions as follows: $29.0 million in the West, $23.3 million in the Mid-Atlantic, $5.0 million in the Southeast and $11.2 million in Other homebuilding.  There was no change in goodwill from September 30, 2007 to December 31, 2007.

(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.

(12)  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.

 

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Beazer Homes USA, Inc.
Unaudited Condensed Consolidating Balance Sheet Information
December 31, 2007
(in thousands)
										Beazer												Consolidated
		Beazer Homes				Guarantor				Mortgage				Non-Guarantor				Consolidating				Beazer Homes
		USA, Inc.				Subsidiaries				Corp				Subsidiaries				Adjustments				USA, Inc.
ASSETS
Cash and cash equivalents		$	353,193			$	-			$	85			$	772			$	(117,510	)		$	236,540
Restricted cash			-				95,987				-				-				-				95,987
Accounts receivable			-				49,109				377				3				-				49,489
Income tax receivable			100,767				-				-				-				-				100,767
Owned inventory			-				2,290,086				-				-				-				2,290,086
Consolidated inventory not owned			-				193,300				-				-				-				193,300
Residential mortgage loans available-for-sale			-				-				93				-				-				93
Investments in unconsolidated joint ventures			3,093				96,333				-				-				-				99,426
Deferred tax assets			341,054				-				412				-				-				341,466
Property, plant and equipment, net			-				66,492				630				2				-				67,124
Goodwill			-				68,613				-				-				-				68,613
Investments in subsidiaries			1,250,071				-				-				-				(1,250,071	)			-
Intercompany			943,916				(1,126,161	)			58,153				7,280				116,812				-
Other assets			39,414				68,052				223				7,313				-				115,002
Total assets		$	3,031,508			$	1,801,811			$	59,973			$	15,370			$	(1,250,769	)		$	3,657,893
LIABILITIES AND STOCKHOLDERS' EQUITY
Trade accounts payable			-				98,716				-				-				-				98,716
Other liabilities			119,652				333,776				1,831				7,615				(259	)			462,615
Intercompany			(2,684	)			-				-				2,684				-				-
Obligations related to consolidated inventory   not owned			-				137,633				-				-				-				137,633
Senior notes (net of discounts of $2,916)			1,522,084				-				-				-				-				1,522,084
Junior subordinated notes			103,093				-				-				-				-				103,093
Warehouse line			-				-				-				-				-				-
Other secured notes payable\			-				44,524				-				-				-				44,524
Model home financing obligations			112,287				-				-				-				-				112,287
Total liabilities			1,854,567				614,514				1,831				10,299				(259	)			2,480,952
Stockholders' equity			1,176,941				1,187,297				58,142				5,071				(1,250,510	)			1,176,941
Total liabilities and stockholders' equity		$	3,031,508			$	1,801,811			$	59,973			$	15,370			$	(1,250,769	)		$	3,657,893

 

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Beazer Homes USA, Inc.

Unaudited Consolidating Balance Sheet Information

September 30, 2007

(in thousands)

Consolidated

Beazer

Other

Beazer

Homes

Guarantor

Beazer

Non-Guarantor

Consolidating

Homes

ASSETS

USA, Inc.

Subsidiaries

Mortgage Corp.

Subsidiaries

Adjustments

USA, Inc.

Cash and cash equivalents

$

447,296

$

-

$

9,700

$

1,559

$

(4,218

)

$

454,337

Restricted cash