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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JANUARY 31, 2003
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______TO_______
Commission file number 1-9186
Toll Brothers, Inc.
(Exact name of registrant as specified in its charter)
Delaware 23-2416878
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3103 Philmont Avenue, Huntingdon Valley, Pennsylvania 19006
(Address of principal executive offices) (Zip Code)
(215) 938-8000
(Registrant's telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes _X_ No ___
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes _X_ No __
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common Stock, $.01 par value: 69,567,076 shares at March 11, 2003.
TOLL BROTHERS, INC. AND SUBSIDIARIES
INDEX
Page No.
--------
Statement of Forward-Looking Information 1
PART I. Financial Information
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets (Unaudited)
at January 31, 2003 and October 31, 2002 2
Condensed Consolidated Statements of Income
(Unaudited) For the Three Months Ended
January 31, 2003 and 2002 3
Condensed Consolidated Statements of Cash Flows
(Unaudited) For the Three Months Ended January
31, 2003 and 2002 4
Notes to Condensed Consolidated Financial
Statements (Unaudited) 5
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
ITEM 3. Quantitative and Qualitative Disclosures
About Market Risk 20
ITEM 4. Controls and Procedures 21
PART II. Other Information
Item 1. Legal Proceedings 22
Item 2. Changes in Securities and Use of Proceeds 22
Item 3. Defaults upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURES 23
CERTIFICATIONS 24
STATEMENT ON FORWARD-LOOKING INFORMATION
Certain information included herein and in our other reports, SEC filings,
statements and presentations is forward-looking within the meaning of the
Private Securities Litigation Reform Act of 1995, including, but not limited to,
statements concerning our anticipated operating results, financial resources,
changes in revenues, changes in profitability, anticipated income to be realized
from our investments in joint ventures and the Toll Realty Trust Group, interest
expense, growth and expansion, ability to acquire land, ability to sell homes
and properties, ability to deliver homes from backlog, ability to gain approvals
and to open new communities, ability to secure materials and subcontractors,
average delivered prices of homes, ability to maintain the liquidity and capital
necessary to expand and take advantage of future opportunities and stock market
valuations. In some cases you can identify those so called forward-looking
statements by words such as "may," "should," "expect," "plan," "anticipate,"
"believe," "estimate," "predict," "potential," "project," "intend," "can,"
"could," "might," or "continue" or the negative of those words or other
comparable words. Such forward-looking information involves important risks and
uncertainties that could significantly affect actual results and cause them to
differ materially from expectations expressed herein and in our other reports,
SEC filings, statements and presentations. These risks and uncertainties include
local, regional and national economic and political conditions, the consequences
of any future terrorist attacks such as those that occurred on September 11,
2001, the effects of governmental regulation, the competitive environment in
which we operate, fluctuations in interest rates, changes in home prices, the
availability and cost of land for future growth, the availability of capital,
fluctuations in capital and securities markets, the availability and cost of
labor and materials, and weather conditions.
Additional information concerning potential factors that we believe could cause
our actual results to differ materially from expected and historical results is
included under the caption "Factors That May Affect Our Future Results" in Item
1 of our Annual Report on Form 10-K for the fiscal year ended October 31, 2002.
If one or more of the assumptions underlying our forward-looking statements
proves incorrect, then our actual results, performance or achievements could
differ materially from those expressed in, or implied by the forward-looking
statements contained in this report. Therefore, we caution you not to place
undue reliance on our forward-looking statements. This statement is provided as
permitted by the Private Securities Litigation Reform Act of 1995.
When this report uses the words "we," "us," and "our," they refer to Toll
Brothers, Inc. and its subsidiaries, unless the context otherwise requires.
1
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TOLL BROTHERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
January 31, October 31,
2003 2002
----------------- ------------------
(Unaudited)
ASSETS
Cash and cash equivalents $206,387 $102,337
Inventory 2,716,195 2,551,061
Property, construction and office
equipment, net 40,075 38,496
Receivables, prepaid expenses
and other assets 95,506 95,065
Mortgage loans receivable 57,738 63,949
Customer deposits held in escrow 21,024 23,019
Investments in unconsolidated entities 23,908 21,438
----------------- ------------------
$3,160,833 $2,895,365
================= ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Loans payable $244,486 $253,194
Senior notes 298,087 -
Subordinated notes 719,970 819,663
Mortgage company warehouse loan 49,936 48,996
Customer deposits 134,234 134,707
Accounts payable 170,837 126,391
Accrued expenses 271,130 281,275
Income taxes payable 92,311 101,630
----------------- ------------------
1,980,991 1,765,856
----------------- ------------------
Stockholders' equity:
Preferred stock
Common stock 740 740
Additional paid-in capital 104,214 102,600
Retained earnings 1,147,213 1,101,799
Treasury stock (72,325) (75,630)
----------------- ------------------
Total stockholders' equity 1,179,842 1,129,509
----------------- ------------------
$3,160,833 $2,895,365
================= ==================
See accompanying notes
2
TOLL BROTHERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share data)
(Unaudited)
Three months ended
January 31,
--------------------------------------
2003 2002
------------------ -----------------
Revenues:
Housing sales $557,886 $482,702
Land sales 9,434 6,423
Equity earnings in
unconsolidated entities 253 -
Interest and other 2,687 3,054
------------------ -----------------
570,260 492,179
------------------ -----------------
Costs & expenses:
Housing sales 405,172 351,425
Land sales 7,614 4,217
Selling, general and administrative 65,623 52,398
Interest 16,041 14,155
Expenses related to early retirement of debt 3,890 -
------------------ -----------------
498,340 422,195
------------------ -----------------
Income before income taxes 71,920 69,984
Income taxes 26,506 25,490
------------------ -----------------
Net income $45,414 $44,494
================== =================
Earnings per share:
Basic $0.65 $0.64
================== =================
Diluted $0.61 $0.60
================== =================
Weighted average number of shares:
Basic 70,407 70,001
Diluted 74,308 74,244
See accompanying notes
3
TOLL BROTHERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
Three months ended
January 31,
----------------------------------
2003 2002
--------------- --------------
Cash flows from operating activities:
Net income $45,414 $44,494
Adjustments to reconcile net income to
net cash used in operating activities:
Depreciation and amortization 3,045 2,903
Equity earnings in unconsolidated
entities (253) -
Deferred tax provision 166 (1,414)
Provision for write-offs 280 1,265
Write-off of unamortized debt issuance costs 973 -
Changes in operating assets and liabilities
Increase in inventory (161,376) (94,017)
Origination of mortgage loans (127,283) (83,430)
Sale of mortgage loans 131,412 82,397
Decrease (increase) in receivables, prepaid
expenses and other assets 2,694 (3,151)
Decrease in customer deposits (473) (882)
Increase in accounts payable and accrued
expenses 43,943 1,860
Decrease in current income taxes payable (9,377) (8,096)
--------------- ---------------
Net cash used in operating activities (70,835) (58,071)
--------------- ---------------
Cash flows from investing activities:
Purchase of property, construction and
office equipment, net (4,144) (3,072)
Investments in unconsolidated entities (3,267) (2,000)
Distributions from unconsolidated entities 1,050 2,800
--------------- ---------------
Net cash used in investing activities (6,361) (2,272)
--------------- ---------------
Cash flows from financing activities:
Proceeds from loans payable 274,766 96,540
Principal payments of loans payable (286,573) (101,645)
Net proceeds from issuance of public debt 297,885 149,748
Redemption of subordinated notes (100,000) -
Proceeds from stock-based benefit plans 377 6,437
Purchase of treasury stock (5,209) (25)
--------------- ---------------
Net cash provided by financing activities 181,246 151,055
--------------- ---------------
Increase in cash and cash equivalents 104,050 90,712
Cash and cash equivalents, beginning of period 102,337 182,840
--------------- ---------------
Cash and cash equivalents, end of period $206,387 $273,552
=============== ===============
See accompanying notes
4
TOLL BROTHERS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the rules and regulations of the Securities and
Exchange Commission for interim financial information. The October 31, 2002
balance sheet amounts and disclosures included herein have been derived from our
October 31, 2002 audited financial statements. Since the accompanying condensed
consolidated financial statements do not include all the information and
footnotes required by accounting principles generally accepted in the United
States for complete financial statements, we suggest that they be read in
conjunction with the financial statements and notes thereto included in our
October 31, 2002 Annual Report on Form 10-K. In the opinion of management, the
accompanying unaudited condensed consolidated financial statements include all
adjustments, which are of a normal recurring nature, necessary to present fairly
our financial position as of January 31, 2003, the results of our operations for
the three months ended January 31, 2003 and 2002 and our cash flows for the
three months ended January 31, 2003 and 2002. The results of operations for such
interim periods are not necessarily indicative of the results to be expected for
the full year.
Statement of Financial Accounting Standards ("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
Long-Lived Assets to be Disposed Of" and the accounting and reporting provisions
of Accounting Principles Board Opinion No. 30, "Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions." The
adoption of SFAS No. 144 as of November 1, 2003 did not have a material impact
on our financial condition or results of operations.
SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of
FASB Statement 13, and Technical Corrections," requires all gains and losses
from the extinguishment of debt to be included as an item from continuing
operations. The provisions of SFAS No. 145 relating to the rescission of SFAS
No. 4, "Reporting Gains and Losses from Extinguishment of Debt," became
effective for our fiscal year ending October 31, 2003. For the three months
ended January 31, 2003, we recognized a pretax charge of approximately $3.9
million related to the retirement in December 2002 of our 8 3/4% Senior
Subordinated Notes due 2006. Under previous accounting principles generally
accepted in the United States, this charge would have been treated as an
extraordinary item.
On March 4, 2002, our Board of Directors declared a two-for-one split of our
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.
5
2. Inventory
Inventory consisted of the following (amounts in thousands):
January 31, October 31,
2003 2002
--------------- -----------------
Land and land development costs $ 815,272 $ 772,796
Construction in progress 1,591,212 1,491,108
Sample homes and sales offices 176,813 163,722
Land deposits and costs of
future developments 123,194 114,212
Other 9,704 9,223
--------------- -----------------
$2,716,195 $2,551,061
=============== =================
Construction in progress includes the cost of homes under construction, land and
land development costs and the carrying costs of lots that have been
substantially improved.
We capitalize certain interest costs to inventory during the development and
construction period. Capitalized interest is charged to interest expense when
the related inventory is closed. Interest incurred, capitalized and expensed for
the three months ended January 31, 2003 and 2002 is summarized as follows
(amounts in thousands):
2003 2002
--------------- -----------------
Interest capitalized,
beginning of period $123,637 $98,650
Interest incurred 25,782 22,870
Interest expensed (16,041) (14,155)
Write-off to cost of sales (64) (823)
--------------- -----------------
Interest capitalized,
end of period $133,314 $106,542
=============== =================
3. Earnings per Share Information
Information pertaining to the calculation of earnings per share for the three
months ended January 31, 2003 and 2002 is as follows (amounts in thousands):
2003 2002
------------ ------------
Basic weighted average shares 70,407 70,001
Common stock equivalents 3,901 4,243
------------ ------------
Diluted weighted average shares 74,308 74,244
============ ============
4. Senior Notes and Senior Subordinated Notes
On November 22, 2002, we issued $300 million of 6.875% Senior Notes. We redeemed
all of the $100 million outstanding 8 3/4% Senior Subordinated Notes due 2006 on
December 27, 2002 at a price of 102.917% of the principal amount. We recognized
a pretax charge of $3.9 million in the first quarter of fiscal 2003 representing
the premium paid on redemption and the write-off of unamortized bond issuance
costs. We intend to use the remaining proceeds for general corporate purposes.
6
5. Stock Repurchase Program
Our Board of Directors has authorized the repurchase of up to 10 million shares
of our common stock, par value $.01, from time to time, in open market
transactions or otherwise, for the purpose of providing shares for our various
employee benefit plans. As of January 31, 2003, we had repurchased approximately
5.6 million shares under the program.
6. Supplemental Disclosure to Statements of Cash Flows
The following are supplemental disclosures to the statements of cash flows for
the three months ended January 31, 2003 and 2002 (amounts in thousands):
2003 2002
---------- ----------
Supplemental disclosures of cash flow information:
Interest paid, net of capitalized
amounts $5,088 $3,574
========== ==========
Income taxes paid $34,168 $35,000
========== ==========
Supplemental disclosures of non-cash activities:
Cost of residential inventories
acquired through seller financing $4,038 $510
========== ==========
Income tax benefit relating to exercise
of employee stock options $108 $4,298
========== ==========
Stock bonus award $9,643 $6,853
========== ==========
7. Supplemental Guarantor Information
Our wholly-owned subsidiary, Toll Brothers Finance Corp. (the "Subsidiary
Issuer"), issued senior debt on November 22, 2002. The obligations of the
Subsidiary Issuer to pay principal, premiums, if any, and interest was
guaranteed jointly and severally on a senior basis by Toll Brothers, Inc. and
substantially all of our wholly-owned homebuilding subsidiaries (the "Guarantor
Subsidiaries"). The guarantees are full and unconditional. Our non-homebuilding
subsidiaries (the "Non-Guarantor Subsidiaries") did not guarantee the debt.
Separate financial statements and other disclosures concerning the Guarantor
Subsidiaries are not presented because management has determined that such
disclosures would not be material to investors. Prior to the senior debt
issuance, the Subsidiary Issuer did not have any operations.
7
Supplemental consolidating financial information of the Company, the Subsidiary
Issuer, the Guarantor Subsidiaries, the Non-Guarantor Subsidiaries and the
eliminations to arrive at Toll Brothers, Inc. on a consolidated basis are as
follows ($ amounts in thousands):
Consolidating Balance Sheet at January 31, 2003
Toll Non-
Brothers, Subsidiary Guarantor Guarantor
Inc. Issuer Subsidiaries Subsidiaries Eliminations Consolidated
--------------------------------------------------------------------------------------
ASSETS
Cash & cash equivalents 202,706 3,681 206,387
Inventory 2,715,816 379 2,716,195
Property, construction
& office equipment - net 30,710 9,365 40,075
Receivables, prepaid
expenses, investments in
subsidiaries & other assets 1,273,735 301,983 (269,534) 39,731 (1,250,409) 95,506
Customer deposits held
in escrow 21,024 21,024
Mortgage loans receivable 57,738 57,738
Investments in unconsol-
idated entities 23,908 23,908
-------------------------------------------------------------------------------------
1,273,735 301,983 2,724,630 110,894 (1,250,409) 3,160,833
=====================================================================================
LIABILITIES & STOCKHOLDERS' EQUITY
LIABILITIES
Loans payable 239,053 5,433 244,486
Senior notes 298,087 298,087
Subordinated notes 719,970 719,970
Mortgage company
warehouse loan 49,936 49,936
Customer deposits 134,234 134,234
Accounts payable 170,767 70 170,837
Accrued expenses 3,896 223,390 43,844 271,130
Income taxes payable 93,893 (1,582) 92,311
--------------------------------------------------------------------------------------
Total liabilities 93,893 301,983 1,487,414 97,701 - 1,980,991
--------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common stock 740 3,003 (3,003) 740
Additional paid-in capital 104,214 4,420 1,734 (6,154) 104,214
Retained earnings 1,147,213 1,232,796 8,456 (1,241,252) 1,147,213
Treasury stock (72,325) (72,325)
--------------------------------------------------------------------------------------
Total equity 1,179,842 - 1,237,216 13,193 (1,250,409) 1,179,842
--------------------------------------------------------------------------------------
1,273,735 301,983 2,724,630 110,894 (1,250,409) 3,160,833
======================================================================================
8
Consolidating Balance Sheet at October 31, 2002
Toll Non-
Brothers, Subsidiary Guarantor Guarantor
Inc. Issuer Subsidiaries Subsidiaries Eliminations Consolidated
--------------------------------------------------------------------------------------
ASSETS
Cash & cash equivalents 99,815 2,522 102,337
Inventory 2,550,708 353 2,551,061
Property, construction
& office equipment - net 29,036 9,460 38,496
Receivables, prepaid
expenses, investments in
subsidiaries & other assets 1,231,139 32,462 35,277 (1,203,813) 95,065
Customer deposits held
in escrow 23,019 23,019
Mortgage loans receivable 2,193 61,756 63,949
Investments in unconsol-
idated entities 21,438 21,438
--------------------------------------------------------------------------------------
1,231,139 - 2,758,671 109,368 (1,203,813) 2,895,365
======================================================================================
LIABILITIES & 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 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
======================================================================================
9
Consolidating Statement of Income for the Three Months ended January 31, 2003
Toll Non-
Brothers, Subsidiary Guarantor Guarantor
Inc. Issuer Subsidiaries Subsidiaries Eliminations Consolidated
------------------------------------------------------------------------------------
Revenues:
Home sales 557,886 557,886
Land sales 9,434 9,434
Equity earnings 253 253
Earnings from
subsidiaries 71,920 (71,920) -
Other 3,947 2,461 6,866 (10,587) 2,687
-------------------------------------------------------------------------------------
71,920 3,947 570,034 6,866 (82,507) 570,260
-------------------------------------------------------------------------------------
Costs and expenses
Cost of sales 411,973 754 59 412,786
Selling, general
and administrative 14 66,236 3,892 (4,519) 65,623
Interest 3,933 16,015 346 (4,253) 16,041
Expenses related to
retirement of debt 3,890 3,890
-------------------------------------------------------------------------------------
- 3,947 498,114 4,992 (8,713) 498,340
-------------------------------------------------------------------------------------
Income before
income taxes 71,920 - 71,920 1,874 (73,794) 71,920
Income taxes 26,506 26,506 692 (27,198) 26,506
-------------------------------------------------------------------------------------
Net income 45,414 - 45,414 1,182 (46,596) 45,414
=====================================================================================
Consolidating Statement of Income for the Three Months ended January 31, 2002
Toll Non-
Brothers, Subsidiary Guarantor Guarantor
Inc. Issuer Subsidiaries Subsidiaries Eliminations Consolidated
------------------------------------------------------------------------------------
Revenues:
Home sales 482,702 482,702
Land sales 6,423 6,423
Earnings from
subsidiaries 69,984 (69,984) -
Other 2,959 4,103 (4,008) 3,054
-------------------------------------------------------------------------------------
69,984 - 492,084 4,103 (73,992) 492,179
-------------------------------------------------------------------------------------
Costs and expenses
Cost of sales 355,178 328 136 355,642
Selling, general
and administrative 52,802 2,764 (3,168) 52,398
Interest 14,120 271 (236) 14,155
-------------------------------------------------------------------------------------
- - 422,100 3,363 (3,268) 422,195
-------------------------------------------------------------------------------------
Income before
income taxes 69,984 - 69,984 740 (70,724) 69,984
Income taxes 25,490 25,490 273 (25,763) 25,490
-------------------------------------------------------------------------------------
Net income 44,494 - 44,494 467 (44,961) 44,494
=====================================================================================
10
Consolidating Statement of Cash Flows for the Three Months ended January 31,
2003
Toll Non-
Brothers, Subsidiary Guarantor Guarantor
Inc. Issuer Subsidiaries Subsidiaries Eliminations Consolidated
--------------------------------------------------------------------------------------
Cash flows from
operating activities
Net income 45,414 45,414 1,182 (46,596) 45,414
Adjustments to reconcile net
income to net cash provided by
(used in) operating activities
Depreciation & amortization 37 2,516 492 3,045
Deferred tax provision 1,586 (1,420) 166
Provision for write-offs 280 280
Equity earnings (253) (253)
Write-off of unamortized
debt issuance costs 973 973
Changes in operating
assets and liabilities
Increase in inventory (161,350) (26) (161,376)
Origination of mortgage loans (127,283) (127,283)
Sale of mortgage loans 131,412 131,412
Decrease in receivables,
prepaid expense and other (42,596) (301,818) 304,922 (4,410) 46,596 2,694
Decrease in customer deposits (473) (473)
Increase in accounts payable
and accrued expenses 9,643 3,896 22,963 7,441 43,943
Decrease in current
taxes payable (9,215) (162) (9,377)
-----------------------------------------------------------------------------------
Net cash used in
operating activities 4,832 (297,885) 214,992 7,226 - (70,835)
-----------------------------------------------------------------------------------
Cash flows from
investing activities
Purchase of property,
construction &
office equipment (3,747) (397) (4,144)
Investment in
unconsolidated entities (3,267) (3,267)
Distributions from
unconsolidated entities 1,050 1,050
-----------------------------------------------------------------------------------
Net cash used in
investing activities - - (5,964) (397) - (6,361)
-----------------------------------------------------------------------------------
Cash flows from
financing activities
Proceeds from loans payable 160,174 114,592 274,766
Principal payments on (166,311) (120,262) (286,573)
loans payable
Net proceeds from issuance of
public debt 297,885 297,885
Redemption of public debt (100,000) (100,000)
Proceeds from stock-based
benefit plans 377 377
Purchase of treasury shares (5,209) (5,209)
-----------------------------------------------------------------------------------
Net cash provided by
financing activities (4,832) 297,885 (106,137) (5,670) - 181,246
Increase in cash
& equivalents - - 102,891 1,159 - 104,050
Cash & equivalents,
beginning of period - - 99,815 2,522 - 102,337
-----------------------------------------------------------------------------------
Cash & equivalents,
end of period - - 202,706 3,681 - 206,387
===================================================================================
11
Consolidating Statement of Cash Flows for the Three Months ended January 31,
2002
Toll Non-
Brothers, Subsidiary Guarantor Guarantor
Inc. Issuer Subsidiaries Subsidiaries Eliminations Consolidated
--------------------------------------------------------------------------------------
Cash flows from
operating activities
Net income 44,494 - 44,494 467 (44,961) 44,494
Adjustments to reconcile net
income to net cash provided by
(used in) operating activities
Depreciation & amortization 2,727 176 2,903
Deferred tax provision (1,414) (1,414)
Provision for write-offs 1,265 1,265
Expenses related to
retirement of debt
Changes in operating
assets and liabilities
Increase in inventory (93,594) (423) (94,017)
Origination of mortgage loans (83,430) (83,430)
Sale of mortgage loans 82,397 82,397
Increase in receivables,
prepaid expense and other (48,249) (764) 901 44,961 (3,151)
Decrease in customer deposits (882) (882)
Increase in accounts payable
and accrued expenses 6,853 (5,310) 317 1,860
Decrease in current
taxes payable (8,096) (8,096)
-----------------------------------------------------------------------------------
Net cash used in
operating activities (6,412) - (52,064) 405 - (58,071)
-----------------------------------------------------------------------------------
Cash flows from
investing activities
Purchase of property,
construction &
office equipment (2,481) (591) (3,072)
Investment in
unconsolidated entities (2,000) (2,000)
Distributions from
unconsolidated entities 2,800 2,800
-----------------------------------------------------------------------------------
Net cash used in
investing activities - - (1,681) (591) - (2,272)
-----------------------------------------------------------------------------------
Cash flows from
financing activities
Proceeds from loans payable 20,399 76,141 96,540
Principal payments on (25,083) (76,562) (101,645)
loans payable
Net proceeds from issuance of
public debt 149,748 149,748
Redemption of public debt
Proceeds from stock-based
benefit plans 6,437 6,437
Purchase of treasury shares (25) (25)
-----------------------------------------------------------------------------------
Net cash provided by
financing activities 6,412 - 145,064 (421) - 151,055
Increase (decrease) in cash
& equivalents - - 91,319 (607) - 90,712
Cash & equivalents,
beginning of period - - 179,434 3,406 - 182,840
-----------------------------------------------------------------------------------
Cash & equivalents,
end of period - - 270,753 2,799 - 273,552
===================================================================================
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CRITICAL ACCOUNTING POLICIES
The preparation of our consolidated financial statements requires 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 entities are accounted for on the cost method.
Inventory
Inventory is stated at the lower of cost or fair value in accordance with SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." 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.
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 write down 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. 144. If this evaluation indicates that 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
13
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 is currently 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 from the joint
ventures, 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 on the site which could take
12 months or more to finish. Two of 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 January 31, 2003, we had an aggregate amount of
approximately $15.1 million invested in these joint ventures and were committed
to contribute additional capital in an aggregate amount of approximately $27.3
million if the joint ventures require it.
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
January 31, 2003, our investment was $1.2 million in this joint venture. We do
not have any commitment to contribute additional capital to this joint venture.
In addition, Toll Brothers Realty Trust Group (the "Trust") was formed in 1998.
The Trust is effectively owned by ourselves, a number of our senior executives
and/or directors including Robert I. Toll, Bruce E. Toll (and certain members of
his family), Zvi Barzilay (and certain members of his family) and Joel H.
Rassman 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 January 31, 2003, our
investment in the Trust was $7.6 million. We also entered into a subscription
agreement whereby each group of investors agreed to invest up to an additional
$9.3 million if required by the Trust. The subscription agreement expires in
August 2003. The Trust currently owns and operates several office buildings and
an apartment complex, a portion of which is rented and a small portion of which
remains under construction.
14
In December 2002, our Board of Directors, upon the recommendation of the Real
Estate Utilization Committee of the Board of Directors (the "Committee"),
approved the sale to the Trust of a 62.2-acre parcel of land which is a portion
of our master planned community known as The Estates at Princeton Junction in
New Jersey, that is intended for development as multi-family apartment buildings
(the "Property"). The Committee's recommendation was based upon the following
advantages to us: (a) we will be able to influence the design and construction
quality so as to enhance the overall master planned community; (b) there are
synergies of development and marketing costs which may be a benefit to us; (c)
the Trust will maintain a high quality of operations, ensuring that the
existence of the apartments in the master plan will not negatively affect the
image of the community as a whole; and (d) as has been our experience with
another Trust property, apartment tenants are potential customers for our
townhomes and single-family homes. Moreover, the sale will allow us to recover
cash, remove the Property from our balance sheet, and free us from the need to
provide capital from our credit facility to build the apartment units. The $9.8
million purchase price was approved by the Committee after reviewing an offer
from an independent third party and after reviewing an independent professional
appraisal.
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 sets forth, for the three month periods ended January 31,
2003 and 2002 a comparison of certain income statement items related to our
operations (amounts in millions):
2003 2002
-------------------------------- --------------------------
$ % $ %
------------------ ------------ ------------ ------------
Housing sales
Revenues 557.9 482.7
Costs 405.2 72.6 351.4 72.8
- ------------------------------------------------------------------------------------------------------------------
Land sales
Revenues 9.4 6.4
Costs 7.6 80.7 4.2 65.7
- ------------------------------------------------------------------------------------------------------------------
Equity earnings in
unconsolidated entities 0.3
- ------------------------------------------------------------------------------------------------------------------
Other 2.7 3.1
- ------------------------------------------------------------------------------------------------------------------
Total revenue 570.3 492.2
- ------------------------------------------------------------------------------------------------------------------
Selling, general and
administrative expenses* 65.6 11.5 52.4 10.6
- ------------------------------------------------------------------------------------------------------------------
Interest expense* 16.0 2.8 14.2 2.9
- ------------------------------------------------------------------------------------------------------------------
Expenses related to early
retirement of debt* 3.9 .7 -
- ------------------------------------------------------------------------------------------------------------------
Total costs and expenses* 498.3 87.4 422.2 85.8
- ------------------------------------------------------------------------------------------------------------------
Income before income taxes* 71.9 12.6 70.0 14.2
- ------------------------------------------------------------------------------------------------------------------
Note: Due to rounding, amounts may not add
* Percentages are based on total revenues.
15
HOUSING SALES
Housing revenues for the three months ended January 31, 2003 were higher than
those for the comparable period of 2002 by approximately $75 million, or 16%.
The increase was attributable to a 9% increase in the average price of the homes
delivered and a 6% increase in the number of homes delivered. The increase in
the average price of the homes delivered in the fiscal 2003 period was the
result of increased selling prices and a shift in the location of homes
delivered to more expensive areas. The increase in the number of homes delivered
in the three month period of fiscal 2003 is primarily due to the higher backlog
of homes at October 31, 2002 as compared to October 31, 2001 which was primarily
the result of a 17% increase in the number of new contracts signed in fiscal
2002 over fiscal 2001.
The value of new sales contracts signed was $586.2 million (1,066 homes) in the
three months ended January 31, 2003, a 21% increase over the value of contracts
signed in the comparable period of fiscal 2002 of $485.2 million (928 homes).
This increase is attributable to a 15% increase in the number of units sold and
a 5% 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 units sold is attributable to the continued demand for
our product and an increase in the number of communities from which we are
selling. At January 31, 2003, we were selling from 172 communities compared to
165 communities at January 31, 2002 and 170 communities at October 31, 2002.
We believe that the demand for our product 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 of potential customers that the purchase of a home is a stable
investment in the current period of economic uncertainty. At January 31, 2003,
we had over 40,000 home sites under our control nationwide in markets we
consider to be affluent.
At January 31, 2003, our backlog of homes under contract was $1.89 billion
(3,387 homes), 34% higher than the $1.41 billion (2,662 homes) backlog at
January 31, 2002. The increase in backlog at January 31, 2003 compared to the
backlog at January 31, 2002 is primarily attributable to a higher backlog at
October 31, 2002 as compared to the backlog at October 31, 2001 and the increase
in the value and number of new contracts signed in the fiscal 2003 period as
compared to the fiscal 2002 period, offset, in part, by the higher deliveries in
the fiscal 2003 period compared to the fiscal 2002 period. Based on the size of
our current backlog, the continued demand for our product and the increased
number of selling communities from which we are operating and the additional
communities we expect to open in the coming months, we believe that we will
deliver approximately 5,000 homes in fiscal 2003 and that the average delivered
price of those homes will be between $525,000 and $535,000.
Housing costs as a percentage of housing sales decreased slightly in the
three-month period ended January 31, 2003 period as compared to the comparable
period of fiscal 2002. The decrease was largely the result of selling prices
increasing at a greater rate than costs and lower inventory write-offs, offset,
in part, by higher land and improvement costs. We incurred $.3 million in
write-offs in the three-month period ended January 31, 2003 as compared to $1.3
million in the comparable period of fiscal 2002. For the full 2003 fiscal year,
we expect that home costs will increase slightly as a percentage of home sales
revenue due primarily to geographic and product mix changes.
16
LAND SALES
We are developing several communities in which we sell a portion of the land to
other builders. The amount of land sales will vary from quarter to quarter
depending upon the scheduled timing of the delivery of the land parcels. Land
sales amounted to $9.4 million for the three months ended January 31, 2003 as
compared to $6.4 million for the comparable period of fiscal 2002. In fiscal
2003, land sales are expected to be approximately $24 million compared to $36.2
million in fiscal 2002.
EQUITY EARNINGS IN UNCONSOLIDATED JOINT VENTURES
We are a participant in several joint ventures and in Toll Brothers Realty Trust
Group. We recognize our proportionate share of the earnings from these entities.
(See "Critical Accounting Policies - Joint Venture Accounting" for a narrative
of our investments in and commitments to these entities.) Earnings from the
joint ventures will vary significantly from quarter to quarter. For fiscal 2003,
we expect to realize approximately $2 million of income from our investments in
the joint ventures and the Trust compared to $1.9 million in fiscal 2002.
INTEREST AND OTHER INCOME
For the three months ended January 31, 2003, interest and other income decreased
$.4 million as compared to the three months ended January 31, 2002. This
decrease was primarily the result of a decrease in interest income, a decrease
in retained customer deposits and a decrease in management and construction fee
income, offset, in part, by higher income realized from our ancillary
businesses. For the full 2003 fiscal year, we expect interest and other income
to be approximately $12 million compared to $11.7 million in fiscal 2002.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A")
SG&A spending increased by $13.2 million, or 25%, in the three-month period
ended January 31, 2003 as compared to the comparable period of fiscal 2002. This
increased spending was principally due to the costs incurred by the greater
number of selling communities that we had during the three-month period of
fiscal 2003 as compared to the comparable period of fiscal 2002 and higher
insurance costs. For the full 2003 fiscal year, we expect that SG&A will
increase slightly as a percentage of revenues compared to the full 2002 fiscal
year.
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 approximately the same for the three-month period ended January 31,
2003 as compared to the comparable period of fiscal 2002. For the full 2003
fiscal year, we expect interest expense as a percentage of revenues to be
comparable to the fiscal 2002 percentage.
17
EXPENSES RELATED TO THE EARLY RETIREMENT OF DEBT
We recognized a pretax charge of $3.9 million in the first quarter of fiscal
2003 representing the premium paid on redemption of our 8 3/4% Senior
Subordinated Notes due 2006 and the write-off of unamortized bond issuance costs
related to these notes. No similar charge was incurred in fiscal 2002.
INCOME BEFORE INCOME TAXES
Income before taxes increased 3% in the three-month period ended January 31,
2003 as compared to the comparable period of fiscal 2002.
INCOME TAXES
Income taxes were provided at an effective rate of 36.9% and 36.4% for the
three-month periods ended January 31, 2003 and 2002, respectively. The
difference in rates in the three-month period of fiscal 2003 as compared to the
comparable period of fiscal 2002 was due primarily to higher tax-free income in
fiscal 2002 as compared to fiscal 2003.
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.
In general, cash flow from operations assumes that as each home is delivered we
will purchase a home site to replace it. Because we own several years supply of
home sites, we do not have to immediately buy lots to replace the ones
delivered. Accordingly, we believe that cash flow from operations before
inventory additions is a better gauge of liquidity.
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 January 31, 2003, we had commitments to acquire land
of approximately $755 million, of which approximately $66 million had been paid
or deposited.
At January 31, 2003, we had a $615 million unsecured revolving credit facility
with 19 banks, of which $90 million extended to February 2003 and $525 million
extends to March 2006. During February 2003, one bank, whose commitment under
the revolving credit facility was expiring, extended $15 million of its
commitment to March 2006. On February 24, 2003 the remaining $75 million of bank
commitments expired, reducing the facility to $540 million. At January 31, 2003,
we had no borrowings and approximately $78.9 million of letters of credit
outstanding under the facility.
In November 2002, we issued $300 million of 6.875% Senior Notes due 2012. We
used a portion of the proceeds to repay all of the $100 million outstanding of
our 8 3/4% Senior Subordinated Notes due 2006, and we have used and will use the
remaining proceeds for general corporate purposes.
18
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.
19
HOUSING DATA
(For the three months ended January 31, 2003 and 2002)
Units $(Millions)
--------------------------------------------------------
2003 2002 2003 2002
-------------------------------------------------------
CLOSINGS
Northeast
(MA, RI, NH, CT, NY, NJ) 168 223 99.2 115.6
Mid-Atlantic (PA, DE, MD, VA) 379 328 182.4 153.5
Midwest (OH, IL, MI) 87 112 43.5 55.0
Southeast (FL, NC, TN) 163 131 73.4 52.6
Southwest (AZ, NV, TX) 130 109 67.4 57.4
West Coast (CA) 109 76 92.0 48.6
--------------------------------------------------------
Total 1,036 979 557.9 482.7
--------------------------------------------------------
CONTRACTS(1)
Northeast
(MA, RI, NH, CT, NY, NJ) 141 190 88.9 108.1
Mid-Atlantic (PA, DE, MD, VA) 435 319 219.4 145.8
Midwest (OH, IL, MI) 94 78 49.8 37.7
Southeast (FL, NC, TN) 115 115 55.8 55.2
Southwest (AZ, NV, TX, CO) 178 116 96.6 53.6
West Coast (CA) 103 110 75.7 84.8
--------------------------------------------------------
Total 1,066 928 586.2 485.2
--------------------------------------------------------
BACKLOG(1)
Northeast
(MA, RI, NH, CT, NY, NJ) 633 618 374.4 323.1
Mid-Atlantic (PA, DE, MD, VA) 1,190 824 584.3 384.5
Midwest (OH, IL, MI) 288 282 156.2 129.5
Southeast (FL, NC, TN) 336 312 186.9 154.0
Southwest (AZ, NV, TX, CO) 584 349 297.8 183.8
West Coast (CA) 356 277 292.2 234.7
--------------------------------------------------------
Total 3,387 2,662 1,891.8 1,409.6
--------------------------------------------------------
(1) Contracts for the three months ended January 31, 2003 and 2002 include
$3.1 million (10 homes) and $1.8 million (6 homes), respectively, from an
unconsolidated 50% owned joint venture. Backlog at January 31, 2003 and
2002 includes $7.8 million (25 homes) and $5.4 million (17 homes),
respectively, from this joint venture.
ITEM 3. 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, but will affect our earnings and cash flow. 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.
20
The table below sets forth, at January 31, 2003, our debt obligations, principal
cash flows by scheduled maturity, weighted-average interest rates and estimated
fair value (amounts in thousands):
Fixed Rate Debt Variable Rate Debt(1)(2)
----------------------------------- ------------------------------------
Fiscal Weighted Weighted
Year of Average Average
Expected Interest Interest
Maturity Amount Rate (%) Amount Rate (%)
- ---------------------------- ----------------- --------------- ----------------- ----------------
2003 $ 23,139 6.73 $50,086 2.91
2004 2,519 7.40 150 1.25
2005 208,393 7.76 150 1.25
2006 3,937 6.89 150 1.25
2007 101,888 7.70 150 1.25
Thereafter 920,000 7.75 3,860 1.25
Discount (1,943)
------------------- -----------------
Total $1,257,933 7.73 $54,546 2.77
------------------- -----------------
Fair value at
January 31, 2003 $1,303,687 $54,546
------------------- -----------------
(1) At January 31, 2003, we had a $615 million unsecured revolving credit
facility with 19 banks, of which $90 million extended to February 2003 and
$525 million extends to March 2006. During February 2003, one bank, whose
commitment under the revolving credit facility was expiring, extended $15
million of its commitment to March 2006. On February 24, 2003 the remaining
$75 million of bank commitments expired, reducing the facility to $540
million. At January 31, 2003, we had no borrowings and approximately $78.9
million of letters of credit outstanding under the facility. Interest is
payable on borrowings under this facility at .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.
(2) One of our subsidiaries has a $50 million line of credit with a bank to fund
mortgage originations. In February 2003, the subsidiary increased its line
of credit to $70 million. 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 January 31, 2003, the subsidiary had $49.9 million outstanding
under the line at an average interest rate of 2.91%. Borrowing under this
line is included in the 2003 fiscal year maturities.
Based upon the amount of variable rate debt outstanding at January 31, 2003 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 $546 thousand per year.
ITEM 4. 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.
21
There have not been any significant changes in our internal controls or in other
factors that could significantly affect these controls since the Evaluation
Date, including any corrective actions with regard to significant deficiencies
and material weaknesses.
PART II. OTHER INFORMATION
ITEM 1. 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.
ITEM 2. Changes in Securities and Use of Proceeds
None
ITEM 3. Defaults upon Senior Securities
None
ITEM 4. Submission of Matters to a Vote of Security Holders
None
ITEM 5. Other Information
None
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 4.1 Indenture dated as of November 22, 2002 between
Toll Brothers Finance Corp., as issuer, Toll Brothers, Inc., and the
other Guarantors (as defined in Section 1.01 thereof) and Bank One
Trust Company, N.A., as Trustee, 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.
Exhibit 4.2 Authorizing Resolutions relating to the
$300,000,000 principal amount of 6.875% Senior Notes due 2012 of Toll
Brothers Finance Corp. guaranteed on a Senior Basis by Toll Brothers,
Inc. and certain of its subsidiaries, 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.
Exhibit 4.3* Registration Rights Agreement dated as of
November 22, 2002 by and among Toll Brothers Finance Corp., Toll
Brothers, Inc., Salomon Smith Barney, Inc., Banc of America Securities
LLC and Banc One Capital Markets, Inc. and each of the initial
purchasers named on Schedule A attached thereto.
22
Exhibit 10.1* Purchase Agreement dated November 15, 2002
between Toll Brothers Finance Corp., Toll Brothers, Inc., Salomon Smith
Barney Inc., Banc of America Securities LLC and Banc One Capital
Markets, Inc. and each of the initial purchasers named therein.
Exhibit 99.1* Certification of Robert I. Toll pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 99.2* Certification of Joel H. Rassman pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
*Filed electronically herewith.
(b) Reports on Form 8-K
During the quarter ended January 31, 2003, we filed the following
Current Reports on Form 8-K:
(1) On November 15, 2002, we filed a Current Report on Form 8-K
for the purpose of filing consolidating financial statements
of Toll Brothers, Inc.
(2) On November 18, 2002, we filed a Current Report on Form 8-K
for the purpose of filing a press release related to the
announcement of Toll Brothers Finance Corp.'s agreement to
sell $300 million of 6.875% Senior Notes due 2012.
(3) On November 22, 2002, we filed a Current Report on Form 8-K
for the purpose of filing a press release related to the
announcement of Toll Corp.'s redemption of all $100 million
outstanding of its 8 3/4% Senior Subordinated Notes due 2006.
(4) On November 27, 2002, we filed a Current Report on Form 8-K
for the purpose of filing documents related to Toll Brothers
Finance Corp.'s issuance of $300 million of 6.875% Senior
Notes due 2012.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TOLL BROTHERS, INC.
(Registrant)
Date: March 14, 2003 By: /s/ Joel H. Rassman
-------------------------------
Joel H. Rassman
Executive Vice President,
Treasurer and Chief
Financial Officer
Date: March 14, 2003 By: /s/ Joseph R. Sicree
-------------------------------
Joseph R. Sicree
Vice President -
Chief Accounting Officer
(Principal Accounting Officer)
23
CERTIFICATION
I, Robert I. Toll, Chief Executive Officer of Toll Brothers, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Toll Brothers, Inc.;
2. Based on my knowledge, this quarterly 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 quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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 we 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 quarterly 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
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly 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 function):
(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 weakness 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
quarterly report whether or 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: March 14, 2003 By: /s/ Robert I. Toll
---------------------------
Robert I. Toll
Chief Executive Officer
24
CERTIFICATION
I, Joel H. Rassman, Chief Financial Officer of Toll Brothers, Inc., certify
that:
1. I have reviewed this quarterly report on Form 10-Q of Toll Brothers, Inc.;
2. Based on my knowledge, this quarterly 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 quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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 we 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 quarterly 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
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly 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 function):
(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 weakness 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
quarterly report whether or 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: March 14, 2003 By: /s/ Joel H. Rassman
------------------------------
Joel H. Rassman
Chief Financial Officer
25