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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
     
(Mark One)    
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the fiscal year ended September 30, 2010
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Commission file number: 001-12822
 
BEAZER HOMES USA, INC.
(Exact name of Registrant as specified in its charter)
 
     
Delaware   58-2086934
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
 
1000 Abernathy Road, Suite 1200, Atlanta, Georgia 30328
(Address of principal executive offices) (Zip code)
 
(770) 829-3700
(Registrant’s telephone number including area code)
 
Securities registered pursuant to Section 12(b) of the Act:
 
     
Title of Securities
 
Exchanges on Which Registered
 
Common Stock, $.001 par value per share
  New York Stock Exchange
 
Securities registered pursuant to Section 12(g) of the Act:
None
 
Indicate by check mark if the registrant is a well-known seasoned issuer (as defined in Rule 405 of the Securities Act)  Yes o     No þ
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o     No þ
 
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 þ     No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o     No o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  þ
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
             
Large accelerated filer o
       Accelerated filer þ   Non-accelerated filer o   Smaller reporting company o
    (Do not check if a smaller reporting company)     
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o     No þ
 
The aggregate market value of the registrant’s Common Stock held by non-affiliates of the registrant (62,188,862 shares) as of March 31, 2010, based on the closing sale price per share as reported by the New York Stock Exchange on such date, was $282,337,433.
 
The number of shares outstanding of the registrant’s Common Stock as of November 3, 2010 was 75,669,381.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
         
    Part of 10-K
    Where Incorporated
 
Portions of the registrant’s Proxy Statement for the 2010 Annual Meeting of Stockholders
    III  
 


 

 
BEAZER HOMES USA, INC.
 
FORM 10-K
 
INDEX
 
             
        Page
        Number
 
Introduction
       
    Forward-Looking Statements     3  
 
PART I.
  Business     5  
  Risk Factors     16  
  Unresolved Staff Comments     25  
  Properties     25  
  Legal Proceedings     25  
  Submission of Matters to a Vote of Security Holders     27  
 
PART II.
  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities     27  
  Selected Financial Data     29  
  Management’s Discussion and Analysis of Financial Condition and Results of Operations     31  
  Quantitative and Qualitative Disclosures About Market Risk     50  
  Financial Statements and Supplementary Data     51  
  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure     100  
  Controls and Procedures     100  
  Other Information     101  
 
PART III.
  Directors, Executive Officers and Corporate Governance     102  
  Executive Compensation     103  
  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters     103  
  Certain Relationships and Related Transactions, and Director Independence     103  
  Principal Accountant Fees and Services     103  
 
PART IV.
  Exhibits and Financial Statement Schedules     103  
    109  
 EX-3.3
 EX-4.23
 EX-10.19
 EX-21
 EX-23
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2


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References to “we,” “us,” “our,” “Beazer,” “Beazer Homes,” and the “Company” in this annual report on Form 10-K refer to Beazer Homes USA, Inc.
 
FORWARD-LOOKING STATEMENTS
 
This Annual Report on Form 10-K contains forward-looking statements. These forward-looking statements represent our expectations or beliefs concerning future events, and it is possible that the results described in this annual report will not be achieved. These forward-looking statements can generally be identified by the use of statements that include words such as “estimate,” “project,” “believe,” “expect,” “anticipate,” “intend,” “plan,” “foresee,” “likely,” “will,” “goal,” “target” or other similar words or phrases. All forward-looking statements are based upon information available to us on the date of this annual report.
 
These forward-looking statements are subject to risks, uncertainties and other factors, many of which are outside of our control, that could cause actual results to differ materially from the results discussed in the forward-looking statements, including, among other things, the matters discussed in this annual report in the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Additional information about factors that could lead to material changes in performance is contained in Part I, Item 1A− Risk Factors. Such factors may include:
 
  •  the final outcome of various putative class action lawsuits, multi-party suits and similar proceedings as well as the results of any other litigation or government proceedings and fulfillment of the obligations in the Deferred Prosecution Agreement and consent orders with governmental authorities and other settlement agreements;
 
  •  additional asset impairment charges or writedowns;
 
  •  economic changes nationally or in local markets, including changes in consumer confidence, declines in employment levels, volatility of mortgage interest rates and inflation;
 
  •  continued or increased downturn in the homebuilding industry;
 
  •  estimates related to homes to be delivered in the future (backlog) are imprecise as they are subject to various cancellation risks which cannot be fully controlled;
 
  •  continued or increased disruption in the availability of mortgage financing or number of foreclosures in the market;
 
  •  our cost of and ability to access capital and otherwise meet our ongoing liquidity needs including the impact of any downgrades of our credit ratings or reductions in our tangible net worth or liquidity levels;
 
  •  potential inability to comply with covenants in our debt agreements or satisfy such obligations through repayment or refinancing;
 
  •  increased competition or delays in reacting to changing consumer preference in home design;
 
  •  shortages of or increased prices for labor, land or raw materials used in housing production;
 
  •  factors affecting margins such as decreased land values underlying land option agreements, increased land development costs on communities under development or delays or difficulties in implementing initiatives to reduce production and overhead cost structure;
 
  •  the performance of our joint ventures and our joint venture partners;
 
  •  the impact of construction defect and home warranty claims including those related to possible installation of drywall imported from China;
 
  •  the cost and availability of insurance and surety bonds;
 
  •  delays in land development or home construction resulting from adverse weather conditions;


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  •  potential delays or increased costs in obtaining necessary permits as a result of changes to, or complying with, laws, regulations, or governmental policies and possible penalties for failure to comply with such laws, regulations and governmental policies;
 
  •  effects of changes in accounting policies, standards, guidelines or principles; or
 
  •  terrorist acts, acts of war and other factors over which the Company has little or no control.
 
Any forward-looking statement speaks only as of the date on which such statement is made, and, except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time and it is not possible for management to predict all such factors.


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PART I
 
Item 1.   Business
 
We are a geographically diversified homebuilder with active operations in 15 states. Our homes are designed to appeal to homeowners at various price points across various demographic segments and are generally offered for sale in advance of their construction. Our objective is to provide our customers with homes that incorporate exceptional value and quality while seeking to maximize our return on invested capital over time.
 
Our principal executive offices are located at 1000 Abernathy Road, Suite 1200, Atlanta, Georgia 30328, telephone (770) 829-3700. We also provide information about our active communities through our Internet website located at http://www.beazer.com. Information on our website is not a part of and shall not be deemed incorporated by reference in this report.
 
Industry Overview and Current Market Conditions
 
The sale of new homes has been and will likely remain a large industry in the United States for four primary reasons: historical growth in both population and households, demographic patterns that indicate an increased likelihood of home ownership as age and income increase, job creation within geographic markets that necessitate new home construction and consumer demand for home features that can be more easily provided in a new home than an existing home.
 
In any year, the demand for new homes is closely tied to job growth, the availability and cost of mortgage financing, the supply of new and existing homes for sale and, importantly, consumer confidence. Consumer confidence is perhaps the most important of these demand variables and is the hardest one to predict accurately because it is a function of, among other things, consumers’ views of their employment and income prospects, recent and likely future home price trends, localized new and existing home inventory, the level of current and near-term interest and mortgage rates, the availability of consumer credit, valuations in stock and bond markets, and other geopolitical factors. Moreover, because the purchase of a home represents many buyers’ largest single financial commitment, it is often also associated with significant emotional considerations.
 
The supply of new homes within specific geographic markets consists of both new homes built pursuant to pre-sale arrangements and speculative homes (frequently referred to as “spec homes”) built by home builders prior to their sale. The ratio of pre-sold to spec homes differs both by geographic market and over time within individual markets based on a wide variety of factors, including the availability of land and lots, access to construction financing, the availability and cost of construction labor and materials, the inventory of existing homes for sale and job growth characteristics. Consumer preferences also play a role. In rapidly growing markets characterized by relatively few available new homes, presale homes are very common. In markets characterized by a significant supply of newly built and existing homes, spec homes tend to represent a larger portion of new home sales as builders attempt to reduce their inventories of completed homes.
 
In general, high levels of employment, low mortgage interest rates and low new home and resale inventories contribute to a strong and growing homebuilding market environment. Conversely, rising or continued high levels of unemployment, higher interest rates and larger new and existing home inventories generally lead to weak industry conditions.
 
While we believe that long-term fundamentals for new home construction remain intact, the homebuilding environment has suffered extensively during the recession of the past several years. Beginning in mid-fiscal 2006 and continuing into fiscal 2010, the homebuilding environment deteriorated against a backdrop of macroeconomic recession, declining consumer confidence and significant tightening in the availability of home mortgage credit. Throughout this period, most housing markets across the United States suffered from an oversupply of new and resale home inventory, reduced levels of consumer demand for new homes, high cancellation rates, aggressive home sale price and buyer incentive competition among homebuilders, and a growing supply of foreclosed homes typically offered at substantially reduced prices. In addition, due initially to market disruptions resulting from the deterioration in the credit quality of loans originated to non-prime and subprime borrowers and also due to steadily increasing unemployment, the credit markets and the mortgage industry experienced a period of disruption


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characterized by bankruptcy, financial institution failure, consolidation and an unprecedented level of intervention by the United States federal government. This mortgage crisis led to reduced availability for mortgage products and reduced investor demand for mortgage loans and mortgage-backed securities. These developments severely impacted consumer confidence and demand for our homes. Although we have recently begun to see signs that certain of these negative market trends may be moderating at both local and national levels, key macroeconomic indicators remain soft or mixed. The supply of new and resale homes in the marketplace has decreased recently, but it is still excessive for the current level of consumer demand and is challenged by an increased number of foreclosed homes offered at substantially reduced prices. These pressures in the marketplace have resulted in the use of increased sales incentives and price reductions in an effort to generate sales and reduce inventory levels by us and many of our competitors.
 
In an effort to provide relief to homebuyers and stabilize the housing industry, the federal government enacted several laws: (1) The Housing and Economic Recovery Act of 2008 (HERA) in July 2008, (2) The Emergency Economic Stabilization Act of 2008 (EESA) in October 2008 and (3) The First Time Homebuyer Tax Credit (FTHBTC) in February 2009.
 
Among other things, HERA provided for a temporary first-time home buyer tax credit for purchases made through July 1, 2009; reforms of Fannie Mae and Freddie Mac, including adjustments to the conforming loan limits; modernization and expansion of the FHA, including an increase to 3.5% in the minimum down payment required for FHA loans; and the elimination of seller-funded down payment assistance programs for FHA loans approved after September 30, 2008. Certain provisions of HERA, such as the elimination of the down payment assistance programs and the increase in minimum down payments, have adversely impacted the ability of potential homebuyers to afford to purchase a new home or obtain financing. The down payment assistance programs were utilized for a number of our home closings prior to fiscal 2009.
 
EESA authorized up to $700 billion in new spending authority for the United States Secretary of the Treasury (the Secretary) to purchase, manage and ultimately dispose of troubled assets. The provisions of this law include an expansion of the Hope for Homeowners Program. This program allows the Secretary to use loan guarantees and credit enhancements so that mortgage loans can be modified to prevent foreclosures. Also, the Secretary can consent to term extensions, rate-reductions and principal write-downs. Federal agencies that own mortgage loans are directed to seek modifications prior to foreclosures.
 
FTHBTC enables homebuyers who have not owned a home in the past three years, subject to certain income limits, to receive a tax credit of 10% of the purchase price of a home up to a maximum of $8,000. In November 2009, this tax credit was extended by Congress to June 2010 and the new law increased the annual income limits for qualification. In addition, the new law also added a $6,500 tax credit for qualified existing homeowners who elect to purchase a new home. Certain states also enacted laws which enabled certain homebuyers to receive additional state tax credits. Availability of these tax credits appears to have incentivized certain homebuyers to purchase homes during the second half of fiscal 2009 and through June 30, 2010 although it is not possible to quantify the precise impact.
 
In spite of these government actions, we, like many other homebuilders, have experienced a material reduction in revenues and margins and have incurred significant net losses in fiscal 2008 through 2010. These net losses were driven primarily by asset impairment and lot option abandonment charges incurred in fiscal 2008, 2009 and 2010. Please see “Management’s Discussion and Analysis of Results of Operations and Financial Condition” for additional information.
 
We have responded to this challenging environment with a disciplined approach to the business with continued reductions in direct construction costs, overhead expenses and land spending. We have entered into an exclusive preferred lender relationship with a national mortgage provider. This exclusive relationship offers our homebuyers the option of a simplified financing process while enabling us to focus on our core competency of homebuilding. We limited our supply of unsold homes under construction and focused on the generation of cash from our existing inventory supply and preservation of cash on hand as we attempted to align our land supply and inventory levels to current expectations for home closings.


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During fiscal 2010, we continued to focus on cash generation from the sale of existing inventory supply as we introduced additional sales incentives and reduced sales prices in certain situations in order to move this inventory. We also reevaluated pricing and incentives offered in select communities in response to local market conditions to generate sales on to-be-built inventory. Certain of these changes resulted in adjustments to our inventory valuations.
 
We continually review each of our markets in order to refine our overall investment strategy and to optimize capital and resource allocations in an effort to enhance our financial position and to increase shareholder value. This review entails an evaluation of both external market factors and our position in each market and over time has resulted in the decision to expand our market presence in certain of our markets and to discontinue homebuilding operations in other markets. As of September 30, 2010, we have substantially concluded our homebuilding operations in Jacksonville, Florida and Albuquerque, New Mexico, but we remain committed to our remaining customer care responsibilities (primarily warranty-related) and will continue to market a limited number of our remaining land positions for sale. While the underlying basis for exiting each market was different, in each instance we concluded we could better serve shareholder interests by re-allocating the capital employed in these markets. The results of operations of all of the homebuilding markets we have exited over the past few years are reported as discontinued operations in our Consolidated Statements of Operations.
 
Long-Term Business Strategy
 
We have developed a long-term business strategy which focuses on the following elements in order to provide a wide range of homebuyers with quality homes while maximizing returns on our invested capital over the course of a housing cycle:
 
Geographic Diversification in Growth Markets.  We compete in a large number of geographically diverse markets in an attempt to reduce our exposure to any particular regional economy. Within these markets, we build homes in a variety of new home communities. We continually review our selection of markets based on both aggregate demographic information and our own operating results. We use the results of these reviews to re-allocate our investments to those markets where we believe we can maximize our profitability and return on capital over the next several years.
 
Differentiated Product.  Our product strategy is to design and build high performance homes that are more enjoyable, more desirable and more affordable. Our eSMART homes are engineered for energy-efficiency, cost savings and comfort. Our eSMART initiative represents a comprehensive program focused on environmental stewardship which seeks to make energy saving, water conservation and improved air quality components standard in all of our homes. These energy efficient homes minimize the impact on the environment while reducing our homebuyers’ annual operating costs. During fiscal 2010, we introduced two additional eSMART options to accelerate the performance of our homes and further increase operating savings to our homebuyers - eSMART Plus and eSMART Green (a certified and tested green home). Through our SMARTDESIGNtm concept, we have adapted our floor plans to make them more livable by arranging spaces to progress logically from public to private areas. We also offer upgrade packages that give our homebuyers the option to personalize their home with built-in closet systems, laundry centers, multi-purpose kitchen islands and more.
 
Diversity of Product Offerings.  Our product strategy further entails addressing the needs of an increasingly diverse profile of home buyers. Within each of our markets we determine the profile of buyers we hope to address and design neighborhoods and homes with the specific needs of those buyers in mind. Depending on the market, we attempt to address one or more of the following types of home buyers: entry-level, move-up or retirement-oriented. Within these buyer groups, we have developed detailed targeted buyer profiles based on demographic and psychographic data including information about their marital and family status, employment, age, affluence, special interests, media consumption and distance moved. Recognizing that our customers want to choose certain components of their new home, we offer limited customization through the use of design studios in most of our markets. These design studios allow the customer to select certain non-structural options for their homes such as cabinetry, flooring, fixtures, appliances and wall coverings.


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Consistent Use of National Brand.  Our homebuilding and marketing activities are conducted under the name of Beazer Homes in each of our markets. We utilize a single brand name across our markets in order to better leverage our national and local marketing activities. Using a single brand has allowed us to execute successful national marketing campaigns and online marketing practices.
 
Operational Scale Efficiencies.  Beyond marketing advantages, we attempt to create both national and local scale efficiencies as a result of the scope of our operations. On a national basis we are able to achieve volume purchasing advantages in certain product categories, share best practices in construction, marketing, planning and design among our markets, respond to telephonic and electronic customer inquiries and leverage our fixed costs in ways that improve profitability. On a local level, while we are not generally the largest builder within our markets, we do attempt to be a major participant within our selected submarkets and targeted buyer profiles. There are further design, construction and cost advantages associated with having strong market positions within particular markets.
 
Balanced Land Policies.  We seek to maximize our return on capital by carefully managing our investment in land. To reduce the risks associated with investments in land, we often use options to control land. We generally do not speculate in land which does not have the benefit of entitlements providing basic development rights to the owner.
 
Reportable Business Segments
 
We design, sell and build single-family and multi-family homes in the following geographic regions which are presented as reportable segments. As of September 30, 2010, we have substantially exited our homebuilding operations in Jacksonville, Florida and Albuquerque, New Mexico. These markets are now reported as discontinued operations in our Consolidated Statements of Operations. As of September 30, 2010, we have sold or discontinued all of our title services operations which were historically included in our Financial Services reportable segment. The historical results of our title services operations are now reported as discontinued operations in our Consolidated Statements of Operations.
 


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Segment/State
  Market(s) / Year Entered
West:
   
Arizona
  Phoenix (1993)
California
  Los Angeles County (1993), Orange County (1993), Riverside and San Bernardino Counties (1993), San Diego County (1992), Ventura County (1993), Sacramento (1993), Kern County (2005)
Nevada
  Las Vegas (1993)
Texas
  Dallas/Ft. Worth (1995), Houston (1995)
East:
   
Indiana
  Indianapolis (2002)
Maryland/Delaware
  Baltimore (1998), Metro-Washington, D.C. (1998), Delaware (2003)
New Jersey/Pennsylvania
  Central and Southern New Jersey (1998), Bucks County, PA (1998)
Tennessee
  Nashville (1987)
Virginia
  Fairfax County (1998), Loudoun County (1998), Prince William County (1998)
Southeast:
   
Florida
  Tampa/St. Petersburg (1996), Orlando (1997), Sarasota (2005), Tallahassee (2006), Panama City (2008)
Georgia
  Atlanta (1985), Savannah (2005)
North Carolina
  Raleigh/Durham (1992)
South Carolina
  Charleston (1987), Myrtle Beach (2002)
 
Seasonal and Quarterly Variability
 
Our homebuilding operating cycle generally reflects higher levels of new home order activity in the second and third fiscal quarters and increased closings in the third and fourth fiscal quarters. However, during periods of an economic downturn in the industry such as we have experienced in recent years, decreased revenues and closings as compared to prior periods including prior quarters, will typically reduce seasonal patterns. Specifically, the expiration of the $8,000 First-time Homebuyer Tax Credit on June 30, 2010 incentivized homebuyers to purchase homes during the first half of fiscal 2010. This resulted in a change to our typical seasonal variations, as we experienced increased closings in our third quarter as compared to our fourth quarter of fiscal 2010.
 
Markets and Product Description
 
We evaluate a number of factors in determining which geographic markets to enter as well as which consumer segments to target with our homebuilding activities. We attempt to anticipate changes in economic and real estate conditions by evaluating such statistical information as the historical and projected growth of the population; the number of new jobs created or projected to be created; the number of housing starts in previous periods; building lot availability and price; housing inventory; level of competition; and home sale absorption rates.
 
We generally seek to differentiate ourselves from our competition in a particular market with respect to customer service, product type, and design and construction quality. We maintain the flexibility to alter our product mix within a given market, depending on market conditions. In determining our product mix, we consider demographic trends, demand for a particular type of product, consumer preferences, margins, timing and the economic strength of the market. Although some of our homes are priced at the upper end of the market, and we offer a selection of amenities and home customization options, we generally do not build “custom homes.” We attempt to maximize efficiency by using standardized design plans whenever possible. In all of our home offerings,

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we attempt to maximize customer satisfaction by incorporating quality and energy-efficient materials, distinctive design features, convenient locations and competitive prices. Specifically, our eSMART homes represent a comprehensive program focused on environmental stewardship which seeks to make energy saving, water conservation and improved air quality components standard in all of our homes. These energy efficient homes minimize the impact on the environment while reducing our homebuyers’ annual operating costs.
 
During fiscal year 2010, the average sales price of our homes closed related to continuing operations was approximately $221,700. The following table summarizes certain operating information of our reportable homebuilding segments and our discontinued homebuilding operations as of and for the years ended September 30, 2010, 2009 and 2008. Please see “Management’s Discussion and Analysis of Results of Operations and Financial Condition” for additional information.
 
                                                 
    2010     2009     2008  
    Number of
    Average
    Number of
    Average
    Number of
    Average
 
    Homes
    Closing
    Homes
    Closing
    Homes
    Closing
 
    Closed     Price     Closed     Price     Closed     Price  
    ($ In 000’s)  
 
West
    1,777     $ 203.0       1,883     $ 216.5       2,688     $ 241.9  
East
    1,729       258.5       1,432       260.8       2,136       287.6  
Southeast
    1,007       191.6       881       212.5       1,546       229.8  
                                                 
Continuing Operations
    4,513     $ 221.7       4,196     $ 230.8       6,370     $ 254.3  
                                                 
Discontinued Operations
    132     $ 212.3       192     $ 242.8       1,322     $ 221.9  
                                                 
 
                                                 
    September 30, 2010     September 30, 2009     September 30, 2008  
    Units in
    Dollar Value
    Units in
    Dollar Value
    Units in
    Dollar Value
 
    Backlog     in Backlog     Backlog     in Backlog     Backlog     in Backlog  
    ($ In 000’s)  
 
West
    269     $ 55,167       431     $ 88,883       521     $ 120,275  
East
    366       102,186       532       143,887       455       125,195  
Southeast
    145       28,800       208       42,520       314       69,874  
                                                 
Continuing Operations
    780     $ 186,153       1,171     $ 275,290       1,290     $ 315,344  
                                                 
Discontinued Operations
    16     $ 2,921       22     $ 5,477       68     $ 16,403  
                                                 
 
Corporate Operations
 
We perform all or most of the following functions at our corporate office:
 
  •  evaluate and select geographic markets;
 
  •  allocate capital resources to particular markets for land acquisitions;
 
  •  maintain and develop relationships with lenders and capital markets to create access to financial resources;
 
  •  plan and design homes and community projects;
 
  •  operate and manage information systems and technology support operations; and
 
  •  monitor the operations of our subsidiaries and divisions.
 
We allocate capital resources necessary for new investments in a manner consistent with our overall business strategy. We will vary the capital allocation based on market conditions, results of operations and other factors. Capital commitments are determined through consultation among selected executive and operational personnel, who play an important role in ensuring that new investments are consistent with our strategy. Centralized financial controls are also maintained through the standardization of accounting and financial policies and procedures.


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Field Operations
 
The development and construction of each new home community is managed by our operating divisions, each of which is generally led by a market leader who, in turn, reports directly to our Chief Executive Officer. At the development stage, a manager (who may be assigned to several communities and reports to the market leader of the division) supervises development of buildable lots. Together with our operating divisions, our field teams are equipped with the skills to complete the functions of identification of land acquisition opportunities, land entitlement, land development, home construction, marketing, sales and warranty service. The accounting, accounts payable, billing and purchasing functions of our field operations are concentrated in three regional accounting centers.
 
Land Acquisition and Development
 
Generally, the land we acquire is purchased only after necessary entitlements have been obtained so that we have the right to begin development or construction as market conditions dictate. During much of the downturn in the homebuilding industry, we made very few significant land acquisitions; however, we have continued to consider attractive opportunities as they arise. We expect to continue to consider land acquisition opportunities as the market improves and particularly in markets where our land bank has been depleted. In a very small number of situations, we will purchase property without all necessary entitlements where we perceive an opportunity to build on such property in a manner consistent with our strategy. The term “entitlements” refers to subdivision approvals, development agreements, tentative maps or recorded plats, depending on the jurisdiction within which the land is located. Entitlements generally give a developer the right to obtain building permits upon compliance with conditions that are usually within the developer’s control. Although entitlements are ordinarily obtained prior to the purchase of land, we are still required to obtain a variety of other governmental approvals and permits during the development process.
 
We select our land for development based upon a variety of factors, including:
 
  •  internal and external demographic and marketing studies;
 
  •  suitability for development during the time period of one to five years from the beginning of the development process to the last closing;
 
  •  financial review as to the feasibility of the proposed project, including profit margins and returns on capital employed;
 
  •  the ability to secure governmental approvals and entitlements;
 
  •  environmental and legal due diligence;
 
  •  competition in the area;
 
  •  proximity to local traffic corridors and amenities; and
 
  •  management’s judgment as to the real estate market and economic trends and our experience in a particular market.
 
We generally purchase land or obtain an option to purchase land, which, in either case, requires certain site improvements prior to construction. Where required, we then undertake or, in the case of land under option, the grantor of the option then undertakes, the development activities (through contractual arrangements with local developers), which include site planning and engineering, as well as constructing road, sewer, water, utilities, drainage and recreational facilities and other amenities. When available in certain markets, we also buy finished lots that are ready for construction.
 
We strive to develop a design and marketing concept for each of our communities, which include determination of size, style and price range of the homes, layout of streets, layout of individual lots and overall community design. The product line offered in a particular new home community depends upon many factors, including the housing generally available in the area, the needs of a particular market and our cost of lots in the new home community. We are, however, often able to use standardized home design plans.


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Option Contracts.  We acquire certain lots by means of option contracts. Option contracts generally require the payment of a cash deposit or issuance of a letter of credit for the right to acquire lots during a specified period of time at a fixed or variable price.
 
Under option contracts, purchase of the properties is contingent upon satisfaction of certain requirements by us and the sellers. Our liability under option contracts is generally limited to forfeiture of the non-refundable deposits, letters of credit and other non-refundable amounts incurred, which aggregated approximately $38.7 million at September 30, 2010. At September 30, 2010, future amounts under option contracts aggregated approximately $221.3 million, net of cash deposits.
 
The following table sets forth, by reportable segment, land controlled by us as of September 30, 2010:
 
                                                                 
    Lots Owned     Total Lots
       
    Homes Under
    Finished
    Lots for Current
    Lots for Future
    Land Held
    Total Lots
    Under
    Total Lots
 
West
  Construction(1)     Lots     Development     Development     for Sale     Owned     Contract     Controlled  
 
Arizona
    129       971       118       650       1       1,869       176       2,045  
California
    136       181       478       3,792       91       4,678       33       4,711  
Nevada
    118       800       659       248             1,825       820       2,645  
Texas
    303       910       993                   2,206       1,117       3,323  
                                                                 
Total West
    686       2,862       2,248       4,690       92       10,578       2,146       12,724  
                                                                 
East
                                                               
Indiana
    193       641       1,471             250       2,555       443       2,998  
Maryland
    247       466       863       806             2,382       60       2,442  
New Jersey
    41       73       457       152             723       376       1,099  
Tennessee
    65       297       1,030                   1,392       275       1,667  
Virginia
    44       73       133                   250       321       571  
                                                                 
Total East
    590       1,550       3,954       958       250       7,302       1,475       8,777  
                                                                 
Southeast
                                                               
Georgia
    8       127       105       88             328       84       412  
Florida
    164       536       1,076       308       30       2,114       1,036       3,150  
North Carolina
    47       194       151       21             413       62       475  
South Carolina
    104       812       685       80             1,681       1,017       2,698  
                                                                 
Total Southeast
    323       1,669       2,017       497       30       4,536       2,199       6,735  
                                                                 
Discontinued Operations
    34                         726       760             760  
                                                                 
Total
    1,633       6,081       8,219       6,145       1,098       23,176       5,820       28,996  
                                                                 
 
 
(1) The category “Homes Under Construction” represents lots upon which construction of a home has commenced.
 
The following table sets forth, by reportable segment, land held for development, land held for future development and land held for sale as of September 30, 2010 (in thousands):
 
                         
          Land Held for
       
    Land Held for
    Future
    Land Held
 
    Development     Development     for Sale  
 
West
  $ 173,404     $ 311,472     $ 5,273  
East
    172,519       47,381       1,376  
Southeast
    98,139       24,036        
Discontinued Operations
                29,610  
                         
Total
  $ 444,062     $ 382,889     $ 36,259  
                         
 
Joint Ventures.  We participate in land development joint ventures in which Beazer Homes has less than a controlling interest. We enter into joint ventures in order to acquire attractive land positions, to manage our risk profile and to leverage our capital base. Our joint ventures are typically entered into with developers, other


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homebuilders and financial partners to develop finished lots for sale to the joint venture’s members and other third parties. Over the past few years for economic and strategic reasons, we have concluded our investment in a number of joint ventures.
 
Our joint ventures typically obtain secured acquisition, development and construction financing. At September 30, 2010, our unconsolidated joint ventures had borrowings outstanding totaling $394.3 million of which $327.9 million related to one joint venture in which we are a 2.58% partner. Under the terms of the agreement, our repayment guarantee related to the outstanding debt of this joint venture is approximately $15.1 million. In some instances, Beazer Homes and our joint venture partners have provided varying levels of guarantees of debt of our unconsolidated joint ventures. At September 30, 2010, these guarantees included, for certain joint ventures, construction completion guarantees, loan to value maintenance agreements, repayment guarantees and environmental indemnities (see Note 3 to the Consolidated Financial Statements for additional information).
 
Construction
 
We typically act as the general contractor for the construction of our new home communities. Our project development operations are controlled by our operating divisions, whose employees supervise the construction of each new home community, coordinate the activities of subcontractors and suppliers, subject their work to quality and cost controls and assure compliance with zoning and building codes. We specify that quality, durable materials be used in the construction of our homes. Our subcontractors follow design plans prepared by architects and engineers who are retained or directly employed by us and whose designs are geared to the local market. A majority of our home plans are prepared in our corporate office, allowing us to ensure the quality of the plans we build as well as to enable us to reduce direct costs through our value engineering efforts.
 
Subcontractors typically are retained on a project-by-project basis to complete construction at a fixed price. Agreements with our subcontractors and materials suppliers are generally entered into after competitive bidding. In connection with this competitive bid process, we obtain information from prospective subcontractors and vendors with respect to their financial condition and ability to perform their agreements with us. We do not maintain significant inventories of construction materials, except for materials being utilized for homes under construction. We have numerous suppliers of raw materials and services used in our business, and such materials and services have been, and continue to be, available. Material prices may fluctuate, however, due to various factors, including demand or supply shortages, which may be beyond the control of our vendors. Whenever possible, we enter into regional and national supply contracts with certain of our vendors. We believe that our relationships with our suppliers and subcontractors are good.
 
Construction time for our homes depends on the availability of labor, materials and supplies, product type and location. Homes are designed to promote efficient use of space and materials, and to minimize construction costs and time. In all of our markets, construction of a home is typically completed within three to six months following commencement of construction. At September 30, 2010, excluding models, we had 1,393 homes at various stages of completion of which 588 were under contract and included in backlog at such date and 805 homes (423 were completed and 382 under construction) were not under a sales contract, either because the construction of the home was begun without a sales contract or because the original sales contract had been cancelled.
 
Warranty Program
 
For certain homes sold through March 31, 2004 (and in certain markets through July 31, 2004), we self-insured our warranty obligations through our wholly owned risk retention group. We continue to maintain reserves to cover potential claims on homes covered under this warranty program. Beginning with homes sold on or after April 1, 2004 (August 1, 2004 in certain markets), our warranties are issued, administered and insured, subject to applicable self-insured retentions, by independent third parties. We currently provide a limited warranty (ranging from one to two years) covering workmanship and materials per our defined performance quality standards. In addition, we provide a limited warranty (generally ranging from a minimum of five years up to the period covered by the applicable statute of repose) covering only certain defined construction defects. We also provide a defined structural warranty with single-family homes and townhomes in certain states.


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Since we subcontract our homebuilding work to subcontractors whose contracts generally include an indemnity obligation and a requirement that certain minimum insurance requirements be met, including providing us with a certificate of insurance prior to receiving payments for their work, many claims relating to workmanship and materials are the primary responsibility of our subcontractors.
 
In addition, we maintain third-party insurance, subject to applicable self-insured retentions, for most construction defects that we encounter in the normal course of business. We believe that our warranty and litigation accruals and third-party insurance are adequate to cover the ultimate resolution of our potential liabilities associated with known and anticipated warranty and construction defect related claims and litigation. Please see “Management’s Discussion and Analysis of Results of Operations and Financial Condition” and Note 13, “Contingencies” to the Consolidated Financial Statements for additional information.
 
There can be no assurance, however, that the terms and limitations of the limited warranty will be effective against claims made by the homebuyers, that we will be able to renew our insurance coverage or renew it at reasonable rates, that we will not be liable for damages, the cost of repairs, and/or the expense of litigation surrounding possible construction defects, soil subsidence or building related claims or that claims will not arise out of events or circumstances not covered by insurance and/or not subject to effective indemnification agreements with our subcontractors.
 
Marketing and Sales
 
We make extensive use of online and traditional advertising vehicles and other promotional activities, including our Internet website (http://www.beazer.com), real estate listing sites, search engine marketing, mass-media advertisements, brochures, direct marketing, directional billboards and the placement of strategically located signboards in the immediate areas of our developments.
 
We normally build, decorate, furnish and landscape model homes for each community and maintain on-site sales offices. At September 30, 2010, we maintained 248 model homes, of which 240 were owned and 8 were leased from third parties pursuant to sale and leaseback agreements. We believe that model homes play a particularly important role in our marketing efforts.
 
We generally sell our homes through commissioned new home sales counselors (who typically work from the sales offices located in the model homes used in the subdivision) as well as through independent brokers. Our personnel are available to assist prospective homebuyers by providing them with floor plans, price information, tours of model homes, and a detailed explanation of eSMART and the associated savings opportunities. The selection of interior features is a principal component of our marketing and sales efforts. Sales personnel are trained by us and participate in a structured training program to be updated on sales techniques, product enhancements, competitive products in the area, the availability of financing, construction schedules, marketing and advertising plans and Company policies including compliance, which management believes results in a sales force with extensive knowledge of our operating policies and housing products. Our policy also provides that sales personnel be licensed real estate agents where required by law. Depending on market conditions, we also at times begin construction on a number of homes for which no signed sales contract exists. The use of an inventory of such homes satisfies the requirements of relocated personnel, first time buyers and of independent brokers, who often represent customers who require a completed home within 60 days. We sometimes use various sales incentives in order to attract homebuyers. The use of incentives depends largely on local economic and competitive market conditions.
 
During fiscal 2009, we established a national new home contact center within our existing leased premises in Phoenix, Arizona. This contact center responds to telephonic and electronic (email) inquiries from prospective home buyers by providing any required information and then scheduling an appointment with a new home sales counselor in one of our new home communities.
 
Customer Financing
 
Through January 31, 2008, Beazer Mortgage Corporation (Beazer Mortgage) financed certain of our mortgage lending activities with borrowings under its warehouse line of credit or from general corporate funds prior to selling the loans and their servicing rights shortly after origination to third-party investors. Beazer Mortgage provided


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qualified homebuyers numerous financing options, including conventional, FHA and Veterans’ Administration (VA) financing programs. Effective February 1, 2008, we exited the mortgage origination business and entered into an exclusive preferred lender arrangement with a national, third-party mortgage provider. The operating results of Beazer Mortgage are included in loss from discontinued operations, net of tax in the Consolidated Statements of Operations for all periods presented. See Item 3 — Legal Proceedings for discussion of the investigations and litigation related to our mortgage origination business.
 
Up until September 30, 2010, we offered title insurance services to our homebuyers in several of our markets. Effective September 30, 2010, we have sold or discontinued all of our title services operations. The operating results of our title services operations which were previously reported in our Financial Services Segment are included in loss from discontinued operations, net of tax in the Consolidated Statements of Operations for all periods presented.
 
Competition
 
The development and sale of residential properties is highly competitive and fragmented, particularly in the current weak housing environment. We compete for residential sales on the basis of a number of interrelated factors, including location, reputation, amenities, design, quality and price, with numerous large and small homebuilders, including some homebuilders with nationwide operations and greater financial resources and/or lower costs than us. We also compete for residential sales with individual resales of existing homes (including a growing number of foreclosed homes offered at substantially reduced prices), available rental housing and, to a lesser extent, resales of condominiums. In recent months, short sales (a transaction in which the seller’s mortgage lender agrees to accept a payoff of less than the balance due on the loan) and foreclosures have become a sizable portion of the existing home market.
 
We utilize our experience within our geographic markets and breadth of product line to vary our regional product offerings to reflect changing market conditions. We strive to respond to market conditions and to capitalize on the opportunities for advantageous land acquisitions in desirable locations. To further strengthen our competitive position, we rely on quality design, construction and service to provide customers with a higher measure of home.
 
Government Regulation and Environmental Matters
 
Generally, our land is purchased with entitlements, giving us the right to obtain building permits upon compliance with specified conditions, which generally are within our control. The length of time necessary to obtain such permits and approvals affects the carrying costs of unimproved property acquired for the purpose of development and construction. In addition, the continued effectiveness of permits already granted is subject to factors such as changes in policies, rules and regulations and their interpretation and application. Many governmental authorities have imposed impact fees as a means of defraying the cost of providing certain governmental services to developing areas. To date, the governmental approval processes discussed above have not had a material adverse effect on our development activities, and indeed all homebuilders in a given market face the same fees and restrictions. There can be no assurance, however, that these and other restrictions will not adversely affect us in the future.
 
We may also be subject to periodic delays or may be precluded entirely from developing communities due to building moratoriums, “slow-growth” or “no-growth” initiatives or building permit allocation ordinances which could be implemented in the future in the states and markets in which we operate. Substantially all of our land is entitled and, therefore, the moratoriums generally would only adversely affect us if they arose from health, safety and welfare issues such as insufficient water or sewage facilities. Local and state governments also have broad discretion regarding the imposition of development fees for communities in their jurisdictions. These fees are normally established, however, when we receive recorded final maps and building permits. We are also subject to a variety of local, state and federal statutes, ordinances, rules and regulations concerning the protection of health and the environment. These laws may result in delays, cause us to incur substantial compliance and other costs, and prohibit or severely restrict development in certain environmentally sensitive regions or areas.
 
In order to provide homes to homebuyers qualifying for FHA-insured or VA-guaranteed mortgages, we must construct homes in compliance with FHA and VA regulations. Our title subsidiaries are subject to various licensing requirements and real estate laws and regulations in the states in which they do business. These laws and regulations


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include provisions regarding operating procedures, investments, lending and privacy disclosures, forms of policies and premiums.
 
In some states, we are required to be registered as a licensed contractor and comply with applicable rules and regulations. Also, in various states, our new home counselors are required to be licensed real estate agents and to comply with the laws and regulations applicable to real estate agents.
 
Failure to comply with any of these laws or regulations could result in loss of licensing and a restriction of our business activities in the applicable jurisdiction.
 
Bonds and Other Obligations
 
In connection with the development of our communities, we are frequently required to provide letters of credit and performance, maintenance and other bonds in support of our related obligations with respect to such developments. The amount of such obligations outstanding at any time varies in accordance with our pending development activities. In the event any such bonds or letters of credit are drawn upon, we would be obligated to reimburse the issuer of such bonds or letters of credit. At September 30, 2010 we had approximately $37.9 million and $184.7 million of outstanding letters of credit and performance bonds, respectively, primarily related to our obligations to local governments to construct roads and other improvements in various developments. This includes outstanding letters of credit of approximately $3.7 million related to our land option contracts.
 
Employees and Subcontractors
 
At September 30, 2010, we employed 883 persons, of whom 275 were sales and marketing personnel and 186 were involved in construction. Although none of our employees are covered by collective bargaining agreements, certain of the subcontractors engaged by us are represented by labor unions or are subject to collective bargaining arrangements. We believe that our relations with our employees and subcontractors are good.
 
Available Information
 
Our Internet website address is www.beazer.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to section 13(a) or 15(d) of the Exchange Act are available free of charge through our website as soon as reasonably practicable after we electronically file with or furnish them to the Securities and Exchange Commission (SEC) and are available in print to any stockholder who requests a printed copy. The public may also read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street N.E., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Additionally, the SEC maintains a website that contains reports, proxy statements, information statements and other information regarding issuers, including us, that file electronically with the SEC at www.sec.gov.
 
In addition, many of our corporate governance documents are available on our website at www.beazer.com. Specifically, our Audit, Finance, Compensation and Nominating/Corporate Governance Committee Charters, our Corporate Governance Guidelines and Code of Business Conduct and Ethics are available. Each of these documents is available in print to any stockholder who requests it.
 
The content on our website is available for information purposes only and is not a part of and shall not be deemed incorporated by reference in this report.
 
Item 1A.   Risk Factors
 
The homebuilding industry has been experiencing a severe downturn that may continue for an indefinite period and continue to adversely affect our business, results of operations and stockholders’ equity.
 
Most housing markets across the United States continue to be characterized by an oversupply of both new and resale home inventory, including foreclosed homes, reduced levels of consumer demand for new homes, increased cancellation rates, aggressive price competition among homebuilders and increased incentives for home sales. As a


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result of these factors, we, like many other homebuilders, have experienced a material reduction in revenues and margins. These challenging market conditions are expected to continue for the foreseeable future and, in the near term, these conditions may further deteriorate. We expect that continued weakness in the homebuilding market would adversely affect our business, results of operations and stockholders’ equity as compared to prior periods and could result in additional inventory impairments in the future.
 
During the past few years, we have experienced elevated levels of cancellations by potential homebuyers although the level of cancellations has improved significantly during the last few quarters. Our backlog reflects the number and value of homes for which we have entered into a sales contract with a customer but have not yet delivered the home. Although these sales contracts typically require a cash deposit and do not make the sale contingent on the sale of the customer’s existing home, in some cases a customer may cancel the contract and receive a complete or partial refund of the deposit as a result of local laws or as a matter of our business practices. If the current industry downturn continues, economic conditions continue to deteriorate or if mortgage financing becomes less accessible, more homebuyers may have an incentive to cancel their contracts with us, even where they might be entitled to no refund or only a partial refund, rather than complete the purchase. Significant cancellations have had, and could have, a material adverse effect on our business as a result of lost sales revenue and the accumulation of unsold housing inventory. In particular, our cancellation rates for the fiscal quarter and fiscal year ended September 30, 2010 were 33.0% and 25.5%, respectively. It is important to note that both backlog and cancellation metrics are operational, rather than accounting data, and should be used only as a general gauge to evaluate performance. There is an inherent imprecision in these metrics based on an evaluation of qualitative factors during the transaction cycle.
 
Based on our impairment tests and consideration of the current and expected future market conditions, we recorded inventory impairment charges of $51.0 million and lot option abandonment charges of $0.9 million during fiscal 2010. During fiscal 2010, we also wrote down our investment in certain of our joint ventures reflecting $24.3 million of impairments of inventory held within those ventures. Future economic or financial developments, including general interest rate increases, poor performance in either the national economy or individual local economies, or our ability to meet our projections could lead to future impairments.
 
Our home sales and operating revenues could decline due to macro-economic and other factors outside of our control, such as changes in consumer confidence, declines in employment levels and increases in the quantity and decreases in the price of new homes and resale homes in the market.
 
Changes in national and regional economic conditions, as well as local economic conditions where we conduct our operations and where prospective purchasers of our homes live, may result in more caution on the part of homebuyers and, consequently, fewer home purchases. These economic uncertainties involve, among other things, conditions of supply and demand in local markets and changes in consumer confidence and income, employment levels, and government regulations. These risks and uncertainties could periodically have an adverse effect on consumer demand for and the pricing of our homes, which could cause our operating revenues to decline. Additional reductions in our revenues could, in turn, further negatively affect the market price of our securities.
 
We are the subject of pending civil litigation which could require us to pay substantial damages or could otherwise have a material adverse effect on us. The failure to fulfill our obligations under the Deferred Prosecution Agreement (the DPA) with the United States Attorney (or related agreements) and the consent order with the SEC could have a material adverse effect on our operations.
 
On July 1, 2009, we entered into the DPA with the United States Attorney for the Western District of North Carolina and a separate but related agreement with the United States Department of Housing and Urban Development (HUD) and the Civil Division of the United States Department of Justice (the HUD Agreement). As of September 30, 2010, we have paid $5 million to HUD pursuant to the HUD Agreement. Under the DPA, we are obligated to make payments to a restitution fund in an amount not to exceed $50 million. As of September 30, 2010, we have been credited with making $10 million of such payments. In connection with fiscal 2010, we will pay an additional $1.0 million to such fund. Future payments to the restitution fund will be equal to 4% of “adjusted EBITDA” as defined in the DPA for the first to occur of (x) a period of 60 months and (y) the total of all payments to the restitution fund equaling $50 million. In the event such payments do not equal at least $50 million at the end of


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60 months then, under the HUD Agreement, the obligations to make restitution payments will continue until the first to occur of (a) 24 months or (b) the date that $48 million has been paid into the restitution fund. Our obligation to make such payments could limit our ability to invest in our business or make payments of principal or interest on our outstanding debt. In addition, in the event we fail to comply with our obligations under the DPA or the HUD Agreement various federal authorities could bring criminal or civil charges against us which could be material to our consolidated financial position, results of operations and liquidity.
 
We and certain of our current and former employees, officers and directors have been named as defendants in securities lawsuits and class action lawsuits. In addition, certain of our subsidiaries have been named in class action and multi-party lawsuits regarding claims made by homebuyers. While a number of these suits have been dismissed and/or settled, we cannot be assured that new claims by different plaintiffs will not be brought in the future. We cannot predict or determine the timing or final outcome of the current lawsuits or the effect that any adverse determinations in the lawsuits may have on us. An unfavorable determination in any of the lawsuits could result in the payment by us of substantial monetary damages which may not be covered by insurance. Further, the legal costs associated with the lawsuits and the amount of time required to be spent by management and the Board of Directors on these matters, even if we are ultimately successful, could have a material adverse effect on our business, financial condition and results of operations. In addition to expenses incurred to defend the Company in these matters, under Delaware law and our bylaws, we may have an obligation to indemnify our current and former officers and directors in relation to these matters. We have obligations to advance legal fees and expenses to certain directors and officers, and we have advanced, and may continue to advance, legal fees and expenses to certain other current and former employees.
 
In connection with the settlement agreement with the SEC entered into on September 24, 2008, we consented, without admitting or denying any wrongdoing, to a cease and desist order requiring future compliance with certain provisions of the federal securities laws and regulations. If we are found to be in violation of the order in the future, we may be subject to penalties and other adverse consequences as a result of the prior actions which could be material to our consolidated financial position, results of operations and liquidity.
 
Our insurance carriers may seek to rescind or deny coverage with respect to certain of the pending lawsuits, or we may not have sufficient coverage under such policies. If the insurance companies are successful in rescinding or denying coverage or if we do not have sufficient coverage under our policies, our business, financial condition and results of operations could be materially adversely affected.
 
We are dependent on the services of certain key employees, and the loss of their services could hurt our business.
 
Our future success depends upon our ability to attract, train, assimilate and retain skilled personnel. If we are unable to retain our key employees or attract, train, assimilate or retain other skilled personnel in the future, it could hinder our business strategy and impose additional costs of identifying and training new individuals. Competition for qualified personnel in all of our operating markets is intense.
 
Potential future downgrades of our credit ratings could adversely affect our access to capital and could otherwise have a material adverse effect on us.
 
Over the past few years, the rating agencies had downgraded the Company’s corporate credit rating and ratings on the Company’s senior unsecured notes due to the deterioration in our homebuilding operations, credit metrics, other earnings-based metrics and the significant decrease in our tangible net worth. Although the rating agencies have increased these ratings recently, these ratings and our current credit condition affect, among other things, our ability to access new capital, especially debt, and negative changes in these ratings may result in more stringent covenants and higher interest rates under the terms of any new debt. Our credit ratings could be further lowered or rating agencies could issue adverse commentaries in the future, which could have a material adverse effect on our business, results of operations, financial condition and liquidity. In particular, a weakening of our financial condition, including a significant increase in our leverage or decrease in our profitability or cash flows, could adversely affect our ability to obtain necessary funds, result in a credit rating downgrade or change in outlook, or otherwise increase our cost of borrowing.


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Our Senior Notes, revolving credit and letter of credit facilities, and certain other debt impose significant restrictions and obligations on us. Restrictions on our ability to borrow could adversely affect our liquidity. In addition, our substantial indebtedness could adversely affect our financial condition, limit our growth and make it more difficult for us to satisfy our debt obligations.
 
Certain of our secured and unsecured indebtedness and revolving credit and letter of credit facilities impose certain restrictions and obligations on us. Under certain of these instruments, we must comply with defined covenants which limit the Company’s ability to, among other things, incur additional indebtedness, engage in certain asset sales, make certain types of restricted payments, engage in transactions with affiliates and create liens on assets of the Company. Failure to comply with certain of these covenants could result in an event of default under the applicable instrument. Any such event of default could negatively impact other covenants or lead to cross defaults under certain of our other debt. There can be no assurance that we will be able to obtain any waivers or amendments that may become necessary in the event of a future default situation without significant additional cost or at all.
 
As of September 30, 2010, we had total outstanding indebtedness of approximately $1.2 billion, net of unamortized discount of approximately $23.6 million. Our substantial indebtedness could have important consequences to us and the holders of our securities, including, among other things:
 
  •  causing us to be unable to satisfy our obligations under our debt agreements;
 
  •  making us more vulnerable to adverse general economic and industry conditions;
 
  •  making it difficult to fund future working capital, land purchases, acquisitions, share repurchases, general corporate purposes or other purposes; and
 
  •  causing us to be limited in our flexibility in planning for, or reacting to, changes in our business.
 
In addition, subject to restrictions in our existing debt instruments, we may incur additional indebtedness. If new debt is added to our current debt levels, the related risks that we now face could intensify. Our growth plans and our ability to make payments of principal or interest on, or to refinance, our indebtedness, will depend on our future operating performance and our ability to enter into additional debt and/or equity financings. If we are unable to generate sufficient cash flows in the future to service our debt, we may be required to refinance all or a portion of our existing debt, to sell assets or to obtain additional financing. We may not be able to do any of the foregoing on terms acceptable to us, if at all.
 
A substantial increase in mortgage interest rates or unavailability of mortgage financing may reduce consumer demand for our homes.
 
Substantially all purchasers of our homes finance their acquisition with mortgage financing. The U.S. residential mortgage market has been impacted by the deterioration in the credit quality of loans originated to non-prime and subprime borrowers and an increase in mortgage foreclosure rates. These difficulties are not expected to improve until residential real estate inventories return to a more normal level and the mortgage credit market stabilizes. While the ultimate outcome of recent events cannot be predicted, they have had and may continue to have an impact on the availability and cost of mortgage financing to our customers. The volatility in interest rates, the decrease in the willingness and ability of lenders to make home mortgage loans, the tightening of lending standards and the limitation of financing product options, have made it more difficult for homebuyers to obtain acceptable financing. Any substantial increase in mortgage interest rates or unavailability of mortgage financing would adversely affect the ability of prospective first-time and move-up homebuyers to obtain financing for our homes, as well as adversely affect the ability of prospective move-up homebuyers to sell their current homes. This disruption in the credit markets and the curtailed availability of mortgage financing has adversely affected, and is expected to continue to adversely affect, our business, financial condition, results of operations and cash flows as compared to prior periods.


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If we are unsuccessful in competing against our homebuilding competitors, our market share could decline or our growth could be impaired and, as a result, our financial results could suffer.
 
Competition in the homebuilding industry is intense, and there are relatively low barriers to entry into our business. Increased competition could hurt our business, as it could prevent us from acquiring attractive parcels of land on which to build homes or make such acquisitions more expensive, hinder our market share expansion, and lead to pricing pressures on our homes that may adversely impact our margins and revenues. If we are unable to successfully compete, our financial results could suffer and the value of, or our ability to service, our debt could be adversely affected. Our competitors may independently develop land and construct housing units that are superior or substantially similar to our products. Furthermore, some of our competitors have substantially greater financial resources and lower costs of funds than we do. Many of these competitors also have longstanding relationships with subcontractors and suppliers in the markets in which we operate. We currently build in several of the top markets in the nation and, therefore, we expect to continue to face additional competition from new entrants into our markets.
 
Our financial condition, results of operations and stockholders’ equity may be adversely affected by any decrease in the value of our inventory, as well as by the associated carrying costs.
 
We regularly acquire land for replacement and expansion of land inventory within our existing and new markets. The risks inherent in purchasing and developing land increase as consumer demand for housing decreases. The market value of land, building lots and housing inventories can fluctuate significantly as a result of changing market conditions and the measures we employ to manage inventory risk may not be adequate to insulate our operations from a severe drop in inventory values. When market conditions are such that land values are not appreciating, previously entered into option agreements may become less desirable, at which time we may elect to forego deposits and preacquisition costs and terminate the agreements. In fiscal 2010, we recorded $0.9 million of lot option abandonment charges. During fiscal 2010, as a result of the further deterioration of the housing market, we determined that the carrying amount of certain of our inventory assets exceeded their estimated fair value. As a result of our analysis, during fiscal 2010, we incurred $51.0 million of non-cash pre-tax charges related to inventory impairments. If these adverse market conditions continue or worsen, we may have to incur additional inventory impairment charges which would adversely affect our financial condition, results of operations and stockholders’ equity and our ability to comply with certain covenants in our debt instruments linked to tangible net worth.
 
We conduct certain of our operations through unconsolidated joint ventures with independent third parties in which we do not have a controlling interest and we can be adversely impacted by joint venture partners’ failure to fulfill their obligations.
 
We participate in land development joint ventures (JVs) in which we have less than a controlling interest. We have entered into JVs in order to acquire attractive land positions, to manage our risk profile and to leverage our capital base. Our JVs are typically entered into with developers, other homebuilders and financial partners to develop finished lots for sale to the joint venture’s members and other third parties. As a result of the continued deterioration of the housing market, we have written down our investment in certain of our JVs reflecting impairments of inventory held within those JVs. If these adverse market conditions continue or worsen, we may have to take further writedowns of our investments in our JVs.
 
Our joint venture investments are generally very illiquid both because we lack a controlling interest in the JVs and because most of our JVs are structured to require super-majority or unanimous approval of the members to sell a substantial portion of the JV’s assets or for a member to receive a return of its invested capital. Our lack of a controlling interest also results in the risk that the JV will take actions that we disagree with, or fail to take actions that we desire, including actions regarding the sale of the underlying property.
 
Our JVs typically obtain secured acquisition, development and construction financing. Generally, we and our joint venture partners have provided varying levels of guarantees of debt or other obligations of our unconsolidated JVs. At September 30, 2010, these guarantees included, for certain joint ventures, construction completion guarantees, loan-to-value maintenance agreements, repayment guarantees and environmental indemnities. As of September 30, 2010, one of our unconsolidated joint ventures is in default under its debt agreement. If all of the


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guarantees under these debt agreements were drawn upon or otherwise invoked, our obligations would total $15.8 million. We cannot predict whether such events will occur or whether such obligations will be invoked.
 
We may not be able to utilize all of our deferred tax assets.
 
As of September 30, 2010, we are in a cumulative loss position based on the guidance in Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes (ASC 740). Due to this cumulative loss position and the lack of sufficient objective evidence regarding the realization of our deferred tax assets in the foreseeable future, we have recorded a valuation allowance for substantially all of our deferred tax assets. Although we do expect the industry to recover from the current downturn to normal profit levels in the future, it may be necessary for us to record additional valuation allowances in the future related to operating losses. Additional valuation allowances could materially increase our income tax expense, and therefore adversely affect our results of operations and tangible net worth in the period in which such valuation allowance is recorded.
 
We could experience a reduction in home sales and revenues or reduced cash flows due to our inability to acquire land for our housing developments if we are unable to obtain reasonably priced financing to support our homebuilding activities.
 
The homebuilding industry is capital intensive, and homebuilding requires significant up-front expenditures to acquire land and to begin development. Accordingly, we incur substantial indebtedness to finance our homebuilding activities. If internally generated funds are not sufficient, we would 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. The amount and types of indebtedness which we may incur are limited by the terms of our existing debt. In addition, the availability of borrowed funds, especially for land acquisition and construction financing, may be greatly reduced nationally, and the lending community may require increased amounts of equity to be invested in a project by borrowers in connection with both new loans and the extension of existing loans. The credit and capital markets have recently experienced significant volatility. If we are required to seek additional financing to fund our operations, continued volatility in these markets may restrict our flexibility to access such financing. If we are not successful in obtaining sufficient capital to fund our planned capital and other expenditures, we may be unable to acquire land for our housing developments. Additionally, if we cannot obtain additional financing to fund the purchase of land under our option contracts, we may incur contractual penalties and fees.
 
Our stock price is volatile and could further decline.
 
The securities markets in general and our common stock in particular have experienced significant price and volume volatility over the past few years. The market price and volume of our common stock may continue to experience significant fluctuations due not only to general stock market conditions but also to a change in sentiment in the market regarding our industry, operations or business prospects. In addition to the other risk factors discussed in this section, the price and volume volatility of our common stock may be affected by:
 
  •  operating results that vary from the expectations of securities analysts and investors;
 
  •  factors influencing home purchases, such as availability of home mortgage loans and interest rates, credit criteria applicable to prospective borrowers, ability to sell existing residences, and homebuyer sentiment in general;
 
  •  the operating and securities price performance of companies that investors consider comparable to us;
 
  •  announcements of strategic developments, acquisitions and other material events by us or our competitors; and
 
  •  changes in global financial markets and global economies and general market conditions, such as interest rates, commodity and equity prices and the value of financial assets.
 
To the extent that the price of our common stock remains low or declines, our ability to raise funds through the issuance of equity or otherwise use our common stock as consideration will be reduced. This, in turn, may adversely impact our ability to reduce our financial leverage, as measured by the ratio of debt to total capital. As of


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September 30, 2010, our financial leverage was 75.3%. Continued high levels of leverage or significant increases may adversely affect our credit ratings and make it more difficult for us to access additional capital. These factors may limit our ability to implement our operating and growth plans.
 
The tax benefits of our pre-ownership change net operating loss carryforwards and any future recognized built-in losses in our assets will be substantially limited since we experienced an “ownership change” as defined in Section 382 of the Internal Revenue Code.
 
Based on recent impairments and our current financial performance, we generated net operating losses for fiscal 2010 and could possibly generate additional net operating losses in future years. In addition, we believe we have significant “built-in losses” in our assets (i.e. an excess tax basis over current fair market value) that may result in tax losses as such assets are sold. Net operating losses generally may be carried forward for a 20-year period to offset future earnings and reduce our federal income tax liability. Built-in losses, if and when recognized, generally will result in tax losses that may then be deducted or carried forward. However, because we experienced an “ownership change” under Section 382 of the Internal Revenue Code as of January 12, 2010, our ability to realize these tax benefits may be significantly limited.
 
Section 382 contains rules that limit the ability of a company that undergoes an “ownership change,” which is generally defined as any change in ownership of more than 50% of its common stock over a three-year period, to utilize its net operating loss carryforwards and certain built-in losses or deductions, as of the ownership change date, that are recognized during the five-year period after the ownership change. These rules generally operate by focusing on changes in the ownership among shareholders owning, directly or indirectly, 5% or more of the company’s common stock (including changes involving a shareholder becoming a 5% shareholder) or any change in ownership arising from a new issuance of stock or share repurchases by the company.
 
As a result of our recent “ownership change” for purposes of Section 382, our ability to use certain of our pre-ownership change net operating loss carryforwards and recognize certain built-in losses or deductions is limited by Section 382 to an estimated maximum amount of approximately $11.4 million ($4 million tax-effected) annually. Based on the resulting limitation, a significant portion of our pre-ownership change net operating loss carryforwards and any future recognized built-in losses or deductions could expire before we would be able to use them. Our inability to utilize our limited pre-ownership change net operating loss carryforwards and any future recognized built-in losses or deductions or the occurrence of a future ownership change and resulting additional limitations could have a material adverse effect on our financial condition, results of operations and cash flows.
 
We are subject to extensive government regulation which could cause us to incur significant liabilities or restrict our business activities.
 
Regulatory requirements could cause us to incur significant liabilities and operating expenses and could restrict our business activities. We are subject to local, state and federal statutes and rules regulating, among other things, certain developmental matters, building and site design, and matters concerning the protection of health and the environment. Our operating expenses may be increased by governmental regulations such as building permit allocation ordinances and impact and other fees and taxes, which may be imposed to defray the cost of providing certain governmental services and improvements. Other governmental regulations, such as building moratoriums and “no growth” or “slow growth” initiatives, which may be adopted in communities which have developed rapidly, may cause delays in new home communities or otherwise restrict our business activities resulting in reductions in our revenues. Any delay or refusal from government agencies to grant us necessary licenses, permits and approvals could have an adverse effect on our operations.
 
We may incur additional operating expenses due to compliance programs or fines, penalties and remediation costs pertaining to environmental regulations within our markets.
 
We are subject to a variety of local, state and federal statutes, ordinances, rules and regulations concerning the protection of health and the environment. The particular environmental laws which apply to any given community vary greatly according to the community site, the site’s environmental conditions and the present and former use of the site. Environmental laws may result in delays, may cause us to implement time consuming and expensive


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compliance programs and may prohibit or severely restrict development in certain environmentally sensitive regions or areas. From time to time, the United States Environmental Protection Agency (EPA) and similar federal or state agencies review homebuilders’ compliance with environmental laws and may levy fines and penalties for failure to strictly comply with applicable environmental laws or impose additional requirements for future compliance as a result of past failures. Any such actions taken with respect to us may increase our costs. Further, we expect that increasingly stringent requirements will be imposed on homebuilders in the future. Environmental regulations can also have an adverse impact on the availability and price of certain raw materials such as lumber. Our communities in California are especially susceptible to restrictive government regulations and environmental laws.
 
We may be subject to significant potential liabilities as a result of construction defect, product liability and warranty claims made against us.
 
As a homebuilder, we have been, and continue to be, subject to construction defect, product liability and home warranty claims, including moisture intrusion and related claims, arising in the ordinary course of business. These claims are common to the homebuilding industry and can be costly.
 
We and certain of our subsidiaries have been, and continue to be, named as defendants in various construction defect claims, product liability claims, complaints and other legal actions that include claims related to Chinese drywall and moisture intrusion. As of September 30, 2010, our warranty reserves include an estimate for the repair of less than 60 homes in Florida where certain of our subcontractors installed defective Chinese drywall in homes that were delivered during our 2006 and 2007 fiscal years. As of September 30, we have completed repairs on approximately 52% of these homes. We are inspecting additional homes in order to determine whether they also contain defective Chinese drywall. The outcome of these inspections and other potential future inspections or an unexpected increase in repair costs may require us to increase our warranty reserve in the future. However, the amount of additional liability, if any, is not reasonably estimable. Furthermore, plaintiffs may in certain of these legal proceedings seek class action status with potential class sizes that vary from case to case. Class action lawsuits can be costly to defend, and if we were to lose any certified class action suit, it could result in substantial liability for us.
 
With respect to certain general liability exposures, including construction defect claims, product liability claims and defective Chinese drywall and related claims, interpretation of underlying current and future trends, assessment of claims and the related liability and reserve estimation process is highly judgmental due to the complex nature of these exposures, with each exposure exhibiting unique circumstances. Furthermore, once claims are asserted for construction defects, it can be difficult to determine the extent to which the assertion of these claims will expand geographically. Although we have obtained insurance for construction defect claims subject to applicable self-insurance retentions, such policies may not be available or adequate to cover liability for damages, the cost of repairs, and/or the expense of litigation surrounding current claims, and future claims may arise out of events or circumstances not covered by insurance and not subject to effective indemnification agreements with our subcontractors.
 
Our operating expenses could increase if we are required to pay higher insurance premiums or litigation costs for various claims, which could cause our net income to decline.
 
The costs of insuring against construction defect, product liability and director and officer claims are substantial. Increasingly in recent years, lawsuits (including class action lawsuits) have been filed against builders, asserting claims of personal injury and property damage. Our insurance may not cover all of the claims, including personal injury claims, or such coverage may become prohibitively expensive. If we are not able to obtain adequate insurance against these claims, we may experience losses that could reduce our net income and restrict our cash flow available to service debt.
 
Historically, builders have recovered from subcontractors and their insurance carriers a significant portion of the construction defect liabilities and costs of defense that the builders have incurred. Insurance coverage available to subcontractors for construction defects is becoming increasingly expensive, and the scope of coverage is


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restricted. If we cannot effectively recover from our subcontractors or their carriers, we may suffer greater losses which could decrease our net income.
 
A builder’s ability to recover against any available insurance policy depends upon the continued solvency and financial strength of the insurance carrier that issued the policy. Many of the states in which we build homes have lengthy statutes of limitations applicable to claims for construction defects. To the extent that any carrier providing insurance coverage to us or our subcontractors becomes insolvent or experiences financial difficulty in the future, we may be unable to recover on those policies, and our net income may decline.
 
We are dependent on the continued availability and satisfactory performance of our subcontractors, which, if unavailable, could have a material adverse effect on our business.
 
We conduct our construction operations only as a general contractor. Virtually all construction work is performed by unaffiliated third-party subcontractors. As a consequence, we depend on the continued availability of and satisfactory performance by these subcontractors for the construction of our homes. There may not be sufficient availability of and satisfactory performance by these unaffiliated third-party subcontractors in the markets in which we operate. In addition, inadequate subcontractor resources could have a material adverse effect on our business.
 
We experience fluctuations and variability in our operating results on a quarterly basis and, as a result, our historical performance may not be a meaningful indicator of future results.
 
Our operating results in a future quarter or quarters may fall below expectations of securities analysts or investors and, as a result, the market value of our common stock will fluctuate. We historically have experienced, and expect to continue to experience, variability in home sales and net earnings on a quarterly basis. As a result of such variability, our historical performance may not be a meaningful indicator of future results. Our quarterly results of operations may continue to fluctuate in the future as a result of a variety of both national and local factors, including, among others:
 
  •  the timing of home closings and land sales;
 
  •  our ability to continue to acquire additional land or secure option contracts to acquire land on acceptable terms;
 
  •  conditions of the real estate market in areas where we operate and of the general economy;
 
  •  raw material and labor shortages;
 
  •  seasonal home buying patterns; and
 
  •  other changes in operating expenses, including the cost of labor and raw materials, personnel and general economic conditions.
 
The occurrence of natural disasters could increase our operating expenses and reduce our revenues and cash flows.
 
The climates and geology of many of the states in which we operate, including California, Florida, Georgia, North Carolina, South Carolina, Tennessee and Texas, present increased risks of natural disasters. To the extent that hurricanes, severe storms, earthquakes, droughts, floods, wildfires or other natural disasters or similar events occur, our homes under construction or our building lots in such states could be damaged or destroyed, which may result in losses exceeding our insurance coverage. Any of these events could increase our operating expenses, impair our cash flows and reduce our revenues, which could, in turn, negatively affect the market price of our securities.
 
Future terrorist attacks against the United States or increased domestic or international instability could have an adverse effect on our operations.
 
Adverse developments in the war on terrorism, future terrorist attacks against the United States, or any outbreak or escalation of hostilities between the United States and any foreign power, including the armed conflicts


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in Iraq and Afghanistan, may cause disruption to the economy, our Company, our employees and our customers, which could adversely affect our revenues, operating expenses, and financial condition.
 
Item 1B.   Unresolved Staff Comments
 
None.
 
Item 2.   Properties
 
As of September 30, 2010, we lease approximately 80,000 square feet of office space in Atlanta, Georgia to house our corporate headquarters. We also lease an aggregate of approximately 362,000 square feet of office space for our subsidiaries’ operations at various locations. We have subleased approximately 75,000 square feet of our leased office space to unrelated third-parties. We own approximately 49,000 square feet of office space in Indianapolis, Indiana which we are actively marketing for sale.
 
Item 3.   Legal Proceedings
 
Litigation
 
ERISA Class Actions.  On April 30, 2007, a putative class action complaint was filed on behalf of a purported class consisting of present and former participants and beneficiaries of the Beazer Homes USA, Inc. 401(k) Plan against the Company and certain employees and directors of the Company. The complaint alleges breach of fiduciary duties, including those set forth in the Employee Retirement Income Security Act (ERISA), as a result of the investment of retirement monies held by the 401(k) Plan in common stock of Beazer Homes at a time when participants were allegedly not provided timely, accurate and complete information concerning Beazer Homes. Four additional lawsuits were filed subsequently making similar allegations and the court consolidated these five lawsuits. The parties have reached a settlement which will be largely funded by insurance proceeds and is subject to court approval. Under the terms of the settlement, the lawsuit will be dismissed with prejudice and there will be a release of all claims. The court has preliminarily approved the settlement and a hearing is scheduled for November 15, 2010 to consider final approval of the settlement.
 
Homeowners Class Action Lawsuits and Multi-Plaintiff Lawsuit.  A putative class action was filed on April 8, 2008 in the United States District Court for the Middle District of North Carolina, Salisbury Division, against Beazer Homes, U.S.A., Inc., Beazer Homes Corp. and Beazer Mortgage Corporation. The Complaint alleges that Beazer violated the Real Estate Settlement Practices Act (RESPA) and North Carolina Gen. Stat. § 75-1.1 by (1) improperly requiring homebuyers to use Beazer-owned mortgage and settlement services as part of a down payment assistance program, and (2) illegally increasing the cost of homes and settlement services sold by Beazer Homes Corp. The purported class consists of all residents of North Carolina who purchased a home from Beazer, using mortgage financing provided by and through Beazer that included seller-funded down payment assistance, between January 1, 2000 and October 11, 2007. The parties have reached an agreement to settle the lawsuit, which will be partially funded by insurance proceeds and is subject to court approval. Under the terms of the settlement, the action will be dismissed with prejudice, and the Company and all other defendants will not admit any liability.
 
Beazer Homes and several subsidiaries were named as defendants in a putative class action lawsuit originally filed on March 12, 2008, in the Superior Court of the State of California, County of Placer. The purported class is defined as all persons who purchased a home from the defendants or their affiliates, with the assistance of a federally related mortgage loan, from March 25, 1999, to the present where Security Title Insurance Company received any money as a reinsurer of the transaction. The complaint alleges that the defendants violated RESPA and asserts claims under a number of state statutes alleging that defendants engaged in a uniform and systematic practice of giving and/or accepting fees and kickbacks to affiliated businesses including affiliated and/or recommended title insurance companies. The complaint also alleges a number of common law claims. Plaintiffs seek an unspecified amount of damages under RESPA, unspecified statutory, compensatory and punitive damages and injunctive and declaratory relief, as well as attorneys’ fees and costs. Defendants removed the action to federal court and plaintiffs filed a Second Amended Complaint which substituted new named-plaintiffs. The Company filed a motion to dismiss the Second Amended Complaint, which the federal court granted in part. The federal court dismissed the sole federal claim, declined to rule on the state law claims, and remanded the case to the Superior Court of Placer


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County. The Company filed a supplemental motion to dismiss/demurrer regarding the remaining state law claims in the Second Amended Complaint and the state court sustained defendants’ demurrer but granted the plaintiffs leave to amend their claims. Plaintiffs thereafter filed a Third Amended Complaint which defendants removed to federal court based on the presence of a federal question and pursuant to the Class Action Fairness Act and thereafter moved to dismiss. Plaintiffs filed a motion to remand the case. The federal court granted the plaintiffs’ motion and remanded the case to the Superior Court of Placer County. The defendants filed a petition with the U.S. Court of Appeals for the Ninth Circuit for permission to appeal the remand order and a demurrer in state court as to all counts of the Third Amended Complaint. The state court granted the defendants’ demurrer as to the plaintiffs’ breach of contract claim, but the unfair competition claim remains. The Company filed its answer to the Third Amended Complaint on June 11, 2010. The Company is in the process of conducting discovery and is vigorously defending against the action.
 
On June 3, 2009, a purported class action complaint was filed by the owners of one of our homes in our Magnolia Lakes’ community in Ft. Myers, Florida. The complaint names the Company and certain distributors and suppliers of drywall and was filed in the Circuit Court for Lee County, Florida on behalf of the named plaintiffs and other similarly situated owners of homes in Magnolia Lakes or alternatively in the State of Florida. The plaintiffs allege that the Company built their homes with defective drywall, manufactured in China, that contains sulfur compounds that allegedly corrode certain metals and that are allegedly capable of harming the health of individuals. Plaintiffs allege physical and economic damages and seek legal and equitable relief, medical monitoring and attorney’s fees. This case has been transferred to the Eastern District of Louisiana pursuant to an order from the United States Judicial Panel on Multidistrict Litigation. In addition, the Company has been named in other complaints filed in the multidistrict litigation and continues to pursue recovery against responsible subcontractors and drywall suppliers. The Company believes that the claims asserted in these actions are governed by its home warranty or are without merit. Accordingly, the Company intends to vigorously defend against this litigation.
 
The lender of one of our unconsolidated joint ventures filed individual lawsuits against some of the joint venture members and certain of those members’ parent companies (including the Company), seeking to recover damages under completion guarantees, among other claims. We intend to vigorously defend against this legal action. We are a 2.58% member in this joint venture (see Note 3 for additional information). An estimate of probable loss or range of loss, if any cannot presently be made. In addition, one member of the joint venture filed an arbitration proceeding against the remaining members related to the plaintiff-member’s allegations that the other members failed to perform under the applicable membership agreements. The arbitration panel issued its decision on July 6, 2010 and denied the plaintiff’s claims for specific performance claims and awarded damages in an amount well below the amount claimed. The Company does not believe that its proportional share of the award is material to our consolidated financial position or results of operations. The plaintiff has moved to have the panel’s award confirmed. Defendants have opposed the motion and have moved to vacate the panel’s decision in part.
 
We cannot predict or determine the timing or final outcome of the lawsuits or the effect that any adverse findings or adverse determinations in the pending lawsuits may have on us. In addition, an estimate of possible loss or range of loss, if any, cannot presently be made with respect to the above pending matters. An unfavorable determination in any of the pending lawsuits could result in the payment by us of substantial monetary damages which may not be fully covered by insurance. Further, the legal costs associated with the lawsuits and the amount of time required to be spent by management and the Board of Directors on these matters, even if we are ultimately successful, could have a material adverse effect on our business, financial condition and results of operations.
 
Other Matters
 
As disclosed in our 2009 Form 10-K, on July 1, 2009, the Company announced that it has resolved the criminal and civil investigations by the United States Attorney’s Office in the Western District of North Carolina (the U.S. Attorney) and other state and federal agencies concerning matters that were the subject of the independent investigation, initiated in April 2007 by the Audit Committee of the Board of Directors (the Investigation) and concluded in May 2008. Under the terms of the deferred prosecution agreement (DPA), the Company’s liability for fiscal 2010 is $1 million and in each of the fiscal years after 2010 through a portion of fiscal 2014 (unless extended as described in Note 13) will be equal to 4% of the Company’s adjusted EBITDA (as defined in the DPA). The total amount of such obligations will be dependent on several factors; however, the maximum liability under the DPA and


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other settlement agreements discussed above will not exceed $55.0 million of which $15 million has been paid as of September 30, 2010.
 
In November 2003, Beazer Homes received a request for information from the EPA pursuant to Section 308 of the Clean Water Act seeking information concerning the nature and extent of storm water discharge practices relating to certain of our communities completed or under construction. The EPA or the equivalent state agency has issued Administrative Orders identifying alleged instances of noncompliance and requiring corrective action to address the alleged deficiencies in storm water management practices. The parties have agreed to settle this matter and the terms are being finalized. The amount to be paid by the Company pursuant to the settlement agreement will not have a material adverse effect on our financial condition, results of operation or cash flows. Beazer Homes has taken action to comply with the requirements of each of the Administrative Orders and is working to otherwise maintain compliance with the requirements of the Clean Water Act.
 
In 2006, we received two Administrative Orders issued by the New Jersey Department of Environmental Protection. The Orders allege certain violations of wetlands disturbance permits. The two Orders assess proposed fines of $630,000 and $678,000, respectively. We have met with the Department to discuss their concerns on the two affected communities and have requested hearings on both matters. We believe that we have significant defenses to the alleged violations and intend to contest the agency’s findings and the proposed fines. We are currently pursuing settlement discussions with the Department.
 
We and certain of our subsidiaries have been named as defendants in various claims, complaints and other legal actions, most relating to construction defects, moisture intrusion and product liability. Certain of the liabilities resulting from these actions are covered in whole or part by insurance. In our opinion, based on our current assessment, the ultimate resolution of these matters will not have a material adverse effect on our financial condition, results of operations or cash flows.
 
Item 4.   Submission of Matters to a Vote of Security Holders
 
None.
 
PART II
 
Item 5.   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
Market Information
 
The Company lists its common shares on the New York Stock Exchange (NYSE) under the symbol “BZH.” On November 3, 2010, the last reported sales price of the Company’s common stock on the NYSE was $4.18. On November 3, 2010, Beazer Homes USA, Inc. had approximately 237 stockholders of record and 75,669,381 shares of common stock outstanding. The following table sets forth, for the quarters indicated, the range of high and low trading for the Company’s common stock during fiscal 2010 and 2009.
 
                                 
    1st Qtr   2nd Qtr   3rd Qtr   4th Qtr
 
Fiscal Year 2010:
                               
High
  $ 6.06     $ 5.44     $ 7.08     $ 4.69  
Low
  $ 3.90     $ 3.83     $ 3.61     $ 3.10  
 
                                 
    1st Qtr   2nd Qtr   3rd Qtr   4th Qtr
 
Fiscal Year 2009:
                               
High
  $ 6.76     $ 1.71     $ 3.95     $ 6.93  
Low
  $ 1.13     $ 0.24     $ 0.87     $ 1.36  


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Dividends
 
Effective November 2, 2007, the Board of Directors suspended the payment of quarterly dividends. The Board concluded that this action, which will allow the Company to conserve approximately $16 million of cash on an annual basis, was a prudent effort in light of the continued deterioration in the housing market. The Board of Directors will periodically reconsider the declaration of dividends. The reinstatement of quarterly dividends, the amount of such dividends, and the form in which the dividends are paid (cash or stock) depends upon the results of operations, the financial condition of the Company and other factors which the Board of Directors deems relevant. The indentures under which our senior notes were issued contain certain restrictive covenants, including limitations on payment of dividends. At September 30, 2010, under the most restrictive covenants of each indenture, none of our retained earnings was available for cash dividends or share repurchases.
 
Securities Authorized for Issuance under Equity Compensation Plans
 
The following table provides information as of September 30, 2010 with respect to our shares of common stock that may be issued under our existing equity compensation plans, all of which have been approved by our stockholders:
 
                         
    Number of
  Weighted
  Number of Common Shares
    Common
  Average
  Remaining Available for
    Shares to be Issued
  Exercise
  Future
    Upon Exercise of
  Price of
  Issuance Under Equity
    Outstanding
  Outstanding
  Compensation
Plan Category
  (a)   (b)   (c)
 
Equity compensation plans approved by stockholders
    2,578,354     $ 22.69       3,987,710  
 
Issuer Purchases of Equity Securities
 
On November 18, 2005, as part of an acceleration of our comprehensive plan to enhance stockholder value, our Board of Directors authorized an increase of our stock repurchase plan to ten million shares of our common stock. Shares may be purchased for cash in the open market, on the NYSE or in privately negotiated transactions. During fiscal 2010, 2009 and 2008, we did not repurchase any shares in the open market. We have currently suspended our repurchase program and any resumption of such program will be at the discretion of the Board of Directors and is unlikely in the foreseeable future.
 
During the quarter ended September 30, 2010, 5,634 shares, at an average price of $4.52 per share, were surrendered to us by employees in payment of minimum tax obligations upon the vesting of restricted stock units under our stock incentive plans.
 
Performance Graph
 
The following graph illustrates the cumulative total stockholder return on Beazer Homes’ common stock for the last five fiscal years through September 30, 2010, compared to the S&P 500 Index and the S&P 500 Homebuilding Index. The comparison assumes an investment in Beazer Homes’ common stock and in each of the foregoing indices of $100 at September 30, 2005, and assumes that all dividends were reinvested. Stockholder returns over the indicated period are based on historical data and should not be considered indicative of future stockholder returns.
 


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(PERFORMANCE GRAPH)
 
                                                             
      Fiscal Year Ended September 30,
      2005     2006     2007     2008     2009     2010
Beazer Homes USA, Inc. 
    $ 100.00       $ 67.05       $ 14.48       $ 10.49       $ 9.81       $ 7.25  
S&P 500
      100.00         110.78         128.98         100.66         93.70         103.24  
S&P Homebuilding
      100.00         72.44         36.83         31.23         26.17         24.28  
                                                             
 
Item 6.   Selected Financial Data
 
                                         
    Year Ended September 30,
    2010   2009   2008   2007   2006
    ($ in millions, except per share amounts)
 
Statement of Operations Data:(i)
                                       
Total revenue
  $ 1,010     $ 972     $ 1,737     $ 2,943     $ 4,545  
Gross profit (loss)
    86       16       (247 )     (89 )     1,122  
Gross margin(i), (ii)
    8.5 %     1.6 %     (14.2 )%     (3.0 )%     24.7 %
Operating (loss) income
  $ (114 )   $ (241 )   $ (618 )   $ (511 )   $ 596  
(Loss) income from continuing operations
    (30 )     (176 )     (780 )     (346 )     378  
EPS from continuing operations -basic
    (0.50 )     (4.54 )     (20.23 )     (9.01 )     9.48  
EPS from continuing operations -diluted
    (0.50 )     (4.54 )     (20.23 )     (9.01 )     8.52  
Dividends paid per common share
                      0.40       0.40  
Balance Sheet Data (end of year)(iii):
                                       
Cash and cash equivalents and restricted cash
  $ 576     $ 557     $ 585     $ 460     $ 172  
Inventory
    1,204       1,318       1,652       2,775       3,608  
Total assets
    1,903       2,029       2,642       3,930       4,715  
Total debt
    1,212       1,509       1,747       1,857       1,956  
Stockholders’ equity
    397       197       375       1,324       1,730  

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    Year Ended September 30,
    2010   2009   2008   2007   2006
    ($ in millions, except per share amounts)
 
Supplemental Financial Data (iii):
                                       
Cash provided by (used in):
                                       
Operating activities
  $ 70     $ 94     $ 316     $ 509     $ (378 )
Investing activities
    (6 )     (80 )     (18 )     (52 )     (105 )
Financing activities
    (34 )     (91 )     (167 )     (171 )     353  
Financial Statistics (iii):
                                       
Total debt as a percentage of total debt and stockholders’ equity
    75.3 %     88.5 %     82.3 %     58.4 %     53.1 %
Net debt as a percentage of net debt and stockholders’ equity(ii)
    62.9 %     83.6 %     75.6 %     51.4 %     50.9 %
Adjusted EBITDA from total operations(iv)
  $ 60.2     $ 108.1     $ (27.5 )   $ 235.6     $ 781.6  
Operating Statistics from continuing operations:
                                       
New orders, net
    4,122       4,077       5,158       7,957       11,272  
Closings
    4,513       4,196       6,370       9,766       15,046  
Units in backlog
    780       1,171       1,290       2,502       4,311  
Average selling price (in thousands)
  $ 221.7     $ 230.8     $ 254.3     $ 289.5     $ 299.9  
 
 
(i) Statement of operations data is from continuing operations. Gross profit (loss) includes inventory impairments and lot options abandonments of $50.0 million, $95.2 million, $403.4 million, $531.2 million and $28.4 million for the fiscal years ended September 30, 2010, 2009, 2008, 2007 and 2006, respectively. Operating (loss) income also includes goodwill impairments of $0, $16.1 million, $48.1 million, $49.7 million and $0 for the fiscal years ended September 30, 2010, 2009, 2008, 2007 and 2006. The aforementioned charges were primarily related to the deterioration of the homebuilding environment over the past few years. Loss from continuing operations for fiscal 2010 and 2009 also include a gain on extinguishment of debt of $43.9 million, and $144.5 million, respectively.
 
(ii) Net Debt = Debt less unrestricted cash and cash equivalents; Gross margin = Gross (loss) profit divided by total revenue.
 
(iii) Discontinued operations were not segregated in the consolidated balance sheets or statements of cash flows.
 
(iv) A reconciliation of EBIT and Adjusted EBITDA to net (loss) income, the most directly comparable GAAP measure, is provided below for each period presented (in thousands):
 
                                         
    Year Ended September 30,  
    2010     2009     2008     2007     2006  
 
Net (loss) income
  $ (34,049 )   $ (189,383 )   $ (951,912 )   $ (411,073 )   $ 368,836  
(Benefit) provision for income taxes
    (133,188 )     (9,076 )     84,763       (222,207 )     214,421  
Interest amortized to home construction and land sales expenses and capitalized interest impaired
    54,556       58,090       126,057       139,880       95,974  
Interest expense not qualified for capitalization
    74,214       83,030       55,185              
                                         
EBIT
  $ (38,467 )   $ (57,339 )   $ (685,907 )   $ (493,400 )   $ 679,231  
                                         

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    Year Ended September 30,  
    2010     2009     2008     2007     2006  
 
EBIT
  $ (38,467 )   $ (57,339 )   $ (685,907 )   $ (493,400 )   $ 679,231  
Depreciation and amortization and stock compensation amortization
    24,774       30,723       40,273       44,743       58,178  
Inventory impairments and option contract abandonments
    49,526       103,751       496,833       599,514       44,175  
Goodwill impairment
          16,143       52,470       52,755        
Joint venture impairment and abandonment charges
    24,328       14,793       68,791       31,939        
                                         
Adjusted EBITDA
  $ 60,161     $ 108,071     $ (27,540 )   $ 235,551     $ 781,584  
                                         
 
EBIT (earnings before interest and taxes) equals net (loss) income before (a) previously capitalized interest amortized to home construction and land sales expenses, capitalized interest impaired and interest expense not qualified for capitalization and (b) income taxes. Adjusted EBITDA (earnings before interest, taxes, depreciation, amortization and impairments) is calculated by adding non-cash charges, including depreciation, amortization, inventory impairment and abandonment charges, goodwill impairments and joint venture impairment charges for the period to EBIT. EBIT and Adjusted EBITDA are not GAAP financial measures. EBIT and Adjusted EBITDA should not be considered alternatives to net income determined in accordance with GAAP as an indicator of operating performance, nor an alternative to cash flows from operating activities determined in accordance with GAAP as a measure of liquidity. Because some analysts and companies may not calculate EBIT and Adjusted EBITDA in the same manner as Beazer Homes, the EBIT and Adjusted EBITDA information presented above may not be comparable to similar presentations by others.
 
The magnitude and volatility of non-cash inventory impairment and abandonment charges, goodwill impairments and joint venture impairment charges for the Company, and for other home builders, have been significant in recent periods and, as such, have made financial analysis of our industry more difficult. Adjusted EBITDA, and other similar presentations by analysts and other companies, is frequently used to assist investors in understanding and comparing the operating characteristics of home building activities by eliminating many of the differences in companies’ respective capitalization, tax position and level of impairments. Management believes this non-GAAP measure enables holders of our securities to better understand the cash implications of our operating performance and our ability to service our debt obligations as they currently exist and as additional indebtedness is incurred in the future. The measure is also useful internally, helping management compare operating results and as a measure of the level of cash which may be available for discretionary spending.
 
Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Executive Overview and Outlook
 
The macro-economic conditions experienced during Fiscal 2010 continued to present challenges that have hindered a recovery for the homebuilding industry. Consumers enjoyed record low interest rates for home mortgages and housing affordability along with federal and local government incentives that have attempted to support the housing industry. These factors provided significant support to the industry during our second and third fiscal quarters as we experienced significant increases in new home orders. However, this elevated volume of home purchases was not sustained upon the expiration of the government incentives. Continued high unemployment levels have caused high levels of uncertainty among employers and consumers concerning the health of the overall economy. This uncertainty led to a decline in home orders during our fourth fiscal quarter that has continued into the first quarter of fiscal 2011. The current homebuilding environment is also challenged by increased numbers of foreclosed homes offered at substantially reduced prices. These combined pressures in the marketplace have resulted in the continued use of sales incentives and price reductions by us and many of our competitors in an effort to generate sales and reduce inventory levels. As a result, we continued to experience inventory valuation adjustments throughout fiscal 2010. Despite these challenges, we were able to produce improvements in new home orders, home closings, gross margins and profitability in fiscal 2010 as compared to fiscal 2009.

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During fiscal 2010, we continued to improve our capitalization while maintaining our three primary goals: generate and maintain liquidity, reduce debt and increase shareholder net worth. We raised $166.7 million of common equity capital, $128.2 million of equity linked capital (Mandatory Convertible Subordinated Notes and Tangible Equity Units) and $300 million Senior Notes while repaying $585.4 million of our Senior Notes.
 
In fiscal 2010, we recognized a tax benefit from total operations of $133.2 million primarily resulting from The Worker, Homeownership and Business Act of 2009 which allowed us to carry back a portion of our fiscal 2009 federal tax loss. This carry back claim allowed us to claim a refund of taxes paid in prior years and to monetize a deferred tax asset that had previously had a valuation allowance recorded against it. The total amount of income tax refunds we received in fiscal 2010 was $135.8 million.
 
Throughout the homebuilding recession we have remained disciplined in our approach to the business. We have continued to reduce direct construction costs, overhead expenses and controlled our land acquisition and development spending. We remain committed to controlling our supply of unsold homes under construction and ensuring that our inventory supply aligns with our current demand expectations. This approach resulted in the closure of several divisional operations during the past several years and resulted in our decision to exit the Jacksonville, Florida and Albuquerque, New Mexico markets during the fourth quarter of fiscal 2010. We expect to continue this disciplined approach to managing our business during these uncertain times as we strive toward returning to profitability.
 
We will continue to focus on maintaining a significant liquidity position as we selectively invest in the growth of the business. We may also, from time to time, continue to seek to retire or purchase our outstanding debt through cash purchases and/or exchanges for equity or other debt securities, in open market purchases, privately negotiated transactions or otherwise. There can be no assurances that we will be able to complete any of these transactions in the future on favorable terms or at all.
 
While our visibility into the economic conditions for fiscal 2011 is limited at this time, we believe that we will continue to benefit from increases in housing starts and improvements in employment. Therefore, we believe the environment will improve, perhaps slowly, and we have taken and will continue to take steps necessary to position ourselves to participate in the housing recovery.
 
We operated Beazer Mortgage Corporation (BMC) from 1998 through February 2008 to offer mortgage financing to the buyers of our homes. BMC entered into various agreements with mortgage investors for the origination of mortgage loans. Underwriting decisions were not made by BMC but by the investors or third-party service providers. To date, we have received requests to repurchase fewer than 100 mortgage loans from various investors. While we have not been required to repurchase any mortgage loans, we have established an immaterial amount as a reserve for the repurchase of mortgage loans originated by BMC. We cannot rule out the potential for additional mortgage loan repurchase claims in the future, although, at this time, we do not believe that the exposure related to any such additional claims would be material to our consolidated financial position or results of operation. As of September 30, 2010, no liability has been recorded for any such additional claims as such exposure is not both probable and reasonably estimable.
 
Critical Accounting Policies
 
Some of our critical accounting policies require the use of judgment in their application or require estimates of inherently uncertain matters. Although our accounting policies are in compliance with accounting principles generally accepted in the United States of America (GAAP), a change in the facts and circumstances of the underlying transactions could significantly change the application of the accounting policies and the resulting financial statement impact. Listed below are those policies that we believe are critical and require the use of complex judgment in their application.
 
Inventory Valuation — Held for Development
 
Our homebuilding inventories that are accounted for as held for development include land and home construction assets grouped together as communities. Homebuilding inventories held for development are stated at cost (including direct construction costs, capitalized indirect costs, capitalized interest and real estate taxes)


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unless facts and circumstances indicate that the carrying value of the assets may not be recoverable. We assess these assets no less than quarterly for recoverability in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) 144, Accounting for the Impairment or Disposal of Long-Lived Assets (ASC 360). Generally, upon the commencement of land development activities, it may take three to five years (depending on, among other things, the size of the community and its sales pace) to fully develop, sell, construct and close all the homes in a typical community. However, the impact of the recent downturn in our business has significantly lengthened the estimated life of many communities. Recoverability of assets is measured by comparing the carrying amount of an asset to future undiscounted cash flows expected to be generated by the asset. If the expected undiscounted cash flows generated are expected to be less than its carrying amount, an impairment charge should be recorded to write down the carrying amount of such asset to its estimated fair value based on discounted cash flows.
 
We conduct a review of the recoverability of our homebuilding inventories held for development at the community level as factors indicate that an impairment may exist. Events and circumstances that might indicate impairment include, but are not limited to, (1) adverse trends in new orders, (2) higher than anticipated cancellations, (3) declining margins, which might result from the need to offer incentives to new homebuyers to drive sales or price reductions to respond to actions taken by our competitors, (4) economic factors specific to the markets in which we operate, including fluctuations in employment levels, population growth, or levels of new and resale homes for sale in the marketplace and (5) a decline in the availability of credit across all industries.
 
As a result, we evaluate, among other things, the following information for each community:
 
  •  Actual “Net Contribution Margin” (defined as homebuilding revenues less homebuilding costs and direct selling expenses) for homes closed in the current fiscal quarter, fiscal year to date and prior two fiscal quarters. Homebuilding costs include land and land development costs (based upon an allocation of such costs, including costs to complete the development, or specific lot costs), home construction costs (including an estimate of costs, if any, to complete home construction), previously capitalized indirect costs (principally for construction supervision), capitalized interest and estimated warranty costs. Direct selling expenses include commissions, closing costs and amortization related to model home furnishings and improvements;
 
  •  Projected Net Contribution Margin for homes in backlog;
 
  •  Actual and trending new orders and cancellation rates;
 
  •  Actual and trending base home sales prices and sales incentives for home sales that occurred in the prior two fiscal quarters that remain in backlog at the end of the fiscal quarter and expected future homes sales prices and sales incentives and absorption over the expected remaining life of the community;
 
  •  A comparison of our community to our competition to include, among other things, an analysis of various product offerings including, the size and style of the homes currently offered for sale, community amenity levels, availability of lots in our community and our competition’s, desirability and uniqueness of our community and other market factors; and
 
  •  Other events that may indicate that the carrying value may not be recoverable.
 
In determining the recoverability of the carrying value of the assets of a community that we have evaluated as requiring a test for impairment, significant quantitative and qualitative assumptions are made relative to the future home sales prices, sales incentives, direct and indirect costs of home construction and land development and the pace of new home orders. In addition, these assumptions are dependent upon the specific market conditions and competitive factors for each specific community and may differ greatly between communities within the same market and communities in different markets. Our estimates are made using information available at the date of the recoverability test, however, as facts and circumstances may change in future reporting periods, our estimates of recoverability are subject to change.
 
For assets in communities for which the undiscounted future cash flows are less than the carrying value, the carrying value of that community is written down to its then estimated fair value based on discounted cash flows. The carrying value of assets in communities that were previously impaired and continue to be classified as held for development is not written up for future estimates of increases in fair value in future reporting periods. Market deterioration that exceeds our estimates may lead us to incur additional impairment charges on previously impaired


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homebuilding assets in addition to homebuilding assets not currently impaired but for which indicators of impairment may arise if the market continues to deteriorate.
 
The fair value of the homebuilding inventory held for development is estimated using the present value of the estimated future cash flows using discount rates commensurate with the risk associated with the underlying community assets. The discount rate used may be different for each community. The factors considered when determining an appropriate discount rate for a community include, among others: (1) community specific factors such as the number of lots in the community, the status of land development in the community, the competitive factors influencing the sales performance of the community and (2) overall market factors such as employment levels, consumer confidence and the existing supply of new and used homes for sale. The assumptions used in our discounted cash flow models are specific to each community tested for impairment. Historically, these assumptions did not include market improvements except in limited circumstances in the latter years of long-lived communities. Our assumptions assume limited market improvements in some communities beginning in fiscal 2011 and continuing improvement in these communities in subsequent years. We assumed the remaining communities would have market improvements beginning in fiscal 2012.
 
For the fiscal year ended September 30, 2010, we used discount rates of 13.7% to 20.0% in our estimated discounted cash flow impairment calculations. During fiscal 2010, 2009 and 2008, we recorded impairments of our inventory of approximately $48.1 million, $78.7 million and $290.7 million, respectively, for land under development and homes under construction for our continuing operations. Impairments of inventory previously held for development related to our discontinued operations were $0.8 million, $1.5 million and $21.9 million for fiscal 2010, 2009 and 2008, respectively.
 
Due to uncertainties in the estimation process, particularly with respect to projected home sales prices and absorption rates, the timing and amount of the estimated future cash flows and discount rates, it is reasonably possible that actual results could differ from the estimates used in our historical analyses. Our assumptions about future home sales prices and absorption rates require significant judgment because the residential homebuilding industry is cyclical and is highly sensitive to changes in economic conditions. We calculated the estimated fair values of inventory held for development that were evaluated for impairment based on current market conditions and assumptions made by management relative to future results. Because our projected cash flows are significantly impacted by changes in market conditions, it is reasonably possible that actual results could differ materially from our estimates and result in additional impairments.
 
Asset Valuation — Land Held for Future Development
 
For those communities for which construction and development activities are expected to occur in the future or have been idled (land held for future development), all applicable interest and real estate taxes are expensed as incurred and the inventory is stated at cost unless facts and circumstances indicate that the carrying value of the assets may not be recoverable. The future enactment of a development plan or the occurrence of events and circumstances may indicate that the carrying amount of an asset may not be recoverable. We evaluate the potential development plans of each community in land held for future development if changes in facts and circumstances occur which would give rise to a more detailed analysis for a change in the status of a community to active status or held for development.
 
Asset Valuation — Land Held for Sale
 
We record assets held for sale at the lower of the carrying value or fair value less costs to sell. The following criteria are used to determine if land is held for sale:
 
  •  management has the authority and commits to a plan to sell the land;
 
  •  the land is available for immediate sale in its present condition;
 
  •  there is an active program to locate a buyer and the plan to sell the property has been initiated;
 
  •  the sale of the land is probable within one year;


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  •  the property is being actively marketed at a reasonable sale price relative to its current fair value; and
 
  •  it is unlikely that the plan to sell will be withdrawn or that significant changes to the plan will be made.
 
Additionally, in certain circumstances, management will re-evaluate the best use of an asset that is currently being accounted for as held for development. In such instances, management will review, among other things, the current and projected competitive circumstances of the community, including the level of supply of new and used inventory, the level of sales absorptions by us and our competition, the level of sales incentives required and the number of owned lots remaining in the community. Based on this review, if the foregoing criteria have been met at the end of the applicable reporting period and we believe that the best use of the asset is the sale of all or a portion of the asset in its current condition, then all or portions of the community are accounted for as held for sale.
 
In determining the fair value of the assets less cost to sell, we considered factors including current sales prices for comparable assets in the area, recent market analysis studies, appraisals, any recent legitimate offers, and listing prices of similar properties. If the estimated fair value less cost to sell of an asset is less than its current carrying value, the asset is written down to its estimated fair value less cost to sell. During fiscal 2010, 2009 and 2008, we recorded inventory impairments on land held for sale by our continuing operations of $1.1 million, $12.5 million and $61.2 million, respectively. Land held for sale inventory impairments related to our discontinued operations totaled $1.0 million, $9.4 million and $55.6 million for fiscal 2010, 2009 and 2008, respectively.
 
Due to uncertainties in the estimation process, it is reasonably possible that actual results could differ from the estimates used in our historical analyses. Our assumptions about land sales prices require significant judgment because the current market is highly sensitive to changes in economic conditions. We calculated the estimated fair values of land held for sale based on current market conditions and assumptions made by management, which may differ materially from actual results and may result in additional impairments if market conditions continue to deteriorate.
 
Homebuilding Revenues and Costs
 
Revenue from the sale of a home is generally recognized when the closing has occurred and the risk of ownership is transferred to the buyer. As appropriate, revenue for condominiums under construction is recognized based on the percentage-of-completion method in accordance with SFAS 66, Accounting for Sales of Real Estate (ASC 360), when certain criteria are met. All associated homebuilding costs are charged to cost of sales in the period when the revenues from home closings are recognized. Homebuilding costs include land and land development costs (based upon an allocation of such costs, including costs to complete the development, or specific lot costs), home construction costs (including an estimate of costs, if any, to complete home construction), previously capitalized indirect costs (principally for construction supervision), capitalized interest and estimated warranty costs. Sales commissions are included in selling, general and administrative expense when the closing has occurred. All other costs are expensed as incurred.
 
Warranty Reserves
 
We currently provide a limited warranty (ranging from one to two years) covering workmanship and materials per our defined performance quality standards. In addition, we provide a limited warranty (generally ranging from a minimum of five years up to the period covered by the applicable statute of repose) covering only certain defined construction defects. We also provide a defined structural warranty with single-family homes and townhomes in certain states.
 
Since we subcontract our homebuilding work to subcontractors whose contracts generally include an indemnity obligation and a requirement that certain minimum insurance requirements be met, including providing us with a certificate of insurance prior to receiving payments for their work, claims relating to workmanship and materials are generally the primary responsibility of our subcontractors.
 
Warranty reserves are included in other liabilities in the consolidated balance sheets. We record reserves covering our anticipated warranty expense for each home closed. Management reviews the adequacy of warranty reserves each reporting period, based on historical experience and management’s estimate of the costs to remediate the claims, and adjusts these provisions accordingly. Our review includes a quarterly analysis of the historical data


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and trends in warranty expense by operating segment. An analysis by operating segment allows us to consider market specific factors such as our warranty experience, the number of home closings, the prices of homes, product mix and other data in estimating our warranty reserves. In addition, our analysis also contemplates the existence of any non-recurring or community-specific warranty related matters that might not be contemplated in our historical data and trends. As a result of our analyses, we adjust our estimated warranty liabilities. Based on historical results, we believe that our existing estimation process is accurate and do not anticipate the process to materially change in the future. Our estimation process for such accruals is discussed in Note 13 to the Consolidated Financial Statements. While we believe that our warranty reserves at September 30, 2010 are adequate, there can be no assurances that historical data and trends will accurately predict our actual warranty costs or that future developments might not lead to a significant change in the reserve.
 
Investments in Unconsolidated Joint Ventures
 
We periodically enter into joint ventures with unrelated developers, other homebuilders and financial partners to develop finished lots for sale to the joint venture’s members and other third parties. We have determined that our interest in these joint ventures should be accounted for under the equity method. We recognize our share of profits and losses from the sale of lots to other buyers. Our share of profits from lots purchased by Beazer Homes from the joint ventures are deferred and treated as a reduction of the cost of the land purchased from the joint venture. Such profits are subsequently recognized at the time the home closes and title passes to the homebuyer.
 
We evaluate our investments in unconsolidated entities for impairment during each reporting period. A series of operating losses of an investee or other factors may indicate that a decrease in the value of our investment in the unconsolidated entity has occurred which is other-than-temporary. The amount of impairment recognized is the excess of the investment’s carrying value over its estimated fair value.
 
Our assumption of the joint venture’s estimated fair value is dependent on market conditions. Inventory in the joint venture is also reviewed for potential impairment by the unconsolidated entities. If a valuation adjustment is recorded by an unconsolidated entity, our proportionate share of it is reflected in our equity in income (loss) from unconsolidated joint ventures with a corresponding decrease to our investment in unconsolidated entities. The operating results of the unconsolidated joint ventures are dependent on the status of the homebuilding industry, which has historically been cyclical and sensitive to changes in economic conditions such as interest rates, credit availability, unemployment levels and consumer sentiment. Changes in these economic conditions could materially affect the projected operational results of the unconsolidated entities. Because of these changes in economic conditions, actual results could differ materially from management’s assumptions and may require material valuation adjustments to our investments in unconsolidated entities to be recorded in the future.
 
During fiscal 2010, 2009 and 2008, we wrote down our investment in certain of our joint ventures reflecting $8.8 million, $12.6 million and $45.3 million, respectively, of impairments of inventory held within those ventures. These charges are included in equity in loss of unconsolidated joint ventures in the accompanying Statement of Operations for the fiscal years ended September 30, 2010, 2009 and 2008, respectively. In addition, for fiscal 2010, 2009 and 2008, respectively, there were $15.5 million, $2.2 million and $23.5 million of joint venture impairments related to certain homebuilding operations in our discontinued operations and, as a result, have been included in loss from discontinued operations, net in the accompanying Statement of Operations. While we believe that no additional impairment of our unconsolidated joint venture investments existed as of September 30, 2010, market deterioration or changes in estimated future cash flows that exceeds our estimates may lead us to incur additional impairment charges. As of September 30, 2010, our remaining investments in unconsolidated joint ventures totaled $8.7 million.
 
Income Taxes — Valuation Allowance
 
Judgment is required in estimating valuation allowances for deferred tax assets. A valuation allowance is established against a deferred tax asset if, based on the available evidence, it is not more likely than not that such assets will be realized. The realization of a deferred tax asset ultimately depends on the existence of sufficient taxable income in either the carryback or carryforward periods under tax law. We periodically assess the need for valuation allowances for deferred tax assets based on more-likely-than-not realization threshold criteria. In our


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assessment, appropriate consideration is given to all positive and negative evidence related to the realization of the deferred tax assets. This assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability, the duration of statutory carryforward periods, our experience with operating loss and tax credit carryforwards not expiring unused, the Section 382 limitation on our ability to carryforward pre-ownership change net operating losses and recognized built-in losses or deductions, and tax planning alternatives.
 
Our assessment of the need for the valuation of deferred tax assets includes assessing the likely future tax consequences of events that have been recognized in our financial statements or tax returns. We base our estimate of deferred tax assets and liabilities on current tax laws and rates and, in certain cases, business plans and other expectations about future outcomes. Changes in existing tax laws or rates could affect actual tax results and future business results may affect the amount of deferred tax liabilities or the valuation of deferred tax assets over time. Our accounting for deferred tax consequences represents our best estimate of future events. Although it is possible there will be changes that are not anticipated in our current estimates, we believe it is unlikely such changes would have a material period-to-period impact on our financial position or results of operations.
 
During fiscal 2008, we determined that it was not more likely than not that substantially all of our deferred tax assets would be realized and, therefore, we established a valuation allowance of $400.6 million for substantially all of our deferred tax assets. We have not changed our assessment regarding the recoverability of our deferred tax assets as of September 30, 2010 and consequently, we determined that a valuation allowance was still warranted. As of September 30, 2010, our deferred tax valuation allowance was $403.8 million. Management reassesses the realizability of the deferred tax assets each reporting period. To the extent that our results of operations improve and deferred tax assets become realizable, the valuation allowance will be reduced and result in a non-cash tax benefit.
 
We experienced an “ownership change” as defined in Section 382 of the Internal Revenue Code as of January 12, 2010. Section 382 contains rules that limit the ability of a company that undergoes an “ownership change” to utilize its net operating loss carryforward and certain built-in losses or deductions recognized during the five-year period after the ownership change. Therefore, our ability to utilize our pre-ownership change net operating loss (NOL) carryforwards and certain recognized built-in losses or deductions is limited by Section 382 to an estimated maximum annual amount of approximately $11.4 million ($4 million tax-effected).
 
There can be no assurance that another ownership change, as defined in the tax law, will not occur. If another “ownership change” occurs, a new annual limitation on the utilization of net operating losses would be determined as of that date.
 
Seasonal and Quarterly Variability
 
Our homebuilding operating cycle generally reflects escalating new order activity in the second and third fiscal quarters and increased closings in the third and fourth fiscal quarters. However, beginning in the second half of fiscal 2006 and continuing through fiscal 2010, we continued to experience challenging conditions in most of our markets which contributed to decreased revenues and closings as compared to prior periods including prior quarters, thereby reducing typical seasonal variations. In addition, the expiration of the $8,000 First time Homebuyer Tax Credit on June 30, 2010, appears to have incentivized certain homebuyers to purchase homes during the first half of fiscal 2010. This resulted in a change to our typical seasonal variations as we experienced increased closings in our third quarter as opposed to our fourth quarter of fiscal 2010. The following chart presents certain quarterly operating data for our continuing operations for our last twelve fiscal quarters.
 
                                         
New Orders (net of cancellations)  
    1st Qtr     2nd Qtr     3rd Qtr     4th Qtr     Total  
 
2010
    710       1,629       1,005       778       4,122  
2009
    514       1,095       1,488       980       4,077  
2008
    988       1,662       1,549       959       5,158  
 


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Closings  
    1st Qtr     2nd Qtr     3rd Qtr     4th Qtr     Total  
 
2010
    935       832       1,597       1,149       4,513  
2009
    859       785       911       1,641       4,196  
2008
    1,629       1,233       1,348       2,160       6,370  
 
RESULTS OF CONTINUING OPERATIONS:
 
                         
    Fiscal Year Ended September 30,  
    2010     2009     2008  
    ($ in thousands)  
 
Revenues:
                       
Homebuilding
  $ 1,000,531     $ 968,314     $ 1,620,990  
Land sales & other
    9,310       3,389       115,737  
                         
Total
  $ 1,009,841     $ 971,703     $ 1,736,727  
                         
Gross profit (loss)
                       
Homebuilding
  $ 81,528     $ 15,134     $ (257,013 )
Land sales & other
    4,080       620       9,570  
                         
Total
  $ 85,608     $ 15,754     $ (247,443 )
                         
Gross Margin — homebuilding
    8.1 %     1.6 %     (15.9 )%
Gross Margin — land sales & other
    43.8 %     18.3 %     8.3 %
Gross Margin — Total
    8.5 %     1.6 %     (14.2 )%
Selling, general and administrative (SG&A) expenses
  $ 186,556     $ 222,691     $ 298,274  
SG&A as a% of total revenue
    18.5 %     22.9 %     17.2 %
Depreciation and amortization
  $ 12,874     $ 18,392     $ 23,802  
Goodwill impairment
  $     $ 16,143     $ 48,105  
Equity in income (loss) of unconsolidated joint ventures from:
                       
Joint venture activities
  $ 10     $ 518     $ (12,527 )
Impairments
  $ (8,817 )   $ (12,630 )   $ (45,292 )
                         
Equity in loss of unconsolidated joint ventures
  $ (8,807 )   $ (12,112 )   $ (57,819 )
                         
Gain on extinguishment of debt
  $ 43,901     $ 144,503     $  
 
Items impacting comparability between periods
 
The following items impact the comparability of our results of operations between fiscal periods 2010, 2009 and 2008: inventory impairments and abandonments, certain selling, general and administrative costs, goodwill impairment charges, joint venture impairment charges, and gain on extinguishment of debt. In addition, during fiscal 2010, we exited or discontinued our title services operations and our New Mexico and Jacksonville, Florida markets and have reclassified the operating results of these operations for all period presented to discontinued operations. We have also reclassified the operating results of our Raleigh market from the East to the Southeast segment in alignment with the basis that is used by management for evaluating segment performance and resource allocations.
 
Inventory Impairments and Abandonments.  The improvement in gross margin over the past two fiscal years was directly related to a reduction in non-cash pre-tax inventory impairments and option contract abandonments from $403.4 million in fiscal 2008 to $95.2 million in fiscal 2009 and $50.0 million in fiscal 2010. The projected cash flows used to evaluate the fair value of inventory are significantly impacted by changes in market conditions including decreased sales prices, the change in sales prices and changes in absorption estimates. The impairments

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recorded on our held for development inventory for the fiscal years ended September 30, 2009 and 2008, primarily resulted from the continued decline in the homebuilding environment across our submarkets. During fiscal 2010, although certain markets showed improvement from the prior years, for certain communities we determined it was prudent to reduce sales prices or further increase sales incentives in response to factors including competitive market conditions. In future periods, we may again determine that it is prudent to reduce sales prices, further increase sales incentives or reduce absorption rates which may lead to additional impairments, which could be material. Our impairments on land held for sale listed below are as a result of challenging market conditions and our review of recent comparable transactions since land held for sale is recorded at net realizable value, less estimated costs to sell. In addition, over the past few years, we have determined the proper course of action with respect to a number of communities within each homebuilding segment was to abandon the remaining lots under option and to write-off the deposits securing the option takedowns, as well as pre-acquisition costs. The abandonment charges below relate to our decision to abandon certain option contracts that no longer fit in our long-term strategic plan and related to our prior year decision to exit certain markets.
 
The following tables set forth, by reportable homebuilding segment, the inventory impairments and lot option abandonment charges recorded for the fiscal years ended September 30, 2010, 2009 and 2008 (in thousands):
 
                         
    Fiscal Year Ended September 30,  
    2010     2009     2008  
 
Development projects and homes in process (Held for Development)
                       
West
  $ 18,056     $ 42,704     $ 145,710  
East
    18,703       6,383       70,152  
Southeast
    7,973       24,536       53,103  
Unallocated
    3,404       5,116       21,769  
                         
Subtotal
  $ 48,136     $ 78,739     $ 290,734  
                         
Land Held for Sale
                       
West
  $ 1,061     $ 9,357     $ 8,505  
East
          1,071       16,883  
Southeast
          2,094       35,793  
                         
Subtotal
  $ 1,061     $ 12,522     $ 61,181  
                         
Lot Option Abandonments
                       
West
  $ 783     $ 99     $ 14,893  
East
    35       2,884       9,850  
Southeast
    21       972       26,744  
                         
Subtotal
  $ 839     $ 3,955     $ 51,487  
                         
Continuing Operations
  $ 50,036     $ 95,216     $ 403,402  
                         


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Inventory impairments related to continuing operations recorded on a quarterly basis during fiscal 2010, the estimated fair value of such impaired inventory at each period end, the number of lots and number of communities impaired in each period are set forth in the table below as follows ($ in thousands):
 
                                                 
                      Estimated Fair
             
    Inventory Impairments     Value of Impaired
             
    Held for
    Held for
          Inventory at Period
    Lots
    Communities
 
Quarter Ended
  Development     Sale     Total     End     Impaired     Impaired  
 
December 31, 2009
  $ 7,486     $ 1,061     $ 8,547     $ 13,997       379       7  
March 31, 2010
    9,976             9,976       25,975       525       13  
June 30, 2010
    4,483             4,483       5,427       131       3  
September 30, 2010
    26,191             26,191       29,313       962       8  
                                                 
Fiscal 2010
  $ 48,136     $ 1,061     $ 49,197                          
                                                 
 
Selling, General and Administrative Expense Items.  Fiscal 2009 included approximately $16 million of expense for obligations related to the government investigations (see Note 13 to the Consolidated Financial Statements). The decrease in SG&A expense for fiscal 2010 as compared to fiscal 2009 is primarily due to continued cost reductions realized as a result of our comprehensive review of SG&A costs and the absence of the previously mentioned $16 million fiscal 2009 expense offset by increased selling expenses related to the increase in home closings.
 
The 25.3% decrease in SG&A expense between fiscal 2008 and 2009 presented is primarily related to cost reductions realized as a result of our comprehensive review and realignment of our overhead structure in light of our reduced volume expectations and lower sales commissions related to decreased revenues, and decreased investigation-related costs and severance costs offset partially by approximately $16 million of expense for obligations related to the government investigations (see Note 13 to the Consolidated Financial Statements). As of September 30, 2009, we had reduced our overall number of employees by 543 or 38% as compared to September 30, 2008, or a cumulative reduction of 79% since September 30, 2006. Fiscal 2009 and 2008 SG&A expense included $4.5 million and $3.1 million in severance costs related to employees who had been severed as of September 30 of the respective year.
 
Fiscal 2010, 2009 and 2008 SG&A expense included $10.2 million, $23.8 million and $31.8 million, respectively of government investigation and investigation support-related costs, including the $16 million obligation recorded in fiscal 2009 and discussed above. As a percentage of total revenue, SG&A expenses were 18.5% in fiscal 2010 (17.5% excluding the investigation-related costs), 22.9% in fiscal 2009 (20.5% excluding the investigation-related costs) and 17.2% in fiscal 2008 (15.3% excluding the investigation-related costs). The change in SG&A costs as a percentage of total revenue is primarily related to the aforementioned investigative and severance costs and the impact of fixed overhead expenses on reduced/increased revenues, as applicable.
 
Goodwill Impairment Charges.  The Company experienced a significant decline in its market capitalization during first quarter of fiscal 2009. As of December 31, 2008, we considered current and expected future market conditions and recorded a pre-tax, non-cash goodwill impairment charge of $16.1 million in the first quarter of fiscal 2009 related to our reporting units in Maryland, Houston, Texas and Nashville, Tennessee. As a result of this impairment charge, we have no goodwill remaining as of September 30, 2009 or 2010. In fiscal 2008, in light of continuing market weakness, significantly reduced new orders, additional pricing pressures and additional incentives provided to homebuyers, our reforecasting of expected future results of operations and increasing inventory charges, we recorded pretax, non-cash goodwill impairment charges of $48.1 million related to our reporting units in Arizona, New Jersey, Southern California and Virginia. The goodwill impairment charges were based on estimates of the fair value of the underlying assets of the reporting units.
 
Joint Venture Impairment Charges.  As a result of the further deterioration of economic conditions in certain of our markets and the settlement of guarantees under debt obligations of certain of our unconsolidated joint ventures, we recorded impairments in certain of our unconsolidated joint ventures totaling $8.8 million, $12.6 million and $45.3 million in fiscal 2010, 2009 and 2008, respectively (see Note 3 to the Consolidated Financial Statements where further discussed). If these adverse market conditions continue or worsen, we may have to take


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further impairments of our investments in these joint ventures that may have a material adverse effect on our financial position and results of operations.
 
Gain on Extinguishment of Debt.  During fiscal 2010, we completed a number of financial transactions including the repurchase of an aggregate of $585.4 million of our outstanding Senior Notes for an aggregate purchase price of $586.3 million, plus accrued and unpaid interest as of the purchase date. We also completed an exchange of $75 million of our outstanding junior unsecured notes. These transactions resulted in a gain on extinguishment of debt of $43.9 million, net of unamortized discounts and debt issuance costs related to these notes. During the second half of fiscal 2009, we voluntarily repurchased in open-market transactions $384.8 million principal amount of our Senior Notes. The aggregate purchase price was $247.7 million, plus accrued and unpaid interest as of the purchase date, which resulted in a $130.2 million pre-tax gain on extinguishment of debt, net of unamortized discounts and debt issuance costs related to these notes. During fiscal 2009, we also negotiated a reduced payoff for one of our other secured notes payable totaling $22.7 million and recorded a gain on debt extinguishment of $14.3 million related to the repayment of this note.
 
Discontinued Operations.  We have classified the results of operations of our mortgage origination services, title services and our exit markets as discontinued operations in the accompanying consolidated statements of operations for all periods presented. All statement of operations information in the table above and the management discussion and analysis that follow exclude the results of discontinued operations. Discontinued operations were not segregated in the Consolidated Statements of Cash Flows or the Consolidated Balance Sheets. Additional operating data related to discontinued operations for the fiscal years ended September 30, 2010, 2009 and 2008 is as follows:
 
                         
    Fiscal Year Ended September 30,  
    2010     2009     2008  
    ($ in thousands)  
 
Closings
    132       192       1,322  
New Orders
    126       146       907  
Homebuilding revenues
  $ 28,029     $ 46,609     $ 293,314  
Land and lot sale revenues
  $ 3,277     $ 3,077     $ 40,064  
Mortgage & title revenues
  $ 1,861     $ 1,813     $ 7,675  
                         
Total revenue
  $ 33,167     $ 51,499     $ 341,053  
                         
 
See Note 15 to the Consolidated Financial Statements for additional information related to our discontinued operations.
 
Segment Results — Continuing Operations
 
Unit Data by Segment
 
                                                                 
    New Orders, net   Cancellation Rates
    2010   2009   2008   10 v 09   09 v 08   2010   2009   2008
 
West
    1,615       1,793       2,449       (9.9 )%     (26.8 )%     29.5 %     35.3 %     41.1 %
East
    1,563       1,509       1,337       3.6 %     12.9 %     25.3 %     30.1 %     48.2 %
Southeast
    944       775       1,372       21.8 %     (43.5 )%     18.1 %     24.1 %     27.2 %
                                                                 
Total
    4,122       4,077       5,158       1.1 %     (21.0 )%     25.5 %     31.5 %     40.2 %
                                                                 
 


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    Backlog at September 30,  
    2010     2009     2008     10 v 09     09 v 08  
 
Units:
                                       
West
    269       431       521       (37.6 )%     (17.3 )%
East
    366       532       455       (31.2 )%     16.9 %
Southeast
    145       208       314       (30.3 )%     (33.8 )%
                                         
Total
    780       1,171       1,290       (33.4 )%     (9.2 )%
                                         
Aggregated $ value of homes in backlog:
                                       
Total ($ in millions)
  $ 186.2     $ 275.3     $ 315.3       (32.4 )%     (12.7 )%
 
Backlog reflects the number and value of homes for which the Company has entered into a sales contract with a customer but has not yet delivered the home.
 
Fiscal 2010 versus 2009
 
New orders, net of cancellations, for fiscal 2010 increased slightly compared to fiscal 2009 in many of our markets driven by increased demand due to federal and state housing credits which expired in June 2010 and decreased cancellation rates. The decrease in net new orders in our West segment was primarily due to continued challenging market conditions which were particularly pronounced in our California markets. Historically low interest rates, increased affordability and federal and state housing tax credits appear to have enticed more prospective buyers to purchase a new home; however, foreclosures are having a damaging impact on the market. In most of our markets, appraisals continue to be negatively impacted by foreclosure comparables which put additional pricing pressures on all home sales and limit financing availability. The decrease in our cancellation rates reflects the market improvement and relative price stabilization as compared to the prior years. It also reflects the impact of historically low interest rates and increased affordability and the impact of federal and state housing tax credits that enticed certain prospective buyers to purchase a new home during fiscal 2010.
 
The decrease in total units in backlog and the aggregate dollar value of homes in backlog for our continuing operations at September 30, 2010 compared to the prior year, related partially to the acceleration of closings into our third fiscal quarter driven by the federal and state housing credits which expired in June 2010. As the availability of mortgage loans further stabilizes, the inventory of new and used homes decreases, and consumer confidence in the economic recovery increases, backlog should increase; however, continued reduced levels of backlog will produce less revenue in the future which could also result in additional asset impairment charges and lower levels of liquidity.
 
Fiscal 2009 versus 2008
 
New orders, net for fiscal 2009 decreased as compared to the same period fiscal 2008 driven by weaker market conditions, including the tightening of mortgage credit availability, an increase in home foreclosures and other economic factors that have impacted homebuyers. For fiscal 2009, we experienced cancellation rates of 31.5% compared to 40.2% for fiscal 2008. These cancellation rates in both fiscal 2009 and 2008 reflect the continued challenging market environment which includes the inability of many potential homebuyers to sell their existing homes and obtain affordable financing. In addition, on July 1, 2008, we completed the sale of two large condominium projects in Virginia, which resulted in the cancellation of 215 orders for fiscal 2008, and the significant increase in the cancellation rate for our East segment. Excluding these transactions, our cancellation rates in the East Segment and total continuing operations were 39.9% and 37.7%, respectively, for fiscal 2008. The decrease in cancellation rates across all markets reflects competitive pricing and a trend in the current environment that buyers are only willing to contract on a new home once their current home sells.
 
The aggregate dollar value of homes in backlog for our continuing operations at September 30, 2009 decreased 12.7% from the prior year, related to a decrease in the number of homes in backlog. The decrease in the number of homes in backlog across our West and Southeast markets is driven primarily by the aforementioned market weakness and lower new orders.

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Backlog declined in many of our homebuilding markets from fiscal 2009 to 2008 due primarily to lower new orders caused by a competitive environment, increased foreclosures, the reduction in the availability of mortgage credit for our potential homebuyers and our decision to sell certain large projects. Foreclosures had by far the most damaging impact on the market during this period. Particularly in our Southeast and Nevada markets, appraisals were negatively impacted by foreclosure comparables which put additional pricing pressure on all home sales and limit financing availability.
 
Homebuilding Revenues and Average Selling Price.  The table below summarizes homebuilding revenues, the average selling prices of our homes and closings by reportable segment ($ in thousands):
 
                                                                                 
    Homebuilding Revenues     Average Selling Price  
    2010     2009     2008     10 v 09     09 v 08     2010     2009     2008     10 v 09     09 v 08  
 
West
  $ 360,756     $ 407,639     $ 651,268       (11.5 )%     (37.4 )%   $ 203.0     $ 216.5     $ 241.9       (6.2 )%     (10.5 )%
East
    446,862       373,498       614,408       19.6 %     (39.2 )%     258.5       260.8       287.6       (0.9 )%     (9.3 )%
Southeast
    192,913       187,177       355,314       3.1 %     (47.3 )%     191.6       212.5       229.8       (9.8 )%     (7.5 )%
                                                                                 
Total
  $ 1,000,531     $ 968,314     $ 1,620,990       3.3 %     (40.3 )%   $ 221.7     $ 230.8     $ 254.3       (3.9 )%     (9.2 )%
                                                                                 
 
                                         
    Closings
    2010   2009   2008   10 v 09   09 v 08
 
West
    1,777       1,883       2,688       (5.6 )%     (29.9 )%
East
    1,729       1,432       2,136       20.7 %     (33.0 )%
Southeast
    1,007       881       1,546       14.3 %     (43.0 )%
                                         
Total
    4,513       4,196       6,370       7.6 %     (34.1 )%
                                         
 
Fiscal 2010 versus 2009
 
Homebuilding revenues increased slightly for the fiscal year ended September 30, 2010 compared to the comparable period of the prior year due to an increase in closings. This year-over year increase in closings was offset partially by a decrease in average selling prices (ASP). The reduction in ASP was primarily attributable to a substantial geographic shift in closings to those markets with the lowest ASP and a higher concentration of entry-level homebuyers. In addition, foreclosures continue to pose problems in many of our markets manifesting in lower appraisals which put additional pricing pressure on all homes for sale. As a result, we reduced sales prices in many of our markets during fiscal 2010 in order to respond to these market conditions. Historically low interest rates, increased affordability and federal and state housing tax credits incented more prospective buyers to purchase a new home and contributed to the significant increase in our closings for the fiscal year ended September 30, 2010.
 
Homebuilding revenues in our West segment decreased 11.5% for the fiscal year ended September 30, 2010 compared to the same period of fiscal 2009 driven by a 5.6% decrease in homes closed and a 6.2% decrease in ASP. The decrease in ASP in our West segment for fiscal 2010 resulted primarily from a significant increase in the sale of entry level homes to first time homebuyers in all of our markets, a reduction in the amount of options and upgrades ordered along with select price declines in markets where conditions, such as a high levels of foreclosures and unemployment necessitated slightly lower home prices.
 
For the fiscal year ended September 30, 2010, our East segment homebuilding revenues increased by 19.6% driven by increased closings across all of our markets in this segment.
 
Our Southeast segment continued to be challenged by excess capacity in both the new home and resale markets and the high number of foreclosures, driving decreases in ASP of 9.8% for the fiscal year ended September 30, 2010 as compared to the prior year. In addition, the homes closed during the fiscal year in many of our markets were more heavily weighted toward the entry level buyer than in the prior year.
 
Fiscal 2009 versus 2008
 
Homebuilding revenues decreased for the fiscal year ended September 30, 2009 compared to fiscal 2008 due to decreased closings in the majority of our markets, related to reduced demand, excess capacity in both new and resale


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markets (including increased foreclosures available at lower prices) as investors continued to divest of prior home purchases and potential homebuyers had difficulty selling their homes and/or obtaining financing. In addition, credit tightening in the mortgage markets, increased unemployment and a decline in consumer confidence in the majority of our markets further compounded the market pressures during the fiscal year 2009.
 
Specifically, homebuilding revenues in the West segment decreased for fiscal 2009 compared to fiscal 2008 due to reduced ASP and reduced demand in the majority of the markets in this segment resulting from deteriorating market conditions and excess capacity in both the new home and resale markets. In addition, credit tightening in the mortgage markets and a decline in consumer confidence in all of our markets further compounded the market deterioration in our Nevada, California, Texas and Arizona markets in our West segment in fiscal 2009.
 
For the fiscal year ended September 30, 2009, our East segment homebuilding revenues decreased by 39.2% driven by a 33.0% decline in closings and a 9.3% decline in average sales prices which was particularly pronounced in our Maryland, New Jersey, Tennessee and Virginia markets. These declines reflect the impact of excess capacity in the resale markets, the impact of credit tightening in the mortgage markets, competitive pricing pressures and a decline in consumer confidence.
 
Our Southeast segment continued to be challenged by significant declines in demand and excess capacity in both the new home and resale markets and high foreclosures, especially in our Georgia and Florida markets, driving decreases in homebuilding revenues of 47.3% for fiscal 2009 as compared to fiscal 2008. Home closings in the Southeast segment decreased by 43.0% from the prior year due to deteriorating market conditions and competitive pressures. The decrease in closings was driven by lower demand, higher available supply of new and resale inventory, increased competition and the tightening of credit requirements and decreased availability of mortgage options for potential homebuyers.
 
Homebuilding Gross Profit (Loss).  Homebuilding gross profit (loss) is defined as homebuilding revenues less home cost of sales (which includes land and land development costs, home construction costs, capitalized interest, indirect costs of construction, estimated warranty costs, closing costs and inventory impairment and lot option abandonment charges). Corporate and unallocated costs include the amortization of capitalized interest and indirect construction costs. The following table sets forth our homebuilding gross profit (loss) and gross margin by reportable segment and total homebuilding gross profit (loss) and gross margin, and such amounts excluding inventory impairments and abandonments for the fiscal years ended September 30, 2010, 2009 and 2008 ($ in thousands). Total homebuilding gross profit (loss) and gross margin excluding inventory impairments and abandonments are not GAAP financial measures. These measures should not be considered alternatives to homebuilding gross profit (loss) determined in accordance with GAAP as an indicator of operating performance. The magnitude and volatility of non-cash inventory impairment and abandonment charges for the Company, and for other home builders, have been significant in recent periods and, as such, have made financial analysis of our industry more difficult. Homebuilding metrics excluding these charges, and other similar presentations by analysts and other companies, is frequently used to assist investors in understanding and comparing the operating characteristics of home building activities by eliminating many of the differences in companies’ respective level of impairments. Management believes these non-GAAP measures enable holders of our securities to better understand the cash implications of our operating performance and our ability to service our debt obligations as they currently exist and as additional indebtedness is incurred in the future. These measures are also useful internally, helping management compare operating results and as a measure of the level of cash which may be available for discretionary spending.
 
                                         
    2010  
                Impairments &
    HB Gross
    HB Gross
 
    HB Gross
    HB Gross
    Abandonments
    Profit (Loss)
    Margin w/o
 
    Profit (Loss)     Margin     (I&A)     w/o I&A     I&A  
 
West
  $ 52,621       14.6 %   $ 19,900     $ 72,521       20.1 %
East
    54,176       12.1 %     18,738       72,914       16.3 %
Southeast
    20,519       10.6 %     7,994       28,513       14.8 %
Corporate & unallocated
    (45,788 )             3,404       (42,384 )        
                                         
Total homebuilding
  $ 81,528       8.1 %   $ 50,036     $ 131,564       13.1 %
                                         


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    2009  
                Impairments &
    HB Gross
    HB Gross
 
    HB Gross
    HB Gross
    Abandonments
    Profit (Loss)
    Margin w/o
 
    Profit (Loss)     Margin     (I&A)     w/o I&A     I&A  
 
West
  $ 28,566       7.0 %   $ 52,160     $ 80,726       19.8 %
East
    45,681       12.2 %     10,338       56,019       15.0 %
Southeast
    (1,811 )     (1.0 )%     27,602       25,791       13.8 %
Corporate & unallocated
    (57,302 )             5,116       (52,186 )        
                                         
Total homebuilding
  $ 15,134       1.6 %   $ 95,216     $ 110,350       11.4 %
                                         
 
                                         
    2008  
                Impairments &
    HB Gross
    HB Gross
 
    HB Gross
    HB Gross
    Abandonments
    Profit (Loss)
    Margin w/o
 
    Profit (Loss)     Margin     (I&A)     w/o I&A     I&A  
 
West
  $ (58,187 )     (8.9 )%   $ 169,108     $ 110,921       17.0 %
East
    6,086       1.0 %     96,885       102,971       16.8 %
Southeast
    (60,470 )     (17.0 )%     115,640       55,170       15.5 %
Corporate & unallocated
    (144,442 )             21,769       (122,673 )        
                                         
Total homebuilding
  $ (257,013 )     (15.9 )%   $ 403,402     $ 146,389       9.0 %
                                         
 
Fiscal 2010 versus 2009
 
For the fiscal year ended September 30, 2010 as compared to the prior year, the increase in gross margins across all segments is primarily due to increased revenues, cost reductions and lower inventory impairments and lot option abandonment charges. Our segments realized a nominal increase in gross margins excluding impairments as prices have begun to stabilize in certain of our markets and we benefitted from cost reductions. A few of our markets experienced a decrease in gross margins excluding inventory impairments for the fiscal year ended September 30, 2010 as compared to the prior year due to our decision to reduce prices in certain of our communities in order to compete with similar product for sale in the locale and to increase the frequency of new home orders.
 
Fiscal 2009 versus 2008
 
The increase in homebuilding gross margins across all segments is primarily due to decreases in corporate costs and inventory impairments and lot option abandonment charges (impairments and abandonments). Excluding impairments and abandonments, homebuilding gross margins increased slightly in our West segment due to continued focus on cost reduction initiatives; whereas they decreased in our East and Southeast segments which continued to be challenged by the further deterioration of market conditions and an increased use of incentives. The decrease in corporate and unallocated costs relates primarily to 1) a reduction of approximately $8 million in investigation-related costs given the resolution of the previously disclosed investigations despite $16 million of expense related to our obligations under the Deferred Prosecution Agreement (see Note 13 to the Consolidated Financial Statements), 2) a reduction of $57.5 million in the amortization of capitalized interest costs due to a lower capitalizable inventory base and an increase in disallowed interest for capitalization which is recorded as other expense, net in the accompanying Consolidated Statements of Operations, and 3) a reduction of $16.7 million in expenses related to the impairment of capitalized interest and indirect costs in connection with the reduced level of inventory impairments in fiscal 2009 compared to fiscal 2008.
 
Land Sales and Other Revenues.  Land sales and other revenues relate to land and lots sold that did not fit within our homebuilding programs and strategic plans in these markets and net fees we received for general


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contractor services we performed on behalf of a third party. The table below summarizes land sales and other revenues and gross profit (loss) by reportable segment ($ in thousands):
 
                                                                                 
    Land Sales & Other Revenues     Land Sales and Other Gross Profit (Loss)  
    2010     2009     2008     10 v 09     09 v 08     2010     2009     2008     10 v 09     09 v 08  
 
West
  $ 3,774     $ 1,529     $ 5,203       146.8 %     (70.6 )%   $ 424     $ (1 )   $ 2,139       n/m       (100.0 )%
East
    4,300       1,120       107,024       283.9 %     (99.0 )%     2,421       562       7,349       330.8 %     (92.4 )%
Southeast
    1,236       740       3,510       67.0 %     (78.9 )%     1,235       59       82       n/m       (28.0 )%
                                                                                 
Total
  $ 9,310     $ 3,389     $ 115,737       174.7 %     (97.1 )%   $ 4,080     $ 620     $ 9,570       558.1 %     (93.5 )%
                                                                                 
 
Fiscal 2010 versus 2009
 
The increase in land sales and other revenue and gross profit in fiscal 2010 from fiscal 2009 relates to our ability to dispose of land and lots that did not fit into our strategic plans. Our fiscal 2010 land sales and other revenue and gross profit in our Southeast segment also include net fees received for general contractor services we performed on behalf of a third party.
 
Fiscal 2009 versus 2008
 
The decrease in land sales revenue and gross profit in our East segment from fiscal 2008 is primarily related to the 2008 sale of two condominium projects in Virginia.
 
Derivative Instruments and Hedging Activities.  We are exposed to fluctuations in interest rates. From time to time, we enter into derivative agreements to manage interest costs and hedge against risks associated with fluctuating interest rates. As of September 30, 2010, we were not a party to any such derivative agreements. We do not enter into or hold derivatives for trading or speculative purposes.
 
Liquidity and Capital Resources.  Our sources of liquidity include, but are not limited to, cash from operations, proceeds from Senior Notes and other bank borrowings, the issuance of equity and equity-linked securities and other external sources of funds. Our short-term and long-term liquidity depend primarily upon our level of net income, working capital management (cash, accounts receivable, accounts payable and other liabilities) and available credit facilities.
 
During the fiscal year ended September 30, 2010, we generated $29.8 million in cash primarily from our operations. Our liquidity position consisted of $537.1 million in cash and cash equivalents plus $39.2 million of restricted cash as of September 30, 2010. We expect to maintain a significant liquidity position during fiscal 2011, subject to changes in market conditions that would alter our expectations for land and land development expenditures or capital market conditions which could increase or decrease our cash balance on a quarterly basis.
 
Our net cash provided by operating activities for the fiscal year ended September 30, 2010 was $69.7 million primarily due to reductions in inventory due to increased closings and timing of strategic land purchases. Net cash used in investing activities was $6.2 million for the fiscal year ended September 30, 2010 compared to $79.7 million and $18.4 million for the fiscal years ended September 30, 2009 and 2008, respectively. For the fiscal year ended September 30, 2010 our use of cash was primarily related to investments in our property, plant and equipment and joint ventures, $3.9 million of which was used by one joint venture to repay outstanding debt, offset by a net reduction in our restricted cash of $10.3 million.
 
Net cash used in financing activities was $33.7 million for fiscal year ended September 30, 2010 as compared to $91.1 million for fiscal 2009 and $167.2 million in fiscal 2008. During fiscal 2010, we completed a $57.5 million Mandatory Convertible Subordinated Notes offering, two common stock offerings totaling 34,925,000 total shares, a $300 million senior unsecured debt offering and an offering of 3 million 7.25% Tangible Equity Units. The net proceeds from these offerings were used to repay our outstanding 2011 Senior Notes, 2012 Senior Notes and our 2024 Convertible Senior Notes.
 
As a result of our 2011 and 2012 Senior Notes and 2024 Convertible Senior Notes repayments, our next scheduled debt payment is not until November 2013. In addition, on January 15, 2010, we completed a partial exchange of $75 million of our outstanding Junior Subordinated Notes. We recorded a net gain of approximately


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$43.9 million during fiscal year ended September 30, 2010 primarily related to the exchange of our Junior Subordinated Notes (see Note 7 to the Consolidated Financial Statements where further discussed).
 
During our fiscal 2010, we received upgrades from S&P in our corporate credit rating to B-. Also during the fiscal year, Moody’s raised its corporate credit rating of the Company to Caa1 and Fitch raised its corporate credit rating of the Company to B-. These ratings and our current credit condition affect, among other things, our ability to access new capital. Negative changes to these ratings may result in more stringent covenants and higher interest rates under the terms of any new debt. Our credit ratings could be lowered or rating agencies could issue adverse commentaries in the future, which could have a material adverse effect on our business, results of operations, financial condition and liquidity. In particular, a weakening of our financial condition, including any further increase in our leverage or decrease in our profitability or cash flows, could adversely affect our ability to obtain necessary funds, result in a credit rating downgrade or change in outlook, or otherwise increase our cost of borrowing.
 
We fulfill our short-term cash requirements with cash generated from our operations. There were no amounts outstanding under the Secured Revolving Credit Facility at September 30, 2010; however, $37.9 million is currently used for letters of credit. We have entered into a number of stand-alone, cash secured letter of credit agreements with banks. These facilities will continue to provide for future working capital and letter of credit needs collateralized by either cash or assets of the Company at our option, based on certain conditions and covenant compliance. As of September 30, 2010, we have secured our letters of credit under these facilities using cash collateral which is maintained in restricted accounts totaling $38.8 million. In addition, we have elected to pledge approximately $925 million of inventory assets to our revolving credit facility. We believe that cash and cash equivalents at September 30, 2010 of $537.1 million, cash generated from our operations and the availability of new debt and equity financing, if any, will be adequate to meet our liquidity needs during fiscal 2011.
 
In addition to our continued focus on generation and preservation of cash, we are also focused on increasing our stockholders’ equity and reducing our leverage. In fiscal 2010, we raised $166.7 million of common equity capital, $128.2 million of equity linked capital (Mandatory Convertible Subordinated Notes and Tangible Equity Units) and $300 million Senior Notes while repaying $585.4 million of our Senior Notes. In addition, we restructured $75 million of our subordinated indebtedness due 2036. In addition, we received federal income tax refunds totaling $133 million.
 
We may also determine in the future that we need to issue additional new common or preferred equity. Any new issuance may take the form of public or private offerings for cash, equity issued to consummate acquisitions of assets or equity issued in exchange for a portion of our outstanding debt. We may also from time to time seek to continue to retire or purchase our outstanding debt through cash purchases and/or exchanges for equity or other debt securities, in open market purchases, privately negotiated transactions or otherwise. In addition, any material variance from our projected operating results or land investments, or investments in or acquisitions of businesses, or amounts paid to fulfill obligations with governmental entities, could require us to obtain additional equity or debt financing. Any such equity transactions or debt financing may be on terms less favorable or at higher costs than our current financing sources, depending on future market conditions and other factors including any possible downgrades in our credit ratings or adverse commentaries issued by rating agencies in the future. Also, there can be no assurance that we will be able to complete any of these transactions in the future on favorable terms or at all.
 
Stock Repurchases and Dividends Paid — The Company did not repurchase any shares in the open market during fiscal 2010, 2009 or 2008. Any future stock repurchases as allowed by our debt covenants must be approved by the Company’s Board of Directors or its Finance Committee.
 
On November 2, 2007, our Board of Directors suspended payment of quarterly dividends. The Board concluded that suspending dividends, which will allow us to conserve approximately $16 million of cash annually, was a prudent effort in light of the continued deterioration of the housing market. In addition, the indentures under which our Senior Notes were issued contain certain restrictive covenants, including limitations on the payment of dividends. At September 30, 2010, under the most restrictive covenants of each indenture, none of our retained earnings was available for cash dividends. Hence, there were no dividends paid in fiscal 2010, 2009 or 2008.


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Off-Balance Sheet Arrangements and Aggregate Contractual Commitments.  At September 30, 2010, we controlled 28,996 lots (a 6-year supply based on fiscal 2010 closings). We owned 80%, or 23,176 lots, and 5,820 lots, 20%, were under option contracts which generally require the payment of cash or the posting of a letter of credit for the right to acquire lots during a specified period of time at a certain price. We historically have attempted to control a portion of our land supply through options. As a result of the flexibility that these options provide us, upon a change in market conditions we may renegotiate the terms of the options prior to exercise or terminate the agreement. Under option contracts, purchase of the properties is contingent upon satisfaction of certain requirements by us and the sellers and our liability is generally limited to forfeiture of the non-refundable deposits, letters of credit and other non-refundable amounts incurred, which aggregated approximately $38.7 million at September 30, 2010. This amount includes non-refundable letters of credit of approximately $3.7 million. The total remaining purchase price, net of cash deposits, committed under all options was $221.3 million as of September 30, 2010. When market conditions improve, we may expand our use of option agreements to supplement our owned inventory supply.
 
We expect to exercise, subject to market conditions, most of our option contracts. Various factors, some of which are beyond our control, such as market conditions, weather conditions and the timing of the completion of development activities, will have a significant impact on the timing of option exercises or whether land options will be exercised.
 
We have historically funded the exercise of land options through a combination of operating cash flows. We expect these sources to continue to be adequate to fund anticipated future option exercises. Therefore, we do not anticipate that the exercise of our land options will have a material adverse effect on our liquidity.
 
We participate in a number of land development joint ventures in which we have less than a controlling interest. We enter into joint ventures in order to acquire attractive land positions, to manage our risk profile and to leverage our capital base. Our joint ventures are typically entered into with developers, other homebuilders and financial partners to develop finished lots for sale to the joint venture’s members and other third parties. We account for our interest in these joint ventures under the equity method. Our consolidated balance sheets include investments in joint ventures totaling $8.7 million and $30.1 million at September 30, 2010 and 2009, respectively.
 
Our joint ventures typically obtain secured acquisition and development financing. At September 30, 2010, our unconsolidated joint ventures had borrowings outstanding totaling $394.3 million, of which $327.9 million related to one joint venture in which we are a 2.58% partner. Generally, we and our joint venture partners have provided varying levels of guarantees of debt or other obligations of our unconsolidated joint ventures. At September 30, 2010, we had repayment guarantees of $15.8 million. One of our unconsolidated joint ventures, in which we have a 2.58% interest, is in default under its debt agreement at September 30, 2010. To the extent that we are unable to reach satisfactory resolutions, we may be called upon to perform under our applicable guarantees. See Note 3 to the Consolidated Financial Statements.
 
The following summarizes our aggregate contractual commitments at September 30, 2010 (in thousands):
 
                                         
    Payments Due by Period  
          Less than 1
                More than 5
 
Contractual Obligations
  Total     Year     1-3 Years     3-5 Years     Years  
 
Senior Notes, Senior Secured Notes & other notes payable
  $ 1,230,968     $ 9,307     $ 15,204     $ 374,575     $ 831,882  
Interest commitments under Senior Notes, Senior Secured Notes & other notes payable(1)
    787,310       104,400       197,660       181,540       303,710  
Obligations related to lots under option
    221,341       77,189       88,385       29,614       26,153  
Operating leases
    24,683       7,534       11,792       4,104       1,253  
Uncertain tax positions(2)
                             
                                         
Total
  $ 2,264,302     $ 198,430     $ 313,041     $ 589,833     $ 1,162,998  
                                         
 
 
(1) Interest on variable rate obligations is based on rates effective as of September 30, 2010.
 
(2) Due to the uncertainty of the timing of settlement with taxing authorities, the Company is unable to make reasonably reliable estimates of the period of cash settlement of unrecognized tax benefits related to uncertain


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tax positions. See Note 9 to Consolidated Financial Statements for additional information regarding the Company’s unrecognized tax benefits as of September 30, 2010.
 
We had outstanding performance bonds of approximately $184.7 million, at September 30, 2010 related principally to our obligations to local governments to construct roads and other improvements in various developments.
 
Recently Adopted Accounting Pronouncements.  In September 2006, the FASB issued SFAS 157, Fair Value Measurements (ASC 820). SFAS 157 (ASC 820) provides guidance for using fair value to measure assets and liabilities. SFAS 157 (ASC 820) applies whenever other standards require (or permit) assets or liabilities to be measured at fair value but does not expand the use of fair value in any new circumstances. SFAS 157 (ASC 820) includes provisions that require expanded disclosure of the effect on earnings for items measured using unobservable data. In February 2008, the FASB issued FASB Staff Position (FSP) 157-2, Effective Date of FASB Statement No. 157 (ASC 820), delaying the effective date of certain non-financial assets and liabilities to fiscal periods beginning after November 15, 2008. The company adopted SFAS 157 (ASC 820) on October 1, 2009 as discussed in Note 8.
 
In February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115 (ASC 825). SFAS 159 (ASC 825) permits companies to measure certain financial instruments and other items at fair value. We have not elected the fair value option applicable under SFAS 159 (ASC 825).
 
In December 2007, the FASB issued SFAS 141 (revised 2007), Business Combinations (ASC 815). SFAS 141R (ASC 815) amends and clarifies the accounting guidance for the acquirer’s recognition and measurement of assets acquired, liabilities assumed and noncontrolling interests of an acquiree in a business combination. SFAS 141R (ASC 815) is effective for any acquisitions completed by the Company after September 30, 2009.
 
In December 2007, the FASB issued SFAS 160, Noncontrolling Interests in Consolidated Financial Statements — an Amendment of ARB 51 (ASC 810). SFAS 160 (ASC 810) requires that a noncontrolling interest (formerly a minority interest) in a subsidiary be classified as equity and the amount of consolidated net income specifically attributable to the noncontrolling interest be included in the consolidated financial statements. The adoption of SFAS 160 (ASC 810) did not have a material impact on our consolidated financial condition and results of operations as of June 30, 2010.
 
In June 2008, the FASB issued FSP EITF Issue No 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities (ASC 260). FSP 03-6-1 (ASC 260) clarifies that non-vested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and are to be included in the computation of earnings per share under the two-class method described in SFAS 128, Earnings per Share (ASC 260) and requires that prior period EPS and share data be restated retrospectively for comparability. The Company grants restricted shares under a share-based compensation plan that qualify as participating securities. FSP 03-6-1 (ASC 260) was effective for the Company beginning October 1, 2009. The adoption of this guidance did not have a material impact on the Company’s diluted earnings per share for the periods ended June 30, 2010 and 2009.
 
In May 2008, the FASB issued FSP APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement) (ASC 470). FSP APB 14-1 (ASC 470) applies to convertible debt instruments that have a “net settlement feature” permitting settlement partially or fully in cash upon conversion. FSP APB 14-1 (ASC 470) was effective for the Company beginning October 1, 2009. Due to the fact that the Company’s convertible securities cannot be settled in cash upon conversion, the adoption of FSP APB 14-1 (ASC 470) did not have a material impact on our consolidated financial condition and results of operations.
 
Recent Accounting Pronouncements Not Yet Adopted.
 
In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R) (ASC 810), which revises the approach to determining the primary beneficiary of a variable interest entity (VIE) to be more qualitative in nature and requires companies to more frequently reassess whether they must consolidate a VIE. SFAS 167 (ASC 810) also requires enhanced disclosures to provide more information about an enterprise’s


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involvement in a variable interest entity. SFAS 167 (ASC 810) is effective for the Company’s fiscal year beginning October 1, 2010. The adoption of this standard is expect to result in the deconsolidation of certain VIEs and is not expected to have a material impact on our consolidated financial condition.
 
Item 7A.   Quantitative and Qualitative Disclosures About Market Risk
 
We are exposed to a number of market risks in the ordinary course of business. Our primary market risk exposure relates to fluctuations in interest rates. We do not believe that our exposure in this area is material to cash flows or earnings. As of September 30, 2010, we had no variable rate debt outstanding. The estimated fair value of our fixed rate debt at September 30, 2010 was $1.2 billion, compared to a carrying value of $1.2 billion. In addition, the effect of a hypothetical one-percentage point decrease in our estimated discount rates would increase the estimated fair value of the fixed rate debt instruments from $1.21 billion to $1.26 billion at September 30, 2010.


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Item 8.   Financial Statements and Supplementary Data
 
Beazer Homes USA, Inc.
 
Consolidated Statements of Operations
 
                         
    Fiscal Year Ended September 30,  
    2010     2009     2008  
    (In thousands, except share and per share amounts)  
 
Total revenue
  $ 1,009,841     $ 971,703     $ 1,736,727  
Home construction and land sales expenses
    874,197       860,733       1,580,768  
Inventory impairments and option contract abandonments
    50,036       95,216       403,402  
                         
Gross profit (loss)
    85,608       15,754       (247,443 )
Selling, general and administrative expenses
    186,556       222,691       298,274  
Depreciation and amortization
    12,874       18,392       23,802  
Goodwill impairment
          16,143       48,105  
                         
Operating loss
    (113,822 )     (241,472 )     (617,624 )
Equity in loss of unconsolidated joint ventures
    (8,807 )     (12,112 )     (57,819 )
Gain on extinguishment of debt
    43,901       144,503        
Other expense, net
    (69,543 )     (74,791 )     (35,405 )
                         
Loss from continuing operations before income taxes
    (148,271 )     (183,872 )     (710,848 )
(Benefit from) provision for income taxes
    (118,355 )     (8,350 )     68,951  
                         
Loss from continuing operations
    (29,916 )     (175,522 )     (779,799 )
Loss from discontinued operations, net of tax
    (4,133 )     (13,861 )     (172,113 )
                         
Net loss
  $ (34,049 )   $ (189,383 )   $ (951,912 )
                         
Weighted average number of shares:
                       
Basic and diluted
    59,801       38,688       38,549  
Basic and diluted loss per share:
                       
Continuing operations
  $ (0.50 )   $ (4.54 )   $ (20.23 )
Discontinued operations
  $ (0.07 )   $ (0.36 )   $ (4.46 )
Total
  $ (0.57 )   $ (4.90 )   $ (24.69 )
Cash dividends per share
  $     $     $  
 
See Notes to Consolidated Financial Statements.


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Beazer Homes USA, Inc.
 
Consolidated Balance Sheets
 
                 
    September 30,
    September 30,
 
    2010     2009  
    (In thousands, except share and per share amounts)  
 
ASSETS
Cash and cash equivalents
  $ 537,121     $ 507,339  
Restricted cash
    39,200       49,461  
Accounts receivable (net of allowance of $3,567 and $7,545, respectively)
    32,647       28,405  
Income tax receivable
    7,684       9,922  
Inventory
               
Owned inventory
    1,153,703       1,265,441  
Consolidated inventory not owned
    49,958       53,015  
                 
Total inventory
    1,203,661       1,318,456  
Investments in unconsolidated joint ventures
    8,721       30,124  
Deferred tax assets, net
    7,779       7,520  
Property, plant and equipment, net
    23,995       25,939  
Other assets
    42,094       52,244  
                 
Total assets
  $ 1,902,902     $ 2,029,410  
                 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Trade accounts payable
  $ 53,418     $ 70,285  
Other liabilities
    210,170       227,315  
Obligations related to consolidated inventory not owned
    30,666       26,356  
Total debt (net of discounts of $23,617 and $27,257, respectively)
    1,211,547       1,508,899  
                 
Total liabilities
    1,505,801       1,832,855  
                 
Stockholders’ equity:
               
Preferred stock (par value $.01 per share, 5,000,000 shares authorized, no shares issued)
           
Common stock (par value $0.001 per share, 180,000,000 shares authorized, 75,669,381 and 43,150,472 issued and 75,669,381 and 39,793,316 outstanding, respectively)
    76       43  
Paid-in capital
    618,612       568,019  
Accumulated deficit
    (221,587 )     (187,538 )
Treasury stock, at cost (0 and 3,357,156 shares, respectively)
          (183,969 )
                 
Total stockholders’ equity
    397,101       196,555  
                 
Total liabilities and stockholders’ equity
  $ 1,902,902     $ 2,029,410  
                 
 
See Notes to Consolidated Financial Statements.


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Beazer Homes USA, Inc.
 
Consolidated Statement of Stockholders’ Equity
 
                                                 
    Preferred
    Common
    Paid in
    Accumulated
    Treasury
       
    Stock     Stock     Capital     Deficit     Stock     Total  
    ($ in thousands)  
 
Balance, September 30, 2007
  $     $ 43     $ 543,705     $ 963,869     $ (183,895 )   $ 1,323,722  
Net loss and comprehensive loss
                      (951,912 )           (951,912 )
Amortization of nonvested stock awards
                6,160                   6,160  
Amortization of stock option awards
                6,404                   6,404  
Tax benefit from stock transactions
                (1,158 )                 (1,158 )
Issuance of bonus stock (43,075 shares)
                1,799                   1,799  
Adoption of FIN 48
                      (10,112 )           (10,112 )
Common stock redeemed (7,255 shares)
                            (52 )     (52 )
                                                 
Balance, September 30, 2008
          43       556,910       1,845       (183,947 )     374,851  
Net loss and comprehensive loss
                      (189,383 )           (189,383 )
Amortization of nonvested stock awards
                6,562                   6,562  
Amortization of stock option awards
                5,277                   5,277  
Tax benefit from stock transactions
                (2,273 )                 (2,273 )
Issuance of bonus stock (27,708 shares)
                1,543                   1,543  
Issuance of restricted stock (544,143 shares)
                                   
Common stock redeemed (14,393 shares)
                            (22 )     (22 )
                                                 
Balance, September 30, 2009
          43       568,019       (187,538 )     (183,969 )     196,555  
Net loss and comprehensive loss
                      (34,049 )           (34,049 )
Amortization of nonvested stock awards
                5,552                   5,552  
Amortization of stock option awards
                5,817                   5,817  
Tax benefit from stock transactions
                (3,099 )                 (3,099 )
Issuance of bonus stock (67,358 shares)
                2,337                   2,337  
Issuance of restricted stock (1,006,145 shares)
          1       (1 )                  
Issuance of prepaid stock purchase contracts
                57,429                   57,429  
Common stock issued (34,925,000 shares)
          35       166,683                   166,718  
Common stock redeemed (32,944 shares)
                (25 )           (134 )     (159 )
Treasury stock utilized (3,384,466 shares)
          (3 )     (184,100 )           184,103        
                                                 
Balance, September 30, 2010
  $     $ 76     $ 618,612     $ (221,587 )   $     $ 397,101  
                                                 
 
See Notes to Consolidated Financial Statements.


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Beazer Homes USA, Inc.
 
Consolidated Statements of Cash Flows
                         
    Fiscal Year Ended September 30,  
    2010     2009     2008  
    (In thousands)  
 
Cash flows from operating activities:
                       
Net loss
  $ (34,049 )   $ (189,383 )   $ (951,912 )
Adjustments to reconcile net loss to net cash provided by operating activities:
                       
Depreciation and amortization
    13,405       18,884       27,709  
Stock-based compensation expense
    11,369       11,839       12,564  
Inventory impairments and option contract abandonments
    51,839       107,127       510,628  
Goodwill impairment
          16,143       52,470  
Deferred income tax (benefit) provision
    (259 )     12,696       260,410  
Provision for doubtful accounts
    (3,978 )     (1,370 )     8,710  
Excess tax benefit from equity-based compensation
    3,099       2,273       1,158  
Equity in loss of unconsolidated joint ventures
    24,350       14,275       81,314  
Cash distributions of income from unconsolidated joint ventures
    208       2,991       2,439  
Gain on extinguishment of debt
    (44,602 )     (148,077 )      
Changes in operating assets and liabilities:
                       
(Increase) decrease in accounts receivable
    (264 )     19,520       (7,820 )
Decrease (increase) in income tax receivable
    2,238       163,578       (109,519 )
Decrease in inventory
    82,504       208,371       572,746  
Decrease in other assets
    3,835       25,072       49,600  
Decrease in trade accounts payable
    (16,867 )     (20,086 )     (27,916 )
Decrease in other liabilities
    (22,530 )     (150,260 )     (161,113 )
Other changes
    (613 )     232       (5,901 )
                         
Net cash provided by operating activities
    69,685       93,825       315,567  
                         
Cash flows from investing activities:
                       
Capital expenditures
    (10,849 )     (7,034 )     (10,566 )
Investments in unconsolidated joint ventures
    (5,602 )     (25,537 )     (13,758 )
Increases in restricted cash
    (37,439 )     (72,168 )     (109,609 )
Decreases in restricted cash
    47,700       23,004       114,483  
Distributions from unconsolidated joint ventures
          2,054       1,050  
                         
Net cash used in investing activities
    (6,190 )     (79,681 )     (18,400 )
                         
Cash flows from financing activities:
                       
Repayment of debt
    (619,806 )     (305,399 )     (143,625 )
Proceeds from issuance of new debt
    374,438       223,750        
Debt issuance costs
    (9,234 )     (7,195 )     (22,335 )
Proceeds from issuance of common stock
    166,718              
Proceeds from issuance of TEU prepaid stock purchase contracts
    57,429              
Common stock redeemed
    (159 )     (22 )     (52 )
Excess tax benefit from equity-based compensation
    (3,099 )     (2,273 )     (1,158 )
                         
Net cash used in financing activities
    (33,713 )     (91,139 )     (167,170 )
                         
Increase (decrease) in cash and cash equivalents
    29,782       (76,995 )     129,997  
Cash and cash equivalents at beginning of period
    507,339       584,334       454,337  
                         
Cash and cash equivalents at end of period
  $ 537,121     $ 507,339     $ 584,334  
                         
 
See Notes to Consolidated Financial Statements.


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Beazer Homes USA, Inc.
 
Notes to Consolidated Financial Statements
 
(1)   Summary of Significant Accounting Policies
 
Organization.  Beazer Homes USA, Inc. is one of the ten largest homebuilders in the United States, based on number of homes closed. We are a geographically diversified homebuilder with active operations in 15 states: Arizona, California, Delaware, Florida, Georgia, Indiana, Maryland, Nevada, New Jersey, North Carolina, Pennsylvania, South Carolina, Tennessee, Texas, and Virginia. Through Beazer Mortgage Corporation, or Beazer Mortgage, we historically offered mortgage origination services to our homebuyers. Through January 31, 2008, Beazer Mortgage financed certain of our mortgage lending activities with borrowings under a warehouse line of credit or from general corporate funds prior to selling the loans and their servicing rights shortly after origination to third-party investors. In addition, through September 30, 2010, we offered title insurance services to our homebuyers in many of our markets. Effective February 1, 2008, we exited the mortgage origination business and effective September 30, 2010 we exited the title services business. Over the past few years, we have discontinued homebuilding operations in certain of our markets. Results from our mortgage origination business, title services business and exit markets are reported as discontinued operations in the accompanying Consolidated Statements of Operations for all periods presented (see Note 15 for further discussion of our Discontinued Operations). We evaluated events that occurred after the balance sheet date but before the financial statements were issued or are available to be issued for accounting treatment and disclosure in accordance with Accounting Standards Codification (ASC) No. 855, Subsequent Events.
 
Presentation.  The accompanying consolidated financial statements include the accounts of Beazer Homes USA, Inc. and our subsidiaries. Intercompany balances have been eliminated in consolidation. Certain items in prior period financial statements have been reclassified to conform to the current presentation.
 
Cash and Cash Equivalents and Restricted Cash.  We consider investments with maturities of three months or less when purchased to be cash equivalents. At September 30, 2010, the majority of our cash and cash equivalents were invested in high-quality money market mutual funds or on deposit with major banks, which were valued at par with no withdrawal restrictions. The underlying investments of these funds were predominately U.S. Government and U.S. Government Agency obligations. Restricted cash includes cash restricted by state law or a contractual requirement and, as of September 30, 2010 relates primarily to cash collateral for our outstanding letters of credit.
 
Accounts Receivable.  Accounts receivable primarily consist of escrow deposits to be received from title companies associated with closed homes. Generally, we receive cash from title companies within a few days of the home being closed.
 
Inventory.  Owned inventory consists solely of residential real estate developments. Interest, real estate taxes and development costs are capitalized in inventory during the development and construction period. Construction and land costs are comprised of direct and allocated costs, including estimated future costs for warranties and amenities. Land, land improvements and other common costs are typically allocated to individual residential lots on a pro-rata basis, and the costs of residential lots are transferred to construction in progress when home construction begins. Consolidated inventory not owned represents the fair value of land under option agreements consolidated pursuant to FASB Interpretation No. 46 (Revised), Consolidation of Variable Interest Entities , an Interpretation of ARB No. 51 (FIN 46R) (ASC 810). FIN 46R requires us to consolidate the financial results of a variable interest entity (VIE) if the Company is the primary beneficiary of the VIE. VIEs are entities in which 1) equity investors do not have a controlling financial interest and/or 2) the entity is unable to finance its activities without additional subordinated financial support from other parties. In addition to lot options recorded in accordance with FIN 46R, we evaluate lot options in accordance with the provisions of SFAS No. 49, Product Financing Arrangements (ASC 470). When our deposits and pre-acquisition development costs exceed certain thresholds, we record the remaining purchase price of the lots as consolidated inventory not owned and obligations related to consolidated inventory not owned in the Consolidated Balance Sheets.


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Investments in Unconsolidated Joint Ventures.  We participate in a number of land development joint ventures in which we have less than a controlling interest. Our joint ventures are typically entered into with unrelated developers, other homebuilders and financial partners to develop finished lots for sale to the joint venture’s members and other third parties. We have determined that our interest in these joint ventures should be accounted for under the equity method as prescribed by SOP 78-9, Accounting for Investments in Real Estate Ventures. We recognize our share of profits from the sale of lots to other buyers. Our share of profits from lots we purchase from the joint ventures is deferred and treated as a reduction of the cost of the land purchased from the joint venture. Such profits are subsequently recognized at the time the home closes and title passes to the homebuyer. We evaluate our investments in unconsolidated entities for impairment during each reporting period in accordance with APB 18, The Equity Method of Accounting for Investments in Common Stock (ASC 323). A series of operating losses of an investee or other factors may indicate that a decrease in the value of our investment in the unconsolidated entity has occurred which is other-than-temporary. The amount of impairment recognized is the excess of the investment’s carrying value over its estimated fair value. Our joint ventures typically obtain secured acquisition and development financing. See Note 3, Investments in Unconsolidated Joint Ventures.
 
Property, Plant and Equipment.  Property, plant and equipment is recorded at cost. Depreciation is computed on a straight-line basis at rates based on estimated useful lives as follows:
 
     
Buildings
  15 — 30 years
Computer and office equipment
  3 — 10 years
Information systems
  Lesser of estimated useful life of the asset or 5 years
Furniture and fixtures
  3 — 7 years
Model and sales office improvements
  Lesser of estimated useful life of the asset or estimated useful life of the community
Leasehold improvements
  Lesser of the lease term or the estimated useful life of the asset
 
Inventory Valuation — Held for Development.  Our homebuilding inventories that are accounted for as held for development include land and home construction assets grouped together as communities. Homebuilding inventories held for development are stated at cost (including direct construction costs, capitalized indirect costs, capitalized interest and real estate taxes) unless facts and circumstances indicate that the carrying value of the assets may not be recoverable. We assess these assets no less than quarterly for recoverability in accordance with the provisions of SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets (ASC 360). Generally, upon the commencement of land development activities, it may take three to five years (depending on, among other things, the size of the community and its sales pace) to fully develop, sell, construct and close all the homes in a typical community. However, the impact of the recent downturn in our business has significantly lengthened the estimated life of many communities. Recoverability of assets is measured by comparing the carrying amount of an asset to future undiscounted cash flows expected to be generated by the asset. If the expected undiscounted cash flows generated are expected to be less than its carrying amount, an impairment charge should be recorded to write down the carrying amount of such asset to its estimated fair value based on discounted cash flows.
 
We conduct a review of the recoverability of our homebuilding inventories held for development at the community level as factors indicate that an impairment may exist. Events and circumstances that might indicate impairment include, but are not limited to, (1) adverse trends in new orders, (2) higher than anticipated cancellations, (3) declining margins which might result from the need to offer incentives to new homebuyers to drive sales or price reductions in response to actions taken by our competitors, (4) economic factors specific to the markets in which we operate, including fluctuations in employment levels, population growth, or levels of new and resale homes for sale in the marketplace and (5) a decline in the availability of credit across all industries.
 
As a result, we evaluate, among other things, the following information for each community:
 
  •  Actual “Net Contribution Margin” (defined as homebuilding revenues less homebuilding costs and direct selling expenses) for homes closed in the current fiscal quarter, fiscal year to date and prior two fiscal


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  quarters. Homebuilding costs include land and land development costs (based upon an allocation of such costs, including costs to complete the development, or specific lot costs), home construction costs (including an estimate of costs, if any, to complete home construction), previously capitalized indirect costs (principally for construction supervision), capitalized interest and estimated warranty costs Direct selling expenses include commissions, closing costs and amortization related to model home furnishings and improvements;
 
  •  Projected Net Contribution Margin for homes in backlog;
 
  •  Actual and trending new orders and cancellation rates;
 
  •  Actual and trending base home sales prices and sales incentives for home sales that occurred in the prior two fiscal quarters that remain in backlog at the end of the fiscal quarter and expected future homes sales prices and sales incentives and absorption over the expected remaining life of the community;
 
  •  A comparison of our community to our competition to include, among other things, an analysis of various product offerings including, the size and style of the homes currently offered for sale, community amenity levels, availability of lots in our community and our competition’s, desirability and uniqueness of our community and other market factors; and
 
  •  Other events that may indicate that the carrying value may not be recoverable.
 
In determining the recoverability of the carrying value of the assets of a community that we have evaluated as requiring a test for impairment, significant quantitative and qualitative assumptions are made relative to the future home sales prices, sales incentives, direct and indirect costs of home construction and land development and the pace of new home orders. In addition, these assumptions are dependent upon the specific market conditions and competitive factors for each specific community and may differ greatly between communities within the same market and communities in different markets. Our estimates are made using information available at the date of the recoverability test, however, as facts and circumstances may change in future reporting periods, our estimates of recoverability are subject to change.
 
For assets in communities for which the undiscounted future cash flows are less than the carrying value, the carrying value of that community is written down to its then estimated fair value based on discounted cash flows. The carrying value of assets in communities that were previously impaired and continue to be classified as held for development is not written up for future estimates of increases in fair value in future reporting periods. Market deterioration that exceeds our estimates may lead us to incur additional impairment charges on previously impaired homebuilding assets in addition to homebuilding assets not currently impaired but for which indicators of impairment may arise if the market continues to deteriorate.
 
The fair value of the homebuilding inventory held for development is estimated using the present value of the estimated future cash flows using discount rates commensurate with the risk associated with the underlying community assets. The discount rate used may be different for each community. The factors considered when determining an appropriate discount rate for a community include, among others: (1) community specific factors such as the number of lots in the community, the status of land development in the community, the competitive factors influencing the sales performance of the community and (2) overall market factors such as employment levels, consumer confidence and the existing supply of new and used homes for sale. The assumptions used in our discounted cash flow models are specific to each community tested for impairment. Historically we did not include market improvements except in limited circumstances in the latter years of long-lived communities. Beginning in the fourth quarter of fiscal 2009, we assumed limited market improvements in some communities beginning in fiscal 2011 and continuing improvement in these communities in subsequent years. We assumed the remaining communities would have market improvements beginning in fiscal 2012.
 
Due to uncertainties in the estimation process, particularly with respect to projected home sales prices and absorption rates, the timing and amount of the estimated future cash flows and discount rates, it is reasonably possible that actual results could differ from the estimates used in our historical analyses. Our assumptions about future home sales prices and absorption rates require significant judgment because the residential homebuilding industry is cyclical and is highly sensitive to changes in economic conditions. We calculated the estimated fair


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values of inventory held for development that were evaluated for impairment based on current market conditions and assumptions made by management relative to future results. Because our projected cash flows are significantly impacted by changes in market conditions, it is reasonably possible that actual results could differ materially from our estimates and result in additional impairments.
 
Asset Valuation — Land Held for Future Development.  For those communities for which construction and development activities are expected to occur in the future or have been idled (land held for future development), all applicable interest and real estate taxes are expensed as incurred and the inventory is stated at cost unless facts and circumstances indicate that the carrying value of the assets may not be recoverable. The future enactment of a development plan or the occurrence of events and circumstances may indicate that the carrying amount of an asset may not be recoverable. We evaluate the potential development plans of each community in land held for future development if changes in facts and circumstances occur which would give rise to a more detailed analysis for a change in the status of a community to active status or held for development.
 
Asset Valuation — Land Held for Sale.  We record assets held for sale at the lower of the carrying value or fair value less costs to sell. The following criteria are used to determine if land is held for sale:
 
  •  management has the authority and commits to a plan to sell the land;
 
  •  the land is available for immediate sale in its present condition;
 
  •  there is an active program to locate a buyer and the plan to sell the property has been initiated;
 
  •  the sale of the land is probable within one year;
 
  •  the property is being actively marketed at a reasonable sale price relative to its current fair value; and
 
  •  it is unlikely that the plan to sell will be withdrawn or that significant changes to the plan will be made.
 
Additionally, in certain circumstances, management will re-evaluate the best use of an asset that is currently being accounted for as held for development. In such instances, management will review, among other things, the current and projected competitive circumstances of the community, including the level of supply of new and used inventory, the level of sales absorptions by us and our competition, the level of sales incentives required and the number of owned lots remaining in the community. If, based on this review and the foregoing criteria have been met at the end of the applicable reporting period, we believe that the best use of the asset is the sale of all or a portion of the asset in its current condition, then all or portions of the community are accounted for as held for sale.
 
In determining the fair value of the assets less cost to sell, we considered factors including current sales prices for comparable assets in the area, recent market analysis studies, appraisals, any recent legitimate offers, and listing prices of similar properties. If the estimated fair value less cost to sell of an asset is less than its current carrying value, the asset is written down to its estimated fair value less cost to sell.
 
Due to uncertainties in the estimation process, it is reasonably possible that actual results could differ from the estimates used in our historical analyses. Our assumptions about land sales prices require significant judgment because the current market is highly sensitive to changes in economic conditions. We calculated the estimated fair values of land held for sale based on current market conditions and assumptions made by management, which may differ materially from actual results and may result in additional impairments if market conditions continue to deteriorate.
 
Goodwill.  Goodwill represents the excess of the purchase price over the fair value of assets acquired. We historically have tested goodwill for impairment annually as of April 30 or more frequently if an event occurred or circumstances indicated that the asset might be impaired. From late fiscal 2006 through the first half of fiscal 2009, the deterioration of the housing industry resulted in an oversupply of inventory, reduced levels of demand, increased cancellation rates, aggressive price competition and increased incentives for homes sales. Based on our impairment tests and consideration of the current and expected future market conditions, over this time we determined that all of our goodwill was impaired. We recorded a non-cash, pre-tax goodwill impairment of $16.1 million in fiscal 2009. In fiscal 2008, we had determined that the goodwill was impaired related to our Southern California, Arizona,


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Colorado, New Jersey and Virginia reporting units and recorded non-cash, pre-tax goodwill impairment charges totaling $52.5 million, of which $4.4 million has been included in loss from discontinued operations, net of tax. The Company has no goodwill remaining as of September 30, 2010 or 2009.
 
Goodwill impairment charges are reported in Corporate and Unallocated and are not allocated to our homebuilding segments. Goodwill balances by reporting segment as of October 1, 2008 and 2009 were as follows.
 
                         
          Fiscal 2009
    September 30,
 
    October 1, 2008     Impairments     2009  
    (In thousands)  
 
West
  $ 6,885     $ (6,885 )   $  
East
    9,258       (9,258 )      
                         
Total
  $ 16,143     $ (16,143 )   $  
                         
 
Other Assets.  Other assets principally include prepaid expenses, debt issuance costs and deferred compensation plan assets.
 
Income Taxes.  Income taxes are accounted for in accordance with SFAS 109, Accounting for Income Taxes and FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109 (FIN 48) (ASC 740). Under ASC 740, the provision for income taxes is comprised of taxes that are currently payable and deferred taxes that relate to temporary differences between financial reporting carrying values and tax bases of assets and liabilities. Deferred tax assets and liabilities result from deductible or taxable amounts in future years when such assets and liabilities are recovered or settled and are measured using the enacted tax rates and laws that are expected to be in effect when the assets and liabilities are recovered or settled. We include any estimated interest and penalties on tax related matters in income taxes payable. We recognize the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition of measurement are recorded in the period in which the change in judgment occurs. We record interest and penalties related to unrecognized tax benefits in income tax expense.
 
Other Liabilities.  Other liabilities include the following:
 
                 
    September 30, 2010     September 30, 2009  
    (In thousands)  
 
Income tax liabilities
  $ 53,508     $ 50,850  
Accrued warranty expenses
    25,821       30,100  
Accrued interest
    35,477       32,533  
Accrued and deferred compensation
    31,474       29,379  
Customer deposits
    3,678       5,507  
Other
    60,212       78,946  
                 
Total
  $ 210,170     $ 227,315  
                 
 
Income Recognition and Classification of Costs.  Revenue and related profit are generally recognized at the time of the closing of a sale, when title to and possession of the property are transferred to the buyer. As appropriate, revenue for condominiums under construction is recognized based on the percentage-of-completion method in accordance with SFAS 66, Accounting for Sales of Real-Estate and Emerging Issues Task Force (EITF) Issue No. 06-8, Applicability of the Assessment of a Buyer’s Continuing Investment under FASB Statement No. 66, Accounting for Sales of Real Estate, for Sales of Condominiums (ASC 360), when certain criteria are met.
 
We recognized loan origination fees and expenses and gains and losses on mortgage loans when the related loans were sold to third-party investors. Beazer’s policy was to sell all mortgage loans it originates and these sales usually occurred within 15 to 30 days of the closing of the home sale. Effective February 1, 2008, Beazer exited the mortgage origination business. The results of Beazer Mortgage have been reported as discontinued operations for all periods presented (see Note 15, Discontinued Operations).


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Sales discounts and incentives include items such as cash discounts, discounts on options included in the home, option upgrades (such as upgrades for cabinetry, countertops and flooring), and seller-paid financing or closing costs. In addition, from time to time, we may also provide homebuyers with retail gift certificates and/or other nominal retail merchandise. All sales incentives other than cash discounts are recognized as a cost of selling the home and are included in home construction and land sales expenses. Cash discounts are accounted for as a reduction in the sales price of the home.
 
Sales commissions are included in selling, general and administrative expenses.
 
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 generally range from 0.5% to 1.5% of total revenue. Additional warranty costs are charged to cost of sales as necessary based on management’s estimate of the costs to remediate existing claims. See Note 13 for a more detailed discussion of warranty costs and related reserves.
 
Advertising costs related to our continuing operations of $11.4 million, $11.8 million and $22.9 million for fiscal years 2010, 2009, and 2008, respectively, were expensed as incurred and are included in selling, general and administrative expenses. The decrease in advertising costs relates primarily to the reduced number of communities being marketed and our more efficient use of advertising dollars in connection with our cost control initiatives.
 
Earnings Per Share (EPS).  The computation of basic earnings per common share is determined by dividing net income applicable to common stockholders by the weighted average number of common shares outstanding during the period. Diluted EPS additionally gives effect (when dilutive) to stock options, other stock based awards and other potentially dilutive securities. In computed diluted loss per share for the fiscal years ended September 30, 2010, 2009 and 2008, all common stock equivalents were excluded from the computation of diluted loss per share as a result of their anti-dilutive effect.
 
Fair Value Measurements.  Certain of our assets are required to be recorded at fair value on a non-recurring basis when events and circumstances indicate that the carrying value may not be recovered. We review our long-lived assets, including inventory for recoverability when factors that indicate an impairment may exist, but no less than quarterly. Fair value is based on estimated cash flows discounted for market risks associated with the long-lived assets. The fair value of certain of our financial instruments approximate their carrying amounts due to the short maturity of these assets and liabilities or the variable interest rates on such obligations. The fair value of our publicly held debt is generally estimated based on quoted bid prices for these instruments. Certain of our other financial instruments are estimated by discounting scheduled cash flows through maturity or using market rates currently being offered on loans with similar terms and credit quality. See Note 8 for additional discussion of our fair value measurements.
 
Stock-Based Compensation.  We use the Black-Scholes model to value stock-settled appreciation rights (SSARs) and stock option grants under SFAS 123R, Share-Based Payment (ASC 718), and applied the “modified prospective method” for existing grants which required us to value the grants made prior to our adoption of SFAS 123R under the fair value method and expense the unvested portion over the remaining vesting period. We estimate forfeitures in calculating the expense related to stock-based compensation. In addition, we reflect the benefits of tax deductions in excess of recognized compensation cost as a financing cash inflow and an operating cash outflow. Nonvested stock granted to employees is valued based on the market price of the common stock on the date of the grant. Performance based, nonvested stock granted to employees is valued using the Monte Carlo valuation method. Cash-settled, stock-based awards granted to employees are initially valued based on the market price of the underlying common stock on the date of the grant and are adjusted to fair value until vested. Stock options issued to non-employees are valued using the Black-Scholes option pricing model. Nonvested stock granted to non-employees is initially valued based on the market price of the common stock on the date of the grant and is adjusted to fair value until vested.
 
Compensation cost arising from nonvested stock granted to employees, from cash-settled, stock-based employee awards and from non-employee stock awards is recognized as expense using the straight-line method over the vesting period. Unearned compensation is included in paid in capital. As of September 30, 2010 and 2009, there was $10.0 million and $9.6 million, respectively, of total unrecognized compensation cost related to nonvested


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stock. The cost remaining at September 30, 2010 is expected to be recognized over a weighted average period of 2.4 years.
 
For the years ended September 30, 2010, 2009, and 2008, total non-cash stock-based compensation expense, included in SG&A expenses, was $11.4 million ($7.6 million net of tax), $11.8 million ($8.3 million net of tax) and $12.3 million ($8.7 million net of tax), respectively.
 
Use of Estimates.  The preparation of financial statements in conformity with generally accepted accounting principals in the U.S (GAAP) 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.
 
Recently Adopted Accounting Pronouncements.  In September 2006, the FASB issued SFAS 157, Fair Value Measurements (ASC 820). SFAS 157 (ASC 820) provides guidance for using fair value to measure assets and liabilities. SFAS 157 (ASC 820) applies whenever other standards require (or permit) assets or liabilities to be measured at fair value but does not expand the use of fair value in any new circumstances. SFAS 157 (ASC 820) includes provisions that require expanded disclosure of the effect on earnings for items measured using unobservable data. In February 2008, the FASB issued FASB Staff Position (FSP) 157-2, Effective Date of FASB Statement No. 157 (ASC 820), delaying the effective date of certain non-financial assets and liabilities to fiscal periods beginning after November 15, 2008. The company adopted SFAS 157 (ASC 820) on October 1, 2009 as discussed in Note 8.
 
In February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115 (ASC 825). SFAS 159 (ASC 825) permits companies to measure certain financial instruments and other items at fair value. We have not elected the fair value option applicable under SFAS 159 (ASC 825).
 
In December 2007, the FASB issued SFAS 141 (revised 2007), Business Combinations (ASC 815). SFAS 141R (ASC 815) amends and clarifies the accounting guidance for the acquirer’s recognition and measurement of assets acquired, liabilities assumed and noncontrolling interests of an acquiree in a business combination. SFAS 141R (ASC 815) is effective for any acquisitions completed by the Company after September 30, 2009.
 
In December 2007, the FASB issued SFAS 160, Noncontrolling Interests in Consolidated Financial Statements — an Amendment of ARB 51 (ASC 810). SFAS 160 (ASC 810) requires that a noncontrolling interest (formerly a minority interest) in a subsidiary be classified as equity and the amount of consolidated net income specifically attributable to the noncontrolling interest be included in the consolidated financial statements. The adoption of SFAS 160 (ASC 810) did not have a material impact on our consolidated financial condition and results of operations as of September 30, 2010.
 
In June 2008, the FASB issued FSP EITF Issue No 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities (ASC 260). FSP 03-6-1 (ASC 260) clarifies that non-vested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and are to be included in the computation of earnings per share under the two-class method described in SFAS 128, Earnings per Share (ASC 260) and requires that prior period EPS and share data be restated retrospectively for comparability. The Company grants restricted shares under a share-based compensation plan that qualify as participating securities. FSP 03-6-1 (ASC 260) was effective for the Company beginning October 1, 2009. The adoption of this guidance did not have a material impact on the Company’s diluted earnings per share for any periods in the fiscal years ended September 30, 2010 and 2009.
 
In May 2008, the FASB issued FSP APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement) (ASC 470). FSP APB 14-1 (ASC 470) applies to convertible debt instruments that have a “net settlement feature” permitting settlement partially or fully in cash upon conversion. FSP APB 14-1 (ASC 470) was effective for the Company beginning October 1, 2009. Due to the


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fact that the Company’s convertible securities cannot be settled in cash upon conversion, the adoption of FSP APB 14-1 (ASC 470) did not have a material impact on our consolidated financial condition and results of operations.
 
Recent Accounting Pronouncements Not Yet Adopted.
 
In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R) (ASC 810), which revises the approach to determining the primary beneficiary of a variable interest entity (VIE) to be more qualitative in nature and requires companies to more frequently reassess whether they must consolidate a VIE. SFAS 167 (ASC 810) also requires enhanced disclosures to provide more information about an enterprise’s involvement in a variable interest entity. SFAS 167 (ASC 810) is effective for the Company’s fiscal year beginning October 1, 2010. The Company expects the adoption of SFAS 167 (ASC 810) to result in the deconsolidation of certain VIEs and a reduction in the amount of consolidated inventory not owned reported in our consolidated financial statements and is not expected to have a material impact on our consolidated financial condition.
 
(2)   Supplemental Cash Flow Information
 
We had the following cash and non-cash activity (in thousands):
 
                         
    2010     2009     2008  
 
Supplemental disclosure of non-cash activity:
                       
Increase (decrease) in obligations related to consolidated inventory not owned
  $ 4,310     $ (44,252 )   $ (107,323 )
Non-cash land acquisitions
    515       16,860       33,285  
Issuance of stock under deferred bonus stock plans
    2,337       1,543       1,799  
Decrease in retained earnings from FIN 48 adoption
                (10,112 )
Supplemental disclosure of cash activity:
                       
Interest payments
    113,885       129,724       133,482  
Income tax payments
    655       9,692       2,879  
Tax refunds received
    135,803       172,465       59,242  
 
(3) Investments in Unconsolidated Joint Ventures
 
As of September 30, 2010, we participated in certain land development joint ventures in which Beazer Homes had less than a controlling interest. The following table presents our investment in our unconsolidated joint ventures, the total equity and outstanding borrowings of these joint ventures and our guarantees of these borrowings as of September 30, 2010 and September 30, 2009:
 
                 
    2010     2009  
    (In thousands)  
 
Beazer’s investment in joint ventures
  $ 8,721     $ 30,124  
Total equity of joint ventures
    94,392       328,875  
Total outstanding borrowings of joint ventures
    394,301       422,682  
Beazer’s estimate of its maximum exposure to our loan-to-value maintenance guarantees
          3,850  
Beazer’s estimate of its maximum exposure to our repayment guarantees
    15,789       15,789  
 
The decrease in our investment in unconsolidated joint ventures from September 30, 2009 to September 30, 2010 relates primarily to impairments offset slightly by additional investments of $5.6 million. In addition, during fiscal 2010, together with our joint venture partners, we terminated our involvement in two joint ventures. For the fiscal years ended September 30, 2010, 2009 and 2008, our loss from joint venture activities, the impairments of our


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investments in certain of our unconsolidated joint ventures, and the overall equity in loss of unconsolidated joint ventures is as follows:
 
                         
    2010     2009     2008  
    (In thousands)  
 
Continuing operations:
                       
Income (loss) from joint venture activity
  $ 10     $ 518     $ (12,527 )
Impairment of joint venture investment
    (8,817 )     (12,630 )     (45,292 )
                         
Equity in loss of unconsolidated joint ventures
  $ (8,807 )   $ (12,112 )   $ (57,819 )
                         
Reported in loss from discontinued operations, net of tax
                       
(Loss) income from joint venture activity
  $ (32 )   $     $ 4  
Impairment of joint venture investment
    (15,511 )     (2,163 )     (23,499 )
                         
Equity in loss of unconsolidated joint ventures — discontinued operations
  $ (15,543 )   $ (2,163 )   $ (23,495 )
                         
 
The aggregate debt of the unconsolidated joint ventures was $394.3 million and $422.7 million at September 30, 2010 and 2009, respectively. At September 30, 2010, total borrowings outstanding include $327.9 million related to one joint venture in which we are a 2.58% member. The $28.4 million reduction in total outstanding joint venture debt during fiscal 2010 resulted primarily from debt payments of $35.0 million in accordance with loan agreements and/or negotiated settlements offset by loan draws of $6.6 million to fund the development activities of certain joint ventures. In December 2009, together with our joint venture partner, we reached agreement with a lender to the joint venture to pay down the joint venture’s outstanding debt by $7.4 million. In connection with this loan repayment, which was funded by capital contributions from both joint venture partners, the lender released the obligations under the related loan-to-value maintenance guarantees.
 
During the fourth quarter of fiscal 2009, one of our unconsolidated joint ventures completed a modification of its loan agreement with its lender, which resulted in, among other things, an extension of its maturity, enhanced guarantees from our joint venture partner and the release of Beazer under all guarantees related to this joint venture. Beazer contributed $9.7 million as an additional investment in the joint venture as part of the loan modification. Also during the fourth quarter of fiscal 2009, the Company and its joint venture partners entered into agreements with a lender to repay the notes payable of one of its unconsolidated joint ventures at a discount. The Company contributed an additional $4.3 million as an investment which was used to reduce the loan balance of this joint venture. We also entered into an agreement with a lender and our joint venture partner to purchase the notes payable and our partner’s interest in one of our unconsolidated joint ventures for a total of $13.6 million. This joint venture is consolidated in our financial statements as of September 30, 2009. In fiscal 2009, we also paid $3.0 million to settle our obligations under guarantees for three ventures which we had previously estimated at a maximum potential obligation of $16.6 million. As part of the settlement agreements, the lenders also cancelled $48.6 million of the outstanding debt of these three joint ventures.
 
One of our joint ventures is in default under its debt obligations. During fiscal 2008, the lender to the joint venture, in which we have a 2.58% investment, notified the joint venture members that it believes the joint venture is in default of certain joint venture loan agreements as a result of certain of the Company’s joint venture members not complying with all aspects of the joint ventures’ loan agreements. The joint venture members are currently in discussions with the lender. In December 2008, the lender filed individual lawsuits against some of the joint venture members and certain of those members’ parent companies (including the Company), seeking to recover damages under completion guarantees, among other claims. We intend to vigorously defend against this legal action. The Company’s share of the outstanding debt is approximately $15.1 million at September 30, 2010. Under the terms of the agreement, our repayment guarantee is estimated at $15.1 million, which is only triggered in the event of bankruptcy of the joint venture. Due to discussions with our other joint venture members, and based on our revised estimates regarding the realizability of our investment, we impaired our equity interest of $8.8 million in this joint venture during fiscal 2010. In addition, one member of the joint venture filed an arbitration proceeding against the


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remaining members related to the plaintiff-member’s allegations that the other members failed to perform under the applicable membership agreements. The arbitration proceeding in this matter was held in February 2010 and the arbitration panel issued its decision on July 6, 2010. Under the decision, the panel denied the plaintiff’s specific performance claims and awarded damages in the amount well below the amount claimed. The Company does not believe that its proportional share of the award is considered material to our consolidated financial position or results of operations. The Company has recorded an accrual for such matter (see Note 13 for additional information). In addition, certain of the joint venture members have curtailed their funding of their allocable joint venture obligations. Given the inherent uncertainties involved in the ongoing negotiations among the joint venture members, as of September 30, 2010, no accrual has been recorded with respect to the unfunded amounts, as obligations to Beazer, if any, related to these matters were not both probable and reasonably estimable.
 
Our joint ventures typically obtain secured acquisition, development and construction financing. Generally Beazer and our joint venture partners provide varying levels of guarantees of debt and other obligations for our unconsolidated joint ventures. At September 30, 2010, these guarantees included, for certain joint ventures, construction completion guarantees, loan-to-value maintenance agreements, repayment guarantees and environmental indemnities.
 
In assessing the need to record a liability for the contingent aspect of these guarantees in accordance with FIN 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (ASC 400), we consider our historical experience in being required to perform under the guarantees, the fair value of the collateral underlying these guarantees and the financial condition of the applicable unconsolidated joint ventures. In addition, we monitor the fair value of the collateral of these unconsolidated joint ventures to ensure that the related borrowings do not exceed the specified percentage of the value of the property securing the borrowings. We have not recorded a liability for the contingent aspects of any guarantees that we determined were reasonably possible but not probable.
 
Construction Completion Guarantees
 
We and our joint venture partners may be obligated to the project lenders to complete land development improvements and the construction of planned homes if the joint venture does not perform the required development. Provided the joint venture and the partners are not in default under any loan provisions, the project lenders typically are obligated to fund these improvements through any financing commitments available under the applicable loans. A majority of these construction completion guarantees are joint and several with our partners. In those cases, we generally have a reimbursement arrangement with our partner which provides that neither party is responsible for more than its proportionate share of the guarantee. However, if our joint venture partner does not have adequate financial resources to meet its obligations under such reimbursement arrangement, we may be liable for more than our proportionate share, up to our maximum exposure, which is the full amount covered by the relevant joint and several guarantee. The guarantees cover a specific scope of work, which may range from an individual development phase to the completion of the entire project. As of September 30, 2010, we have a completion guarantee related to one joint venture loan which also has a repayment guarantee associated with it. No accrual has been recorded, as losses, if any, related to construction completion guarantees are not both probable and reasonably estimable.
 
Loan-to-Value Maintenance Agreements
 
We and our joint venture partners may provide credit enhancements to acquisition, development and construction borrowings in the form of loan-to-value maintenance agreements, which can limit the amount of additional funding provided by the lenders or require repayment of the borrowings to the extent such borrowings plus construction completion costs exceed a specified percentage of the value of the property securing the borrowings. The agreements generally require periodic reappraisals of the underlying property value. To the extent that the underlying property gets reappraised, the amount of the exposure under the loan-to value-maintenance (LTV) guarantee would be adjusted accordingly and any such change could be significant. In certain cases, we may be required to make a re-balancing payment following a reappraisal in order to reduce the applicable loan-to-value


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ratio to the required level. As of September 30, 2010, we do not have any obligations related to LTV guarantees. Our estimate of the Company’s portion of LTV guarantees of the unconsolidated joint ventures was $3.9 million at September 30, 2009. During fiscal 2010, the Company and its joint venture partner reached an agreement with the lender of a joint venture to release the LTV guarantee and extend the related loan maturity up to two years in exchange for a loan repayment of $7.4 million. The Company invested an additional $3.9 million in the joint venture to facilitate this repayment during fiscal 2010.
 
Repayment Guarantees
 
We and our joint venture partners have repayment guarantees related to certain joint ventures’ borrowings. These repayment guarantees require the repayment of all or a portion of the debt of the unconsolidated joint venture only in the event the joint venture defaults on its obligations under the borrowing or in some cases only in the event the joint venture files for bankruptcy. Our estimate of Beazer’s maximum exposure to our repayment guarantees related to the outstanding debt of its unconsolidated joint ventures was $15.8 million at both September 30, 2010 and 2009.
 
Environmental Indemnities
 
Additionally, we and our joint venture partners generally provide unsecured environmental indemnities to joint venture project lenders. In each case, we have performed due diligence on potential environmental risks. These indemnities obligate us to reimburse the project lenders for claims related to environmental matters for which they are held responsible. During the fiscal years ended September 30, 2010 and 2009, we were not required to make any payments related to environmental indemnities. No accrual has been recorded, as losses, if any, related to environmental indemnities are not both probable and reasonably estimable
 
(4)   Inventory
 
                 
    September 30, 2010     September 30, 2009  
    (In thousands)  
 
Homes under construction
  $ 210,104     $ 219,724  
Development projects in progress
    444,062       487,457  
Land held for future development
    382,889       417,834  
Land held for sale
    36,259       42,470  
Capitalized interest
    36,884       38,338  
Model homes
    43,505       59,618  
                 
Total owned inventory
  $ 1,153,703     $ 1,265,441  
                 
 
Homes under construction includes homes finished and ready for delivery and homes in various stages of construction. We had 423 ($71.5 million) and 270 ($46.3 million) completed homes that were not subject to a sales contract at September 30, 2010 and 2009, respectively (“spec homes”). The increase in spec homes at September 30, 2010 was primarily due to homes started in anticipation of increased demand related to the expiration of the federal and state tax rebates in June 2010 that remained unsold at fiscal year end. 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. Land held for future development consists of communities for which construction and development activities are expected to occur in the future or have been idled and are stated at cost unless facts and circumstances indicate that the carrying value of the assets may not be recoverable. All applicable interest and real estate taxes on land held for future development are expensed as incurred. During the fiscal year 2010, we reclassified $33.5 million of land held for future development to development projects in progress. Since 2008, the Company has made strategic decisions to re-allocate capital employed through sales of select properties and through the exiting of certain markets no longer viewed as strategic and has recorded such land as held for sale. Land held for sale as of September 30, 2010 and 2009 principally included land held for sale in the markets we have decided to exit including Colorado, New Mexico, Jacksonville, Florida and Charlotte, North Carolina.


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Total owned inventory, by reportable segment, is set forth in the table below (in thousands):
 
                                                                 
    September 30, 2010     September 30, 2009  
          Held for
    Land
    Total
          Held for
    Land Held
    Total
 
    Projects in
    Future
    Held
    Owned
    Projects in
    Future
    for
    Owned
 
    Progress     Development     for Sale     Inventory     Progress     Development     Sale     Inventory  
 
West Segment
  $ 281,912     $ 311,472     $ 5,273     $ 598,657     $ 276,348     $ 345,050     $ 8,171     $ 629,569  
East Segment
    269,210       47,381       1,376       317,967       318,888       48,748       2,927       370,563  
Southeast Segment
    121,509       24,036             145,545       136,015       24,036             160,051  
Unallocated
    53,157                   53,157       56,992                   56,992  
Discontinued Operations
    8,767             29,610       38,377       16,894             31,372       48,266  
                                                                 
Total
  $ 734,555     $ 382,889     $ 36,259     $ 1,153,703     $ 805,137     $ 417,834     $ 42,470     $ 1,265,441  
                                                                 
 
Inventory located in California, the state with our largest concentration of inventory, was $345.7 million and $358.7 million at September 30, 2010 and 2009, respectively.
 
Inventory Impairments.  The following tables set forth, by reportable homebuilding segment, the inventory impairments and lot option abandonment charges recorded for the fiscal years ended September 30, 2010, 2009 and 2008 (in thousands) :
 
                         
    Fiscal Year Ended September 30,  
    2010     2009     2008  
 
Development projects and homes in process (Held for Development)
                       
West
  $ 18,056     $ 42,704     $ 145,710  
East
    18,703       6,383       70,152  
Southeast
    7,973       24,536       53,103  
Unallocated
    3,404       5,116       21,769  
                         
Subtotal
  $ 48,136     $ 78,739     $ 290,734  
                         
Land Held for Sale
                       
West
  $ 1,061     $ 9,357     $ 8,505  
East
          1,071       16,883  
Southeast
          2,094       35,793  
                         
Subtotal
  $ 1,061     $ 12,522     $ 61,181  
                         
Lot Option Abandonments
                       
West
  $ 783     $ 99     $ 14,893  
East
    35       2,884       9,850  
Southeast
    21       972       26,744  
                         
Subtotal
  $ 839     $ 3,955     $ 51,487  
                         
Continuing Operations
  $ 50,036     $ 95,216     $ 403,402  
                         
Discontinued Operations
                       
Held for Development
  $ 781     $ 1,477     $ 21,888  
Land Held for Sale
    1,003       9,370       55,593  
Lot Option Abandonments
    19       1,064       29,745  
                         
Subtotal
  $ 1,803     $ 11,911     $ 107,226  
                         
Total Company
  $ 51,839     $ 107,127     $ 510,628  
                         


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The inventory held for development that was impaired during fiscal 2010, 2009 and 2008 was based on our estimated discounted cash flow impairment calculations. The fair value below represents the fair value immediately after a community’s impairment, or the last impairment taken for communities impaired multiple times ($ in millions).
 
                         
    2010   2009   2008
 
Discount Rate — low
    14 %     17 %     16 %
Discount Rate — high
    20 %     22 %     23 %
Continuing operations
                       
Communities impaired
    26       34       103  
Lots impaired
    1,855       3,361       8,838  
Estimated fair value
  $ 68.3     $ 103.7     $ 363.7  
Discontinued operations
                       
Communities impaired
    3       1       37  
Lots impaired
    40       121       641  
Estimated fair value
  $ 4.5     $ 2.4     $ 47.9  
 
During fiscal 2009 and 2010, for certain communities we determined it was prudent to reduce sales prices or further increase sales incentives in response to factors including competitive market conditions. Because the projected cash flows used to evaluate the fair value of inventory are significantly impacted by changes in market conditions including decreased sales prices, the change in sales prices and changes in absorption estimates led to additional impairments in certain communities during the fiscal year. In future periods, we may again determine that it is prudent to reduce sales prices, further increase sales incentives or reduce absorption rates which may lead to additional impairments, which could be material. The impairments recorded on our held for development inventory for the fiscal years ended September 30, 2010, 2009 and 2008, primarily resulted from the continued decline in the homebuilding environment across our submarkets.
 
The impairments on land held for sale above represent further write downs of these properties to net realizable value, less estimated costs to sell and are as a result of challenging market conditions and our review of recent comparable transactions.
 
Lot Option Agreements and Abandonments.  We also have access to land inventory through lot option contracts, which generally enable us to defer acquiring portions of properties owned by third parties and unconsolidated entities until we have determined whether to exercise our lot option. A majority of our lot option contracts require a non-refundable cash deposit or irrevocable letter of credit based on a percentage of the purchase price of the land for the right to acquire lots during a specified period of time at a certain price. Under lot option contracts, purchase of the properties is contingent upon satisfaction of certain requirements by us and the sellers. Our liability under option contracts is generally limited to forfeiture of the non-refundable deposits, letters of credit and other non-refundable amounts incurred, which aggregated approximately $38.7 million at September 30, 2010. This amount includes non-refundable letters of credit of approximately $3.7 million. The total remaining purchase price, net of cash deposits, committed under all options was $221.3 million as of September 30, 2010.
 
We have determined the proper course of action with respect to a number of communities within each homebuilding segment was to abandon the remaining lots under option and to write-off the deposits securing the option takedowns, as well as preacquisition costs. In determining whether to abandon a lot option contract, we evaluate the lot option primarily based upon the expected cash flows from the property that is the subject of the option. If we intend to abandon or walk-away from a lot option contract, we record a charge to earnings in the period such decision is made for the deposit amount and any related capitalized costs associated with the lot option contract. We recorded lot option abandonment charges during the fiscal years ended September 30, 2010, 2009 and 2008 as indicated in the table above. The abandonment charges relate to our decision to abandon certain option contracts that no longer fit in our long-term strategic plan and related to our prior year decision to exit certain markets.


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