UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

 

FORM 10-Q

 

ý  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended March 31, 2005

 

or

 

o  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 incorporation or organization)		(I.R.S. employer 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 an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

 

 

 

 

 

BEAZER HOMES USA, INC.

FORM 10-Q

 

INDEX

 

PART I					FINANCIAL INFORMATION
		Item 1			Financial Statements
				Unaudited Condensed Consolidated Balance Sheets, March 31, 2005 and September 30, 2004
				Unaudited Condensed Consolidated Statements of Operations, Three and Six Months Ended March 31, 2005 and 2004
				Unaudited Condensed Consolidated Statements of Cash Flows, Six Months Ended March 31, 2005 and 2004
				Unaudited Consolidated Statements of Comprehensive (Loss) Income, Three and Six Months Ended March 31, 2005 and 2004
				Notes to Unaudited Condensed Consolidated Financial Statements
		Item 2			Management’s Discussion and Analysis of Financial Condition and Results of Operations
		Item 3			Quantitative and Qualitative Disclosures About Market Risk
		Item 4			Controls and Procedures
PART II					OTHER INFORMATION
	Item 1				Legal Proceedings
	Item 4				Submission of Matters to a Vote of Security Holders
	Item 6				Exhibits and Reports on Form 8-K
SIGNATURES

 

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Part I. Financial Information

 

BEAZER HOMES USA, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)

 

		March 31, 2005			September 30, 2004
ASSETS
Cash and cash equivalents		$	15,930		$	320,880
Accounts receivable		74,505			70,574
Inventory
Owned inventory		2,532,378			2,089,330
Consolidated inventory not owned		182,813			254,765
Total inventory		2,715,191			2,344,095
Investments in and advances to unconsolidated joint ventures		76,638			44,748
Deferred tax asset		46,698			47,052
Property, plant and equipment, net		25,514			24,671
Goodwill		121,368			251,603
Other assets		55,305			45,839
Total assets		$	3,131,149		$	3,149,462
LIABILITIES AND STOCKHOLDERS’ EQUITY
Trade accounts payable		$	132,703		$	123,287
Other payables and accrued liabilities		480,069			437,608
Obligations related to consolidated inventory not owned		147,928			219,042
Term loan		200,000			200,000
Senior notes (net of discount of $13,910 and $14,663 respectively)		916,090			915,337
Other notes payable		34,700			22,067
Total liabilities		1,911,490			1,917,341
Stockholders’ equity:
Preferred stock (par value $.01 per share, 5,000,000 shares authorized, no shares issued)		—			—
Common stock (par value $.001 and $.01 per share, 80,000,000 shares authorized, 41,551,361 and 53,605,047 issued and 41,551,361 and 41,191,419 outstanding, respectively)		42			536
Paid-in capital		514,625			593,392
Retained earnings		721,522			741,701
Treasury stock (0 and 12,413,628 shares)		—			(88,150		)
Unearned compensation		(16,530		)	(14,748		)
Accumulated other comprehensive loss		—			(610		)
Total stockholders’ equity		1,219,659			1,232,121
Total liabilities and stockholders’ equity		$	3,131,149		$	3,149,462

 

See Notes to Unaudited Condensed Consolidated Financial Statements

 

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BEAZER HOMES USA, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

 

		Three Months Ended March 31,						Six Months Ended March 31,
		2005			2004			2005			2004
Total revenue		$	976,248		$	876,581		$	1,888,075		$	1,686,689
Costs and expenses:
Home construction and land sales		796,057			699,020			1,492,412			1,343,969
Selling, general and administrative		108,070			99,717			212,664			189,224
Goodwill impairment charge		130,235			—			130,235			—
Operating (loss) income		(58,114		)	77,844			52,764			153,496
Equity in income of unconsolidated joint ventures		301			378			199			935
Other income, net		1,436			1,872			4,000			3,017
(Loss) Income before income taxes		(56,377		)	80,094			56,963			157,448
Provision for income taxes		27,967			31,236			71,603			61,404
Net (loss) income		$	(84,344	)	$	48,858		$	(14,640	)	$	96,044
Weighted average number of shares:
Basic (1)		40,409			39,993			40,352			39,918
Diluted (1)		40,409			41,595			40,352			41,538
Net (loss) income per common share:
Basic (1)		$	(2.09	)	$	1.22		$	(0.36	)	$	2.41
Diluted (1)		$	(2.09	)	$	1.17		$	(0.36	)	$	2.31
Cash dividends per share (1)		$	0.10		$	0.03		$	0.13		$	0.06

 

(1)          Share and per share amounts for prior periods have been retroactively adjusted to reflect the effect of the Company’s March 2005 three-for-one stock split.

 

See Notes to Unaudited Condensed Consolidated Financial Statements

 

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BEAZER HOMES USA, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

		Six Months Ended March 31,
		2005			2004
Cash flows from operating activities:
Net (loss) income		$	(14,640	)	$	96,044
Adjustments to reconcile net (loss) income to net cash used in operating activities:
Depreciation and amortization		9,635			8,035
Equity in earnings of unconsolidated joint ventures		(199		)	(935		)
Goodwill impairment charge		130,235			—
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable		(3,931		)	24,028
Increase in inventory		(420,134		)	(333,772		)
Increase in other assets		(9,468		)	(11,451		)
Increase in trade accounts payable		9,416			28,193
Increase in other liabilities		43,803			11,741
Other changes		1,694			1,521
Net cash used in operating activities		(253,589		)	(176,596		)
Cash flows from investing activities:
Capital expenditures		(5,968		)	(3,926		)
Investments in unconsolidated joint ventures		(40,483		)	(3,116		)
Distributions from unconsolidated joint ventures		8,792			3,183
Net cash used in investing activities		(37,659		)	(3,859		)
Cash flows from financing activities:
Repayment of other notes payable		(9,443		)	—
Proceeds from 6 1/2% senior notes		—			198,100
Proceeds from stock option exercises		1,280			1,728
Dividends paid		(5,539		)	(2,726		)
Debt issuance costs		—			(460		)
Net cash (used in) provided by financing activities		(13,702		)	196,642
(Decrease) increase in cash and cash equivalents		(304,950		)	16,187
Cash and cash equivalents at beginning of period		320,880			73,372
Cash and cash equivalents at end of period		$	15,930		$	89,559
Supplemental cash flow information:
Interest paid		$	39,527		$	29,234
Income taxes paid		$	76,185		$	76,789
Supplemental disclosures of non-cash activities:
Consolidated inventory not owned		$	—		$	207,672
Land purchased through issuance of note payable		$	22,076		$	8,928

 

See Notes to Unaudited Condensed Consolidated Financial Statements

 

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BEAZER HOMES USA, INC.

UNAUDITED CONSOLIDATED STATEMENTS

OF COMPREHENSIVE (LOSS) INCOME

(in thousands)

 

		Three Months Ended March 31,						Six Months Ended March 31,
		2005			2004			2005			2004
Net (loss) income		$	(84,344	)	$	48,858		$	(14,640	)	$	96,044
Other comprehensive income:
Unrealized gain on interest rate swaps, net of related taxes		—			565			610			1,312
Comprehensive (loss) income		$	(84,344	)	$	49,423		$	(14,030	)	$	97,356

 

See Notes to Unaudited Condensed Consolidated Financial Statements

 

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(1) Basis of Presentation

 

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 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.  Certain items in prior period financial statements have been reclassified to conform to the current presentation.  For further information, refer to our audited consolidated financial statements appearing in our Annual Report on Form 10-K for the fiscal year ended September 30, 2004.

 

The Company’s stockholders approved an amendment to the Company’s certificate of incorporation to increase the number of authorized shares of common stock from 30 million to 80 million shares, which resulted in a change in par value to $.001 per share.  The Company’s Board of Directors subsequently approved a three-for-one stock split in February 2005.  The stock split was effected in the form of a stock dividend paid on March 22, 2005 to shareholders of record at the close of business on March 10, 2005.  All share and per share amounts (except par value) have been retroactively adjusted to reflect the split.  There was no net effect on stockholders’ equity as a result of the stock split.

 

(2) Goodwill Impairment Charge

 

During the quarter ended March 31, 2005, we recorded a $130.2 million non-cash, non tax-deductible impairment charge to write off substantially all of the goodwill allocated to certain underperforming markets in Indiana, Ohio, Kentucky and Charlotte, North Carolina.  The goodwill had been recorded as a result of our April 2002 acquisition of Crossmann Communities.  The fair value of each reporting unit is determined based on expected discounted future cash flows.  The forecasts and valuations of the respective divisions, along with weaker than anticipated local economies, particularly in the Midwest markets, and severe price competition, particularly at entry level price points, led us to conclude the goodwill was impaired in accordance with the provisions of SFAS 142.

 

(3) Stock-Based Compensation

 

We account for stock awards granted to employees under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations.  No compensation expense is recognized for stock options granted to employees because all stock options granted have exercise prices not less than the market value of our stock on the date of the grant.  Restricted stock granted to employees is valued based on the market price of the common stock on the date of the grant.

 

We account for stock awards issued to non-employees under the recognition and measurement principles of Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation” and Emerging Issues Task Force Issue No. 96-18: “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services.”  Stock options issued to non-employees are valued using the Black-Scholes option pricing

 

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model.  Restricted stock granted to non-employees is initially valued based on the market price of the common stock on the date of the grant.

 

Unearned compensation arising from the restricted stock granted to employees and from non-employee stock awards is amortized to expense using the straight-line method over the period of the restrictions. The balance of unearned compensation related to non-employee awards is adjusted on a quarterly basis to reflect changes in the market value of Beazer Homes’ common stock.  Unearned compensation is shown as a reduction of stockholders’ equity in the condensed consolidated balance sheets.

 

The following table illustrates the effect (in thousands, except per share amounts) on net income (loss) and earnings per share if we had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation:

 

		Three Months Ended March 31,						Six Months Ended March 31,
		2005			2004			2005			2004
Net (loss) income, as reported		$	(84,344	)	$	48,858		$	(14,640	)	$	96,044
Add: Stock-based employee compensation expense included in reported net (loss) income, net of related tax effects		1,750			1,129			3,099			2,108
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(2,730		)	(1,867		)	(5,847		)	(3,466		)
Pro forma net (loss) income		$	(85,324	)	$	48,120		$	(17,388	)	$	94,686
(Loss) earnings per share:
Basic - as reported (1)		$	(2.09	)	$	1.22		$	(0.36	)	$	2.41
Basic - pro forma (1)		$	(2.11	)	$	1.20		$	(0.43	)	$	2.37
Diluted - as reported (1)		$	(2.09	)	$	1.17		$	(0.36	)	$	2.31
Diluted - pro forma (1)		$	(2.11	)	$	1.16		$	(0.43	)	$	2.31

 

(1)          Share and per share amounts for prior periods have been retroactively adjusted to reflect the effect of the Company’s

March 2005 three-for-one stock split.

 

In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS 123(R) “Share-Based Payment”.  SFAS 123(R) requires the fair value of all share based payment transactions to be recognized in the financial statements.  As a result, upon adoption of SFAS 123(R) we will be required to recognize compensation expense for the fair value of employee stock options over the applicable vesting period.  We do not expect SFAS 123(R) to significantly change our accounting for restricted stock awards or non-employee stock awards.

 

SFAS 123(R) is effective as of the beginning of the first fiscal year that begins after June 15, 2005, the first quarter of our fiscal 2006.  SFAS 123(R) applies to new awards and to awards modified, repurchased, or cancelled after the required effective date, as well as to the unvested portion of awards outstanding as of the required effective date (“modified prospective application”). Upon adoption, prior periods may be, but are not required to be, restated.

 

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In March 2005, the Securities and Exchange Commission released SEC Staff Accounting Bulletin (“SAB”) No. 107, “Share-Based Payment.”  SAB No. 107 provides the SEC staff’s position regarding the implementation of SFAS No. 123(R).  SAB No. 107 contains interpretive guidance related to the interaction between SFAS No. 123(R) and certain SEC rules and regulations, as well as provides the staff’s views regarding the valuation of share-based payment transactions.  We are currently evaluating SAB No. 107 and will be incorporating it as part of our adoption of SFAS No. 123(R).

 

(4) Inventory

 

Inventory consists of (in thousands):

 

 

		March 31, 2005			September 30, 2004
Homes under construction		$	1,026,916		$	847,517
Development projects in progress		1,318,522			1,105,933
Unimproved land held for future development		100,779			57,563
Model homes		86,161			78,317
Consolidated inventory not owned		182,813			254,765
		$	2,715,191		$	2,344,095

 

Homes under construction includes homes finished and ready for delivery and homes in various stages of construction.  Excluding model homes, we had 365 completed homes (valued at $70.2 million) and 345 completed homes (valued at $69.1 million) at March 31, 2005 and September 30, 2004, respectively, that were not subject to a sales contract.

 

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.

 

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 on our consolidated balance sheets in other payables and accrued 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 $207.1 million at March 31, 2005.  This amount includes letters of credit of approximately $28.6 million. Below is a summary of amounts, net of cash deposits, committed under all options at March 31, 2005 (in thousands):

 

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		Aggregate Exercise Price of Options
Options with specific performance		$	19,740
Options without specific performance		$	2,045,549
Total options		$	2,065,289

 

Certain of our option contracts are with sellers who are deemed to be Variable Interest Entities (“VIEs”) under FASB Revised Interpretation No. 46, “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 March 31, 2005 and September 30, 2004 reflect consolidated inventory not owned of $182.8 million and $254.8 million, respectively.  Obligations related to consolidated inventory not owned totaled $147.9 million at March 31, 2005 and $219.0 million at September 30, 2004.  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.  The above disclosures of amounts committed under options include our obligations related to consolidated inventory not owned.

 

(5) Investments in and Advances to Unconsolidated Joint Ventures

 

We participate in a number of land development joint ventures in which we have less than a controlling interest.  Our joint ventures are typically entered into with developers and other homebuilders to develop finished lots for sale to the joint venture’s members and other third parties.  We account for our interest in these joint ventures under the equity method.  We recognize our share of profits from the sale of lots to other buyers.  Our share of profits from lots we purchase from the joint ventures are deferred and treated as a reduction of the cost of the land purchased from the joint venture.  Such profits are subsequently recognized at the time the home closes and title passes to the homebuyer.

 

Our joint ventures typically obtain secured acquisition and development financing.  In some instances, we and our joint venture partners have provided varying levels of guarantees of debt of our unconsolidated joint ventures.  At March 31, 2005 and September 30, 2004, we had repayment guarantees of $23.2 million and $10.0 million, respectively, and loan-to-value maintenance guarantees of $64.8 million and $56.8 million, respectively, of debt of unconsolidated joint ventures.  Repayment guarantees require us to repay our share of debt of unconsolidated joint ventures in the event the joint venture defaults on its obligations under the

 

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borrowings.  Loan-to-value maintenance guarantees require us to repay our share of the venture’s borrowings to the extent such borrowings exceed a specified percentage of the value of the property securing the loan.

 

(6) Interest

 

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

 

		Three Months Ended March 31,						Six Months Ended March 31,
		2005			2004			2005			2004
Capitalized interest in inventory, beginning of period		$	48,551		$	37,469		$	44,121		$	34,285
Interest incurred and capitalized		21,082			18,532			41,471			35,403
Capitalized interest amortized to cost of sales		(17,353		)	(15,187		)	(33,312		)	(28,874		)
Capitalized interest in inventory, end of period		$	52,280		$	40,814		$	52,280		$	40,814

 

(7) (Loss) Earnings Per Share

 

Basic and diluted (loss) earnings per share were calculated as follows (in thousands, except per share amounts):

 

		Three Months Ended March 31,						Six Months Ended March 31,
		2005			2004			2005			2004
Basic:
Net (loss) income		$	(84,344	)	$	48,858		$	(14,640	)	$	96,044
Weighted average number of common shares outstanding		40,409			39,993			40,352			39,918
Basic (loss) earnings per share		$	(2.09	)	$	1.22		$	(0.36	)	$	2.41
Diluted:
Net (loss) income		$	(84,344	)	$	48,858		$	(14,640	)	$	96,044
Weighted average number of common shares outstanding		40,409			39,993			40,352			39,918
Effect of dilutive securities:
Restricted stock		—			767			—			766
Options to acquire common stock		—			834			—			855
Diluted weighted average common shares outstanding		40,409			41,594			40,352			41,539
Diluted (loss) earnings per share		$	(2.09	)	$	1.17		$	(0.36	)	$	2.31

 

Basic and diluted (loss) earnings per share amounts and weighted average shares outstanding for prior periods have been retroactively restated to reflect the effect of the Company’s March 2005 three-for-one stock split.

 

The calculation of diluted loss per share for the three and six months ended March 31, 2005, as calculated above, excludes the impact of the assumed conversion of shares underlying restricted stock units, stock options and our 4 5/8% Convertible Senior Notes because their inclusion would have been antidilutive.

 

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In September 2004 the Emerging Issues Task Force (“EITF”) of the FASB reached a consensus on EITF Issue No. 04-8: “The Effect of Contingently Convertible Debt on Diluted Earnings Per Share” (“EITF 04-8”).  The consensus was ratified by the FASB in October 2004.  EITF 04-8 requires that shares issuable upon conversion of contingently convertible debt instruments (“Co-Cos”) be included in diluted earnings per share computations using the “if-converted method” regardless of whether the issuer’s stock price exceeds the contingent conversion price.  Prior to EITF 04-8, shares issuable upon conversion of Co-Cos were generally excluded from diluted earnings per share computations until the issuer’s stock price exceeded the contingent conversion price.  EITF 04-8, which applies to our 4 5/8 % Convertible Senior Notes issued in June 2004, was effective beginning with the first quarter of our fiscal 2005.  Restatement of prior period earnings per share amounts presented for comparative purposes is required.  The calculation of diluted loss per share for the three and six month periods ended March 31, 2005 excludes the impact of EITF 04-8 because its inclusion would be antidilutive.  Our 4 5/8 % Convertible Senior Notes were not outstanding at March 31, 2004, the adoption of EITF 04-8 had no impact on previously reported diluted earnings per share for the three and six months ended March 31, 2004.

 

(8) Long Term Debt

 

We have a credit facility (the “Credit Facility”) with a group of banks.  The Credit Facility includes a $550 million four-year revolving credit facility (the “Revolving Credit Facility”) and a $200 million four-year term loan (the “Term Loan”).  The Revolving Credit Facility and Term Loan mature in June 2008.  The Revolving Credit Facility and the Term Loan bear interest at a variable rate (4.44% at March 31, 2005) based upon LIBOR or the alternate base rate of interest announced by our lead bank.  The Credit Facility contains various operating and financial covenants.

 

Available borrowings under the Revolving Credit Facility are limited to certain percentages of homes under contract, unsold homes, substantially improved lots and accounts receivable.  At March 31, 2005, we had no borrowings outstanding, and had available borrowings of $466.6 million under the Revolving Credit Facility.

 

In June 2004, we issued $180 million aggregate principal amount of 4 5/8% Convertible Senior Notes due 2024 (the “Convertible Senior Notes”) in a private placement pursuant to Rule 144A promulgated under the Securities Act of 1933, as amended.  In August 2004, we filed a registration statement on Form S-3 with the SEC covering resales of the Convertible Senior Notes and the common stock issuable upon conversion.  The Convertible Senior Notes were issued at a price of 100% of their face amount (before underwriting discount and other issuance costs).  Interest on the Convertible Senior Notes is payable semiannually.  The notes are convertible by holders into shares of our common stock at an initial conversion rate of 19.44 shares of Beazer Homes common stock per $1,000 principal amount (subject to adjustment for customary reasons), representing an initial conversion price of $51.44 per share of common stock (adjusted for the March 2005 three-for-one stock split).  The notes are convertible if the price of our common stock is equal to or greater than 120% of the conversion price for 20 of the last 30 consecutive trading days of a calendar quarter and under certain other circumstances as more fully described in Note 8 to our consolidated financial statements appearing in our Annual Report on Form 10-K for the fiscal year ended September 30, 2004.

 

We may, at our option, redeem for cash the Convertible Senior Notes in whole or in part at any time on or after June 15, 2009, initially at 101.321% of the principal amount, declining to 100% of the principal amount after June 15, 2011.  Holders have the right to require us to purchase all or any portion of the Convertible Senior Notes for cash on June 15, 2011, June 15, 2014 and June 15, 2019 or if we undergo a fundamental change, as

 

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defined.  In each case, we will pay a purchase price equal to 100% of the principal amount of the notes to be purchased plus any accrued and unpaid interest to such purchase date.

 

In November 2003, we issued $200 million 6 ½% Senior Notes due November 2013 (the “Original Notes”) in a private placement pursuant to Rule 144A and Regulation S promulgated under the Securities Act of 1933, as amended.  The Original Notes were issued at a price of 100% of their face amount (before underwriting discount and other issuance costs).  In May 2004 we completed an offer to exchange all of the outstanding Original Notes for an equal amount of 6 ½% Senior Notes due November 2013 (the “6 ½% Senior Notes”), which were registered under the Securities Act of 1933.  Interest on the 6 ½% Senior Notes is payable semiannually.  We may, at our option, redeem the 6 ½% Senior Notes in whole or in part at any time after November 2008, initially at 103.250% of the principal amount, declining to 100% of the principal amount after November 2011.  We may redeem the 6 ½% Senior Notes, in whole or in part, at any time before November 2008 at a redemption price equal to the principal amount thereof plus a “make-whole” premium, plus accrued and unpaid interest.  A portion of such notes may also be redeemed prior to November 2006 under certain conditions.

 

In April 2002, we issued $350 million 8 3/8% Senior Notes due April 2012 (the “Original Notes”) in a private placement pursuant to Rule 144A and Regulation S promulgated under the Securities Act of 1933, as amended.  In September 2002 we completed an offer to exchange all of the outstanding Original Notes for an equal amount of 8 3/8% Senior Notes due 2012 (the “8 3/8% Senior Notes”), which were registered under the Securities Act of 1933.  The terms of the 8 3/8% Senior Notes were substantially identical to the terms of the Original Notes.  The Original Notes were issued at a price of 100% of their face amount (before underwriting discount and other issuance costs).  Interest on the 8 3/8% Senior Notes is payable semiannually.  We may, at our option, redeem the 8 3/8% Senior Notes in whole or in part at any time after April 2007, initially at 104.188% of the principal amount, declining to 100% of the principal amount after April 2010.

 

In May 2001, we issued $200 million 8 5/8% Senior Notes due May 2011 (the “8 5/8% Senior Notes”) at a price of 99.178% of their face amount (before underwriting discount and other issuance costs).  Interest on the 8 5/8% Senior Notes is payable semiannually.  We may, at our option, redeem the 8 5/8% Senior Notes in whole or in part at any time after May 2006, initially at 104.3125% of the principal amount, declining to 100% of the principal amount after May 2009.

 

The Convertible Senior Notes, the 6 ½ % Senior Notes, the 8 3/8% Senior Notes and the 8 5/8% Senior Notes (collectively, the “Senior Notes”) are unsecured obligations ranking pari passu with all other existing and future senior indebtedness.  All of our significant subsidiaries are full and unconditional guarantors of the Senior Notes and our obligations under the Credit Facility, and are jointly and severally liable for obligations under the Senior Notes and the 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 March 31, 2005, under the most restrictive covenants of each indenture, approximately $247.1 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.

 

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We are exposed to fluctuations in interest rates.  From time to time, we have entered into derivative agreements to manage interest costs and hedge against risks associated with fluctuating interest rates related to $100 million of floating rate debt.  At September 30, 2004, we had swap agreements to effectively fix the interest rate on $100 million in floating rate debt.  As of September 30, 2004, we had recorded a cumulative after-tax other comprehensive loss of $610,000 as a result of the Swap Agreements.  The estimated fair value of the Swap Agreements, based on current market rates, approximated $1.0 million at September 30, 2004 and was included in other liabilities.  The Swap Agreements matured on December 20, 2004.

 

(9) Contingencies

 

Trinity Claims - We 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 and mold.  We have experienced a significant number of such claims in our Midwest region and particularly with respect to homes built by Trinity Homes LLC, a subsidiary which we acquired in the Crossmann acquisition in 2002.

 

As of March 31, 2005, there were 13 pending lawsuits related to such complaints received by Trinity.  Twelve of these involve suits by individual homeowners, and the cost to resolve these matters is not expected to be material, either individually or in the aggregate.  One of these suits is a class action suit that was filed in the State of Indiana in August 2003.  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 water 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 water 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 the Company’s 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.

 

Our warranty reserves at March 31, 2005 and September 30, 2004 include accruals for our estimated costs to assess and remediate all homes for which Trinity had received complaints related to moisture intrusion and mold, including a provision for legal fees.  Our warranty reserves at March 31, 2005 also include accruals for

 

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class action claims received, pursuant to the settlement discussed above, from class members who had not previously contacted Trinity with complaints.

 

The following is a rollforward of total complaints received as of each balance sheet date:

 

		Three Months Ended March 31,				Six Months Ended March 31,
		2005		2004		2005		2004
Complaints outstanding at beginning of period		904		511		887		415
Complaints received during the period		703		248		754		344
Complaints resolved during the period		(23	)	—		(57	)	—
Complaints outstanding at end of the period		1,584		759		1,584		759

 

The cost to assess and remediate a home depends on the extent of moisture damage, if any, that the home has incurred.  We classify homes for which we receive complaints 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 March 31, 2005 and September 30, 2004, 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 we had received complaints, but for which we had not yet performed assessments.  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, beginning in the quarter ended March 31, 2005, the Company refined its cost estimation process to consider the subdivision of the claimant along with the categorization discussed above.  Once a house is categorized, detailed budgets are used as the basis to prepare our estimated costs to remediate such homes.

 

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 fifty-four (54) homes under the program.  During the quarter and six months ended March 31, 2005, we sold two and three of the repurchased homes, respectively.  The remaining fifty-one homes were acquired for an aggregate purchase price of $17.2 million.  Our accrual at March 31, 2005 includes our estimated costs to sell homes that we have repurchased, and our estimated losses on the sale of those homes, if any.

 

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Changes in our accrual for Trinity moisture intrusion and related mold issues during the period were as follows (in thousands):

 

		Three Months Ended March 31,						Six Months Ended March 31,
		2005			2004			2005			2004
Balance at beginning of period		$	45,900		$	14,014		$	42,173		$	9,200
Provisions		45,000			11,373			55,000			18,258
Payments		(4,165		)	(1,292		)	(10,438		)	(3,363		)
Balance at end of period		$	86,735		$	24,095		$	86,735		$	24,095

 

Our accruals at March 31, 2005 represent our best estimates of the costs to resolve all asserted complaints.  Actual costs to assess and remediate homes in each category and subdivision, the extent of damage to homes not yet assessed, our estimates of costs to sell repurchased homes, and our 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.  However, the amount or range of such losses cannot be determined at this time.

 

Warranty Reserves - - We provide a limited warranty (ranging from one to two years) of workmanship and materials with each of our homes. Such warranty covers defects in plumbing, electrical, heating, cooling and ventilating systems and construction defects. In addition, we provide a warranty (ranging from a minimum of ten years up to the period covered by the applicable statute of repose) with each of our homes, covering construction defects only. 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 our subcontractors.

 

As noted above, our warranty reserves at March 31, 2005 and September 30, 2004 include accruals for Trinity moisture intrusion and related mold issues.  Warranty reserves are included in accrued expenses in the consolidated financial statements.  We record reserves covering our 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 our actual warranty costs or future developments could lead to a significant change in the reserve.

 

Changes in our warranty reserves, which include amounts related to the Trinity moisture intrusion and mold issues discussed above, during the period are as follows (in thousands):

 

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		Three Months Ended March 31,						Six Months Ended March 31,
		2005			2004			2005			2004
Balance at beginning of period		$	93,631		$	47,939		$	86,163		$	40,473
Provisions		53,981			19,303			72,296			35,190
Payments		(10,897		)	(5,515		)	(21,744		)	(13,936		)
Balance at end of period		$	136,715		$	61,727		$	136,715		$	61,727

 

Other Contingencies - The Company and certain of its subsidiaries have been named as defendants in various claims, complaints and other legal actions, including relating to moisture intrusion and related mold claims, construction defects and product liability.  Certain of the liabilities resulting from these actions are covered by insurance.  With respect to certain general liability exposures, including construction defect, moisture intrusion and related mold claims and product liability, interpretation of underlying current and future trends, assessment of claims and the related liability and reserve estimation process is highly judgmental due to the complex nature of these exposures, with each exposure exhibiting unique circumstances.  In particular, for construction defect liability there is a high degree of uncertainty relating to whether insurance coverage exists, when losses occur, the size of each loss, expectations for future interpretive rulings concerning contract provisions and the extent to which the assertion of these claims will expand geographically.  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.

 

(10) Income Taxes

 

A provision for income taxes for the three and six month periods ended March 31, 2005 has been recorded at an estimated effective income tax rate exclusive of the goodwill impairment charge as such charge is not tax deductible.  Our effective income tax rate, exclusive of the goodwill impairment charge was 37.87% and 38.25% for the three and six month periods ended March 31, 2005, respectively.  Our effective tax rate was 39.0% for the three and six month periods ended March 31, 2004.

 

(11)  Supplemental Guarantor Information

 

As discussed in Note 8, Beazer Homes’ obligations to pay principal, premium, if any, and interest under certain debt are guaranteed on a joint and several basis by substantially all of its subsidiaries.  The guarantees are full and unconditional and the guarantor subsidiaries are 100% owned by Beazer Homes USA, Inc.  The Company has 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.

Condensed Consolidating Balance Sheet

March 31, 2005

(in thousands)

 

		Beazer Homes USA, Inc.			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminating Entries			Consolidated Beazer Homes USA, Inc.
ASSETS
Cash and cash equivalents		$	76,405		$	(60,751	)	$	276		$	—		$	15,930
Accounts receivable		—			73,590			915			—			74,505
Owned Inventory		—			2,524,219			—			8,159			2,532,378
Consolidated inventory not owned		—			182,813			—			—			182,813
Investments in unconsolidated joint ventures		—			76,638			—			—			76,638
Deferred tax asset		46,698			—			—			—			46,698
Property, plant and equipment, net		—			25,514			—			—			25,514
Goodwill		—			121,368			—			—			121,368
Investments in subsidiaries		1,328,172			—			—			(1,328,172		)	—
Intercompany		925,514			(944,840		)	19,326			—			—
Other assets		17,879			27,276			10,150			—			55,305
Total Assets		$	2,394,668		$	2,025,827		$	30,667		$	(1,320,013	)	$	3,131,149
LIABILITIES AND STOCKHOLDERS’ EQUITY
Trade accounts payable		$	—		$	132,643		$	60		$	—		$	132,703
Other liabilities		62,102			403,513			11,333			3,121			480,069
Intercompany		(3,183		)	—			3,183			—			—
Obligations related to consolidated inventory not owned		—			147,928			—			—			147,928
Term Loan		200,000			—			—			—			200,000
Senior notes		916,090			—			—			—			916,090
Other notes payable		—			34,700			—			—			34,700
Total Liabilities		1,175,009			718,784			14,576			3,121			1,911,490
Stockholders’ Equity		1,219,659			1,307,043			16,091			(1,323,134		)	1,219,659
Total Liabilities and Stockholders’ Equity		$	2,394,668		$	2,025,827		$	30,667		$	(1,320,013	)	$	3,131,149

 

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Beazer Homes USA, Inc.

Condensed Consolidating Balance Sheet

September 30, 2004

(in thousands)

 

		Beazer Homes USA, Inc.			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminating Entries			Consolidated Beazer Homes USA, Inc.
ASSETS
Cash and cash equivalents		$	392,110		$	(71,569	)	$	339		$	—		$	320,880
Accounts receivable		—			70,237			337			—			70,574
Owned inventory		—			2,079,494			—			9,836			2,089,330
Consolidated inventory not owned		—			254,765			—			—			254,765
Investment in unconsolidated joint ventures		—			44,748			—			—			44,748
Deferred tax asset		47,052			—			—			—			47,052
Property, plant and equipment, net		—			24,671			—			—			24,671
Goodwill		—			251,603			—			—			251,603
Investments in subsidiaries		1,468,078			—			—			(1,468,078		)	—
Intercompany		566,216			(583,038		)	16,822			—			—
Other assets		19,432			17,881			8,526			—			45,839
Total Assets		$	2,492,888		$	2,088,792		$	26,024		$	(1,458,242	)	$	3,149,462
LIABILITIES AND STOCKHOLDERS’ EQUITY
Trade accounts payable		$	—		$	123,174		$	113		$	—		$	123,287
Other liabilities		146,473			276,242			11,057			3,836			437,608
Intercompany		(1,043		)	—			1,043			—			—
Obligations related to consolidated inventory not owned		—			219,042			—			—			219,042
Term Loan		200,000			—			—			—			200,000
Senior Notes		915,337			—			—			—			915,337
Other notes payable		—			22,067			—			—			22,067
Total Liabilities		1,260,767			640,525			12,213			3,836			1,917,341
Stockholders’ Equity		1,232,121			1,448,267			13,811			(1,462,078		)	1,232,121
Total Liabilities and Stockholders’ Equity		$	2,492,888		$	2,088,792		$	26,024		$	(1,458,242	)	$	3,149,462

 

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