EXHIBIT 99.1
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 as of October 31, 2001 and 2000, and the related
consolidated statements of income and cash flows for each of the three years in
the period ended October 31, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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, 2001 and 2000, and the consolidated results
of their operations and their cash flows for each of the three years in the
period ended October 31, 2001, in conformity with accounting principles
generally accepted in the United States.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
December 11, 2001, except for Notes 1 and 13, as to which the date is November
14, 2002
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share data)
Year ended October 31,
----------------------------------------
2001 2000 1999
------ ------ ------
Revenues
Home sales $2,180,469 $1,762,930 $1,438,171
Land sales 27,530 38,730 17,345
Equity earnings in
unconsolidated joint ventures 6,756 3,250
Interest and other 14,850 9,452 8,599
---------- ---------- ----------
2,229,605 1,814,362 1,464,115
---------- ---------- ----------
Costs and expenses
Home sales 1,602,276 1,337,060 1,117,872
Land sales 21,464 29,809 13,375
Selling, general and
administrative 209,729 170,358 130,213
Interest 58,247 46,169 39,905
---------- ---------- ----------
1,891,716 1,583,396 1,301,365
---------- ---------- ----------
Income before income taxes and
extraordinary loss 337,889 230,966 162,750
Income taxes 124,216 85,023 59,723
---------- ---------- ----------
Income before extraordinary loss 213,673 145,943 103,027
Extraordinary loss (1,461)
---------- ---------- ----------
Net income $ 213,673 $ 145,943 $ 101,566
========== ========== ==========
Earnings per share
Basic:
Income before extraordinary loss $ 2.98 $ 2.01 $ 1.40
Extraordinary loss (0.02)
---------- ---------- ----------
Net income $ 2.98 $ 2.01 $ 1.38
========== ========== ==========
Diluted:
Income before extraordinary loss $ 2.76 $ 1.95 $ 1.38
Extraordinary loss (0.02)
---------- ---------- ----------
Net income $ 2.76 $ 1.95 $ 1.36
========== ========== ==========
Weighted average number of shares:
Basic 71,670 72,537 73,378
Diluted 77,367 74,825 74,872
See accompanying notes.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
October 31
-------------------------
2001 2000
------ ------
ASSETS
Cash and cash equivalents $ 182,840 $ 161,860
Inventory 2,183,541 1,712,383
Property, construction and office
equipment, net 33,095 24,075
Receivables, prepaid expenses and
other assets 118,542 113,025
Investments in unconsolidated entities 14,182 18,911
---------- ----------
$2,532,200 $2,030,254
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Loans payable $ 387,466 $ 326,537
Subordinated notes 669,581 469,499
Customer deposits 101,778 104,924
Accounts payable 132,970 110,927
Accrued expenses 229,671 185,141
Income taxes payable 98,151 88,081
---------- ----------
Total liabilities 1,619,617 1,285,109
========== ==========
Stockholders' equity
Preferred stock, none issued
Common stock, 74,029 and 74,056 shares
issued at October 31, 2001 and 2000,
respectively 369 369
Additional paid-in capital 107,014 105,454
Retained earnings 882,281 668,608
Treasury stock, at cost - 4,473 shares
and 2,266 shares at October 31,
2001 and 2000, respectively (77,081) (29,286)
---------- ----------
Total stockholders' equity 912,583 745,145
---------- ----------
$2,532,200 $2,030,254
========== ==========
See accompanying notes.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
Year ended October 31
------------------------------
2001 2000 1999
------ ------ ------
Cash flow from operating activities:
Net income $213,673 $145,943 $101,566
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 9,356 8,528 6,594
Equity earnings in unconsolidated
joint ventures (6,756) (3,250)
Extraordinary loss from
extinguishment of debt 2,318
Deferred tax provision 7,323 5,191 1,569
Changes in operating assets and liabilities,
net of assets and liabilities acquired:
Increase in inventory (443,887) (264,303) (282,764)
Origination of mortgage loans (199,102)
Sale of mortgage loans 183,449
Decrease (increase)in receivables, prepaid
expenses and other assets 10,793 (28,025) (32,524)
(Decrease) increase in customer deposits
on sales contracts (3,146) 22,429 11,557
Increase in accounts payable
and accrued expenses 71,776 71,492 62,769
Increase in current income taxes payable 8,142 25,132 8,045
-------- -------- --------
Net cash used in operating activities (148,379) (16,863) (120,870)
-------- -------- --------
Cash flow from investing activities:
Purchase of property and equipment, net (15,020) (9,415) (8,331)
Acquisition of company, net of cash acquired (11,090)
Investment in unconsolidated entities (15,193)
Distribution from unconsolidated entities 15,750 13,589
Net cash provided by(used in)
investing activities -------- -------- --------
730 4,174 (34,614)
-------- -------- --------
Cash flow from financing activities:
Proceeds from loans payable 208,628 559,843 177,500
Principal payments of loans payable (180,094) (460,482) (187,551)
Net proceeds from issuance
senior subordinated notes 196,930 267,716
Redemption of subordinated notes (71,359)
Proceeds from stock based benefit plans 14,932 11,936 2,223
Purchase of treasury stock (71,767) (33,232) (16,704)
-------- -------- --------
Net cash provided by financing activities 168,629 78,065 171,825
-------- -------- --------
Net increase in cash and cash equivalents 20,980 65,376 16,341
Cash and cash equivalents, beginning of year 161,860 96,484 80,143
-------- -------- --------
Cash and cash equivalents, end of year $182,840 $161,860 $ 96,484
======== ======== ========
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. Investments in 20% to 50% owned partnerships and affiliates are
accounted for on the equity method. Investments in less than 20% owned
affiliates are accounted for on the cost method.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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 homes. Revenue and cost of sales is recorded at the time each home
sale is closed and title and possession has been transferred to the buyer.
Closing normally occurs shortly after construction is substantially completed.
Land sales revenue and cost of sales is recorded at the time that title and
possession of the property has been transferred to the buyer.
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 is recorded at cost and is stated
net of accumulated depreciation of $35,792,000 and $30,288,000 at October 31,
2001 and 2000, respectively. Depreciation is recorded by using the straight-line
method over the estimated useful lives of the assets.
Inventory
Inventory is stated at the lower of cost or fair value. In addition to direct
land acquisition, land development and home 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 the cost of homes
closed based upon the total number of homes to be constructed in each community.
Home construction and related costs are charged to the 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.
Treasury Stock
Treasury stock is recorded at cost. Issuance of treasury shares is 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.
Segment Reporting
Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures about
Segments of an Enterprise and Related Information," establishes standards for
the manner in which public enterprises report information about operating
segments. The Company has determined that its operations primarily involve one
reportable segment, home building.
New Accounting Pronouncement
SFAS No. 133, "Accounting for Derivative Instruments and for Hedging
Activities," establishes accounting and reporting standards of derivative
instruments embedded in other contracts, and for hedging activities. The Company
adopted SFAS No. 133, as amended, in the first quarter of 2001. Such adoption
did not have a material impact on the Company's reported results of operations,
financial position or cash flows.
SFAS No. 142, "Goodwill and Other Intangible Assets," provides guidance on
accounting for intangible assets and eliminates the amortization of goodwill and
certain other intangible assets. Intangible assets, including goodwill, that are
not subject to amortization are required to be tested for impairment and
possible write-down on an annual basis. The Company is required to adopt SFAS
No. 142 for its fiscal year 2003. The adoption of SFAS No.142 will not have a
material effect on the Company.
SFAS No. 145, "Rescission of SFAS No. 4, 44 and 64, Amendment of FASB Statement
No. 13 and Technical Corrections" requires all gains and losses from
extinguishment of debt to be included as an item of income from continuing
operations. The provisions of SFAS No. 145 related to the rescission of SFAS No.
4 are effective for the Company's fiscal year 2003. Upon adoption of SFAS No.
145, the Company's previously reported extraordinary items related to gains and
losses from the retirement of debt will be reclassified and not reported as
extraordinary items.
Stock Split
On March 4, 2002, the Company's Board of Directors declared a two-for-one split
of the Company's common stock in the form of a stock dividend to stockholders of
record on March 14, 2002. The additional shares were distributed on March 28,
2002. All share and per share amounts included in the Consolidated Statements of
Income, Consolidated Balance Sheets, footnotes 5, 6, 7 and 11, and the Summary
Consolidated Quarterly Financial Data have been restated to reflect the split.
2. Inventory
Inventory consisted of the following (amounts in thousands):
October 31,
-------------------------
2001 2000
------ ------
Land and land development costs $ 833,386 $ 558,503
Construction in progress 1,145,046 992,098
Sample homes 75,723 60,511
Land deposits and costs of
future development 89,360 68,560
Deferred marketing costs 40,026 32,711
---------- ----------
$2,183,541 $1,712,383
========== ==========
Construction in progress includes the cost of homes under construction, land and
land development costs and the carrying cost of home sites that have been
substantially improved.
For the years ended October 31, 2001, 2000 and 1999, the Company provided for
inventory write-downs and the expensing of costs which it believed not to be
recoverable of $13,035,000, $7,448,000 and $5,092,000, respectively.
Interest capitalized in inventories is charged to interest expense when the
related inventory is closed. Changes in capitalized interest for the three years
ended October 31, 2001 were as follows (amounts in thousands):
2001 2000 1999
------ ------ ------
Interest capitalized,
beginning of year $78,443 $64,984 $53,966
Interest incurred 79,209 60,236 51,396
Interest expensed (58,247) (46,169) (39,905)
Write-off to cost and expenses (755) (608) (473)
------- ------- -------
Interest capitalized, end of year $98,650 $78,443 $64,984
======= ======= =======
3. Loans Payable and Subordinated Notes
Loans payable consisted of the following (amounts in thousands):
October 31
--------------------
2001 2000
------ ------
Revolving credit facility $ 80,000 $ 80,000
Term loan due March 2002 50,000 50,000
Term loan due July 2005 192,500 170,000
Other 64,966 26,537
-------- --------
$387,466 $326,537
======== ========
The Company has a $535,000,000 unsecured revolving credit facility with 16
banks of which $445,000,000 extends through March 2006 and $90,000,000 extends
through February 2003. Interest is payable on borrowings at 0.90% 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 3.32% at October 31, 2001. At October 31, 2001,
letters of credit and obligations under escrow agreements of approximately
$43,862,000 were outstanding. The agreement contains various covenants,
including financial covenants related to consolidated stockholders' equity,
indebtedness and inventory. The agreement requires the Company to maintain a
minimum consolidated stockholders' equity which restricts the payment of cash
dividends and the repurchase of Company stock to approximately $230,000,000 at
October 31, 2001.
The Company borrowed $50,000,000 from three banks at a fixed rate of 7.72%
repayable in March 2002. The Company has borrowed $192,500,000 from eight banks
at a weighted-average interest rate of 8.04% repayable in July 2005. Both loans
are unsecured and the agreements contain financial covenants that are less
restrictive than the covenants contained in the Company's revolving credit
agreement.
A subsidiary of the Company has a $35,000,000 line of credit with a bank to fund
mortgage originations. The line of credit is collateralized by all the assets of
the subsidiary. At October 31, 2001, the subsidiary had borrowed $24,754,000
under the line of credit and had assets of approximately $28,364,000.
At October 31, 2001, the aggregate estimated fair value of the Company's loans
payable was approximately $405,500,000. The fair value of loans was estimated
based upon the interest rates at October 31, 2001 that the Company believed were
available to it for loans with similar terms and remaining maturities.
Subordinated notes consisted of the following (amounts in thousands):
October 31
--------------------
2001 2000
------ ------
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
8 1/8% Senior Subordinated Notes
due February 1, 2009 170,000 170,000
8% Senior Subordinated Notes
due May 1, 2009 100,000 100,000
8 1/4% Senior Subordinated Notes
due February 1, 2011 200,000
Bond discount (419) (501)
-------- --------
$669,581 $469,499
======== ========
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 the fifth anniversary of each issue's date of issuance.
At October 31, 2001, the aggregate fair value of all the outstanding
subordinated notes, based upon their indicated market prices, was approximately
$661,600,000.
In November 2001, the Company issued $150,000,000 of 8.25% Senior Subordinated
Notes due December 2011. The notes are subordinated to all senior indebtedness
of the Company and have the same restrictions as to the payment of dividends and
the repurchase of Company stock as the other issues of the Company's
subordinated notes. The notes are redeemable in part, at the Company's option,
from the proceeds of one or more public equity offerings prior to December 1,
2004 and redeemable in whole or in part on or after December 1, 2006.
The annual aggregate maturity of the Company's loans and notes during each of
the next five fiscal years is: 2002 - $93,573,000; 2003 - $6,107,000; 2004 -
$5,671,000; 2005 - $195,811,000; and 2006 - $181,394,000.
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% in 2001, 2000
and 1999. The effective tax rates in 2001, 2000, and 1999 were 36.8%, 36.8% and
36.7%, respectively. The primary difference between the Company's Base Rate and
effective tax rate was tax-free income.
The provision for income taxes for each of the three years ended October 31,
2001 was as follows (amounts in thousands):
2001 2000 1999
------ ------ ------
Federal $114,131 $78,105 $54,874
State 10,085 6,918 4,849
-------- ------- -------
$124,216 $85,023 $59,723
======== ======= =======
Current $116,893 $79,832 $58,154
Deferred 7,323 5,191 1,569
-------- ------- -------
$124,216 $85,023 $59,723
======== ======= =======
The components of income taxes payable consisted of the following (amounts in
thousands):
October 31,
-------------------
2001 2000
------ ------
Current $66,522 $63,775
Deferred 31,629 24,306
------- -------
$98,151 $88,081
======= =======
The components of net deferred taxes payable consisted of the following (amounts
in thousands):
October 31
-----------------
2001 2000
------ ------
Deferred tax liabilities:
Capitalized interest $32,789 $26,287
Deferred expense 17,755 13,743
------- -------
Total 50,544 40,030
------- -------
Deferred tax assets:
Inventory valuation reserves 5,716 4,555
Inventory valuation differences 2,581 2,184
Deferred income 2,329 2,170
Accrued expenses
deductible when paid 1,324 178
Other 6,965 6,637
------- -------
Total 18,915 15,724
------- -------
Net deferred tax liability $31,629 $24,306
======= =======
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 Board of Directors is authorized to amend the Company's
Certificate of Incorporation to increase the number of authorized shares of
Common Stock to 200,000,000 shares and the number of shares of authorized
Preferred Stock to 15,000,000 shares.
On March 7, 2002, the Company's Board of Directors amended the Company's
Certificate of Incorporation to increase the number of authorized shares of
Common Stock to 100,000,000 shares.
Changes in stockholders' equity for the three years ended October 31, 2001 were
as follows (amounts in thousands):
Common Stock Additional
-------------- Paid-In Retained Treasury
Shares Amount Capital Earnings Stock Total
------ ------ --------- -------- -------- -----
Balance,
November 1, 1998 73,870 $ 369 $ 106,099 $421,099 $ (1,811) $525,756
Net income 101,566 101,566
Purchase of treasury
stock (1,602) (16,704) (16,704)
Exercise of stock
options 354 (1,143) 3,701 2,558
Executive bonus award 212 342 2,120 2,462
Employee benefit plan
issuances 74 (59) 755 696
------ ----- --------- -------- -------- --------
Balance,
October 31, 1999 72,908 369 105,239 522,665 (11,939) 616,334
Net income 145,943 145,943
Purchase of treasury
stock (2,710) (33,232) (33,232)
Exercise of stock
options 1,344 588 13,352 13,940
Executive bonus award 160 (225) 1,621 1,396
Employee benefit plan
issuances 88 (148) 912 764
------ ----- --------- -------- -------- --------
Balance,
October 31, 2000 71,790 369 105,454 668,608 (29,286) 745,145
Net income 213,673 213,673
Purchase of treasury
stock (4,122) (71,767) (71,767)
Exercise of stock
options 1,562 (336) 20,452 20,116
Executive bonus award 272 1,678 2,735 4,413
Employee benefit plan
issuances 52 218 785 1,003
------ ----- --------- -------- -------- --------
Balance,
October 31, 2001 69,554 $369 $107,014 $882,281 $(77,081) $912,583
Stockholder Rights Plan
Shares of the Company's Common Stock outstanding are subject to stock purchase
rights. The rights, which are exercisable only under certain conditions, entitle
the holder, other than an acquiring person (and certain related parties of an
acquiring person), as defined in the plan, to purchase common shares at prices
specified in the rights agreement. Unless earlier redeemed, the rights will
expire on July 11, 2007. The rights were not exercisable at October 31, 2001.
Redemption of Common Stock
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 December 2000, the Company's Board of Directors authorized the repurchase of
up to 5,000,000 shares (10,000,000 shares after the two-for-one stock split) 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. At October 31, 2001, the Company had repurchased approximately
2,061,000 shares (4,122,000 shares after the two-for-one stock split) under the
authorization.
6. Stock-Based Benefit Plans
Stock-Based Compensation Plans
The Company accounts for its stock option plans according to Accounting
Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" ("APB
25"). Accordingly, no compensation costs are recognized upon issuance or
exercise of stock options.
SFAS No. 123, "Accounting for Stock-Based Compensation," requires the disclosure
of the estimated value of employee option grants and their impact on net income
using option pricing models that are designed to estimate the value of options
that, 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, 2001, 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 SFAS No. 123 had been adopted, were as follows
(in thousands, except per share amounts):
Year ended October 31,
--------------------------------
2001 2000 1999
------ ------ ------
Net income As reported $213,673 $145,943 $101,566
Pro forma $202,597 $136,622 $ 93,402
Basic net income per share As reported $ 2.98 $ 2.01 $ 1.38
Pro forma $ 2.83 $ 1.88 $ 1.27
Diluted net income per share As reported $ 2.76 $ 1.95 $ 1.36
Pro forma $ 2.62 $ 1.83 $ 1.25
Weighted-average grant date
fair value per share of
options granted $ 8.93 $ 4.52 $ 5.49
For the purposes of providing the pro forma disclosures, the fair value of
options granted was 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, 2001.
2001 2000 1999
------ ------ ------
Risk-free interest rate 4.01% 5.80% 6.14%
Expected life (years) 7.31 7.70 7.10
Volatility 37.40% 35.70% 34.90%
Dividends none none none
Stock Option Plans
The Company's four stock option plans for employees, officers and 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 issued (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 issued (including treasury shares). The 1995 Plan and the
1998 Plan each restricts the number of shares available for grant in a year to a
maximum of 5,000,000 shares. No additional options may be granted under the
Company's Stock Option Plan (1986).
The following table summarizes stock option activity for the four plans during
the three years ended October 31, 2001:
Number Weighted Average
of Options Exercise Price
---------- ----------------
Outstanding, November 1, 1998 9,885,036 $ 9.76
Granted 2,505,600 11.40
Exercised (352,940) 5.69
Cancelled (254,510) 11.48
----------
Outstanding, October 31, 1999 11,783,186 $10.20
Granted 3,759,500 8.77
Exercised (1,356,576) 8.84
Cancelled (178,598) 10.48
----------
Outstanding, October 31, 2000 14,007,512 $ 9.94
Granted 2,298,800 19.31
Exercised (1,589,806) 9.59
Cancelled (230,628) 11.51
----------
Outstanding, October 31, 2001 14,485,878 $11.44
==========
Options exercisable and their weighted average exercise price as of October 31,
2001, 2000 and 1999 were 9,275,765 shares and $9.96; 7,748,446 shares and $9.96;
and 7,473,810 shares and $9.47, respectively.
Options available for grant at October 31, 2001, 2000 and 1999 under all the
plans were 5,618,728; 4,626,502 and 6,377,314, respectively.
The following table summarizes information about stock options outstanding at
October 31, 2001:
Options Outstanding Options Exercisable
-------------------------------- ---------------------
Weighted-
Average
Remaining Weighted- Weighted-
Range of Contractual Average Average
Exercise Number Life Exercise Number Exercise
Prices Outstanding (in years) Price Exercisable Price
------------ ----------- ---------- -------- ----------- --------
$ 4.97-$ 7.94 1,428,600 2.8 $ 5.41 1,428,600 $ 5.41
8.69- 10.13 6,124,906 6.5 9.13 4,472,696 9.26
11.16- 12.78 3,288,172 6.7 11.89 1,979,460 11.96
13.72- 14.75 1,395,000 6.2 14.01 1,395,000 14.01
19.31 2,249,200 9.1 19.31 - -
---------- ---------
$ 4.97-$19.31 14,485,878 6.6 $11.44 9,275,756 $ 9.96
========== =========
Bonus Award Shares
Under the terms of the Company's Cash Bonus Plan covering Robert I. Toll, Mr.
Toll is entitled to receive cash bonus awards based upon the pre-tax earnings
and stockholders' equity of the Company. In December 1998, Mr. Toll and the
Board of Directors agreed that any bonus payable for each of the three fiscal
years ended October 31, 2001 will be made (except for specific conditions) in
shares of the Company's Common Stock using the value of the stock as of the date
of the agreement ($12.125 per share). The stockholders approved the plan at the
Company's 1999 Annual Meeting. The Company recognized compensation expense in
2001 of $6,855,000, in 2000 of $4,413,000 and in 1999 of $1,395,000, which
represented the fair market value of the shares issued to Mr. Toll (440,002
shares in 2001, 271,584 shares in 2000 and 159,372 shares in 1999). On October
31, 2001, 2000 and 1999, the closing price of the Company's Common Stock on the
New York Stock Exchange was $15.58, $16.25 and $8.75, respectively. Under the
Company's deferred compensation plan Mr. Toll can elect to defer receipt of his
bonus until a future date. Mr. Toll elected to defer receipt of his bonus for
fiscal 2001.
In December 2000, Mr. Toll and the Board of Directors agreed that any bonus
payable for each of the three fiscal years ended October 31, 2004 will be made
(except for specific conditions) in shares of the Company's Common Stock using
the value of the stock as of the date of the agreement ($19.3125 per share). The
stockholders approved the plan at the Company's 2001 Annual Meeting.
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 2007, provides that 600,000 shares be reserved for purchase. As of
October 31, 2001, a total of 453,948 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, 2001, 2000 and 1999 were
12,536 shares and $15.24; 12,618 shares and $9.71; and 24,364 shares and $8.49,
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, 2001 is as follows (amounts in thousands):
2001 2000 1999
------ ------ ------
Basic weighted average shares 71,670 72,537 73,378
Common stock equivalents 5,697 2,288 1,493
------ ------ ------
Diluted weighted average shares 77,367 74,825 74,872
====== ====== ======
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 $3,141,000, $ 2,579,000, and
$1,876,000, for the years ended October 31, 2001, 2000 and 1999, respectively.
9. Extraordinary Loss from Extinguishment of Debt
In January 1999, the Company called for the redemption of all of its outstanding
9 1/2% Senior Subordinated Notes due 2003 at 102% of the principal amount plus
accrued interest. The redemption resulted in an extraordinary loss in fiscal
1999 of $1,461,000, net of $857,000 of income tax benefit. The loss represented
the redemption premium and a write-off of unamortized deferred issuance costs.
10. Commitments and Contingencies
At October 31, 2001, the Company had agreements to purchase land and improved
home sites for future development with purchase prices aggregating approximately
$721,129,000, of which $42,658,000 had been paid or deposited. Purchase of the
properties is contingent upon satisfaction of certain requirements by the
Company and the sellers.
At October 31, 2001, the Company had agreements of sale outstanding to deliver
2,727 homes with an aggregate sales value of approximately $1,411,374,000.
At October 31, 2001, the Company was committed to make approximately
$290,000,000 of mortgage loans to its homebuyers and to others. All loans with
committed interest rates are covered by take-out commitments from third-party
lenders, resulting in no interest rate risk to the Company. The Company also
arranges a variety of mortgage programs that are offered to its homebuyers
through outside mortgage lenders.
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 Transactions
To take advantage of commercial real estate opportunities that may present
themselves from time to time, the Company formed Toll Brothers Realty Trust (the
"Trust"), a venture that is effectively owned one-third by the Company;
one-third by a number of senior executives and/or directors, including Robert I.
Toll, Bruce E. Toll (and certain family members), Zvi Barzilay (and certain
family members), and Joel H. Rassman; and one-third by the Pennsylvania State
Employees Retirement System (collectively, the "Shareholders").
In June 2000, the Shareholders entered into a subscription agreement whereby
each group agreed to invest additional capital in an amount not to exceed
$9,259,000 if required by the Trust. The commitment expires in June 2002.
At October 31, 2001, the Company had an investment of $7,471,000 in the Trust.
This investment is accounted for on the equity method.
The Company provides development, finance and management services to the
Trust and received fees under the terms of various agreements in the amount of
$1,672,000, $1,392,000 and $2,524,000 in fiscal 2001, 2000 and 1999,
respectively.
During fiscal 2000, the Company repurchased 500,000 shares of its Common Stock
from Bruce E. Toll at $15 per share, a price that was within the trading range
of the Company's Common Stock on the dates of the transactions.
12. Supplemental Disclosure 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, 2001 (amounts in thousands):
2001 2000 1999
------ ------ ------
Cash flow information:
Interest paid, net of amount capitalized $ 26,985 $21,548 $17,469
Income taxes paid $108,750 $54,700 $49,250
Non-cash activity:
Cost of inventory acquired through
seller financing $ 34,662 $ 8,321 $ 7,504
Investment in unconsolidated subsidiary
acquired through seller financing $ 4,500
Income tax benefit related to exercise
of employee stock options $ 5,396 $ 2,128 $ 541
Stock bonus awards $ 4,413 $ 1,395 $ 2,462
Contributions to employee retirement plan $ 791 $ 641 $ 490
Acquisition of company:
Fair value of assets acquired $56,026
Liabilities assumed $44,934
Cash paid $11,092
13. Supplemental Guarantor Information
A wholly owned subsidiary of the Company, Toll Brothers Finance Corp.(the
"Subsidiary Issuer"), intends to issue senior debt. The obligations of the
Subsidiary Issuer to pay principal, premiums, if any, and interest will be
guaranteed jointly and severally on a senior basis by the Company and
substantially all of the Company's wholly-owned homebuilding subsidiaries (the
"Guarantor Subsidiaries"). The guarantees will be full and unconditional. The
Company's non-homebuilding subsidiaries (the " Non-Guarantor Subsidiaries") will
not guarantee the debt. Separate financial statements and other disclosures
concerning the Guarantor Subsidiaries are not presented because management has
determined that such disclosures would not be material to investors.
Supplemental consolidating financial information of the Company, the Subsidiary
Issuer, the Guarantor Subsidiaries, the Non-Guarantor Subsidiaries and the
eliminations to arrive at Toll Brothers, Inc. on a consolidated basis are
presented below. Toll Brothers Finance Corp. prior to the intended senior debt
issuance has not had any operations.
Toll Non-
Brothers, Subsidiary Guarantor Guarantor
Inc. Issuer Subsidiaries Subsidiaries Elimination Consolidated
-------------------------------------------------------------------------------------------
Consolidating Balance Sheet
At October 31, 2001 ($ in thousands)
ASSETS
Cash and cash equivalents 179,434 3,406 182,840
Inventory 2,183,045 496 2,183,541
Property, construction and
office equipment, net 27,067 6,028 33,095
Receivables, prepaid
expenses and other assets 1,010,734 27,465 13,726 (977,444) 74,481
Mortgage loans receivable 669 26,089 26,758
Customer deposits held
in escrow 17,303 17,303
Investments in
unconsolidated entities 14,182 14,182
----------------------------------------------------------------------------------------------
1,010,734 - 2,449,165 49,745 (977,444) 2,532,200
==============================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Loans payable 357,802 4,910 362,712
Subordinated notes 669,581 669,581
Mortgage company
warehouse loans 24,754 24,754
Customer deposits 101,778 101,778
Accounts payable 132,909 61 132,970
Accrued expenses 215,101 14,570 229,671
Income taxes payable 98,151 98,151
----------------------------------------------------------------------------------------------
Total liabilities 98,151 - 1,477,171 44,295 - 1,619,617
----------------------------------------------------------------------------------------------
Stockholders' equity
Preferred Stock -
Common stock 369 1 3 (4) 369
Additional paid-in-capital 107,014 5,070 1,084 (6,154) 107,014
Retained earnings 882,281 966,923 4,363 (971,286) 882,281
Treasury stock (77,081) (77,081)
----------------------------------------------------------------------------------------------
Total stockholders' equity 912,583 - 971,994 5,450 (977,444) 912,583
----------------------------------------------------------------------------------------------
1,010,734 - 2,449,165 49,745 (977,444) 2,532,200
==============================================================================================
Toll Non-
Brothers, Subsidiary Guarantor Guarantor
Inc. Issuer Subsidiaries Subsidiaries Elimination Consolidated
-------------------------------------------------------------------------------------------
Consolidating Balance Sheet
At October 31, 2000 ($ in thousands)
ASSETS
Cash and cash equivalents 157,086 4,774 161,860
Inventory 1,711,667 716 1,712,383
Property, construction and
office equipment, net 21,601 2,474 24,075
Receivables, prepaid
expenses and other assets 833,226 9,293 3,587 (762,527) 83,579
Mortgage loans receivable 10,436 10,436
Customer deposits held
in escrow 19,010 19,010
Investments in
unconsolidated entities 18,911 18,911
---------------------------------------------------------------------------------------------
833,226 - 1,937,568 21,987 (762,527) 2,030,254
=============================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Loans payable 321,477 5,060 326,537
Subordinated notes 469,499 469,499
Customer deposits 104,924 104,924
Accounts payable 110,910 17 110,927
Accrued expenses 172,159 12,982 185,141
Income taxes payable 88,081 88,081
---------------------------------------------------------------------------------------------
Total liabilities 88,081 - 1,178,969 18,059 - 1,285,109
---------------------------------------------------------------------------------------------
Stockholders' equity
Preferred Stock -
Common stock 369 1 2 (3) 369
Additional paid-in-capital 105,454 5,570 584 (6,154) 105,454
Retained earnings 668,608 753,028 3,342 (756,370) 668,608
Treasury stock (29,286) (29,286)
---------------------------------------------------------------------------------------------
Total stockholders' equity 745,145 - 758,599 3,928 (762,527) 745,145
---------------------------------------------------------------------------------------------
833,226 - 1,937,568 21,987 (762,527) 2,030,254
=============================================================================================
Toll Non-
Brothers, Subsidiary Guarantor Guarantor
Inc. Issuer Subsidiaries Subsidiaries Elimination Consolidated
-------------------------------------------------------------------------------------------
Consolidating Income Statement
For the fiscal year ended October 31, 2001 ($ in thousands)
Revenues:
Housing sales 2,180,469 2,180,469
Land sales 27,530 27,530
Other 14,335 15,192 (14,677) 14,850
Equity earnings
from unconsolidated
entities 6,756 6,756
Earnings from
subsidiaries 337,892 (337,892) -
---------------------------------------------------------------------------------------------
337,892 - 2,229,090 15,192 (352,569) 2,229,605
---------------------------------------------------------------------------------------------
Costs and expenses:
Cost of sales 1,623,526 3,577 (3,363) 1,623,740
Selling, general
and administrative 3 209,638 9,036 (8,948) 209,729
Interest 58,035 960 (748) 58,247
---------------------------------------------------------------------------------------------
3 - 1,891,199 13,573 (13,059) 1,891,716
---------------------------------------------------------------------------------------------
Income before taxes 337,889 - 337,891 1,619 (339,510) 337,889
Income taxes 124,216 123,996 597 (124,593) 124,216
---------------------------------------------------------------------------------------------
Net income 213,673 - 213,895 1,022 (214,917) 213,673
=============================================================================================
Toll Non-
Brothers, Subsidiary Guarantor Guarantor
Inc. Issuer Subsidiaries Subsidiaries Elimination Consolidated
-------------------------------------------------------------------------------------------
Consolidating Income Statement
For the fiscal year ended October 31, 2000 ($ in thousands)
Revenues:
Housing sales 1,762,930 1,762,930
Land sales 38,730 38,730
Other 9,737 10,354 (10,639) 9,452
Equity earnings
from unconsolidated
entities 3,250 3,250
Earnings from
subsidiaries 231,011 (231,011) -
---------------------------------------------------------------------------------------------
231,011 - 1,814,647 10,354 (241,650) 1,814,362
---------------------------------------------------------------------------------------------
Costs and expenses:
Cost of sales 1,366,669 3,921 (3,721) 1,366,869
Selling, general
and administrative 45 171,037 6,008 (6,732) 170,358
Interest 45,929 285 (45) 46,169
---------------------------------------------------------------------------------------------
45 - 1,583,635 10,214 (10,498) 1,583,396
---------------------------------------------------------------------------------------------
Income before taxes 230,966 - 231,012 140 (231,152) 230,966
Income taxes 85,023 85,222 52 (85,274) 85,023
---------------------------------------------------------------------------------------------
Net income 145,943 - 145,790 88 (145,878) 145,943
=============================================================================================
Toll Non-
Brothers, Subsidiary Guarantor Guarantor
Inc. Issuer Subsidiaries Subsidiaries Elimination Consolidated
-------------------------------------------------------------------------------------------
Consolidating Income Statement
For the fiscal year ended October 31, 1999 ($ in thousands)
Revenues:
Housing sales 1,438,171 1,438,171
Land sales 17,345 17,345
Other 5,020 4,542 (963) 8,599
Equity earnings
from unconsolidated
entities -
Earnings from
subsidiaries 160,481 (160,481) -
--------------------------------------------------------------------------------------------
160,481 - 1,460,536 4,542 (161,444) 1,464,115
--------------------------------------------------------------------------------------------
Costs and expenses:
Cost of sales 1,131,224 23 1,131,247
Selling, general
and administrative 49 127,173 2,991 130,213
Interest 39,905 39,905
--------------------------------------------------------------------------------------------
49 - 1,298,302 3,014 - 1,301,365
--------------------------------------------------------------------------------------------
Income before taxes and
extraordinary
item 160,432 - 162,234 1,528 (161,444) 162,750
Income taxes 58,866 59,532 565 (59,240) 59,723
--------------------------------------------------------------------------------------------
Income before
extraordinary item 101,566 - 102,702 963 (102,204) 103,027
Extraordinary item (1,461) (1,461)
--------------------------------------------------------------------------------------------
Net income 101,566 - 101,241 963 (102,204) 101,566
============================================================================================
Toll Non-
Brothers, Subsidiary Guarantor Guarantor
Inc. Issuer Subsidiaries Subsidiaries Elimination Consolidated
-------------------------------------------------------------------------------------------
Consolidating Statement of Cash Flows
For the fiscal year ended October 31, 2001 ($ in thousands)
Cash flow from operating
activities:
Net income 213,673 213,895 1,022 (214,917) 213,673
Adjustments to reconcile net income to
net cash used in operating activities:
Depreciation and amortization 8,845 511 9,356
Equity earnings in unconsolidated joint
ventures (6,756) (6,756)
Deferred tax provision 7,323 7,323
Changes in operating assets and
liabilities:
Increase in inventory (444,107) 220 (443,887)
Origination of mortgage loans (199,102) (199,102)
Sale of mortgage loans 183,449 183,449
Decrease in receivables, -
prepaid expenses and other assets (177,507) (16,978) (9,639) 214,917 10,793
(Decrease) in customer deposits (3,146) (3,146)
Increase in accounts payable and
accrued expenses 5,204 64,941 1,631 71,776
Increase in income taxes payable 8,142 8,142
---------------------------------------------------------------------------------------
Net cash used in operating activities 56,835 - (183,306) (21,908) - (148,379)
---------------------------------------------------------------------------------------
Cash flow from investing activities:
Purchase of property and equipment,
net (10,957) (4,063) (15,020)
Distribution from unconsolidated
entities 15,750 15,750
---------------------------------------------------------------------------------------
Net cash provided by investing
activities - - 4,793 (4,063) - 730
---------------------------------------------------------------------------------------
Cash flow from financing activities
Proceeds from loans payable 123,662 84,966 208,628
Principal payments of loans payable (119,731) (60,363) (180,094)
Net proceeds from issuance of public debt 196,930 196,930
Proceeds from stock-based benefit plans 14,932 14,932
Purchase of treasury stock (71,767) (71,767)
---------------------------------------------------------------------------------------
Net cash provided by financing
activities (56,835) - 200,861 24,603 - 168,629
---------------------------------------------------------------------------------------
Net increase in cash and cash
equivalents - - 22,348 (1,368) - 20,980
Cash and cash equivalents, beginning of
year 157,086 4,774 161,860
---------------------------------------------------------------------------------------
Cash and cash equivalents, end of year - - 179,434 3,406 - 182,840
=======================================================================================
Toll Non-
Brothers, Subsidiary Guarantor Guarantor
Inc. Issuer Subsidiaries Subsidiaries Elimination Consolidated
-------------------------------------------------------------------------------------------
Consolidating Statement of Cash Flows
For the Fiscal Year ended October 31, 2000 ($ in thousands)
Cash flow from operating
activities:
Net income 145,943 145,790 88 (145,878) 145,943
Adjustments to reconcile net income to
net cash used in operating activities:
Depreciation and amortization 8,186 342 8,528
Equity earnings in unconsolidated
joint ventures (3,250) (3,250)
Deferred tax provision 5,191 5,191
Changes in operating assets and
liabilities:
Increase in inventory (263,615) (688) (264,303)
Origination of mortgage loans (22,982) (22,982)
Sale of mortgage loans 12,546 12,546
Increase in receivables,
prepaid expenses and other assets (157,006) (14,748) 8,287 145,878 (17,589)
Increase in customer deposits 22,429 22,429
Increase in accounts payable and
accrued expenses 2,036 67,243 2,213 71,492
Increase in income taxes payable 25,132 25,132
------------------------------------------------------------------------------------------
Net cash used in operating activities 21,296 - (37,965) (194) - (16,863)
------------------------------------------------------------------------------------------
Cash flow from investing activities:
Purchase of property and equipment,
net (8,143) (1,272) (9,415)
Distribution from unconsolidated
entities 13,589 13,589
------------------------------------------------------------------------------------------
Net cash provided by
investing activities - - 5,446 (1,272) - 4,174
------------------------------------------------------------------------------------------
Cash flow from financing activities
Proceeds from loans payable 554,783 5,060 559,843
Principal payments of loans payable (460,482) (460,482)
Proceeds from stock-based benefit
plans 11,936 11,936
Purchase of treasury stock (33,232) (33,232)
------------------------------------------------------------------------------------------
Net cash provided by financing
activities (21,296) - 94,301 5,060 - 78,065
------------------------------------------------------------------------------------------
Net increase in cash and cash
equivalents - - 61,782 3,594 - 65,376
Cash and cash equivalents, beginning
of year 95,304 1,180 96,484
------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year - - 157,086 4,774 - 161,860
==========================================================================================
Toll Non-
Brothers, Subsidiary Guarantor Guarantor
Inc. Issuer Subsidiaries Subsidiaries Elimination Consolidated
-------------------------------------------------------------------------------------------
Consolidating Statement of Cash Flows
For the Fiscal Year ended October 31, 1999 ($ in thousands)
Cash flow from operating
activities:
Net income 101,566 101,241 963 (102,204) 101,566
Adjustments to reconcile net income to
net cash used in operating activities:
Depreciation and amortization 6,535 59 6,594
Extraordinary loss from extinguishment
of debt 2,318 2,318
Deferred tax provision 1,569 1,569
Changes in operating assets and
liabilities, net of assets and
liabilities acquired
Increase in inventory (282,736) (28) (282,764)
Increase in receivables,
prepaid expenses and other assets (99,650) (25,202) (9,876) 102,204 (32,524)
Increase in customer deposits 11,557 11,557
Increase in accounts payable and
accrued expenses 2,951 56,123 3,695 62,769
Increase in income taxes payable 8,045 8,045
----------------------------------------------------------------------------------------
Net cash used in operating activities 14,481 - (130,164) (5,187) - (120,870)
----------------------------------------------------------------------------------------
Cash flow from investing activities:
Purchase of property and equipment, net (6,835) (1,496) (8,331)
Acquisition of company, net of cash
acquired (11,090) (11,090)
Investment in unconsolidated entities (15,193) (15,193)
----------------------------------------------------------------------------------------
Net cash used in investing
activities - - (33,118) (1,496) - (34,614)
----------------------------------------------------------------------------------------
Cash flow from financing activities
Proceeds from loans payable 177,500 177,500
Principal payments of loans payable (187,551) (187,551)
Net proceeds from issuance of public
debt 267,716 267,716
Redemption of public debt (71,359) (71,359)
Proceeds from stock-based benefit plans 2,223 2,223
Purchase of treasury stock (16,704) (16,704)
----------------------------------------------------------------------------------------
Net cash provided by financing
activities (14,481) - 186,306 - - 171,825
----------------------------------------------------------------------------------------
Net increase in cash and cash
equivalents - - 23,024 (6,683) - 16,341
Cash and cash equivalents, beginning
of year 72,280 7,863 80,143
----------------------------------------------------------------------------------------
Cash and cash equivalents, end of year - - 95,304 1,180 - 96,484
========================================================================================
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 2001:
Revenue $655,752 $584,068 $514,524 $475,261
Income before income taxes $108,183 $ 94,160 $ 72,351 $ 63,195
Net Income $ 68,526 $ 59,444 $ 45,778 $ 39,925
Earnings per share
Basic $ .98 $ .83 $ .63 $ .55
Diluted $ .92 $ .77 $ .58 $ .51
Weighted average number
of shares
Basic 69,820 71,677 72,857 72,326
Diluted 74,661 77,413 78,564 78,830
Fiscal 2000:
Revenue $614,793 $464,532 $390,486 $344,551
Income before income taxes $ 92,484 $ 58,791 $ 44,363 $ 35,328
Net Income $ 58,366 $ 37,234 $ 27,950 $ 22,393
Earnings per share*
Basic $ .81 $ .52 $ 0.38 $ 0.31
Diluted $ .76 $ .50 $ 0.38 $ 0.30
Weighted average number
of shares
Basic 72,122 72,293 72,792 72,942
Diluted 76,973 74,438 74,072 73,818
* Due to rounding, the sum of the quarterly earnings per share amounts may not
equal the reported earnings per share for the year.