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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, 2002
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
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(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
and Pacific Exchange
* Includes associated Right to Purchase Series A Junior Participating
Preferred Stock.
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. [ X ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ X ] No [ ]
As of December 31, 2002 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 $1,030,887,000.
As of December 31, 2002, there were 70,493,425 shares of Common Stock
outstanding.
Documents Incorporated by Reference: Portions of the proxy statement of Toll
Brothers, Inc. with respect to the 2003 Annual Meeting of Stockholders,
scheduled to be held on March 20, 2003, are incorporated by reference into Items
10 through 13 hereof.
PART I
ITEM 1. BUSINESS
General
Toll Brothers, Inc., a Delaware corporation formed in May 1986, began doing
business through predecessor entities in 1967. When this report uses the words
"we," "us," and "our," these words refer to Toll Brothers, Inc. and its
subsidiaries, unless the context otherwise requires.
We design, build, market and arrange financing for single-family detached and
attached homes in middle-income and high-income residential communities catering
to move-up, empty-nester and active-adult age-qualified homebuyers in 22 states
in six regions around the United States. Our communities are generally located
on land we have either developed or acquired fully approved and, in some cases,
improved. Currently, we operate in the major suburban residential areas of:
o southeastern Pennsylvania and Delaware
o central New Jersey
o the Virginia and Maryland suburbs of Washington, D.C.
o Baltimore County, Maryland
o the Boston, Massachusetts metropolitan area
o Rhode Island
o Southern New Hampshire
o Fairfield, New Haven and Hartford Counties, Connecticut
o Westchester and Dutchess Counties, New York
o the Los Angeles metropolitan area and San Diego, California
o the San Francisco Bay area of northern California
o Palm Springs, California
o the Phoenix, Arizona metropolitan area
o Raleigh and Charlotte, North Carolina
o Dallas, Austin and San Antonio, Texas
o the east and west coasts of Florida
o Las Vegas, Nevada
o Columbus, Ohio
o Nashville, Tennessee
o Detroit, Michigan
o Chicago, Illinois
o Denver, Colorado
o the Hilton Head area of South Carolina
We continue to explore additional geographic areas for expansion.
We market our homes primarily to middle-income and upper-income buyers,
emphasizing high quality construction and customer satisfaction. In the five
years ended October 31, 2002, we delivered 19,387 homes from 372 communities,
including 4,430 homes from 212 communities delivered in fiscal 2002.
We operate our own land development, architectural, engineering, mortgage,
title, security monitoring, landscape, cable T.V., broadband Internet access,
lumber distribution, house component assembly and manufacturing operations. We
also own and operate golf courses and country clubs in conjunction with several
of our master planned communities.
In order to take advantage of commercial real estate opportunities which may
present themselves from time to time, we formed Toll Brothers Realty Trust Group
(the "Trust") in 1998. The Trust is owned one-third by us, one-third by a number
of our senior executives and/or directors, including Robert I. Toll, Bruce E.
Toll (and members of his family), Zvi Barzilay (and members of his family) and
Joel H. Rassman, and one-third by the Pennsylvania State Employees Retirement
System. We provide development, finance and management services to the Trust and
receive fees for our services. The Trust currently owns and operates several
office buildings and an apartment complex, a portion of which is rented and a
portion of which remains under construction.
At October 31, 2002, we were operating in 243 communities containing over 21,800
home sites which we owned or controlled through options. Of the 243 communities,
170 were offering homes for sale, 34 had not yet opened for sale and 39 were
sold out but all home deliveries had not been completed. At October 31, 2002, we
also owned or controlled through options approximately 19,000 home sites in 157
proposed communities. We expect to have approximately 185 selling communities by
October 31, 2003. Of the approximately 40,800 lots owned or controlled through
options at October 31, 2002, we owned approximately 25,800 of them.
At October 31, 2002, we were offering single-family detached homes at prices,
excluding customized options, generally ranging from $233,000 to $1,493,000 with
an average base sales price of $501,000. We were offering single-family attached
homes at prices, excluding customized options, generally ranging from $166,000
to $622,000, with an average base sales price of $322,000. On average,
homebuyers added approximately 21% in options and lot premiums to the base price
of homes delivered in fiscal 2002.
We had backlogs of $1.87 billion (3,366 homes) at October 31, 2002 and $1.41
billion (2,727 homes) at October 31, 2001. We expect that substantially all
homes in backlog at October 31, 2002 will be delivered by October 31, 2003.
In recognition of our achievements, we have received numerous awards from
national, state and local homebuilder publications and associations. We are the
only publicly traded national homebuilder to have won all three of the
industry's highest honors: America's Best Builder (1996), the National Housing
Quality Award (1995), and Builder of the Year (1988).
We attempt to reduce certain risks homebuilders encounter by controlling land
for future development through options whenever possible, thus allowing us to
obtain the necessary governmental approvals before acquiring title to the land;
by generally commencing construction of a home only after executing an agreement
of sale 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, we may purchase properties
outright, or acquire an underlying mortgage, prior to obtaining all of the
governmental approvals necessary to commence development.
For financial information pertaining to revenues, earnings and assets, please
see the accompanying financial statements and notes thereto.
2
Our Communities
Our communities generally are located in affluent suburban areas near major
highways with access to major cities. We currently operate in 22 states in six
regions around the country. The following table lists the states in which we
operate and the fiscal years in which we or our predecessors commenced
operations:
Fiscal Fiscal
Year of Year of
State Entry State Entry
-------------- ------- -------------- -------
Pennsylvania 1967 Florida 1995
New Jersey 1982 Arizona 1995
Delaware 1987 Ohio 1997
Massachusetts 1988 Tennessee 1998
Maryland 1988 Nevada 1998
Virginia 1992 Michigan 1999
Connecticut 1992 Illinois 1999
New York 1993 Rhode Island 2000
California 1994 New Hampshire 2000
North Carolina 1994 Colorado 2001
Texas 1995 South Carolina 2002
We market our high-quality, detached, single-family homes primarily to "upscale"
luxury home buyers, generally comprised of those persons who have previously
owned a principal residence and who are seeking to buy a larger home - the
so-called "move-up" market. We believe our reputation as a developer of homes
for this market enhances our competitive position with respect to the sale of
our smaller, more moderately priced detached homes, as well as our attached
homes.
We also market to the 50+ year-old "empty-nester" market and believe that this
market has strong growth potential. We have developed a number of home designs
with features such as one-story living and first floor master bedroom suites, as
well as communities with recreational amenities such as golf courses, pools,
country clubs and recreation centers, that we believe appeal to this category of
home buyer. We have integrated these designs and features with our other home
types into our communities. The empty-nester market now accounts for
approximately 30% of our home sales.
In 1999, we opened for sale our first active-adult, age-qualified community for
households in which at least one member is 55 years of age. We are currently
selling from ten such communities and expect to open 14 additional age-qualified
communities during the next few years. In fiscal 2002, approximately 9% of new
contracts signed were in active-adult communities. We believe this figure could
grow to approximately 15% over the next few years.
Another part of our business is the second-home market. We have been selling in
this market for several years in Arizona, California and Florida and are
expanding this product line into Delaware, Maryland, Pennsylvania and South
Carolina.
We believe that the demographics of our move-up, empty-nester, active-adult,
age-qualified and second-home up-scale markets provide us with the potential for
growth in the coming decade. According to the U.S. Census Bureau, the number of
households earning $100,000 or more (in constant 2001 dollars) now stands at
15.1 million households, approximately 13.8% of all households. This group has
grown at eight times the rate of increase of all U.S. households over the past
two decades. According to Claritas, Inc., a provider of demographic information,
approximately seven million of these households are located in our current
markets.
3
The largest group of baby boomers, the more than four million born annually
between 1954 and 1964, are now 38 to 48 years of age and in their peak move-up
home buying years. The leading edge of the baby boom generation has now entered
its 50s and the empty-nester market. The number of households with persons 55 to
64 years old, the focus of our age-qualified communities, is projected to
increase by over 47% by the Year 2010 according to the U.S. Census Bureau.
American Demographics magazine predicts that, as the baby boomers mature and
become more affluent, second home ownership will grow from approximately 6.4
million homes in 2000 to 10 million homes in 2010.
We also develop master planned communities and currently have 14 such
communities containing approximately 12,700 home sites. We expect to open
several additional communities during the next few years. These communities,
many of which contain golf courses and other country club type amenities, enable
us to offer multiple home types and sizes to a broad range of move-up,
empty-nester, active-adult and second-home buyers. We realize efficiencies from
shared common costs such as land development and infrastructure over the several
communities within the master planned community. We currently have open master
planned communities in California, Florida, Michigan, North Carolina,
Pennsylvania, Virginia and South Carolina.
Each single-family detached-home community offers several home plans, with the
opportunity for homebuyers to select various exterior styles. We design each
community to fit existing land characteristics. We strive to achieve diversity
among architectural styles within an overall planned community by offering a
variety of house models and several exterior design options for each house
model, by preserving existing trees and foliage whenever practicable, and by
curving street layouts which allow 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. Our communities have attractive entrances with distinctive
signage and landscaping. We believe that our added attention to community detail
avoids a "development" appearance and gives each community a diversified
neighborhood appearance that enhances home values.
Our attached home communities generally offer one- to four-story homes, provide
for limited exterior options and often include commonly-owned recreational
facilities such as playing fields, swimming pools and tennis courts.
Our Homes
In most of our single-family detached-home communities, we offer at least four
different house floor plans, each with several substantially different
architectural styles. In addition, the exterior of each basic floor plan 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 our communities, a wide selection of options is available to
purchasers for additional charges. The number and complexity of options
typically increase with the size and base selling price of our homes. Major
options include additional garages, guest suites and other additional rooms,
finished lofts and extra fireplaces. On average, options purchased by our
homebuyers, including lot premiums, added approximately 21% to the base price of
homes purchased in fiscal 2002.
4
The range of base sales prices for our different lines of homes at October 31,
2002, was as follows:
Detached Homes:
Move-up $ 246,000 - $ 559,000
Executive 247,000 - 770,000
Estate 345,000 - 1,493,000
Active adult, age-qualified 233,000 - 443,000
Attached Homes:
Flats $ 166,000 - $ 582,000
Townhomes 200,000 - 450,000
Carriage homes 276,000 - 622,000
Contracts for the sale of homes are at fixed prices. The prices at which homes
are offered in a community have generally increased from time to time during the
period in which that community is offering homes for sale; however, there can be
no assurance that sales prices will increase in the future.
We offer some of the same basic home designs in similar communities. However, we
are continuously developing new designs to replace or augment existing ones to
ensure that our homes reflect current consumer tastes. We use our own
architectural staff, and also engage unaffiliated architectural firms, to
develop new designs. During the past year, we introduced 116 new models.
We operate in six regions around the United States. The following table
summarizes by region closings and new contracts signed during fiscal 2002 and
2001, and backlog at October 31, 2002 and 2001:
Closings New Contracts(1) Backlog(2)
------------------------------- ---------------------------- ----------------------------
Units $Mill Units $Mill Units $Mill
----------- -------------- ------------ -------------- ----------- --------------
FISCAL 2002
Northeast
(CT,MA,NH,NJ,NY,RI) 886 465.3 895 519.5 660 384.7
Mid-Atlantic
(DE,MD,PA,VA) 1,580 735.0 1,881 890.1 1,134 547.4
Midwest(IL,MI,OH) 394 187.3 398 202.9 290 152.7
Southeast(FL,NC,TN) 614 258.9 670 312.0 384 204.5
Southwest
(AZ,CO,NV,TX) 513 270.4 707 351.4 536 268.5
West(CA) 443 362.4 562 472.3 362 308.5
----------- -------------- ------------ -------------- ----------- --------------
4,430 2,279.3 5,113 2,748.2 3,366 1,866.3
----------- -------------- ------------ -------------- ----------- --------------
FISCAL 2001
Northeast 942 477.6 870 440.6 651 330.6
Mid-Atlantic 1,395 646.1 1,549 719.1 833 392.2
Midwest 455 211.4 534 232.3 330 151.0
Southeast 519 233.9 535 238.7 328 151.4
Southwest 573 286.6 498 264.7 342 187.6
West 474 324.9 380 278.5 243 198.6
----------- -------------- ------------ -------------- ----------- --------------
Total 4,358 2,180.5 4,366 2,173.9 2,727 1,411.4
----------- -------------- ------------ -------------- ----------- --------------
(1) New contracts include $13.7 million (43 homes) and $15.4 million (52 homes)
in fiscal 2002 and 2001,respectively, from an unconsolidated 50% owned joint
venture.
(2) Backlog at October 31, 2002 and 2001 include $7.5 million (24 homes) and
$7.8 million (25 homes) from an unconsolidated 50% owned joint venture.
5
The following table summarizes certain information with respect to our
residential communities under development at October 31, 2002:
Homes Under
Number of Homes Homes Contract and Homesites
Region Communities Approved Closed Not Closed Available
- ------ ----------- -------- ------ ---------- ---------
Northeast 50 4,306 1,482 660 2,164
Mid-Atlantic 75 11,778 2,871 1,134 7,773
Southeast 27 3,763 1,361 384 2,018
Southwest 40 3,847 1,209 536 2,102
Midwest 21 2,687 941 290 1,456
West 30 3,929 605 362 2,962
---------- ------- ----- ---------- -------
Total 243 30,310 8,469 3,366 18,475
========== ======= -==== ========== =======
At October 31, 2002, significant site improvements had not commenced on
approximately 10,900 of the 18,475 available home sites. Of the 18,475 available
home sites, 1,133 were not owned by us, but were controlled through options and
43 lots were owned by a 50% owned joint venture.
Of the 243 communities under development at October 31, 2002, 170 were offering
homes for sale, 34 had not yet opened for sale and 39 were sold out, but not all
home deliveries had been completed. Of the 170 communities in which homes were
being offered for sale, 142 were single-family detached home communities
containing a total of 187 homes (exclusive of model homes) under construction
but not under contract, and 28 were attached-home communities containing a total
of 118 homes (exclusive of model homes) under construction but not under
contract.
Land Policy
Before entering into an agreement to purchase a land parcel, we complete
extensive comparative studies and analyses on detailed company-designed forms
that assist us in evaluating the acquisition. We generally attempt to enter into
option agreements to purchase land for future communities. However, in order to
obtain better terms or prices, or due to competitive pressures, we may acquire
property outright from time to time. In addition, we have, at times, acquired
the underlying mortgage on a property and subsequently obtained title to that
property.
Our options, or agreements, to purchase land are generally entered into on a
non-recourse basis, thereby limiting our financial exposure to the amounts
invested in property approval and pre-development costs. The use of options or
purchase agreements may increase the price of land that we eventually acquire,
but significantly reduces our risk by allowing us to obtain the necessary
development approvals before acquiring the land. As approvals are obtained, the
values of the options, purchase agreements and land generally increases. We have
the ability to extend many of these options for varying periods of time, in some
cases by making an additional payment and, in other cases, without any
additional payment. Our purchase agreements are typically subject to numerous
conditions including, but not limited to, our ability to obtain necessary
governmental approvals for the proposed community. Often, our down payment on an
agreement will be returned to us if all approvals are not obtained, although
pre-development costs may not be recoverable. We generally have the right to
cancel any of our agreements to purchase land by forfeiture of our payment on
the agreement. In such instances, we generally are not able to recover any
pre-development costs.
6
Our ability to continue development activities over the long-term will be
dependent upon our continued ability to locate and enter into options or
agreements to purchase land, obtain governmental approvals for suitable parcels
of land, and consummate the acquisition and complete the development of such
land.
While we believe that there is significant diversity in our existing markets and
that this diversity provides some protection from the vagaries of individual
local economies, we believe that greater geographic diversification will provide
additional protection and more opportunities for growth. We continue to look to
enter new markets.
The following is a summary, at October 31, 2002, of the parcels of land that we
either owned or controlled through options or purchase agreements for proposed
communities, as distinguished from those currently under development:
Number of Number of
Region Communities Homes Planned
- ------------ ----------- -------------
Northeast 49 5,605
Mid-Atlantic 72 8,931
Southeast 6 931
Southwest 16 2,061
Midwest 7 957
West 7 518
---------- ------------
Total 157 19,003
========== ============
Of the 19,003 planned home sites, 5,114 of them were owned by us. At October 31,
2002, the aggregate purchase price of land parcels under option and purchase
agreements was approximately $860 million, of which we had paid or deposited
approximately $64 million.
We evaluate all of the land under our control for proposed communities on an
ongoing basis with respect to economic and market feasibility. During the year
ended October 31, 2002, such feasibility analyses resulted in approximately $2.5
million 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 we will be successful in securing the necessary
development approvals for the land currently under our control or for land we
may acquire control of in the future or that, upon obtaining such development
approvals, we will elect to complete the purchases of land under option or
complete the development of land that we own. We have generally been successful
in the past in obtaining governmental approvals, have substantial land currently
under control for which we have obtained or are seeking approvals (as set forth
in the table above), and devote significant resources to locating suitable land
for future development and to obtaining the required approvals on land under our
control. Failure to locate sufficient suitable land or to obtain necessary
governmental approvals may impair our ability over the long-term to maintain
current levels of development activities.
We believe that we have an adequate supply of land in our existing communities
or held for future development (assuming that all properties are developed) to
maintain our operations at current levels for several years.
7
Community Development
We expend considerable effort in developing a concept for each community, which
includes determining the size, style and price range of the homes, the layout of
the streets and individual lots, and the overall community design. After
obtaining the necessary governmental subdivision and other approvals, which may
take several years, we improve the land by grading and clearing it; installing
roads, recreational amenities and underground utility lines; erecting
distinctive entrance structures; and staking out individual home sites.
Each community is managed by a project manager who is usually located at the
site. Working with sales staff, construction managers, marketing personnel and,
when required, other in-house and outside professionals such as accountants,
engineers, architects and legal counsel, the project manager is responsible for
supervising and coordinating the various developmental steps from the approval
stage through land acquisition, marketing, selling, construction and customer
service, and for monitoring the progress of work and controlling expenditures.
Major decisions regarding each community are made in consultation with senior
members of our management team.
We recognize revenue from home sales only when title and possession of a home
are transferred to the buyer, which generally occurs shortly after home
construction is substantially completed. The most significant variable affecting
the timing of our revenue stream, other than housing demand, is receipt of final
land regulatory approvals, which, in turn, permits us to begin the process of
obtaining executed sales contracts from home buyers. Receipt of such final
approvals is not seasonal. Although our sales and construction activities vary
somewhat by season, which affects 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. We act as a general contractor and
purchase some, but not all, of the building supplies we require. See
"Manufacturing/Distribution Facilities" in Item 2. While we have experienced
some shortages from time to time in the availability of subcontractors in some
markets, we do not anticipate any material effect from these shortages on our
home building operations.
Our construction managers and assistant construction managers coordinate
subcontracting activities and supervise all aspects of construction work and
quality control. One of the ways we seek to achieve home buyer satisfaction is
by providing our construction managers with incentive compensation arrangements
based on each home buyer's satisfaction as expressed by their responses on
pre-closing and post-closing questionnaires.
We maintain insurance, subject to deductibles and self-insured retentions, to
protect us against various risks associated with our activities including, among
others, general liability, "all-risk" property, workers' compensation,
automobile, and employee fidelity. We accrue for our expected costs associated
with the deductibles and self-insured retentions.
Marketing
We believe that our marketing strategy, which emphasizes our more expensive
"Estate" and "Executive" lines of homes, has enhanced our reputation as a
builder-developer of high-quality upscale housing. We believe this reputation
results in greater demand for all of our lines of homes. To enhance this image,
we generally include attractive decorative features such as chair rails, crown
moldings, dentil moldings, vaulted and coffered ceilings and other aesthetic
elements, even in our less expensive homes, based on our belief that this
additional construction expense improves our marketing and sales effort.
8
In determining the prices for our homes, we utilize, in addition to management's
extensive experience, an internally developed value analysis program that
compares our homes with homes offered by other builders in each local marketing
area. In our application of this program, we assign a positive or negative
dollar value to differences between our product features and those of our
competitors, such as house and community amenities, location and reputation.
We expend great effort in designing and decorating our model homes, which play
an important role in our marketing. In our models, we create an attractive
atmosphere, with bread baking in the oven, fires burning in fireplaces, and
music playing in the background. Interior decorating varies among the models and
is carefully selected to reflect the lifestyles of prospective buyers. During
the past several years, we have received numerous awards from various
homebuilder associations for our interior merchandising.
We typically have a sales office in each community that is staffed by our own
sales personnel. Sales personnel are generally compensated with both salary and
commission. A significant portion of our sales is derived from the introduction
of customers to our communities by local cooperating realtors.
We advertise extensively in newspapers, other local and regional publications,
and on billboards. We also use videotapes and attractive color brochures to
market our communities. The Internet is also an important resource we use in
marketing and providing information to our customers. A visitor to our award
winning website, www.tollbrothers.com, can obtain detailed information regarding
our communities and homes across the country and take panoramic or video tours
of our homes.
All our homes are sold under our limited warranty as to workmanship and
mechanical equipment. Many homes also come with a limited ten-year warranty as
to structural integrity.
Competition
The homebuilding business is highly competitive and fragmented. We compete with
numerous homebuilders of varying sizes, ranging from local to national in scope,
some of which have greater sales and financial resources than we have. Sales of
existing homes also provide competition. We compete primarily on the basis of
price, location, design, quality, service and reputation; however, we believe
our financial stability, relative to others in our industry, has become an
increasingly favorable competitive factor.
Regulation and Environmental Matters
We are 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 property or locality. In a number of our
markets, there has been an increase in state and local legislation authorizing
the acquisition of land as dedicated open space, mainly by governmental,
quasi-public and non-profit entities. In addition, we are subject to various
licensing, registration and filing requirements in connection with the
construction, advertisement and sale of homes in our communities. Although these
laws have increased our overall costs, they have not had a material effect on
us, except to the extent that their application may have delayed the opening of
communities or caused us to conclude that development of a proposed community
would not be economically feasible, even if any or all necessary governmental
approvals were obtained. See "Land Policy" in this Item 1. We also may be
subject to periodic delays or may be precluded entirely from developing
communities due to building moratoriums in one or more of the areas in which we
operate. Generally, such moratoriums relate to insufficient water or sewage
facilities, or inadequate road capacity.
9
In order to secure certain approvals, in some areas, we may have to provide
affordable housing at below market rental or sales prices. The impact on us will
depend on how the various state and local governments in the areas in which we
engage, or intend to engage, in development, implement their programs for
affordable housing. To date, these restrictions have not had a material impact
on us.
We also are subject to a variety of local, state and federal statutes,
ordinances, rules and regulations concerning protection of public health and the
environment ("environmental laws"). The particular environmental laws that apply
to any given community vary greatly according to the location and environmental
condition of the site, and the present and former uses of the site. These
environmental laws may result in delays, may cause us to incur substantial
compliance and other costs, and/or may prohibit or severely restrict development
in certain environmentally sensitive regions or areas.
We maintain a policy of engaging independent environmental consultants to
evaluate land for the potential of hazardous or toxic materials, wastes or
substances before consummating an acquisition. Because we generally have
obtained such assessments for the land we have purchased, we have not been
significantly affected to date by the presence of such materials.
Employees
At October 31, 2002, we employed 2,960 full-time persons; of these, 120 were in
executive positions, 344 were engaged in sales activities, 309 were in project
management activities, 1,183 were in administrative and clerical activities, 686
were in construction activities, 154 were in architectural and engineering
activities and 164 were in manufacturing and distribution. We consider our
employee relations to be good.
Factors That May Affect Our Future Results
(Cautionary Statements Under the Private Securities Litigation Reform Act of
1995)
Certain information included in this report or in other materials we have filed
or will file with the Securities and Exchange Commission (as well as information
included in oral statements or other written statements made or to be made by
us) contains or may contain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended. You can identify these
statements by the fact that they do not relate strictly to historical or current
facts. They contain words like "anticipate," "estimate," "expect," "project,"
"intend," "plan," "believe," "may," "can," "could," "might" and other words or
phrases of similar meaning in connection with any discussion of future operating
or financial performance. Such statements include information relating to
anticipated operating results, financial resources, changes in revenues, changes
in profitability, interest expense, growth and expansion, anticipated income to
be realized from our investments in joint ventures and the Toll Brothers Realty
Trust Group, the ability to acquire land, the ability to gain approvals and to
open new communities, the ability to sell homes and properties, the ability to
deliver homes from backlog, the ability to secure materials and subcontractors,
the ability to produce the liquidity and capital necessary to expand and take
advantage of opportunities in the future, and stock market valuations. From time
to time, forward-looking statements also are included in our other periodic
reports on Forms 10-Q and 8-K, in press releases and in other material released
to the public.
10
Any or all of the forward-looking statements included in this report and in any
other reports or public statements made by us may turn out to be inaccurate.
This can occur as a result of incorrect assumptions or as a consequence of known
or unknown risks and uncertainties. Many factors mentioned in this report or in
other reports or public statements made by us, such as government regulation and
the competitive environment, will be important in determining our future
performance. Consequently, actual results may differ materially from those that
might be anticipated from our forward-looking statements.
We undertake no obligation to publicly update any forward-looking statements,
whether as a result of new information, future events or otherwise. However, any
further disclosures made on related subjects in our subsequent reports on Forms
10-K, 10-Q and 8-K should be consulted. The following cautionary discussion of
risks, uncertainties and possible inaccurate assumptions relevant to our
business includes factors we believe could cause our actual results to differ
materially from expected and historical results. Other factors beyond those
listed below, including factors unknown to us and factors known to us which we
have not determined to be material, could also adversely affect us. This
discussion is provided as permitted by the Private Securities Litigation Reform
Act of 1995, and all of our forward-looking statements are expressly qualified
in their entirety by the cautionary statements contained or referenced in this
section.
We operate in a very competitive environment, which is characterized by
competition from a number of other homebuilders in each market in which
we operate. Actions or changes in plans by competitors may negatively
affect us.
Our business can be affected by changes in general economic and market
conditions, as well as local economic and market conditions where our
operations are conducted and where prospective purchasers of our homes
live.
The impact and uncertainties created by the September 11, 2001 terrorist
attacks and the consequences of any future terrorist attacks, as well as
other events affecting the national and world economies, may affect our
business.
The plans for future development of our residential communities can be
affected by a number of factors including, for example, time delays in
obtaining necessary governmental permits and approvals and legal
challenges to our proposed communities.
Our operations depend on our ability to continue to obtain land for the
development of residential communities at reasonable prices. Changes in
competition, availability of financing, customer trends and market
conditions may impact our ability to obtain land for new residential
communities.
The development of our residential communities may be affected by
circumstances beyond our control, including weather conditions, work
stoppages, labor disputes, unforeseen engineering, environmental or
geological problems and unanticipated shortages of or increases in the
cost of materials and labor. Any of these circumstances could give rise
to delays in the completion of, or increase the cost of, developing one
or more of our residential communities.
11
The interest rate on our revolving credit facility is subject to
fluctuation based on changes in short-term interest rates, the amount of
borrowings we have incurred and the ratings which national rating
agencies assign to our outstanding debt securities. Our interest expense
could increase as a result of these factors.
Our business and earnings are substantially dependent on our ability to
obtain financing for our development activities. Increases in interest
rates, concerns about the market or the economy, or consolidation or
dissolution of financial institutions could increase our cost of
borrowing and/or reduce our ability to obtain the funds required for our
future operations.
Our business and earnings are also substantially dependent on the
ability of our customers to finance the purchase of their homes.
Limitations on the availability of financing or increases in the cost of
such financing could adversely affect our operations.
We believe that our recorded tax balances are adequate. However, it is
not possible to predict the effects of possible changes in the tax laws
or changes in their interpretation. These changes or interpretations, if
made, could have a material negative effect on our operating results.
Claims have been brought against us in various legal proceedings which
have not had, and are not expected to have, a material adverse effect on
the business or on our financial condition; however, additional legal
and tax claims may arise from time to time, and it is possible that our
cash flows and results of operations could be affected from time to time
by the resolution of one or more of such matters.
We are subject to construction defect and home warranty claims arising
in the ordinary course of business. These claims are common in the
homebuilding industry and can be costly. In addition, the costs of
insuring against construction defects and product liability claims are
high, the amount of coverage offered by insurance companies is currently
limited, and the amounts of deductibles and self insured retentions are
high. There can be no assurance that this coverage will not be further
restricted or become more costly. If we are not able to obtain adequate
insurance against these claims, we may experience losses that could hurt
our business.
There is intense competition to attract and retain management and key
employees in the markets where our operations are conducted. Our
business could be adversely affected if we are unable to recruit or
retain key personnel in one or more of the markets in which we conduct
our operations.
Available Information
We file annual, quarterly and current reports, proxy statements and
other information with the Securities and Exchange Commission (the "SEC"). These
filings are available to the public over the Internet at the SEC's web site at
http://www.sec.gov. You may also read and copy any document we file at the SEC's
public reference room located at 450 Fifth Street, NW, Washington, DC 20549.
Please call the SEC at 1-800-SEC-0330 for further information on the public
reference room.
12
Our principal Internet address is www.tollbrothers.com. We make
available free of charge on www.tollbrothers.com our annual, quarterly and
current reports, and amendments to those reports, as soon as reasonably
practicable after we electronically file such material with, or furnish it to,
the SEC.
In addition, you may request a copy of these filings (excluding
exhibits) at no cost by writing or telephoning us at the following address or
telephone number:
Toll Brothers, Inc.
3103 Philmont Ave.
Huntington Valley, PA 19006
Attention: Director of Investor Relations
Telephone: (215) 938-8000
ITEM 2. PROPERTIES
Headquarters
Our corporate offices, which we own, contain approximately 70,000 square feet,
and are located at 3103 Philmont Avenue, Huntingdon Valley, Montgomery County,
Pennsylvania.
Manufacturing/Distribution Facilities
We own a facility of approximately 200,000 square feet located in
Morrisville, Pennsylvania. We also own a facility of approximately
100,000 square feet located in Emporia, Virginia, which we acquired in 1999. In
both facilities we manufacture open wall panels, roof and floor trusses, and
certain interior and exterior millwork to supply a portion of our construction
needs. These operations also permit us to purchase wholesale lumber, plywood,
windows, doors, certain other interior and exterior millwork and other building
materials to supply to our communities. We believe that increased efficiency,
cost savings and productivity result from the operation of these plants and from
the wholesale purchase of material. The Pennsylvania plant generally does not
sell or supply to any purchaser other than to us, while the Virginia plant sells
wall panels and roof and floor trusses to us as well as to a small number of
outside purchasers.
Regional and Other Facilities
We lease office and warehouse space in various locations, none of which is
material to our business.
ITEM 3. LEGAL PROCEEDINGS
We are involved in various claims and litigation arising principally in the
ordinary course of business. We believe that the disposition of these matters
will not have a material adverse effect on our business or our financial
condition. There are no proceedings required to be disclosed pursuant to Item
103 of Regulation S-K.
13
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, 2002.
Item 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The following table includes information with respect to all of our executive
officers at October 31, 2002. All executive officers serve at the pleasure of
our Board of Directors.
Name Age Positions
Robert I. Toll 61 Chairman of the Board,
Chief Executive Officer
and Director
Zvi Barzilay 56 President, Chief Operating
Officer and Director
Joel H. Rassman 57 Executive Vice President,
Treasurer, Chief Financial
Officer and Director
Robert I. Toll, with his brother Bruce E. Toll, the Vice Chairman of the Board
and a Director of Toll Brothers, Inc., co-founded our predecessors' operations
in 1967. Robert I. Toll has been our Chief Executive Officer and Chairman of the
Board since our inception.
Zvi Barzilay joined us as a project manager in 1980 and has been an officer
since 1983. Mr. Barzilay was elected a Director of Toll Brothers, Inc. in 1994.
He has held the position of Chief Operating Officer since May 1998 and the
position of President since November 1998.
Joel H. Rassman joined us as Senior Vice President, Chief Financial Officer and
Treasurer in 1984. Mr. Rassman has been a Director of Toll Brothers, Inc. since
1996. He has held the position of Executive Vice President since May 2002.
14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Our common stock is principally traded on the New York Stock Exchange (Symbol:
TOL). It is also listed on the Pacific Exchange.
The following table sets forth the price range of our common stock on the New
York Stock Exchange for each fiscal quarter during the two years ended October
31, 2002. All amounts reflect a 2-for-1 stock split in the form of a stock
dividend that occurred in March 2002.
Three Months Ended
------------------
October 31 July 31 April 30 January 31
---------- ------- -------- ----------
2002
High $ 27.20 $ 31.80 $ 30.20 $ 23.20
Low $ 17.76 $ 20.81 $ 20.93 $ 15.42
2001
High $ 20.12 $ 22.07 $ 19.85 $ 22.63
Low $ 12.93 $ 15.20 $ 16.20 $ 15.60
We have not paid any cash dividends on our common stock to date and expect that,
for the foreseeable future, we will not do so; rather, we will follow a policy
of retaining earnings in order to finance the continued growth of our business.
The payment of dividends is within the discretion of our Board of Directors and
any decision to pay dividends in the future will depend upon an evaluation of a
number of factors, including our earnings, capital requirements, our operating
and financial condition, and any contractual limitation then in effect. In this
regard, our senior subordinated notes contain restrictions on the amount of
dividends we may pay on our common stock. In addition, our bank revolving credit
agreement and bank term loan require the maintenance of minimum consolidated
stockholders' equity, which restricts the amount of dividends we may pay. At
October 31, 2002, under the most restrictive of these provisions, we could have
paid up to approximately $350 million of cash dividends.
At October 31, 2002, there were approximately 744 record holders of our common
stock.
15
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial and housing data
at and for each of the five fiscal years ended October 31, 2002. It should be
read in conjunction with the Consolidated Financial Statements and Notes
thereto, included in this report beginning at page F-1, and Management's
Discussion and Analysis of Financial Condition and Results of Operations,
included in Item 7 of this report.
Summary Consolidated Income Statement Data (amounts in thousands, except per
share data)(share and per share amounts have been adjusted for a two-for-one
stock split in March 2002):
Year ended October 31
2002 2001 2000 1999 1998
---------------- ---------------- ---------------- ------------------ ----------------
Revenues $2,328,972 $2,229,605 $1,814,362 $1,464,115 $1,210,816
================ ================ ================ ================== ================
Income before
income taxes and
extraordinary item $347,318 $337,889 $230,966 $162,750 $134,293
================ ================ ================ ================== ================
Income before
extraordinary item $219,887 $213,673 $145,943 $103,027 $85,819
Extraordinary loss (1,461) (1,115)
---------------- ---------------- ---------------- ------------------ ----------------
Net income $219,887 $213,673 $145,943 $101,566 $84,704
================ ================ ================ ================== ================
Earnings per share:
Basic:
Income before
extraordinary item $3.12 $2.98 $2.01 $1.40 $1.18
Extraordinary loss (0.02) (0.02)
---------------- ---------------- ---------------- ------------------ ----------------
Net income $3.12 $2.98 $2.01 $1.38 $1.16
---------------- ---------------- ---------------- ------------------ ----------------
Weighted average
number of shares
outstanding 70,472 71,670 72,537 73,378 72,965
Diluted:
Income before
extraordinary item $2.91 $2.76 $1.95 $1.38 $1.12
Extraordinary loss (0.02) (0.01)
---------------- ------------------ ---------------- ---------------- ----------------
Net income $2.91 $2.76 $1.95 $1.36 $1.11
---------------- ---------------- ---------------- ------------------ ----------------
Weighted average
number of shares
outstanding 75,480 77,367 74,825 74,872 76,721
Summary Consolidated Balance Sheet Data(amounts in thousands):
As of October 31: 2002 2001 2000 1999 1998
---------------- ---------------- ---------------- ------------------ ----------------
Inventory $2,551,061 $2,183,541 $1,712,383 $1,443,282 $1,111,223
================ ================ ================ ================== ================
Total assets $2,895,365 $2,532,200 $2,030,254 $1,668,062 $1,254,468
================ ================ ================ ================== ================
Debt
Loans payable $253,194 $362,712 $326,537 $213,317 $182,292
Mortgage company
warehouse loan 48,996 24,754
Subordinated notes 819,663 669,581 469,499 469,418 269,296
---------------- ---------------- ---------------- ------------------ ----------------
Total debt $1,121,853 $1,057,047 $796,036 $682,735 $451,588
================ ================ ================ ================== ================
Stockholders' equity $1,129,509 $912,583 $745,145 $616,334 $525,756
================ ================ ================ ================== ================
16
Housing Data
Fiscal year: 2002 2001 2000 1999 1998
---------------- ---------------- ---------------- ------------------ ----------------
Number of homes
closed 4,430 4,358 3,945 3,555 3,099
Sales value of
homes closed
(in thousands) $2,279,261 $2,180,469 $1,762,930 $1,438,171 $1,206,290
Number of homes
contracted(1) 5,113 4,366 4,418 3,845 3,387
Sales value of
homes contracted
(in thousands)(1) $2,748,171 $2,173,938 $2,149,366 $1,640,990 $1,383,093
As of October 31
Number of homes
in backlog(1) 3,366 2,727 2,779 2,381 1,892
Sales value of
homes in backlog(1) $1,866,294 $1,411,374 $1,434,946 $1,067,685 $814,714
(1) New contracts for fiscal 2002 and 2001 included $13.7 million (43 homes) and
$15.4 million (52 homes), respectively, from an unconsolidated 50% owned joint
venture. Backlog as of October 31, 2002 and 2001 included $7.5 million (24
homes) and $7.8 million (25 homes), respectively, from this joint venture.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CRITICAL ACCOUNTING POLICIES
The preparation of our consolidated financial statements require us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and the related disclosure of contingent assets and
liabilities. On an ongoing basis, we evaluate our estimates, including those
related to the recognition of income and expenses, impairment of assets,
estimates of future improvement costs, capitalization of costs, provision for
litigation, insurance and warranty claims and income taxes. We base our
estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis of making judgments about the carrying value of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates and assumptions or conditions.
We believe the following critical accounting policies reflect the more
significant judgments and estimates used in the preparation of our consolidated
financial statements.
Basis of Presentation
Our financial statements include the accounts of Toll Brothers, Inc. 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 entiites are accounted for on the cost method.
Inventory
Inventory is stated at the lower of cost or fair value in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of". In addition to direct 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.
17
It takes approximately four to five years to fully develop, sell and deliver all
the homes in one of our typical communities. Longer or shorter time periods are
possible depending on the number of home sites in a community. Our master
planned communities, consisting of several smaller communities, may take up to
10 years to complete. Since our inventory is considered a long-lived asset under
accounting principles generally accepted in the United States, we are required
to review the carrying value of each of our communities and writedown the value
of those communities for which we believe the values are not recoverable. When
the profitability of a current community deteriorates or the sales pace declines
significantly or some other factor indicates a possible impairment in the
recoverability of the asset, we evaluate the property in accordance with the
guidelines of SFAS No. 121. If this evaluation indicates an impairment loss
should be recognized, we charge cost of sales for the estimated impairment loss
in the period determined.
In addition, we review all the land held for future communities or future
sections of current communities, whether owned or under contract, to determine
whether or not we expect to proceed with the development of the land. Based upon
this review, we decide: (a) as to land that is under a purchase contract but not
owned, whether the contract will be terminated or renegotiated; and (b) as to
land we own, whether the land can be developed as contemplated or in an
alternative manner, or should be sold. We then further determine which costs
that have been capitalized to the property are recoverable and which costs
should be written off.
Income Recognition
Revenue and cost of sales are recorded at the time each home, or lot, is closed
and title and possession are transferred to the buyer.
Land, land development and related costs (both incurred and estimated to be
incurred in the future) are amortized to the cost of homes closed based upon the
total number of homes to be constructed in each community. Any changes to the
estimated costs subsequent to the commencement of delivery of homes are
allocated to the remaining undelivered homes in the community. Home construction
and related costs are charged to the cost of homes closed under the specific
identification method.
The estimated land, common area development and related costs of master planned
communities (including the cost of golf courses, net of their estimated residual
value) are allocated to individual communities within a master planned community
on a relative sales value basis. Any change in the estimated costs are allocated
to the remaining lots in each of the communities of the master planned
community.
Joint Venture Accounting
We have investments in three joint ventures with independent third parties to
develop and sell land that was owned or currently is owned by our venture
partners. We recognize our share of earnings from the sale of lots to other
builders. We do not recognize earnings from lots we purchase, but instead reduce
our cost basis in these lots by our share of the earnings on those lot sales. We
have agreed to purchase 180 lots from one of the ventures and have the right to
purchase up to 385 lots from the second. The third venture has sold all the land
that it owned and is currently in the process of completing the final land
improvements which could take 12 months or more to finish. The joint ventures
also participate in the profits earned on home sales from the lots sold to other
builders above certain agreed upon levels. At October 31, 2002, we had
approximately $12.7 million invested in these joint ventures and were committed
to contribute additional capital of approximately $30 million if the joint
ventures require it.
18
In addition, we effectively own one-third of Toll Brothers Realty Trust Group
(the "Trust"), which was formed with a number of our senior executives and
directors and with the Pennsylvania State Employees Retirement System to take
advantage of commercial real estate opportunities that may present themselves
from time to time. We provide development, finance and management services to
the Trust and receive fees under various agreements. At October 31, 2002, our
investment in the Trust was $7.5 million. We also entered into a subscription
agreement whereby each group of investors agreed to invest an additional $9.3
million if required by the Trust. The original subscription agreement, which was
to expire in June 2002, was extended to August 2003. The Trust currently owns
and operates several office buildings and an apartment complex, a portion of
which is rented and a portion of which remains under construction.
We also own 50% of a joint venture with an unrelated third party that is
currently selling and building an active-adult, age-qualified community. At
October 31, 2002, our investment was $1.2 million in this joint venture. We do
not have any further commitment to contribute additional capital to this joint
venture.
We do not currently guarantee any indebtedness of the joint ventures or the
Trust. Our total commitment to these entities is not material to our financial
condition. These investments are accounted for on the equity method.
RESULTS OF OPERATIONS
The following table provides a comparison of certain income statement items
related to our operations (amounts in millions):
Year ended October 31, 2002 2001 2000
--------------- ------- -------------- ---------- -------------- --------
$ % $ % $ %
--------------- ------- -------------- ---------- -------------- --------
Home sales
Revenues 2,279.3 2,180.5 1,762.9
Costs 1,655.3 72.6 1,602.3 73.5 1,337.1 75.8
--------------- -------------- --------------
Land sales
Revenues 36.2 27.5 38.7
Costs 25.7 70.9 21.5 78.0 29.8 77.0
--------------- -------------- --------------
Equity earnings in
unconsolidated joint
ventures 1.9 6.8 3.3
Interest and other 11.7 14.9 9.5
--------------- -------------- --------------
Total revenues 2,329.0 2,229.6 1,814.4
--------------- -------------- --------------
Selling, general and
administrative expenses 236.1 10.1 209.7 9.4 170.4 9.4
Interest expense 64.5 2.8 58.2 2.6 46.2 2.5
--------------- --------------
--------------
Total costs and expenses 1,981.7 85.1 1,891.7 84.8 1,583.4 87.3
--------------- -------------- --------------
Operating income 347.3 14.9 337.9 15.2 231.0 12.7
=============== ============== ==============
Note: Percentages for selling, general and administrative expenses, interest
expense, total costs and expenses, and operating income are based on total
revenues. Amounts may not add due to rounding.
19
FISCAL 2002 COMPARED TO FISCAL 2001
Home Sales
Home sales revenues for fiscal 2002 were higher than those for fiscal 2001 by
approximately $99 million, or 5%. The revenue increase was attributable to a 2%
increase in the number of homes delivered and a 3% increase in the average price
of the homes delivered. The increase in the average price of the homes delivered
in fiscal 2002 was principally the result of increased base selling prices and
an increase in the average value of options and lot premiums that our buyers
paid. In fiscal 2002, our buyers paid approximately 21% above the base selling
price for options and lot premiums.
The slight increase in the number of homes delivered in fiscal 2002 was due
primarily to the small increase in the number of delivering communities and a
slight decline in the number of homes delivered per community.
We have encountered and continue to encounter delays in the opening of new
communities and new sections of existing communities due to increased
governmental regulation in many of the markets in which we operate. These delays
resulted in a decline in the number of selling communities we had in the later
part of fiscal 2000, which did not reverse until the middle of fiscal 2001. In
addition, it often takes more than nine months from the signing of an agreement
of sale to the delivery of a home to a buyer. Because of the delays in the
opening of new communities in fiscal 2000 and 2001 and the long period of time
before a new community can start delivering homes once it opens for sale, the
increase in the average number of communities delivering homes in fiscal 2002
compared to fiscal 2001 was slight.
The number of homes delivered per community in fiscal 2002 declined slightly
compared to fiscal 2001. This decline was primarily due to the decline in
backlog at October 31, 2001 as compared to October 31, 2000 and a softness in
new contract signings that we encountered in the first portion of the first
quarter of fiscal 2002. The decline in backlog at October 31, 2001 and the
softness in the first part of the first quarter of fiscal 2002 were due
primarily to the slowing economy exacerbated by the tragic events of September
11, 2001.
The value of new sales contracts signed was $2.75 billion (5,113 homes) in
fiscal 2002, a 26% increase over the $2.17 billion (4,366 homes) signed in
fiscal 2001. This increase is attributable to a 17% increase in the number of
homes sold and an 8% increase in the average selling price of the homes (due
primarily to the location and size of homes sold and increases in base selling
prices). The increase in the number of homes sold is attributable to an increase
in the number of communities from which we were selling and the continued demand
for our homes. At October 31, 2002, we were selling from 170 communities
compared to 155 communities at October 31, 2001.
We believe that the demand for our homes is attributable to an increase in the
number of affluent households, the maturation of the baby boom generation, a
constricted supply of available new home sites, attractive mortgage rates and
the belief on the part of potential customers that the purchase of a home is a
stable investment in the current period of economic uncertainty. At October 31,
2002, we had over 40,800 home sites under our control nationwide in markets we
consider to be affluent.
At October 31, 2002, our backlog of homes under contract was $1.87 billion
(3,366 homes), 32% higher than the $1.41 billion (2,727 homes) backlog at
October 31, 2001. The increase in backlog is primarily attributable to the
increase in the number of new contracts signed and the increased prices of the
homes sold during fiscal 2002 as previously discussed. Based on the size of our
current backlog, the continued demand for our homes, the increased number of
selling communities from which we are operating and the additional communities
we expect to open in the early part of fiscal 2003, we believe that we will
deliver approximately 5,000 homes in fiscal 2003 and the average delivered price
of those homes will be between $530,000 and $540,000.
20
Home costs as a percentage of home sales revenues decreased to 72.6% in fiscal
2002 compared to 73.5% in fiscal 2001. The decrease was largely the result of
selling prices increasing at a greater rate than costs, lower land and
improvement costs, improved operating efficiencies and lower inventory
writedowns, offset in part by the cost of increased sales incentives provided to
customers in the later part of the fourth quarter of fiscal 2001 and the
beginning of the first quarter of fiscal 2002. These incentives were used to
help increase new contract signings which were adversely affected by the
economic slowdown in the later part of fiscal 2001 and the effect the tragic
events of September 11, 2001 had on new orders. We incurred $6.1 million in
write-offs in fiscal 2002 as compared to $13.0 million in fiscal 2001. In fiscal
2003, we expect that home costs will increase slightly as a percentage of home
sales revenues due primarily to geographic and product mix changes.
Land Sales
We are developing several master planned communities in which we sell land to
other builders. The amount of land sales will vary from year to year depending
upon the scheduled timing of the delivery of the land parcels. Land sales
amounted to $36.2 million for fiscal 2002, as compared to $27.5 million for
fiscal 2001. In fiscal 2003, land sales are expected to amount to approximately
$20 million.
Equity Earnings in Unconsolidated Joint Ventures
We are a party to several joint ventures and in Toll Brothers Realty Trust Group
(the "Trust"). We recognize income for our proportionate share of the earnings
from these entities. (See "Critical Accounting Policies - Joint Venture
Accounting" for a narrative of our investment in and commitments to these
entities.) In fiscal 2002 and 2001, only two of the joint ventures were
operating. We recognized $1.9 million of earnings from these entities in fiscal
2002 compared to $6.8 million in fiscal 2001. The decline in earnings was caused
by the reduction in the number of lots delivered by one of the joint ventures in
fiscal 2002 compared to fiscal 2001. The reduction in fiscal 2002 was the result
of fewer lots being available for sale by the joint venture due to the delivery
of the last lots owned by it. Earnings from joint ventures will vary
significantly from year to year depending on the level of activity of the
entities. For fiscal 2003, we expect to realize approximately $4 million of
income from our investments in the joint ventures and the Trust.
Interest and Other Income
Interest and other income decreased $3.2 million in fiscal 2002 compared to
fiscal 2001. The decrease was principally due to a decrease in interest income,
a decrease in earnings from our ancillary businesses and a non-recurring gain in
the fiscal 2001 from the sale of an office building constructed by us, offset,
in part, by increased income from retained customer deposits.
Selling, General and Administrative Expenses ("SG&A")
SG&A spending increased by $26.4 million or 12.6% in fiscal 2002 as compared to
fiscal 2001 and increased as a percentage of revenues from 9.4% in fiscal 2001
to 10.1% in fiscal 2002. The increased spending was principally due to the costs
incurred by the greater number of selling communities that we had during fiscal
2002 as compared to fiscal 2001, costs associated with the continued expansion
of the number of new communities and increased insurance costs, offset, in part,
by the discontinuance of amortization of goodwill pursuant to our adoption of
Statement of Financial Accounting Standards Board No. 142 in November 2001. We
expect to open approximately 70 communities in fiscal 2003 as compared to 57 in
fiscal 2002. In fiscal 2003, we expect SG&A will increase slightly as a
percentage of total revenues compared to fiscal 2002.
21
FISCAL 2001 COMPARED TO FISCAL 2000
Home Sales
Home sales revenues for fiscal 2001 were higher than those for fiscal 2000 by
approximately $418 million, or 24%. The revenue increase was primarily
attributable to a 12% increase in the average price of the homes delivered and a
10% increase in the number of homes delivered. The increase in the average price
of the homes delivered was the result of increases in selling prices, a shift in
the location of homes delivered to more expensive areas and an increase in the
dollar amount of options that our home buyers selected. During fiscal 2001, our
homebuyers paid approximately 21% above the base selling price of a home for
options and lot premiums, compared to 19% in fiscal 2000. The increase in the
number of homes delivered was primarily due to the larger backlog of homes to be
delivered at the beginning of fiscal 2001 as compared to fiscal 2000.
The value of new sales contracts signed was $2.17 billion (4,366 homes) and
$2.15 billion (4,418 homes) for fiscal 2001 and fiscal 2000, respectively. The
increase in the value of new contracts signed in fiscal 2001 was primarily
attributable to an increase in the average selling price of the homes (due
primarily to an increase in base selling prices, a shift in the location of
homes sold to more expensive areas and an increase in the dollar amount of
options selected by our home buyers), offset, in part, by a decrease in the
average number of communities in which we were offering homes for sale and the
resulting decrease in the number of homes for which we signed sales contracts.
The decrease in the number of communities was the result of increased regulatory
requirements that delayed the opening of some new communities and new sections
of some existing communities.
At October 31, 2001, the backlog of homes under contract was $1.41 billion
(2,727 homes), as compared to the $1.43 billion (2,779 homes) backlog at October
31, 2000.
The terrorist attacks of September 11, 2001 impacted us most severely in the
first few weeks immediately after the events as consumer confidence dropped, the
stock market declined and our business slowed. In the six-week period following
October 31, 2001, the total number of deposits was approximately 12% higher than
the same period of fiscal 2000. On a per-community basis, deposits were down
approximately 2% over the same period. Compared to the previous five-year
average for the six-week period, deposits were approximately 6% higher on a
per-community basis.
Home costs as a percentage of home sales revenues decreased in fiscal 2001 as
compared to fiscal 2000. The decrease was largely the result of selling prices
increasing at a greater rate than costs, lower land and improvement costs, and
improved operating efficiencies, offset, in part, by higher inventory
writedowns. We incurred $13.0 million in write-offs in fiscal 2001, as compared
to $7.4 million in fiscal 2000.
Land Sales
In fiscal 2001, we operated a land development and sales operation in our South
Riding master planned community located in Loudoun County, Virginia. Land sales
amounted to $27.5 million for fiscal 2001 compared to $38.7 million in fiscal
2000. The decrease in land sales in fiscal 2001 as compared to fiscal 2000 was
due to fewer lots being available for sale in South Riding in fiscal 2001 than
in 2000, offset, in part, by increased sales of lots from several of our other
master planned communities.
22
Equity Earnings in Unconsolidated Joint Ventures
In fiscal 1998, we entered into a joint venture to develop and sell land owned
by our venture partner. Under the terms of the agreement, we have the right to
purchase up to a specified number of lots with the majority of the lots to be
sold to other builders. In fiscal 2000, the joint venture sold its first group
of home sites to other builders and to us. We recognize our share of earnings
from the sale of lots to other builders. We do not recognize earnings from lots
we purchase; instead, we reduce our cost basis in these lots by our share of the
earnings of the joint venture from the sale of these lots.
Interest and Other Income
Interest and other income increased approximately $5.4 million in fiscal 2001 as
compared to fiscal 2000. The increase was principally due to an increase in
interest income, the gain from the sale of an office building constructed by us
in fiscal 2001, and an increase in earnings from our ancillary businesses,
offset in part by reduced management fee income and gains from the sale of
miscellaneous assets recognized in fiscal 2000.
Selling, General and Administrative Expenses ("SG&A")
SG&A spending increased by $39.4 million, or 23%, in fiscal 2001 as compared to
fiscal 2000. This increased spending was primarily due to the increase in home
revenues in fiscal 2001 over fiscal 2000, and costs related to the development
of our master planned communities. SG&A as a percentage of total revenues was
the same in fiscal 2001 and fiscal 2000.
INTEREST EXPENSE
We determine interest expense on a specific lot-by-lot basis for our
homebuilding operations and on a parcel-by-parcel basis for land sales.
As a percentage of total revenues, interest expense varies depending on many
factors including the period of time that we owned the land, the length of time
that the homes delivered during the period were under construction, and the
interest rates and the amount of debt carried by us in proportion to the amount
of our inventory during those periods. Interest expense as a percentage of
revenues was slightly higher in fiscal 2002 as compared to fiscal 2001 and was
slightly higher in fiscal 2001 than fiscal 2000.
INCOME BEFORE INCOME TAXES
Income before income taxes increased 2.8% in fiscal 2002 compared to fiscal 2001
and increased 46.3% in fiscal 2001 compared to fiscal 2000.
INCOME TAXES
Income taxes for fiscal 2002, 2001 and 2000 were provided at effective rates of
36.7%, 36.8% and 36.8%, respectively.
CAPITAL RESOURCES AND LIQUIDITY
Funding for our operations has been provided principally by cash flow from
operations, unsecured bank borrowings and the public debt markets.
23
Cash flow from operations, before inventory additions, has improved as operating
results have improved. One of the main factors that determines cash flow from
operations, before inventory additions, is the level of revenues from the
delivery of homes and land sales. We anticipate that cash flow from operations,
before inventory additions, will continue to be strong. We have used our cash
flow from operations, before inventory additions, bank borrowings and public
debt to: acquire additional land for new communities; fund additional
expenditures for land development; fund construction costs needed to meet the
requirements of our increased backlog and the increasing number of communities
in which we are offering homes for sale; repurchase our stock; and repay debt.
We expect that our inventory will continue to increase and we are currently
negotiating and searching for additional opportunities to obtain control of land
for future communities. At October 31, 2002, we had commitments to acquire land
of approximately $860 million, of which approximately $65 million had been paid
or deposited.
At October 31, 2002, we had a $615 million unsecured revolving credit facility
with 19 banks, of which $90 million extends to February 2003 and $525 million
extends to March 2006. At October 31, 2002, we had no borrowings against the
facility and approximately $77.5 million of letters of credit outstanding under
the facility.
In November 2002, we issued $300 million of 6.875% Senior Notes. We intend to
use the proceeds to repay all of the $100 million outstanding of our 8 3/4%
Senior Subordinated Notes due 2006, repay bank debt and for general corporate
purposes. We called for redemption all of the $100 million outstanding 8 3/4%
Senior Subordinated Notes effective December 27, 2002 at a price of 102.917% of
the principal amount. We will recognize a pretax charge of approximately $4
million in the first quarter of fiscal 2003 representing the premium paid on
redemption and the write-off of unamortized bond issuance costs.
We believe that we will be able to continue to fund our activities through a
combination of existing cash resources, cash flow from operations and existing
sources of credit, including the public debt markets.
INFLATION
The long-term impact of inflation on us is manifested in increased costs for
land, land development, construction and overhead, as well as in increased sales
prices. We generally contract 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 our
profits. Since the sales prices of homes are fixed at the time a buyer enters
into a contract to acquire a home and we generally contract to sell a home
before commencement of construction, any inflation of costs in excess of those
anticipated may result in lower gross margins. We generally attempt to minimize
that effect by entering into fixed-price contracts with our subcontractors and
material suppliers for specified periods of time, which generally do not exceed
one year.
In general, housing demand 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 our
interest costs. If we are 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 home purchases, our 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 new homes.
24
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk primarily due to fluctuations in interest rates.
We utilize both fixed rate and variable rate debt. For fixed rate debt, changes
in interest rates generally affect the fair market value of the debt instrument,
but not our earnings or cash flow. Conversely, for variable rate debt, changes
in interest rates generally do not impact the fair market value of the debt
instrument. We do not have the obligation to prepay fixed rate debt prior to
maturity, and, as a result, interest rate risk and changes in fair market value
should not have a significant impact on such debt until we are required to
refinance such debt.
The table below sets forth, as of October 31, 2002, our long-term debt
obligations, principal cash flows by scheduled maturity, weighted-average
interest rates and estimated fair value (amounts in thousands):
Fixed Rate Debt(3) Variable Rate Debt(1)(2)
------------------ ------------------------
Fiscal Weighted Weighted
Year of Average Average
Expected Interest Interest
Maturity Amount Rate Amount Rate
- ------------------- -------- --------- ------- ----------
2003 $ 20,511 6.91% $53,796 3.42%
2004 2,659 6.61 4,800 4.01
2005 208,359 7.74 2,870 3.97
2006 4,885 8.51 150 1.99
2007 200,000 8.25 150 1.92
Thereafter 620,000 8.18 4,010 1.92
--------- --------
Total $1,056,414 8.05% $65,776 3.39%
========== =======
Fair value at
October 31, 2002 $1,067,210 $65,776
========== =======
(1) We have a $615 million revolving credit facility with 19 banks of which
$525 million extends through March 2006 and $90 million extends through
February 2003. Interest is payable on borrowings under this facility at
0.90%(this rate will vary based upon our corporate debt rating and
leverage ratios) above the Eurodollar rate or at other specified variable
rates as selected by us from time to time. We had no borrowings against
this facility at October 31, 2002.
(2) One of our subsidiaries has a $50 million line of credit with a bank to
fund mortgage originations. The line is due within 90 days of demand by
the bank and bears interest at the bank's overnight rate plus an agreed
upon margin. At October 31, 2002 the subsidiary had $49.0 million
outstanding under the line at an average interest rate of 3.36%. Borrowing
under this line is included in the 2003 fiscal year maturities.
(3) In November 2002, we issued $300 million of 6.875% Senior Notes due 2012.
We will use a portion of the proceeds from the notes to redeem all of the
$100 million of our outstanding 8 3/4% Senior Subordinated Notes due 2006.
We expect to complete this redemption on December 27, 2002. The 8 3/4%
notes are included in the fiscal 2007 maturities.
Based upon the amount of variable rate debt outstanding at October 31, 2002 and
holding the variable rate debt balance constant, each one percentage point
increase in interest rates would increase the interest incurred by us by
approximately $660,000 per year.
25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the financial statements, listed in Item 15(a)(1) and (2),
which appear at pages 38 through 65 of this report and which are incorporated
herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following information is incorporated herein by reference:
(a) the information in Part I, Item 4A of this report;
(b) the information in the Company's Proxy Statement for the 2003 Annual
Meeting of Stockholders (the "2003 Proxy Statement") beginning
immediately following the caption "Proposal One - Election of
Directors for Terms Ending 2006;" and
(c) the information in the 2003 Proxy Statement beginning immediately
following the caption "Section 16(a) Beneficial Ownership Reporting
Compliance" to, but not including, the caption "Certain Transactions."
ITEM 11. EXECUTIVE COMPENSATION
The information in the 2003 Proxy Statement in the section captioned "Proposal
One - Election of Directors for Terms Ending 2006," beginning immediately
following the sub-caption "Compensation of Directors" to, but not including, the
caption "Report of the Audit Committee" is incorporated herein by reference.
26
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information in the 2003 Proxy Statement subcaptioned "Security Ownership of
Principal Stockholders and Management" to, but not including, the caption
"Proposal One - Election of Directors for Terms Ending 2006" is incorporated
herein by reference.
The following table provides information as of October 31, 2002 with respect to
compensation plans (including individual compensation arrangements) under which
our equity securities are authorized for issuance.
Equity Compensation Plan Information
Number of Weighted- Number of securities
securities average remaining available
to be exercise price for future issuance
issued upon of outstanding under equity
exercise of options, compensation plans
outstanding warrants (excluding securities
options, warrants and rights reflected in
and rights column(a))(1)(2)
Plan Category (in thousands) (in thousands)
------------- ------------------------ --------------------- ------------------------------------
(a) (b) (c)
Equity compensation
plans approved by
security holders 15,321 13.24 3,498
Equity compensation
plans not approved
by security holders - -
------------------------ ------------------------------------
Total 15,321 13.24 3,498
------------------------ -----------------------------------
(1) In December 2002, the Compensation Committee of our Board of Directors,
the committee that administers the stock option plans, voted to eliminate
any options currently available for grant and future increases in options
available for grant under the our Stock Option and Incentive Stock Plan
(the "1995 Plan"). Options available for grant at October 31, 2002 under
the 1995 Plan were 2,269,000. The above amount does not include options
available for grant under the 1995 Plan.
(2) Our 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). This plan restricts
the number of shares available for grant in a year to a maximum of
5,000,000 shares.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following information is incorporated herein by reference:
(a) the information in the 2003 Proxy Statement in the section
captioned "Executive Compensation" beginning immediately following
the sub-caption "Compensation Committee Interlocks and Insider
Participation" to, but not including, the caption "Report of the
Compensation Committee on Executive Compensation"; and
(b) the information in the 2003 Proxy Statement beginning immediately
following the caption "Certain Transactions" to, but not including,
the caption "Stockholder Proposals."
27
ITEM 14. CONTROLS AND PROCEDURES
Our chief executive officer and chief financial officer evaluated the
effectiveness of our disclosure controls and procedures (as defined in Rule
13a-14(c) under the Securities Exchange Act of 1934, as amended) within 90 days
of the filing date of this report (the "Evaluation Date") and, based on that
evaluation, concluded that, as of the Evaluation Date, we had sufficient
controls and procedures for recording, processing, summarizing and reporting
information that is required to be disclosed in our reports under the Securities
Exchange Act of 1934, as amended, within the time periods specified in the SEC's
rules and forms.
Since the Evaluation Date, there have not been any significant changes to our
internal controls, including any corrective actions with regard to significant
deficiencies and material weaknesses.
PART IV
ITEM 15. 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 38
Consolidated Statements of Income for the
Years Ended October 31, 2002, 2001 and 2000 39
Consolidated Balance Sheets as of
October 31, 2002 and 2001 40
Consolidated Statements of Cash Flows for the
Years Ended October 31, 2002, 2001 and 2000 41
Notes to Consolidated Financial Statements 42-63
Summary Consolidated Quarterly Financial Data
(unaudited) 64
2. Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts
for the Years Ended October 31,
2002, 2001 and 2000 65
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.
28
3. Exhibits
The following exhibits are included with this report or incorporated
herein by reference:
Exhibit
Number Description
3.1 Restated Certificate of Incorporation dated July 1, 1986 is
hereby incorporated by reference to Exhibit 3.1 of the
Registrant's Form 10-Q for the quarter ended January 31, 2002.
3.2 Amendment to the Restated Certificate of Incorporation dated
March 7, 1989, is hereby incorporated by reference to Exhibit 3.2
of Registrant's Form 10-Q for the quarter ended January 31, 2002.
3.3 Amendment to the Restated Certificate of Incorporation dated
March 11, 1993, is hereby incorporated by reference to Exhibit
3.3 of Registrant's Form 10-Q for the quarter ended January 31,
2002.
3.4 Amendment to the Restated Certificate of Incorporation dated June
12, 1997, is hereby incorporated by reference to Exhibit 3.4 of
Registrant's Form 10-Q for the quarter ended January 31, 2002.
3.5 Amendment to the Restated Certificate of Incorporation dated
January 8, 1998, is hereby incorporated by reference to Exhibit
3.5 of Registrant's Form 10-Q for the quarter ended January 31,
2002.
3.6 Amendment to the Restated Certificate of Incorporation dated
March 7, 2002, is hereby incorporated by reference to Exhibit 3.6
of Registrant's Form 10-Q for the quarter ended January 31, 2002.
3.7 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.
3.8 Amendment to the by-laws dated July 11, 2000 is hereby
incorporated by reference to Exhibit 3.1 of the registrant's Form
10-Q for the quarter ended July 31, 2000.
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, among 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.
29
Exhibit
Number Description
4.4 Indenture dated as of January 26, 1999, among Toll Corp., as
issuer, the Registrant, as guarantor, and 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 filed on July 13, 1999 with the Securities
and Exchange Commission.
4.5 Indenture dated as of January 25, 2001, among Toll Corp., as
issuer, the Registrant, as guarantor, and Bank One Trust Company,
as Trustee, including form of guarantee, is hereby incorporated
by reference to Exhibit 4.1 of the Registrant's Form 10-Q filed
with the Securities and Exchange Commission for the quarter ended
January 31, 2001.
4.6 Indenture dated as of November 22, 2002 between Toll Brothers
Finance Corp., as issuer, the Registrant, as guarantor, and Bank
One Trust Company, as Trustee, including form of guarantee, is
hereby incorporated by reference to Exhibit 4.1 of the
Registrant's Form 8-K filed with the Securities and Exchange
Commission on November 27, 2002.
4.7 Authorizing Resolutions, dated as of November 6, 1996, relating
to the $100,000,000 principal amount of 8 3/4% Senior
Subordinated Notes of Toll Corp. due 2006, guaranteed on a Senior
Subordinated Basis by Toll Brothers, Inc., is hereby incorporated
by reference to Exhibit 4.2 of the Registrant's Form 8-K filed on
November 15, 1996 with the Securities and Exchange Commission.
4.8 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.
4.9 Authorizing Resolutions, dated as of January 22, 1999, relating
to the $170,000,000 principal amount of 8 1/8% Senior
Subordinated Notes of Toll Corp. due 2009, guaranteed on a Senior
Subordinated basis by Toll Brothers, Inc., is hereby incorporated
by reference to Exhibit 4.1 of the Registrant's Form 8-K filed on
January 25, 1999 with the Securities and Exchange Commission.
4.10 Authorizing Resolutions, dated as of April 13, 1999, relating to
$100,000,000 principal amount of 8% Senior Subordinated Notes of
Toll Corp. due 2009, guaranteed on a Senior Subordinated basis by
Toll Brothers, Inc. is hereby incorporated by reference to
Exhibit 4.1 of the Registrant's Form 8-K filed on April 14, 1999
with the Securities and Exchange Commission.
4.11 Authorizing Resolutions, dated as of January 23, 2001, relating
to $200,000,000 principal amount of 8 1/4% Senior Subordinated
Notes of Toll Corp. due 2011, guaranteed on a Senior Subordinated
basis by Toll Brothers, Inc. is hereby incorporated by reference
to Exhibit 4.1 of the Registrant's Form 8-K filed on January 24,
2001 with the Securities and Exchange Commission.
30
Exhibit
Number Description
4.12 Authorizing Resolutions, dated as of November 27, 2001, relating
to $150,000,000 principal amount of 8.25% Senior Subordinated
Notes of Toll Corp. due 2011, guaranteed on a Senior Subordinated
basis by Toll Brothers, Inc. is hereby incorporated by reference
to Exhibit 4 of the Registrant's Form 8-K filed on December 6,
2001 with the Securities and Exchange Commission.
4.13 Authorizing Resolutions, dated as of November 15, 2002, relating
to $300,000,000 principal amount of 6.875% Senior Notes of Toll
Brothers Finance Corp. due 2012, guaranteed on a Senior basis by
the Registrant and certain subsidiaries of the Registrant is
hereby incorporated by reference to Exhibit 4.2 of the
Registrant's Form 8-K filed with the Securities and Exchange
Commission on November 27, 2002.
4.14 Rights Agreement dated as of June 12, 1997 by and between the
Registrant and ChaseMellon Shareholder Service, L.L.C., as Rights
Agent, is hereby incorporated by reference to Exhibit 1 to the
Registrant's Registration Statement on Form 8-A dated June 20,
1997.
4.15 Amendment to Rights Agreement dated as of July 31, 1998, by and
between the Registrant and ChaseMellon Shareholder Service,
L.L.C. as Rights Agent incorporated herein by reference to
Exhibit 1 to the Registrant's Registration Statement on Form 8-
A/A dated August 21, 1998.
10.1 Amended and Restated Credit Agreement by and among First
Huntingdon Finance Corp., the Registrant and the lenders which
are parties thereto dated May 18, 2001, is hereby incorporated by
reference to Exhibit 10.3 of the Registrant's Form 10-Q for the
quarter ended April 30, 2001.
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 stockholders on
April 6, 1992, is hereby incorporated by reference to Exhibit
19(a) of the Registrant's Form 10-Q for the quarter ended April
30, 1992.
10.3* Toll Brothers, Inc. Amended and Restated Stock Purchase Plan
(1986) 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. Amended and Restated Stock Purchase Plan
(1986) effective June 14, 2001 is hereby incorporated by
reference to Exhibit 10.1 of the Registrant's Registration
Statement on Form 10-Q for the quarter ended July 31, 2001.
10.5* 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 8-K filed with the
Securities and Exchange Commission on May 25, 1994.
31
Exhibit
Number Description
10.6* 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
Form 10-Q for the quarter ended April 30, 1995.
10.7* Amendment to the Toll Brothers, Inc. Key Executives and Non-
Employee Directors Stock Option Plan (1993) effective June 14,
2001 is hereby incorporated by reference to Exhibit 10.2 of the
Registrant's Form 10-Q for the quarter ended July 31, 2001.
10.8* 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.
10.9* 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 fiscal year ended October 31,
1996.
10.10* Amendment to the Toll Brothers, Inc. Cash Bonus Plan dated
December 10, 1998 is hereby incorporated by reference to Exhibit
10.8 of the registrant's Form 10-K for the fiscal year ended
October 31, 2000.
10.11* Amendment to the Toll Brothers, Inc. Cash Bonus Plan dated
December 14, 2000 is hereby incorporated by reference to Exhibit
10.1 of the Registrant's Form 10-Q for the quarter ended April
30, 2001.
10.12* Toll Brothers, Inc. Stock Option and Incentive Stock Plan (1995)
is hereby incorporated by reference to Exhibit 10.1 of the
Registrant's Form 10-Q for the quarter ended April 30, 1995.
10.13* 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
fiscal year ended October 31, 1996.
10.14* Amendment to the Toll Brothers, Inc. Stock Option and Incentive
Stock Plan (1995) effective March 22, 2001 is hereby incorporated
by reference to Exhibit 10.3 of the Registrant's Form 10-Q for
the quarter ended July 31, 2001.
10.15* Toll Brothers, Inc. Stock Incentive Plan (1998) 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 June 25, 1998, File No. 333-57645.
10.16* Amendment to the Toll Brothers, Inc. Stock Incentive Plan (1998)
effective March 22, 2001 is hereby incorporated by reference to
Exhibit 10.4 of the Registrant's Form 10-Q for the quarter ended
July 31, 2001.
10.17* Toll Brothers, Inc. Executive Officer Cash Bonus Plan is hereby
incorporated by reference to Exhibit 10.2 of the Registrant's
Form 10-Q for the quarter ended April 30, 2001.
32
Exhibit
Number Description
10.18* 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 Registrant's Form 10-K for the fiscal year
ended October 31, 1995.
10.19* 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 Registrant's Form 10-K for the fiscal year
ended October 31, 1995.
10.20* Agreement dated March 5, 1998 between the Registrant and Bruce E.
Toll regarding Mr. Toll's resignation and related matters is
hereby incorporated by reference to Exhibit 10.2 to the
Registrant's Form 10-Q for the quarter ended April 30, 1998.
10.21* 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 Form 10-Q for
the quarter ended April 30, 1998.
10.22* Amendment to the Agreement dated March 5, 1998 between the
Registrant and Bruce E. Toll and to the Consulting and Non-
Competition Agreement dated March 5, 1998 between the Registrant
and Bruce E. Toll is hereby incorporated by reference to Exhibit
10.1 of the Registrant's Form 10-Q for the quarter ended July 31,
2000.
10.23* 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.
10.24* Toll Bros., Inc. Non-Qualified Deferred Compensation Plan is
hereby incorporated by reference to Exhibit 10.24 of the
Registrant's Form 10-K for the fiscal year ended October 31,
2001.
10.25* Toll Brothers, Inc. Stock Award Deferral Plan is hereby
incorporated by reference to Exhibit 10.25 of the Registrant's
Form 10-K for the fiscal year ended October 31, 2001.
12 Statement RE: Computation of Ratios of Earnings to Fixed Charges.
21 Subsidiaries of the Registrant.
23 Consent of Independent Auditors.
99.1 Certification of Robert I. Toll pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification of Joel H. Rassman pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
*This exhibit is a management contract or compensatory plan or arrangement
required to be filed as an exhibit to this report.
33
(b) Reports on Form 8-K
During the quarter ended October 31, 2002, we filed a current
report on Form 8-K on September 6, 2002 for the purpose of filing the chief
executive officer's and chief financial officer's sworn statements pursuant to
Section 21(a) of the Securities Exchange Act of 1934 certifying certain facts
and circumstances relating to the covered reports described in such statements.
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 17, 2002.
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 17, 2002
Robert I. Toll of Directors and
Chief Executive Officer
(Principal Executive Officer)
/s/ Bruce E. Toll Vice Chairman of the Board December 17, 2002
Bruce E. Toll and Director
/s/ Zvi Barzilay President, Chief Operating December 17, 2002
Zvi Barzilay Officer and Director
/s/ Joel H. Rassman Executive Vice President, December 17, 2002
Joel H. Rassman Treasurer, Chief Financial
Officer and Director
(Principal Financial Officer)
/s/ Joseph R. Sicree Vice President and December 17, 2002
Joseph R. Sicree Chief Accounting Officer
(Principal Accounting Officer)
/s/ Robert S. Blank Director December 17, 2002
Robert S. Blank
/s/ Edward G. Boehne Director December 17, 2002
Edward G. Boehne
/s/ Richard J. Braemer Director December 17, 2002
Richard J. Braemer
/s/ Roger S. Hillas Director December 17, 2002
Roger S. Hillas
/s/ Carl B. Marbach Director December 17, 2002
Carl B. Marbach
/s/ Paul E. Shapiro Director December 17, 2002
Paul E. Shapiro
34
CERTIFICATION
I, Robert I. Toll, Chief Executive Officer of Toll Brothers, Inc., certify that:
1. I have reviewed this annual report on Form 10-K of Toll Brothers, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.
Date: December 17, 2002 /s/ Robert I. Toll
------------------
Robert I. Toll
Chief Executive Officer
35
CERTIFICATION
I, Joel H. Rassman, Chief Financial Officer of Toll Brothers, Inc., certify
that:
1. I have reviewed this annual report on Form 10-K of Toll Brothers, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether not there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: December 17, 2002 /s/ Joel H. Rassman
-------------------
Joel H. Rassman
Chief Financial Officer
36
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Toll Brothers, Inc.
We have audited the accompanying consolidated balance sheets of Toll Brothers,
Inc. and subsidiaries as of October 31, 2002 and 2001, and the related
consolidated statements of income and cash flows for each of the three years in
the period ended October 31, 2002. Our audits also included the financial
statement schedule listed in the Index at item 15(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 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, 2002 and 2001, and the consolidated results
of their operations and their cash flows for each of the three years in the
period ended October 31, 2002, in conformity with accounting principles
generally accepted in the United States. 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 12, 2002
37
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share data)
Year ended October 31,
-------------------------------------------------------------------
2002 2001 2000
-------------------- -------------------- --------------------
Revenues
Home sales $2,279,261 $2,180,469 $1,762,930
Land sales 36,183 27,530 38,730
Equity earnings in
unconsolidated joint ventures 1,870 6,756 3,250
Interest and other 11,658 14,850 9,452
-------------------- -------------------- --------------------
2,328,972 2,229,605 1,814,362
-------------------- -------------------- --------------------
Costs and expenses
Home sales 1,655,331 1,602,276 1,337,060
Land sales 25,671 21,464 29,809
Selling, general and
administrative 236,123 209,729 170,358
Interest 64,529 58,247 46,169
-------------------- -------------------- --------------------
1,981,654 1,891,716 1,583,396
-------------------- -------------------- --------------------
Income before income taxes 347,318 337,889 230,966
Income taxes 127,431 124,216 85,023
-------------------- -------------------- --------------------
Net income $219,887 $213,673 $145,943
==================== ==================== ====================
Earnings per share
Basic $3.12 $2.98 $2.01
==================== ==================== ====================
Diluted $2.91 $2.76 $1.95
==================== ==================== ====================
Weighted average number of shares
Basic 70,472 71,670 72,537
Diluted 75,480 77,367 74,825
See accompanying notes.
38
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
October 31
--------------------------------------------
2002 2001
-------------------- ---------------------
ASSETS
Cash and cash equivalents $102,337 $182,840
Inventory 2,551,061 2,183,541
Property, construction and office
equipment, net 38,496 33,095
Receivables, prepaid expenses and
other assets 95,065 74,481
Mortgage loans receivable 63,949 26,758
Customer deposits held in escrow 23,019 17,303
Investments in unconsolidated entities 21,438 14,182
-------------------- ---------------------
$2,895,365 $2,532,200
==================== =====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Loans payable $253,194 $362,712
Subordinated notes 819,663 669,581
Mortgage company warehouse loan 48,996 24,754
Customer deposits 134,707 101,778
Accounts payable 126,391 132,970
Accrued expenses 281,275 229,671
Income taxes payable 101,630 98,151
-------------------- ---------------------
Total liabilities 1,765,856 1,619,617
-------------------- ---------------------
Stockholders' equity
Preferred stock, none issued
Common stock, 74,002 and 74,029 shares
issued at October 31, 2002 and 2001,
respectively 740 369
Additional paid-in capital 102,600 107,014
Retained earnings 1,101,799 882,281
Treasury stock, at cost - 3,785 shares
and 4,473 shares at October 31,
2002 and 2001, respectively (75,630) (77,081)
-------------------- ---------------------
Total stockholders' equity 1,129,509 912,583
-------------------- ---------------------
$2,895,365 $2,532,200
==================== =====================
See accompanying notes.
39
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
Year ended October 31
--------------------------------------------
2002 2001 2000
--------- --------- ---------
Cash flow from operating activities:
Net income $ 219,887 $ 213,673 $ 145,943
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 10,495 9,356 8,528
Equity earnings in unconsolidated
joint ventures (1,870) (6,756) (3,250)
Deferred tax provision 1,831 7,323 5,191
Provision for inventory writedowns 6,081 13,035 7,448
Changes in operating assets and liabilities:
Increase in inventory (360,409) (456,922) (271,751)
Origination of mortgage loans (412,431) (199,102)
Sale of mortgage loans 376,764 183,449
(Increase)decrease in receivables, prepaid
expenses and other assets (29,185) 10,793 (28,025)
Increase (decrease) in customer deposits
on sales contracts 32,929 (3,146) 22,429
Increase in accounts payable
and accrued expenses 52,761 71,776 71,492
Increase in current income taxes payable 9,042 8,142 25,132
--------- --------- ---------
Net cash used in operating activities (94,105) (148,379) (16,863)
--------- --------- ---------
Cash flow from investing activities:
Purchase of property and equipment, net (14,170) (15,020) (9,415)
Investment in unconsolidated entities (9,526)
Distribution from unconsolidated entities 4,200 15,750 13,589
--------- --------- ---------
Net cash (used in) provided by
investing activities (19,496) 730 4,174
--------- --------- ---------
Cash flow from financing activities:
Proceeds from loans payable 528,710 208,628 559,843
Principal payments of loans payable (627,270) (180,094) (460,482)
Net proceeds from issuance
senior subordinated notes 149,748 196,930
Proceeds from stock based benefit plans 12,997 14,932 11,936
Purchase of treasury stock (31,087) (71,767) (33,232)
--------- --------- ---------
Net cash provided by financing activities 33,098 168,629 78,065
--------- --------- ---------
Net (decrease)increase in cash and cash equivalents (80,503) 20,980 65,376
Cash and cash equivalents, beginning of year 182,840 161,860 96,484
--------- --------- ---------
Cash and cash equivalents, end of year $ 102,337 182,840 $ 161,860
========= ========= =========
See accompanying notes.
40
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 entities
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. 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.
Land, land development and related costs (both incurred and estimated to be
incurred in the future) are amortized to the cost of homes closed based upon the
total number of homes the Company expects to construct in each community. Any
changes resulting from a change in the estimated number of homes to be
constructed or a change in estimated costs subsequent to the commencement of
delivery of homes are allocated to the remaining undelivered homes in the
community. Home construction and related costs are charged to the cost of homes
closed under the specific identification method.
The estimated land, common area development and related costs of master planned
communities (including the cost of golf courses, net of their estimated residual
value) are allocated to individual communities within a master planned community
on a relative sales value basis. Any changes resulting from a change in the
estimated number of homes to be constructed or a change in estimated costs are
allocated to the remaining lots in each of the communities of the master planned
community.
Land sales revenue and cost of sales are recorded at the time that title and
possession of the property have 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.
41
Property, Construction and Office Equipment
Property, construction and office equipment are recorded at cost and are stated
net of accumulated depreciation of $44.5 million and $35.8 million at October
31, 2002 and 2001, 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 accordance with
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." 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.
It takes approximately four to five years to fully develop, sell and deliver all
the homes in one of the Company's typical communities. Longer or shorter time
periods are possible depending on the number of home sites in a community. The
Company's master planned communities, consisting of several smaller communities,
may take up to 10 years to complete. Since the Company's inventory is considered
a long-lived asset under accounting principles generally accepted in the United
States, the Company is required to review the carrying value of each of its
communities and writedown the value of those communities for which it believes
the values are not recoverable. When the profitability of a current community
deteriorates or the sales pace declines significantly or some other factor
indicates a possible impairment in the recoverability of the asset, the Company
evaluates the property in accordance with the guidelines of SFAS No. 121. If
this evaluation indicates an impairment loss should be recognized, the Company
charges cost of sales for the estimated impairment loss in the period
determined.
In addition, the Company reviews all the land held for future communities or
future sections of current communities, whether owned or under contract, to
determine whether or not it expects to proceed with the development of the land,
and, if so, whether it will be developed in the manner originally contemplated.
Based upon this review, the Company decides: (a) as to land that is under a
purchase contract but not owned, whether the contract will be terminated or
renegotiated; and (b) as to land the Company owns, whether the land can be
developed as contemplated or in an alternative manner, or should be sold. The
Company then further determines which costs that have been capitalized to the
property are recoverable and which costs should be written off.
The Company capitalizes certain project marketing costs and charges them against
income as homes are closed.
Joint Venture Accounting
The Company is a party to three joint ventures with independent third parties to
develop and sell land that was owned or is currently owned by its venture
partners. The Company recognizes its share of the earnings from the sale of lots
to other builders. The Company does not recognize earnings from the lots it
purchases from these ventures, but reduces its cost basis in the lots by its
share of the earnings from those lots.
42
The Company effectively owns one-third of Toll Brothers Realty Trust Group and
50% of a joint venture that is selling and building an active-adult,
age-qualified community. The Company recognizes its share of the earnings from
these entities.
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.
Advertising Costs
The Company expenses advertising costs as incurred.
Warranty Costs
The Company accrues for expected warranty costs at the time each home is closed
and title and possession have been transferred to the buyer. Costs are accrued
based upon historical experience.
Insurance Costs
The Company accrues for the expected costs associated with the deductibles and
self-insured retentions on its various insurance policies.
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.
Goodwill and Other Intangible Assets
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 writedown on an annual basis. The Company adopted SFAS No. 142 as of
November 1, 2001, the first day of its 2002 fiscal year. The adoption of SFAS
No. 142 did not have a material impact on the Company's fiscal 2002 financial
statements. The Company had $9.4 million of unamortized goodwill as of November
1, 2001. The Company amortized $1.1 million (net of $674,000 of income taxes)
and $1.1 million (net of $665,000 of income taxes) in fiscal 2001 and 2000,
respectively. Had the Company not amortized goodwill during fiscal 2001, net
income, diluted earnings per share and basic earnings per share would have been
$214.8 million, $2.78 and $3.00, respectively. Had the Company not amortized
goodwill during fiscal 2000, net income, diluted earnings per share and basic
earnings per share would have been $147.1 million, $1.97 and $2.03,
respectively.
43
New Accounting Pronouncements
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets,"
provides guidance on financial accounting and reporting for the impairment or
disposal of long-lived assets and supersedes SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of",
and the accounting and reporting provisions of Accounting Principles Bulletin
Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, Extraordinary, Unusual and Infrequently
Occurring Events and Transactions." The Company is required to adopt SFAS No.
144 for its 2003 fiscal year. The Company's adoption of SFAS No. 144 will not
have a material impact on its financial condition or results of operations.
SFAS No. 145, "Rescission of SFAS Nos. 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 relating to the rescission of SFAS
No. 4 will become effective for the Company's fiscal year 2003.
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 have been restated to reflect the split.
Reclassification
Certain prior year amounts have been reclassified to conform with the fiscal
2002 presentation.
2. Inventory
Inventory consisted of the following (amounts in thousands):
2002 2001
---------- ----------
Land and land development costs $ 772,796 $ 833,386
Construction in progress 491,108 1,146,485
Sample homes and sales offices 163,722 107,744
Land deposits and costs of
future development 114,212 89,360
Other 9,223 6,566
---------- ----------
$2,551,061 $2,183,541
========== ==========
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.
The Company provided for inventory writedowns and the expensing of costs which
it believed not to be recoverable of $6.1 million in fiscal 2002, $13.0 million
in fiscal 2001 and $7.4 million in fiscal 2000. Of these amounts, $2.5 million,
$3.8 million and $1.6 million were applicable to future communities in fiscal
2002, fiscal 2001 and fiscal 2000, respectively.
44
Interest capitalized in inventories is charged to interest expense when the
related inventory is delivered. Changes in capitalized interest for the three
years ended October 31, 2002 were as follows (amounts in thousands):
2002 2001 2000
-------- -------- --------
Interest capitalized,
beginning of year $ 98,650 $ 78,443 $ 64,984
Interest incurred 90,313 79,209 60,236
Interest expensed (64,529) (58,247) (46,169)
Write-off to cost and expenses (797) (755) (608)
-------- -------- --------
Interest capitalized, end of year $123,637 $ 98,650 $ 78,443
======== ======== ========
3. Loans Payable and Subordinated Notes
Loans payable at October 31, 2002 and 2001 consisted of the following
(amounts in thousands):
2002 2001
-------- --------
Term loan due July 2005 $207,500 $192,500
Revolving credit facility - 80,000
Term loan due March 2002 - 50,000
Other 45,694 40,212
-------- --------
$253,194 $362,712
======== ========
The Company has a $615 million unsecured revolving credit facility with 19
banks of which $525 million extends through March 2006 and $90 million extends
through February 2003. Interest is payable on borrowings under the facility at
0.90% (subject to adjustment based upon the Company's debt rating and leverage
ratios) above the Eurodollar rate or at other specified variable rates as
selected by the Company from time to time. The Company had no outstanding
borrowings against the facility at October 31, 2002. At October 31, 2002,
letters of credit and obligations under escrow agreements of approximately $77.5
million were outstanding under the facility. The revolving credit 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 would restrict the payment of cash dividends and the repurchase of Company
stock to approximately $350 million at October 31, 2002.
The Company has borrowed $207.5 million from nine banks at a weighted-average
interest rate of 7.76% repayable in July 2005. This term loan is unsecured and
the agreement contains financial covenants that are less restrictive than the
covenants contained in the Company's revolving credit agreement.
At October 31, 2002, the aggregate estimated fair value of the Company's loans
payable was approximately $275.6 million. The fair value of loans was estimated
based upon the interest rates at October 31, 2002 that the Company believed were
available to it for loans with similar terms and remaining maturities.
45
At October 31, 2002 and 2001, the Company's senior subordinated notes consisted
of the following (amounts in thousands):
2002 2001
-------- --------
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 200,000 200,000
8.25% Senior Subordinated Notes
due December 1, 2011 150,000 -
Bond discount (337) (419)
-------- --------
$819,663 $669,581
======== ========
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, 2002, the aggregate fair value of all the outstanding
subordinated notes, based upon their indicated market prices, was approximately
$808.3 million.
A subsidiary of the Company has a $50 million bank line of credit to fund
mortgage originations. The line of credit is collateralized by all the assets of
the subsidiary. At October 31, 2002, the subsidiary had borrowed $49.0 million
under the line of credit at an average interest rate of 3.36% and had assets of
approximately $65 million.
The annual aggregate maturities of the Company's loans and notes during each of
the next five fiscal years are: 2003 - $74.3 million; 2004 - $7.5 million; 2005
- - $211.2 million; 2006 - $5.0 million; and 2007 - $200.2 million. The Company
called for redemption its 8 3/4% Senior Subordinated Notes due 2006 on December
27, 2002. These notes are included in fiscal 2007 maturities. See footnote 12
for additional information related to the redemption.
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 2002, 2001
and 2000. The effective tax rate in 2002, 2001, and 2000 was 36.7%, 36.8% and
36.8%, respectively. The primary difference between the Company's Base Rate and
effective tax rate was tax-free income.
46
The provision for income taxes for each of the three years ended October 31,
2002, 2001 and 2000 was as follows (amounts in thousands):
2002 2001 2000
-------- -------- -------
Federal $117,233 $114,131 $78,105
State 10,198 10,085 6,918
-------- -------- -------
$127,431 $124,216 $85,023
======== ======== =======
Current $125,600 $116,893 $79,832
Deferred 1,831 7,323 5,191
-------- -------- -------
$127,431 $124,216 $85,023
======== ======== =======
The components of income taxes payable at October 31, 2002 and 2001 consisted of
the following (amounts in thousands):
2002 2001
-------- -------
Current $ 68,170 $66,522
Deferred 33,460 31,629
-------- -------
$101,630 $98,151
======== =======
The components of net deferred taxes payable at October 31, 2002 and 2001
consisted of the following (amounts in thousands):
2002 2001
------- -------
Deferred tax liabilities:
Capitalized interest $38,783 $32,789
Deferred expense 22,192 17,755
------- -------
Total 60,975 50,544
------- -------
Deferred tax assets:
Accrued expenses
deductible when paid 16,723 7,040
Inventory valuation differences 2,204 2,581
Deferred income 431 2,329
Other 8,157 6,965
------- -------
Total 27,515 18,915
------- -------
Net deferred tax liability $33,460 $31,629
======= =======
5. Stockholders' Equity
The Company's authorized capital stock consists of 100,000,000 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.
47
Changes in stockholders' equity for the three years ended October 31, 2002 were
as follows (amounts in thousands):
Common Stock Additional
-------------------- Paid-In Retained Treasury
Shares Amount Capital Earnings Stock Total
------- ------ -------- ---------- -------- ----------
Balance,
November 1, 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
Net income 219,887 219,887
Purchase of treasury
stock (1,238) (31,087) (31,087)
Exercise of stock
options 1,411 (4,137) 24,192 20,055
Executive bonus award 440 (647) 7,502 6,855
Two-for-one stock
split 371 (2) (369) -
Employee benefit plan
issuances 50 372 844 1,216
------- ----- -------- ---------- -------- ----------
Balance,
October 31, 2002 70,217 $740 $102,600 $1,101,799 $(75,630) $1,129,509
======= ===== ======== ========== ======== ==========
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 million
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 million of life insurance on each of their lives. In addition, the Tolls
have granted the Company an option to purchase up to an additional $30 million
(or a lesser amount under certain circumstances) of the Company's Common Stock
from each of their estates. The agreements expire in October 2005.
48
In December 2000, the Company's Board of Directors authorized the repurchase of
up to 10,000,000 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. At October 31, 2002, the Company had
repurchased approximately 5,360,000 shares under the authorization.
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, 2002.
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.
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, 2002:
2002 2001 2000
------ ------ ------
Risk-free interest rate 5.02% 4.01% 5.80%
Expected life (years) 7.50 7.31 7.70
Volatility 41.30% 37.40% 35.70%
Dividends none none none
49
At October 31, 2002, 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):
2002 2001 2000
----------------- ---------------- ------------------
Net income As reported $219,887 $213,673 $145,943
Pro forma $205,314 $202,597 $136,622
Basic net income per share As reported $3.12 $2.98 $2.01
Pro forma $2.91 $2.83 $1.88
Diluted net income per share As reported $2.91 $2.76 $1.95
Pro forma $2.72 $2.62 $1.83
Weighted-average grant date
fair value per share of
options granted $11.17 $8.93 $4.52
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.
On December 12, 2002, the Compensation Committee of the Company's Board of
Directors, the committee that administers the stock option plans, voted to
eliminate any options currently available for grant and future increases in
options available for grant under the Company's Stock Option and Incentive Stock
Plan (1995). Options available for grant at October 31, 2002 under the 1995 plan
were 2,269,032.
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 1998 Plan 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) and the Company's Stock Option and Stock Incentive Plan (1995).
50
The following table summarizes stock option activity for the four plans during
the three years ended October 31, 2002:
Number Weighted Average
of Options Exercise Price
(in 000's)
-------------------- ----------------------------
Outstanding, November 1, 1999 11,783 $10.20
Granted 3,760 8.77
Exercised (1,357) 8.84
Cancelled (179) 10.48
-------------------- ----------------------------
Outstanding, October 31, 2000 14,007 $ 9.94
Granted 2,299 19.31
Exercised (1,590) 9.59
Cancelled (230) 11.51
-------------------- ----------------------------
Outstanding, October 31, 2001 14,486 $11.44
Granted 2,586 21.76
Exercised (1,530) 9.98
Cancelled (221) 17.68
-------------------- ----------------------------
Outstanding, October 31, 2002 15,321 $13.24
-------------------- ----------------------------
Options exercisable and their weighted average exercise price at October 31,
2002, 2001 and 2000 were 9,780,881 shares and $10.64; 9,275,756 shares and
$9.96; and 7,748,446 shares and $9.96, respectively.
Options available for grant at October 31, 2002, 2001 and 2000 under all the
plans were 3,498,000 (after the elimination of 2,269,032 options available for
grant under the 1995 Plan), 5,618,728 and 4,626,502, respectively.
The following table summarizes information about stock options outstanding and
exercisable at October 31, 2002:
Options Outstanding Options Exercisable
--------------------------------------------------------- ------------------------------------
Weighted-
Average
Remaining Weighted- Weighted-
Range of Number Contractual Average Number Average
Exercise Outstanding Life Exercise Exercisable Exercise
Prices (in 000's) (in years) Price (in 000's) Price
- ------------------------- ------------------- ------------------- ---------------- ------------------- ---------------
$ 4.35 -$ 8.70 1,405 2.6 $ 6.15 1,405 $ 6.15
8.71 - 10.88 5,117 5.8 9.13 4,106 9.22
10.89 - 13.06 2,845 5.8 11.86 2,377 11.95
13.07 - 15.23 1,395 5.2 14.01 1,395 14.01
17.41 - 21.76 4,559 8.7 20.65 498 19.31
----------- ------------ --------
$ 4.35 -$21.76 15,321 6.3 $13.24 9,781 $10.64
=========== ============ ========
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 would 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 and 2000 of $6.9 million and $4.4 million, respectively, which represented
the fair market value of the shares issued to Mr. Toll (440,002 shares in 2001
and 271,584 shares in 2000).
51
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 would 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. The Company
recognized compensation expense in 2002 of $9.6 million, which represented the
fair market value of shares issued to Mr. Toll (471,099 shares).
On October 31, 2002, 2001 and 2000, the closing price of the Company's Common
Stock on the New York Stock Exchange was $20.48, $15.58 and $16.25,
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 2002 and 2001.
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, 2002, a total of 448,276 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, 2002, 2001 and 2000 were
15,672 shares and $21.24; 12,536 shares and $15.24; and 12,618 shares and $9.71,
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, 2002 is as follows (amounts in thousands):
2002 2001 2000
------ ------ -----
Basic weighted average shares 70,472 71,670 72,537
Assumed conversion of dilutive
stock options 5,008 5,697 2,288
------ ------ ------
Diluted weighted average shares 75,480 77,367 74,825
====== ====== ======
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 $3.5 million, $3.1 million, and
$2.6 million, for the years ended October 31, 2002, 2001 and 2000, respectively.
52
9. Commitments and Contingencies
At October 31, 2002 the Company had agreements to purchase land and improved
home sites for future development with purchase prices aggregating approximately
$860 million, of which $64 million 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, 2002, the Company had outstanding surety bonds amounting to
approximately $587.6 million related primarily to its obligations to various
governmental entities to construct improvements in the Company's various
communities. The Company estimates that approximately $265 million of work
remains on these improvements. The Company has an additional $41.5 million of
surety bonds outstanding which guarantee other obligations of the Company. The
Company does not believe that any outstanding bonds will likely be drawn upon.
At October 31, 2002, the Company had agreements of sale outstanding to deliver
3,366 homes with an aggregate sales value of approximately $1.87 billion.
At October 31, 2002, the Company was committed to make approximately
$364 million 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, which minimizes the Company's interest rate risk. 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.
10. 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
Group (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").
The Shareholders entered into a subscription agreement whereby each group has
agreed to invest additional capital in an amount not to exceed $9.3 million if
required by the Trust. The original subscription agreement, which was to expire
in June 2002, was extended until August 2003.
At October 31, 2002, the Company had an investment of $7.5 million 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 amounts of
$1.2 million, $1.7 million and $1.4 million in fiscal 2002, 2001 and 2000,
respectively.
53
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.
11. 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, 2002 (amounts in thousands):
2002 2001 2000
------------------ ---------------- ----------------
Cash flow information:
Interest paid, net of amount capitalized $29,867 $26,985 $21,548
Income taxes paid $116,558 $108,750 $54,700
Non-cash activity:
Cost of inventory acquired through
seller financing $13,993 $34,662 $8,321
Investment in unconsolidated subsidiary
acquired through seller financing - - $4,500
Income tax benefit related to exercise
of employee stock options $7,394 $5,396 $2,128
Stock bonus awards $6,855 $4,413 $1,395
Contributions to employee retirement plan $883 $791 $641
12. Subsequent Event
In November 2002, Toll Brothers Finance Corp., a wholly-owned subsidiary of the
Company, issued $300 million of 6.875% Senior Notes due 2012. The notes were
issued in a private placement under Rule 144A of the Securities Act of 1933, as
amended. The Company has agreed to file a registration statement enabling the
noteholders to exchange the notes for publicly registered notes. The Company
intends to use the proceeds from the offering to redeem $100 million of its 8
3/4% Senior Subordinated Notes due 2006, repay bank debt and for general
corporate purposes.
The Company called for redemption its 8 3/4% Senior Subordinated Notes due 2006
at 102.917% of principal amount on December 27, 2002. The redemption will result
in a pretax charge in the Company's first quarter of fiscal 2003 of
approximately $4 million.
13. Supplemental Guarantor Information
A wholly owned subsidiary of the Company, Toll Brothers Finance Corp.(the
"Subsidiary Issuer"), issued senior debt on November 22, 2002. The obligations
of the Subsidiary Issuer to pay principal, premiums, if any, and interest was
guaranteed jointly and severally on a senior basis by the Company and
substantially all of the Company's wholly-owned homebuilding subsidiaries (the
"Guarantor Subsidiaries"). The guarantees are full and unconditional. The
Company's non-homebuilding subsidiaries (the "Non-Guarantor Subsidiaries") did
not guarantee the debt. Separate financial statements and other disclosures
concerning the Guarantor Subsidiaries are not presented because management has
determined that such disclosures would not be material to investors. Prior to
the senior debt issuance, Toll Brothers Finance Corp. did not have any
operations.
54
Supplemental consolidating financial information of the Company, the Subsidiary
Issuer, the Guarantor Subsidiaries, the Non-Guarantor Subsidiaries and the
eliminations to arrive at Toll Brothers, Inc. on a consolidated basis are as
follows ($ amounts in thousands):
Consolidating Balance Sheet at October 31, 2002
Toll Subsidiary Guarantor Non- Elim- Consolidated
Brothers, Issuer Subsid- Guarantor ination
Inc. iaries Subsid-
iaries
-----------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents 99,815 2,522 102,337
Inventory 2,550,708 353 2,551,061
Property and office
equipment, net 29,036 9,460 38,496
Receivables, prepaid
expenses and other assets 1,231,139 32,462 35,277 (1,203,813) 95,065
Mortgage loans receivable 2,193 61,756 63,949
Customer deposits held
in escrow 23,019 23,019
Investments in
unconsolidated entities 21,438 21,438
-----------------------------------------------------------------------------------------
1,231,139 - 2,758,671 109,368 (1,203,813) 2,895,365
=========================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Loans payable 241,151 12,043 253,194
Subordinated notes 819,663 819,663
Mortgage company
warehouse loan 48,996 48,996
Customer deposits 134,707 134,707
Accounts payable 126,324 67 126,391
Accrued expenses 244,868 36,407 281,275
Income taxes payable 101,630 101,630
-----------------------------------------------------------------------------------------
Total liabilities 101,630 - 1,566,713 97,513 - 1,765,856
-----------------------------------------------------------------------------------------
Stockholders' equity
Common stock 740 3,003 (3,003) 740
Additional paid-
in capital 102,600 4,420 1,734 (6,154) 102,600
Retained earnings 1,101,799 1,187,538 7,118 (1,194,656) 1,101,799
Treasury stock (75,630) (75,630)
-----------------------------------------------------------------------------------------
Total stockholders'
equity 1,129,509 - 1,191,958 11,855 (1,203,813) 1,129,509
-----------------------------------------------------------------------------------------
1,231,139 - 2,758,671 109,368 (1,203,813) 2,895,365
=========================================================================================
55
Consolidating Balance Sheet at October 31, 2001
Toll Subsidiary Guarantor Non- Elim- Consolidated
Brothers, Issuer Subsid- Guarantor ination
Inc. iaries Subsid-
iaries
-----------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents 179,434 3,406 182,840
Inventory 2,183,045 496 2,183,541
Property 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 loan 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
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
=========================================================================================
56
Consolidating Income Statement for the fiscal year ended October 31, 2002
Toll Subsidiary Guarantor Non- Elim- Consolidated
Brothers, Issuer Subsid- Guarantor ination
Inc. iaries Subsid-
iaries
--------------------------------------------------------------------------------------
Revenues:
Home sales 2,279,261 2,279,261
Land sales 36,183 36,183
Other 12,687 32,652 (33,681) 11,658
Equity earnings
from unconsolidated
entities 1,870 1,870
Earnings from
subsidiaries 347,478 (347,478) -
--------------------------------------------------------------------------------------
347,478 - 2,330,001 32,652 (381,159) 2,328,972
--------------------------------------------------------------------------------------
Costs and expenses:
Cost of sales 1,681,150 14,383 (14,531) 1,681,002
Selling, general
and administrative 6 237,121 12,890 (13,894) 236,123
Interest 154 64,254 1,008 (887) 64,529
--------------------------------------------------------------------------------------
160 - 1,982,525 28,281 (29,312) 1,981,654
--------------------------------------------------------------------------------------
Income before
income taxes 347,318 - 347,476 4,371 (351,847) 347,318
Income taxes 127,431 127,489 1,616 (129,105) 127,431
--------------------------------------------------------------------------------------
Net income 219,887 - 219,987 2,755 (222,742) 219,887
======================================================================================
57
Consolidating Income Statement for the fiscal year ended October 31, 2001
Toll Subsidiary Guarantor Non- Elim- Consolidated
Brothers, Issuer Subsid- Guarantor ination
Inc. iaries Subsid-
iaries
--------------------------------------------------------------------------------------
Revenues:
Home 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
income 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
===================================================================================
58
Consolidating Income Statement for the fiscal year ended October 31, 2000
Toll Subsidiary Guarantor Non- Elim- Consolidated
Brothers, Issuer Subsid- Guarantor ination
Inc. iaries Subsid-
iaries
--------------------------------------------------------------------------------------
Revenues:
Home 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
income 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
======================================================================================
59
Consolidating Statement of Cash Flows for the fiscal year ended October 31, 2002
Toll Subsidiary Guarantor Non- Elim- Consolidated
Brothers, Issuer Subsid- Guarantor ination
Inc. iaries Subsid-
iaries
------------------------------------------------------------------------------------
Cash flow from operating activities
Net income 219,887 219,987 2,755 (222,742) 219,887
Adjustments to reconcile net income
to net cash used in operations:
Depreciation and amortization 9,509 986 10,495
Equity earnings in
unconsolidated joint ventures (1,870) (1,870)
Deferred tax provision 1,831 1,831
Provision for inventory writedown 6,081 6,081
Changes in operating assets and liabilities:
(Increase) decrease in inventory (360,552) 143 (360,409)
Origination of mortgage loans (412,431) (412,431)
Sale of mortgage loans 376,764 376,764
(Increase) decrease in receivables,
prepaid expenses and other assets (220,404) (12,963) (18,560) 222,742 (29,185)
Increase in customer deposits 32,929 32,929
Increase in accounts payable
and accrued expenses 7,734 22,531 22,496 52,761
Increase in income taxes payable 9,042 9,042
------------------------------------------------------------------------------------
Net cash provided by (used in)
operating activities 18,090 - (84,348) (27,847) - (94,105)
------------------------------------------------------------------------------------
Cash flow from investing activities
Purchase of property
and equipment, net (9,758) (4,412) (14,170)
Unconsolidated entities
Investment in (9,526) (9,526)
Distribution from 4,200 4,200
------------------------------------------------------------------------------------
Net cash used in
investing activities - - (15,084) (4,412) - (19,496)
------------------------------------------------------------------------------------
Cash flow from financing activities
Proceeds from loans payable 180,995 347,715 528,710
Principal payments of loans payable (310,931) (316,339) (627,270)
Net proceeds from public debt 149,748 149,748
Proceeds from stock-based plans 12,997 12,997
Purchase of treasury stock (31,087) (31,087)
Net cash (used in) provided by
------------------------------------------------------------------------------------
financing activities (18,090) - 19,812 31,376 - 33,098
------------------------------------------------------------------------------------
Net increase in cash
and cash equivalents (79,620) (883) (80,503)
Cash and cash equivalents,
beginning of year 179,434 3,406 182,840
Cash and cash equivalents,
------------------------------------------------------------------------------------
end of year - - 99,814 2,523 - 102,337
====================================================================================
60
Consolidating Statement of Cash Flows for the fiscal year ended October 31, 2001
Toll Subsidiary Guarantor Non- Elim- Consolidated
Brothers, Issuer Subsid- Guarantor ination
Inc. iaries Subsid-
iaries
------------------------------------------------------------------------------------
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 operations:
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
Provision for inventory writedown 13,035 13,035
Changes in operating assets and liabilities:
(Increase) decrease in inventory (457,142) 220 (456,922)
Origination of mortgage loans (199,102) (199,102)
Sale of mortgage loans 183,449 183,449
(Increase) 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 provided by (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 used in (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 public debt 196,930 196,930
Proceeds from stock-based plans 14,932 14,932
Purchase of treasury stock (71,767) (71,767)
------------------------------------------------------------------------------------
Net cash (used in) 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
======================================================================================
61
Consolidating Statement of Cash Flows for the fiscal year ended October 31, 2000
Toll Subsidiary Guarantor Non- Elim- Consolidated
Brothers, Issuer Subsid- Guarantor ination
Inc. iaries Subsid-
iaries
------------------------------------------------------------------------------------
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 operations:
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
Provision for inventory writedown 7,448 7,448
Changes in operating assets and liabilities:
Increase in inventory (271,063) (688) (271,751)
Origination of mortgage loans (22,982) (22,982)
Sale of mortgage loans 12,546 12,546
(Increase) decrease 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 provided by (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 used in (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 plans 11,936 11,936
Purchase of treasury stock (33,232) (33,232)
Net cash (used in) 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
====================================================================================
62
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 2002:
Revenue $705,590 $580,707 $550,496 $492,179
Gross profit $192,433 $162,103 $156,897 $136,537
Income before income taxes $109,905 $84,603 $82,826 $69,984
Net Income $69,383 $53,500 $52,510 $44,494
Earnings per share*
Basic $0.99 $0.76 $0.74 $0.63
Diluted $0.93 $0.70 $0.69 $0.60
Weighted average number*
of shares
Basic 70,204 70,835 70,849 70,001
Diluted 74,752 76,685 76,237 74,244
Fiscal 2001:
Revenue $655,752 $584,068 $514,524 $475,261
Gross profit $182,759 $164,239 $136,959 $121,908
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 $0.98 $0.83 $0.63 $0.55
Diluted $0.92 $0.77 $0.58 $0.51
Weighted average number*
of shares
Basic 69,820 71,677 72,857 72,326
Diluted 74,661 77,413 78,564 78,830
* Due to rounding, the sum of the quarterly earnings per share amounts may not
equal the reported earnings per share for the year. Share and per share amounts
have been adjusted for a two-for-one stock split in March 2002.
63
TOLL BROTHERS, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(Amounts in thousands)
Balance at Charged Charged Balance
Beginning to Costs to at End
of and Other of
Description Period Expenses Accounts Deductions Period
----------- ---------- -------- -------- ---------- -------
Net realizable value
reserves for inventory
of land and land
development costs:
Year ended
October 31, 2000:
New Jersey $ 3,708 $ 3,708
Year ended
October 31, 2001:
New Jersey $ 3,708 3,708 -
Year ended
October 31, 2002:
New Jersey - -
64