SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED April 30, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION
PERIOD FROM TO
Commission file number 1-9186
TOLL BROTHERS, INC.
(Exact name of registrant as specified in its charter)
Delaware 23-2416878
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3103 Philmont Avenue, Huntingdon Valley, Pennsylvania 19006
(Address of principal executive offices) (Zip Code)
(215) 938-8000
(Registrant's telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common Stock, $.01 par value: 36,996,537 shares as of June 1, 1998
PAGE
TOLL BROTHERS, INC. AND SUBSIDIARIES
INDEX
Page
No.
PART I. Financial Information
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets (Unaudited) 1
as of April 30, 1998 and October 31, 1997
Condensed Consolidated Statements of Income 2
(Unaudited) For the Six Months and Three
Months Ended April 30, 1998 and 1997
Condensed Consolidated Statements of Cash Flows 3
(Unaudited)For the Six Months Ended
April 30, 1998 and 1997
Notes to Condensed Consolidated Financial Statements 4
(Unaudited)
ITEM 2. Management's Discussion and Analysis of 7
Financial Condition and Results of Operations
PART II. Other Information 10
SIGNATURES 12
STATEMENT OF FORWARD-LOOKING INFORMATION
Certain information included herein and in other statements, reports and
S.E.C.filings is foward-looking within the meaning of the Private Securities
Litigation Reform Act of 1995 related to subject matter such as national and
local economic conditions, the effect of governmental regulation on the Company,
the competitive environment in which the Company operates, changes in interest
rates, home prices, availability and cost of land for future growth,
availability of working capital, the availability and cost of labor and
materials and the levels of spending for selling, general and administrative
costs. Such forward looking information involves important risks and
uncertainties that could significantly affect expected results.
These risks and uncertainties are addressed in this and other SEC filings.
PAGE
TOLL BROTHERS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEET
(Amounts in thousands)
(Unaudited)
April 30, October 31,
1998 1997
ASSETS
Cash and cash equivalents $ 55,122 $ 147,575
Residential inventories 1,037,315 921,595
Property, construction and office
equipment 14,708 15,074
Receivables, prepaid expenses and
other assets 44,465 31,793
Mortgage notes receivable 2,051 2,589
$1,153,661 $1,118,626
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Loans payable $ 170,016 $ 189,579
Subordinated notes 269,255 319,924
Customer deposits on sales
contracts 71,468 52,698
Accounts payable 49,629 48,600
Accrued expenses 77,196 75,237
Collateralized mortgage
obligations payable 2,285 2,577
Income taxes payable 39,243 44,759
Total liabilities 679,092 733,374
Shareholders' equity:
Preferred stock
Common stock 370 343
Additional paid-in capital 106,677 48,514
Retained earnings 367,522 336,395
Total shareholders' equity 474,569 385,252
$1,153,661 $1,118,626
See accompanying notes
TOLL BROTHERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands except per share data)
(Unaudited)
Six months Three months
ended April 30 ended April 30
1998 1997 1998 1997
Revenues:
Housing sales $491,447 $409,950 $248,213 $208,513
Interest and other 2,891 1,776 1,410 693
494,338 411,726 249,623 209,206
Costs and expenses:
Land and housing construction 381,156 317,980 192,306 162,599
Selling, general &
administrative 48,517 38,893 24,999 20,073
Interest 14,625 12,742 7,594 6,605
444,298 369,615 224,899 189,277
Income before income taxes
and extraordinary loss 50,040 42,111 24,724 19,929
Income taxes 17,798 15,411 9,037 7,326
Income before extraordinary loss 32,242 26,700 15,687 12,603
Extraordinary loss from
extinguishment of debt,
net of income taxes of $655
in 1998 and $1,659 in 1997 1,115 2,772 1,115
Net income $ 31,127 $ 23,928 $ 14,572 $ 12,603
Earnings per share:
Basic
Income before extraordinary $ .90 $ .78 $ .42 $ .37
loss
Extraordinary loss from
extinguishment of debt .03 .08 .03
Net Income $ .87 $ .70 $ .39 $ .37
Diluted
Income before extraordinary $ .85 $ .74 $ .41 $ .35
loss
Extraordinary loss from
extinguishment of debt .03 .07 .03
Net Income $ .82 $ .67 $ .38 $ .35
Weighted average number
of shares
Basic 35,980 34,035 36,976 34,124
Diluted 38,400 37,083 38,673 37,138
See accompanying notes
PAGE
TOLL BROTHERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
Six month
ended April 30
1998 1997
Cash flows from operating activities:
Net income $31,127 $23,928
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 2,072 1,696
Amortization of discount on loans 916 190
Extraordinary loss from extinguishment of debt 1,770 4,431
Deferred taxes 3,869 2,764
Changes in operating
assets and liabilities:
Increase in residential inventories (118,724) (59,818)
(Increase) decrease in receivables,
prepaid expenses and other assets (15,881) 802
Increase in customer deposits on sales 18,770 8,016
contracts
Increase (decrease) in accounts payable,
accrued expenses and other liabilities 7,753 (171)
Decrease in current income taxes payable (8,454) (7,449)
Net cash used in operating activities (76,782) (25,611)
Cash flows from investing activities:
Purchase of property, construction and office
equipment, net (1,350) (3,638)
Principal repayments of mortgage notes receivable 538 157
Net cash used in investing activities (812) (3,481)
Cash flows from financing activities:
Proceeds from loans payable 50,000 80,000
Principal payments of loans payable (67,638) (40,027)
Proceeds from the issuance of senior subordinated notes 97,500
Repurchase of subordinated notes (90,434)
Principal payments of collateralized mortgage
obligations (292) (152)
Proceeds from stock options exercised and employee
stock plan purchases 3,348 1,920
Purchase of treasury stock (277)
Net cash (used in) provided by financing (14,859) 48,807
activities
Net (decrease)increase in cash and cash equivalents(92,453) 19,715
Cash and cash equivalents, beginning of period 147,575 22,891
Cash and cash equivalents, end of period $55,122 $42,606
Supplemental disclosures of cash flow information
Interest paid, net of capitalized amount $ 3,946 $ 2,678
Income taxes paid $21,731 $18,102
Supplemental disclosures of non-cash financing activities:
Cost of residential inventories acquired through
seller financing $11,144
Income tax benefit relating to exercise of employee
stock options $ 843 $ 335
Stock bonus award $ 3,564 $ 2,295
Conversion of Subordinated debt $50,712
See accompanying notes
PAGE
TOLL BROTHERS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands)
(Unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with the rules and regulations of
the Securities and Exchange Commission for interim financial information.
The October 31, 1997 balance sheet amounts and disclosures included
herein have been derived from the October 31, 1997 audited financial
statements of the Registrant. Since the accompanying condensed consolidated
financial statements do not include all the information and footnotes
required by generally accepted accounting principles for complete financial
statements, it is suggested that they be read in conjunction with the
financial statements and notes thereto included in the Registrant's
October 31, 1997 Annual Report on Form 10-K. In the opinion of management,
the accompanying unaudited condensed consolidated financial statements
include all adjustments, which are of a normal recurring nature,
necessary to present fairly the Company's financial position as of April
30, 1998 the results of its operations for the six months and three
months then ended and its cash flows for the six months then ended. The
results of operations for such interim periods are not necessarily
indicative of the results to be expected for the full year.
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No.128, "Earnings Per Share". Statement 128
replaced the previously reported primary and fully diluted earnings per
share with basic and diluted earnings per share. Unlike primary earnings
per share, basic earnings per share excludes any dilutive effects of
options, warrants, and convertible securities. Diluted earnings per
share is very similar to the previously reported fully diluted earnings per
share. All earnings per share amounts for all periods have been presented,
and where necessary, restated to conform to the Statement 128 requirements.
PAGE
2. Residential Inventories
Residential inventories consisted of the following:
April 30, October 31,
1998 1997
Land and land development costs $251,971 $234,855
Construction in progress 674,572 590,295
Sample homes 49,974 47,920
Land deposits and costs of future
development 38,746 28,314
Deferred marketing and financing
costs 22,052 20,211
$1,037,315 $921,595
Construction in progress includes the cost of homes under construction,
land and land development and carrying costs of lots that have been
substantially improved.
The Company capitalizes certain interest costs to inventories during the
development and construction period. Capitalized interest is charged to
interest expense when the related inventories are closed. Interest
incurred, capitalized and expensed is summarized as follows:
Six months Three months
ended April 30 ended April 30
1998 1997 1998 1997
Interest capitalized,
beginning of period $51,687 $46,191 $54,991 $49,198
Interest incurred 19,705 17,993 9,352 8,768
Interest expensed (14,625) (12,742) (7,594) (6,605)
Write off to cost of sales (18) (83) (2)
Interest capitalized,
end of period $56,749 $51,359 $56,749 $51,359
3. Extinguishment of Debt
In December 1997, the Company called for redemption on January 14, 1998
all of its outstanding 4 3/4% Convertible Senior Subordinated Notes due 2004
at 102.969% of principal amount plus accrued interest. Prior to the
redemption date, $50.8 million of bonds were converted into common stock of
the Company.
In February 1998, the Company entered into a new five year, $355 million
bank credit facility. In connection therewith, the Company repaid $62
million of fixed rate long-term bank loans. The Company recognized an
extraordinary charge in the second quarter of 1998
of $1.1 million, net of $655,000 of income taxes, related to the retirement
of its previous revolving credit agreement and prepayment of the term loans.
In January 1997, the Company called for redemption on March 15, 1997
all of its outstanding 10 1/2% Senior Subordinated Notes due 2002 at
103% of principal amount plus accrued interest. The redemption resulted in
an extraordinary loss in the first quarter of fiscal 1997 of $2,772,000, net
of $1,659,000 of income taxes. The loss represents the redemption
premium and the write-off of unamortized deferred issuance costs.
4. Earnings per share information: (in thousands)
Six months Three months
ended April 30 ended April 30
1998 1997 1998 1997
Basic Weighted average
shares outstanding (Basic) 35,980 34,035 36,976 34,124
Stock options 1,539 703 1,697 669
Convertible subordinated
notes 881 2,345 2,345
Diluted weighted
average shares 38,400 37,083 38,673 37,138
Earnings addback related
to interest on convertible
subordinated notes $ 315 $ 756 $ 0 $ 378
5. Stock Repurchase Program
In April 1997, the Company's Board of Directors authorized the repurchase
of up to 3,000,000 shares of its Common Stock, par value $.01, from time
to time, in open market transactions or otherwise, for the purpose of
providing shares for its various employee benefit plans. As of April 30,
1998, the Company had repurchased 10,000 shares. The Company reissued
these shares to employees upon exercise of stock options.
PAGE
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain income
statement items related to the Company's operations as percentages of
total revenues and certain other data:
Six months Three months
ended April 30 ended April 30
1998 1997 1998 1997
Revenues 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Land and housing construction 77.1 77.2 77.0 77.7
Selling, general and
administrative 9.8 9.5 10.0 9.6
Interest 3.0 3.1 3.1 3.2
Total costs and expenses 89.9 89.8 90.1 90.5
Income before taxes 10.1% 10.2% 9.9% 9.5%
Revenues for the six month and three month periods ended April 30, 1998 were
higher than those of the comparable periods of 1997 by approximately $82.6
million, or 20%, and $40.4 million, or 19%, respectively. The increased
revenues for the 1998 periods were primarily attributable to the increase in
the number of the homes delivered during the periods which was due to the
greater number of communities from which the Company was delivering homes
and the larger backlog of homes at the beginning of fiscal 1998 as compared
to the beginning of fiscal 1997. The revenue increases were offset in part
by a 3.6% decrease in the average selling price per home delivered in the
second quarter of fiscal 1998 and delays caused by the excessive rains in
the Company's Western markets. The decrease in the average selling price
per home delivered in the second quarter of fiscal 1998 compared to the
second quarter of 1997 was due principally to an increase in the number of
smaller homes delivered during the period and delays in delivery of some of
the larger homes due to the aforementioned weather conditions.
The value of new sales contracts signed amounted to $706 million (1,751 homes)
and $435 million (1,076 homes) for the six month and three month periods ended
April 30, 1998, respectively. The value of new contracts signed for the
comparable periods of fiscal 1997 were $528 million (1,314 homes) and
$355 million (872 homes), respectively. The increase in new contracts signed
in both periods of 1998 was primarily attributable to an increase both in the
number of communities in which the Company was offering homes for sale and in
the number of contracts signed per community.
Orders for new homes are generally the strongest during the Company's second
quarter and consequently the backlog at April 30 is generally at its highest
level in the Company's fiscal year. As of April 30, 1998, the backlog of
homes under contract amounted to $852 million (2,045 homes), approximately
32% higher than the $644 million (1,593 homes) backlog as of April 30,
1997 and approximately 36% higher than the $627 million (1,551 homes) backlog
as of October 31, 1997. The increase in backlog at April 30, 1998 is primarily
attributable to the increases in the new contracts signed as previously
discussed which exceeded the homes delivered during the applicable periods.
Land and construction costs as a percentage of revenues decreased in the three
month period ended April 30, 1998 as compared to the same period of 1997. The
decrease was due principally to a shift in the geographic mix of homes
delivered to more profitable markets. The costs as a percentage of revenues
for both six months periods of 1998 and 1997 were comparable.
Selling, general and administrative expenses ("SG&A") in the six month and
three month periods ended April 30, 1998 increased over the comparable
periods of 1997 by $9.6 million or 25%, and $4.9 million or 25%,
respectively. These increases were primarily attributable to the higher
level of spending due to the increase in revenues in the 1998 periods as
compared to the same periods of 1997 and the Company's geographic expansion.
Interest expense is determined on a specific home-by-home basis and will vary
depending on many factors including the period of time that the land under the
home was owned, the length of time that the home was under construction, and
the interest rates and the amount of debt carried by the Company in proportion
to the amount of its inventory during those periods. As a percentage of
revenues, interest expense was lower in the six month and three month periods
of 1998 as compared to 1997.
Income Taxes
The Company's estimated combined state and federal tax rate before providing
for the effect of permanent book-tax differences ("Base Rate") was 37% and
37.5% in the 1998 and 1997 periods, respectively. The decrease in the Base
Rate was due to a decrease in the Company's estimated effective state tax
rate. The effective tax rate for the six month and three month periods of
1998 were 35.6% and 36.6% as compared to 36.6% and 36.8% for the comparable
periods of 1997. The primary differences between the Company's Base Rate and
effective tax rate were tax free income in 1998 and 1997 and in the first
quarter of 1998 and an adjustment due to the recomputation of the Company's
deferred tax liability resulting from the change in the Company's estimated
Base Rate. The Company expects the effective rate for the remainder of fiscal
1998 to increase and for the full 1998 fiscal year to be approximately 36.5%.
EXTRAORDINARY LOSSES FROM EXTINGUISHMENT OF DEBT
In February 1998, the Company entered into a new five year, $355 million bank
credit facility. In connection therewith, the Company repaid $62 million of
fixed rate long-term bank loans. The Company recognized an extraordinary
charge in the second quarter of 1998 of $1.1 million, net of $655,000 of
income taxes, related to the retirement of its previous revolving credit
agreement and prepayment of the term loans.
In January 1997, the Company called for redemption on March 15, 1997 of all
of its outstanding 10 1/2% Senior Subordinated Notes due 2002 at 103% of
principal amount plus accrued interest. The redemption resulted in an
extraordinary loss in the first quarter of fiscal 1997 of $2,772,000, net
of $1,659,000 of income taxes. The loss represents the redemption premium
and a write-off of unamortized deferred issuance costs.
CAPITAL RESOURCES AND LIQUIDITY
Funding for the Company's residential development activities has been
principally provided by cash flows from operations, unsecured bank
borrowings and the public debt and equity markets.
The Company has a $355 million unsecured revolving credit facility
with fifteen banks which extends through February 2003. As of April 30, 1998,
the Company had $50 million of loans and approximately $17 million of
letters of credit outstanding under the facility.
The Company believes that it will be able to continue to fund its activities
through a combination of operating cash flow and existing sources of
credit.
YEAR 2000
In prior years, many computer programs were written using two digits rather
than four to define the applicable year which could result in systems failures
or errors. Management has reviewed its internal software systems and believes
that the required changes will be completed without causing operational issues
or have a material impact on the Company's results of operations or financial
condition.
HOUSING DATA
Six Months Three Month
Ended April 30 Ended April 30
1998 1997 1998 1997
Period ended April 30:
# of homes closed 1,310 1,088 665 538
# of homes contracted 1,751 1,314 1,076 872
Sales value of homes
contracted (in thous.) $705,873 $528,126 $435,453 $354,611
April 30, Oct.31, April 30, Oct. 31,
1998 1997 1997 1996
# of homes in backlog 2,045 1,551 1,593 1,367
Sales value of homes in
backlog (in thous.) $852,337 $627,220 $644,370 $526,194
PART II. Other Information
ITEM 1. Legal Proceedings
None.
ITEM 2. Changes in Securities
None.
ITEM 3. Defaults upon Senior Securities
None.
ITEM 4. Submission of Matters to a Vote of Security Holders
(a) The Company's 1998 Annual Meeting of Shareholders was
held on March 5, 1998.
(b) Not required.
(c) The following proposals were submitted to a vote of
shareholders and were approved by the affirmative vote of a
majority of the shares of common stock of the Company that
were present in person or by proxy, as indicated below.
(i) The approval of the proposed Toll Brothers, Inc. Stock
Incentive Plan (1998).
FOR AGAINST ABSTAIN
19,298,984 10,947,238 49,002
(ii) The approval of the proposed amendment of the
Company's Certificate of Incorporation.
FOR AGAINST ABSTAIN
27,739,195 2,438,630 117,399
(iii) The approval of Ernst & Young LLP as the Company's
independent auditors for the 1998 fiscal year.
FOR AGAINST ABSTAIN
32,703,632 15,262 17,766
ITEM 5. Other Information
None.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 10.1 Credit Agreement dated as of February 25, 1998
among First Huntingdon Finance Corp., The
Registrant, The First National Bank of
Chicago, (Administrative Agent); Bank of
America National Trust and Savings
Association; (Co-Agent); CoreStates Bank, N.A.,
(Co-Agent); Credit Lyonnais New York Branch
(Co-Agent);Comerica Bank; Nationsbank,
National Association; Fleet National Bank;
Guaranty Federal Bank, F.S.B.; Mellon Bank,
N.A.; Banque Paribas; Bayerische Vereinsbank AG,
New York Branch; Kredietbank N.V.; Suntrust
Bank, Atlanta; The Fuji Bank Limited;
and Bank Hapoalim B.M. Philadelphia Branch
Exhibit 10.2 Agreement dated March 5,1998 between the
Registrant and Bruce E. Toll ("Mr. Toll")
regarding Mr. Toll's resignation and related
matters.
Exhibit 10.3 Consulting and non-competition agreement dated
March 5,1998 between the Registrant and
Bruce E. Toll
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
Form 8-K dated February 25, 1998 filed for the purpose of
recalculating earnings per share for the five years ended
October 31, 1997 in accordance with statement of Financial
Accounting Standards No. 128,"Earnings Per Share".
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TOLL BROTHERS, INC.
(Registrant)
Date: June 9, 1998 By: /s/ Joel H. Rassman
Joel H. Rassman
Senior Vice President,
Treasurer and Chief
Financial Officer
Date: June 9, 1998 By: /s/ Joseph R. Sicree
Joseph R. Sicree
Vice President -
Chief Accounting Officer
(Principal Accounting Officer)