Beazer Homes 10-K 9-30-2004


FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
x    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended September 30, 2004
 
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
(I.R.S. Employer
incorporation or organization)
Identification No.)

1000 Abernathy Road, Suite 1200, Atlanta, Georgia 30328
(Address of principal executive offices) (Zip code)

(Registrant's telephone number including area code) (770) 829-3700

Securities registered pursuant to Section 12(b) of the Act:

Title of Securities
Exchanges on which Registered
Common Stock, $.01 par value per share
New York Stock Exchange
Preferred Share Purchase Rights
New York Stock Exchange

Securities registered pursuant to section 12(g) of the Act: None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes x No o
The aggregate market value of the registrant’s Common Stock held by non-affiliates of the registrant (13,359,995 shares) as of March 31, 2004, based on the closing sale price per share as reported by the New York Stock Exchange on such date, was $1,412,285,071.
The number of shares outstanding of the registrant’s Common Stock as of November 16, 2004 was 13,831,234.

DOCUMENTS INCORPORATED BY REFERENCE
 
Part of 10-K where incorporated
Portions of the registrant’s Proxy Statement for the 2005 Annual Meeting of Stockholders
III
   
 
Website Access to Company Reports 

Beazer Homes’ internet website address is www.beazer.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to section 13(a) or 15(d) of the Exchange Act are available free of charge through our website as soon as reasonably practicable after we electronically file with or furnish them to the Securities and Exchange Commission and are available in print to any stockholder who requests a printed copy.

 
     

 
BEAZER HOMES USA, INC.
 
FORM 10-K
 
INDEX
 
   
Page
Number
   
Item 1.
2
Item 2.
10
Item 3.
10
Item 4.
11
     
   
Item 5.
13
Item 6.
14
Item 7.
16
Item 7A.
32
Item 8.
33
Item 9.
63
Item 9A.
63
     
   
Item 10.
63
Item 11.
63
Item 12.
63
Item 13.
63
Item 14.
63
     
   
Item 15.
64
     
   
     
 
 
     

Table of Contents
 
PART I
Item 1. Business
 
Our principal executive offices are located at 1000 Abernathy Road, Suite 1200, Atlanta, Georgia 30328, telephone (770) 829-3700. We also provide information about our active communities and mortgage financing through our Internet website located at http://www.beazer.com. Information on our website is not a part of and shall not be deemed incorporated by reference in this report.

We design, build and sell primarily single-family homes in the following locations within the United States:

Region/State
Market(s) / Year Entered
   
Southeast Region:
 
Florida
Jacksonville (1993), Fort Myers/Naples (1996), Tampa/St. Petersburg (1996), Orlando (1997)
Georgia
Atlanta (1985)
North Carolina
Charlotte (1987), Raleigh/Durham (1992), Greensboro (1999)
South Carolina
Charleston (1987), Columbia (1993), Myrtle Beach (2002)
Tennessee/Mississippi
Nashville (1987), Memphis (2002), Northern Mississippi (2002)
   
West Region:
 
Arizona
Phoenix (1993)
California
Los Angeles County (1993), Orange County (1993), Riverside & San Bernadino Counties (1993), San Diego County (1992), Ventura County (1993), Sacramento (1993)
Colorado
Denver (2001), Colorado Springs (2003)
Nevada
Las Vegas (1993)
   
Central Region:
 
Texas
Dallas/Ft. Worth (1995), Houston (1995)
   
Mid-Atlantic Region:
 
Maryland/Delaware
Baltimore (1998), Metro-Washington DC (1998), Delaware (2003)
New Jersey/ Pennsylvania
Central and Southern New Jersey (1998), Bucks County, PA (1998)
Virginia/West Virginia
Fairfax County (1998), Loudoun County (1998), Prince William County (1998), West Virginia (2004)
   
Midwest Region:
 
Indiana
Indianapolis (2002), Lafayette (2002), Ft. Wayne (2002)
Kentucky
Lexington (2002)
Ohio
Columbus (2002), Cincinnati/Dayton (2002)

We design our homes at various price points to appeal to homebuyers across various demographic segments. Our objective is to provide our customers at each price point with homes that incorporate exceptional value and quality while seeking to maximize our return on invested capital. To achieve this objective, we have developed a business strategy which focuses on the following elements:

Geographic Diversity and Growth Markets. We compete in a large number of geographically diverse markets in an attempt to reduce our exposure to any particular regional economy. Most of the markets in which we operate have experienced significant population growth in recent years. Within these markets, we build homes in a variety of projects. Our business strategy entails further increasing our market penetration across the geographically diverse markets in which we compete.

Leverage of National Brand.   In October 2003, we launched a branding strategy that is designed to build a unified consumer brand across all markets in which we operate. Our new national branding strategy presents us as one company with one name, one logo, one message and one purpose. We believe that a national branding strategy will differentiate us from our competitors by promoting qualities that lead to good recommendations, referrals to family and friends, and repeat purchases by loyal customers. We feel that a strengthened, national brand identity will better position us to consistently address the needs of our customers across all of our markets.

 
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Leverage Size, Scale and Capabilities to Achieve Optimal Efficiencies.  The Company has implemented specific profitability initiatives which focus on leveraging our size, scale and capabilities in order to achieve enhanced gross profit and operating profit margins. These initiatives include:
  § leveraging our size to create economies of scale in purchasing and construction;
  § standardizing best practices and product designs;
  § using branding and increased market penetration to maximize efficiency of land use; and
  § leveraging our fixed cost infrastructure by increasing depth and breadth in markets where we have an established presence.

Quality Homes at Various Price-Points to Meet the Needs of Increasingly Diverse HomebuyersWe seek to maximize customer satisfaction by offering homes which incorporate quality materials, distinctive design features, convenient locations and competitive prices. During fiscal year 2004, the average sales price of our homes closed was approximately $232,200. Our product strategy entails addressing the needs of an increasingly diverse profile of buyers as evidenced by demographic trends including, among others, increased immigration, changing profiles of households, the aging of the baby-boomers, and the rise of the echo-boomers (children of the baby-boomers) into the ranks of homeownership. Our product offering is broken down into the following product categories:

Economy. These homes are targeted primarily at entry-level buyers, are generally 1,500 square feet or less in size, and are intended to meet the needs of those buyers for whom price is the most important factor in the buying decision.

Value. These homes are targeted at entry-level and move-up buyers, generally range from 1,500 to 2,500 square feet in size, and are intended to appeal to buyers who are more interested in style and features, but are still somewhat price-focused.

Style. These homes are targeted at more affluent move-up buyers, are generally greater than 2,500 square feet in size, and are intended to appeal to buyers in the more luxurious segment of the market, who place greater emphasis on style and features.

In addition, we also offer homes to the ‘active-adult’ segment which is targeted to buyers over 55 years of age, in communities with special amenities. We offer these homes within the Economy, Value and Style categories described above. Within each product category, we seek to provide exceptional value and to ensure an enjoyable customer experience.

Additional Products and Services for Homebuyers.  In order to maximize our profitability and provide our customers with the additional products and services that they desire, we have incorporated design centers and mortgage origination operations into our business. Recognizing that our customers want to choose certain components of their new home, we offer limited customization through the use of design studios in most of our markets. These design studios allow the customer to select certain non-structural customizations for their homes such as cabinetry, flooring, fixtures, applianc es and wall coverings. Additionally, recognizing the homebuyer's desire to simplify the financing process, we originate mortgages on behalf of our customers through our subsidiary Beazer Mortgage Corporation, or Beazer Mortgage. Beazer Mortgage originates, processes and brokers mortgages to third party investors. Beazer Mortgage generally does not retain or service the mortgages that it brokers. We also provide title services to our customers in many of our markets.  

Decentralized Operations with Experienced Management. We believe our in-depth knowledge of our local markets enables us to better serve our customers. Our local managers, who have significant experience in both the homebuilding industry and the markets they serve, are responsible for operating decisions regarding design, construction and marketing. We combine these decentralized operations with a centralized corporate-level management which controls decisions regarding overall strategy, land acquisitions and financial matters.

Conservative Land Policies. We seek to maximize our return on capital by judiciously managing our investment in land. To reduce the risks associated with investments in land, we use options to control land whenever possible. In addition, we do not speculate in land which is not generally subject to entitlements providing basic development rights to the owner.
 
Value Created.  We evaluate our financial performance and the financial performance of our operations using Value Created, a variation of economic profit or economic value added. Value Created measures the extent to which we exceed our cost of capital. It is calculated as earnings before interest and taxes (“EBIT”), less a charge for all of the capital employed multiplied by our estimate of our minimum weighted average cost of capital.

 
 
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Company History

In March 1994, we completed a concurrent initial public offering of common stock and issuance of senior notes (the “IPO”). Prior to our IPO, we were an indirect wholly-owned subsidiary of Hanson PLC (“Hanson”), a company registered in the United Kingdom. Hanson currently does not hold any investment, or ongoing interest, in us.

In January 2002, we signed an agreement to merge with Crossmann Communities, Inc., or Crossmann. Operating in eleven markets in Indiana, Kentucky, Mississippi, Ohio, North Carolina, South Carolina and Tennessee, Crossmann primarily targeted entry-level and first time move-up homebuyers. Pursuant to the merger agreement, on April 17, 2002, Crossmann merged into our wholly owned subsidiary, Beazer Homes Investment Corp.

Markets and Product Description

We evaluate a number of factors in determining which geographic markets to enter or in which markets to concentrate our homebuilding activities. We attempt to anticipate swings in economic and real estate conditions by evaluating such statistical information as:

  · the historical and projected growth of the population;
  · the number of new jobs created or projected to be created;
  · the number of housing starts in previous periods;
  · building lot availability and price;
  · housing inventory;
  · level of competition; and
  · home sale absorption rates.

We generally seek to differentiate ourselves from our competition in a particular market with respect to customer service and product type. We maintain the flexibility to alter our product mix within a given market depending on market conditions. In determining our product mix we consider demographic trends, demand for a particular type of product, margins, timing and the economic strength of the market. Although some of our Value and Style homes are priced at the upper end of the market and we offer a selection of amenities, we generally do not build "custom homes." The prices of our Value and Style homes generally are well below the prices of custom homes in most areas. We attempt to maximize efficiency by using standardized design plans whenever possible.

The following table summarizes certain operating information regarding our markets as of and for the year ended September 30, 2004 (dollars in thousands):

State
 
Number of Active Subdivisions
 
Number of Homes Closed
 
Average Closing Price
 
Units in Backlog at Year End
 
Dollar Value of Backlog at Year End
 
Arizona
   
32
   
1,403
 
$
209.1
   
1,068
 
$
253,193
 
California
   
31
   
2,457
   
362.1
   
1,020
   
432,293
 
Colorado
   
15
   
420
   
370.3
   
133
   
46,951
 
Florida
   
41
   
1,616
   
241.6
   
1,200
   
301,021
 
Georgia
   
19
   
670
   
208.7
   
168
   
40,901
 
Indiana
   
86
   
1,591
   
144.6
   
875
   
123,532
 
Kentucky
   
8
   
209
   
135.5
   
42
   
6,237
 
Maryland/Delaware
   
21
   
333
   
348.8
   
371
   
125,758
 
Nevada
   
12
   
1,600
   
222.8
   
919
   
271,620
 
New Jersey/Pennsylvania
   
13
   
381
   
342.8
   
236
   
87,980
 
North & South Carolina
   
89
   
2,564
   
149.0
   
1,016
   
165,475
 
Ohio
   
35
   
592
   
170.6
   
294
   
54,556
 
Tennessee/Mississippi
   
28
   
726
   
179.4
   
245
   
44,606
 
Texas
   
43
   
1,020
   
160.4
   
429
   
68,105
 
Virginia/West Virginia
   
23
   
869
   
360.0
   
440
   
213,689
 
Total Company
   
496
   
16,451
 
$
232.2
   
8,456
 
$
2,235,917
 

 
Our homebuilding and marketing activities are conducted under the name of Beazer Homes in each of our markets, except for certain communities in Indianapolis, Indiana which operate under the trade name Trinity Homes.

 
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Table of Contents

Corporate Operations

We perform the following functions at a centralized level:

  · evaluate and select geographic markets;
  · allocate capital resources to particular markets, including with respect to land acquisitions;
  · maintain and develop our relationships with lenders and capital markets constituencies to regulate the flow of financial resources;
  · maintain centralized information systems; and
  · monitor the decentralized operations of our subsidiaries and divisions.

We allocate capital resources necessary for new projects in a manner consistent with our overall operating strategy. We utilize Value Created, return on capital employed and profit margin as criteria for our allocation of capital resources. We will vary the capital allocation based on market conditions, results of operations and other factors. Capital commitments are determined through consultation among selected executive and operational personnel, who play an important role in ensuring that new projects are consistent with our strategy. Centralized financial controls are also maintained through the standardiz ation of accounting and financial policies and procedures.

Structurally, we operate through separate divisions, which are generally located within the areas in which they operate. Each division is managed by executives with substantial experience in the division's market. In addition, each division is equipped with the skills to complete the functions of land acquisition, map processing, land development, construction, marketing, sales and product service.

Land Acquisition and Development

Substantially all of the land we acquire is purchased only after necessary entitlements have been obtained so that we have the right to begin development or construction as market conditions dictate. In certain situations, we will purchase property without all necessary entitlements where we perceive an opportunity to build on such property in a manner consistent with our strategy. The term "entitlements" refers to development agreements, tentative maps or recorded plats, depending on the jurisdiction within which the land is located. Entitlements generally give a developer the right to obtain building permits upon compliance with conditions that are usually within the developer's control. Although entitlements are ordinarily obtained prior to the purchase of land, we are still required to obtain a variety of other governmental approvals and permits during the development process.

We select our land for development based upon a variety of factors, including:

  · internal and external demographic and marketing studies;
  · suitability for development during the time period of one to five years from the beginning of the development process to the last closing;
  · financial review as to the feasibility of the proposed project, including projected Value Created, profit margins and returns on capital employed;
  · the ability to secure governmental approvals and entitlements;
  · environmental and legal due diligence;
  · competition in the area;
  · proximity to local traffic corridors and amenities; and
  · management's judgment as to the real estate market and economic trends and our experience in a particular market.

We generally purchase land or obtain an option to purchase land, which, in either case, requires certain site improvements prior to construction. Where required, we then undertake or, in the case of land under option, the grantor of the option then undertakes, the development activities (through contractual arrangements with local developers) which include site planning and engineering, as well as constructing road, sewer, water, utilities, drainage and recreational facilities and other amenities. When available in certain markets, we also buy finished lots that are ready for construction.

We strive to develop a design and marketing concept for each of our projects, which includes determination of size, style and price range of the homes, layout of streets, layout of individual lots and overall community design. The product line offered in a particular project depends upon many factors, including the housing generally available in the area, the needs of a particular market and our cost of lots in the project. We are, however, often able to use standardized design plans.

 
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The development and construction of each project are managed by our operating divisions, each of which is generally led by a president who, in turn, reports directly or indirectly to our Chief Operating Officer and our Chief Executive Officer. At the development stage, a manager (who may be assigned to several projects and reports to the president of the division) supervises development of buildable lots. In addition, a builder is responsible for each project site to supervise actual construction, and each division has one or more customer care and marketing representatives assigned to projects operated by that division.
 
The following table sets forth, by state, land controlled by us as of September 30, 2004:

  
Lots Owned
Lots Under Contract(3)
 
 
Undevel-
Lots Under
 
Homes
Total
 
Undevel-
 
Total
 
Total
 
oped
Develop-
Finished
Under Con-
Lots
 
oped
Finished
Lots Under
 
Land
 
Lots(1)
ment
Lots
struction(2)
Owned
 
Lots
Lots
Contract
 
Controlled
Southeast Region:
                     
Georgia
-
12
166
200
378
 
376
2,806
3,182
 
3,560
Florida
765
1,964
888
855
4,472
 
326
2,883
3,209
 
7,681
North & South Carolina
660
1,381
1,604
883
4,528
 
2,512
3,422
5,934
 
10,462
Tennessee/Mississippi
-
838
233
393
1,464
 
1,278
474
1,752
 
3,216
West Region:
                     
Arizona
-
2,152
670
456
3,278
 
2,905
475
3,380
 
6,658
California
-
2,562
483
1,121
4,166
 
4,489
802
5,291
 
9,457
Colorado
-
247
128
305
680
 
-
1,665
1,665
 
2,345
Nevada
-
1,885
92
877
2,854
 
2,182
609
2,791
 
5,645
Central Region:
                     
Texas
273
3,285
1,553
498
5,609
 
75
1,343
1,418
 
7,027
Mid-Atlantic Region:
                     
Maryland/Delaware
-
563
124
184
871
 
-
5,449
5,449
 
6,320
New Jersey/ Pennsylvania
-
220
445
191
856
 
3,460
395
3,855
 
4,711
Virginia/West Virginia
-
568
225
225
1,018
 
993
1,830
2,823
 
3,841
Midwest Region:
               
-
   
Indiana
-
5,529
2,125
789
8,443
 
766
2,794
3,560
 
12,003
Kentucky
-
607
70
64
741
 
-
647
647
 
1,388
Ohio
1,310
45
1,004
428
2,787
 
2,192
1,278
3,470
 
6,257
Total
3,008
21,858
9,810
7,469
42,145
 
21,554
26,872
48,426
 
90,571
 
 
(1) “Undeveloped Lots” consists of raw land that is expected to be developed into the respective number of lots reflected in this table.
(2) The category “Homes Under Construction” represents lots on which construction of a home has commenced.
(3) The classification within “Lots Under Contract” for this schedule is based upon level of completion at delivery as stated in the option contract.
 
Option Contracts: We acquire certain lots by means of option contracts. Option contracts generally require the payment of a cash deposit or issuance of a letter of credit for the right to acquire lots during a specified period of time at a certain price. Our option contracts generally have expiration periods ranging from one to sixty months.

Under option contracts, both with and without specific performance, 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 is included on our consolidated balance sheet in other liabilities at September 30, 2004. At September 30, 2004, we are committed to future amounts under option contracts with specific performance obligations that aggregated $28.2 million, net of cash deposits. 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 $180.7 million at September 30, 2004. This amount includes letters of credit of approxi mately $57.8 million. At September 30, 2004, future amounts under option contracts without specific performance obligations aggregated approximately $1.8 billion, net of cash deposits.

 
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Construction

We act as the general contractor for the construction of our projects. Our project development operations are controlled by our subsidiaries and divisions, whose employees supervise the construction of each project, coordinate the activities of subcontractors and suppliers, subject their work to quality and cost controls and assure compliance with zoning and building codes. We specify that quality, durable materials be used in the construction of our homes. Our subcontractors follow design plans prepared by architects and engineers who are retained by us and whose designs are geared to the local market. Subcontractors typically are retained on a project-by-project basis to complete construction at a fixed price. Agreements with our subcontractors and materials' suppliers are generally entered into after competitive bidding. In connection with this competitive bid process, we obtain information from prospective subcontractors and vendors with respect to their financial condition and ability to perform their agreements with us. We do not maintain significant inventories of construction materials except for materials being utilized for homes under construction. We have numerous suppliers of raw materials and services used in our business, and such materials and services have been and continue to be available. Material prices may fluctuate, however, due to various factors, including demand or supply shortages, which may be beyond the control of our vendors. From time to time we enter into regional and national supply contracts with certain of our vendors. We believe that our relationships with our suppliers and subcontractors are good.

Construction time for our homes depends on the availability of labor, materials and supplies, product type and location. Homes are designed to promote efficient use of space and materials, and to minimize construction costs and time. In all of our markets, construction of a home is typically completed within three to six months following commencement of construction. At September 30, 2004, we had 1,108 finished homes (excluding models), of which 763 were sold and included in backlog at such date.

Warranty Program

For homes sold through March 31, 2004 (and in certain markets, through July 31, 2004), we self-insure our structural warranty obligations through our wholly owned risk retention group, United Home Insurance Company, A Risk Retention Group, or UHIC. Beginning with homes sold April 1, 2004 (August 1, 2004 in certain markets), our warranties are issued and administered by Professional Warranty Corporation and insured by Steadfast Insurance Company, a Zurich American Company, subject to a $5 million per occurrence deductible.    

Under the UHIC program, we provide a variety of warranties for our homes, spanning from one to ten years in length. We provide a one- to two-year limited warranty of workmanship and materials with each of our homes, which generally includes home inspection visits with the customer during the first year following the purchase of a home. We subcontract our homebuilding work to subcontractors who provide us with an indemnity and a certificate of insurance prior to receiving payments for their work and, therefore, claims relating to workmanship and materials are generally the primary responsibility of our subcontractors. In addition, the first year of our warranty covers defects in plumbing, electrical, heating, cooling and ventilation systems, and major structural defects; the second year of such warranty covers major structural defects and certain defects in plumbing, electrical, heating, cooling and ventilation systems of the home (exclusive of defects in appliances, fixtures and equipment); and the final eight years of protection cover only major structural defects.

Under the Professional Warranty Corporation program, we provide a variety of warranties for our homes, spanning in length from one year to the period covered by the applicable statute of repose. We provide a one- to two-year limited warranty of workmanship and materials with each of our homes, which generally includes home inspection visits with the customer during the first year following the purchase of a home. We subcontract our homebuilding work to subcontractors who provide us with an indemnity and a certificate of insurance prior to receiving payments for their work and, therefore, claims relating to workmanship and materials are generally the primary responsibility of our subcontractors. In addition, the first year of our warranty covers defects in plumbing, electrical, heating, cooling and ventilation syste ms, and construction defects; the second year of such warranty covers construction defects and certain defects in plumbing, electrical, heating, cooling and ventilation systems of the home (exclusive of defects in appliances, fixtures and equipment); and the remaining years of protection cover only construction defects.

 
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We record a reserve of approximately 0.5% to 1.0% of the sales price of a home to cover warranty expenses, although this allowance is subject to adjustment in special circumstances. Our historical experience is that such warranty expenses generally fall within the amount established for such allowance.

In addition, we maintain third party insurance for most construction defects which we encounter in the normal course of business. We believe that our accruals and third party insurance are adequate to cover the ultimate resolution of our potential liabilities associated with known and anticipated warranty and construction defect related claims and litigation.

There can be no assurance, however, that the terms and limitations of the limited warranty will be effective against claims made by the homebuyers, that we will be able to renew our insurance coverage or renew it at reasonable rates, that we will not be liable for damages, the cost of repairs, and/or the expense of litigation surrounding possible construction defects, soil subsidence or building related claims or that claims will not arise out of uninsurable events or circumstances not covered by insurance and not subject to effective indemnification agreements with our subcontractors.
 
Marketing and Sales

We make extensive use of advertising and other promotional activities, including our website (http://www.beazer.com), mass-media advertisements, brochures, direct mail and the placement of strategically located signboards in the immediate areas of our developments.

We normally build, decorate, furnish and landscape between one and five model homes for each project and maintain on-site sales offices. At September 30, 2004, we maintained 667 model homes, of which 550 were owned and 117 were leased from third parties pursuant to sale and leaseback agreements. We believe that model homes play a particularly important role in our marketing efforts. Consequently, we expend a significant effort in creating an attractive atmosphere at our model homes. Interior decorations are undertaken by both in-house and local third-party design specialists, and vary within our models based upon th e lifestyles of targeted homebuyers. The purchase of furniture, fixtures and fittings is coordinated to ensure that manufacturers’ bulk discounts are utilized to the maximum extent. Structural changes in design from the model homes are not generally permitted, but homebuyers may select various optional amenities. We also use a cross-referral program that encourages our personnel to direct customers to other Beazer Homes subdivisions based on the customers’ needs.

We generally sell our homes through commissioned employees (who typically work from the sales offices located at the model homes used in the subdivision) as well as through independent brokers. Our personnel are available to assist prospective homebuyers by providing them with floor plans, price information and tours of model homes and in connection with the selection of options. The selection of interior features is a principal component of our marketing and sales efforts. Sales personnel are trained by us and attend periodic meetings to be updated on sales techniques, competitive products in the area, the availability of financing, construction schedules, marketing and advertising plans, which management bel ieves result in a sales force with extensive knowledge of our operating policies and housing products. Our policy also provides that sales personnel be licensed real estate agents where required by law. We also build a number of homes for which no signed sales contract exists at the time of commencement of construction. The use of an inventory of such homes is necessary to satisfy the requirements of relocated personnel and of independent brokers, who often represent customers who require a completed home within 60 days. At September 30, 2004, excluding models, we had 1,648 homes at various stages of completion (of which 345 were completed) for which we had not received a sales contract.

We sometimes use various sales incentives in order to attract homebuyers. The use of incentives depends largely on local economic and competitive market conditions.

 
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Customer Financing

We provide customer financing through Beazer Mortgage. Beazer Mortgage provides mortgage origination services only, and generally does not retain or service the mortgages that it originates. These mortgages are generally funded by one of a network of mortgage lenders. Beazer Mortgage can provide qualified homebuyers numerous financing options, including a wide variety of conventional, FHA and VA financing programs. In certain situations we will seek to assist our homebuyers in obtaining financing from outside mortgage lenders and, in certain limited circumstances, we may attempt to minimize potential risks relating to the availability of customer financing by purchasing mortgage financing commitments that lock in the availability of funds and interest rates at specified levels for a certain period of time. Because substantially all homebuyers utilize long-term mortgage financing to purchase a home, adverse economic conditions, increases in unemployment and high mortgage interest rates may deter and eliminate a substantial number of potential homebuyers from our markets in the future.
 
Competition and Market Factors

The development and sale of residential properties is highly competitive and fragmented. We compete for residential sales on the basis of a number of interrelated factors, including location, reputation, amenities, design, quality and price, with numerous large and small homebuilders, including some homebuilders with nationwide operations and greater financial resources and/or lower costs than us. We also compete for residential sales with individual resales of existing homes, available rental housing and, to a lesser extent, resales of condominiums. We believe that we compare favorably to other builders in the markets in which we operate, due primarily to:

  · our experience within our geographic markets and breadth of product line, which allows us to vary our regional product offerings to reflect changing market conditions;
  · our responsiveness to market conditions, enabling us to capitalize on the opportunities for advantageous land acquisitions in desirable locations; and
  · our reputation for quality design, construction and service.

The housing industry is cyclical and is affected by consumer confidence levels and prevailing economic conditions generally, including interest rate levels. A variety of other factors affect the housing industry and demand for new homes, including the availability of labor and materials and increases in the costs thereof, changes in costs associated with home ownership such as increases in property taxes and energy costs, changes in consumer preferences, demographic trends and the availability of and changes in mortgage financing programs.

Government Regulation and Environmental Matters

Substantially all of our land is purchased with entitlements, giving us the right to obtain building permits upon compliance with specified conditions, which generally are within our control. Upon compliance with such conditions, we must obtain building permits. The length of time necessary to obtain such permits and approvals affects the carrying costs of unimproved property acquired for the purpose of development and construction. In addition, the continued effectiveness of permits already granted is subject to factors such as changes in policies, rules and regulations and their interpretation and application. Several governmental authorities have imposed impact fees as a means of defraying the cost of providing certain governmental services to developing areas. To date, the governmental approval processes discus sed above have not had a material adverse effect on our development activities, and indeed all homebuilders in a given market face the same fees and restrictions. There can be no assurance, however, that these and other restrictions will not adversely affect us in the future.

We may also be subject to periodic delays or may be precluded entirely from developing communities due to building moratoriums or "slow-growth" or "no-growth" initiatives or building permit allocation ordinances which could be implemented in the future in the states and markets in which we operate. Substantially all of our land is entitled and, therefore, the moratoriums generally would only adversely affect us if they arose from health, safety and welfare issues such as insufficient water or sewage facilities. Local and state governments also have broad discretion regarding the imposition of development fees for projects in their jurisdiction. These fees are normally established, however, when we receive recorded final maps and building permits. We are also subject to a variety of local, state and federal statutes , ordinances, rules and regulations concerning the protection of health and the environment. These laws may result in delays, cause us to incur substantial compliance and other costs, and prohibit or severely restrict development in certain environmentally sensitive regions or areas.
 
Bonds and Other Obligations

We are frequently required, in connection with the development of our projects, to obtain letters of credit and performance, maintenance and other bonds in support of our related obligations with respect to such developments. The amount of such obligations outstanding at any time varies in accordance with our pending development activities. In the event any such bonds or letters of credit are drawn upon, we would be obligated to reimburse the issuer of such bonds or letters of credit. At September 30, 2004 we had outstanding approximately $45.9 million and $351.3 million of outstanding letters of credit and performance bonds, respectively, related to our obligations to local governments to construct roads and other improvements in various developments in addition to outstanding letters of credit of approximately $5 7.8 million related to our land option contracts. We do not believe that we will be required to draw upon any such bonds or letters of credit.

Employees and Subcontractors

At September 30, 2004, we employed 3,428 persons, of whom 747 were sales and marketing personnel, 1,223 were executive, management and administrative personnel, 1,238 were involved in construction and 220 were personnel of Beazer Mortgage. Although none of our employees are covered by collective bargaining agreements, certain of the subcontractors engaged by us are represented by labor unions or are subject to collective bargaining arrangements. We believe that our relations with our employees and subcontractors are good.

 
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Item 2. Properties

We lease approximately 42,000square feet of office space in Atlanta, Georgia to house our corporate headquarters. We also lease an aggregate of approximately 481,000 square feet of office space for our subsidiaries’ operations at various locations. We own approximately 18,500 square feet of manufacturing space and an aggregate of 57,872 square feet of office space in Nashville, Tennessee and Indianapolis, Indiana.

Item 3. Legal Proceedings

As of September 30, 2004, our subsidiary, Trinity Homes LLC, had received 979 construction defect and warranty complaints related to moisture intrusion and mold. As of September 30, 2004, there were eleven pending lawsuits related to these complaints. One of these suits, Christopher J. Colon and Mary A. Colon v. Trinity Homes LLC and Beazer Homes Investment Corp. (formerly filed as Gary Harmon and Sheri Harmon v. Trinity Homes LLC and Beazer Homes Investment Corp.) is a class action suit that was filed in Hamilton County Superior Court in the State of Indiana on August 19, 2003 against Trinity and Beazer Homes Investment C orp., another one of our subsidiaries and Trinity’s parent. As part of that case, the plaintiffs are asserting that Trinity and Beazer Homes Investment Corp. violated applicable building codes. The complaint attempts to define the purported class to include all owners of a residential structure in Indiana constructed and marketed by Trinity and Beazer Homes Investment Corp. in which a one-inch gap with a vapor barrier does not exist between an exterior brick veneer wall and the surface of the underlying exterior wall. Excluded from the class are any residents who suffer personal injuries caused by mold infestation. No monetary amount was stated in the claim.

The parties in the putative class action engaged in a series of mediation conferences which resulted in an agreement for a proposed settlement of the case. The parties submitted settlement documents to the court, which the Court preliminarily approved on August 6, 2004.  A Fairness Hearing was held on October 18, 2004 and the Court approved the settlement agreement on October 20, 2004.

The settlement class is defined as 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.  However, the class definition specifically excludes (a) any houses built by Homes by John McKenzie; (b) any houses owned by Trinity as of August 6, 2004, or which as of August 6, 2004 were the subject of an executed agreement for Trinity to purchase the homes; and (c) any houses for which a homeowner has executed or agreed to a release in favor of Trinity as part of a separate agreement.

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. A licensed engineering firm working on behalf of the homeowners will be allowed to review the plan for the remediation of each home as well as the performance of the repair work.  The settlement establishes a time frame within which the work must be completed and provides a Dispute Resolution Panel to resolve disputes between a homeowner and Trinity concerning both the plan to remediate the home and the performance of the work.

Under the settlement, each homeowner releases Trinity, Beazer Homes Investment Corp. and other affiliated companies from the claims asserted in the class action lawsuit, claims arising out of external water intrusion, and claims of improper brick installation, including property damage claims, loss or diminution of property value claims, and most personal injury claims, among others.

There was a 30-day timeframe, which ended on November 19, 2004, to appeal the Court’s Order approving the settlement.  No appeals were received by the Court within the timeframe established. The Company expects to send out the claims notices on or about December 20, 2004 and the Class Members will have 60 days to file Claims.

In November 2003, Beazer Homes received a request for information from the United States Environmental Protection Agency (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 projects undertaken since December 1998. Beazer Homes identified 381 projects within this category and the EPA sought specific information concerning 71 of them and is conducting site inspections on certain others. As of September 30, 2004, the EPA or an equivalent state agency has issued Administrative Orders identifying alleged instances of noncompliance for 20 of the sites. The Administrative Orders provide mandatory compliance schedules to address the alleged deficiencies in storm water management practices, but do not impose any monetary penalties. 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 is working to comply with the requirements of the Administrative Orders and to otherwise maintain compliance with the requirements of the Clean Water Act.

 
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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. In our opinion, the ultimate resolution of these matters will not have a material adverse effect on our financial condition or results of operations.
 
Item 4. Submission of Matters to a Vote of Security Holders

No matters were submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders, through the solicitation of proxies or otherwise.

SEPARATE ITEM: EXECUTIVE OFFICERS OF THE REGISTRANT


Name
Age
Position
Executive Officers
   
Ian J. McCarthy
51
President, Chief Executive Officer and Director
Michael H. Furlow
54
Executive Vice President, Chief Operating Officer
James O’Leary
41
Executive Vice President, Chief Financial Officer
John Skelton
55
Senior Vice President, Forward Planning
C. Lowell Ball
47
Senior Vice President, General Counsel
Michael T. Rand
42
Senior Vice President, Chief Accounting Officer
Jonathan P. Smoke
35
Senior Vice President, Chief Information Officer
Cory J. Bodyston
45
Senior Vice President, Treasurer
Fred Fratto
50
Senior Vice President, Human Resources


Business Experience

IAN J. MCCARTHY. Mr. McCarthy is the President and Chief Executive Officer of Beazer Homes and has served as a director of Beazer Homes since the initial public offering of common stock in March 1994 (“the IPO”).  Mr. McCarthy has served as President of predecessors of Beazer Homes since January 1991 and was responsible for all United States residential homebuilding operations in that capacity.  During the period May 1981 to January 1991, Mr. McCarthy was employed in Hong Kong and Thailand becoming a director of Beazer Far East and from January 1980 to May 1981 was employed by Kier, Ltd., a comp any engaged in the United Kingdom construction industry which became an indirect, wholly-owned subsidiary of Beazer PLC. Mr. McCarthy is a Chartered Civil Engineer with a Bachelor of Science degree from The City University, London.  Mr. McCarthy currently serves as Chairman of the National Advisory Board of HomeAid America, and as a member of HomeAid America's Board of Directors.  He also serves on the Board of Directors of Builder Homesite, Inc., on the Board of Directors of the Metro Atlanta Chamber of Commerce, and as a Trustee for the Woodruff Arts Center, Atlanta, Georgia.  He was inducted into the California Building Industry Hall of Fame in 2004, the first non-California resident to receive this honor.

MICHAEL H. FURLOW. Mr. Furlow joined us in October 1997 as the Executive Vice President for Operations. In this capacity the Division Presidents report to Mr. Furlow and he is responsible for the performance of those operating divisions. During the 12 years prior to joining Beazer Homes, Mr. Furlow was with Pulte Home Corporation in various field and corporate roles, most recently as a Regional President. Mr. Furlow received a Bachelor of Arts degree with honors in accounting from the University of West Florida and initially worked as a Certified Public Accountant for Arthur Young & Company.

JAMES O’LEARY. Mr. O’Leary joined us in June 2002 as Executive Vice President, Corporate Development. In August 2003 he was appointed Executive Vice President and Chief Financial Officer. Mr. O’Leary was previously with U.S. Industries, Inc. from 1995 to 2002. From 2000 to 2002, Mr. O’Leary was Chairman and CEO of LCA Group, Inc., U.S. Industries’ global lighting subsidiary. He also served as Executive Vice President of U.S. Industries from 1999 to 2002, Senior Vice President and Chief Financial Officer from 1998 to 1999 and Vice President and Corporate Controller from 1995 to 1998. Mr. O’Leary held various financial and operational positions at Hanson PLC., U.S. Industries’ former parent company, from 1993 to 1995 at which time U.S. Industries was spun off to Hanson’s shareh olders. Mr. O’Leary was with Deloitte & Touche from 1985 to 1993. Mr. O’Leary holds a Master of Business Administration degree from the Wharton School of the University of Pennsylvania and a Bachelor of Business Administration degree from Pace University. Mr. O’Leary is a licensed Certified Public Accountant.

 
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Table of Contents

JOHN SKELTON. Mr. Skelton served as Senior Vice President, Operations from the IPO through fiscal 1998, was appointed Senior Vice President, Financial Planning in fiscal 1999 and appointed Senior Vice President, Forward Planning in fiscal 2003. Mr. Skelton served as Vice President and Chief Financial Officer of Beazer Homes, Inc., a subsidiary of Beazer Homes, since 1985 and Vice President and Chief Financial Officer of Beazer Homes Holdings, Inc., a subsidiary of Beazer Homes, since April 1993. During the period 1977 to 1985, Mr. Skelton served as Finance Director of Leech Homes, a subsidiary of Leech PLC which was acquired by Beazer PLC in 1985. After graduating with a Bachelor's degree from Durham University in the United Kingdom, he was employed by Deloitte & Touche and is a Fellow of the Institute of Chart ered Accountants in England and Wales.

C. LOWELL BALL. Mr. Ball joined us in August 2000 as Senior Vice President and General Counsel. From 1992 to August 2000, Mr. Ball held equivalent positions with commercial real estate investment, development-operating companies, including Regent Partners, Inc., Compass Management and Leasing, Inc. and Dutch Institutional Holding Company. Prior to 1992, Mr. Ball practiced law for ten years with two major Atlanta law firms: Long, Aldridge & Norman and Sutherland, Asbill & Brennan. Mr. Ball graduated with honors from the University of North Carolina School of Law where he served on the Board of Editors of the North Carolina Law Review. He also received his undergraduate degree from the University of North Carolina where he was a Morehead Scholar.

MICHAEL T. RAND. Mr. Rand joined us in November 1996 as Vice President, Operational and Accounting Controls and was promoted to Vice President, Corporate Controller in June of 1998. Mr. Rand was promoted to Senior Vice President, Corporate Controller in October 2002, and to Senior Vice President, Chief Accounting Officer in August 2004. Prior to joining Beazer Homes, Mr. Rand was with the firm KPMG Peat Marwick from 1984 to 1996, at which time he served as a Senior Audit Manager. Mr. Rand holds a Bachelors degree in Commerce from the University of Virginia and is a licensed Certified Public Accountant.

JONATHAN P. SMOKE. Mr. Smoke joined us in March 2001 as Vice President, eBusiness, was appointed Chief Information Officer in April 2002, and was promoted to Senior Vice President in September 2003. Mr. Smoke was previously with Lend Lease Corporation from 1999 to 2001 where he was responsible for ebusiness strategy and initiatives. Mr. Smoke was a management consultant with Deloitte & Touche from 1993 to 1999. Mr. Smoke holds a Master of Business Administration degree from the McCombs School of Business at the University of Texas at Austin and a Bachelor of Arts degree from Rhodes College.

CORY J. BOYDSTON. Mrs. Boydston joined us in January 1998 as Vice President and Treasurer, and was promoted to Senior Vice President in October 2004. Mrs. Boydston is currently responsible for the Treasury functions of the Company. She also oversees the Company’s Title and Homeowner Insurance operations. Prior to joining Beazer, Mrs. Boydston was with Lennar Corporation from 1987 to 1997, serving in various capacities including Vice President - Finance and Chief Financial Officer, Corporate Controller, and Chief Financial Officer - Investment Division. Before joining Lennar, Mrs. Boydston was with Hayes Microcomputer Products and Arthur Andersen & Co. Mrs. Boydston received a Bachelor of Science Degree in Accounting from Florida State University in 1981 and holds an active CPA license in the State of Georg ia.

FRED FRATTO. Mr. Fratto joined us in October, 2002 as Vice President, Human Resources and was promoted to Senior Vice President in October 2004. Prior to joining Beazer Homes, Mr. Fratto served as Vice President, Human Resources and Administration for the Gulfstream Aerospace Corporation from 1999 to 2002. Previously, Mr. Fratto was with the Newell Rubbermaid Company from 1995 to 1999 and Westinghouse Electric Corporation from 1980 to 1995. He holds a Master of Science degree in Industrial and Labor Relations from West Virginia University and a Bachelor of Arts degree from Fairmont State College.

 
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Table of Contents
 
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
 
Market Information

The Company lists its common shares on the New York Stock Exchange (NYSE) under the symbol “BZH.” On November 16, 2004, the last reported sales price of the Company’s common stock on the NYSE was $125.00. On November 16, 2004, Beazer Homes USA, Inc. had approximately 115 shareholders of record and 13,831,234 shares of common stock outstanding. The following table sets forth, for the quarters indicated, the range of high and low trading for the Company’s common stock during fiscal 2004 and 2003.

Quarter ended:
 
September 30
 
June 30
 
March 31
 
December 31
 
 
 
 
 
 
 
 
 
 
 
2004 Period:
 
 
 
 
 
 
 
 
 
High
 
$
109.85
 
$
107.10
 
$
112.99
 
$
109.60
 
Low
 
$
86.43
 
$
89.15
 
$
88.26
 
$
83.39
 
 
   
   
   
   
 
2003 Period:
   
   
   
   
 
High
 
$
87.94
 
$
94.90
 
$
63.93
 
$
70.40
 
Low
 
$
75.57
 
$
58.18
 
$
52.49
 
$
51.40
 


Dividends

During fiscal 2004, the Company paid quarterly cash dividends of $0.10 per common share, or a total of approximately $5.5 million. The Company expects to continue paying regular cash dividends on a quarterly basis. However, the Board of Directors will periodically reconsider the declaration of dividends and the Company will pay dividends at the discretion of the Board of Directors. The continuation of payments, the amount of such dividends, and the form in which the dividends are paid (cash or stock) depends upon the results of operations, the financial condition of the Company and other factors which the Board of Directors deems relevant. The indentures under which our Senior Notes were issued contain certain restrictive covenants, including limitations on payment of dividends. At September 30, 2004, under the mos t restrictive covenants of each indenture, approximately $289.7 million of our retained earnings was available for cash dividends and for share repurchases.

The following table provides information as of September 30, 2004 with respect to our shares of common stock that may be issued under our existing equity compensation plans, all of which have been approved by our stockholders:

 
 
 
 
Plan Category
 
 
 
 
Number of Common
Shares to be Issued
Upon Exercise of
Outstanding Options
 
 
 
 
 
Weighted-Average
Exercise Price of
Outstanding Options
 
 
 
Number of Common
Shares Remaining
Available for Future
Issuance Under Equity
Compensation Plans
(excluding Common
Shares Reflected in
Column (a))
   
(a)
 
(b)
 
(c)
Equity compensation plans approved by stockholders
 
607,268
 
$58.78
 
1,007,348

 
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Table of Contents
 
Item 6. Selected Financial Data
 
Selected Financial Data
 
(dollars in thousands, except per share amounts)
 
   
Year Ended September 30,
   
2004
 
2003
 
2002
 
2001
 
2000
 
Statement of Operations Data:
         
(iv)
         
Total revenue
 
$
3,907,109
 
$
3,177,408
 
$
2,641,173
 
$
1,805,177
 
$
1,527,865
 
Operating income
   
377,935
   
279,155
   
193,174
   
121,027
   
75,623
 
Net income
   
235,811
   
172,745
   
122,634
   
74,876
   
43,606
 
Net income per common share:
                               
 Basic
   
17.74
   
13.41
   
11.64
   
9.19
   
5.28
 
 Diluted
   
17.09
   
12.78
   
10.74
   
8.18
   
5.05
 
Balance Sheet Data (end of year):
                               
Cash
 
$
320,880
 
$
73,372
 
$
124,989
 
$
41,678
 
$
-
 
Inventory
   
2,344,095
   
1,723,483
   
1,364,133
   
844,737
   
629,663
 
Total assets
   
3,149,462
   
2,212,034
   
1,892,847
   
995,289
   
696,228
 
Total debt
   
1,137,404
   
741,365
   
739,100
   
395,238
   
252,349
 
Stockholders' equity
   
1,232,121
   
993,695
   
799,515
   
351,195
   
270,538
 
Supplemental Financial Data:
                               
Cash provided by/(used in):
                               
 Operating activities
 
$
(73,719
)
$
(41,049
)
$
59,464
 
$
(25,578
)
$
(18,726
)
 Investing activities
   
(30,476
)
 
(6,552
)
 
(314,633
)
 
(72,835
)
 
(11,805
)
 Financing activities
   
351,703
   
(4,016
)
 
338,480
   
140,091
   
30,531
 
EBIT (i)
   
452,774
   
340,980
   
245,060
   
155,983
   
99,189
 
EBITDA (i)
   
468,529
   
354,200
   
254,513
   
165,236
   
106,041
 
Interest incurred (ii)
   
76,035
   
65,295
   
51,171
   
35,825
   
30,897
 
EBIT/interest incurred
   
5.95
 x  
5.22
 x  
4.79
 x  
4.35
 x  
3.21
 x
EBITDA/interest incurred
   
6.16
 x  
5.42
 x  
4.97
 x  
4.61
 x  
3.43
 x
Financial Statistics (iii):
                               
Total debt as a percentage of total
                               
debt and stockholders'equity
   
48.0
%
 
42.7
%
 
48.0
%
 
53.0
%
 
48.3
%
Asset Turnover
   
1.46
 x  
1.55
 x  
1.83
 x  
2.13
 x  
2.37
 x
EBIT Margin
   
11.6
%
 
10.7
%
 
9.3
%
 
8.6
%
 
6.5
%
Return on average assets (pre-tax)
   
16.9
%
 
16.6
%
 
17.0
%
 
18.4
%
 
15.4
%
Return on average capital (pre-tax)
   
22.1
%
 
20.8
%
 
21.4
%
 
24.6
%
 
20.4
%
Return on average equity
   
21.2
%
 
19.3
%
 
21.3
%
 
24.1
%
 
17.3
%

(i) EBIT and EBITDA: EBIT (earnings before interest and taxes) equals net income before (a) previously capitalized interest amortized to costs and expenses; and (b) income taxes. EBITDA (earnings before interest, taxes, depreciation and amortization) is calculated by adding depreciation and amortization for the period to EBIT. EBIT and EBITDA are not generally accepted accounting principles (GAAP) financial measures. EBIT and EBITDA should not be considered alternatives to net income determined in accordance with GAAP as an indicator of operating performance, nor an alternative to cash flows from operating activities determined in accordance with GAAP as a measure of liquidity. Because some analysts and companies may not calculate EBIT and EBITDA in the same manner as Beazer Homes, the EBIT and EBITDA information presented above may not be comparable to similar presentations by others.
 
EBITDA is a measure commonly used in the homebuilding industry and is presented to assist in understanding the ability of our operations to generate cash in addition to the cash needed to service existing interest requirements and ongoing tax obligations.  By providing a measure of available cash, management believes that this non-GAAP measure enables holders of our outstanding senior indebtedness to better understand our cash performance and our ability to service our debt obligations as they currently exist and as additional indebtedness is incurred in the future.  The measure is useful in budgeting and determining capital expenditure levels because it enables management to evaluate the amount of cash that will be available for discretionary spending.
 
 
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Table of Contents

A reconciliation of EBITDA and EBIT to cash provided/(used) by operations, the most directly comparable GAAP measure, is provided below for each period presented:
 
   
Year Ended September 30,
 
   
2004
 
2003
 
2002
 
2001
 
2000
 
                       
Net cash provided/(used) by operating activities
 
$
(73,719
)
$
(41,049
)
$
59,464
 
$
(25,578
)
$
(18,726
)
                                 
Increase in inventory
   
410,525
   
328,893
   
152,990
   
153,668
   
97,104
 
Provision for income taxes
   
150,764
   
112,784
   
79,425
   
47,872
   
27,879
 
Deferred income tax benefit (provision)
   
22,740
   
(87
)
 
6,613
   
7,906
   
3,792
 
Interest amortized to cost of sales
   
66,199
   
55,451
   
43,001
   
33,235
   
27,704
 
Increase in accounts payable and other liabilities
   
(120,976
)
 
(96,224
)
 
(71,781
)
 
(38,721
)
 
(39,654
)
Change in book overdraft
   
-
   
-
   
-
   
(20,095
)
 
11,219
 
Increase (decrease) in accounts receivable and other assets
   
21,399
   
14,702
   
(2,010
)
 
16,837
   
1,671
 
Loss on early extinguishment of debt
   
-
   
(7,570
)
 
-
   
(1,202
)
 
-
 
Tax benefit from stock transactions
   
(8,127
)
 
(11,502
)
 
(12,235
)
 
(3,837
)
 
-
 
Other
   
(276
)
 
(1,198
)
 
(954
)
 
(4,849
)
 
(4,948
)
EBITDA
   
468,529
   
354,200
   
254,513
   
165,236
   
106,041
 
Less depreciation and amortization
   
15,755
   
13,220
   
9,453
   
9,253
   
6,852
 
EBIT
 
$
452,774
 
$
340,980
 
$
245,060
 
$
155,983
 
$
99,189
 
 
(ii) All interest incurred is capitalized to inventory and subsequently amortized to cost of sales as homes are closed.
 
(iii) Asset turnover = (total revenue divided by average total assets); EBIT margin = (EBIT divided by total revenues); Return on average assets = (EBIT divided by average total assets); Return on average capital = (EBIT divided by average total debt plus stockholders' equity); Return on average equity = (net income divided by average stockholders' equity).
 
(iv) As discussed in Item 7 below and in Note 2 to the Consolidated Financial Statements, Beazer Homes acquired Crossmann Communities effective April 17, 2002.

 
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
 
General

HomebuildingWe design, build and sell single-family homes in the following regions and states:
 
Southeast
West
Central
Mid-Atlantic
Midwest
Florida
Arizona
Texas
Delaware
Indiana
         
Georgia
California
 
Maryland
Kentucky
         
Mississippi
Colorado
 
New Jersey
Ohio
         
North Carolina
Nevada
 
Pennsylvania
 
         
South Carolina
   
Virginia
 
         
Tennessee
   
West Virginia
 

We intend, subject to market conditions, to expand in our current markets through focused product expansion and price point diversification and to consider entering new markets either through expansion from existing markets or through acquisitions of established regional homebuilders. We seek to be one of the five largest builders in each of the markets that we serve.

Our homes are designed to appeal to homebuyers at various price-points across various demographic segments, and are generally offered for sale in advance of their construction. Once a sales contract has been signed by both the homebuyer and Beazer Homes, we classify the transaction as a "new order" and include the home in “backlog.” Such sales contracts are usually subject to certain contingencies such as the buyer's ability to qualify for financing. We do not recognize revenue on homes in backlog until the sales are closed and the risk of ownership has been transferred to the buyer.

Crossmann Acquisition: On April 16, 2002, our stockholders and the stockholders of Crossmann Communities, Inc. (“Crossmann”) approved the merger of Crossmann into one of our wholly owned subsidiaries, and the merger became effective on April 17, 2002. Crossmann built single-family homes in Indiana-its home base- with operations in Kentucky, Mississippi, North Carolina, Ohio, South Carolina and Tennessee and was a leading regional builder in these markets prior to the merger. We have included Crossmann’s operating results in our consolidated financial statements since April 1, 2002, less an imputed interest charge on the cash portion of the merger consideration for the period April 1, 2002 through April 16, 2002.

The aggregate merger consideration we paid consisted of approximately 3.9 million shares of our common stock (approximately $308.6 million) and $191.6 million in cash. In connection with the merger, we also repaid approximately $125.4 million of Crossmann debt. The cash portion of the merger consideration and the repayment of Crossmann debt upon the merger were funded from proceeds from our issuance of $350 million 8 3/8% Senior Notes due 2012 in a private placement on April 17, 2002.

Ancillary Businesses: We have established several businesses to support our core homebuilding operations. We operate design studios in the majority of our markets. Through design studios, homebuyers can choose non-structural upgrades and options for their new home. We also provide mortgage origination services for our homebuyers through Beazer Mortgage Corporation, or Beazer Mortgage. Beazer Mortgage originates, processes and brokers mortgages to third party investors. Beazer Mortgage generally does not retain or service the mortgages that it brokers. We also provide title services to our homebuyers in many of our markets. We will continue to evaluate opportunities to provide other ancillary services to our homebuyers.
 
Critical Accounting PoliciesSome of our critical accounting policies require the use of judgment in their application or require estimates of inherently uncertain matters. Although our accounting policies are in compliance with accounting principles generally accepted in the United States of America, a change in the facts and circumstances of the underlying transactions could significantly change the application of the accounting policies and the resulting financial statement impact. Listed below are those policies that we believe are critical and require the use of complex judgment in their application.

 
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Table of Contents

Inventory Valuation 

Housing projects and land held for development and sale 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 be impaired. We assess these assets for recoverability in accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS No. 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 net cash flows expected to be generate d by the asset. If these assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.

These evaluations for impairment are significantly impacted by estimates of revenues, costs and expenses and other factors. Due to uncertainties in the estimation process, it is reasonably possible that actual results could differ from those estimates. Our assumptions about future home sales prices and volumes require significant judgment because the residential homebuilding industry is cyclical and is highly sensitive to changes in economic conditions. We continue to evaluate the carrying value of our inventory and, based on historical results, believe that our existing estimation process is accurate and do not anticipate the process to materially change in the future.

Goodwill 

We test goodwill for impairment annually or more frequently if an event occurs or circumstances change that more likely than not reduce the value of a reporting unit below its carrying value. For purposes of goodwill impairment testing, we compare the fair value of each reporting unit with its carrying amount, including goodwill. Each of our operating divisions is considered a reporting unit. The fair value of each reporting unit is determined based on expected discounted future cash flows. If the carrying amount of a reporting unit exceeds its fair value, goodwill is considered impaired. If goodwill is considered impaired, the impairment loss to be recognized is measured by the amount by which the carrying amount of the goodwill exceeds implied fair value of that goodwill. We performed our annual impairment test o f goodwill as of April 30, 2004. For purposes of our annual goodwill impairment test, we obtained independent valuations of our reporting units. Based on comparison of those independent valuations to the carrying values of our reporting units at April 30, 2004, we determined that goodwill was not impaired.

Inherent in our fair value determinations are certain judgments and estimates, including projections of future cash flows, the discount rate reflecting the risk inherent in future cash flows, the interpretation of current economic indicators and market valuations and our strategic plans with regard to our operations. A change in these underlying assumptions would cause a change in the results of the tests, which could cause the fair value of one or more reporting units to be less than their respective carrying amounts. In addition, to the extent that there are significant changes in market conditions or overall economic conditions or our strategic plans change, it is possible that our conclusion regarding goodwill impairment could change, which could have a material effect on our financial position and results of o perations.

Our goodwill has been assigned to reporting units in different geographic locations. Therefore, potential goodwill impairment charges resulting from changes in local market and /or local economic conditions or changes in our strategic plans may be isolated to one or a few of our reporting units. However, our business is concentrated in the homebuilding industry and, as such, a widespread decline in the homebuilding industry or a significant deterioration of economic conditions could have a negative impact on the estimated fair value of a larger number of our reporting units.

While we believe that no impairment existed as of September 30, 2004, there can be no assurances that future economic or financial developments, including general interest rate increases or poor performance in either the national economy or individual local economies, might not lead to impairment of goodwill prospectively.

 
  17  

Table of Contents

Homebuilding Revenues and Costs

Revenue from the sale of a home is recognized when the closing has occurred and the risk of ownership is transferred to the buyer. All associated homebuilding costs are charged to cost of sales in the period when the revenues from home closings are recognized. 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. Sales commissions are included in selling, general and administrative expense when the closing has occurred. All other costs are expensed as incurred.

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.
 
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. Factors that affect our warranty liability include the number of homes sold, historical and anticipated rates of warranty claims, and cost per claim. Based on historical results, we believe that our existing estimation process is accurate and do not anticipate the process to materially change in the future. Our warranty reserves at September 30, 2004 and 2003 include accruals for certain moisture instrusion issues. Our estimation process for such accruals is discussed in Note 14 to the Consolidated Financial Statements. While we believe that our warranty reserves at September 30, 2004 are adequate, there can be no assurances that historical data and trends will accurately predict our actual warranty costs or that future developments might not lead to a significant change in the reserve.

Value Created: We evaluate our financial performance and the financial performance of our operations using Value Created, a variation of economic profit or economic value added. Value Created measures the extent to which we exceed our cost of capital. It is ca lculated as earnings before interest and taxes (EBIT), less a charge for all of the capital employed multiplied by our estimate of our minimum weighted average cost of capital. Most of our employees receive incentive compensation based upon a combination of Value Created and the change in Value Created during the year. For key managers a portion of the incentive is put in a bank. This portion is always at risk and may be paid out over three years. We believe that our Value Created system encourages managers to act like owners, rewards profitable growth and focuses attention on long-term loyalty and performance.

 
  18  

Table of Contents

The following tables present certain operating and financial data for the years discussed:
 
   
2004
 
2003
 
2002
 
 
 
Amount
 
% Change
 
Amount
 
% Change
 
Amount
 
Number of new orders,
                               
net of cancellations(1) :
                               
Southeast Region:
                               
Florida
   
2,061
   
33.1
%
 
1,549
   
22.5
%
 
1,265
 
Georgia
   
650
   
25.2
   
519
   
3.4
   
502
 
North and South Carolina
   
2,461
   
(13.6
)
 
2,850
   
30.9
   
2,177
 
Tennessee/Mississippi
   
712
   
2.3
   
696
   
2.5
   
679
 
Total Southeast
   
5,884
   
4.8
   
5,614
   
21.4
   
4,623
 
West Region:
                               
Arizona
   
1,764
   
22.2
   
1,443
   
11.5
   
1,294
 
California
   
2,776
   
38.2
   
2,009
   
(10.3
)
 
2,239
 
Colorado
   
410
   
13.9
   
360
   
53.2
   
235
 
Nevada
   
1,783
   
34.1
   
1,330
   
47.6
   
901
 
Total West
   
6,733
   
30.9
   
5,142
   
10.1
   
4,669
 
Central Region:
                               
Texas
   
1,053
   
(6.6
)
 
1,128
   
(9.3
)
 
1,244
 
Mid-Atlantic Region:
                               
Maryland/Delaware
   
430
   
15.9
   
371
   
15.2
   
322
 
New Jersey/Pennsylvania
   
404
   
15.4
   
350
   
25.0
   
280
 
Virginia/West Virginia
   
679
   
(27.3
)
 
934
   
22.4
   
763
 
Total Mid-Atlantic
   
1,513
   
(8.6
)
 
1,655
   
21.2
   
1,365
 
Midwest Region:
                               
Indiana
   
1,558
   
(23.1
)
 
2,026
   
67.3
   
1,211
 
Kentucky
   
132
   
(42.4
)
 
229
   
100.9
   
114
 
Ohio
   
608
   
16.5
   
522
   
35.9
   
384
 
Total Midwest
   
2,298
   
(17.2
)
 
2,777
   
62.5
   
1,709
 
Total
   
17,481
   
7.1
%
 
16,316
   
19.9
%
 
13,610
 
Backlog at end of year:
                               
Southeast Region:
                               
Florida
   
1,200
   
58.9
%
 
755
   
12.7
%
 
670
 
Georgia
   
168
   
(10.6
)
 
188
   
26.2
   
149
 
North and South Carolina
   
1,016
   
(9.2
)
 
1,119
   
36.0
   
823
 
Tennessee/Mississippi
   
245
   
(5.4
)
 
259
   
15.1
   
225
 
Total Southeast
   
2,629
   
13.3
   
2,321
   
24.3
   
1,867
 
West Region:
                               
Arizona
   
1,068
   
51.1
   
707
   
15.0
   
615
 
California
   
1,020
   
45.5
   
701
   
(4.4
)
 
733
 
Colorado
   
133
   
(7.0
)
 
143
   
164.8
   
54
 
Nevada
   
919
   
24.9
   
736
   
70.8
   
431
 
Total West
   
3,140
   
37.3
   
2,287
   
24.8
   
1,833
 
Central Region:
                               
Texas
   
429
   
8.3
   
396
   
(21.9
)
 
507
 
Mid-Atlantic Region:
                               
Maryland/Delaware
   
371
   
35.4
   
274
   
83.9
   
149
 
New Jersey/Pennsylvania
   
236
   
10.8
   
213
   
53.2
   
139
 
Virginia/West Virginia
   
440
   
(30.2
)
 
630
   
52.9
   
412
 
Total Mid-Atlantic
   
1,047
   
(6.3
)
 
1,117
   
59.6
   
700
 
Midwest Region:
                               
Indiana
   
875
   
(3.6
)
 
908
   
(15.8
)
 
1,079
 
Kentucky
   
42
   
(64.7
)
 
119
   
54.5
   
77
 
Ohio
   
294
   
5.8
   
278
   
(39.0
)
 
456
 
Total Midwest
   
1,211
   
(7.2
)
 
1,305
   
(19.0
)
 
1,612
 
Total
   
8,456
   
13.9
%
 
7,426
   
13.9
%
 
6,519
 
     
 (1) New orders for 2002 do not include 2,535 homes in backlog from acquired operations.    

 
  19  

Table of Contents
 
   
Year Ended September 30,
   
2004
 
2003
 
2002
 
   
Amount
 
% Change
 
Amount
 
% Change
 
Amount
 
Number of closings:
                               
Southeast Region:
                               
Florida
   
1,616
   
10.4
%
 
1,464
   
29.3
%
 
1,132
 
Georgia
   
670
   
39.6
   
480
   
1.5
   
473
 
North and South Carolina
   
2,564
   
0.4
   
2,554
   
21.4
   
2,103
 
Tennessee/Mississippi
   
726
   
9.7
   
662
   
(23.6
)
 
867
 
Total Southeast
   
5,576
   
8.1
   
5,160
   
12.8
   
4,575
 
West Region:
                               
Arizona
   
1,403
   
3.8
   
1,351
   
11.6
   
1,211
 
California
   
2,457
   
20.4
   
2,041
   
(0.9
)
 
2,059
 
Colorado
   
420
   
55.0
   
271
   
(27.9
)
 
376
 
Nevada
   
1,600
   
56.1
   
1,025
   
28.8
   
796
 
Total West
   
5,880
   
25.4
   
4,688
   
5.5
   
4,442
 
Central Region:
                               
Texas
   
1,020
   
(17.7
)
 
1,239
   
10.5
   
1,121
 
Mid-Atlantic Region:
                               
Maryland/Delaware
   
333
   
35.4
   
246
   
(29.3
)
 
348
 
New Jersey/Pennsylvania
   
381
   
38.0
   
276
   
(0.4
)
 
277
 
Virginia
   
869
   
21.4
   
716
   
(9.0
)
 
787
 
Total Mid-Atlantic
   
1,583
   
27.9
   
1,238
   
(12.3
)
 
1,412
 
Midwest Region:
                               
Indiana
   
1,591
   
(27.6
)
 
2,197
   
51.7
   
1,448
 
Kentucky
   
209
   
11.8
   
187
   
81.6
   
103
 
Ohio
   
592
   
(15.4
)
 
700
   
39.4
   
502
 
Total Midwest
   
2,392
   
(22.4
)
 
3,084
   
50.2
   
2,053
 
Total
   
16,451
   
6.8
%
 
15,409
   
13.3
%
 
13,603
 
                                 
Homebuilding Revenues(in thousands):
                       
Southeast Region
 
$
1,042,589
   
15.7
%
$
900,901
   
18.6
%
$
759,646
 
West Region
   
1,694,954
   
45.9
   
1,161,983
   
16.9
   
994,120
 
Central Region
   
163,569
   
(15.2
)
 
192,841
   
10.3
   
174,816
 
Mid-Atlantic Region
   
559,596
   
37.6
   
406,708
   
6.9
   
380,296
 
Midwest Region
   
359,320
   
(18.1
)
 
438,831
   
53.4
   
286,032
 
Total
 
$
3,820,028
   
23.2
%
$
3,101,264
   
19.5
%
$
2,594,910
 
                                 
Average sales price per home closed(in thousands):
                 
Southeast Region
 
$
187.0
   
7.1
%
$
174.6
   
5.2
%
$
166.0
 
West Region
   
288.3
   
16.3
   
247.9
   
10.8
   
223.8
 
Central Region
   
160.4
   
3.1
   
155.6
   
(0.2
)
 
155.9
 
Mid-Atlantic Region
   
353.5
   
7.6
   
328.5
   
22.0
   
269.3
 
Midwest Region
   
150.2
   
5.6
   
142.3
   
2.2
   
139.3
 
Company Average
   
232.2
   
15.4
   
201.3
   
5.5
   
190.8
 
                                 
Number of active subdivisions at year end:
                       
Southeast Region
   
177
   
(0.6
)%
 
178
   
(5.3
)%
 
188
 
West Region
   
90
   
(7.2
)
 
97
   
32.9
   
73
 
Central Region
   
43
   
10.3
   
39
   
14.7
   
34
 
Mid-Atlantic Region
   
57
   
42.5
   
40
   
14.3
   
35
 
Midwest Region
   
129
   
(7.9
)
 
140
   
1.4
   
138
 
Total
   
496
   
0.4
%
 
494
   
5.6
%
 
468
 

 
  20  

Table of Contents
 
New Orders:  

New orders increased in each of the last two fiscal years compared to the prior year.

The increases in new orders during fiscal 2004 compared to fiscal 2003 were driven by our Southeast and West regions. Order increases in our Southeast region reflect strength in Georgia and Florida, which was somewhat offset by weakness in parts of the Carolinas. Orders increased in all markets in our West region, where demand continues to be strong. Orders were down in our Mid-Atlantic region compared to a strong 2003, including orders during 2003 for affordable housing units built through governmental programs. The decreases in orders in our Midwest region reflect continued weakness in our Indiana and Kentucky markets driven primarily by the soft economy in those markets. Management continues to focus efforts on improving performance in the Mid west. We have initiated specific actions including completing a three-year financial plan, organizational alignment including management changes where appropriate, consolidating some office facilities, eliminating redundant costs, introducing new product into the region, and enhancing realtor programs and other marketing initiatives, including a coordinated media campaign centered on the Beazer Homes brand. Management continues to believe that these markets hold long-term strategic advantages for the Company. Orders were also down in our Central Region, reflecting continued weakness in our Dallas market.

The increases in new orders in fiscal 2003 reflected strong overall demand in most of our markets, with the strongest growth in the Southeast, Mid-Atlantic and West regions. Low interest rates and favorable demographic trends, including population growth, fueled demand, particularly in the first-time buyer segment. The increase in new orders in the Midwest during fiscal 2003 reflects the inclusion of results from that region for a full year compared to six months of fiscal 2002.

The fundamentals that drive sales activity are numerous and varied. On a macro level, low unemployment and low mortgage interest rates each contribute to a positive general homebuilding market environment. Our ability to stay ahead of changing customer preferences and local demographic trends with our product mix and to maintain adequate product supply (as measured by the number of active subdivisions) contributes locally to new order trends.

Backlog: The increases in unit backlog in each of the past two fiscal years reflect the favorable homebuilding environment driving new order activity, and our ability to gain market share. The average sales price of homes in backlog increased at September 30, 2004 to $264,400 from $221,500 at September 30, 2003 and $198,400 at September 30, 2002. The increase in the overall average price in backlog is due to our ability to raise prices in most markets, especially in our West and Mid-Atlantic regions, an increased percentage of homes in backlog from the higher priced West region, and our efforts in price point diversification where in some markets we are expanding our product offering to include higher priced homes.

 
Aggregate Sales Value of Homes in Backlog
 
(in thousands)
 
 
 
 
 
 
 
2004
 
$
2,235,917
 
2003
 
 
1,644,814
 
2002
 
 
1,293,290
 
 
 
Average Sales Price of Homes in Backlog
 
(in thousands)
 
 
 
 
 
 
 
2004
 
$
264.4
 
2003
 
 
221.5
 
2002
 
 
198.4
 

 
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Table of Contents
 
Seasonality and Quarterly Variability:

Our homebuilding operating cycle generally reflects escalating new order activity in our second and third fiscal quarters and increased closings in our third and fourth fiscal quarters. Fiscal 2002 results include new orders and closings for Crossmann from April 1, 2002, resulting in an increase in new orders and in closings for the third and fourth fiscal quarters. We believe that the typical seasonality reflects the preference of homebuyers to shop for a new home in the spring, as well as the scheduling of construction to accommodate seasonal weather conditions.

The following chart presents certain quarterly operating data for our last twelve fiscal quarters and is indicative of this seasonality.

New Orders
       
 
4thQ
3rdQ
2ndQ
1stQ
2004
4,276
4,869
5,032
3,304
2003
3,862
4,734
4,579
3,141
2002
3,731
4,227
3,142
2,510



Closings
       
 
4thQ
3rdQ
2ndQ
1stQ
2004
5,098
4,061
3,684
3,608
2003
5,014
3,616
3,297
3,482
2002
4,839
3,960
2,439
2,365

 
Financial Results:

The following table provides additional details of revenues and certain expenses included in our consolidated statements of operations (in thousands).

   
Year Ended September 30,
 
   
2004
 
2003
 
2002
 
Revenues:
             
Homebuilding (1)
 
$
3,824,142
 
$
3,097,021
 
$
2,594,910
 
Land and lot sales
   
44,702
   
39,069
   
18,051
 
Mortgage origination
   
51,140
   
57,152
   
41,006
 
Intercompany elimination - mortgage
   
(12,875
)
 
(15,834
)
 
(12,794
)
Total revenue
 
$
3,907,109
 
$
3,177,408
 
$
2,641,173
 
Cost of home construction and land sales:
                   
Homebuilding(1)
 
$
3,069,976
 
$
2,515,015
 
$
2,152,757
 
Land and lot sales
   
42,631
   
34,854
   
15,452
 
Intercompany elimination - mortgage
   
(12,875
)
 
(15,834
)
 
(12,794
)
Total cost of home construction and land sales
 
$
3,099,732
 
$
2,534,035
 
$
2,155,415
 
Selling, general and administrative:
                   
Homebuilding operations
 
$
397,601
 
$
325,657
 
$
269,655
 
Mortgage origination operations
   
31,841
   
30,991
   
22,929
 
Total selling, general and administrative
 
$
429,442
 
$
356,648
 
$
292,584
 

(1) Homebuilding revenues for fiscal 2004 reflect the recognition on a consolidated basis of $4.1 million of revenues related to closings that occurred in fiscal 2003, but for which funding was not received until fiscal 2004. During fiscal 2003, revenues and related cost of sales were not recognized on those closings where the buyers' initial investments were not sufficient to recognize profit at the time of closing. We received funding on such closings pursuant to commitments from bond authority programs in early fiscal 2004, at which time we recognized the revenues and related cost of sales.

 
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Revenues:

The increase in homebuilding revenues for fiscal 2004 compared to fiscal 2003 is the result of an increase in the number of homes closed and increased average sales prices in most of our markets. The increases in both closings and average sales price were driven primarily by continued strong demand in most of our markets.

The increase in homebuilding revenues for fiscal 2003 compared to fiscal 2002 is the result of an increase in the number of homes closed and increased average sales prices in most of our markets, as well as the inclusion for a full year of the Midwest region, which we entered with the acquisition of Crossmann in April 2002.

Cost of Home Construction and Land Sales:
Cost of Home Construction and Land Sales
             
(in thousands)
             
   
2004
 
2003
 
2002
 
Revenues
 
$
3,907,109
 
$
3,177,408
 
$
2,641,173
 
Cost of home construction and land sales
 
$
3,099,732
 
$
2,534,035
 
$
2,155,415
 
Gross Margin
   
20.7
%
 
20.2
%
 
18.4
%

Gross margin increased in fiscal 2004 as compared to fiscal 2003 as a result of a strong pricing environment driven by robust demand and constraints on supply in many of our markets, combined with the realization of cost savings arising from the execution of our profit improvement initiatives. Fiscal 2004 gross margins also benefited from a higher percentage of revenues from our West and Mid-Atlantic regions, where margins are high relative to other markets. The fiscal 2004 margin improvement was achieved despite $43.9 million in warranty expenses associated with construction defect claims from water intrusion at one of our Midwest divisions.

Gross margin increased in fiscal 2003 as compared to fiscal 2002 as a result of our ability to raise prices in most markets combined with greater emphasis on focused profit improvement initiatives, including cost reductions resulting from improved efficiency and the negotiation of national and regional supply agreements. Fiscal 2003 gross margins also benefited from a higher percentage of revenues from California, where margins are high relative to other markets, while fiscal 2002 margins were negatively impacted by purchase accounting adjustments related to the Crossmann acquisition. The fiscal 2003 margin improvement was achieved despite higher warranty expenses associated with construction defect claims from water intrusion in the Midwest and inventory write-downs in the Southeast.

We executed several land sales during the past three fiscal years. We realized gross profits of $2.1 million, $4.2 million, and $2.6 million on these land sales in fiscal 2004, 2003 and 2002, respectively.

Selling, General and Administrative Expense:

Selling, General and Administrative Expense as a Percentage of Total Revenue
 
2004
11.0%
2003
11.2%
2002
11.1%

During fiscal 2004, SG&A expense decreased as a percentage of revenue despite the inclusion of $12.3 million of marketing costs associated with our national branding initiative. The decrease is due primarily to benefits from scale as we leverage our overhead infrastructure through organic revenue growth.

During fiscal 2003, SG&A expense increased slightly as a percentage of revenue due primarily to higher management bonuses for fiscal 2003, the amount of which is related to the increase in our profits rather than our increase in revenue. In addition to increased management bonuses, fiscal 2003 SG&A included marketing costs incurred in preparation for the roll out of our national branding initiative launched in early fiscal 2004.

 
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Mortgage Origination Operations

Number of Mortgages Originated
             
   
2004
 
2003
 
2002
 
Beazer Mortgage originations
   
9,633
   
10,139
   
8,882
 
Total closings
   
16,151
   
15,409
   
13,603
 
Capture rate
   
59
%
 
66
%
 
65
%
 
Our capture rate (Beazer Mortgage originations as a percentage of total home closings) during fiscal 2004 decreased from 2003 due primarily to increased competition for new purchase mortgages driven by a slowdown in the refinance market.

During fiscal 2003, our capture rate increased over 2002 due primarily to an improved capture rate in our Midwest region.

Our capture rate is based on total closings. Our capture rate excluding non-financed closings was approximately 63% for fiscal 2004.

Income Taxes:

Income taxes for fiscal 2004 were provided at the effective rate of 39.0%. Income taxes for fiscal 2003 were provided at the effective rate of 39.5%. Income taxes for fiscal 2002 were provided at the effective rate of 39.3% (39% for the period prior to the Crossmann acquisition and 39.5% post acquisition). The principal difference between our effective rate and the U.S. Federal statutory rate is state income taxes.

Derivative Instruments and Hedging Activities:

We are exposed to fluctuations in interest rates. We enter into derivative agreements to manage interest costs and hedge against risks associated with fluctuating interest rates. We do not enter into or hold derivatives for trading or speculative purposes. During the year ended September 30, 2001 we entered into interest rate swap agreements (the “Swap Agreements”) to effectively fix the variable interest rate on $100 million of floating rate debt. The Swap Agreements mature in December 2004.

The Swap Agreements have been designated as cash flow hedges and accordingly, are recorded at fair value in our consolidated balance sheets and the related gains or losses are deferred in stockholders’ equity, net of taxes, as a component of other comprehensive income. Amounts to be received or paid as a result of the Swap Agreements are accrued and recognized as adjustments to interest related to the designated debt. The net effect of this accounting on our operating results is that interest on the variable-rate debt is generally recorded based on fixed interest rates. No portion of these hedges was considered ineffective for the year ended September 30, 2004. We expect to reclassify $610,000, net of taxes of $354,000, from other comprehensive loss to interest expense over the next twelve months.

As a result of the Swap Agreements, we have recorded a cumulative after-tax other comprehensive loss of $610,000 as of September 30, 2004. The estimated fair value of the Swap Agreements, based on current market rates, approximated $1 million at September 30, 2004 and is included in other liabilities.

Financial Condition And Liquidity:

At September 30, 2004, we had cash of $320.9 million, compared to $73.4 million at September 30, 2003. The increase in cash was primarily due to the issuance of $200 million of 6 1/2 % Senior Notes due 2013 and $180 million of 4 5/8 % Senior Notes due 2024. Our net cash used in operating activities for the year ended September 30, 2004 was $73.7 million, as increased net income and increases in accounts payable and other liabilities were offset by increased levels of inventory driven by higher year end backlog and anticipated future growth. Net cash used in investing activities was $30.5 million for fiscal 2004 as we invested $25.8 million in unconsolidated joint ventures to support our land acquisition strategy. Net cash provided by financing activities was $351.7 million in fiscal 2004, as proceeds from the Senior Notes issuances discussed above were somewhat offset by common share repurchases and dividend payments of $17.5 million and $5.5 million, respectively.

 
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Our net cash used in operating activities for the year ended September 30, 2003 was $41.0 million, as increased net income and increases in accounts payable and other liabilities were offset by increased levels of inventory driven by higher year end backlog and anticipated future growth. Net cash used in investing activities was $6.6 million for fiscal 2003. Net cash used in financing activities was $4.0 million in fiscal 2003 as proceeds from our term loan were used to pay off our existing term loan and 8 7/8% Senior Notes due 2008 (as discussed below), and proceeds from stock option exercises offset cash used for share repurchases.

In April 2002, we acquired Crossmann Communities for approximately $500.2 million, of which $308.6 million was paid through the issuance of 3.9 million shares of our common stock and $191.6 million was paid in cash. In connection with the merger, we also repaid approximately $125.4 million of Crossmann debt, resulting in total consideration paid of $625.6 million. The acquisition has been accounted for as a purchase and, accordingly, the purchase price has been allocated to reflect the fair value of assets and liabilities acquired. The cash portion of the acquisition and repayment of Crossmann debt was funded with the proceeds from a Senior Note offering.

At September 30, 2004 we had the following long-term debt (in thousands):

Debt
 
Due
 
Amount
 
4 5/8% Convertible Senior Notes
   
June 2024
 
$
180,000
 
6 1/2% Senior Notes
   
November 2013
   
200,000
 
8 3/8% Senior Notes
   
April 2012
   
350,000
 
8 5/8% Senior Notes
   
May 2011
   
200,000
 
Term Loan
   
June 2008
   
200,000
 
Other Notes Payable
   
Various Dates
   
22,067
 
Unamortized discount
         
(14,663
)
Total
       
$
1,137,404
 
 
In May 2004, we amended and restated our existing bank credit facility (the “Credit Facility”) to increase the banks’ commitments and extend the maturity date for one year. The amended 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 now mature in June 2008. The Revolving Credit Facility and the Term Loan bear interest at a fluctuating rate (3.3% at September 30, 2004) based upon LIBOR or the alternate base rate of interest announced by our lead bank. The Credit Facility contains various operating and financial covenants. Each of our significant subsidiaries is a guarantor under the Credit Facility.

We fulfill our short-term cash requirements with cash generated from our operations and funds available from our unsecured Revolving Credit Facility. 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 September 30, 2004, we had no borrowings outstanding and available borrowings of $259.4 million under the Revolving Credit Facility.

We entered into Swap Agreements to manage interest costs and hedge against risks associated with fluctuating interest rates related to $100 million of floating rate debt. As of September 30, 2004, we had entered into interest rate swaps to effectively fix the interest rate (before spread) on $100 million in floating rate debt as follows: $75 million is fixed at 5.925% per annum; $10 million is fixed at 5.17% per annum; $5 million is fixed at 5.50% per annum; and $10 million is fixed at 5.055% per annum. The Swap Agreements expire in December 2004.

 
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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 beginning December 2004. Beginning with the six-month interest period commencing on June 15, 2009, we will pay contingent interest during a six-month interest period if the average trading pric e of the notes for a five trading day reference period equals or exceeds 120% of the principal amount of the notes. The notes are convertible by holders into shares of our common stock at an initial conversion rate of 6.48 shares of Beazer Homes common stock per $1,000 principal amount (subject to adjustment for customary reasons), representing an initial conversion price of $154.32 per share of common stock, under the following circumstances: a) during any calendar quarter, if the last reported sale price of our common stock for at least 20 trading days during the period of 30 consecutive trading days ending on the last trading day of the previous calendar quarter is greater than or equal to 120% of the conversion price on such last trading day; b) subject to certain limitations, during the five consecutive trading days after any five consecutive trading days in which the trading price per $1,000 principal amount of notes for each day of that period is less than 98% of the product of the last reported sale price of our common stock and the conversion rate of the notes on each such day, provided that if the price of our common stock issuable upon conversion is between 100% and 120% of the conversion price, holders will be entitled to receive upon conversion only the value of the principal amount of the notes converted plus accrued and unpaid interest, including contingent interest and additional amounts owed, if any, c) if the notes have been called for redemption, d) upon the occurrence of specified corporate transactions, e) during any period in which the credit rating assigned to the notes by either Moody’s or S&P is lower than B1 or B+, respectively, or the notes are no longer rated by at least one of these rating services or their successors.

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 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, including contingent interest, if any, and any additional amounts owed, if any, to such purchase date.

In November 2003, we issued $200 million 6 1/2 % 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 1/2 % Senior Notes due November 2013 (the “6 ½% Senior Notes”), which were registered under the Securities Act of 1933. Interest on the 6 1/2 % Senior Notes is payable semiannually. We may, at our option, redeem the 6 1/2 % Senior Notes in whole or in part at any time after November 2008, initially at 103.250% of the principal amount, decl ining to 100% of the principal amount after November 2011. We may redeem the 6 1/2 % 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 pa rt at any time after April 2007, initially at 104.188% of the principal amount, declining to 100% of the principal amount after April 2010. A portion of such notes may also be redeemed prior to April 2005 under certain conditions. We used the proceeds from the issuance of the 8 3/8 % Senior Notes to fund the cash portion of the Crossmann acquisition, to repay Crossmann’s outstanding net indebtedness, to reduce borrowings under our revolving credit facility at the time, and to pay related fees, commissions and other expenses.

 
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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.

During fiscal 2003, we retired our $100 million 8 7/8% Senior Notes due in 2008 (the “8 7/8% Senior Notes”). The 8 7/8% Senior Notes were redeemed at 104.438% of the principal amount, plus accrued interest. As a result of the redemption of the 8 7/8% Senior Notes, we recorded a pre-tax charge of $7.6 million, which includes the write off of previously capitalized fees.

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. Neither the Credit Facility nor the Senior Notes restrict distributions to Beazer Homes by its subsidiaries. At September 30, 2004, we were in compliance with all covenants related to the Credit Facility and Senior Notes. At September 30, 2004, under the mos t restrictive covenants of each indenture, approximately $289.7 million of our retained earnings were available for cash dividends and for share repurchases.

In February 2003, our Board of Directors approved a stock repurchase plan authorizing the purchase of up to one million shares of our outstanding common stock. During fiscal 2004, we repurchased 179,800 shares for an aggregate purchase price of $17.5 million or approximately $98 per share pursuant to the plan. During fiscal 2003, we repurchased 128,000 shares for an aggregate purchase price of $6.9 million or approximately $54 per share pursuant to the plan. At September 30, 2004, we were authorized to purchase up to 692,200 additional shares pursuant to the plan. During fiscal 2002, certain officers and employees transferred to us 31,072 shares of our common stock, valued at prevailing market prices. The transfers, made to satisfy such officers’ and employees’ tax obligations under certain stock incentiv e plans, were accounted for as a stock repurchase by the Company. The Company has since discontinued the practice of allowing officers and employees to settle tax obligations through the transfer of stock to the Company.

During fiscal 2004, the Company paid quarterly cash dividends of $0.10 per common share, or a total of approximately $5.5 million. No dividends were paid during fiscal years 2003 or 2002.

We attempt to control half or more of our land supply through options. At September 30, 2004, we controlled 90,571 lots (a 5.5 year supply based on fiscal 2004 closings), with 42,145 lots owned and 48,426 lots under option. We expect to exercise all of our option contracts with specific performance obligations and, subject to market conditions, substantially all of our option contracts without specific performance obligations. As a result of the flexibility that these options provide us, upon a change in market conditions, we may renegotiate the terms of the options prior to their ultimate exercise.

Land Bank
         
   
Lots
 
Percentage
 
Owned
   
42,145
   
47
%
Optioned
   
48,426
   
53
%
Total
   
90,571
   
100
%

In January 2000, we filed a $300 million universal shelf registration statement on Form S-3 with the Securities and Exchange Commission. Pursuant to the filing, we may, from time to time over an extended period, offer new debt or equity securities. This shelf registration allows us to expediently access capital markets periodically. Our $200 million 8 5/8% Senior Notes were sold pursuant to this registration statement. The timing and amount of future offerings, if any, will depend on market and general business conditions.

We believe that our cash on hand and current borrowing capacity at September 30, 2004 and anticipated cash flows from operations are sufficient to meet our liquidity needs for the foreseeable future.

 
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Off-Balance Sheet Arrangements and Aggregate Contractual Commitments:

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 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 $180.7 million at September 30, 2004. This amount includes letter s of credit of approximately $57.8 million. Below is a summary of amounts, net of cash deposits, committed under all options at September 30, 2004 (in thousands):

   
Aggregate Exercise Price of Options
 
Options with specific performance
 
$
28,184
 
Options without specific performance
   
1,763,158
 
Total options
 
$
1,791,342
 

We expect to exercise all of our option contracts with specific performance obligations and, subject to market conditions, substantially all 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, can have a significant impact on the timing of option exercises. Under their current terms, and assuming no significant changes in market conditions or other factors, we expect to exercise our land options as follows (in thousands):

Year Ending September 30,
 
 
 
2005
 
$
397,314
 
2006
   
583,068
 
Thereafter
   
810,960
 
Total
 
$
1,791,342
 

We have historically funded the exercise of land options though a combination of operating cash flows and borrowings under our Revolving Credit Facility. We expect these sources to continue to be adequate to fund anticipated future option exercises. Therefore, we do not anticipate that the exercise of our land options will have a material adverse effect on our liquidity.

Certain of our option contracts are with sellers who are deemed to be Variable Interest Entities (“VIE”s) under FASB Interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51” (“FIN 46”). FIN 46 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 46, 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.

 
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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 September 30, 2004 and 2003 reflect consolidated inventory not owned of $254.8 million and $35.7 million, respectively. Obligations related to consolidated inventory not owned totaled $219.0 million at September 30, 2004 and $30.5 million at September 3 0, 2003. 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 increase in consolidated inventory not owned and the related obligations is due primarily to the transition provisions of FIN 46, which applied immediately to VIEs created after January 31, 2003 and with respect to variable interests held before February 1, 2003 applied beginning with our quarter ended March 31, 2004. The above disclosures of amounts committed under options include our obligations related to consolidated inventory not owned.

We participate in a number of land development joint ventures in which we have less than a controlling interest. We enter into joint ventures in order to acquire attractive land positions, to manage our risk profile and to leverage our capital base. 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. Our consolidated balance sheets include investments in joint ventures totaling $44.7 million and $26.6 million at September 30, 2004 and 2003 respectively.

Our joint ventures typically obtain secured acquisition, development and construction financing. At September 30, 2004, our unconsolidated joint ventures had borrowings outstanding totaling $128.1 million. In some instances, we and our joint venture partners have provided varying levels of guarantees of debt of our unconsolidated joint ventures. At September 30, 2004, we had repayment guarantees of $10 million and loan-to-value maintenance guarantees of $56.8 million 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 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.

The following summarizes our aggregate contractual commitments at September 30, 2004:

   
Payments Due by Period (in Thousands)
 
Contractual Obligations
 
Total
 
Less than 1 year
 
1-3 years
 
3-5 years
 
More than 5 years
 
Long-Term Debt (1)
 
$
1,782,457
 
$
92,479
 
$
153,281
 
$
340,744
 
$