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Item
1.01
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Entry
into a
Material Definitive
Agreement
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On
October 10, 2007, the Company entered into a waiver and amendment of
its $500
million unsecured revolving credit facility (“Credit Facility”), waiving events
of default under the facility arising from the Company’s decision to restate its
financial statements. Under the amendment, the Company’s obligations
under the Credit Facility will be secured by assets that make up a borrowing
base as well as substantially all of the Company’s unencumbered personal
property. The borrowing base is expected to initially be comprised of
approximately $108 million in cash, for the purpose of collateralizing
the
outstanding letters of credit. The Company is permitted to grow the
borrowing base by adding additional cash and/or real estate to the collateral
securing the Credit Facility. Subject to certain conditions, the
Company will be permitted to obtain a release of liens on cash securing
the
facility if it substitutes real estate into the borrowing base, subject
to
agreed upon advance rates on such real estate. In addition, the
Company obtained additional flexibility with respect to its financial
covenants
in the Credit Facility. The Company currently has sufficient real
property that, if added to the collateral pool, would allow it to fully
access
the total $500 million commitment under the Credit Facility.
The
Company amended its financial covenants to provide that (i) the Company
will
maintain a minimum consolidated tangible net worth (as defined in the
Credit
Facility) of $900 million, increasing by 50% of net income in future
periods and
50% of net proceeds from equity issuances, (ii) the Company will maintain
an
interest coverage ratio (as defined in the Credit Facility) of not less
than 1.0
to 1.0 for the quarter ending September 30, 2007, 0.5 to 1.0 for the
quarter
ending December 31, 2007, 0.25 to 1.0 for the next four quarters
ending on or prior to December 31, 2008, 0.5 to 1.0 for the next two
quarters
ending June 30, 2009, 0.75 to 1.0 for the quarter ending September 30,
2009, 1.0
to 1.0 for the quarter ending December 31, 2009, 1.25 to 1.0 for the
quarter
ending March 31, 2010, 1.5 to 1.0 for the quarter ending June 30, 2010
and 1.75
to 1.0 for each quarter thereafter, and (iii) at any time that the interest
coverage ratio is less than 1.75 to 1.0 and the ratio of adjusted cash
flow from
operations to interest incurred on a trailing four-quarter basis (as
defined in
the Credit Facility) is less than 1.75 to 1.0, the Company is required
to
maintain unrestricted cash not included in the borrowing base calculation,
together with borrowing base availability (as those terms are defined
in the
Credit Facility) of at least $120 million.
Borrowings
shall be priced off of a pricing grid based on the leverage ratio (as
defined in
the Credit Facility). Pricing at the time of closing of the amendment
and waiver will be LIBOR plus 350 basis points.
The
Credit Facility matures in 2011.
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Item
2.02
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Results
of Operations and Financial
Condition
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For
the
quarter ended September 30, 2007, the Company’s preliminary home closings
totaled 3,940, a 39% decline from the same period in the prior fiscal
year. Preliminary net new home orders totaled 990, a decline of 52%
from the prior fiscal year, driven largely by an unusually high cancellation
rate (68%), which the Company attributes in large part to the pronounced
tightening in the mortgage markets in August and September.
At
September 30, 2007, the Company had cash on hand in excess of $400
million. Subsequently, the Company has repaid approximately $75
million in secured debt and intends to pledge $108 million to collateralize
its
outstanding letters of credit.
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Item4.02a
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Non-Reliance
on Previously Issued Financial Statements or a Related Audit
Report of
Completed Interim Report
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On
October 5, 2007, the Audit Committee of Beazer Homes’ Board of Directors
reported to the entire Board of Directors its interim findings from its
independent internal investigation into the Company’s mortgage origination
business and certain accounting and financial reporting matters.
The
independent internal investigation has identified to date the following
accounting matters:
Accounting
for Reserves and Other Accrued Liabilities
During
the course of the internal investigation, and as previously disclosed,
the Audit
Committee discovered that reserves and other accrued liabilities,
relating primarily to land development costs and costs to complete on
closed
homes were recorded in prior accounting periods in excess of amounts
that would
have been appropriate under generally accepted accounting principles
(“GAAP”). In essence, the investigation uncovered the accumulation of
reserves and other accrued liabilities in the earlier periods affected
by the
restatement that were partially and improperly released into income during
fiscal 2006. The Company believes the cumulative impact for
correcting these matters over all periods affected by the restatement
will be to
increase pre-tax income by more than $25 million. However, the
restatement for these matters is expected to reduce pre-tax income for
the
Company's 2006 fiscal year by approximately $20 million.
Model
Home Sale-Leaseback Accounting
During
the course of the internal investigation the Company also identified
the
existence of a continuing interest in the potential appreciation of model
homes
sold in certain sale-leaseback transactions to investors. Due to this
continuing interest, these model home transactions did not qualify for
sale-leaseback accounting, and, instead, should have been accounted for
as
financing transactions in accordance with GAAP. The Company has no
negative economic exposure to the eventual sales prices of the model
homes when
sold by the investors. Therefore, the
restatement
of these transactions will primarily relate to timing differences that
will have
the effect of shifting revenue and income from fiscal year 2006 into
future
periods. Through June 30, 2007, pretax income is expected to be reduced
by
approximately $20 million, with a corresponding increase in future
periods.
As
a
result of these matters, the Audit Committee has determined that it will
be
necessary for the Company to restate its consolidated financial statements
relating to fiscal years 2004 through 2006 contained in our annual report
on
Form 10-K and the condensed consolidated financial statements presented
in
quarterly reports on Form 10-Q for the interim periods of fiscal 2006
and fiscal
2007 (collectively the “restatement period”). The Company expects to report a
cumulative effect adjustment in the restated consolidated financial statements
in consideration of these matters from fiscal years 1999 through
2003. The restatement will not cause an adjustment to the Company’s
current cash position. The estimated adjustments described above
remain subject to review by the Company's management, its Audit Committee
and
the Company's independent registered public accounting firm as part of
its audit
of the Company's consolidated financial statements, and, as a result,
there can
be no assurance that the final adjustments that are made as part of the
restatement will not differ materially from these estimates.
Until
the
internal investigation is completed and the restatement is finalized,
the
Company is unable to quantify precisely the impact of the restatement
on its
previously issued financial statements. As a result of the Audit
Committee’s findings, the Audit Committee determined on October 5, 2007 that the
Company’s previously issued financial statements for the periods impacted by
the
restatement as described above and the related audit reports of the Company’s
independent registered public accounting firm should no longer be relied
upon. Furthermore, the impact of these matters on the Company's
internal control over financial reporting and disclosure controls and
procedures
is being evaluated.
The
Company is working expeditiously to complete the restatements as soon
as
practical. Management and the Audit Committee have discussed the
matters disclosed within this Item 4.02a with the Company’s independent
registered public accounting firm.
As
previously disclosed, the Audit Committee of the Company’s Board of Directors
has been conducting an independent internal investigation of the Company’s
mortgage origination business since April 2007. The Audit Committee
retained Alston & Bird LLP as its independent legal counsel which, in turn,
retained Navigant Consulting, Inc. as independent forensic accountants,
to
assist with the internal investigation. The internal investigation
was conducted across the Company’s operations and the findings, in addition to
the accounting matters previously disclosed in Item 4.02a are summarized
as
follows:
Mortgage
Origination
The
internal investigation found evidence that employees of the Company’s Beazer
Mortgage Corporation subsidiary violated certain U.S. Department of Housing
and
Urban Development (“HUD”) regulations, particularly in relation to Down Payment
Assistance programs, in certain Federal Housing Administration (“FHA”) insured
loans originated by Beazer Mortgage Corporation dating back to at least
2000. As discussed below, due to several uncertainties regarding the
Company’s ultimate liability from these matters, at this time it is not possible
for the Company to determine the total financial statement impact related
to the
mortgage issues identified in the internal investigation.
The
Company’s potential future liability relates, in part, to the impact of
providing reimbursement of losses arising from mortgage defaults in
circumstances in which the Company’s FHA-insured mortgage origination activities
would have violated standard representations made to mortgage
purchasers. In the event of fraud or certain misrepresentations at
the time of the sale of such FHA-insured loans, the Company may be liable
for
losses suffered either by the mortgage purchaser, or HUD if any payment
was made
pursuant to an FHA loan guarantee. The factors influencing the extent
of such potential future liability include, among other things, the number
of
FHA-insured loans originated by Beazer Mortgage Corporation, the percentage
of
such loans in which misrepresentations or fraud may have occurred, and
the
default rate, principal amount and losses associated with such
loans.
The
Company intends to attempt to negotiate a settlement with regulatory
authorities
that would allow the Company to quantify its exposure associated with
reimbursement of losses and payment of regulatory fines, if they are
imposed. Based on an analysis of the factors described above and
available precedents, the Company currently believes that an aggregate
settlement with regulatory authorities in a range of $8 - $15 million
may be
attainable. However, no settlement has been reached with any regulatory
authority at this time and there can be no assurance that any such settlement,
if reached, will be within this range. The Company is also potentially
liable
for damages, costs and expenses related to potential civil litigation
involving
FHA-insured loans that cannot be quantified at this time.
Ongoing
External Investigations
As
previously disclosed, the Company and its subsidiary, Beazer Mortgage
Corporation, received a subpoena from the United States Attorney’s Office in the
Western District of North Carolina seeking the production of documents
focusing
on our mortgage origination services. In addition, the Company received
from the
Securities and Exchange Commission (“SEC”) a formal order of private
investigation to determine whether the Company and/or other persons or
entities
involved with the Company have violated federal securities laws, including,
among others, the anti-fraud, books and records, internal accounting
controls,
periodic reporting and certification provisions thereof.
Other
In
addition, the Company has prepaid approximately $75 million in secured
debt and
received waivers under its two other secured credit facilities.
Item
9.01 Financial
Statements and Exhibits
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10.1
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Waiver
and First Amendment, dated as of October 10, 2007, to and under
the Credit
Agreement, dated as of July 25, 2007, among Beazer Homes USA,
Inc., the
lenders parties thereto and Wachovia Bank, National Association,
as
Agent.
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99.1
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Press
Release issued October 11, 2007.
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