SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended October 31, 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 19006-4298
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (215) 938-8000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
Common Stock (par value $.01) New York Stock Exchange
Pacific Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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.
As of December 31, 1998, the aggregate market value of the Common
Stock held by non-affiliates (all persons other than executive officers and
directors of Registrant) of the Registrant was approximately $576,490,000.
As of December 31, 1998, there were 36,923,576 shares of Common
Stock outstanding.
Documents Incorporated by Reference:
Toll Brothers, Inc. Proxy Statement with respect to its 1999 Annual
Meeting ofShareholders, scheduled to be held on March 4, 1999, is
incorporated into Part III hereof by reference.
PART I
ITEM 1. BUSINESS
General
Toll Brothers, Inc. ("Toll Brothers" or the "Company"), a Delaware corporation
formed in May 1986, commenced its business operations, through predecessor
entities, in 1967. Toll Brothers designs, builds, markets and arranges
financing for single family detached and attached homes in middle and high
income residential communities catering to both move-up and empty nester
homebuyers in eighteen states and six regions around the country. The
communities are generally located on land the Company has either developed or
acquired fully approved and, in some cases, improved. Currently, Toll Brothers
operates predominantly in major suburban residential areas in southeastern
Pennsylvania, central New Jersey, the Virginia and Maryland suburbs of
Washington, D.C., the Boston, Massachusetts metropolitan area, southern
Connecticut, Westchester County, New York, southern and northern California,
the suburbs of Raleigh and Charlotte, North Carolina,
metro Phoenix, Arizona, the suburbs of Dallas and Austin, Texas, in
several markets on the east and west coasts of Florida, in Las Vegas, Nevada, in
Columbus, Ohio, in Nashville, Tennessee and in the state of Delaware.
The Company acquired property in the suburbs of Detroit, Michigan and Chicago,
Illinois in fiscal 1998 and began offering homes for sale in those markets in
December 1998. The Company continues to explore additional geographic areas for
expansion. The Company markets its homes primarily to middle-income and
upper-income buyers, emphasizing high quality construction and customer
satisfaction. The Company also operates its own architectural, engineering,
mortgage, title, security monitoring, landscape, insurance brokerage,
component assembly and manufacturing operations.
As of October 31, 1998, the Company was offering homes for sale in 122
communities containing over 10,500 home sites which were owned or
controlled through options. The Company also controlled approximately 19,800
home sites in proposed communities.
Single family detached homes were being offered at prices, excluding
customized options, generally ranging from $132,000 to $832,000 with an
average base sales price of $396,000. Attached homes, excluding customized
options, were being offered at prices generally ranging from $103,000 to
$535,000, with an average base sales price of $229,000. In the five years ended
October 31, 1998, Toll Brothers delivered more than 11,000 homes in 250
communities.
In recognition of its achievements, the Company has received numerous
awards from national, state and local homebuilder publications and associations.
In fiscal 1996, the Company was selected "America's Best Builder" by the
National Association of Home Builders (the "NAHB") and Builder magazine in
recognition of its excellent financial performance, unique custom-production
system for building luxury homes in high volume and the excellence of its
designs. In 1995, the Company received the National Housing Quality Award from
the NAHB, which recognized the Company's outstanding commitment to total
quality management and continuous improvement. In 1994, the Company received
one of the first place awards in the "Build America Beautiful" Awards Program,
sponsored by Better Homes and Gardens magazine, the NAHB and Keep America
Beautiful, Inc., in recognition of the Company's programs to improve the
handling of solid waste on construction sites. In 1988, the Company was named
"The Builder of the Year" by Professional Builder magazine.
On October 31, 1998 and 1997, the Company had backlogs of $814,714,000
(1,892 homes) and $627,220,000 (1,551 homes), respectively. Substantially
all homes in backlog at October 31, 1998 are expected to be delivered by
October 31, 1999.
The Company generally attempts to reduce certain risks homebuilders
encounter by controlling land for future development through options whenever
possible (which allows the Company to obtain the necessary governmental
approvals before acquiring title to the land), by generally beginning
construction of homes after an agreement of sale has been executed with a buyer
and by using subcontractors to perform home construction and land development
work on a fixed-price basis.In order to obtain better terms or prices or due to
competitive pressures, the Company has purchased several properties outright,
or acquired the underlying mortgage, prior to obtaining all of the necessary
governmental approvals needed to commence development.
In 1998, the Company formed a group of entities (collectively, the "Real
Estate Group")to take advantage of commercial real estate opportunities which
may present themselves from time to time. These opportunities may be the
result of commercial parcels, attached to larger properties that the Company
has acquired or may acquire for its homebuilding operations, or from the direct
acquisition of unrelated land or operating properties. At October 31, 1998 the
primary assets of the Real Estate Group consisted of $6,000,000 in cash
contributed by the Company.
In November 1998, Robert I. Toll, Bruce E. Toll, Zvi Barzilay, Joel
Rassman, all of whom are executive officers and directors of the Company, and
other Company officers (the "Partners") contributed their partnership interests
in an apartment complex under construction in exchange for a fifty percent
ownership interest in the Real Estate Group. Based upon independent valuations
obtained by the Company and reviewed by the Board of Directors, the Board of
Directors believes that the value of the assets received, net of liabilities
assumed were at least equal to the consideration given to the Partners. In
December 1998, an independent pension fund agreed to contribute a total of
$10,000,000 (a $6,000,000 initial cash contribution and $4,000,000 in future
contributions) to the Real Estate Group for a one-third interest in it. The
Company initially expects to realize development, finance and management fees
from these activities and, on an ongoing basis, a return on its investment in
the Real Estate Group.
The Communities
Toll Brothers' communities are generally located in suburban areas near
major highways with access to major cities. Through 1981, all communities
were located in southeastern Pennsylvania. The Company began selling homes in
central New Jersey in 1982, in northern Delaware and Massachusetts in 1987, in
Maryland in 1988, in Virginia and Connecticut in 1992, in New York in 1993, in
southern California and North Carolina in 1994, in the suburbs of Dallas,
Texas and Florida in 1995, in Austin, Texas in 1996, in Columbus, Ohio and
Nashville, Tennessee in 1997, and in northern California in 1998. The Company
entered the metro Phoenix, Arizona market in August 1995 and the Las Vegas,
Nevada market in November 1997 through the acquisition of assets of two
privately owned homebuilders. The Company acquired property in the suburbs of
Detroit, Michigan and Chicago, Illinois in fiscal 1998 and began offering
homes for sale in those markets in December 1998.
The Company emphasizes its high-quality, detached single family homes
that are marketed primarily to the "upscale" luxury market, generally those
persons who have previously owned a principal residence seeking to buy a
larger home - the so-called "move-up" market. The Company believes its
reputation as a developer of homes for this market enhances its competitive
position with respect to the sale of more moderately priced detached homes,
as well as attached homes. The Company also markets to the 50+ year-old
"empty nester" and believes that this market has strong growth potential.
The Company has developed a number of home designs that it believes will
appeal to this category of home buyer and integrated these designs into its
communities along with its other homes. The Company expects to open for sale
its first age restricted community in 1999.
Each single family home community offers several home plans, with the
opportunity for home buyers to select various exterior styles. The communities
are designed to fit existing land characteristics, blending winding streets,
cul-de-sacs and underground utilities to establish a pleasant environment.
The Company strives to create a diversity of architectural styles within an
overall planned community. This diversity arises from variations among the
models offered and in exterior design options of homes of the same basic
floor plan, from the preservation of existing trees and foliage whenever
practicable, and from the curving street layout, which allows relatively
few homes to be seen from any vantage point. Normally, homes of the same
type or color may not be built next to each other. The communities have
attractive entrances with distinctive signage and landscaping. The Company
believes this avoids a "development" appearance and gives each community a
diversified neighborhood appearance that enhances home values.
The Company's attached home communities generally offer one to three story
homes, provide for limited exterior options and often contain commonly-owned
recreational acreage with swimming pools and tennis courts. These communities
have associations through which homeowners act jointly for their common
interest.
It is the Company's belief that the homes built by Toll Brothers in its
named communities provide homeowners with additional value upon resale.
The Homes
Most single family detached-home communities offer at least three
different home plans, each with several substantially different architectural
styles. Forexample, the same basic floor plan may be selected with a Colonial,
Georgian, Federal or Provincial design, and exteriors may be varied further
by the use of stone, stucco, brick or siding. Attached home communities
generally offer two or three different floor plans with two, three or four
bedrooms.
In all of Toll Brothers' communities, certain options are available to the
purchaser for an additional charge. The options typically are more
numerous and significant on the more expensive homes. Major options include
additional garages, additional rooms, finished lofts and additional fireplaces.
As a result of the additional charges for such options, the average sales
price was approximately 19% higher than the base sales price during fiscal
1998.
The range of base sales prices for the Company's lines of homes as of
October 31, 1998, was as follows:
Single Family Detached Homes:
Move-up $122,000 - $413,000
Executive 256,000 - 654,000
Estate 279,000 - 832,000
Attached Homes:
Townhomes 103,000 - 283,000
Carriage Homes 207,000 - 535,000
Contracts for the sale of homes are at fixed prices. The prices at which
homes are offered have generally increased from time to time during the
sellout period for each community; however, there can be no assurance that
sales prices will increase in the future.
The Company uses some of the same basic home designs in similar
communities. However, the Company is continuously developing new designs to
replace or augment existing ones to assure that its homes reflect current
consumer preferences. For new designs, the Company has its own architectural
staff and also engages unaffiliated architectural firms. During the past year,
the Company has introduced approximately 39 new models.
The Company operates in six regions throughout the United States. The
following table summarizes by region the Company's closings and new contracts
signed for fiscal 1998 and the Company's backlog as of October 31, 1998:
Region Closings New Contracts Backlog
Units $000 Units $000 Units $000
Northeast (MA,NY,CT,NJ) 1,054 $ 417,200 1,005 $433,200 565 $264,600
Midatlantic(PA,DE,MD,VA) 1,220 457,900 1,389 541,800 699 278,200
Southeast (NC, TN, FL) 176 72,800 224 103,800 132 65,800
Southwest (AZ, NV, TX) 462 141,000 611 207,700 412 153,900
Midwest (OH) 7 3,100 27 12,100 21 9,500
West (CA) 180 114,300 131 84,700 63 42,700
Total 3,099 $1,206,300 3,387 $1,383,300 1,892 $814,700
The following table summarizes certain information with respect to
residential communities of Toll Brothers under development as of October 31,
1998:
HOMES UNDER
NUMBER OF HOMES HOMES CONTRACT AND HOME SITES
STATE COMMUNITIES APPROVED CLOSED NOT CLOSED AVAILABLE
Arizona 20 1,485 397 286 802
California 8 889 295 63 531
Connecticut 6 282 147 17 118
Delaware 1 150 0 17 133
Florida 11 819 143 98 578
Illinois 2 102 0 0 102
Massachusetts 5 362 95 63 204
Maryland 7 780 275 77 428
Michigan 1 28 0 0 28
Nevada 5 600 113 51 436
New Jersey:
Central 19 1,688 537 270 881
North central 4 627 209 61 357
South central 4 710 357 70 283
New York 8 522 106 84 332
North Carolina 5 586 205 27 354
Ohio 3 192 7 21 164
Pennsylvania 30 3,411 1,542 420 1,449
Tennessee 4 273 2 7 264
Texas 8 920 146 75 699
Virginia 12 1,270 589 185 496
Total 163(1) 15,696 5,165 1,892 8,639(2)
(1) Of these 163 communities, 122 had homes being offered for sale, 17
had not yet opened for sale and 24 had been sold out but not all closings had
been completed. Of the 122 communities in which homes were being offered for
sale, 115 were single family detached-home communities containing a total of
147 homes under construction but not under contract (exclusive of model homes)
and 7 were attached home communities containing a total of 7 homes under
construction but not under contract (exclusive of model homes).
(2) On October 31, 1998, significant site improvements had not commenced on
approximately 4,809 of the 8,639 available home sites. Of the 8,639
available home sites, 697 were not owned by the Company, but were controlled
through options.
Land Policy
Before entering into a contract to acquire land, the Company completes
extensive comparative studies and analyses on detailed Company-designed forms
that assist it in evaluating the acquisition. Toll Brothers generally attempts
to follow a policy of acquiring options to purchase land for future
communities. However, in order to obtain better terms or prices, or due to
competitive pressures, the Company has at times acquired property outright.
In addition, the Company has at times acquired the underlying mortgage on a
property and subsequently obtained title to that property.
The options or purchase agreements are generally on a non-recourse basis,
thereby limiting the Company's financial exposure to the amounts invested in
property and pre-development costs. The use of options or purchase agreements
may increase the price of land that the Company eventually acquires, but
significantly reduces risk. It also allows the Company to obtain necessary
development approvals before acquisition of the land, which generally enhances
the value of the options and the land eventually acquired. The Company's
purchase agreements are typically subject to numerous conditions including,
but not limited to, the Company's ability to obtain necessary governmental
approvals for the proposed community. Often, the down payment on the
agreement will be returned to the Company if all approvals are not
obtained, although pre-development costs may not be recoverable. The Company
has the ability to extend many of these options for varying periods of time,
in some cases by the payment of an additional deposit and in some cases
without an additional payment. The Company has the right to cancel any of its
land agreements by forfeiture of the Company's down payment on the agreement.
In such instances, the Company generally is not able to recover any
pre-development costs.
During the early 1990's, due to the recession and the difficulties other
builders and land developers had in obtaining financing, the number of buyers
competing for land in the Company's market areas diminished, while the number
of sellers increased, resulting in more advantageous prices for land
acquisitions made by the Company. Further, many of the land parcels offered
for sale were fully approved, and often improved, subdivisions. Generally,
such types of subdivisions previously had not been available for acquisition
in the Company's market area. The Company purchased several such subdivisions
outright and acquired control of several others through option contracts.
Due to the improvement in the economy and the increased availability of
capital during the past several years, the Company has seen an increase in
competition for available land in its market areas. The continuation of the
Company's development activities over the long term will be dependent upon
its continued ability to locate, enter into contracts to acquire, obtain
governmental approvals for, consummate the acquisition of, and improve
suitable parcels of land.
While the Company believes that there is significant diversity in its
Northeast and Mid-Atlantic markets and that this diversity provides protection
from the vagaries of individual local economies, it believes that a greater
geographic diversification will provide additional protection and more
opportunities for growth. During the past five years, the Company has expanded
into Arizona, California, Florida, Nevada, North Carolina, Ohio, Tennessee
and Texas. The Company acquired property in Michigan and Illinois in fiscal
1998 and began offering homes for sale in those markets in December 1998. The
Company continues to look for new markets.
The following is a summary of the parcels of land that the Company either
owns or controls through options at October 31, 1998 for proposed communities,
as distinguished from those currently under development:
Number of Number of Number of
State Communities Acres Homes Planned
Arizona 4 160 378
California 11 896 911
Colorado 2 164 235
Connecticut 2 241 100
Delaware 1 172 75
Florida 12 1,850 2,233
Maryland 4 236 542
Massachusetts 2 265 256
Michigan 11 1,400 1,093
New Jersey
Central 19 1,973 2,624
North central 9 1,350 789
South central 3 545 717
New York 2 49 67
North Carolina 5 621 811
Ohio 2 140 160
Pennsylvania 27 2,421 3,119
Rhode Island 2 50 134
Tennessee 1 152 136
Texas 4 146 358
Virginia 26 2,768 5,112
Total 149 15,599 19,850(1)
(1) Of the 19,850 planned home sites, 5,744 lots are owned.
The aggregate purchase price of land parcels under option at October 31,
1998 was approximately $435,966,000 of which $28,921,000 had been paid or
deposited.
The Company evaluates all of the land under control for proposed
communities on an ongoing basis with respect to economic and market
feasibility. During the year ended October 31, 1998, such feasibility
analyses resulted in approximately $1,685,000 of capitalized costs related
to proposed communities being charged to expense because they were no
longer deemed to be recoverable.
There can be no assurance that the Company will be successful in securing
necessary development approvals for the land currently under its control
or for land which the Company may acquire control of in the future or, that
upon obtaining such development approvals, the Company will elect to
complete its purchases under such options. The Company has generally been
successful in the past in obtaining governmental approvals, has substantial
land currently under its control for which it is seeking such
approvals (as set forth in the table above), and devotes significant
resources to locating suitable land for future development and to obtaining
the required approvals on land under its control. Failure to locate
sufficient suitable land or to obtain necessary governmental approvals,
however, may impair the ability of the Company over the long-term to maintain
current levels of development activities.
The Company generally has not purchased land for speculation or with the
contemplation of selling it for profit.
The Company believes that it has an adequate supply of land in its existing
communities and in land held for future development (assuming that all
properties are developed) to maintain its operations at its current levels
for several years.
Community Development
The Company expends considerable effort in developing a concept for
each community, which includes determination of size, style and price range of
the homes, layout of the streets and individual lots, and overall community
design. After obtaining the necessary governmental subdivision and other
approvals, which can sometimes require several years, the Company improves
the land by grading and clearing it, installing roads, underground utility
lines and pipes, erecting distinctive entrance structures,
and staking out individual home sites.
Each community is managed by a project manager who is located at the site.
Working with construction managers, marketing personnel and, when required,
other Company and outside professionals such as engineers, architects and
legal counsel, the project manager is responsible for supervising and
coordinating the various developmental steps from acquisition through the
approval stage, marketing, construction and customer service, including
monitoring the progress of work and controlling expenditures. Major decisions
regarding each community are made by senior members of the Company's
management.
The Company recognizes revenue only at the point which title and
possession are transferred to the buyer, which generally occurs shortly after
home construction is substantially completed. The most significant variable
affecting the timing of the Company's revenue stream, other than housing
demand, is receipt of final regulatory approvals, which, in turn, permits the
Company to begin the process of obtaining executed contracts for sales of
homes. Receipt of such final approvals is not seasonal. Although the
Company's sales and construction activities vary somewhat with
the seasons, affecting the timing of closings, any such seasonal effect is
relatively insignificant compared to the effect of receipt of final governmental
approvals.
Subcontractors perform all home construction and land development work,
generally under fixed-price contracts. Toll Brothers acts as a general
contractor and purchases some, but not all, of the building supplies it
requires (see "PROPERTIES - Manufacturing/Distribution Facility"). While the
Company has experienced some shortages in the availability of subcontractors
in some markets, it does not anticipate any material effect from these
shortages in its homebuilding operations. The Company's construction managers
and assistant managers coordinate subcontracting activities and supervise all
aspects of construction work and quality control. One of the ways the Company
seeks to achieve home buyer satisfaction is by providing its construction
managers with incentive compensation arrangements based on each home buyer's
satisfaction based on their responses on pre-closing and post-closing
checklists.
The Company maintains insurance to protect against certain risks
associated with its activities. These insurance coverages include,
among others, general liability, "all-risk" property, workers' compensation,
automobile, and employee fidelity. The Company believes the amounts and extent
of such insurance coverages are adequate.
Marketing
The Company believes that its marketing strategy, which emphasizes its
more expensive "Estate" and "Executive" lines of homes, has enhanced the
Company's reputation as a builder-developer of high-quality upscale housing.
The Company believes this reputation results in greater demand for all of the
Company's lines of homes. The Company generally includes attractive
decorative moldings such as chair rails, crown moldings, dentil moldings and
other aesthetic features, even in its less expensive homes, on the basis that
this additional construction expense is important to its marketing effort.
In addition to relying on management's extensive experience, the
Company determines the prices for its homes through a Company-designed value
analysis program that compares a Toll Brothers home with homes offered by
other builders in the relevant marketing area. The Company accomplishes this
by assigning a positive or negative dollar value to differences in product
features, such as amenities, location and marketing.
Toll Brothers expends great effort in creating its model homes, which play
an important role in the Company's marketing. In its models, Toll Brothers
creates an attractive atmosphere, with bread baking in the oven, fires
burning in fireplaces, and music playing in the background. Interior
decorations vary among the models and are carefully selected based upon the
lifestyles of the prospective buyers. During the past several years, the
Company has received a number of awards from various homebuilder associations
for its interior merchandising.
The sales office located in each community is generally staffed by
Company sales personnel, who are compensated with salary and commission.
In addition, a significant portion of Toll Brothers' sales is derived from
the introduction of customers to its communities by local cooperating realtors.
The Company advertises extensively in newspapers, other local and
regional publications and on billboards. The Company also uses videotapes and
attractive color brochures to describe each community. The Company has
established a web site on the Internet (http://www.tollbrothers.com) to
provide its customers with additional information on the Company and its homes.
All Toll Brothers homes are sold under the Company's limited warranty as
to workmanship and mechanical equipment. Many homebuyers are also
provided with a limited ten-year warranty as to structural integrity.
Customer Financing
The Company makes arrangements with a variety of mortgage lenders to
provide home buyers a range of conventional mortgage financing programs.
By making available an array of attractive mortgage programs to qualified
purchasers, the Company is able to better coordinate and expedite the entire
sales transaction by ensuring that mortgage commitments are received and that
closings take place on a timely and efficient basis. During fiscal 1998,
approximately 50% of the Company's closings were financed through mortgage
programs offered by the Company. In addition, during the same period, the
Company's home buyers, on average, financed approximately 73% of the
purchase price of their homes.
The Company secures the availability of a variety of competitive market
rate mortgage products from both national and regional lenders. Such
availability is generally obtained at no cost to the Company and is committed
for varying lengths of time and amounts.
Competition
The homebuilding business is highly competitive and fragmented. The
Company competes with numerous homebuilders of varying size, ranging from
local to national in scope, some of which have greater sales and financial
resources than the Company. Resales of homes also provide competition. The
Company competes primarily on the basis of price, location, design, quality,
service and reputation; however, during the past several years, the Company's
financial stability, relative to others in its industry, has become an
increasingly favorable competitive factor. The Company believes
that, due to the increased availability of capital, competition has increased
during the past several years.
Regulation and Environmental Matters
The Company is subject to various local, state and federal statutes,
ordinances, rules and regulations concerning zoning, building design,
construction and similar matters, including local regulations which impose
restrictive zoning and density requirements in order to limit the number of
homes that can eventually be built within the boundaries of a particular
locality. The Company has also seen an increase in state and local
legislation authorizing the acquisition of land, mainly by governmental,
quasi-public and non-profit entities, as dedicated open space. In addition,
the Company is subject to registration and filing requirements in connection
with the construction, advertisement and sale of homes in its communities in
certain states and localities in which it operates. These laws have not had a
material effect on the Company, except to the extent that application of such
laws may have caused the Company to conclude that development of a proposed
community would not be economically feasible, even if any or all necessary
governmental approvals were obtained (See "Business-Land Policy"). The Company
may also be subject to periodic delays or may be precluded entirely from
developing communities due to building moratoriums in the areas in which it
operates. Generally, such moratoriums relate to insufficient water or sewage
facilities or inadequate road capacity.
In order to secure certain approvals, the Company may have to provide
affordable housing at below market rental or sales prices. The impact on the
Company will depend on how the various state and local governments in the
areas in which the Company engages, or intends to engage, in development,
implement their programs for affordable housing. To date, these restrictions
have not had a material impact on the Company. The Company is also subject
to a variety of local, state and federal statutes, ordinances, rules and
regulations concerning protection of health and the environment
("environmental laws"), as well as the effects of environmental factors.
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 uses of the site. These environmental laws may result in
delays, may cause the Company to incur substantial compliance and other costs,
and may prohibit or severely restrict development in certain environmentally
sensitive regions or areas.
The Company maintains a policy of engaging, prior to consummating the
purchase of land, independent environmental consultants to assess such land
for the potential of hazardous or toxic materials, wastes or substances.
Because it has generally obtained such assessments for the land it has
purchased, the Company has not been significantly affected to date by the
presence of such materials.
Employees
As of October 31, 1998, the Company employed 1,583 full-time persons;
of these, 59 were in executive positions, 183 were engaged in sales activities,
170 in project management activities, 496 in administrative and clerical
activities, 463 in construction activities, 88 in engineering activities and
124 in the panel plant operations. The Company considers its employee
relations to be good.
ITEM 2. PROPERTIES
Headquarters
Toll Brothers' corporate offices, containing approximately 70,000 square
feet, are located in a facility at 3103 Philmont Avenue, Huntingdon Valley,
Montgomery County, Pennsylvania. The facility was purchased by the Company
in September 1988.
Manufacturing/Distribution Facility
Toll Brothers owns a facility of approximately 200,000 square feet in
which it manufactures open wall panels, roof and floor trusses, and
certain interior and exterior millwork to supply a portion of the Company's
construction needs. This operation also permits Toll Brothers to purchase
wholesale lumber, plywood, windows, doors, certain other interior and exterior
millwork and other building materials to supply its communities. The Company
believes that increased efficiency, cost savings and productivity result from
the operation of this plant and from such wholesale purchases of material.
This plant generally does not sell or supply to any purchasers
other than Toll Brothers. The property, which is located in Morrisville,
Pennsylvania, is adjacent to U.S. Route 1, a major thoroughfare, and is served
by rail.
Regional and Other Facilities
The Company leases office and warehouse space in various locations,
none of which is material to the business of the Company.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various claims and litigation arising
principally in the ordinary course of business. The Company believes that
the disposition of these matters will not have a material adverse effect on
the business or the financial condition of the Company.
The Company, members of its board and certain of its officers were named
as defendants in an action filed in the Delaware Chancery Court in October
1997, entitled Camody v. Toll Brothers, Inc. The plaintiff, who purports to
represent a class of Company stockholders, seeks declaratory and injunctive
relief invalidating the Company's Shareholder Rights Plan, claiming certain of
its terms are unauthorized by Delaware's General Corporation Law and that
adoption of the Plan was a violation of fiduciary duty. On October 29, 1997,
the defendants moved to dismiss the Complaint on, among other grounds, it
failed to state a claim for relief, the claims were derivative and
demand upon the board was required and the claims were not ripe for
review. Full briefing and argument ensued. On July 24, 1998, the Court denied
Defendants' motion in its entirety. Thereafter, the parties engaged in
settlement negotiations which led to an agreement in principal which the
Company and plaintiff expect to submit to the Court for approval. The Company
does not expect that the settlement of the litigation will have a material
impact on the Company's financial position or operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of the
fiscal year ended October 31, 1998.
EXECUTIVE OFFICERS OF THE REGISTRANT
The section entitled "Proposal One: Election of Directors" of the
Company's Proxy Statement for the 1999 Annual Meeting of Shareholders is
incorporated herein by reference.
The following table includes information with respect to all executive
officers of the Company as of October 31, 1998. All executive officers
serve at the pleasure of the Board of Directors of the Company.
Name Age Positions
Robert I. Toll 57 Chairman of the Board,
Chief Executive Officer
and Director
Bruce E. Toll 55 President (through
October 31, 1998) and
Director
Zvi Barzilay 52 Chief Operating Officer,
President (effective
November 1, 1998) and
Director
Joel H. Rassman 53 Senior Vice President,
Treasurer, Chief Financial
Officer and Director
Robert I. Toll and Bruce E. Toll, who are brothers, co-founded the
Company's predecessors' operations in 1967. Their principal occupation since
inception has been related to various homebuilding and other real estate
related activities. Effective April 30, 1998, Bruce E. Toll resigned his
position as Chief Operating Officer, and effective October 31, 1998, he
resigned his position as President. The Board of Directors elected Bruce E.
Toll, effective November 1, 1998, Vice Chairman of the Board.
Zvi Barzilay joined the Company as a project manager in 1980 and has
been an officer since 1983. Mr. Barzilay was elected a Director of the
Company in 1994 and was elected by the Board of Directors to the position of
Chief Operating Officer as of May 1, 1998 and President as of November 1,
1998.
Joel H. Rassman has been a senior vice president of the Company since
joining the Company in 1984. Mr. Rassman was elected a Director of the
Company in 1996.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is principally traded on the New York
Stock Exchange (Symbol: TOL). It is also listed on the Pacific Stock Exchange.
The following table sets forth the price range of the Company's common
stock on the New York Stock Exchange for each fiscal quarter during the
two years ended October 31, 1998.
Three Months Ended
October 31 July 31 April 30 January 31
1998
High $30 1/2 $30 1/4 $31 5/8 $29
Low $17 3/8 $23 3/4 $26 7/16 $22 1/8
1997
High $25 1/2 $21 1/16 $19 7/8 $20 1/4
Low $20 5/16 $17 5/8 $17 1/2 $16 7/8
The Company has not paid any cash dividends on its common stock to
date and expects that for the foreseeable future it will follow a policy of
retaining earnings in order to finance the continued development of its
business. Payment of dividends is within the discretion of the Company's
Board of Directors and will depend upon the earnings, capital requirements
and operating and financial condition of the Company, among other
factors. The Company's 9 1/2% Senior Subordinated Notes due March 15, 2003,
8 3/4% Senior Subordinated Notes due 2006 and 7 3/4% Senior Subordinated
Notes due 2007, contain restrictions on the amount of dividends the Company
may pay on its common stock. In addition, the Company's Bank Revolving
Credit Agreement requires the maintenance of minimum consolidated stockholders'
equity which restricts the amount of dividends the Company may pay. As of
October 31, 1998, under the most restrictive of the agreements, the Company
could pay up to approximately $173,000,000 of cash dividends.
At October 31, 1998, there were approximately 703 record holders of the
Company's common stock.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial and housing
data of the Company as of and for each of the five fiscal years ended October
31, 1998. It should be read in conjunction with the Consolidated Financial
Statements and Notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Summary Consolidated Income Statement Data (Amounts in thousands,except per
share data)
Year Ended October 31
1998 1997 1996 1995 1994
Revenues $1,210,816 $971,660 $760,707 $646,339 $504,064
Income before income taxes,
extraordinary item $ 134,293 $107,646 $ 85,793 $ 79,439 $56,840
Income before extraordinary
item $ 85,819 $ 67,847 $ 53,744 $ 49,932 $ 36,177
Extraordinary loss (1,115) (2,772)
Net income $ 84,704 $ 65,075 $ 53,744 $ 49,932 $ 36,177
EARNINGS PER SHARE
Basic*
Income before extraordinary
item $ 2.35 $ 1.99 $ 1.59 $ 1.49 $ 1.08
Extraordinary loss (.03) (.08)
Net income $ 2.32 $ 1.91 $ 1.59 $ 1.49 $ 1.08
Weighted average number of
shares outstanding 36,483 34,127 33,865 33,510 33,398
Diluted*
Income before extraordinary
item $ 2.25 $ 1.86 $ 1.50 $ 1.42 $ 1.05
Extraordinary loss (.03) (.07)
Net income $ 2.22 $ 1.78 $ 1.50 $ 1.42 $ 1.05
Weighted average number of
shares outstanding 38,360 37,263 36,879 36,360 35,655
*Due to rounding, amounts may not add
Summary Consolidated Balance Sheet Data (Amounts in thousands)
October 31
1998 1997 1996 1995 1994
Inventory $1,111,863 $ 921,595 $772,471 $623,830 $506,347
Total assets $1,254,468 $1,118,626 $ 837,926 $ 692,457 $ 586,893
Debt
Loans payable $ 182,292 $ 189,579 $ 132,109 $ 59,057 $ 17,506
Subordinated debt 269,296 319,924 208,415 221,226 227,969
Collateralized mortgage
obligations payable 1,384 2,577 2,816 3,912 4,686
Total $ 452,972 $ 512,080 $ 343,340 $ 284,195 $ 250,161
Shareholders' equity $ 525,756 $ 385,252 $ 314,677 $ 256,659 $ 204,176
Housing Data
Year ended October 31: 1998 1997 1996 1995 1994
Number of homes
closed 3,099 2,517 2,109 1,825 1,583
Sales value of homes
closed
(in thousands) $1,206,290 $ 968,253 $ 759,303 $ 643,017 $ 501,822
Number of homes
contracted 3,387 2,701 2,398 1,846 1,716
Sales value of homes
contracted
(in thousands) $1,383,093 $1,069,279 $ 884,677 $ 660,467 $ 586,941
As of October 31:
Number of homes
in backlog 1,892 1,551 1,367 1,078 1,025
Sales value of homes
in backlog
(in thousands) $ 814,714 $ 627,220 $ 526,194 $ 400,820 $ 370,560
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
The following table sets forth certain income statement items related to the
Company's
operations as percentages of total revenues:
Year Ended October 31: 1998 1997 1996
Revenues 100.0% 100.0% 100.0%
Costs and expenses:
Land and housing construction 77.1 77.0 76.4
Selling, general and administrative 8.8 8.9 9.1
Interest 3.0 3.0 3.2
Total costs and expenses 88.9 88.9 88.7
Operating income 11.1% 11.1% 11.3%
FISCAL 1998 COMPARED TO FISCAL 1997
Revenues of $1.21 billion for fiscal 1998 exceeded fiscal 1997 revenues
by $239 million or 25%. The increase was primarily due to a 23% increase in
the number of homes delivered. The increase in the number of homes delivered
was the result of the higher backlog of homes at the beginning of fiscal 1998
as compared to the beginning of fiscal 1997 and an increase in the number of
homes sold during fiscal 1998 over the number of homes sold in fiscal 1997.
The Company signed $1.38 billion (3,387 homes) of new sales contracts in
fiscal 1998, a 29% increase over the $1.07 billion (2,701 homes) of new
sales contracts signed in fiscal 1997. The increase in new sales
contracts signed in fiscal 1998 was the result of an increase in the average
number of selling communities in 1998 compared to 1997, an increase in the
number of homes sold per community and an increase in the average sales price
per home. The increase in the number of selling communities was the result of
the Company's expansion in its newer markets and its entry into the Las Vegas
market in November 1997. The increase in the average sales price per home was
the result of the shift in the location of homes sold to more expensive areas,
a change in product mix to larger homes, an increase in base selling prices
and an increase in the value of options that homebuyers selected. The Company
expects revenues to increase in fiscal 1999 over 1998 due to the higher backlog
at October 31, 1998 as compared to October 31, 1997 ($815 million versus $627
million) and an increase in the number of selling communities due to the
further penetration into its existing markets.
Land and construction costs were higher as a percentage of revenues in
fiscal 1998 as compared to fiscal 1997 due to increased material costs and
increased costs in the Company's newer markets resulting from construction
costs generally being higher as a percentage of selling price, and the
relatively less efficient construction and construction-related activities,
in these markets. Although the Company became more efficient in its newer
markets during fiscal 1998, as compared to fiscal 1997, the
increase in revenues from these markets as a percentage of total revenues
resulted in an increase in the overall percentage of land and construction
costs as a percentage of revenues. These increases were partially offset by
decreased land and land development costs and decreased overhead costs.
Selling, general and administrative expenses ("SG&A') amounted to
$106.7 million in fiscal 1998, a 24% increase over the $86.3 million spent
in fiscal 1997. The increase in spending was primarily attributable to the
increase in the number of homes delivered, the increased number of selling
communities and the Company's continued geographic expansion. As a percentage
of revenues, SG&A declined slightly in fiscal 1998 as compared to fiscal
1997 due to revenues increasing at a faster rate then spending.
FISCAL 1997 COMPARED TO FISCAL 1996
Revenues for fiscal 1997 of $972 million exceeded fiscal 1996 revenues of
$761 million by $211 million or 28%. The increase in revenues was attributable
to a 19% increase in the number of homes delivered and a 7% increase in the
average delivered price. The increase in the number of homes delivered was
due to an increase in 1997 in the number of communities delivering homes, the
larger backlog of homes as of the beginning of fiscal 1997 as compared to 1996
and an increase in 1997 in the number of homes sold per community. The increase
in the number of selling communities was the result of the Company's geographic
expansion as well as a greater penetration of its existing markets. The
increase in the average price per home delivered in fiscal 1997 was due to a
continuing shift in the location of the homes to more expensive
areas, a change in product mix to larger homes, an increase in the total
price of options that homebuyers selected and increases in selling prices.
Land and construction costs as a percentage of revenues increased in fiscal
1997 as compared to 1996 due principally to increased material and overhead
costs, to increased costs in the Company's newer markets (Arizona, California,
Florida, North Carolina and Texas) resulting from generally higher construction
costs as a percentage of selling price and to relatively less efficient
construction and construction-related activities in these markets. The cost
increases were partially offset by the lower amount of inventory writedowns
recognized in 1997 ($2.0 million) as compared to 1996 ($4.6 million).
Selling, general and administrative expenses ("SG&A) as a percentage of
revenues decreased in fiscal 1997 as compared to fiscal 1996 due to revenues
increasing in 1997 at a faster pace than SG&A spending. The increase in
spending was primarily attributable to the Company's geographic expansion and
the increase in the number of communities that it was operating in 1997 as
compared to 1996.
INTEREST EXPENSE
Interest expense is determined on a specific lot-by-lot 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 house 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.
INCOME TAXES
Income taxes for fiscal 1998, 1997, and 1996 were provided at effective
rates of 36.1%, 37.0%, and 37.4%, respectively.
EXTRAORDINARY LOSS 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 $1,115,000, net of $655,000 of income
tax benefit, related to the retirement of its previous revolving credit
agreement and prepayment of the term loans.
In January 1997, the Company called for redemption in March 1997 of all
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 of $2,772,000, net of $1,659,000 of income tax benefit.
CAPITAL RESOURCES AND LIQUIDITY
Funding for the Company's residential development activities is
principally provided by cash flows from operations, unsecured bank borrowings
and, from time to time, the public debt and equity markets.
Cash flow from operations, before inventory additions, has improved as
operating results improved. The Company anticipates that the cash flow from
operations will continue to improve as a result of an increase in revenues
from the delivery of homes from the existing backlog as well as from new sales
contracts. The Company has used the cash flow from operations, bank borrowings
and public debt to acquire additional land for new communities, to fund
additional expenditures for land development and construction costs needed to
meet the requirements of the increased backlog and continuing expansion of
the number of communities in which the Company is offering homes for sale and
to reduce debt. The Company expects that inventories will continue to increase
and is currently negotiating and searching for additional opportunities to
obtain control of land for future communities.
The Company has a $355 million unsecured revolving credit facility with
fourteen banks which extends through February 2003. In December 1998, the
revolving credit facility was increased to $415 million. As of October 31,
1998, the Company had $50 million of loans and approximately $23.4 million
of letters of credit outstanding under the facility.
The Company believes that it will be able to fund its activities through a
combination of existing cash reserves, operating cash flow and existing
sources of credit.
INFLATION
The long-term impact of inflation on the Company is manifested in
increased land, land development, construction and overhead costs, as well as
in increased sales prices. The Company generally contracts for land
significantly before development and sales efforts begin. Accordingly, to the
extent land acquisition costs are fixed, increases or decreases in the sales
prices of homes may affect the Company's profits. Since the sales prices of
homes are fixed at the time of sale and the Company generally sells
its homes prior to commencement of construction, any inflation of costs in
excess of those anticipated may result in lower gross margins. The Company
generally attempts to minimize that effect by entering into fixed-price
contracts with its subcontractors and material suppliers for specified periods
of time, which generally do not exceed one year.
Housing demand, in general, is adversely affected by increases in interest
costs, as well as in housing costs. Interest rates, the length of time that
land remains in inventory and the proportion of inventory that is financed
affect the Company's interest costs. If the Company is unable to raise sales
prices enough to compensate for higher costs, or if mortgage interest rates
increase significantly, affecting prospective buyers' ability to adequately
finance a home purchase, the Company's revenues, gross margins and net income
would be adversely affected. Increases in sales prices, whether the result of
inflation or demand, may affect the ability of prospective buyers to afford a
new home.
YEAR 2000 READINESS DISCLOSURE
The Company has assessed and is continuing to assess its operating
systems, computer software applications, computer equipment and other
equipment with embedded electronic circuits ("Programs") that it currently
uses to identify whether they are year 2000 compliant and, if not, what
steps are needed to bring them into compliance. The Company expects that
almost all Programs will be year 2000 compliant by the end of the first
quarter of calendar 1999. For those Programs that will not be compliant by
then, the Company is reviewing the potential impact on the Company and
the alternatives that are available to it if the Programs cannot be brought
into compliance by December 31, 1999. The Company believes that the
required changes to its Programs will be made on a timely basis without
causing material operational issues or having a material impact on its
results of operations or its financial position.
The Company believes that its core business of homebuilding is not
heavily dependent on the Year 2000 compliance of its Programs and that,
should a reasonably likely
worst case Year 2000 situation occur, the Company, because of the basic
nature of its systems, many of which can be executed manually, would not
likely suffer material loss or disruption in remedying the situation.
The costs incurred and expected to be incurred in the future regarding
Year 2000 compliance have been and are expected to be immaterial to the
results of operation and financial position of the Company. Costs related to
Year 2000 compliance are expensed.
The Company has been reviewing whether its significant subcontractors,
suppliers, financial institutions and other service providers ("Providers")
are Year 2000 compliant. The Company is not aware of any Providers that do not
expect to be compliant; however, the Company has no means of ensuring that its
Providers will be Year 2000 ready. The inability of Providers to be Year 2000
ready in a timely fashion could have an adverse impact on the Company. The
Company plans to respond to any such contingency involving any of its Providers
by seeking to utilize alternative sources for such goods and services, where
practicable. In addition, widespread disruptions in the national or
international economy, including, for example, disruptions
affecting financial markets, commercial and investment banks,
governmental agencies and utility services, such as heat, lights, power and
telephones, could also have an adverse impact on the Company. The likelihood
and effects of such disruptions are not determinable at this time.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements as set forth in item 14(a)(1) and (2).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item with respect to executive officers of
the Company is set forth in Part I. The information required by this item
with respect to the Directors of the Company is incorporated by reference
to the Company's Proxy Statement for the 1999 Annual Meeting of Shareholders.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
Company's Proxy Statement for the 1999 Annual Meeting of Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
Company's Proxy Statement for the 1999 Annual Meeting of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
Company's Proxy Statement for the 1999 Annual Meeting of Shareholders.
STATEMENT ON FORWARD-LOOKING INFORMATION
Certain information included herein and in other Company statements,
reports and S.E.C. filings is forward-looking within the meaning of the
Private Securities Litigation Reform Act of 1995, including, but not limited
to, statements concerning the Company's anticipated operating results,
financial resources, increases in revenues, increased profitability, interest
expense, growth and expansion, ability to acquire land and Year 2000 readiness,
and the effect on the Company if the Company or significant third parties
are not Year 2000 compliant. Such forward-looking information involves
important risks and uncertainties that could significantly
affect actual results and cause them to differ materially from expectations
expressed therein. These risks and uncertainties include local, regional and
national economic conditions, the effects of governmental regulation, the
competitive environment in which the Company operates, fluctuations in interest
rates, changes in home prices, the availability and cost of land for future
growth, the availability of capital, the availability and cost of labor and
materials, and weather conditions.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
(a) Financial Statements and Financial Statement Schedule
1. Financial Statements
Page
Report of Independent Auditors F-1
Consolidated Statements of Income for the
Years Ended October 31, 1998, 1997 and 1996 F-2
Consolidated Balance Sheets as of
October 31, 1998 and 1997 F-3
Consolidated Statements of Cash Flows for the
Years Ended October 31, 1998, 1997 and 1996 F-4
Notes to Consolidated Financial Statements F-5 - F-18
Summary Consolidated Quarterly Data F-19
2. Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts
for the Years Ended October 31,
1998, 1997 and 1996 F-20
Schedules not listed above have been omitted because
they are either not applicable or the required information
is included in the financial statements or notes thereto.
3. Exhibits required to be filed by Item 601 of Regulation S-K:
Exhibit
Number Description
3.1 Certificate of Incorporation, as amended, is hereby incorporated by
reference to Exhibit 3.1 of the Registrant's Form 10-K for the fiscal
year ended October 31, 1989.
3.2 Amendment to the Certificate of Incorporation dated March 11,
1993, is hereby incorporated by reference to Exhibit 3.1 of
Registrant's Form 10-Q for the quarter ended January 31, 1993.
Exhibit
Number Description
3.3 By-laws, as amended, are hereby incorporated by reference to
Exhibit 3.2 of the Registrant's Form 10-K for the fiscal year ended
October 31, 1989.
4.1 Specimen Stock Certificate is hereby incorporated by reference to
Exhibit 4.1 of the Registrant's Form 10-K for the fiscal year ended
October 31, 1991.
4.2 Indenture dated as of March 15, 1993, among Toll Corp., as issuer,
the Registrant, as guarantor, and NBD Bank, National Association, as
Trustee, including Form of Guarantee, is hereby incorporated by
reference to Exhibit 4.1 of Toll Corp.'s Registration Statement on
Form S-3 filed with the Securities and Exchange Commission,
March 10, 1993, File No.33-58350.
4.3 Indenture dated as of November 12, 1996 between Toll Corp., as issuer,
the Registrant, as guarantor, NBD Bank, a Michigan banking
corporation, as Trustee, including form of guarantee, is hereby
incorporated by reference to Exhibit 4.1 of the Registrant's Form 8-K
dated November 6, 1996 filed with the Securities and Exchange
Commission.
4.4 Authorizing Resolutions, dated as of September 16, 1997, relating to
the $100,000,000 principal amount of 7 3/4% Senior Subordinated Notes
due 2007 of Toll Corp., guaranteed on a Senior Subordinated basis by
Toll Brothers, Inc. is hereby incorporated by reference to Exhibit
4.5 of the Registrant's Form 10-K for the fiscal year ended October
31, 1997.
4.5 Rights Agreement dated as of June 12, 1997 by and between the Company
and Chase Mellon Shareholder Service, L.L.C., as Rights Agent, is
hereby incorporated by reference to Exhibit 1 to the Company's
Registration Statement on Form 8A dated June 20, 1997.
4.6 Amendment to Rights Agreement dated as of July 31, 1998, by and
between the Company and ChaseMellon Shareholder Service, L.L.C. as
Rights Agent incorporated herein by reference to Exhibit 1 to the
Company's Registration Statement on Form 8-A/A dated August 21, 1998.
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;
Exhibit
Number Description
Kredietbank N.V.; Suntrust Bank, Atlanta; The Fuji Bank Limited;
and Bank Hapoalim B.M. Philadelphia Branch is hereby incorporated by
reference to Exhibit 10.1 of the Registrant's Form 10-Q for the
quarter ended April 30, 1998.
10.2 Toll Brothers, Inc. Amended and Restated Stock Option Plan (1986), as
amended and restated by the Registrant's Board of Directors on
February 24, 1992 and adopted by its shareholders on April 6, 1992,
is hereby incorporated by reference to Exhibit 19(a) of the
Registrant's Form 10-Q for the quarterly period ended April 30, 1992.
10.3 Toll Brothers, Inc. Amended and Restated Stock Purchase Plan is
hereby incorporated by reference to Exhibit 4 of the Registrant's
Registration Statement on Form S-8 filed with the Securities and
Exchange Commission on August 4, 1987, File No. 33-16250.
10.4 Toll Brothers, Inc. Key Executives and Non-Employee Directors
Stock Option Plan (1993) is hereby incorporated by reference to
Exhibit 10.1 of the Registrant's Form 8K filed with the Securities
and Exchange Commission on May 25, 1994.
10.5 Amendment to the Toll Brothers, Inc. Key Executives and Non-Employee
Directors Stock Option Plan (1993) is hereby incorporated by
reference to Exhibit 10.2 of the Registrant's's Quarterly Report on
Form 10-Q for the quarter ended April 30, 1995.
10.6 Toll Brothers, Inc. Cash Bonus Plan is hereby incorporated by
reference to Exhibit 10.2 of the Registrant's Form 8-K filed with the
Securities and Exchange Commission on May 25, 1994.
10.7 Amendment to the Toll Brothers, Inc. Cash Bonus Plan dated May 29,
1996 is hereby incorporated by reference to Exhibit 10.7 of the
Registrant's Form 10-K for the year ended October 31, 1996.
10.8 Toll Brothers, Inc. Stock Option and Incentive Stock Plan (1995) is
hereby incorporated by reference to Exhibit 10.1 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended April 30, 1995.
10.9 Amendment to the Toll Brothers, Inc. Stock Option and Incentive Stock
Plan (1995) dated May 29, 1996 is hereby incorporated by reference to
Exhibit 10.9 the Registrant's Form 10-K for the year ended October
31, 1997.
Exhibit
Number Description
10.10 Toll Brothers, Inc. Stock Incentive Plan (1998) is hereby
incorporated by reference to Exhibit 4 of the Registant's Registration
Statement on Form S-8 filed with the Securities and Exchange
Commission on June 25, 1998, File No. 333-57645.
10.11 Stock Redemption Agreement between the Registrant and Robert I.
Toll, dated October 28, 1995, is hereby incorporated by reference to
Exhibit 10.7 of the Registrants Form 10-K for the year ended October
31, 1995.
10.12 Stock Redemption Agreement between the Registrant and Bruce E. Toll,
dated October 28, 1995, is hereby incorporated by reference to Exhibit
10.8 of the Registrants Form 10-K for the year ended October 31, 1995.
10.13 Agreement dated March 5, 1998 between the Registrant and Bruce E. Toll
regarding Mr. Toll's resignation and related matters is hereby
incoporated by reference to Exhibit 10.2 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended April 30, 1998.
10.14 Consulting and Non-Competition Agreement dated March 5, 1998
between the Registrant and Bruce E. Toll is hereby incorporated by
reference to Exhibit 10.3 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended April 30, 1998.
10.15 Agreement between the Registrant and Joel H. Rassman, dated June 30,
1988,is hereby incorporated by reference to Exhibit 10.8 of Toll
Corp.'s Registration Statement on Form S-1 filed with the Securities
and Exchange Commission on September 9, 1988, File No. 33-23162.
10.16 Agreement regarding sharing of office expenses, dated May 29,
1986, among Robert Toll, Bruce Toll and the Registrant, is hereby
incorporated by reference to Exhibit 10.8 of the Registrant's
Registration Statement on Form S-1 filed with the Securities and
Exchange Commission on July 8, 1986, File No. 33-6066.
22 Subsidiaries of the Registrant.
23 Consent of Independent Auditors.
27 Financial Data Schedule
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, in the Township
of Lower Moreland, Commonwealth of Pennsylvania on December 10, 1998.
TOLL BROTHERS, INC.
By: /s/ Robert I. Toll
Robert I. Toll
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Robert I. Toll Chairman of the Board December 10, 1998
Robert I. Toll of Directors and
Chief Executive Officer
(Principal Executive Officer)
/s/ Bruce E. Toll Vice Chairman of the Board December 10, 1998
Bruce E. Toll and Director
/s/ Zvi Barzilay President, Chief Operating December 10, 1998
Zvi Barzilay Officer and Director
/s/ Joel H. Rassman Senior Vice President, December 10, 1998
Joel H. Rassman Treasurer, Chief Financial
Officer and Director
(Principal Financial Officer)
/s/ Joseph R. Sicree Vice President and December 10, 1998
Joseph R. Sicree Chief Accounting Officer
(Principal Accounting Officer)
Signature Title Date
/s/ Robert S. Blank Director December 10, 1998
Robert S. Blank
/s/ Richard J. Braemer Director December 10, 1998
Richard J. Braemer
/s/ Roger S. Hillas Director December 10, 1998
Roger S. Hillas
/s/ Carl B. Marbach Director December 10, 1998
Carl B. Marbach
/s/ Paul E. Shapiro Director December 10, 1998
Paul E. Shapiro
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Toll Brothers, Inc.
We have audited the accompanying consolidated balance sheets of Toll
Brothers, Inc. and subsidiaries at October 31, 1998 and 1997, and the
related consolidated statements of income, and cash flows for each of the
three years in the period ended October 31, 1998. Our audits also included
the financial statement schedule listed in the Index at item 14(a). These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Toll
Brothers, Inc. and subsidiaries at October 31, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of
the three years in the period ended October 31, 1998, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
December 8, 1999
PAGE
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share data)
Year Ended October 31
1998 1997 1996
Revenues:
Housing sales $1,206,290 $968,253 $759,303
Interest and other 4,526 3,407 1,404
1,210,816 971,660 760,707
Costs and expenses:
Land and housing construction 933,853 748,323 580,990
Selling, general and administrative 106,729 86,301 69,735
Interest 35,941 29,390 24,189
1,076,523 864,014 674,914
Income before income taxes and
extraordinary loss 134,293 107,646 85,793
Income taxes 48,474 39,799 32,049
Income before extraordinary loss 85,819 67,847 53,744
Extraordinary loss (1,115) (2,772)
Net income $ 84,704 $ 65,075 $ 53,744
Earnings per share
Basic:
Income before extraordinary loss $ 2.35 $ 1.99 $ 1.59
Extraordinary loss (.03) (.08)
Net income $ 2.32 $ 1.91 $ 1.59
Diluted:*
Income before extraordinary loss $ 2.25 $ 1.86 $ 1.50
Extraordinary loss (.03) (.07)
Net income $ 2.22 $ 1.78 $ 1.50
Weighted average number of shares
Basic 36,483 34,127 33,865
Diluted 38,360 37,263 36,879
* Due to rounding, the amounts may not add.
See accompanying notes.
PAGE
CONSOLIDATED BALANCE SHEETS (Amounts in thousands)
October 31
1998 1997
ASSETS
Cash and cash equivalents $ 80,143 $ 147,575
Inventory 1,111,863 921,595
Property, construction and office
equipment, net 14,425 15,074
Receivables, prepaid expenses and other
assets 46,652 31,793
Mortgage notes receivable 1,385 2,589
$1,254,468 $1,118,626
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Loans payable $ 182,292 $ 189,579
Subordinated notes 269,296 319,924
Customer deposits on sales contracts 69,398 52,698
Accounts payable 58,081 48,600
Accrued expenses 97,449 75,237
Collateralized mortgage obligations payable 1,384 2,577
Income taxes payable 50,812 44,759
Total liabilities 728,712 733,374
Stockholders' equity
Preferred stock, none issued
Common stock, 37,011 and 34,275 shares
issued at October 31, 1998 and 1997, respectively 369 343
Additional paid-in capital 106,099 48,514
Retained earnings 421,099 336,395
Treasury stock, at cost-76 shares
at October 31, 1998 (1,811)
Total stockholders' equity 525,756 385,252
$1,254,468 $1,118,626
See accompanying notes.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands)
Year Ended October 31
1998 1997 1996
Cash flows from operating activities:
Net income $ 84,704 $ 65,075 $ 53,744
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 4,141 3,816 3,125
Amortization of loan discount 1,470 239 181
Loss from repurchase of subordinated debt 540
Extraordinary loss from extinguishment of debt 1,770 4,431
Deferred tax provision 324 3,332 877
Inventory valuation provisions 1,000
Changes in operating assets and liabilities:
Increase in inventory (179,772) (120,280) (138,059)
Increase in receivables, prepaid
expenses and other assets (18,427) (3,994) (2,783)
Increase in customer deposits on sales contracts 16,700 9,311 7,193
Increase in accounts payable and accrued expenses36,458 25,498 22,223
Increase(decrease) in income taxes payable 5,912 5,722 (1,805)
Net cash used in operating activities (46,720) (6,850) (53,764)
Cash flows from investing activities:
Purchase of property and equipment, net (2,834) (5,329) (3,596)
Principal repayments of mortgage
notes receivable 1,204 244 1,107
Net cash used in investing activities (1,630) (5,085) (2,489)
Cash flows from financing activities:
Proceeds from loans payable 55,000 145,000 173,028
Principal payments of loans payable (74,416) (116,613) (111,738)
Net proceeds from issuance of subordinated debt 195,700
Repurchase of subordinated debt (90,434) (13,096)
Principal payments of collateralized mortgage
obligations payable (1,193) (239) (1,096)
Proceeds from stock-based benefit plans 4,874 3,205 4,274
Purchase of treasury stock (3,347)
Net cash (used in) provided by financing (19,082) 136,619 51,372
activities
Net (decrease) increase in cash and cash equivalents(67,432) 124,684 (4,881)
Cash and cash equivalents, beginning of year 147,575 22,891 27,772
Cash and cash equivalents, end of year $ 80,143 $147,575 $ 22,891
See accompanying notes.
Notes to Consolidated Financial Statements
1. Significant Accounting Policies
Basis of presentation
The accompanying consolidated financial statements include the accounts
of Toll Brothers, Inc. (the "Company"), a Delaware corporation, and its
majority-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
Income recognition
The Company is primarily engaged in the development, construction and
sale of residential housing. Revenues and cost of sales are recorded at the
time each home sale is closed and title and possession have been transferred
to the buyer. Closing normally occurs shortly after construction is
substantially completed.
Cash and cash equivalents
Liquid investments or investments with original maturities of three months
or less are classified as cash equivalents. The carrying value of these
investments approximates their fair value.
Property, construction and office equipment
Property, construction and office equipment are recorded at cost and are
stated net of accumulated depreciation of $21,938,000 and $18,985,000 at
October 31, 1998 and 1997, respectively. Depreciation is recorded by using
the straight-line method over the estimated useful lives of the assets.
Inventories
Inventories are stated at the lower of cost or fair value. In addition to
direct land acquisition, land development and housing construction costs,
costs include interest, real estate taxes and direct overhead costs related
to development and construction, which are capitalized to inventories during
the period beginning with the commencement of development and ending with
the completion of construction.
Land, land development and related costs are amortized to cost of homes
closed based upon the total number of homes to be constructed in each
community. Housing construction and related costs are charged to cost of
homes closed under the specific identification method.
The Company capitalizes certain project marketing costs and charges them
against income as homes are closed.
Statement of Financial Accounting Standards No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of" ("FAS 121"), established standards for the recognition and
measurement of impairment losses on long-lived assets. The Company adopted
FAS 121 in the first quarter of fiscal 1997. The adoption did not result in
the recognition of an impairment loss.
Earnings per share
Statement of Financial Accounting Standards No. 128, "Earnings Per
Share" ("FAS 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 FAS 128 requirements.
Stock-based compensation
The Company accounts for stock options in accordance with the Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25"). In accordance with Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("FAS 123"), the Company
provides pro forma net income and earnings per share information "as if"
FAS 123 had been adopted. Because the Company continues to account for its
stock option plans under APB 25, there is no impact on the Company's
consolidated financial statements resulting from implementation of FAS 123.
Treasury Stock
Treasury stock is recorded at cost. Re-issuances of treasury stock are
accounted for on a first-in, first out basis. Differences between the cost
of treasury shares and the re-issuance proceeds are charged to additional
paid-in capital.
2. Inventory
Inventory consisted of the following(amounts in thousands):
October 31
1998 1997
Land and land development costs $ 298,948 $234,855
Construction in progress 693,971 590,295
Sample homes 47,520 47,920
Land deposits and costs of
future development 50,174 28,314
Deferred marketing and
financing costs 21,250 20,211
$1,111,863 $921,595
Construction in progress includes the cost of homes under construction,land
and land development costs and the carrying cost of lots that have been
substantially improved.
For the years ended October 31, 1998, 1997, and 1996, the Company provided for
inventory writedowns and the expensing of costs which it believed not to be
recoverable of $2,010,000, $2,048,000, and $4,611,000, respectively.
Interest capitalized in inventories is charged to interest expense when the
related inventories are closed. Changes in capitalized interest for the three
years ended October 31, 1998 were as follows(amounts in thousands):
1998 1997 1996
Interest capitalized,
beginning of year $ 51,687 $ 46,191 $43,142
Interest incurred 38,331 35,242 27,695
Interest expensed (35,941) (29,390) (24,189)
Write-off to cost
and expenses (111) (356) (457)
Interest capitalized,
end of year $ 53,966 $ 51,687 $ 46,191
3. Loans Payable and Subordinated Notes
Loans payable consisted of the following(amounts in thousands):
October 31
1998 1997
Revolving credit facility $ 50,000 $ 50,000
Term loan due July 2001 56,000 68,000
Term loan due March 2002 50,000 50,000
Other 26,292 21,579
$182,292 $189,579
The Company has a $355,000,000 (increased to $415,000,000 in
December 1998) unsecured revolving credit facility with fourteen banks which
extends through February 2003. Interest is payable on short-term borrowings
at .575% above the Eurodollar rate or at other specified variable rates as
selected by the Company from time to time. The Company fixed the interest
rate on $20,000,000 of borrowing at 6.39% until March 2002 through an interest
rate swap with a bank. Had the Company not entered into the interest rate
swap, the interest rate on this borrowing would have been 5.95% at
October 31, 1998. As of October 31, 1998, letters of credit and
obligations under escrow agreements of $23,379,000 were outstanding. The
agreement contains various covenants, including financial covenants related to
consolidated stockholders' equity, indebtedness and inventory. The agreement
requires that the Company maintain a minimum consolidated stockholders'
equity which restricts the payment of cash dividends and the repurchase of
Company stock to approximately $173,000,000 as of October 31, 1998.
The Company borrowed $56,000,000 from six banks at a fixed interest
rate of 7.91% repayable in July 2001. The Company borrowed $50,000,000 from
three banks at a fixed rate of 7.72% repayable in March 2002. Both loans are
unsecured and the agreements contain substantially the same financial covenants
as the Company's revolving credit facility.
The carrying value of the loans payable approximates their estimated fair
value.
Subordinated notes consisted of the following(amounts in thousands):
October 31,
1998 1997
9 1/2% Senior Subordinated Notes,
due March 15,2003 $ 69,960 $ 69,960
8 3/4% Senior Subordinated Notes
due November 15, 2006 100,000 100,000
7 3/4% Senior Subordinated Notes
due September 15, 2007 100,000 100,000
4 3/4% Convertible Senior Subordinated Notes,
due January 15, 2004 50,999
Bond discount (664) (1,035)
$ 269,296 $ 319,924
All issues of senior subordinated notes are subordinated to all senior
indebtedness of the Company. The indentures restrict certain payments by the
Company including cash dividends and the repurchase of Company stock. The
notes are redeemable in whole or in part at the option of the Company at
various prices on or after March 15, 1998 with regard to the 9 1/2% notes,
on or after November 15, 2001 with regard to the 8 3/4% notes and on or after
September 15, 2002 with regard to the 7 3/4% notes.
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.
As of October 31, 1998, the aggregate fair value of all the outstanding
subordinated notes, based upon their quoted market prices, was approximately
$271,709,000.
The annual aggregate maturities of the Company's loans and notes during
the next five fiscal years are: 1999 - $60,778,000; 2000 - 10,062,000; 2001 -
$59,452,000; and 2002 - $50,000,000; and 2003 - $71,960,000.
4. Income taxes
The Company's estimated combined federal and state tax rate before
providing for the effect of permanent book-tax differences ("Base Rate")
was 37%, 37.5% and 37.5% in 1998, 1997 and 1996, respectively. The decrease
in the Base Rate in 1998 was due to a decrease in the Company's estimated
effective state tax rate. The effective tax rates in 1998, 1997, and 1996
were 36.1%, 37.0% and 37.4%, respectively. The primary difference between the
Company's Base rate and effective tax rate was tax free income
in 1998 and 1997 and in 1998, an adjustment due to the recomputation of
the Company's deferred tax liability resulting from the change in the Company's
estimated Base Rate and the deductibility of certain expenses at a higher basis
for tax purposes than for book purposes.
The provisions for income taxes for each of the three years ended October 31,
1998 were as follows (amounts in thousands):
1998 1997 1996
Federal $44,865 $35,812 $29,013
State 3,609 3,987 3,036
$48,474 $39,799 $32,049
Current $48,150 $36,467 $31,172
Deferred 324 3,332 877
$48,474 $39,799 $32,049
The components of income taxes payable consisted of the following
(amounts in thousands):
October 31
1998 1997
Current $33,267 $27,538
Deferred 17,545 17,221
$50,812 $44,759
The components of net deferred taxes payable consisted of the following
(amounts in thousands):
October 31
1998 1997
Deferred tax liabilities:
Capitalized interest $18,915 $17,702
Deferred expenses 6,299 6,387
Total 25,214 24,089
Deferred tax assets:
Net realizable value reserves 2,292 2,871
Inventory valuation differences 1,727 1,526
Accrued expenses
deductible when paid 342 231
Other 3,308 2,240
Total 7,669 6,868
Net deferred tax liability $17,545 $17,221
5. Stockholders' Equity
The Company's authorized capital stock consists of 45,000,000 shares of
Common Stock, $.01 par value per share, and 1,000,000 shares of Preferred
Stock, $.01 par value per share. The Company's Certificate of Incorporation,
as amended, authorizes the Board of Directors to increase the number of
authorized shares of Common Stock to 100,000,000 shares and the number of
shares of authorized Preferred Stock to 15,000,000 shares.
Changes in stockholders' equity for the three years ended October 31, 1998
were as follows (amounts in thousands):
Additional
Common Stock Paid-In Retained Treasury
Shares Amount Capital Earnings Stock Total
Balance, November 1, 1995 33,638 $ 336 $38,747 $217,576 $ --- $256,659
Net income 53,744 53,744
Exercise of stock options 276 3 4,196 4,199
Employee stock plan
purchases 5 75 75
Balance, October 31, 1996 33,919 339 43,018 271,320 $ --- 314,677
Net Income 65,075 65,075
Exercise of stock options 218 2 3,121 3,123
Executive bonus award 134 2 2,293 2,295
Employee stock plan
purchases 4 82 82
Balance, October 31, 1997 34,275 343 48,514 336,395 $ --- 385,252
Net income 84,704 84,704
Purchase of treasury stock (133) (1) (3,346) (3,347)
Exercise of stock options 285 3 3,240 1,405 4,648
Executive bonus awards 161 1 3,563 3,564
Employee stock plan
purchases 10 93 130 223
Conversion of debt 2,337 23 50,689 50,712
Balance, October 31, 1998 36,935 $ 369 $106,099 $421,099 $(1,811)$525,756
Shareholder Rights Plan
The Company's shareholder rights plan, as amended, provided for a
dividend of one right for each share of Common Stock of the Company to all
shareholders of record at the close of business on July 11, 1997. The rights
are not currently exercisable but would become exercisable if certain events
occurred relating to a person or group acquiring or attempting to acquire
beneficial ownership of 15% or more of the Common Stock of the Company
subsequent to July 11, 1997. If any person acquires 15% or more of the Common
Stock of the Company, each right, will entitle the holder to acquire,
upon payment of the exercise price of the right (presently $100), Common
Stock of the Company having a market value equal to twice the rights exercise
price. If, after a person or group, has acquired 15% or more of the outstanding
Common Stock of the Company, the Company is acquired in a merger or other
business combination, or 50% or more of its assets or earning power is sold or
transferred in one transaction or a series of related transactions, each
right becomes a right to acquire common shares of the other party to the
transaction having a value equal to twice the exercise price of the right.
Rights are redeemable at $.001 per right by action of the Board of
Directors at any time prior to the tenth day following the public
announcement that a person or group, has acquired beneficial ownership of 15%
or more of the Common Stock of the Company. Unless earlier redeemed, the
rights will expire on July 11, 2007.
Redemption of Common Stock
In order to help provide for an orderly market in the Company's Common
Stock in the event of the death of either Robert I. Toll or Bruce E. Toll
(the "Tolls"), or both of them, the Company and the Tolls have entered into
agreements in which the Company has agreed to purchase from the estate of
each of the Tolls $10,000,000 of the Company's Common Stock (or a lesser
amount under certain circumstances) at a price equal to the greater of fair
market value (as defined) or book value (as defined). Further, the Tolls
have agreed to allow the Company to purchase $10,000,000 of life
insurance on each of their lives. In addition, the Tolls granted the
Company an option to purchase up to an additional $30,000,000 (or a lesser
amount under certain circumstances) of the Company's Common Stock from each
of their estates. The agreements expire in October 2005.
In April 1997, the Company announced that its 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 October 31,
1998, the Company had repurchased 133,000 shares of which 57,000 shares were
re-issued to employees upon the exercise of stock options and purchases under
the Company's Employee Stock Purchase Plan.
6. Stock-Based Benefit Plans
Stock-Based Compensation Plans
FAS 123 requires the disclosure of the estimated value of employee option
grants and their impact on net income using option pricing models which are
designed to estimate the value of options which, unlike employee stock
options, can be traded at any time and are transferable. In addition to
restrictions on trading, employee stock options may include other restrictions
such as vesting periods. Further, such models require the input of highly
subjective assumptions including the expected volatility of the
stock price. Therefore, in management's opinion, the existing models do
not provide a reliable single measure of the value of employee stock options.
At October 31, 1998, the Company's stock-based compensation plans
consisted of its four stock option plans. Net income and net income per share
as reported in these consolidated financial statements and on a pro forma
basis, as if the fair value based method described in FAS 123 had been adopted,
were as follows (in thousands, except per share amounts):
Year Ended October 31,
1998 1997 1996
Net income As reported $84,704 $65,075 $53,744
Pro forma $72,841 $60,068 $51,480
Basic net income per share As reported $ 2.32 $ 1.91 $ 1.59
Pro forma $ 2.00 $ 1.76 $ 1.52
Diluted net income per share As reported $ 2.22 $ 1.78 $ 1.50
Pro forma $ 1.91 $ 1.65 $ 1.44
Weighted-average grant date
fair value per share of options granted $ 12.01 $ 9.37 $ 9.82
For the purposes of providing the pro forma disclosures, the fair value of
options granted were estimated using the Black-Scholes option pricing model
with the following weighted average assumptions used for grants in each of the
three fiscal years ended October 31, 1998.
1998 1997 1996
Risk-free interest rate 4.68% 5.87% 6.27%
Expected life 7.2 years 7 years 7 years
Volatility 35.1% 37.5% 39.9%
Dividends none none none
The effects of applying FAS 123 for the purpose of providing pro forma
disclosures may not be indicative of the effects on reported net income and
net income per share for future years, as the pro forma disclosures include
the effects of only those awards granted on or after November 1, 1995.
Stock Option Plans
The Company's four stock option plans for employees, officers and
non-employee directors provide for the granting of incentive stock options
and non-statutory options with a term of up to ten years at a price not less
than the market price of the stock at the date of grant. The Company's Stock
Option and Incentive Stock Plan (1995)provides for automatic increases each
January 1 in the number of shares available for grant by 2% of the number
of shares outstanding (including treasury shares). The Company's Stock
Incentive Plan (1998) provides for automatic increases each November 1 in the
number of shares available for grant by 2.5% of the number of shares
outstanding (including treasury shares). The 1995 Plan and the 1998 Plan
restrict the number of options that may be granted in a calendar year in each
plan to the lesser of the number of shares available for grant or 2,500,000
shares. No compensation costs were recognized under the Company's stock option
plans in 1998, 1997 and 1996. No additional options may be granted under
the Company's Stock Option Plan (1986).
The following summarizes stock option activity for the four plans during
the three years ended October 31, 1998:
Number Weighted Average
of Options Exercise Price
Outstanding,
November 1, 1995 2,342,200 $ 12.37
Granted 843,450 19.76
Exercised (276,000) 12.10
Cancelled (37,825) 16.00
Outstanding,
October 31, 1996 2,871,825 $ 14.52
Granted 1,090,400 19.30
Exercised (218,601) 11.54
Cancelled ( 59,449) 19.64
Outstanding,
October 31, 1997 3,684,175 $ 16.03
Granted 1,720,575 26.41
Exercised (293,015) 14.04
Cancelled (169,217) 22.85
Outstanding,
October 31, 1998 4,942,518 $ 19.53
Options exercisable and their weighted average exercise price as of
October 31, 1998, 1997 and 1996 were 3,286,706 shares and $17.90, 2,336,186
shares and $13.99, and 1,751,800 shares and $12.84, respectively.
Options available for grant at October 31, 1998, 1997 and 1996 under all
the plans were 3,893,663, 2,412,372, and 2,899,000, respectively.
The following table summarizes information about stock options
outstanding at October 31, 1998:
Options Outstanding Options Exercisable
Weighted-
Average Weighted- Weighted-
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
(in years)
$ 7.75 -$11.00 812,900 5.6 $10.32 812,900 $10.32
12.19 - 15.88 689,700 2.5 14.48 689,700 14.48
17.13 - 20.25 1,812,743 7.4 19.36 1,036,606 19.06
23.06 - 25.56 929,675 9.1 25.29 50,000 23.06
27.44 - 29.50 697,500 9.2 28.01 697,500 28.01
$ 7.75 -$29.50 4,942,518 7.0 $19.53 3,286,706 $17.90
Bonus Award Shares
Under the terms of the Company's Cash Bonus Plan covering Robert I. Toll and
Bruce E. Toll (the "Executives"), each Executive was entitled to receive cash
bonus awards based upon the pretax earnings and stockholders' equity of the
Company. In May 1996, the Board of Directors and the Executives agreed, that
any bonus payable under the plan for each of the three fiscal years ended
October 31, 1998 shall be made (except for specified conditions) in shares of
the Company's Common Stock using the value of the stock as of the date of the
agreement ($17.125 per share). The shareholders approved the plan at the
Company's 1997 Annual Meeting. The shares are issued from the Company's Stock
Option and Incentive Stock Plan (1995). In March 1998, in connection with
Bruce E. Toll's withdrawal from the day to day operations of the
business, the Board of Directors and Bruce E. Toll agreed to modify his
cash bonus award whereby his 1998 cash bonus award would be paid in cash and
the amount would be calculated based upon 50% of the estimated bonus that
would have been earned. Robert I. Toll will receive 106,186 shares for his
1998 bonus award. The Company recognized $3,944,000 as compensation expense
in 1998, which represented the fair market value of the shares to be issued
to Robert I. Toll and the cash bonus paid to Bruce E. Toll. The Executives
received 80,547 shares each for their 1997 bonus award and 66,975 shares each
for their 1996 bonus award. The Company recognized, as compensation expense,
the fair market value of the shares issued under the plan ($3,564,000 in 1997
and $2,295,000 in 1996).
Employee Stock Purchase Plan
The Company's Employee Stock Purchase Plan enables substantially all
employees to purchase the Company's Common Stock for 95% of the market
price of the stock on specified offering dates or at 85% of the market price
of the stock on specified offering dates subject to restrictions. The plan,
which terminates in December 2001, provides that 100,000 shares be reserved
for purchase. As of October 31, 1998, a total of 51,733 shares were available
for issuance.
The number of shares and the average prices per share issued under this
plan during each of the three fiscal years ended October 31, 1998, 1997 and
1996 were 9,916 shares and $22.48, 4,131 shares and $19.98, and 4,580 shares
and $16.29, respectively. No compensation expense was recognized by the
Company under this plan.
7. Earnings Per Share Information
Information pertaining to the calculation of earnings per share for each of
the three years ended October 31, 1998 were as follows:(in thousands)
<OPTION>
1998 1997 1996
Basic weighted average
shares 36,483 34,127 33,865
Common stock equivalents 1,437 791 624
Convertible subordinated notes 440 2,345 2,390
Diluted weighted average shares 38,360 37,263 36,879
Earnings addback related
to interest on convertible
subordinated notes,
net of income tax benefits $ 315 $1,512 $1,543
8. Employee Retirement Plan
The Company maintains a salary deferral savings plan covering
substantially all employees. The plan provides for Company contributions
totaling 2% of all eligible compensation, plus 2% of eligible compensation
above the social security wage base, plus matching contributions of up to 2%
of eligible compensation of employees electing to contribute via salary
deferrals. Company contributions with respect to the plan totaled $1,591,000,
$1,399,000 and $1,061,000, for the years ended October 31, 1998, 1997 and 1996,
respectively.
9. Extraordinary Loss from Extinquishment 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 fiscal 1998 of $1,115,000, net of $655,000 of
income tax benefit, 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 tax benefit. The loss represents the redemption premium
and the write-off of unamortized deferred issuance costs.
10. Commitments and Contingencies
As of October 31, 1998, the Company had agreements to purchase land
and improved home sites for future development with purchase prices
aggregating approximately $435,966,000 of which $28,921,000 had been paid or
deposited. Purchase of the properties is contingent upon satisfaction of
certain requirements by the Company and the sellers.
As of October 31, 1998, the Company had agreements of sale outstanding
to deliver 1,892 homes with an aggregate sales value of approximately
$814,714,000. As of that date, the Company had arranged through a number of
outside mortgage lenders to provide approximately $283,354,000 of mortgages
related to those sales agreements.
The Company is involved in various claims and litigation arising in the
ordinary course of business. The Company believes that the disposition of
these matters will not have a material effect on the business or on the
financial condition of the Company.
11. Related Party Transaction
In 1998, the Company formed a group of entities (collectively, the "Real
Estate Group")to take advantage of commercial real estate opportunities which
may present themselves from time to time. These opportunities may be the
result of commercial parcels, attached to larger properties that the Company
has acquired or may acquire for its homebuilding operations, or from the direct
acquisition of unrelated land or operating properties. At October 31, 1998 the
primary assets of the Real Estate Group consisted of $6,000,000 in cash
contributed by the Company.
In November 1998, Robert I. Toll, Bruce E. Toll, Zvi Barzilay, Joel
Rassman, all of whom are officers and directors of the Company, and other
Company officers (the "Partners") contributed their partnership interests in
an apartment complex under construction in exchange for a fifty percent
ownership interest in the Real Estate Group. Based upon independent valuations
obtained by the Company and reviewed by the Board of Directors, the Board of
Directors believes that the value of the assets received, net of liabilities
assumed, were at least equal to the consideration given to the Partners. The
Company intends to seek outside investors for the Real Estate Group. The
Company initially expects to realize development, finance and management
fees from these activities and, on an ongoing basis, a return on its
investment in the Real Estate Group.
12. Supplemental Disclosures to Statements of Cash Flows
The following are supplemental disclosures to the statements of cash flows
for each of the three years ended October 31, 1998 (amounts in thousands):
1998 1997 1996
Supplemental disclosures of cash flow information:
Interest paid, net of amount capitalized $13,340 $ 9,385 $ 8,612
Income taxes paid $40,835 $28,485 $32,116
Supplemental disclosures of noncash activities:
Cost of residential inventories acquired
through seller financing $13,500 $28,844 $11,582
Income tax benefit relating to exercise
of employee stock options $ 748 $ 601 $ 861
Stock bonus award $ 3,564 $ 2,295
Conversion of subordinated debt $50,712
Summary Consolidated Quarterly Financial Data (Unaudited)
(Amounts in thousands, except per share data)
Three Months Ended
Oct. 31 July 31 April 30 Jan. 31
Fiscal 1998:
Revenues $374,345 $342,133 $249,623 $244,715
Income before income taxes
and extraordinary loss $ 43,525 $ 40,728 $ 24,724 $ 25,316
Income before extraordinary loss $ 27,855 $ 25,722 $ 15,687 $ 16,555
Net Income $ 27,855 $ 25,722 $ 14,572 $ 16,555
Earning per share
Basic:
Income before extraordinary loss* $ .75 $ .70 $ .42 $ .47
Net income* $ .75 $ .70 $ .39 $ .47
Diluted:
Income before extraordinary loss $ .73 $ .67 $ .41 $ .44
Net income $ .73 $ .67 $ .38 $ .44
Weighted average number of
shares:
Basic 36,965 37,005 36,976 34,983
Diluted 38,145 38,495 38,673 38,127
Fiscal 1997:
Revenues $318,108 $241,826 $209,206 $202,520
Income before income taxes
and extraordinary loss $ 39,111 $ 26,424 $ 19,929 $ 22,182
Income before extraordinary loss $ 24,597 $ 16,550 $ 12,603 $ 14,097
Net Income $ 24,597 $ 16,550 $ 12,603 $ 11,325
Earning per share
Basic:
Income before extraordinary loss $ .72 $ .48 $ .37 $ .42
Net income* $ .72 $ .48 $ .37 $ .33
Diluted:
Income before extraordinary loss $ .66 $ .46 $ .35 $ .39
Net income* $ .66 $ .46 $ .35 $ .32
Weighted average number of
shares:
Basic 34,238 34,200 34,124 33,945
Diluted 37,685 37,201 37,138 37,027
* Due to rounding, the sum of the quarterly
earnings per share does not equal the year's total.
PAGE
TOLL BROTHERS, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(Amounts in thousands)
Balance at Charged to Charged to Balance
Beginning Costs and Other at End
Description of Period Expenses Accounts Deductions of Period
(B) (A)
Net realizable value
reserves for
inventory of land
and land
development costs:
Year ended
October 31, 1996:
Delaware $ 680 $ 183 $ 497
Massachusetts 2,396 1,698 698
New Jersey 7,358 $1,000 150 8,208
Total $10,434 $1,000 $2,031 $ 9,403
Year ended
October 31, 1997:
Delaware $ 497 $ 142 $ 355
Massachusetts 698 70 628
New Jersey 8,208 3,835 665 $ 3,708
Total $ 9,403 $4,047 $1,648 $ 3,708
Year ended
October 31, 1998
New Jersey $ 3,708 $ 3,708
(A) Represents amount of reserves utilized, which is recorded at the
time that affected homes are closed.
(B) Applied to asset carrying value