<PAGE>
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- ------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(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, 1998
/ / 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)
<TABLE>
<S> <C>
DELAWARE 58-2086934
(State or other jurisdiction of incorporation or (I.R.S. Employer Identification No.)
organization)
</TABLE>
5775 PEACHTREE DUNWOODY ROAD, SUITE 200, ATLANTA, GEORGIA 30342
(Address of principal executive offices) (Zip code)
(Registrant's telephone number including area code) (404) 250-3420
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
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<CAPTION>
TITLE OF SECURITIES EXCHANGES ON WHICH REGISTERED
- ---------------------------------------------------------------------------------------------------- -----------------------------
<S> <C>
Common Stock, $.01 par value per share New York Stock Exchange
Series A Cumulative Convertible Exchangeable Preferred Stock, $.01 par value per share New York Stock Exchange
Preferred Share Purchase Rights New York Stock Exchange
</TABLE>
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 / /
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. / /
The aggregate market value of the registrant's Common Stock held by
non-affiliates of the registrant (5,743,672 shares) as of December 7, 1998,
based on the closing sale price per share as reported by the New York Stock
Exchange on such date, was $118,463,235. The number of shares outstanding of
the registrant's Common Stock as of December 7, 1998 was 6,267,423.
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<PAGE>
(C) EXHIBITS
Reference is made to Item 14(a)3 above. The following is a list of
exhibits, included in Item 14(a)3 above, that are filed concurrently with
this report.
The Beazer Homes USA, Inc. Form 10-K/A for the year ended September 30,
1998 is being amended hereby to correct an inadvertent EDGAR filing error in
exhibit 13. The corrected exhibit 13 is filed herewith.
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<S> <C> <C>
4.5......... Fourth Supplemental Indenture (9% Notes) dated July 20, 1998
4.8......... First Supplemental Indenture (8[fr7/8]% Notes) dated July 20, 1998
10.12....... Amended and Restated Credit Agreement dated November 3, 1998 between the
Company and First National Bank of Chicago, as Agent, and Comerica Bank and
Guaranty Federal Bank, F.S.B. as Managing Agents
11.......... Earnings Per Share Calculations
13.......... The Company's Annual Report to Shareholders for the fiscal year ended
September 30, 1998. Except as expressly incorporated by reference in this
report on Form 10-K, such Annual Report is furnished only for the information
of the Securities and Exchange Commission and is not deemed ""filed'' as part of
this report. The following portions of such Annual Report are incorporated by
reference in the indicated items of this report.
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2
<PAGE>
<TABLE>
<CAPTION>
PORTIONS OF THE ANNUAL REPORT FOR THE FISCAL YEAR ENDED ITEM OF THIS
SEPTEMBER 30, 1998 REPORT
----------------------------------------------------------------- ------------
<C> <S> <C>
""Trading Information'' and ""Quarterly Stock Price Information'' 5
Selected Financial Data 6
Management's Discussion and Analysis of Financial Condition and 7
Results of Operations
Consolidated Financial Statements 8
23.1........ Consent of Deloitte & Touche LLP, Independent Auditors.
27.......... Financial Data Schedule
</TABLE>
3
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
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<S> <C> <C>
BEAZER HOMES USA, INC.
By: /s/ IAN J. MCCARTHY
------------------------------------
Name: Ian J. McCarthy
Title: President and Chief Executive
Officer
Date: December 23, 1998
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
12/23/98 By: /s/ BRIAN C. BEAZER
- -------- ------------------------------------------------------------
Date Brian C. Beazer, Director and Non-Executive Chairman of the
Board
12/23/98 By: /s/ IAN J. MCCARTHY
- -------- ------------------------------------------------------------
Date Ian J. McCarthy, Director, President and Chief Executive
Officer (Principal Executive Officer)
12/23/98 By: /s/ DAVID S. WEISS
- -------- ------------------------------------------------------------
Date David S. Weiss, Director, Executive Vice President and Chief
Financial Officer (Principal Financial Officer)
12/23/98 By: /s/ THOMAS B. HOWARD, JR.
- -------- ------------------------------------------------------------
Thomas B. Howard, Jr., Director
12/23/98 By: /s/ GEORGE W. MEFFERD
- -------- ------------------------------------------------------------
George W. Mefferd, Director
12/23/98 By: /s/ D.E. MUNDELL
- -------- ------------------------------------------------------------
D.E. Mundell, Director
12/23/98 By: /s/ LARRY T. SOLARI
- -------- ------------------------------------------------------------
Larry T. Solari, Director
12/23/98 By: /s/ MICHAEL T. RAND
- -------- ------------------------------------------------------------
Michael T. Rand, Vice President and Controller
(Principal Accounting Officer)
</TABLE>
4
<PAGE>
Exhibit 13
BEAZER HOMES
1998 ANNUAL REPORT
MAKING IT
HAPPEN
RECORD RESULTS
IN OUR FIFTH YEAR AS A PUBLIC COMPANY
GROWTH RE-IGNITED
IN 1998 WITH KEY ACQUISITIONS
AND INTERNAL EXPANSION
ROUNDTABLE DISCUSSION
WITH BEAZER HOMES MANAGEMENT
<PAGE>
MAKING IT HAPPEN
Two years ago, Beazer Homes USA began implementing a number of plans to improve
profitability. We consciously leveled off our growth and concentrated on four
primary initiatives: A focus on beating our cost of capital and creating value.
Opening mortgage origination operations. Increasing our use of design centers to
improve margins. And implementing new information systems to improve operational
efficiency. Our efforts have more than paid off. Fiscal 1998 was a record year
for Beazer Homes, and we have entered a new stage of development, characterized
by improved profitability and renewed growth. Beazer Homes is "Making It
Happen."
1 COMPANY HIGHLIGHTS
2 DEAR SHEARHOLDERS
4 ROUNDTABLE DISCUSSION WITH
BEAZER HOMES MANAGEMENT
16 DIRECTORY OF HOMEBUILDERS
17 FINANCIAL REVIEW
46 NOTE REGARDING FORWARD-LOOKING STATEMENTS
47 OPERATING AND CORPORATE MANAGEMENT
48 BOARD OF DIRECTORS
49 SHAREHOLDER INFORMATION
BUSINESS DESCRIPTION
BeazerHomes USA, Inc., headquartered in Atlanta, Georgia, is
one of the nation's largest geographically diversified
homebuilders. The Company currently has operations in 12
states: five in the Southeast, three in the Southwest, three
in the Mid-Atlantic region and Texas. Beazer Homes focuses
on building quality homes that provide value to entry-level
and first-move-up home buyers. The Company has been doing
business in the United States since 1985 and has been listed
on the New York Stock Exchange since 1994. Its common stock
is traded under the symbol "BZH."
<PAGE>
CALIFORNIA
KEY TRENDS AND INITIATIVES
The California homebuilding market came roaring back in 1998. Prices and profit
margins expanded by even more than the number of homes closed. The Beazer
divisions in both southern (San Diego, Orange County, Riverside/San Bernadino,
Ventura and Los Angeles areas) and northern (Sacramento) California took full
advantage of the rebound of the California market to post records for volume
and profitability in 1998.
MARKET POSITION
#2 in Sacramento
Top 10 in southern California
NEVADA
KEY TRENDS AND INITIATIVES
Gross margins improved dramatically in Nevada in 1998, as Beazer closed out
older, less profitable subdivisions and concentrated on fewer communities and a
lower level of investment. With Las Vegas likely near its peak of homebuilding
activity, Beazer does not expect to expand significantly in this market in the
short term.
MARKET POSITION
Top 15 in Las Vegas
ARIZONA
KEY TRENDS AND INITIATIVES
Phoenix continues to be Beazer's largest market, with 1,336 closings in 1998.
Beazer has a strong focus on the affordable end of this market, although it
also builds some move-up product there. Beazer is well positioned for future
growth in Phoenix, with a low-cost land bank, equivalent to nearly three years
of closings and a level of backlog up 82% as it enters fiscal 1999.
MARKET POSITION
#4 in Phoenix
TEXAS
KEY TRENDS AND INITIATIVES
Construction delays, caused by significant labor and raw materials shortages,
resulted in a reduced number of closings in Beazer's Texas markets in 1998.
Beazer enters 1999, however, with its backlog up over 50% in Texas. Texas'
population is projected to have the second largest increase (after Florida) of
any state over the next 10 years, fueled in great part by immigration.
MARKET POSITION
Top 15 in both Dallas and Houston
TENNESSEE
Key Trends and Initiatives
Through its Tennessee division, Phillips Builders, Beazer continues to hold the
top spots in both Nashville and Knoxville, despite increased competition from
national builders. Beazer continues to be very successful in the move-up and
luxury segments while exploring more entry-level and first-time move-up
opportunities for 1999.
MARKET POSITION
#1 in Knoxville
#1 in Nashville
FLORIDA
KEY TRENDS AND INITIATIVES
Strong prospects for increases in employment and population, fueled by
immigration, makes Florida a significant growth opportunity for Beazer. With
two acquisitions, Beazer has now become the fourth largest builder in the
Orlando market. Beazer's Panitz Homes division continues to dominate the first
and second move-up segments of the Jacksonville market. Beazer is also
expanding its presence in Ft. Myers and Tampa and expects significant growth in
these markets in 1999.
MARKET POSITION
#3 in Jacksonville
#4 in Orlando (combined Beazer and Snow Construction)
Top 10 in Ft. Myers
NORTH AND SOUTHCAROLINA
KEY TRENDS AND INITIATIVES
Through its Carolinas division, Squires Homes, Beazer continues to expand its
presence in the Carolinas. In 1998, Beazer achieved growth in its well
established markets of Charlotte, Raleigh and Charleston, while increasing its
market share in the newer markets of Columbia and Myrtle Beach and closing
homes for the first time in Greenville. Beazer expects that its strategy of
"satellite" markets leveraging off of a central hub in Charlotte will help
provide further profitable growth in the Carolinas.
MARKET POSITION
#1 in Charleston
#2 in Charlotte
#4 in Columbia
#2 in Raleigh
#5 in Myrtle Beach
GEORGIA
KEY TRENDS AND INITIATIVES
Despite being the largest homebuilding market in the United States, Atlanta is
also among the most fragmented and competitive. Beazer scaled back in this
market in 1998, reducing its number of active subdivisions and re-deploying
capital to other markets. Having reduced its level of investment significantly,
Beazer's Atlanta operation is now experiencing an improved return on capital
from eight core subdivisions.
MARKET POSITION
Top 15 in Atlanta
MID-ATLANTIC (MARYLAND,
VIRGINIA AND NEW JERSEY)
KEY TRENDS AND INITIATIVES
In December 1998, Beazer completed its acquisition of Trafalgar House, with
operations in Maryland, Virginia and New Jersey. Trafalgar House is the fourth
largest builder in the Washington, D.C. metropolitan area, which is the third
largest single family homebuilding market in the United States. With annual
closings of over 1,000 homes and revenues of over $200 million, Trafalgar House
is expected to contribute significantly to Beazer's growth in 1999.
MARKET POSITION
#4 in Washington, D.C. metropolitan area
Top 10 in central and southern New Jersey
NOTE: Market position represents a Company estimate based upon the most recent
market data available. Market data consists of homes closed or sold.
<PAGE>
COMPANY HIGHLIGHTS
DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA
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<CAPTION>
FINANCIAL HIGHLIGHTS Year Ended September 30,
----------------------------------
1998 1997 1996
----------------------------------
STATEMENT OF OPERATIONS DATA
<S> <C> <C> <C>
Homes closed .............................. 6,113 5,785 5,935
Total revenue ............................. $977,409 $852,110 $866,627
Earnings before interest and taxes ("EBIT") $ 56,525 $ 33,051(i) $ 45,327
Net income ................................ $ 23,201 $ 11,189(i) $ 18,266
Net income per common share
Basic ................................... $ 3.27 $ 1.18(i) $ 2.24
Diluted ................................. $ 2.66 $ 1.15(i) $ 2.01
BALANCE SHEET DATA AT YEAR END
Total assets .............................. $525,591 $399,595 $356,643
Total debt ................................ $215,000 $145,000 $115,000
Stockholders' equity ...................... $199,224 $179,286 $178,701
RETURN DATA(ii)
Return on average assets .................. 12.2% 8.7%(i) 12.9%
Return on average capital ................. 15.3% 10.7%(i) 15.8%
Return on average equity .................. 12.3% 6.3%(i) 10.6%
</TABLE>
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<CAPTION>
MAKET DATA Year Ended September 30,
-----------------------------------------------------
NUMBER OF
AVERAGE PRICE ACTIVE
BACKLOG AT OF HOMES SUBDIVISIONS
YEAR END CLOSINGS CLOSED AT YEAR END
------------------------------------------------------
<S> <C> <C> <C> <C>
SELECTED INFORMATION BY STATE
Arizona ............... 478 1,336 $ 127.6 32
California ............ 182 1,154 $ 173.4 18
Florida ............... 342 677 $ 178.0 41
Georgia ............... 92 166 $ 170.2 8
Nevada ................ 83 491 $ 161.3 9
North Carolina ........ 226 777 $ 141.8 25
South Carolina ........ 182 445 $ 121.6 16
Tennessee ............. 154 428 $ 196.0 23
Texas ................. 318 639 $ 171.0 31
---------------------------------------------------
TOTAL ................. 2,057 6,113 $ 156.4 203
---------------------------------------------------
</TABLE>
(i) Fiscal 1997 results include the effect of a $6,326 writedown of inventory
in Nevada. EBIT, net income and diluted net income per common share
excluding the writedown would be $39,377, $15,079 and $1.70, respectively.
Return on average assets, return on average capital and return on average
equity excluding the writedown would be 10.4%, 12.7% and 8.4% respectively.
(ii) Return on average assets is defined as earnings before interest and taxes
("EBIT") divided by average total assets for the year. Return on average
capital is defined as EBIT divided by average total debt plus stockholders'
equity for the year. Return on average equity is defined as net income
divided by average stockholders' equity.
BEAZER HOMES USA 1
<PAGE>
DEAR SHAREHOLDERS,
WE ARE EXTREMELY PLEASED TO REPORT RECORD RESULTS IN OUR FIFTH FISCAL YEAR AS A
PUBLIC COMPANY. BEAZER HOMES IS NOW IN A NEW STAGE OF ITS DEVELOPMENT A STAGE
CHARACTERIZED BY IMPROVED PROFITABILITY AND RENEWED GROWTH.
This year's record results illustrate these trends:
IMPROVED PROFITABILITY
o EBIT up to 5.8% of revenues from 3.9%.
o Net income up 107% (54% compared to 1997 excluding writedown).
o EPS up 131% (56% compared to 1997 excluding writedown).
o Gross margin improved in each of the last six consecutive quarters.
RENEWED GROWTH
o Revenues up 15%.
o New orders up 24%.
o Backlog at year end up 73% in units and 82% in dollar value.
o Subsequent to year end completed Trafalgar House acquisition.
These results reflect the successful implementation of initiatives that we began
two years ago. Now we are "Making It Happen."
CURRENT RESULTS REFLECT SUCCESS OF INITIATIVES STARTED IN 1996
Two years ago, we made a conscious decision to temporarily level off our growth
and concentrate more heavily on improving our profitability. We committed to
four key initiatives:
o renewing our focus on beating our cost of capital and creating value,
o opening mortgage origination operations at all locations,
o increasing our use of design centers to better serve home buyers and improve
margins and
o implementing new information systems to assist in all these efforts.
We are proud to report on the success of all these efforts. In fiscal 1998:
o our "Value Created" incentive compensation plan, implemented at the Corporate
level in 1997, was extended throughout the Company,
o Beazer Mortgage originated mortgages for all Beazer divisions,
o we sold upgrades and options through 11 design centers and
o our Executive Information System was used by all key operating managers.
The successful implementation of these initiatives has produced six consecutive
quarters of gross margin improvement, and we currently project future
improvements in margins based on the profitability in our record backlog.
GROWTH IS RE-IGNITED
Having achieved the results that we strove for with our profitability
initiatives, we have now re-ignited the growth that characterized our early
years as a public company.
During fiscal 1998, we completed the acquisition of an Orlando homebuilder and
added to that with another acquisition in Orlando subsequent to year end. We
began our joint venture with the largest homebuilder in Mexico to build
affordable housing in the United States. We also increased our number of active
subdivisions during the year and our investment in our ongoing operations.
These moves, as well as a buoyant U.S. economy, contributed to a dramatic
increase in our backlog at year end. This increased backlog gives us confidence
of further growth in 1999.
Subsequent to 1998 year end, we acquired the U.S. homebuilding operations of
Trafalgar House, in Virginia, Maryland and New Jersey. Through this acquisition
we will become the fourth largest builder in the Washington, D.C. metropolitan
area. We believe that this is an excellent acquisition that expands our presence
into a new region and should be accretive to our shareholders in fiscal 1999.
2 BEAZER HOMES USA
<PAGE>
[Photograph Page 3]
(l) BRIAN C. BEAZER
(r) IAN J. MCCARTHY
[Bar Charts Page 3]
BACKLOG
(in millions of dollars)
98 $347.3
97 $212.2
96 $210.6
95 $190.4
94 $143.4
"At September 30, 1998 the dollar
value of our backlog is up over 80%...
GROSS MARGIN
2Q 97 14.3%
3Q 97 15.2%
4Q 97 15.8%
1Q 98 16.2%
2Q 98 16.3%
3Q 98 17.2%
4Q 98 17.7%
...and our gross margin, which has
increased for the last six consecutive
quarters, continues to improve."
BEAZER ENDS YEAR IN STRONGEST FINANCIAL POSITION EVER
While achieving record results and growth, we nevertheless continued to follow
our conservative financial policies. We ended fiscal 1998 with a very strong
financial position and significant liquidity. This gave us the ability to
complete the acquisition of Trafalgar House using funds under our bank revolving
credit facility, while still maintaining a conservative capital structure.
As we ended fiscal 1998, capital markets were extremely volatile. While we
believe strongly in the fundamental trends that will provide long-term growth in
housing, we understand that short-term volatility will create challenges and
opportunities. The acquisition of Trafalgar House was one such opportunity. We
intend to continue to have the financial flexibility to address these challenges
and to take advantage of future opportunities.
LOOKING FORWARD TO CONTINUING IMPROVED PERFORMANCE
The initiatives that we have implemented over the last two years have produced
excellent results in 1998. We expect to improve on them in 1999. At September
30, 1998, the dollar value of our backlog is up over 80% and our gross margin,
which has increased for the last six consecutive quarters, continues to improve.
While we benefited from a strong U.S. economy in 1998, we believe that
successfully implementing our plans provided most of the impetus for improved
profitability. We are extremely optimistic about our future. Our strong backlog
and continued improving margins provide momentum for growth in earnings in 1999.
Our strong financial position has given us the financial flexibility to take
advantage of an attractive acquisition opportunity and will continue to serve us
well in a period of economic volatility, should it materialize. Most importantly
we have given an extremely strong and experienced management team the tools they
need to manage our business prudently and profitably for future growth.
Following this letter is a roundtable discussion with Beazer management. In that
section, our executive management team answers questions about our performance
in 1998 and plans for the future.
We are proud of the success that we have achieved in 1998, and are particularly
grateful to all of our employees who implemented our profitability initiatives.
Our employees, subcontractors, suppliers, lenders and investors have
collectively produced this year's results. Based on their efforts, we expect,
absent significant adverse economic changes, to exceed 1998 record results in
1999.
Sincerely,
/S/BRIAN C. BEAZER
Brian C. Beazer
Non-Executive Chairman of the Board
/S/IAN J. MCCARTHY
Ian J. McCarthy
President and Chief Executive Officer
BEAZER HOMES USA 3
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[Photographs Page 4]
Q&A WITH IAN DAVID AND MIKE
ROUNDTABLE DISCUSSION WITH BEAZER HOMES MANAGEMENT
THE FOLLOWING IS A ROUNDTABLE DISCUSSION IN WHICH BEAZER'S EXECUTIVE MANAGEMENT
ANSWER QUESTIONS ABOUT THE COMPANY AND THE HOMEBUILDING INDUSTRY. ANSWERING THE
QUESTIONS WERE (LEFT TO RIGHT ABOVE) IAN MCCARTHY, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, DAVID WEISS, EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER, AND
MICHAEL FURLOW, EXECUTIVE VICE PRESIDENT AND CHIEF OPERATING OFFICER.
Q: WHAT FACTORS HAVE CONTRIBUTED TO BEAZER'S RECENT IMPROVED EARNINGS
PERFORMANCE?
A: IAN: We believe that the principal factor driving our improved earnings
performance is the successful implementation of the profitability initiatives
that we began two years ago - our Value Created Incentive Plan, the opening of
design centers and mortgage origination operations and the integration of our
information systems. Certainly we were also helped by a very strong economic
environment; however, the majority of our 56% increase in earnings during the
last year, from $1.70 per share (before writedown) to $2.66 per share, was from
the initiatives that I just mentioned.
Q: DO YOU KNOW HOW MUCH OF THIS ADDITIONAL PROFIT CAME FROM EACH INITIATIVE?
A: DAVID: Yes we do, although some are easier to quantify than others. Our EBIT
[earnings before interest and taxes] margin increased 190 basis points from
3.9% in 1997 to 5.8% in 1998. Of this increase approximately 50 basis points
came from our design centers and another 60 from our mortgage origination
operations. Both would have been higher, except that many of the design centers
and mortgage operations are new and were not open the entire year. The
contribution from our Value Created Incentive Plan is more difficult to
quantify; however, it was very positive.
WHAT WE PROMISE
"DURING THE COMING YEAR, WE WILL BEGIN TO IMPLEMENT A NUMBER OF PLANS TO IMPROVE
PROFITABILITY."
- 1996 ANNUAL REPORT
MAKING IT HAPPEN
DURING 1997 WE STARTED OPENING DESIGN CENTERS AND MORTGAGE ORIGINATION
OPERATIONS AND DESIGNED AN INCENTIVE PLAN BASED ON VALUE CREATED. IN 1998 DESIGN
CENTERS WERE OPEN IN ALL MAJOR MARKETS, BEAZER MORTGAGE ORIGINATED MORTGAGES FOR
THE MAJORITY OF OUR HOME BUYERS AND OUR VALUE CREATED INCENTIVE PLAN WAS
IMPLEMENTED AT ALL OPERATIONS.
4 BEAZER HOMES USA
<PAGE>
MIKE: I'd like to add that, while its impact may be difficult to measure, it's
the Value Created incentive plan that will produce the largest continuing
improvements in profitability in the future. Through this plan the concept of
creating value has spread to every level in the organization.
Q: HOW DOES THE VALUE CREATED INCENTIVE PLAN WORK?
A: DAVID: Well first let me define what we mean by Value Created. Value Created
is the amount of profit over our cost of capital. In other words, it is the
amount of profit that we earn after we have paid our banks and bondholders their
interest and after we have provided our shareholders with the minimum profit
that they require to continue investing in the Company. Only after we have
earned this excess profit can we share it among our employees and our
shareholders.
MIKE: That's a good technical definition. For our operating managers the plan
simply means that they need to make more than a 14% return on all the money that
Beazer has invested in their operations. In basic terms, they need to keep their
profits up and their asset base down. The results of this can be seen in 1998
profits are up over 50%, while our total capital employed (debt plus equity) is
up only 28%. Capital employed at year end also includes $68 million of cash on
hand. Our operating managers improved profits while still freeing up capital.
DAVID: Bonuses under our incentive plan are a percentage of actual performance
and are not based upon performance against a budget. This eliminates the
negotiations that often characterize a budget process. Under the Value Created
incentive plan, managers set aggressive targets so that we will allocate to
their operation the amount of capital they need. The plan also encourages
long-term thinking, since half of each year's potential bonus is put into a bank
that may be paid out over three years. The banked bonus is always at risk and
can be reduced by future negative performance. Finally, because bonuses are paid
both on the absolute level of Value Created and on the improvement over the
prior year, the plan encourages long-term, profitable growth.
[Photograph Page 5]
"IT'S THE VALUE CREATED
INCENTIVE PLAN THAT WILL
PRODUCE THE LARGEST
CONTINUING IMPROVE-
MENTS IN PROFITABILITY IN
THE FUTURE. THROUGH THIS
PLAN THE CONCEPT OF
CREATING VALUE HAS
SPREAD TO EVERY LEVEL IN
THE ORGANIZATION."
BEAZER HOMES USA 5
<PAGE>
[Photograph Page 6]
Q: WHAT FINANCIAL MEASURES DOES BEAZER USE TO EVALUATE ITS PERFORMANCE AND HOW
ARE THEY RELATED TO THE VALUE CREATED INCENTIVE PLAN?
A: IAN: Our principal measure is return on capital. We concentrate on the
combination of asset turnover and profit margin to yield a superior return on
capital. We seek to maintain an above average level of asset turnover by
controlling our investment in land. We control approximately a three-year supply
of lots, but own only half of those. The other half we control through options.
Our land policy generates a higher level of asset turnover, but at slightly
lower margins than if we invested in long-term land. The end result, however, is
a higher return on capital with considerably less risk. Our return on capital
has increased dramatically this year as we have continued to maintain a
conservative land policy and a high level of asset turnover, even as we have
focused on improving our profit margin.
DAVID: As Ian points out, we don't feel that profit margin is the most important
measure of a homebuilder's success. We believe it's return on capital. Our
performance in this area must exceed our cost of capital if we are to create
value for our shareholders. Internally we use a weighted average, pre-tax, cost
of capital of 14% as part of our Value Created incentive plan. For fiscal 1998
our overall return on average capital employed was 15% - in excess of our
internal gauge. We expect to continue to improve on this performance.
Breaking return on capital down into its components, we have a short-term target
of improving our annual EBIT margin to 6.5% while continuing to maintain in
excess of 2.7 times capital turnover. If we achieve both of these in 1999, we
will improve on both the return on overall capital and the return on equity that
we achieved in 1998.
Q: DOES THE VALUE CREATED PLAN MAKE A DIFFERENCE IN OPERATING DECISIONS?
A: MIKE: It certainly does. Let me give you an example: In making the decision
whether or not to start a home before it is sold, a manager realizes that for
every additional dollar spent he or she needs to make not just additional
profit, but enough profit to cover a 14% charge on the amount invested.
Choosing which house plan to put on which lot rather than letting the home
buyer make these choices, however, makes it more difficult to achieve a maximum
profit margin on the home. Under an incentive plan based on a short-term profit
budget, this could be overridden by the fact that starting the home increases
the likelihood of selling it
6 BEAZER HOMES USA
<PAGE>
[Photograph Page 7]
"WE BELIEVE [THE RESURGENCE OF CALIFORNIA'S ECONOMY] WILL CONTINUE FOR SOME TIME
AND WE ARE ALL WELL POSITIONED TO TAKE ADVANTAGE OF IT, WITH A FULL THREE-YEAR
SUPPLY OF LOTS UNDER CONTROL IN SOUTHERN CALIFORNIA."
this year. The Value Created plan makes you think twice about investing money in
starting unsold homes. This has contributed to an over 50% reduction in our
number of unsold finished homes, from 2.2 per community at September 30, 1997 to
1.0 at September 30, 1998.
Q: MANY REGARD HOMEBUILDING AS A MATURE INDUSTRY. DO YOU AGREE WITH THIS
ASSESSMENT?
A: IAN: No, I don't. Long-term growth in homebuilding is tied closely to
population growth. The U.S. Census Bureau projects that the population of the
United States will increase by over 40 million people over the next 20 years.
Much of this increase, over 800,000 per year, is projected to come from
immigration. People who immigrate to the United States have a strong desire to
own their own home and their homeownership rate increases dramatically with the
length of their stay in the U.S. The housing boom of the 1990s has been fueled
in great part by population growth through immigration and the growth of
minorities.
According to a report on "The State of the Nation's Housing" published by the
Joint Center for Housing Studies at Harvard University in 1998, "minorities
contributed 42 percent of the growth in homeowners between 1994 and 1997." Our
joint venture with Corporacion GEO is intended to address this significant
trend.
Q: HOW IS BEAZER'S VENTURE WITH CORPORACION GEO INTENDED TO WORK AND WHAT ARE
YOUR EXPECTATIONS FOR IT?
A: IAN: Our joint venture with Corporacion Geo is expected to build homes
initially priced from under $40,000 to $55,000. The construction techniques
WHAT WE PROMISE
"OVERALL WE MAINTAIN A TWO- TO THREE-YEAR SUPPLY OF LOTS UNDER CONTROL, WITH
UNDER TWO YEARS OWNED."
- 1995 ANNUAL REPORT
MAKING IT HAPPEN
AT THE END OF EACH OF ITS FIVE FISCAL YEARS AS A PUBLIC COMPANY, BEAZER HAS
CONTROLLED UNDER A THREE-YEAR SUPPLY OF LOTS. AT SEPTEMBER 30, 1998 WE
CONTROLLED OVER 18,500 LOTS, A 3.0 YEAR SUPPLY (BASED UPON 1998 HOMES CLOSED),
WITH 45% (A 1.4 YEAR SUPPLY) OWNED AND THE REST UNDER OPTION.
BEAZER HOMES USA 7
<PAGE>
and community designs will be based on those which GEO has been using very
successfully and profitably in Mexico for over 20 years. GEO is the largest
builder of affordable housing in the Americas.
The venture, which markets under the name Premier Communities, recently opened
its first community in El Paso, Texas. After proving its success in El Paso, the
venture is expected to expand rapidly to other markets. Markets that we are
currently considering are Phoenix, Houston, South Florida and Puerto Rico.
We have very ambitious plans for Premier Communities. We believe that it will
tap into a large, under-served and growing segment of the market, the Hispanic
community. The U.S. Census Bureau projects that by the year 2005, Hispanics will
be the largest minority group in the U.S. and that by the year 2015, the number
of Hispanics in the U.S. will exceed the total of all people over age 65. While
many homebuilders have been concentrating on the aging population, this group,
which is expected to be larger, has been nearly ignored.
The venture is owned 60% by GEO and 40% by Beazer. It receives land acquisition
and construction funding from Fannie Mae's Housing Impact Fund at very
attractive rates and our qualifying home buyers will receive down payment
assistance from the Texas State Affordable Housing Corporation, backed by the
U.S. Department of Housing and Urban Development. We believe that it represents
a unique private venture in which U.S. and Mexican companies are sharing ideas
and expertise to address a very serious issue in the U.S. - the lack of
affordable housing for a growing population. We are extremely excited about it.
[Photograph Page 8]
"THERE WILL ALWAYS BE A
DEMAND FOR HOUSING
THROUGHOUT THE ECONOMIC
CYCLE, ESPECIALLY IN THE
ENTRY-LEVEL SEGMENT."
8 BEAZER HOMES USA
<PAGE>
[Bar Chart Page 9]
TOTAL PROJECTED U.S. POPULATION(i)
(in millions)
2000 274.6
2005 286.0
2010 297.7
2015 310.1
(i) U.S. CENSUS BUREAU FIGURES
OVER THE LONG-TERM, HOUSING GROWTH
WILL BE DRIVEN BY POPULATION GROWTH...
PROJECTED POPULATION GROWTH
1995-2025(i)
1 California1 7,696,000
2 Texas 8,459,000
3 Florida 6,544,000
4 Georgia 2,699,000
5 Washington 2,377,000
6 Arizona 2,195,000
7 North Carolina 2,154,000
8 Virginia 1,848,000
9 New York 1,694,000
10 New Jersey 1,613,000
11 Illinois 1,610,000
12 Colorado 1,442,000
13 Tennessee 1,409,000
14 Maryland 1,232,000
15 Oregon 1,209,000
16 South Carolina 972,000
(i) U.S. CENSUS BUREAU FIGURES
...AND BEAZER IS WELL POSITIONED, WITH
OPERATIONS IN 11 OF THE 16 LARGEST
GROWTH STATES.
Q: HOW DOES BEAZER CHOOSE ITS MARKETS AND WHAT POSITION DOES IT TRY TO MAINTAIN
IN THEM?
A: IAN: We absolutely want to be in growth markets - that is, markets with
positive prospects for long-term population and employment growth. If you have
population and employment growth, you will have a strong housing market. Of the
twelve states in which we are now doing business, eleven of them are among the
top states for population growth from 1995 to 2025, as projected by the U.S.
Census Bureau. This is based on the absolute level of population growth and not
just percentages, since we want to be doing business in large markets.
MIKE: To expand on Ian's comments, we also intend to be among the top five
players in all of the markets that we serve. We believe that you need to be a
major player to get the best land deals offered to you and to get the best
subcontractors to steadily work for you. You do not have to be number one, but
you need to have a major presence. That is one of the reasons why we are so
proud of our two acquisitions in Orlando this past year, Calton Homes and Snow
Construction. Through these two acquisitions, we have gone from not being in
Orlando at all to being the number four builder in that market.
IAN: We also like to have a major presence in the first-time buyer and first
move-up segments of most of our markets. We are not, however, exclusively in the
entry-level segment. In some markets, where this segment is particularly
competitive, we target other market niches. In Jacksonville, for example, we
market to the first and second move-up and the move-down segments. We believe,
however, that the entry-level buyer is the most stable segment of the housing
market. New families and households will always need homes, whereas the decision
to purchase a luxury home is more discretionary.
[Logo]
PREMIER COMMUNITIES
JOINT VENTURE POSITIONS BEAZER IN GROWING AFFORDABLE-HOUSING MARKET.
In December 1997, Beazer formed a joint venture with Corporacion GEO, the
largest homebuilder in Mexico, to build affordable housing in the United States
targeted at the growing Hispanic market.
At the ground breaking of Premier Communities' first development, Oasis Ranch in
El Paso, Miguel Gomez-Mont, GEO's Chief Executive Officer, said, "WE ARE
EXTREMELY PROUD THAT WE ARE JOINING FORCES WITH BEAZER TO ADDRESS THE VERY
SERIOUS ISSUE OF AFFORDABLE HOUSING IN THE UNITED STATES. THROUGH THIS VENTURE
WE BELIEVE WE WILL DO NOTHING LESS THAN REVOLUTIONIZE THE U.S. HOMEBUILDING
INDUSTRY."
BEAZER HOMES USA 9
<PAGE>
Q: WHAT ARE THE MOST SIGNIFICANT REGIONAL GROWTH PATTERNS AFFECTING BEAZER?
A: IAN: The most significant is the resurgence of California. After a downturn
in the late 1980s, California's economy experienced minimal growth from 1991 to
1996. Now it has begun to grow dramatically, releasing a huge pent-up demand for
housing with corresponding increased pricing. We believe this trend will
continue for some time and we are well positioned to take advantage of it, with
a full three-year supply of lots under control in southern California.
MIKE: We also see future strong growth in Texas and Florida. Although Texas was
affected this year by construction delays, caused both by unusually hot and wet
weather and by a shortage of both building materials and skilled tradespeople,
we forecast strong growth in Texas in 1999. Florida, as an immigration point
into the United States, continues to grow at a dramatic pace, and we expect our
operations there to grow significantly along with the increasing demand.
No region in which we operate was particularly slow during the year, although we
did reduce our levels of investment in Las Vegas and Atlanta, two very
competitive markets. We have used the capital taken out of these two markets to
help fund our expansion in the growing markets in California, Florida and Texas.
DAVID: Mike points out one of the great advantages of being a geographically
diversified homebuilder. We can adapt by changing our level of investment in our
various markets. During 1998, no one market accounted for more than 18% of our
consolidated revenues. With the addition of Trafalgar House, we will be even
more diversified. We expect that no individual market will comprise more than
13% of our consolidated revenues in 1999.
Q: WHY SHOULD AN INVESTOR INVEST IN A CYCLICAL INDUSTRY LIKE HOMEBUILDING?
A: IAN: In my opinion, there are two principal reasons. The first is the
long-term growth factor which I mentioned before, population growth fueled by
immigration and growth of minority markets. Over the long term this will create
strong demand for new housing.
The second reason is more specific to Beazer. There will always be a demand for
housing throughout the economic cycle, especially in the entry-level segment.
Companies with a strong financial position can take advantage of their superior
position to grow - both through timely, opportunistic purchases of land and
through acquisitions. The homebuilding industry is consolidating and we believe
that this will accelerate in a downturn. We have a track record of successfully
integrating acquisitions into our company and we intend to have the financial
flexibility to take advantage of that strength.
Expansion through acquisition has always been a part of our strategy and we have
timed our acquisitions to act counter-cyclically - taking advantage of the
cycles to extract value. Our 1993 acquisition of Watt Housing, a significant
builder in southern California, Phoenix and Las Vegas, was a great example of
that. In 1993, California was at the depth of a housing recession. We bought
that business at a significant discount, just as we did in Texas in 1995 with
our acquisition of Bramalea and have now done with Trafalgar House. Since 1993,
the growth of our acquired operations has been dramatic. Improved profitability
from being integrated into Beazer's systems has made the earnings growth at
these operations even more significant. We expect the same to be true of
Trafalgar.
Q: HOW DOES THE TRAFALGAR HOUSE ACQUISITION FIT INTO BEAZER'S STRATEGY?
A: IAN: It fits perfectly into our strategy of being a major player in a
significant growth market. Through this acquisition we will become the fourth
largest builder in the Washington, D.C. metropolitan area. This is one of the
reasons we like to expand to new markets through acquisition. We immediately get
a significant presence with an experienced management team.
WHAT WE PROMISE
"PRUDENT FINANCIAL MANAGEMENT IS THE BACKBONE OF OUR OPERATIONS AND WILL
CONTINUE TO SUCCESSFULLY LEAD BEAZER HOMES THROUGH THE CYCLICALITY OF OUR
INDUSTRY."
- 1994 ANNUAL REPORT
MAKING IT HAPPEN
IN 1998 WE ENDED THE YEAR WITH A NET DEBT TO TOTAL CAPITALIZATION LEVEL OF 43%,
THE SAME CONSERVATIVE LEVEL AS IN MARCH 1994 WHEN WE WENT PUBLIC.
10 BEAZER HOMES USA
<PAGE>
[Photographs Page 11]
"DURING THE YEAR ENDED SEPTEMBER 30, 1998, BEAZER REDUCED ITS NUMBER OF UNSOLD,
FINISHED HOMES BY MORE THAN 50%, FROM 2.2 TO 1.0 PER ACTIVE SUBDIVISION."
DAVID: The Trafalgar House acquisition also absolutely fits into our strategy of
being an opportunistic acquirer of businesses. Over recent years, our
acquisition activity had been relatively limited. We believed that acquisition
prices were too expensive. Now, with volatility in international capital markets
and a bit of a capital crunch in the United States, we are seeing more
opportunities. Trafalgar House is one such opportunity. Trafalgar's parent
company, the Norwegian construction company, Kvaerner, needed to dispose of some
of its businesses to repay debt and sought to divest of its U.S. homebuilding
operations. We paid approximately $90 million for Trafalgar, less than 50% of
its annual historical revenues and a significant discount to its book value.
This is exactly the type of opportunistic acquisition of a quality company that
we seek to complete.
Q: HOW DOES THE TRAFALGAR HOUSE ACQUISITION AFFECT BEAZER'S FINANCIAL POSITION?
A: DAVID: We were and will continue to be in a very strong financial position,
both before and after the acquisition. At September 30, 1998, before the
acquisition, we had no borrowings outstanding under our $200 million revolving
credit facility and $68 million of cash on hand. After the acquisition our debt
to total capitalization will still be in the conservative mid 50% range - much
lower than the average builder. We will continue to maintain significant
liquidity and a conservative financial position.
Q: WHAT IS THE MOST SIGNIFICANT CHALLENGE IN THE HOMEBUILDING INDUSTRY TODAY AND
WHAT IS BEAZER DOING TO ADDRESS IT?
A: IAN: The most significant challenge to homebuilders is a lack of an adequate
skilled workforce in the industry. It is becoming increasingly difficult to get
"VALUE CREATED" AFFECTS OPERATING DECISIONS
The impact of Beazer's Value Created Incentive Plan on operating decision making
is reflected in an increase in "presales" (homes sold before commencement of
construction) at Beazer Homes. This resulted in a corresponding reduction of the
number of unsold homes under construction between 1997 and 1998.
The Value Created Incentive Plan creates an acute awareness of the cost of
capital. As a result managers try to reduce the capital employed in the business
while improving its profitability. Reducing the dollars invested in unsold homes
(speculative inventory or "spec" as it is sometimes referred to) is one of the
most dramatic ways to reduce capital employed.
During the year ended September 30, 1998, Beazer reduced its number of unsold,
finished homes by more than 50%, from 2.2 to 1.0 per active subdivision.
BEAZER HOMES USA 11
<PAGE>
[Photographs Page 12]
ED SNIDER CONDUCTS "BOOT
CAMPS" TO TRAIN NEW CON-
STRUCTION SUPERINTENDENTS.
BEAZER "BOOT CAMPS" PROVIDE
TOP-QUALITY TRAINING FOR SUPERINTENDENTS
One of the biggest challenges in the homebuilding industry
is the lack of trained construction professionals. To
address this issue, Beazer conducts construction training
programs, referred to as "Boot Camps," for new construction
superintendents. Classes are given by experienced personnel
like Ed Snider.
In addition to having over 20 years of experience in
homebuilding construction, Ed also runs the in-house
insurance company that insures Beazer's 10-year structural
warranty on its homes. Beazer was the first major U.S.
homebuilder to have a captive insurance company approved by
the state of Vermont to insure its warranty obligations.
<PAGE>
skilled tradespeople in home construction. We are addressing this issue through
training and attempting to retain the best of our people. Mike is heavily
involved in these two efforts.
MIKE: That's right. One of my major objectives since joining Beazer has been to
spread the knowledge base of our top operating management to employees
throughout the Company. Our top managers have an average of over 20 years
experience in homebuilding, the bulk of it in their local markets. To share that
knowledge base, we have established a training council to develop functional
training programs in all major areas of the business. Our top construction
managers, for instance, conduct training programs, which we refer to as "Boot
Camps," to train our newer employees.
We also have pushed down the Value Created incentive plan to the majority of our
employees, including the construction managers. This reinforces the
entrepreneurial spirit of our company and helps employees share in the profits
that they create. Over the long term, I believe that this will be a significant
factor in our ability to retain the best people.
IAN: I would add that another challenge facing homebuilders is the increasing
difficulty and delay in getting zoning. Growth restrictions are also making land
more difficult to entitle and develop. In the short term, this will benefit
builders with an adequate supply of entitled lots, like Beazer. Over the long
term, however, it will increase the cost of housing to the consumer.
Q: BEAZER HAS ALWAYS DESCRIBED ITSELF AS A VERY DECENTRALIZED COMPANY. HAS THAT
CHANGED?
A: IAN: No, it has not changed. The vast majority of our operating decisions are
still made in the field by operating managers who are very experienced in their
local markets. Our basic approach, which we described in 1994 as our "Formula
For Success," remains intact - decentralized operations combined with strong
centralized financial controls.
We have, however, added certain controls and strengthened the oversight function
at the Corporate office. Adding two highly experienced homebuilding executives,
Cory Boydston, our Vice President of Administration and Treasurer, and Mike, has
helped us do this.
MIKE: Thanks. Following up on our "Formula for Success," one of the key areas
where there is a balance between decentralized operations and centralized
controls is in land purchasing. While our operating managers in the field
identify, research and negotiate land purchases, every proposed purchase is
reviewed by a Land Committee, on which both Ian and I serve. In addition to
evaluating the merits of each land purchase, this committee also sees how it
fits into our overall strategy and land position. Further, any land purchase
involving significant development costs is reviewed by an independent
engineering consulting firm as a "second opinion."
Land purchasing is one of the most important decisions in homebuilding.
Accordingly, we regard it as a shared responsibility between Corporate and
operations.
WHAT WE PROMISE
"IN THE FOURTH QUARTER OF THIS YEAR OUR EBIT MARGIN INCREASED BY 20 BASIS
POINTS. WE ARE ONLY PART OF THE WAY THERE AND EXPECT FURTHER IMPROVEMENTS IN
FISCAL 1998."
- 1997 ANNUAL REPORT
MAKING IT HAPPEN
THE QUARTER ENDED SEPTEMBER 30, 1998 WAS OUR SIXTH CONSECUTIVE QUARTER WITH AN
IMPROVEMENT IN GROSS PROFIT MARGIN. OUR EBIT MARGIN FOR THE 1998 FOURTH FISCAL
QUARTER WAS 7.1%, A 160 BASIS POINT IMPROVEMENT OVER THE COMPARABLE QUARTER OF
THE PRIOR YEAR.
Q: HOW MUCH INSIDER OWNERSHIP IS THERE IN BEAZER?
A: IAN: Beazer went public in 1994 as a spin off from a larger public company.
Unlike many other homebuilders, it was not a privately owned business when it
went public. Insider ownership, however, has been steadily increasing since that
time. It has gone from 1.2%, as reported in our 1994 Proxy Statement, to
approximately 8% currently. Two of the factors that have contributed to this
increase are programs that we have put in place to encourage employee stock
ownership. The first is a 401(k) plan that includes Company contributions in
Beazer stock. The second is a program that allows top managers to take a portion
of their
BEAZER HOMES USA 13
<PAGE>
[Photograph Page 14]
TOM MEYER,
President
Homebuilders Financial Network
THE SUCCESS OF BEAZER MORTGAGE
In fiscal 1997, Beazer Homes began opening mortgage origination operations. By
the fourth quarter of fiscal 1998, Beazer Mortgage originated mortgages for the
majority of Beazer's home buyers. Beazer's relationship with Homebuilders
Financial Network (HFN) has been a major contributor to this success.
HFN provided Beazer with the system to establish mortgage operations and
arranged a national network of mortgage lenders.
Tom Meyer, President of HFN, said, "THROUGH ALL OUR YEARS OF WORKING WITH
HOMEBUILDERS, WE HAVE HAD OUR GREATEST SUCCESS WITH BEAZER HOMES. THEIR
ENTREPRENEURIAL SPIRIT HAS MADE BEAZER MORTGAGE A SUCCESS BOTH FOR BEAZER AND
FOR HFN."
annual bonus in Company stock, which is restricted for three years. Over 20% of
the incentive compensation earned in 1998 by executive corporate management and
division presidents was paid in Company stock under this plan.
Q: NOW THAT BEAZER IS IN THE MORTGAGE BUSINESS, HOW DO YOU DEAL WITH THE RISKS
ASSOCIATED WITH THAT BUSINESS?
A: DAVID: We only originate mortgages, we do not hold or service them. As a
result our exposure to and level of risk in the business is extremely
controlled. All mortgages are funded and held by lenders who commit at the time
that we originate the loan. In addition, nearly all of the mortgages that we
originate are for Beazer Homes home buyers. We regard the mortgage business
principally as an extension of and support for our homebuilding operations.
Q: DO YOU INTEND TO EXPAND INTO OTHER ANCILLARY BUSINESSES, SUCH AS YOU HAVE
DONE WITH BEAZER MORTGAGE?
A: IAN: We will continue to evaluate other opportunities to expand our services
to our customer base. Both mortgage operations and design centers are natural
extensions. Another one could be arrangement of title or other insurance. We
will enter these businesses when we believe we can receive adequate returns by
providing additional value to our home buyers, without taking on significant
financial risk.
DAVID: One thing that we often do when evaluating entry into a new line of
business is "partner" with a company that has true expertise in the area. This
is not necessarily a partnership in the legal sense, but it is a partnership in
terms of the sharing of expertise and risks. In the case of Beazer Mortgage, for
instance, we used Homebuilders Financial Network, out of Miami, to help us set
up our mortgage operations. They also arranged the network of lenders that we
use and participate in the ongoing management of the operation. For this they
receive a fee based on profits of the business. This arrangement has worked out
extremely well both for them and for us.
Q: WHAT IS THE MOST SIGNIFICANT TREND IN HOME CONSTRUCTION TODAY?
A: MIKE: The most significant trend in homebuilding is the growing tendency of
home buyers to customize their homes through the use of options and upgrades. It
used to be that there was a clear distinction between a custom builder and a
production builder. That distinction has become less clear as home buyers have
added more and more to their home through options.
Our use of design centers has done a lot to allow us to capitalize on this
trend. Further, by offering options through our design center that might have
been included as standards previously, we are able to keep our base home price
low. This allows more home buyers to afford Beazer homes.
14 BEAZER HOMES USA
<PAGE>
[Photograph Page 15]
Q: WHERE DO YOU SEE BEAZER HOMES GOING IN THE FUTURE?
A: IAN: Having attained the profitability improvements that we set out to
achieve two years ago, we will now re-ignite our growth. We expect to continue
to grow through three means - growth in our existing markets, expansion through
acquisitions and entry into new, related lines of business. Our venture in
affordable housing is just one example of how that growth will be achieved.
While expanding we will continue to maintain a strong financial position. This
will allow us to thrive throughout the economic cycle. We will continue to focus
on return on capital and creating value for our shareholders. Most importantly
we expect to maintain a position as one of the most profitable of the top 10
homebuilders in the United States.
INTERIOR DESIGN PROFESSIONALS ARE AVAILABLE IN EACH MARKET TO ASSIST HOMEBUYERS
IN "CUSTOMIZING" THEIR NEW HOMES. COMMON UPGRADES INCLUDE:
o APPLIANCE PACKAGES
o CABINETRY
o CARPETING
o COUNTER TOPS AND BACKSPLASHES
o EXTERIOR MATERIALS AND COLOR
o LIGHT FIXTURES
o PLUMBING FIXTURES
o TILE/HARDWOOD FLOORING
o WALLCOVERINGS
BEAZER HOMES USA 15
<PAGE>
[Photograph Page 16]
DIRECTORY OF HOMEBUILDERS
"THE MOST SIGNIFICANT TREND IN HOMEBUILDING IS THE GROWING
TENDENCY OF HOME BUYERS TO CUSTOMIZE THEIR HOMES THROUGH THE
USE OF OPTIONS AND UPGRADES. OUR USE OF DESIGN CENTERS HAS
DONE A LOT TO ALLOW US TO CAPITALIZE ON THIS TREND."
BEAZER HOMES ARIZONA
2005 West 14th Street
Tempe, AZ 85281
BEAZER HOMES CALIFORNIA
Southern California Division
1100 Town and Country
Orange, CA 92868
Northern California Division
3009 Douglas Boulevard
Roseville, CA 95661
BEAZER HOMES FLORIDA
Panitz Homes (Jacksonville)
3020 Hartley Avenue
Jacksonville, FL 32257
Mid-Florida Division
Gulfcoast Homes office
11934 Fairway Lakes Drive
Ft. Myers, FL 33913
Mid-Florida Division
Tampa office
1211 N. Westshore Boulevard
Tampa, FL 33607
Mid-Florida Division
Treasure Coast office
871 Island Club Square
Vero Beach, FL 33963
Orlando Division
380 S. North Lake Boulevard
Altamonte Springs, FL 32701
BEAZER HOMES GEORGIA
3790 Data Drive
Norcross, GA 30092
BEAZER HOMES NEVADA
Las Vegas Division
770 East Warm Springs Road
Las Vegas, NV 89119
Reno/Sparks Division
4480 Scott Peak Circle
Sparks, NV 89434
BEAZER HOMES TEXAS
Houston Division
10235 West Little York
Houston, TX 77040
Dallas/Ft. Worth Division
1231 Greenway Drive
Irving, TX 75038
PHILLIPS BUILDERS (TENNESSEE)
Nashville Division
2910 Kraft Drive
Nashville, TN 37204
Knoxville Division
1645 Downtown West Blvd.
Knoxville, TN 37919
SQUIRES HOMES (CAROLINAS)
Charlotte Division
5501 Executive Center
Charlotte, NC 28212
Raleigh Division
3701 National Drive
Raleigh, NC 27612
Coastal Carolina Division
Charleston office
7410 Northside Drive
North Charleston, SC 29420
Coastal Carolina Division
Myrtle Beach office
710 21st Avenue North
Hampton Park
Myrtle Beach, SC 29577
Columbia Division
2001 Assembly Street
Columbia, SC 29201
TRAFALGAR HOUSE (MID-ATLANTIC)
Maryland Division
8965 Guildford Road
Columbia, MD 21046
New Jersey Division
250 Phillips Boulevard
Trenton, NJ 08618
Virginia Division
8300 Greensboro Drive
McLean, VA 22102
16 BEAZER HOMES USA
<PAGE>
FINANCIAL REVIEW
18 MANAGEMENT'S RESPONSIBILITY
FOR FINANCIAL REPORTING AND
SYSTEM OF INTERNAL CONTROL
19 SELECTED FINANCIAL DATA
20 MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
30 INDEPENDENT AUDITORS' REPORT
31 CONSOLIDATED STATEMENTS
OF OPERATIONS
32 CONSOLIDATED BALANCE SHEETS
33 CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY
34 CONSOLIDATED STATEMENTS
OD CASH FLOWS
35 NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
44 QUARTERLY DATA
45 SELECTED FINANCIAL AND
OPERATING DATA: 1992-1998
BEAZER HOMES USA 17
<PAGE>
MANAGEMENT'S RESPONSIBILITY
FOR FINANCIAL REPORTING AND SYSTEM OF INTERNAL CONTROL
FINANCIAL STATEMENTS
The accompanying consolidated financial statements are the responsibility of the
Company's management. The consolidated financial statements have been prepared
in accordance with generally accepted accounting principles and, as such,
include amounts based on management's best estimates and judgments.
The Company's consolidated financial statements have been audited by Deloitte &
Touche LLP, independent auditors, who were given unrestricted access to all
financial records and related data. The Company believes that all
representations made to the independent auditors during their audit were valid
and appropriate. Deloitte & Touche LLP's audit report included on page 30
provides an independent opinion as to the fairness of presentation of the
consolidated financial statements.
SYSTEM OF INTERNAL CONTROLS
The Company maintains a system of internal controls over financial recording and
reporting which is designed to provide reasonable assurance that assets are
safeguarded and transactions are recorded in accordance with the Company's
policies and procedures and which ultimately will result in the preparation of
reliable financial statements. The system contains self-monitoring mechanisms,
and actions are taken to correct deficiencies as they are identified. Even an
effective internal control system has inherent limitations - including the
possibility of the overriding of controls - and therefore can provide only
reasonable, not absolute, assurance with respect to financial statement
preparation.
The Company assessed its internal control system as of September 30, 1998 in
relation to criteria for effective internal control over preparation of its
published annual (and interim) financial statements described in "Internal
Control - Integrated Framework" issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this assessment, the Company
believes that, as of September 30, 1998, its system of internal controls over
the preparation of its published annual (and interim) financial statements met
these criteria. Deloitte & Touche LLP also reviews and tests the effectiveness
of these systems to the extent they deem necessary to determine the extent of
audit procedures needed in connection with their audit of the consolidated
financial statements.
The Audit Committee of the Board of Directors, which is composed of Directors
who are not officers or employees of the Company, provides oversight to the
financial reporting process. The independent auditors have unrestricted access
to the Audit Committee.
/S/IAN J. MCCARTHY
Ian J. McCarthy
President and Chief Executive Officer
/S/DAVID S. WEISS
David S. Weiss
Executive Vice President and Chief Financial Officer
/S/MICHAEL T. RAND
Michael T. Rand
Vice President and Controller
18 BEAZER HOMES USA
<PAGE>
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
(dollars in thousands, except per share data)
Year Ended September 30,
------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
Total revenue ................................ $977,409 $852,110 $866,627 $647,828 $536,526
Writedown of inventory ....................... $ 6,326
Operating income ............................. $ 36,916 $ 17,656(i) $ 30,122 $ 18,629 $ 27,377
Net income ................................... $ 23,201 $ 11,189(i) $ 18,266 $ 11,352 $ 16,468
Net income per common share:
Basic ...................................... $ 3.27 $ 1.18(i) $ 2.24 $ 1.26 $ 1.78(iv)
Diluted .................................... $ 2.66 $ 1.15(i) $ 2.01 $ 1.23 $ 1.76(iv)
BALANCE SHEET DATA:
Cash ......................................... $ 67,608 $ 1,267 $ 12,942 $ 40,407 $ 35,980
Inventory .................................... $405,095 $361,945 $320,969 $285,268 $253,356
Total assets ................................. $525,591 $399,595 $356,643 $345,240 $314,941
Total debt ................................... $215,000 $145,000 $115,000 $115,000 $115,000
Stockholders' equity ......................... $199,224 $179,286 $178,701 $164,544 $150,406
SUPPLEMENTAL FINANCIAL DATA:
EBIT(ii) ..................................... $ 56,525 $ 33,051(i) $ 45,327 $ 32,188 $ 37,169
EBITDA(ii) ................................... $ 59,794 $ 35,272(i) $ 46,855 $ 33,542 $ 38,384
Interest incurred ............................ $ 21,259 $ 16,159 $ 14,176 $ 14,737 $ 11,306
EBIT/interest incurred ....................... 2.66x 2.05x 3.20x 2.18x 3.29x
EBITDA/interest incurred ..................... 2.81x 2.18x 3.31x 2.28x 3.40x
FINANCIAL STATISTICS(iii):
Total debt as a percentage of total
debt and stockholders' equity .............. 51.9% 44.7% 39.2% 41.1% 43.3%
Asset Turnover ............................... 2.11x 2.25x 2.47x 1.96x 1.92x
EBIT Margin .................................. 5.8% 3.9%(i) 5.2% 5.0% 6.9%
Return on Assets ............................. 12.2% 8.7%(i) 12.9% 9.8% 13.3%
Return on Capital ............................ 15.3% 10.7%(i) 15.8% 11.8% 15.5%
Return on Equity ............................. 12.3% 6.3%(i) 10.6% 7.2% 13.4%
<FN>
(i) Fiscal 1997 results include the effect of a $6,326 writedown to inventory
in Nevada. Excluding the effect of the writedown, operating income, net
income and diluted net income per share for fiscal 1997 are $23,982,
$15,079, and $1.70, respectively. Excluding the effect of the writedown,
EBIT and EBITDA for fiscal 1997 are $39,377 and $41,598, respectively.
Excluding the effect of the writedown, EBIT margin, return on asset, return
on capital and return on equity for fiscal 1997 are 4.6%, 10.4%, 12.7% and
8.4%, respectively.
(ii) EBIT and EBITDA: EBIT (earnings before interest and taxes) equals net
income before (a) previously capitalized interest amortized to costs and
expenses; (b) income taxes; and (c) cumulative effect of change in
accounting principle. EBITDA (earnings before interest, taxes,
depreciation, and amortization) is calculated by adding depreciation and
amortization for the period to EBIT. EBITDA is commonly used to analyze
companies on the basis of operating performance, leverage, and liquidity.
EBIT and EBITDA are not intended to represent cash flows for the period nor
have they been presented as an alternative to net income as an indicator of
operating performance.
(iii)Asset turnover = (total revenue divided by average total assets); EBIT
margin = (EBIT divided by total revenues); Return on average asset = (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) Pro forma to give effect to the initial public offering and related
transactions, as if such transactions were effected as of October 1, 1993.
</FN>
</TABLE>
BEAZER HOMES USA 19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OPERATING AND FINANCIAL DATA
The following tables present certain operating and financial data for the years
discussed (dollars in thousands):
<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------------------------------------
1998 1997 1996
Amount % Change Amount % Change Amount
---------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NUMBER OF NEW ORDERS, NET
OF CANCELLATIONS(i):
SOUTHEAST REGION:
Georgia ............... 215 30.3% 165 (34.8)% 253
North Carolina ........ 831 36.7 608 (9.4) 671
South Carolina ........ 518 31.8 393 29.7 303
Tennessee ............. 501 21.3 413 (9.6) 457
Florida ............... 823 111.0 390 7.1 364
---------------------------------------------------------
TOTAL SOUTHEAST ....... 2,888 46.7 1,969 (3.9) 2,048
---------------------------------------------------------
SOUTHWEST REGION:
Arizona ............... 1,552 22.8 1,264 (24.8) 1,681
California ............ 1,258 23.7 1,017 0.9 1,008
Nevada ................ 435 (18.8) 536 11.0 483
---------------------------------------------------------
TOTAL SOUTHWEST ....... 3,245 15.2 2,817 (11.2) 3,172
---------------------------------------------------------
CENTRAL REGION:
Texas ................. 749 (2.1) 765 90.8 401
---------------------------------------------------------
TOTAL ................. 6,882 24.0% 5,551 (1.2)% 5,621
---------------------------------------------------------
NUMBER OF HOMES IN BACKLOG AT END OF YEAR:
SOUTHEAST REGION:
Georgia ............... 92 114.0% 43 (17.3)% 52
North Carolina ........ 226 31.4 172 (10.4) 192
South Carolina ........ 182 67.0 109 1.9 107
Tennessee ............. 154 90.1 81 (35.2) 125
Florida ............... 342 242.0 100 (3.8) 104
---------------------------------------------------------
TOTAL SOUTHEAST ....... 996 97.2 505 (12.9) 580
---------------------------------------------------------
SOUTHWEST REGION:
Arizona ............... 478 82.4 262 (36.7) 414
California ............ 182 133.3 78 (18.8) 96
Nevada ................ 83 (40.3) 139 (18.2) 170
---------------------------------------------------------
TOTAL SOUTHWEST ....... 743 55.1 479 (29.6) 680
---------------------------------------------------------
CENTRAL REGION:
Texas ................. 318 52.9 208 25.3 166
---------------------------------------------------------
TOTAL ................. 2,057 72.6% 1,192 (16.4)% 1,426
---------------------------------------------------------
SALES VALUE OF HOMES IN BACKLOG AT END OF YEAR:
Southeast region ...... $169,261 107.1% $ 81,720 (16.7)% $ 98,092
Southwest region ...... 122,345 66.8 73,346 (15.2) 86,539
Central region ........ 55,698 57.5 35,373 36.0 26,006
---------------------------------------------------------
TOTAL ................. $347,304 82.4% $190,439 (9.6)% $210,637
---------------------------------------------------------
</TABLE>
SEE FOOTNOTES, PAGE 21
20 BEAZER HOMES USA
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------------------------
1998 1997 1996
Amount % Change Amount % Change Amount
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
NUMBER OF CLOSINGS:
SOUTHEAST REGION:
Georgia ............................ 166 (4.6)% 174 (43.5)% 308
North Carolina ..................... 777 23.7 628 (9.9) 697
South Carolina ..................... 445 13.8 391 41.7 276
Tennessee .......................... 428 (6.3) 457 (13.1) 526
Florida ............................ 677 71.8 394 (2.7) 405
-----------------------------------------------------
TOTAL SOUTHEAST .................... 2,493 22.0 2,044 (7.6) 2,212
-----------------------------------------------------
SOUTHWEST REGION:
Arizona ............................ 1,336 (5.6) 1,416 (23.5) 1,852
California ......................... 1,154 11.5 1,035 1.7 1,018
Nevada ............................. 491 (13.4) 567 19.9 473
-----------------------------------------------------
TOTAL SOUTHWEST .................... 2,981 (1.2) 3,018 (9.7) 3,343
-----------------------------------------------------
CENTRAL REGION:
Texas .............................. 639 (11.6) 723 90.8 379
NEW JERSEY ......................... -- n/m -- n/m 1
-----------------------------------------------------
TOTAL .............................. 6,113 5.7% 5,785 (2.5)% 5,935
-----------------------------------------------------
TOTAL REVENUES:
Southeast region ................... $401,671 20.2 % $334,069 0.6% $332,159
Southwest region ................... 461,434 13.9 405,095 (14.8) 475,662
Central region ..................... 114,304 1.2 112,946 92.7 58,621
New Jersey ......................... -- n/m -- n/m 185
-----------------------------------------------------
TOTAL .............................. $977,409 14.7% $852,110 (1.7)% $866,627
-----------------------------------------------------
AVERAGE SALES PRICE PER HOME CLOSED:
Southeast region ................... $ 159.2 (2.5)% $ 163.2 9.0% $ 149.7
Southwest region ................... 150.1 12.1 133.9 (5.9) 142.3
Central region ..................... 171.0 9.7 155.9 1.2 154.1
New Jersey ......................... -- n/m -- n/m 185.0
-----------------------------------------------------
TOTAL .............................. $ 156.4 6.5% $ 146.8 0.7% $ 145.8
-----------------------------------------------------
NUMBER OF ACTIVE
SUBDIVISIONS AT YEAR END:
Southeast region ................... 113 8.7% 104 5.1% 99
Southwest region ................... 59 (1.7) 60 (3.2) 62
Central region ..................... 31 (6.1) 33 6.5 31
-----------------------------------------------------
TOTAL .............................. 203 3.0% 197 2.6 % 192
-----------------------------------------------------
<FN>
See "Results of Operations" for a discussion of certain fluctuations considered
to be significant in both absolute value and percentage amount.
n/m Percentage change not meaningful
(i) New orders for 1998 and 1996 do not include 96 and 256 homes in backlog,
respectively, from acquired operations.
</FN>
</TABLE>
BEAZER HOMES USA 21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
GENERAL
Beazer Homes designs, builds and sells single family homes in the Southeast,
Southwest and Central regions of the United States. The Company's Southeast
Region includes Georgia, North Carolina, South Carolina, Tennessee and Florida;
its Southwest Region includes Arizona, California and Nevada, and its Central
Region includes Texas. The Company intends, subject to market conditions, to
expand in its current markets and to consider entering new markets through
expansion from existing markets ("satellite expansion") or through acquisitions
of established regional homebuilders.
The Company's homes are designed to appeal primarily to entry-level and first
time move-up home buyers, and are generally offered for sale in advance of their
construction. The majority of homes are sold pursuant to standard sales
contracts entered into prior to commencement of construction. Once a contract
has been signed, the Company classifies the transaction as a "new order." Such
sales contracts are usually subject to certain contingencies such as the buyer's
ability to qualify for financing. Homes covered by such sales contracts are
considered by the Company as its "backlog." The Company does not recognize
revenue on homes in backlog until the sales are closed and the risk of ownership
has been transferred to the buyer.
During fiscal 1996, the Company began providing mortgage origination services
for its customers through Beazer Mortgage Company ("Beazer Mortgage"). Beazer
Mortgage originates, processes and sells mortgages to third-party investors on
behalf of the homebuilding operations of the Company. Beazer Mortgage does not
retain or service the mortgages that it originates and an investor is secured
prior to origination.
During the first quarter of fiscal 1998, the Company entered into a joint
venture agreement with Corporacion GEO, the largest builder of affordable homes
in Mexico, to build homes in the United States. The joint venture will focus
exclusively on the development, construction and sale of affordable housing
throughout the U.S. The joint venture is owned 60% by Corporacion GEO and 40% by
Beazer. Development has begun on the venture's first project; however, no homes
have been delivered as of September 30, 1998. The venture did not have a
significant impact on Beazer's operating results during fiscal 1998.
NEW ORDERS AND BACKLOG - Each of the Company's Southeast and Southwest regions
experienced substantial growth in new orders during fiscal 1998 compared to the
prior year period. The most noteworthy markets of growth include Florida - up
111% (up 34% excluding the impact of the Orlando operations entered via
acquisition in December 1997) - and California - up 24%. The Company believes
the increase in new orders is attributable to generally strong economic
conditions in each of the markets that it operates and the Company's increased
investment in those markets where Beazer believes it can significantly exceed
its cost of capital.
Backlog levels correspond directly with the new order and closing trends
experienced by the Company. Backlog at September 30, 1998 was substantially in
excess of that at September 30, 1997 in each of the Company's markets, excluding
Nevada, in terms of both units and aggregate dollar value. The decrease in
backlog in Nevada is indicative of the Company scaling back operations in that
market. The Company expects to deliver substantially all of the homes in backlog
during the first six months of fiscal 1999.
The Company experienced fewer new orders during the year ended September 30,
1997 than the year ended September 30, 1996. The principal reason for this
decrease was a reduction in the number of active subdivisions in the Company's
Arizona operations. Excluding the Company's Arizona operations, new orders
increased by 347 homes in fiscal 1997. The principal increase was in the
Company's Texas operations.
22 BEAZER HOMES USA
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
The decreased level of total new orders contributed to lower backlog levels at
September 30, 1997 compared to September 30, 1996.
The Company has historically experienced fluctuations in new order activity in
periods of significant mortgage rate changes. Additional factors that impact the
Company's new order trends include the ability to react to changing customer
preferences through product mix and pricing, local economic conditions and
product supply (as measured by the number of active subdivisions).
SEASONALITY AND QUARTERLY VARIABILITY - The Company has historically experienced
significant seasonality and quarter-to-quarter variability in homebuilding
activity levels. The annual operating cycle generally reflects escalating new
orders in the Company's second and third fiscal quarters. Since closings usually
trail home sales by four to six months, closings typically are lowest in the
first quarter of the fiscal year, and revenues from home closings usually peak
in the third and fourth quarters of the fiscal year. The Company believes that
this seasonality reflects the preference of home buyers to shop for a new home
in the spring, as well as the scheduling of construction to accommodate seasonal
weather conditions. This trend, however, may be altered in periods of extreme
fluctuations in economic conditions, such as interest rates and general
confidence. The Company's operations can also be affected by inflation. All
costs and expenses including land, raw materials, subcontracted labor and
interest would increase in an inflationary period and, as a result, the
Company's margins could decrease unless the increased costs were recovered
through higher sales prices.
The following table presents certain unaudited quarterly financial and operating
data for the Company's last eight fiscal quarters. These historical results are
not necessarily indicative of results to be expected for any future period.
<TABLE>
<CAPTION>
(dollars in thousands)
Quarter Ended
------------------------------------------------------------------------------------------------
SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31,
1998 1998 1998 1997 1997 1997 1997 1996
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenue .................... $365,649 $234,811 $221,323 $155,626 $317,273 $195,991 $177,762 $161,083
NUMBER OF NEW
ORDERS, NET:
Southeast ........................ 763 767 941 417 472 555 573 369
Southwest ........................ 643 971 1,058 573 750 789 733 545
Central .......................... 130 245 278 96 167 250 228 120
------------------------------------------------------------------------------------------------
TOTAL ............................ 1,536 1,983 2,277 1,086 1,389 1,594 1,534 1,034
------------------------------------------------------------------------------------------------
NUMBER OF CLOSINGS:
Southeast ........................ 909 608 561 415 716 493 457 378
Southwest ........................ 1,099 750 663 469 1,140 651 627 600
Central .......................... 197 139 149 154 274 171 143 135
------------------------------------------------------------------------------------------------
TOTAL ............................ 2,205 1,497 1,373 1,038 2,130 1,315 1,227 1,113
------------------------------------------------------------------------------------------------
</TABLE>
BEAZER HOMES USA 23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
RESULTS OF OPERATIONS
The following table provides additional details of revenues and certain expenses
included in the Company's consolidated statements of operations (in thousands).
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------------
1998 1997 1996
----------------------------------------
<S> <C> <C> <C>
REVENUES:
Home sales ................................... $ 956,018 $ 849,520 $ 865,355
Land and lot sales ........................... 16,834 1,581 1,272
Mortgage originations ........................ 8,295 1,767 100
Intercompany elimination - mortgage .......... (3,738) (758) (100)
----------------------------------------
TOTAL REVENUE ................................ $ 977,409 $ 852,110 $ 866,627
----------------------------------------
COST OF HOME CONSTRUCTION AND LAND SALES:
Home sales ................................... $ 799,425 $ 720,390 $ 731,554
Land and lot sales ........................... 15,516 1,552 941
Intercompany elimination - mortgage .......... (3,738) (758) (100)
----------------------------------------
Total cost of home construction and land sales $ 811,203 $ 721,184 $ 732,395
----------------------------------------
SELLING, GENERAL AND ADMINISTRATIVE:
Homebuilding operations ...................... $ 105,946 $ 90,860 $ 88,776
Mortgage origination operations .............. 4,313 1,227 200
----------------------------------------
TOTAL SELLING, GENERAL AND ADMINISTRATIVE .... $ 110,259 $ 92,087 $ 88,976
----------------------------------------
</TABLE>
The following table shows certain items in the Company's statements of income
expressed as a percentage of certain components of revenue.
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------
1998 1997 1996
-------------------------------
<S> <C> <C> <C>
AS A PERCENTAGE OF TOTAL REVENUE:
Cost of home construction and land sales ...... 83.0% 84.7% 84.5%
Amortization of previously capitalized interest 1.9% 1.7% 1.7%
Selling, general and administrative:
Homebuilding operations...................... 10.8% 10.7% 10.2%
Mortgage originations........................ 0.4% 0.1% 0.0%
AS A PERCENTAGE OF HOME SALE REVENUE:
Cost of home construction...................... 83.6% 84.8% 84.5%
</TABLE>
24 BEAZER HOMES USA
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
REVENUES - The 12.5% increase in revenues from home sales for the year ended
September 30, 1998 compared to the year ended September 30, 1997 is the result
of both an increase in the average price per home closed and an increase in the
number of homes closed. The increase in average price is largely attributable to
sales price increases during fiscal 1998 in several markets and higher revenue
contributions from options sold through the Company's design centers than those
recognized during fiscal 1997.
The 1.8% decrease in revenues from home sales for the year ended September 30,
1997 compared to the year ended September 30, 1996 is the result of a 3%
decrease in the number of homes closed offset by a 1% increase in average sales
price. The principal reason for the decrease was a decline in home closings in
Arizona, the Company's largest market. This decrease was partially offset by the
continued expansion of the Company's Texas operations. The slight increase in
the average sales price is the result of the decrease in closings in Arizona
where the average sales price was below the Company average.
Consistent with the Company's stated policy of reducing its investment in
markets and projects that are not exceeding the Company's overall cost of
capital, the Company had several land sales during fiscal 1998. The Company did
not realize any significant profit or loss on these land sales. The Company did
not have any significant land and lot sales during fiscal 1997 or 1996.
COST OF HOME CONSTRUCTION AND LAND SALES - The decrease in homebuilding cost of
home construction and land sales ("COS") as a percentage of homebuilding
revenues for the year ended September 30, 1998 compared to September 30, 1997 is
principally the result of continued savings from the Company's profitability
initiatives, specifically design centers. Additionally, a strong general
economic environment during the year resulted in sales price increases in most
of the Company's markets contributing to the overall decrease in homebuilding
COS as a percentage of homebuilding revenues.
The improvement in total COS as a percentage of total revenues for the year
ended September 30, 1998 compared to the same period in 1997 exceeded the
improvement in the homebuilding percentage because of the benefit to total COS
provided by the mortgage origination operations. That benefit is the result of
Beazer Mortgage receiving revenues for costs previously paid by Beazer's
homebuilding operations to third-party lenders. These payments are eliminated
against the corresponding revenue recognized by the mortgage origination
operations thus reducing total COS.
The principal reason for the increase in both homebuilding COS and total COS in
fiscal 1997 compared to fiscal 1996 relates to issues in the Company's Nevada
operations. For the fiscal year ended September 30, 1997, the COS as a
percentage of revenues was 91.2% for the Nevada operations compared to 84.8% for
the total Company. During fiscal 1997, the Company experienced development
issues in two subdivisions in Nevada, resulting in a writedown to inventory and
reduced margins in other subdivisions in Nevada. The Company made management
changes and implemented additional controls around projects involving
significant development expenditures.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE - The increase in homebuilding
selling, general and administrative expense ("SG&A") for the year ended
September 30, 1998 compared to the year ended September 30, 1997 is primarily
attributable to the ramp up of design centers, a full year of amortization of
information systems costs and higher incentive compensation during fiscal 1998.
The increase in homebuilding SG&A in fiscal 1997 compared to fiscal 1996 is
principally the result of increased sales and marketing expenses relating to the
opening of new subdivisions within the Company's existing markets. The sales and
marketing component of total SG&A as a percentage of revenues increased to 6.5%
from 6.1% in fiscal 1996. The general and administrative component of total SG&A
was 4.2% for both fiscal 1997 and 1996.
BEAZER HOMES USA 25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
The increase in mortgage origination SG&A is the result of the opening of Beazer
Mortgage branches in each of the Company's markets. As of September 30, 1998 the
Company had mortgage originator operations in each of the nine states which it
operates compared to five states at September 30, 1997.
WRITE-DOWN OF INVENTORY - During the year ended September 30, 1997, the Company
recorded a pretax charge of $6.3 million ($3.9 million after tax) to write down
two properties located in Nevada to their fair market value (estimated based on
the sales prices of comparable projects). The two Nevada properties, Craig Ranch
in North Las Vegas and Promontory in Reno, had incurred significant development
costs that were not anticipated at the beginning of the project. As a result,
the estimated future undiscounted cash flows of the projects were less than
their respective current book values.
MORTGAGE ORIGINATION OPERATIONS - As of September 30, 1998, Beazer Mortgage was
operating in each state that the Company does business. Beazer Mortgage
originated approximately 3,100 mortgages on behalf of Beazer home buyers during
fiscal 1998, a capture rate of 51% on total Company closings. During fiscal
1997, Beazer Mortgage originated approximately 960 mortgages, a capture rate of
approximately 17% on total Company closings. Prior to intercompany eliminations,
the mortgage origination operations generated operating income of approximately
$4,000,000 and $500,000 in fiscal 1998 and 1997, respectively. The results of
operations for the year ended September 30, 1996 were not significant.
INCOME TAXES - Income taxes for fiscal 1998, 1997 and 1996, were provided at
effective rates of 38.1%, 38.5% and 39.5%, respectively. The decline over the
three years results principally from tax savings strategies the Company
implemented in fiscal 1996.
FINANCIAL CONDITION AND LIQUIDITY
In March 1998, the Company issued $100 million of 8 7/8% Senior Notes, due in
April 2008 (the "8 7/8% Senior Notes") at a price of 99.183% of their face
amount (before underwriting discount and other issuance costs). The net proceeds
of the Senior Note offering were used to repay short-term borrowings under the
Company's revolving credit facility. Interest on the 8 7/8% Senior Notes is
payable semiannually. The Company may, at its option, redeem the 8 7/8% Senior
Notes in whole or in part at any time after March 2003, initially at 104.438% of
the principal amount, declining to 100% of the principal amount after March
2006.
The Company also has outstanding $115 million of Senior Notes which mature in
March 2004 (the "9% Senior Notes"). Interest on the 9% Senior Notes is payable
semiannually. The Company may, at its option, redeem the 9% Senior Notes in
whole or in part at any time after February 1999, initially at 102.571% of the
principal amount, declining to 100% of the principal amount after February 2001.
The 9% Senior Notes and the 8 7/8% Senior Notes are unsecured obligations of the
Company ranking pari passu with all other existing and future senior
indebtedness of the Company.
At September 30, 1998, the Company had no outstanding borrowings under its $200
million unsecured revolving credit facility (the "Credit Facility"). The Company
fulfills its short-term cash requirements with cash generated from its
operations and unused funds available from the Credit Facility. Available
borrowings under this credit agreement are limited to certain percentages of
homes under contract, unsold homes, substantially improved lots and accounts
receivable. At September 30, 1998 the Company had available additional
borrowings of $47 million under the Credit Facility.
26 BEAZER HOMES USA
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
On November 3, 1998, the Company amended and restated the credit facility (the
"New Credit Facility") to extend the maturity from February 2001 to November
2002 and modify certain provisions, including the determination of available
borrowings. At September 30, 1998, the Company would have had available
additional borrowings of $90 million under the New Credit Facility.
During the year ended September 30, 1998, the Company utilized borrowings under
the Credit Facility of approximately $16.7 million for the acquisition of the
Orlando, Florida operations of Calton Homes of Florida, Inc. All such borrowings
were repaid as of September 30, 1998.
All significant subsidiaries of Beazer Homes USA, Inc. are guarantors of the
Notes and the Company's obligations under the Credit Facility and are jointly
and severally liable for the Company's obligations under the Notes and the
Credit Facility. Separate financial statements and other disclosures concerning
each of the significant subsidiaries are not included, as the aggregate assets,
liabilities, earnings and equity of the subsidiaries equal such amounts for the
Company on a consolidated basis and separate subsidiary financial statements are
not considered material to investors. The total assets, revenues and operating
profit of the non-guarantor subsidiaries are in the aggregate immaterial to the
Company on a consolidated basis. Neither the Credit Facility nor the Notes
restrict distributions to Beazer Homes USA, Inc. by its subsidiaries.
The Company has utilized, and will continue to utilize, land options as a method
of controlling and subsequently acquiring land. At September 30, 1998, the
Company had 10,496 lots under option. At September 30, 1998, the Company had
commitments with respect to option contracts with specific performance
obligations of approximately $39.0 million. The Company expects to exercise all
of its option contracts with specific performance obligations and, subject to
market conditions, substantially all of its options contracts without specific
performance obligations.
The Company's Series A Convertible Exchangeable Preferred Stock (the "Preferred
Stock") is convertible into common stock at an exchange rate of $19.05 per
common share and became callable by the Company on September 1, 1998 at a 5%
premium. The Company intends to call its Preferred Stock at the earliest date
that it believes it is likely that the majority of holders would convert into
common stock.
Management believes that the Company's current borrowing capacity, cash on hand
at September 30, 1998, and anticipated cash flows from operations are sufficient
to meet liquidity needs for the foreseeable future. There can be no assurance,
however, that amounts available in the future from the Company's sources of
liquidity will be sufficient to meet the Company's future capital needs. The
amount and types of indebtedness that the Company may incur may be limited by
the terms of the indentures governing the senior notes and the New Credit
Facility. The Company continually evaluates expansion opportunities through
acquisition of established regional homebuilders, and such opportunities may
require the Company to seek additional capital in the form of equity or debt
financing from a variety of potential sources, including additional bank
financing and/or securities offerings.
In October 1998, the Company acquired the assets of Snow Construction, Inc. in
Orlando, Florida for $1.8 million. In December 1998, the Company acquired the
assets of the homebuilding operations of Trafalgar House Property, Inc. for a
purchase price of approximately $90 million. The Company funded this acquisition
with borrowings under the New Credit Facility.
BEAZER HOMES USA 27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
YEAR 2000 COMPLIANCE AND READINESS DISCLOSURES
GENERAL - The Company recognizes the importance of the Year 2000 issue and is
taking a proactive approach intended to facilitate an appropriate transition
into the Year 2000. This proactive approach includes the following phases:
o Allocation of Company resources to manage the approach,
o Evaluation of the Company's information technology ("IT") systems and non-IT
systems that include imbedded microprocessors (together, the Company's
"Internal Systems"),
o Evaluation of IT and non-IT systems for principal vendors (principally
subcontractors) and other service providers (together, the Company's "External
Systems"),
o Evaluation of risk associated with Internal and External Systems compliance
efforts,
o Test of all material Internal and External Systems as practicable,
o Creation of contingency plans for non-compliance of either Internal or
External Systems, and
o Determination of the expected total cost of a complete state of readiness for
the Company.
STATE OF READINESS - During fiscal 1996, the Company began a series of
profitability initiatives including a streamlining of all Internal Systems.
These efforts included updating the hardware and software being used by a
majority of the Company's employees. All such purchases contemplated future Year
2000 issues and are considered compliant. As such, the Company's Year 2000
initiative has not required substantial investments as of September 30, 1998 and
the Company does not believe it will require a substantial future investment.
The Company has allocated resources to the phased approach outlined above and
has completed an inventory of Internal Systems and substantially completed an
inventory of External Systems to determine those that do not properly recognize
dates after December 31, 1999.
The Company's principal Internal Systems include its general systems
architecture (local and wide area networks), financial accounting system,
executive information system, payroll services system and cash management
system. The Company is currently operating on the latest version of each of the
listed systems (excluding architecture) and has received representations from
the vendors indicating that they are Year 2000 compliant. The Company is in the
process of evaluating the compliance of its general systems architecture.
Despite the certifications from the software vendors the Company will test
compliance on its principal Internal Systems during fiscal 1999.
The Company's principal External Systems include those of its subcontractors,
significant raw material vendors, and general service providers such as
telecommunications and power. The Company has substantially completed its
evaluation of its significant subcontractors and raw material providers via
inquiry. The Company has not performed its own tests on these systems, and no
assurance can be given as to the compliance of these systems. Based on the
information currently available, the Company is not aware of any material
non-compliance by its general service providers; however, the Company does not
control these systems and cannot assure their compliance.
COSTS - As of September 30, 1998, less than $100,000 of outside consulting costs
have been incurred related specifically to the Company's Year 2000 initiatives.
The Company will incur capital expenditures and internal staff costs as well as
additional outside consulting expenditures related to this process. Based on
currently available information, the Company does not expect the costs of these
initiatives to exceed $500,000.
28 BEAZER HOMES USA
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
RISKS PRESENTED BY THE YEAR 2000 ISSUE - The failure by the Company to
appropriately address a material Year 2000 issue within its Internal Systems, or
the failure by any third party to address an External System could have a
material adverse impact on the Company's financial condition, liquidity or
results of operations. To date, however, the Company has not identified any
material Internal or External System that presents a significant risk of not
being Year 2000 ready or for which a suitable alternative does not exist. With
continued evaluation, however, the Company may identify an Internal or External
System that presents a risk for a Year 2000 disruption in operations.The
homebuilding construction process by nature is labor intensive and could operate
for a limited time in a manual environment. At this time, the Company believes
the most likely worst-case scenario would result if there were a significant
disruption in services provided by banking institutions, mortgage lenders,
utility service providers, or certain government agencies which could inhibit
the ability of the Company to deliver finished homes to its customers.
CONTINGENCY PLANS - The Company is in the process of identifying contingency
plans that would allow for the construction and delivery of homes to customers
should any of the Company's Internal or External Systems fail. These contingency
plans will consist of construction and raw material scheduling arrangements and
potential alternative financing options for homebuyers.
All statements relating to the Year 2000 issue made in Forms 10-K, 10-Q or
Registration Statements filed by the Company with the Securities and Exchange
Commission after January 1, 1996 are hereby incorporated by reference and
designated as Year 2000 Readiness Disclosures.
OUTLOOK
The Company is optimistic about its prospects for fiscal 1999. As a result of
increased backlog at September 30, 1998, the Company expects home closings to be
strong for the first six months of fiscal 1999 compared to the same period in
fiscal 1998. In addition, the Company believes the current strong economic
environment combined with its profitability initiatives will result in a
continued reduction of its cost of home construction and land sales as a
percentage of revenues in the first half of fiscal 1999.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement No. 131, "Disclosures about Segments of
an Enterprise and Related Information"("SFAS 131"). SFAS 131 becomes effective
for fiscal years beginning after December 15, 1997. The Company does not believe
this statement will have an effect on the Company's results of operations or
financial position.
In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 is effective for
periods beginning after June 15, 1999. The Company has not yet completed an
analysis of the effect of this statement on its financial statements.
BEAZER HOMES USA 29
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Beazer Homes USA, Inc.
We have audited the accompanying consolidated balance sheets of Beazer Homes
USA, Inc. as of September 30, 1998 and 1997 and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended September 30, 1998. These consolidated financial
statements are the responsibility of the management of Beazer Homes USA, Inc.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Beazer
Homes USA, Inc. at September 30, 1998 and 1997 and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended September 30, 1998 in conformity with generally accepted accounting
principles.
Atlanta, Georgia
November 3, 1998
(December 4, 1998 as to Note 14)
30 BEAZER HOMES USA
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(dollars in thousands, except per share amounts)
Year Ended September 30,
--------------------------------------------
1998 1997 1996
--------------------------------------------
<S> <C> <C> <C>
Total revenue ................................... $ 977,409 $ 852,110 $ 866,627
Costs and expenses:
Home construction and land sales .............. 811,203 721,184 732,395
Amortization of previously capitalized interest 19,031 14,857 15,134
Selling, general and administrative ........... 110,259 92,087 88,976
Writedown of inventory ........................ 6,326
--------------------------------------------
Operating income ................................ 36,916 17,656 30,122
Other income .................................... 578 538 71
--------------------------------------------
Income before income taxes ...................... 37,494 18,194 30,193
Provision for income taxes ...................... 14,293 7,005 11,927
--------------------------------------------
Net income ...................................... $ 23,201 $ 11,189 $ 18,266
--------------------------------------------
Preferred dividends ............................. $ 4,000 $ 4,000 $ 4,000
Net income applicable to common shareholders .... $ 19,201 $ 7,189 $ 14,266
Net income per common share:
Basic ......................................... $ 3.27 $ 1.18 $ 2.24
Diluted ....................................... $ 2.66 $ 1.15 $ 2.01
Weighted average number of shares :
Basic ......................................... 5,864,182 6,088,195 6,374,961
Diluted ....................................... 8,730,863 6,274,250 9,099,839
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BEAZER HOMES USA 31
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(dollars in thousands) September 30,
-----------------------------
1998 1997
-----------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents .................................. $ 67,608 $ 1,267
Accounts receivable ........................................ 16,949 7,114
Inventory .................................................. 405,095 361,945
Deferred tax asset ......................................... 3,283 3,142
Property, plant and equipment, net ......................... 12,332 11,592
Goodwill, net .............................................. 8,853 5,664
Other assets ............................................... 11,471 8,871
-----------------------------
Total Assets ............................................... $ 525,591 $ 399,595
-----------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Trade accounts payable ..................................... $ 61,942 $ 44,443
Other liabilities .......................................... 49,425 30,866
Revolving credit facility .................................. 30,000
Senior Notes ............................................... 215,000 115,000
-----------------------------
Total Liabilities .......................................... 326,367 220,309
-----------------------------
Stockholders' Equity:
Preferred stock (par value $.01 per share,
5,000,000 shares authorized, 2,000,000 issued and
outstanding, $50,000 aggregate liquidation preference) .. 20 20
Common stock (par value $.01 per share, 30,000,000 shares
authorized, 9,559,200 and 9,355,957 issued, 6,267,423 and
6,064,180 outstanding) .................................. 93 93
Paid-in-capital .......................................... 192,729 187,798
Retained earnings ........................................ 64,003 44,802
Unearned restricted stock ................................ (5,638) (1,444)
Treasury stock, at cost (3,291,777 shares) ............... (51,983) (51,983)
-----------------------------
Total Stockholders' Equity ............................... 199,224 179,286
-----------------------------
Total Liabilities and Stockholders' Equity ................. $ 525,591 $ 399,595
-----------------------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
32 BEAZER HOMES USA
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
(dollars in thousands)
Preferred Common Paid in Retained Restricted Treasury
Stock Stock Capital Earnings Stock Stock Total
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1995 ................ $ 20 $ 93 $187,698 $ 23,347 $ (1,907) (44,707) $164,544
Purchase of treasury stock
(25,000 shares) .......................... (349) (349)
Issuance of restricted stock
(46,500 shares) .......................... 482 (482)
Cancellation of restricted stock
(38,417 shares) .......................... (458) 458
Remeasurement of unearned
restricted stock ......................... (228) 228
Amortization of unearned
restricted stock ......................... 257 257
Preferred stock dividends paid ............. (4,000) (4,000)
Other ...................................... (17) (17)
Net income ................................. 18,266 18,266
----------------------------------------------------------------------------------------
Balance, September 30, 1996 ................ $ 20 $ 93 $187,477 $ 37,613 $ (1,446) $(45,056) $178,701
Purchase of treasury stock
(517,510 shares) ......................... (6,927) (6,927)
Issuance of restricted stock
(50,757 shares) .......................... 321 (321)
Amortization of unearned
restricted stock ......................... 323 323
Preferred stock dividends paid ............. (4,000) (4,000)
Net income ................................. 11,189 11,189
----------------------------------------------------------------------------------------
Balance, September 30, 1997 ................ $ 20 $ 93 $187,798 $ 44,802 $ (1,444) $(51,983) $179,286
Issuance of restricted stock
(238,000 shares) ......................... 4,805 (4,805)
Amortization of unearned
restricted stock ......................... 611 611
Preferred stock dividends paid ............. (4,000) (4,000)
Other shares issued ........................ 126 126
Net income ................................. 23,201 23,201
----------------------------------------------------------------------------------------
Balance, September 30, 1998 ................ $ 20 $ 93 $192,729 $ 64,003 $ (5,638) $(51,983) $199,224
----------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BEAZER HOMES USA 33
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(dollars in thousands) Year Ended September 30,
--------------------------------------------
1998 1997 1996
--------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $23,201 $ 11,189 $ 18,266
Adjustments to reconcile net income
to net cash provided (used) by
operating activities:
Depreciation and amortization .................. 3,269 2,221 1,528
Provision for deferred income taxes ............ 340 (1,280) 588
Writedown of inventory ......................... 6,326
Changes in operating assets and
liabilities, net of effects
from acquisitions:
Increase in inventory .......................... (26,220) (47,302) (11,603)
Increase (decrease) in trade accounts payable .. 15,824 13,012 (9,024)
Increase (decrease) in other accrued liabilities 18,344 (645) 1,698
Other .......................................... (7,609) (3,988) (1,346)
--------------------------------------------
Net cash provided (used) by operating activities . 27,149 (20,467) 107
--------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures ............................. (5,775) (9,445) (1,866)
Investment in unconsolidated joint venture ....... (1,200)
Acquisitions, net of cash acquired ............... (16,766) (21,357)
--------------------------------------------
Net cash used by investing activities ............ (23,741) (9,445) (23,223)
--------------------------------------------
Cash flows from financing activities
Proceeds from issuance of 8 7/8% Senior Notes .... 100,000
Net borrowings under revolving credit facility ... (30,000) 30,000
Debt issuance costs .............................. (3,067) (836)
Cash dividends paid on preferred stock ........... (4,000) (4,000) (4,000)
Share repurchases ................................ (6,927) (349)
--------------------------------------------
Net cash provided (used) by financing activities . 62,933 18,237 (4,349)
--------------------------------------------
Increase (decrease) in cash and cash equivalents . 66,341 (11,675) (27,465)
Cash and cash equivalents at beginning of year ... 1,267 12,942 40,407
--------------------------------------------
Cash and cash equivalents at end of year ......... $ 67,608 $ 1,267 $ 12,942
--------------------------------------------
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid .................................. $ 20,379 $ 15,659 $ 13,885
Income taxes paid .............................. $ 14,533 $ 5,399 $ 11,581
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
34 BEAZER HOMES USA
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION - Beazer Homes USA, Inc. ("Beazer" or the "Company") is one of the
largest single-family home builders in the United States. Beazer designs, builds
and sells single family homes in 24 markets located in Arizona, California,
Florida, Georgia, Nevada, North Carolina, South Carolina, Tennessee and Texas
and provides mortgage origination services to its homebuyers through Beazer
Mortgage Corp. ("Beazer Mortgage").
BASIS OF PRESENTATION - The accompanying consolidated financial statements
include the accounts of Beazer Homes USA, Inc., and its wholly owned
subsidiaries. Intercompany balances have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS - The Company considers cash investments with
maturities of three months or less when purchased to be cash equivalents.
INVENTORY - Inventory consists of residential real estate developments including
interest, real estate taxes and development costs capitalized to land and
construction costs during the development and construction period.
INVESTMENT IN JOINT VENTURE - During fiscal 1998, the Company entered into a
joint venture agreement with Corporacion GEO, a Mexican homebuilder, to build
affordable homes in the United States. The Company has a non-controlling 40%
ownership interest in the joint venture. Accordingly, the joint venture is
accounted for under the equity method. Development of the joint venture's first
project began during October 1998. Through September 30, 1998, the results of
operations of the joint venture were not significant. During fiscal 1998, the
Company advanced approximately $1.2 million to the joint venture and at
September 30, 1998 has a remaining funding commitment of $3.6 million over the
next two years. The investment is classified with other assets on the
consolidated balance sheet.
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are recorded at
cost. Depreciation is computed on a straight line basis at rates based on
estimated useful lives as follows:
Building ....................... 15 YEARS
Machinery and equipment ........ 3 - 12 YEARS
Information systems ............ 3 - 5 YEARS
Furniture and fixtures ......... 3 - 5 YEARS
INCOME TAXES - Deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
INCOME RECOGNITION AND CLASSIFICATION OF COSTS - Income from the sale of
residential units or land parcels is recognized when closings have occurred and
the risk of ownership is transferred to the buyer. Sales commissions are
included in selling, general and administrative expense.
Revenues for fees paid to Beazer Mortgage from third-party lenders are
recognized concurrent with the closing on the sale of the residential unit. All
general and administrative expenses of operating Beazer Mortgage are included in
selling, general and administrative expense.
BEAZER HOMES USA 35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
GOODWILL - Goodwill represents the excess of the purchase price over the fair
value of assets acquired and is being amortized over a 15-year period.
Amortization expense was $736,000, $541,000, and $541,000, for the years ended
September 30, 1998, 1997 and 1996, respectively. Accumulated amortization was
$3,185,000 and $2,449,000 at September 30, 1998 and 1997, respectively. In the
event that facts and circumstances indicate that the carrying value of goodwill
may be impaired, an evaluation of recoverability would be performed. If an
evaluation is required, the estimated future undiscounted cash flows associated
with the asset would be compared to the asset's carrying amount to determine if
a write-down to market value or discounted cash flow value is required.
WARRANTY COSTS - Estimated future warranty costs are charged to cost of sales in
the period when the revenues from home closings are recognized. Such estimated
warranty costs range from 0.5% to 1.0% of total revenue and, based upon
experience, have been sufficient to cover costs incurred.
OTHER LIABILITIES - Other liabilities includes home buyer deposits, accrued
compensation and various other accrued expenses.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The historical carrying amount of
short-term financial instruments approximates fair value. The fair values of the
Company's publicly held debt are estimated based on the quoted bid prices for
these debt instruments. The fair values of the Company's publicly held debt
approximates their book values at September 30, 1998 and 1997.
EARNINGS PER SHARE - During fiscal 1998, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share." As a
result, all previously reported earnings per share data has been restated to
conform with SFAS No. 128. The computation of basic earnings per common share is
determined by dividing net income applicable to common shareholders by the
weighted average number of common shares outstanding during the period.
Diluted earnings per share additionally gives effect to dilutive common stock
equivalent units, including (i) the assumed conversion of 2,000,000 shares of
the Company's Series A Cumulative Convertible Exchangeable Preferred Stock (see
Note 11) into 2,624,672 shares of Common Stock (in fiscal 1996 and 1998) and
(ii) stock options and awards.
STOCK-BASED COMPENSATION - As described in Note 12, the Company has elected to
follow the intrinsic value method to account for compensation expense related to
the award of stock options and to furnish the pro forma disclosures required
under SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123").
Since the Company's stock option awards are granted at prices no less than the
fair-market value of the shares at the date of grant, no compensation expense is
recognized. Compensation expense, if any, related to restricted stock awards is
determined at the date of grant, recorded as unearned compensation expense and
amortized over the vesting period of the awarded shares. The unearned
compensation expense related to such awards is reflected as a reduction of
stockholder's equity.
USE OF ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RECLASSIFICATIONS - Certain items in prior period financial statements have been
reclassified to conform to the current presentation.
36 BEAZER HOMES USA
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
RECENT ACCOUNTING PRONOUNCEMENTS - In June 1997, the FASB issued Statement No.
131, "Disclosures about Segments of an Enterprise and Related Information"("SFAS
131"). SFAS 131 becomes effective for fiscal years beginning after December 15,
1997 with early adoption permitted. The statements will have no effect on the
Company's results of operations or financial position.
In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 is effective for
periods beginning after June 15, 1999. The Company has not yet completed an
analysis of the effect of this statement on its financial statements.
NOTE 2 - ACQUISITIONS
Since October 1, 1995, the Company has acquired substantially all of the assets
or all of the outstanding capital stock of each of the following businesses
(also see Note 14):
<TABLE>
<CAPTION>
CONSIDERATION
BUSINESS ACQUIRED (IN THOUSANDS) ACQUISITION DATE
----------------------------------------------
<S> <C> <C>
Calton Homes of Florida .......... $16,700 November 1997
Trendmaker Homes - Dallas ........ 21,000 June 1996
Gulfcoast Homes .................. 3,200 May 1996
</TABLE>
Consideration includes cash paid plus certain borrowings assumed and repaid
immediately subsequent to the acquisitions. These acquisitions have been
recorded using the purchase method of accounting and, accordingly, the purchase
price has been allocated to the assets acquired and the liabilities assumed
based on their estimated fair values as of the date of acquisitions. The
allocations of purchase price resulted in approximately $3.9 million of
goodwill, principally from the acquisition of Calton Homes of Florida. The
operating results of the acquired businesses are included in the Company's
consolidated statements of income from their respective dates of acquisition.
The pro forma effect on the Company's operating results of acquired businesses
prior to their acquisition date would not be significant.
NOTE 3 - INVENTORY
Inventory at September 30 includes (in thousands):
<TABLE>
<CAPTION>
1998 1997
--------------------------
<S> <C> <C>
Homes under construction ....... $194,566 $169,459
Development projects in progress 165,218 131,842
Unimproved land held for
future development ........... 18,605 34,792
Model homes .................... 26,706 25,852
--------------------------
$405,095 $361,945
--------------------------
</TABLE>
Homes under construction includes homes finished and ready for delivery and
homes in various stages of construction. At September 30, 1998 the Company had
208 completed homes ($30.7 million) that were not subject to a sales contract,
not including model homes. At September 30, 1997 the Company had 426 completed
homes ($49.8 million) that were not subject to a sales contract, not including
model homes.
Development projects in progress consist principally of land and land
improvement costs. Certain of the fully developed lots in this category are
reserved by a deposit or sales contract.
Inventory located in California, the state with the Company's largest
concentration of inventory, totaled $97.7 million and $74.5 million at September
30, 1998 and 1997, respectively.
In March 1997 the Company recorded a pre-tax charge of $6.3 million to write
down two properties located in Nevada to their estimated fair market value
(based on the sales prices of comparable projects). The two Nevada properties
had incurred significant development costs that were not anticipated at the
beginning of the projects. As a result, the estimated future undiscounted cash
flows of the projects at that time were less than their respective book values.
BEAZER HOMES USA 37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company acquires 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 without
specific performance obligations, the Company's liability is generally limited
to forfeiture of the non-refundable deposits, which aggregated approximately
$10.6 million and $10.3 million at September 30, 1998 and 1997, respectively,
and is included in development projects in process. Under option contracts, both
with and without specific performance, purchase of the properties is contingent
upon satisfaction of certain requirements by the Company and the sellers. Below
is a summary of amounts (in thousands) committed under all options:
<TABLE>
<CAPTION>
AGGREGATE PURCHASE
PRICE AS OF
SEPTEMBER 30, 1998
----------------------------
<S> <C>
Options with specific performance ..... $ 38,968
Options without specific performance .. 204,087
----------------------------
Total options ......................... $ 243,055
----------------------------
</TABLE>
NOTE 4 - INTEREST
Information regarding interest (in thousands) is as follows.
<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------------------
1998 1997 1996
---------------------------------------
<S> <C> <C> <C>
Capitalized interest in
inventory, beginning of year $ 6,855 $ 5,553 $ 6,511
Interest incurred
and capitalized ............ 21,259 16,159 14,176
Capitalized interest
amortized to cost of sales . (19,031) (14,857) (15,134)
---------------------------------------
Capitalized interest in
inventory, end of the year . $ 9,083 $ 6,855 $ 5,553
---------------------------------------
</TABLE>
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of (in thousands):
<TABLE>
<CAPTION>
September 30,
------------------------
1998 1997
------------------------
<S> <C> <C>
Land and buildings ............... $ 935 $ 1,041
Leasehold improvements ........... 883 660
Machinery and equipment .......... 3,467 4,050
Information systems .............. 9,354 4,232
Furniture and fixtures ........... 5,103 6,517
------------------------
19,742 16,500
Less: Accumulated depreciation ... 7,410 4,908
------------------------
Property, plant and equipment, net $12,332 $11,592
------------------------
</TABLE>
NOTE 6 - REVOLVING CREDIT FACILITY
The Company maintains a revolving line of credit with a group of banks. The
credit agreement at September 30, 1998, provides for up to $200 million of
unsecured borrowings. Borrowings under the credit agreement generally bear
interest payable monthly at a fluctuating rate based upon the corporate base
rate of interest announced by the lead bank, the federal funds rate or LIBOR.
All outstanding borrowings under the credit agreement are due in February 2001.
The credit agreement contains various operating and financial covenants. Each of
the Company's significant subsidiaries is a guarantor under the credit
agreement.
Available borrowings under the Credit Agreement are limited to certain
percentages of homes under contract, unsold homes, substantially improved lots
and accounts receivable. At September 30, 1998, the Company had no borrowings
outstanding, and had available additional borrowings of $47 million under the
credit agreement.
On November 3, 1998, the Company amended and restated the credit facility (the
"New Credit Facility") to extend the maturity from February 2001 to November
2002 and modify certain
38 BEAZER HOMES USA
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
provisions, including the determination of available borrowings. At September
30, 1998, the Company would have had available additional borrowings of $90
million under the New Credit Agreement.
NOTE 7 - SENIOR NOTES
In March 1998, the Company issued $100 million of 8 7/8% Senior Notes, due in
April 2008 (the "8 7/8% Senior Notes") at a price of 99.183% of their face
amount (before underwriting discount and other issuance costs). The net proceeds
of the Senior Note offering were used to repay short-term borrowings under the
Company's revolving credit facility. Interest on the 8 7/8% Senior Notes is
payable semiannually. The Company may, at its option, redeem the 8 7/8% Senior
Notes in whole or in part at any time after March 2003, initially at 104.438% of
the principal amount, declining to 100% of the principal amount after March
2006. A portion of such notes may also be redeemed prior to April 2001 under
certain conditions.
The Company also has outstanding $115 million of Senior Notes which mature in
March 2004 (the "9% Senior Notes"). Interest on the 9% Senior Notes is payable
semiannually. The Company may, at its option, redeem the 9% Senior Notes in
whole or in part at any time after February 1999, initially at 102.571% of the
principal amount, declining to 100% of the principal amount after February 2001.
The 9% Senior Notes and the 8 7/8% Senior Notes are unsecured obligations of the
Company ranking pari passu with all other existing and future senior
indebtedness of the Company.
The indentures under which the 9% Senior Notes and the 8 7/8% Senior Notes were
issued contain certain restrictive covenants, including limitations on payment
of dividends. At September 30, 1998, under the most restrictive covenants of
each indenture, approximately $37.1 million of the Company's retained earnings
was available for cash dividends and for the acquisition by the Company of its
common stock. Each indenture provides that, in the event of defined changes in
control or if the Company's consolidated tangible net worth falls below a
specified level or in certain circumstances upon sale of assets, the Company is
required to offer to repurchase certain specified amounts of outstanding senior
notes.
NOTE 8 - INCOME TAXES
The provision for income taxes consists of (in thousands):
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------------
1998 1997 1996
----------------------------------------
<S> <C> <C> <C>
Current:
Federal............... $12,297 $ 7,507 $ 9,579
State ................ 1,656 778 1,760
Deferred ............... 340 (1,280) 588
----------------------------------------
Total .................. $14,293 $ 7,005 $ 11,927
----------------------------------------
</TABLE>
The provision for income taxes differs from the amount computed by applying the
federal income tax statutory rate as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------------
1998 1997 1996
----------------------------------------
<S> <C> <C> <C>
Income tax computed
at statutory rate .... $ 13,123 $ 6,368 $ 10,568
State income taxes,
net of federal benefit 1,077 506 1,143
Goodwill amortization .. 189 189 189
Other, net ............. (96) (58) 27
----------------------------------------
Total .................. $ 14,293 $ 7,005 $ 11,927
----------------------------------------
</TABLE>
Deferred tax assets relate principally to differences between book and tax bases
of inventory as a result of the various acquisitions, and to the timing and
deductibility of accrued warranty costs.
BEAZER HOMES USA 39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 9 - LEASES
The Company is obligated under various noncancelable operating leases for office
facilities and equipment. Rental expense under these agreements amounted to
approximately $4,400,000, $2,258,000 and $2,485,000 for the years ended
September 30, 1998, 1997 and 1996, respectively. As of September 30, 1998 future
minimum lease payments under noncancelable operating lease agreements are as
follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING SEPTEMBER 30,
<S> <C>
1999 ........................ $2,999
2000 ........................ 2,156
2001 ........................ 1,280
2002 ........................ 619
2003 ........................ 200
Thereafter .................. 2
------------
Total ....................... $7,256
------------
</TABLE>
NOTE 10 - STOCKHOLDERS' EQUITY
PREFERRED STOCK - The Company has 2,000,000 shares of its Series A Cumulative
Convertible Exchangeable Preferred Stock (Liquidation Preference $25.00 per
share), par value $0.01 issued and outstanding. The Preferred Stock pays
dividends quarterly at an annual rate of 8%, is convertible at the holder's
option into the Company's Common Stock at a conversion price of $19.05 per
Common Share, is exchangeable at the Company's option into 8% Convertible
Subordinated Debentures due 2005 and became callable by the Company beginning in
September 1998 at a 5% premium.
COMMON STOCK REPURCHASE PLAN - In June 1996, the Company's Board of Directors
approved a stock repurchase plan authorizing the purchase of up to 10% of the
Company's then outstanding common stock. Such repurchases, if completed, would
be affected at various prices from time to time in the open market. As of
September 30, 1998 the Company had purchased 542,510 shares for an aggregate
purchase price of approximately $7.3 million under this repurchase plan.
SHAREHOLDER RIGHTS PLAN - In June 1996, the Company's Board of Directors adopted
a Shareholder Rights Plan and distributed a dividend of one preferred share
purchase right (a "Right") to purchase one one-hundredth of a share of Series B
Junior Participating Preferred Stock, par value $0.01 per share (the "Junior
Preferred Shares"), of the Company. The Rights become exercisable in certain
limited circumstances involving principally the acquisition of over 20% of the
Company's outstanding common stock by any one individual or group. The Rights
are initially exercisable at a price of $80 per one hundredth of a Junior
Preferred Share subject to adjustment. Following certain other events after the
Rights have become exercisable, each Right entitles its holder to purchase at
the Right's then-current exercise price, a number of shares of the Company's
common stock having a market value of twice such price, or, in certain
circumstances, securities of the acquirer, having a then-current market value of
two times the exercise price of the right.
The Rights are redeemable and may be amended at the Company's option before they
become exercisable. Until a Right is exercised, the holder of a Right has no
rights as a shareholder of the Company. The Rights expire in June 2006.
40 BEAZER HOMES USA
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 11 - EARNINGS PER SHARE
Basic and diluted earnings per share are calculated as follows (in thousands,
except per share amounts):
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------------------------
1998 1997 1996
------------------------------------------
<S> <C> <C> <C>
EARNINGS
Net income ........................... $23,201 $11,189 $18,266
Less: Dividends on
preferred shares ................... 4,000 4,000 4,000
------------------------------------------
Net income applicable to
common shareholders ................ $19,201 $ 7,189 $14,266
------------------------------------------
BASIC:
Net income applicable to
common shareholders ................ $19,201 $ 7,189 $14,266
Weighted average number
of common shares outstanding ....... 5,864 6,088 6,375
Basic earnings per share ............. $ 3.27 $ 1.18 $ 2.24
DILUTED:
Net income applicable to
common shareholders ................ $19,201 $ 7,189 $14,266
Plus: Dividends on
preferred shares ................... 4,000 n/a 4,000
------------------------------------------
Net income applicable to
common shareholders ................ $23,201 $ 7,189 $18,266
------------------------------------------
Weighted average number
of common shares outstanding ....... 5,864 6,088 6,375
Effect of dilutive securities -
Assumed conversion
of preferred shares ................ 2,625 n/a 2,625
Restricted stock ................... 163 142 99
Options to acquire
common stock ....................... 79 44 1
------------------------------------------
Diluted weighted average
number of common
shares outstanding ................. 8,731 6,274 9,100
------------------------------------------
Diluted earnings per share ........... $ 2.66 $ 1.15 $ 2.01
</TABLE>
The computation of diluted earnings per share for the year ended September 30,
1997 excludes the assumed conversion of 2.0 million shares of the Company's
Series A Cumulative Convertible Exchangeable Preferred Stock into 2.6 million
shares of common stock at the conversion price of $19.05 since the effect of
such conversion is antidilutive for this period. Options to purchase 228,500 and
306,000 shares of common stock were not included in the computation of diluted
EPS for the years ending September 30, 1997 and 1996, respectively, because the
options' exercise price was greater than the average market price of the common
shares during those years.
NOTE 12 - RETIREMENT PLAN AND INCENTIVE AWARDS
401(k) RETIREMENT PLAN - The Company sponsors a 401(k) Retirement Savings and
Investment Plan (the "Plan"). Substantially all employees are eligible for
participation in the Plan after completing six months of service with the
Company. Participants may defer and contribute to the Plan from 1% to 17% of
their salary with certain limitations on highly compensated individuals. The
Company matches 50% of the first 6% of the participant's contributions. The
participant's contributions vest 100% immediately, while the Company's
contributions vest after five years. The Company's total contributions for the
years ended September 30, 1998, 1997 and 1996 were approximately $876,000,
$620,000 and $587,000, respectively.
STOCK OPTION AWARDS - The Company has issued several stock option awards to
officers, key employees and non-employee directors under its 1994 Stock
Incentive Plan and to non-employee directors pursuant to the Company's
Non-Employee Director Stock Option Plan. Stock options are generally exercisable
at the fair market value of the Company's common stock on the grant date and may
be exercised between three to 10 years from the date such options are granted.
BEAZER HOMES USA 41
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Information regarding activity under the Company's stock option plans is
summarized as follows:
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------------------------------------------
1998 1997 1996
-------------------------------------------------------------------
Wtd Avg Wtd Avg Wtd Avg
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at beginning of year ........................ 560,500 $ 17.57 346,000 $ 16.07 352,000 $ 15.90
Granted ......................................................... 248,000 20.19 214,500 20.06 42,000 17.72
Forfeited ....................................................... (48,000) 16.09
-------------------------------------------------------------------
Options outstanding at end of year .............................. 808,500 $ 17.81 560,500 $ 17.57 346,000 $ 16.07
-------------------------------------------------------------------
Options exercisable at end of year .............................. 312,000 $ 15.90 165,000 $ 17.50 -- --
-------------------------------------------------------------------
Weighted average fair value of options granted during the year .. $ 8.53 $ 10.17 $ 9.09
-------------------------------------------------------------------
</TABLE>
The Company applies Accounting Principle Board Option No. 25 in accounting for
its stock option plans and, accordingly, no compensation cost has been
recognized for stock options in the accompanying financial statements. SFAS 123
requires disclosure of pro forma net earnings and pro forma net earnings per
share as if the fair value based method had been applied in measuring
compensation expense for awards granted since 1996. Reported and such pro forma
net earnings (in thousands) and net income per share amounts are set forth
below:
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------------------
1998 1997 1996
--------------------------------------------
<S> <C> <C> <C>
REPORTED:
Net income ............... $ 23,201 $ 11,189 $ 18,266
Basic net income per share $ 3.27 $ 1.18 $ 2.24
Diluted net income
per share .............. $ 2.66 $ 1.15 $ 2.01
Pro forma:
Net income ............... $ 22,733 $ 11,137 $ 18,266
Basic net income per share $ 3.19 $ 1.17 $ 2.24
Diluted net income
per share .............. $ 2.60 $ 1.14 $ 2.01
</TABLE>
The fair values of the options granted were estimated on the date of their grant
using the Black-Scholes option pricing model based on the following weighted
average assumptions:
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------------
1998 1997 1996
----------------------------------------
<S> <C> <C> <C>
Expected volatility ........ 29.7% 39.3% 42.4%
Expected dividend yield .... NONE none none
Risk-free interest rate .... 5.3% 6.1% 6.0%
Expected life (in years) ... 6.5 6.5 6.5
</TABLE>
The 808,500 stock options outstanding at September 30, 1998 have exercise prices
ranging from $13.375 to $20.1875, with a weighted average remaining contractual
life of 8.3 years.
OTHER STOCK AWARDS - The Company has made several restricted stock awards to
officers and key employees under the 1994 Stock Incentive Plan. All restricted
stock is awarded in the name of each participant, who has all the rights of
other common stockholders subject to restrictions and forfeiture provisions
which lapse over time.
42 BEAZER HOMES USA
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Restricted Stock is included in common stock outstanding when awarded and
included in basic weighted average shares outstanding when vested. Compensation
expense recognized for such awards total $611,000, $323,000 and $257,000 for the
years ended September 30, 1998, 1997 and 1996, respectively.
Activity relating to such restricted stock awards is summarized as follows:
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------------------
1998 1997 1996
----------------------------------------------
<S> <C> <C> <C>
Restricted shares,
beginning of period ......... 186,500 170,500 171,750
Shares awarded ................ 238,000 16,000 33,000
Shares forfeited .............. (34,250)
Shares vested ................. (52,876)
----------------------------------------------
Restricted shares, end of period 371,624 186,500 170,500
----------------------------------------------
</TABLE>
During 1998, the Company extended its incentive compensation plan (called the
Value Created Incentive Plan), modeled under the concepts of economic profit or
economic value added, to all key operating managers within the organization.
Participants may receive a portion of their earned incentive compensation under
the plan in Company common stock (the "Bonus Restricted Stock"). Such shares are
issued after a three-year vesting period at a discount to the stock's market
value at the time the bonus is earned. Should the employee terminate for any
reason during the vesting period, this portion of the incentive compensation is
settled in cash. The Company had 118,408, 69,689 and 67,918 shares of Bonus
Restricted Stock issuable as of September 30, 1998, 1997 and 1996, respectively.
At September 30, 1998, the Company has reserved 1,265,599 shares of common stock
for issuance under its various stock incentive plans and has 109,401 shares
available for future grants.
NOTE 13 - CONTINGENCIES
The Company had outstanding letters of credit and performance bonds of
approximately $10.9 and $68.6 million, respectively, at September 30, 1998
related principally to its obligations to local governments to construct roads
and other improvements in various developments. The Company does not believe
that any such letters of credit or bonds are likely to be drawn upon.
The Company is a defendant or plaintiff in various legal actions which have
arisen in the normal course of business. In the opinion of management, the
ultimate resolution of these matters will not have a material adverse effect on
the Company's financial position, results of operations or cash flows.
NOTE 14 - SUBSEQUENT EVENTS
In October 1998, the Company acquired the assets of Snow Construction, Inc. in
Orlando, Florida for approximately $1.8 million. On December 4, 1998, the
Company acquired the assets of the homebuilding operations of Trafalgar House
Property, Inc. for a purchase price of approximately $90 million. The Company
funded this acquisition with borrowings under the New Credit Facility.
BEAZER HOMES USA 43
<PAGE>
QUARTERLY DATA
QUARTERLY FINANCIAL DATA:
Summarized quarterly financial information (unaudited) (in thousands, except
per share data)
<TABLE>
<CAPTION>
QUARTER ENDED SEPTEMBER 30 JUNE 30 MARCH 31 DECEMBER 31
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FISCAL 1998:
Total revenue ..................... $ 365,649 $ 234,811 $ 221,323 $ 155,626
Operating income .................. 19,158 8,814 6,135 2,808
Net income ........................ 11,956 5,621 3,805 1,819
Net income per common share:
Basic ........................... $ 1.86 $ 0.79 $ 0.48 $ 0.14
Diluted ......................... $ 1.37 $ 0.67 $ 0.44 $ 0.14
------------------------------------------------------------------------
FISCAL 1997:
Total revenue ..................... $ 317,273 $ 195,991 $ 177,762 $ 161,083
Operating income (loss) ........... 12,147 5,438 (4,133) 4,199
Net income (loss) ................. 7,537 3,434 (2,460) 2,677
Net income (loss) per common share:
Basic ........................... $ 1.12 $ 0.41 $ (0.55) $ 0.27
Diluted ......................... $ 0.87 $ 0.40 $ (0.55) $ 0.26
------------------------------------------------------------------------
FISCAL 1996:
Total revenue ..................... $ 294,828 $ 217,065 $ 196,505 $ 158,230
Operating income .................. 11,228 7,979 6,084 4,833
Net income ........................ 6,888 4,817 3,663 2,900
Net income per common share:
Basic ........................... $ 0.92 $ 0.60 $ 0.42 $ 0.30
Diluted ......................... $ 0.76 $ 0.53 $ 0.40 $ 0.29
------------------------------------------------------------------------
</TABLE>
QUARTERLY STOCK PRICE INFORMATION:
<TABLE>
<CAPTION>
HIGH LOW
------------------------------------
<S> <C> <C>
1998 PERIOD:
July 1, 1998 through September 30, 1998 ... $ 26.875 $ 20.125
April 1, 1998 through June 30, 1998 ....... $ 27.125 $ 21.00
January 1, 1998 through March 31, 1998 .... $ 26.00 $ 19.875
October 1, 1997 through December 31, 1997 . $ 20.00 $ 17.6875
------------------------------------
1997 PERIOD:
July 1, 1997 through September 30, 1997 ... $ 20.4375 $ 16.00
April 1, 1997 through June 30, 1997 ....... $ 17.25 $ 12.75
January 1, 1997 through March 31, 1997 .... $ 18.50 $ 14.75
October 1, 1996 through December 31, 1996 . $ 18.50 $ 13.75
------------------------------------
</TABLE>
44 BEAZER HOMES USA
<PAGE>
SELECTED FINANCIAL AND OPERATING DATA: 1992-1998
<TABLE>
<CAPTION>
TEN MONTHS
(dollars in thousands, except per share data) ENDED
Year Ended September 30, SEPTEMBER 30,
--------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993 1992(ii)
--------------------------------------------------------------------------------------------
FINANCIAL DATA
STATEMENT OF OPERATIONS DATA
<S> <C> <C> <C> <C> <C> <C> <C>
Total revenue ......................... $977,409 $852,110 $866,627 $647,828 $536,526 $275,054 $111,429
Earnings before interest
and taxes("EBIT") ................... $ 56,525 $ 33,051 $ 45,327 $ 32,188 $ 37,169 $ 22,713 $ 8,595
Net income ............................ $ 23,201 $ 11,189 $ 18,266 $ 11,352 $ 16,468 $ 16,046 $ 6,415
Net income per common share:
Basic ............................... $ 3.27 $ 1.18 $ 2.24 $ 1.26 $ 1.78(i) n/m n/m
Diluted ............................. $ 2.66 $ 1.15 $ 2.01 $ 1.23 $ 1.76(i) n/m n/m
BALANCE SHEET DATA AT YEAR END
Total assets .......................... $525,591 $399,595 $356,643 $345,240 $314,941 $245,349 $ 65,964
Total debt ............................ $215,000 $145,000 $115,000 $115,000 $115,000 $119,925 $ 11
Stockholders' equity .................. $199,224 $179,286 $178,701 $164,544 $150,406 $ 95,595 $ 58,816
RETURN DATA (i)
Return on average assets .............. 12.2% 8.7% 12.9% 9.8% 13.3% 14.6% n/m
Return on average capital ............. 15.3% 10.7% 15.8% 11.8% 15.5% 20.8% n/m
Return on average equity .............. 12.3% 6.3% 10.6% 7.2% 13.4% 16.6% n/m
OPERATING DATA
NUMBER OF NEW ORDERS,
NET OF CANCELLATIONS
Southeast region ...................... 2,888 1,969 2,048 2,083 1,726 1,392 1,263
Southwest region ...................... 3,245 2,817 3,172 2,660 1,902 1,071 5
Central region ........................ 749 765 401 98 -- -- --
New Jersey ............................ -- -- -- -- 48 80 --
--------------------------------------------------------------------------------------------
Total ................................. 6,882 5,551 5,621 4,841 3,676 2,543 1,268
--------------------------------------------------------------------------------------------
BACKLOG AT END OF PERIOD
Southeast region ...................... 996 505 580 708 478 437 357
Southwest region ...................... 743 479 680 722 506 677 5
Central region ........................ 318 208 166 53 -- -- --
New Jersey ............................ -- -- -- 1 3 74 --
--------------------------------------------------------------------------------------------
Total ................................. 2,057 1,192 1,426 1,484 987 1,188 362
--------------------------------------------------------------------------------------------
NUMBER OF CLOSINGS
Southeast region ...................... 2,493 2,044 2,212 1,853 1,734 1,312 1,182
Southwest region ...................... 2,981 3,018 3,343 2,444 2,073 775 --
Central region ........................ 639 723 379 64 -- -- --
New Jersey ............................ -- -- 1 2 119 6 --
--------------------------------------------------------------------------------------------
Total ................................. 6,113 5,785 5,935 4,363 3,926 2,093 1,182
--------------------------------------------------------------------------------------------
AVERAGE SALES PRICE PER
HOME CLOSED ........................... $ 156.4 $ 146.8 $ 145.8 $ 148.5 $ 136.7 $ 131.4 $ 108.0
--------------------------------------------------------------------------------------------
<FN>
n/m Not meaningful
(i) See definitions on page 1 for return data and page 19 for 1994 EPS data.
(ii) Periods presented are those periods subsequent to the acquisition of Beazer
PLC (the Company's former parent) by Hanson PLC in December 1991.
</FN>
</TABLE>
BEAZER HOMES USA 45
<PAGE>
NOTE REGARDING FORWARD-LOOKING STATEMENTS
CAUTIONARY STATEMENT PURSUANT TO SAFE HARBOR PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
Certain of the statements contained in this report, including those under
"Outlook," "Financial Condition," and "Year 2000 compliance" constitute
"forward-looking statements" within the meaning of the federal securities laws.
While the Company believes that these statements are accurate, Beazer's business
is dependent upon general economic conditions and are subject to risks and
uncertainties that could cause actual results to differ materially from those
expressed in or implied by such statements. The most significant factors that
could cause actual results to differ materially from those expressed in the
forward-looking statements include, but are not limited to, the following:
o Economic changes nationally or in one of the Company's local markets
o Volatility of mortgage interest rates
o Increased competition in certain of the Company's local markets
o Increased prices for labor, land and raw materials used in the production
of houses
o Increased land development cost on projects under development
o Any delays in reacting to changing consumer preference in home design
o Delays or difficulties in implementing the Company's initiatives to reduce
its production and overhead cost structure
o Delays in land development or home construction resulting from adverse
weather conditions in one of the Company's local markets
46 BEAZER HOMES USA
<PAGE>
OPERATING AND CORPORATE MANAGEMENT
OPERATING MANAGEMENT
<TABLE>
<CAPTION>
YEARS IN YEARS IN
NAME TITLE HOMEBUILDING MARKET
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SOUTHEAST REGION
FLORIDA.................. LEON J. PANITZ, JR. President, Panitz Homes 23 20
CHRISTIN CUPP President, Mid-Florida Division 16 16
DONALD W. KNUTSON President, Orlando Division 12 5
GEORGIA.................. JAMES M. LIGHTFOOT Senior Vice President, Georgia Division 1 1
NORTH AND SOUTH CAROLINA. GARY N. BAUCOM Regional Manager and President, Squires Homes 27 27
NORTH CAROLINA........... SCOTT K. THORSON President, Squires Homes - Charlotte 15 4
ROBERT J. POLANCO President, Squires Homes - Raleigh 21 6
SOUTH CAROLINA........... FRANK FINLAW President, Coastal Carolina Division - Charleston Office 21 6
WILLIAM J. MAZAR President, Coastal Carolina Division - Columbia Office 16 4
TENNESSEE................ H. EDDIE PHILLIPS Regional Manager and President, Phillips Builders 31 31
SOUTHWEST REGION
ARIZONA.................. JOSEPH C. THOMPSON Regional Manager, Arizona Division 24 24
CALIFORNIA............... ANTHONY R. TONSO President, Northern California Division 30 9
GERALD A. GATES President, Southern California Division 26 11
NEVADA................... WARREN D. KIGGINS, JR. President, Nevada Division 26 2
CENTRAL REGION
TEXAS.................... KURT S. WATZEK Regional Manager 21 21
S. RANDOLF ALFORD President, Houston Division 25 25
WILLIAM HAMMERSLEY President, Dallas Division 21 1
MID-ATLANTIC REGION
MARYLAND................. DAVID L. CARNEY President, Trafalgar Maryland Division 20 12
VIRGINIA................. LAURENCE L. CREEMER President, Trafalgar Virginia Division 29 10
NEW JERSEY............... MICHAEL J. NEILL President, Trafalgar New Jersey Division 22 12
-----------------------------------------------------------------------------------------------------
AVERAGE 21 12
-----------------------------------------------------------------------------------------------------
</TABLE>
CORPORATE MANAGEMENT
IAN J. MCCARTHY
President and Chief Executive Officer
DAVID S. WEISS
Executive Vice President and Chief Financial Officer
MICHAEL H. FURLOW
Executive Vice President and Chief Operating Officer
JOHN SKELTON
Senior Vice President, Operations
PETER H. SIMONS
Senior Vice President, Corporate Development
CORY J. BOYDSTON
Vice President, Administration and Treasurer
JENNIFER P. JONES
Vice President, Human Resources
ROBERT M. KAGENSKI
Vice President, Information Systems
DAVID T. ROOT
Vice President, Operating and Safety Services
MICHAEL T. RAND
Vice President, Corporate Controller
BEAZER HOMES USA 47
<PAGE>
BOARD OF DIRECTORS
BRIAN C. BEAZER
Non-Executive Chairman of the Board
Beazer Homes USA, Inc.
Mr. Beazer has served as a non-executive Chairman since March 1994. He began
work in the construction industry in the late 1950s. He served as Chief
Executive Officer of Beazer PLC from 1968 to 1991, and Chairman of that company
from 1983 to 1991. Mr. Beazer is also a Director of Beazer Japan, Ltd., Seal
Mint Ltd., Jade Holdings Pte Ltd., Jade Technologies Singapore Pte Ltd., FSM
Europe B.V., United Pacific Industries Limited and U.S. Industries, Inc.
THOMAS B. HOWARD, JR.
Former Chairman and Chief Executive Officer
Gifford-Hill & Company
Mr. Howard has been Director of the Company since 1995. He held various
positions with Gifford-Hill & Company, a construction and aggregates company,
from 1969 to 1986 and served as its Chairman and Chief Executive Officer from
1986 to 1989. Gifford-Hill & Co. was acquired by Beazer PLC in 1989 and Mr.
Howard served as Chairman and Chief Executive Officer of the successor company
until 1992. During the period 1957 to 1969, Mr. Howard held various positions
with Vulcan Materials Company. Mr. Howard currently serves as a Director of
Lennox International, Inc. and on the Board of Trustees of the Methodist
Hospitals Foundation.
IAN J. MCCARTHY
President and Chief Executive Officer
Beazer Homes USA, Inc.
Mr. McCarthy has served as a Director and Chief Executive Officer since November
1993. Mr. McCarthy served as President of Beazer Homes, Inc. ("BHI") since
October 1992 and as President of Beazer Homes Holdings, Inc. ("BHH") since April
1993. From January 1991 to October 1992, he served as Executive Vice President
of BHI, responsible for all U.S. residential home building operations. During
the period May 1981 to January 1991, Mr. McCarthy was employed in Hong Kong and
Thailand as a Director of Beazer Far East, and from January 1980 to May 1981 was
employed by Kier Limited, a company engaged in the U.K. construction industry.
Mr. McCarthy currently serves as a Director of LADD Furniture, Inc.
GEORGE W. MEFFERD
Former Group Vice President
Fluor Corporation
Mr. Mefferd has served as a Director since March 1994. Beginning in 1986, Mr.
Mefferd served as Group Vice President and a Director of Fluor Corporation, an
engineering and construction company. From 1974 to 1986, Mr. Mefferd held
various positions with Fluor Corporation, an engineering and construction
company, including Senior Vice President - Finance, Treasurer, Group Vice
President and Chief Financial Officer.
D. E. MUNDELL
Chairman
ORIX USA Corporation
Mr. Mundell has served as a Director since March 1994. Mr. Mundell has served as
Chairman of ORIX USA Corporation, a financial services company, since January
1991. During the period 1959 to 1990, Mr. Mundell held various positions within
United States Leasing International, Inc., retiring as Chairman in 1990. He is
also a Director of Varian Associates and Stockton Holding, Ltd.
LARRY T. SOLARI
Chairman and Chief Executive Officer
BSI Holdings, Inc.
Mr. Solari has served as a Director since March 1994. He is currently the
Chairman and CEO of BSI Holdings, Inc. Prior to joining BSI, Mr. Solari was the
Chairman and CEOof Sequentia, Inc., the President of the Building Materials
Group of Domtar, Inc., and the President of the Construction Products Group for
Owens-Corning Fiberglass. Mr. Solari currently is a Director of Pacific Coast
Building Products, Inc., BSI Holdings, Inc. and Therma-Tru, Inc. He has also
been a Director of the Policy Advisory Board of the Harvard Joint Center for
Housing Studies and an Advisory Board Member of the National Home Builders
Association.
DAVID S. WEISS
Executive Vice President and Chief Financial Officer
Beazer Homes USA, Inc.
Mr. Weiss has served as a Director and as Executive Vice President and Chief
Financial Officer since November 1993. Previously he was Assistant Corporate
Controller of Hanson Industries from February 1993. He was Manager of Financial
Reporting for Colgate-Palmolive Company from November 1991 to February 1993 and
was with the firm Deloitte & Touche from 1982 to 1991 at which time he served as
a Senior Audit Manager.
48 BEAZER HOMES USA
<PAGE>
SHAREHOLDER INFORMATION
CORPORATE HEADQUARTERS
Beazer Homes USA, Inc.
5775 Peachtree Dunwoody Road
Suite 200
Atlanta, Georgia 30342
Telephone: (404) 250-3420
GENERAL COUNSEL
Paul, Hastings, Janofsky & Walker LLP
INQUIRIES
Individuals seeking financial data should contact David S. Weiss, Executive Vice
President and Chief Financial Officer or Scott M. McKelvey, Director of External
Reporting and Investor Relations.
Others seeking information about the Company and its operations should contact
Ian J. McCarthy, President and Chief Executive Officer.
FORM 10 - K
Copies of Beazer Homes USA, Inc.'s Annual Report on Form 10-K as filed with the
United States Securities and Exchange Commission will be furnished upon written
request to David S. Weiss, Executive Vice President and Chief Financial Officer.
ANNUAL MEETING
The Annual Shareholders' meeting will be held at 9:00 am EST on February 4, 1999
at The Westin Atlanta North at Perimeter, 7 Concourse Parkway, Atlanta, Georgia
30328.
TRANSFER AGENT
First Chicago Trust Company of New York
525 Washington Boulevard
Jersey City, New Jersey 07303-2536
(201) 324-1225
INDEPENDENT AUDITORS
Deloitte & Touche LLP
TRADING INFORMATION
Beazer Homes USA, Inc. lists its common shares on the New York Stock Exchange,
reading under the symbol BZH, and its preferred shares under the symbol BZH.PrA.
On December 7, 1998, the last reported sales price of Company's Common Stock on
the New York Stock Exchange was $24.625.
OWNERSHIP
On December 7, 1998, Beazer Homes USA, Inc. had approximately 63 shareholders of
record and 6,267,423 shares of Common Stock outstanding.
DUPLICATE MAILINGS
If you are receiving duplicate or unwanted copies of our publications, please
contact the First Chicago Trust Company of New York at the numbers listed or
contact Scott M. McKelvey, Director of External Reporting and Investor
Relations, at Beazer Homes.
Designed and Produced by COLLATERAL COMMUNICATIONS, INC. / Atlanta
BEAZER HOMES USA 49
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VISIT OUR WEB SITE AT WWW.BEAZER.COM
o HOMER o
BEAZER
BEAZER HOMES USA, INC.
5775 PEACHTREE DUNWOODY ROAD
SUITE 200
ATLANTA, GA 30342
(404) 250-3420
