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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, 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.
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(Exact name of Registrant as specified in its charter)
Delaware 23-2416878
- -------------------------------------------------------------- ------------------------------------
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
3103 Philmont Avenue, Huntingdon Valley, Pennsylvania 19006-4298
- ----------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (215) 938-8000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
------------------- ----------------
Common Stock (par value $.01)* New York Stock Exchange
and Pacific Exchange
Guarantee of Toll Brothers Finance New York Stock Exchange
Corp. 6.875% Senior Notes due 2012
Guarantee of Toll Brothers Finance New York Stock Exchange
Corp. 5.95% Senior Notes due 2013
* 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 April 30, 2003 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 $1,164,665,000.
As of December 31, 2003, there were 74,194,358 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement of Toll Brothers, Inc. with respect to the
2004 Annual Meeting of Stockholders, scheduled to be held on March 18, 2004,
are incorporated by reference into Part III of this report.
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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," they 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.
We cater to move-up, empty-nester and active-adult age-qualified home buyers
in 21 states in six regions of 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 and northern 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 and San Diego, California metropolitan areas
o the San Francisco Bay area of northern California
o Palm Springs, California
o the Phoenix, Arizona metropolitan area
o the Raleigh and Charlotte, North Carolina metropolitan areas
o the Dallas, Austin and San Antonio, Texas metropolitan areas
o the southeast and southwest coasts and Jacksonville area of Florida
o the Las Vegas and Reno, Nevada metropolitan areas
o the Columbus, Ohio metropolitan area
o the Detroit, Michigan metropolitan area
o the Chicago, Illinois metropolitan area
o the Denver, Colorado metropolitan area
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, 2003, we delivered 21,199 homes from 400 communities,
including 4,911 homes from 213 communities in fiscal 2003.
1
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.
At October 31, 2003, we were operating in 313 communities containing
approximately 25,600 home sites that we owned or controlled through options.
Of the 313 communities, 200 were offering homes for sale, 55 had not yet
opened for sale and 58 were sold out but all home deliveries had not been
completed. At October 31, 2003, we also owned or controlled through options
approximately 22,500 home sites in 196 proposed communities. We expect to have
approximately 225 selling communities by October 31, 2004. Of the
approximately 48,100 lots owned or controlled through options at October 31,
2003, we owned approximately 29,100.
At October 31, 2003, we were offering single-family detached homes at
prices, excluding customized
options, generally ranging from $246,000 to $1,708,000, with an average base
sales price of $546,000. We were offering single-family attached homes at
prices, excluding customized options, generally ranging from $202,000 to
$716,000, with an average base sales price of $349,000. On average, our home
buyers added
approximately 22%, or $103,000 per home, in options and lot premiums to the
base price of homes delivered in fiscal 2003. In fiscal 2003, 79% of the homes
we delivered sold for less than $700,000.
We had backlogs of $2.64 billion (4,667 homes) at October 31, 2003 and $1.87
billion (3,366 homes) at October 31, 2002. We expect that most of the homes in
backlog at October 31, 2003 will be delivered by
October 31, 2004.
In recognition of our achievements, we have received numerous awards from
national, state and local home builder publications and associations. We are
the only publicly traded national home builder 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 home builders 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; generally commencing construction of a home only after executing an
agreement of sale with a buyer; and 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.
To take advantage of commercial real estate opportunities, we formed Toll
Brothers Realty Trust Group (the "Trust") in 1998. The Trust is effectively
owned one-third by us, one-third by Robert I. Toll, Bruce E. Toll (and members
of his family), Zvi Barzilay (and members of his family), Joel H. Rassman, and
other members of our senior management, 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 806-unit apartment
complex in
Virginia, and is currently building a 635-unit apartment complex in New
Jersey.
In September 2003, we acquired substantially all of the assets of Richard R.
Dostie, Inc. ("Dostie"), a privately owned home builder in the Jacksonville,
Florida area. We expect the operations we purchased from Dostie to deliver
approximately $65 million (200 homes) in fiscal 2004.
In October 2003, we acquired substantially all of the assets of The
Manhattan Building Company ("MBC"), a privately owned developer of urban in-
fill locations in northern New Jersey. MBC, which is now operating as City
Living by Toll Brothers, is currently building for a joint venture in which it
has a 40%
interest, The Sky Club, a 326-unit, 17-story two-tower structure under
construction in Hoboken, New Jersey. Through City Living by Toll Brothers, we
are also in the planning stages on several additional high-rise and mid-rise
projects in Hoboken and Jersey City, New Jersey on the Hoboken border.
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 21 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:
Year of Year of
State Entry State Entry
----- ----- ----- -----
Pennsylvania................................. 1967 Florida......................................... 1995
New Jersey................................... 1982 Arizona......................................... 1995
Delaware..................................... 1987 Ohio............................................ 1997
Massachusetts................................ 1988 Nevada.......................................... 1998
Maryland..................................... 1988 Michigan........................................ 1999
Virginia..................................... 1992 Illinois........................................ 1999
Connecticut.................................. 1992 Rhode Island.................................... 2000
New York..................................... 1993 New Hampshire................................... 2000
California................................... 1994 Colorado........................................ 2001
North Carolina............................... 1994 South Carolina.................................. 2002
Texas........................................ 1995
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, marinas, pool complexes, 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 16 such communities and expect to open additional age-
qualified communities during the next few years. In fiscal 2003, approximately
10.9% of new contracts signed were in active-adult communities compared to
approximately 9.3% in fiscal 2002. We believe this figure could increase to
approximately 15% over the next few years.
We also sell homes in the second-home market. We have been selling homes in
this market for several years and currently offer them in Arizona, California,
Florida, Delaware, Maryland, Pennsylvania and South Carolina.
In October 2003, we acquired substantially all of the assets of The
Manhattan Building Company, a
privately owned developer and re-developer of urban in-fill sites in Northern
New Jersey. This acquisition
expands our position in the New Jersey luxury residential market and broadens
our capabilities to take advantage of future opportunities in the mid and
high-rise urban residential market. Prior to the acquisition, we had urban in-
fill communities in Providence, Rhode Island and in Palantine, a suburb of
Chicago, Illinois.
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 2002 dollars) now
stands at 15.7 million households, approximately 14.1% 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.
The largest group of baby boomers, the more than four million born annually
between 1954 and 1964, are now 39 to 49 years of age and in their peak move-up
home buying years. The leading edge of the baby
3
boom generation has now entered its 50's 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% between the year 2000 and 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 an estimated 10 million homes in 2010.
We develop individual stand-alone communities as well as master planned
communities. We currently have 14 master planned communities containing
approximately 12,400 home sites and expect to open several additional
communities during the next few years. Our master planned 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 master
planned communities in Arizona, California, Florida,
Illinois, Michigan, North Carolina, Nevada, Pennsylvania, South Carolina and
Virginia.
Each single-family detached-home community offers several home plans, with
the opportunity for home buyers 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 home buyers, including lot
premiums, added approximately 22%, or $103,000 per home, to the base price of
homes purchased in fiscal 2003.
The range of base sales prices for our different lines of homes at October
31, 2003, was as follows:
Detached Homes:
Move-up.................................... $246,000 -- $ 638,000
Executive.................................. 282,000 -- 810,000
Estate..................................... 345,000 -- 1,708,000
Active-adult, age-qualified................ 235,000 -- 450,000
Attached Homes:
Flats...................................... $202,000 -- $ 450,000
Townhomes.................................. 210,000 -- 582,000
Carriage homes............................. 200,000 -- 716,000
Contracts for the sale of homes are at fixed prices. The prices at which
homes are offered in a community generally have 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.
4
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 130 new models.
We operate in six regions around the United States. The following table
summarizes by region
closings and new contracts signed during fiscal 2003 and 2002, and backlog at
October 31, 2003 and 2002
($ in millions):
New Contracts
Closings (1) Backlog (2)
--------------- --------------- ---------------
Region Units $000 Units $000 Units $000
------ ----- ------- ----- ------- ----- -------
FISCAL 2003
Northeast (CT, MA, NH, NJ, NY, RI) ....................................... 755 450.3 1,027 584.9 932 519.4
Mid-Atlantic (DE, MD, PA, VA) ............................................ 1,793 882.0 2,333 1,171.8 1,674 837.1
Midwest (IL, MI, OH) ..................................................... 405 219.4 462 246.7 309 167.9
Southeast (FL, NC, SC, TN) ............................................... 653 311.3 591 296.9 411 218.3
Southwest (AZ, CO, NV, TX) ............................................... 717 378.2 890 506.5 709 396.8
West (CA) ................................................................ 588 489.8 858 678.4 632 497.1
----- ------- ----- ------- ----- -------
4,911 2,731.0 6,161 3,485.2 4,667 2,636.6
===== ======= ===== ======= ===== =======
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 1,134 547.3
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) ............................................... 513 270.4 707 351.4 536 268.6
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
===== ======= ===== ======= ===== =======
- ---------------
(1) New contracts include $9.2 million (29 homes) and $13.7 million (43 homes)
in fiscal 2003 and 2002, respectively, from an unconsolidated 50% owned
joint venture.
(2) Backlog at October 31, 2003 and 2002 includes $4.7 million (15 homes) and
$7.5 million (24 homes) from an unconsolidated 50% owned joint venture.
The following table summarizes certain information with respect to our
residential communities under development at October 31, 2003:
Homes Under
Number of Homes Homes Contract and Homesites
Region Communities Approved Closed Not Closed Available
------ ----------- -------- ------ ------------ ---------
Northeast.......................................................... 61 6,205 1,517 932 3,756
Mid-Atlantic....................................................... 93 12,712 3,491 1,674 7,547
Midwest............................................................ 29 3,507 1,307 309 1,891
Southeast.......................................................... 50 4,743 1,573 411 2,759
Southwest.......................................................... 53 4,714 1,456 709 2,549
West............................................................... 27 3,749 687 632 2,430
--- ------ ------ ----- ------
Total............................................................. 313 35,630 10,031 4,667 20,932
=== ====== ====== ===== ======
At October 31, 2003, significant site improvements had not commenced on
approximately 14,400 of the 20,932 available home sites. Of the 20,932
available home sites, 951 were controlled through options, but were not owned
by us, and 14 lots were owned by a joint venture in which we have a 50%
ownership
interest.
Of the 313 communities under development at October 31, 2003, 200 were
offering homes for sale, 55 had not yet opened for sale and 58 were sold out,
but not all home deliveries had been completed. Of the 200
5
communities in which homes were being offered for sale, 170 were single-family
detached-home communities containing a total of 209 homes (exclusive of model
homes) under construction but not under contract, and 30 were attached-home
communities containing a total of 58 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
downpayment 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.
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.
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 also believe that greater geographic diversification will
provide additional protection and more opportunities for growth and,
accordingly, continue to search for new markets.
The following is a summary, at October 31, 2003, 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 ....................................... 55 5,267
Mid-Atlantic .................................... 91 11,975
Midwest ......................................... 8 664
Southeast ....................................... 10 1,201
Southwest ....................................... 22 2,569
West ............................................ 10 783
--- ------
Total ........................................... 196 22,459
=== ======
Of the 22,459 planned home sites, 4,433 were owned by us. At October 31,
2003, the aggregate purchase price of land parcels under option and purchase
agreements was approximately $1.08 billion, of which we had paid or deposited
approximately $99.2 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, 2003, such feasibility analyses
6
resulted in approximately $2.0 million of capitalized costs related to
proposed communities being charged to expense because they were no longer
deemed to be recoverable.
We have substantial land currently under control for which we have obtained
approvals or are seeking approvals (as set forth in the tables above). We
devote significant resources to locating suitable land for future development
and to obtaining the required approvals on land under our control. 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 of
which we may acquire control 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 generally have been
successful in obtaining governmental approvals in the past. 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 and held for future development (assuming that all properties are
developed) to maintain our operations at current levels for several years.
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 because receipt of approvals
permits us to begin the process of obtaining executed sales contracts from
home buyers. 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, which is not seasonal.
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 in which 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 amounts, 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 amounts.
7
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.
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 home builder 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 Web site, 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 home builders 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 most 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 particular communities 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.
8
In order to secure certain approvals, in some areas, we may be required to
provide affordable housing at below market rental or sales prices. The impact
on us depends 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. Complying with 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, 2003, we employed 3,416 full-time persons; of these, 142 were
in executive positions, 376 were engaged in sales activities, 364 were in
project management activities, 1,405 were in administrative and clerical
activities, 750 were in construction activities, 188 were in architectural and
engineering activities and 191 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 such as "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, in presentations,
on our Web site and in other material released to the public.
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
9
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 home builders 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.
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
our business or 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.
10
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.
Our principal Internet address is www.tollbrothers.com. We make available
free of charge on or through www.tollbrothers.com our annual reports on Form
10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and
amendments to those reports, as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the SEC.
Our Board of Directors has various committees including an audit committee,
an executive compensation committee and a nominating and corporate governance
committee. Each of the three committees named above has a formal charter. We
also have Corporate Governance Guidelines, a Code of Ethics for Principal
Executive Officer and Senior Financial Officers, and a Code of Ethics and
Business Conduct for Directors, Officers and Employees. Copies of these
charters, guidelines and codes, and any waivers or amendments to such codes
which are applicable to our executive officers, senior financial officers or
directors, can be obtained free of charge from our Web site,
www.tollbrothersinc.com.
In addition, you may request a copy of the foregoing filings (excluding
exhibits), charters, guidelines and codes, and any waivers or amendments to
such codes which are applicable to our executive officers, senior financial
officers or directors, at no cost by writing or telephoning us at the
following address or telephone number:
Toll Brothers, Inc.
3103 Philmont Ave.
Huntingdon Valley, PA 19006
Attention: Director of Investor Relations
Telephone: (215) 938-8000
ITEM 2. PROPERTIES
Headquarters
Our corporate offices, which we own, contain approximately 114,000 square
feet, and are located in Huntingdon Valley, Montgomery County, Pennsylvania
19006.
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. 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 efficiencies, 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 are
material to our business.
11
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.
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, 2003.
Item 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The following table includes information with respect to all of our
executive officers at October 31, 2003. All executive officers serve at the
pleasure of our Board of Directors.
Name Age Positions
- ---- --- ---------
Robert I. Toll 62 Chairman of the Board, Chief Executive Officer
and Director
Zvi Barzilay 57 President, Chief Operating Officer and Director
Joel H. Rassman 58 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.
12
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, 2003.
Three Months Ended
---------------------------------------------
October 31 July 31 April 30 January 31
---------- ------- -------- ----------
2003
High ..................... $37.02 $32.13 $23.65 $21.92
Low ...................... $25.67 $22.64 $17.63 $18.85
2002
High ..................... $27.20 $31.80 $30.20 $23.20
Low ...................... $17.76 $20.81 $20.93 $15.42
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 a
minimum tangible net worth (as defined in the respective agreements), which
restricts the amount of dividends we may pay. At October 31, 2003, under the
most restrictive of these provisions, we could have paid up to approximately
$527.6 million of cash dividends.
At December 31, 2003, there were approximately 650 record holders of our
common stock.
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, 2003. It
should be read in conjunction with the Consolidated Financial Statements and
Notes thereto, included in this report beginning at page F-2, and Management's
Discussion and Analysis of Financial Condition and Results of Operations,
included in Item 7 of this report.
Summary Consolidated Income Statement
(amounts in thousands, except per share data):
Year ended October 31: 2003 2002 2001 2000 1999
- ---------------------- ---------- ---------- ---------- ---------- ----------
Revenues....................................................... $2,775,241 $2,328,972 $2,229,605 $1,814,362 $1,464,115
Income before income taxes..................................... $ 411,153 $ 347,318 $ 337,889 $ 230,966 $ 160,432
Net income..................................................... $ 259,820 $ 219,887 $ 213,673 $ 145,943 $ 101,566
Earnings per share:
Basic......................................................... $ 3.68 $ 3.12 $ 2.98 $ 2.01 $ 1.38
Diluted....................................................... $ 3.44 $ 2.91 $ 2.76 $ 1.95 $ 1.36
Weighted average number of shares
outstanding
Basic......................................................... 70,670 70,472 71,670 72,537 73,378
Diluted....................................................... 75,541 75,480 77,367 74,825 74,872
13
Summary Consolidated Balance Sheet
(amounts in thousands):
At October 31: 2003 2002 2001 2000 1999
- -------------- ---------- ---------- ---------- ---------- ----------
Inventory...................................................... $3,080,349 $2,551,061 $2,183,541 $1,712,383 $1,443,282
========== ========== ========== ========== ==========
Total assets................................................... $3,787,391 $2,895,365 $2,532,200 $2,030,254 $1,668,062
========== ========== ========== ========== ==========
Debt
Loans payable................................................. $ 281,697 $ 253,194 $ 362,712 $ 326,537 $ 213,317
Senior debt................................................... 546,669
Subordinated debt............................................. 620,000 819,663 669,581 469,499 469,418
Mortgage company warehouse loan............................... 49,939 48,996 24,754
---------- ---------- ---------- ---------- ----------
Total debt..................................................... $1,498,305 $1,121,853 $1,057,047 $ 796,036 $ 682,735
========== ========== ========== ========== ==========
Stockholders' equity........................................... $1,476,628 $1,129,509 $ 912,583 $ 745,145 $ 616,334
========== ========== ========== ========== ==========
Summary Housing Data
Year ended October 31: 2003 2002 2001 2000 1999
- ---------------------- ---------- ---------- ---------- ---------- ----------
Closings
Number of homes............................................... 4,911 4,430 4,358 3,945 3,555
Value (in thousands).......................................... $2,731,044 $2,279,261 $2,180,469 $1,762,930 $1,438,171
Contracts (1)
Number of homes............................................... 6,161 5,113 4,366 4,418 3,845
Value (in thousands).......................................... $3,485,168 $2,748,171 $2,173,938 $2,149,366 $1,640,990
At October 31: 2003 2002 2001 2000 1999
- -------------- ---------- ---------- ---------- ---------- ----------
Backlog (2)
Number of homes............................................... 4,667 3,366 2,727 2,779 2,381
Value (in thousands).......................................... $2,636,618 $1,866,294 $1,411,374 $1,434,946 $1,067,685
Number of selling communities.................................. 200 170 155 146 140
Homesites
Owned......................................................... 29,081 25,822 25,981 22,275 23,163
Controlled.................................................... 18,977 15,022 13,165 10,843 11,268
---------- ---------- ---------- ---------- ----------
Total.......................................................... 48,058 40,844 39,146 33,118 34,431
========== ========== ========== ========== ==========
- ---------------
(1) New contracts for fiscal 2003 and 2002 included $9.2 million (29 homes) and
$13.7 million (43 homes), respectively, from an unconsolidated 50% owned
joint venture.
(2) Backlog at of October 31, 2003 and 2002 included $4.7 million (15 homes)
and $7.5 million (24 homes), respectively, from an unconsolidated 50% owned
joint venture.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
Fiscal 2003 was another record year for us. Home sales revenues increased by
20% over fiscal 2002 and net income increased by 18%. In addition, our backlog
of homes under contract but not yet delivered to home buyers ("backlog") at
October 31, 2003 was 41% greater than the backlog at October 31, 2002. Based
upon the increased level of backlog, the continued strong trend in new orders
and the expected new community openings in fiscal 2004, we expect fiscal 2004
to be another record year of revenues and income. We currently own or control
over 48,000 home sites in 44 affluent markets, a substantial number of which
have the necessary development approvals. We believe that as the approval
process becomes more difficult and the political pressure from no-growth
proponents increases, our expertise in taking land through the approval
process and our already approved land positions will allow us to continue to
grow in fiscal 2005 and beyond.
14
Because of the strong demand for our homes, we have been able to increase the
base selling prices in many of our communities during the past several years.
Because of the length of time that it takes to obtain the necessary
approvals on a property, complete the land improvements on it, and deliver a
home after a home buyer signs an agreement of sale, we and other home builders
are subject to many risks. We attempt to reduce certain risks 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; generally commencing construction of a home after executing an
agreement of sale with a buyer; and using subcontractors to perform home
construction and land development work on a fixed-price basis.
In the ordinary course of doing business, we must make estimates and
judgments that affect decisions on how we operate and the reported amounts of
assets, liabilities, revenues and expenses. These estimates include, but are
not limited to, those related to the recognition of income and expenses,
impairment of assets, estimates of future improvement and amenity costs,
capitalization of costs to inventory, provisions for litigation, insurance and
warranty costs, and income taxes. We base our estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances. On an ongoing basis we evaluate and adjust our
estimates based on the information currently available. Actual results may
differ from these estimates and assumptions or conditions.
We have grown on average over 20% per year in the last decade. We have
funded this growth through the reinvestment of profits, bank borrowings and
capital market transactions. In order to help fund our growth in fiscal 2004
and beyond, we raised approximately $86 million from a common stock offering
in August 2003 and raised $550 million in two senior note offerings, a portion
of which was used to retire $200 million of senior subordinated notes which
had shorter maturities and higher interest rates. At October 31, 2003, we had
$425 million of cash and cash equivalents and approximately $460 million (net
of $115 million of letters of credit) available under our bank revolving
credit facility. With these resources, our strong cash flow from operations
before inventory growth and our record of accessing the public debt and equity
markets, we believe we have the resources available to continue to grow in
2004 and beyond.
CRITICAL ACCOUNTING POLICIES
We believe the following critical accounting policies reflect the more
significant judgments and estimates used in the preparation of our
consolidated financial statements.
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 or more to complete. Because 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 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,
15
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 cost is allocated to the remaining lots in each of the communities
of the master planned community.
OFF-BALANCE SHEET ARRANGEMENTS
We have investments in and advances to 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 the lot sales.
We are obligated to purchase 180 lots from one of the joint ventures in
which we have an interest, 45 of which we have purchased to date. We have the
right to purchase up to 385 lots from the second venture. 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 complete. Two of the joint ventures also participate in the profits
earned from home sales on lots sold to other builders above certain agreed
upon price levels. At October 31, 2003, we had approximately $24.5 million
invested in or advanced to the three joint ventures and were committed to
contribute additional capital in an aggregate amount of approximately $22.0
million if the joint ventures require it.
In October 2003, we acquired substantially all of the assets of The
Manhattan Building Company. One of the assets acquired was a 40% interest in a
joint venture that is building The Sky Club, a 326-unit, 17-story two-tower
structure, located in Hoboken, New Jersey. At October 31, 2003, our investment
in this joint venture was $4.0 million. We do not have any commitment to
contribute additional capital to this joint venture.
To take advantage of commercial real estate opportunities, we formed Toll
Brothers Realty Trust Group (the "Trust") in 1998. The Trust is effectively
owned one-third by us, one-third by Robert I. Toll, Bruce E. Toll (and members
of his family), Zvi Barzilay (and members of his family), Joel H. Rassman, and
other members of our senior management, 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 806-unit apartment
complex which it developed in Virginia, and is currently building a 635-unit
apartment complex in New Jersey. At October 31, 2003, our investment in the
Trust was $5.5 million. The Trust has a $25 million revolving credit facility
that extends through June 2005. As collateral for this facility, we and the
other groups of investors each 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 agreements, which were due to expire
in August 2003, were extended until August 2005.
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.
16
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, 2003 2002 2001
-------------- -------------- --------------
$ % $ % $ %
------- ---- ------- ---- ------- ----
Home sales
Revenues ................................................................... 2,731.0 2,279.3 2,180.5
Costs ...................................................................... 1,977.4 72.4 1,655.3 72.6 1,602.3 73.5
Land sales
Revenues ................................................................... 27.4 36.2 27.5
Costs ...................................................................... 17.9 65.2 25.7 70.9 21.5 78.0
Equity earnings in
unconsolidated entities .................................................... 1.0 1.9 6.8
Interest and other .......................................................... 15.8 11.7 14.9
Total revenues .............................................................. 2,775.2 2,329.0 2,229.6
Selling, general and
administrative expenses* ................................................... 288.3 10.4 236.1 10.1 209.7 9.4
Interest expense* ........................................................... 73.2 2.6 64.5 2.8 58.2 2.6
Expenses related to early
retirement of debt* ........................................................ 7.2 0.3
Total costs and expenses* ................................................... 2,364.1 85.2 1,981.7 85.1 1,891.7 84.8
Income before income taxes* ................................................. 411.2 14.8 347.3 14.9 337.9 15.2
Income taxes ................................................................ 151.3 127.4 124.2
Net income* ................................................................. 259.8 9.4 219.9 9.4 213.7 9.6
- ---------------
* Note: Percentages for selling, general and administrative expenses,
interest expense, expenses related to early retirement of debt, total costs
and expenses, income before taxes and net income are based on total
revenues. Amounts may not add due to rounding.
FISCAL 2003 COMPARED TO FISCAL 2002
Home Sales
Home sales revenues for fiscal 2003 of $2.73 billion (4,911 homes) were
higher than those of the comparable period of 2002 by approximately $451.8
million, or 20%. The increase was attributable to an 8% increase in the
average price of the homes delivered and an 11% increase in the number of
homes delivered. The increase in the average price of homes delivered in
fiscal 2003 was the result of increased base selling prices, a shift in the
location of homes delivered to more expensive areas and increased expenditures
on options and lot premiums by our home buyers. The increase in the number of
homes delivered in fiscal 2003 was 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, and a 4% increase in the number of contracts signed in
the first six months of fiscal 2003 as compared to the first six months of
fiscal 2002.
The value of new sales contracts signed was $3.49 billion (6,161 homes) in
fiscal 2003, a 27% increase over the $2.75 billion (5,113 homes) value of new
sales contracts signed in fiscal 2002. The increase in fiscal 2003 was
attributable to a 20% increase in the number of units sold and a 5% increase
in the average selling price of the homes. The increase in the average selling
price in fiscal 2003 was attributable to increases in base selling prices and
increases in option and lot premiums selected by our home buyers. The increase
in the number of units sold in fiscal 2003 was attributable to the continued
demand for our homes and the increase in the number of communities from which
we were selling homes. We were selling from 200 communities (including seven
communities which we acquired from Richard R. Dostie, Inc. in September 2003)
at October 31, 2003, compared to 170 communities at October 31, 2002. At
October 31, 2004 we expect to be selling from approximately 225 communities.
We believe that the demand for our homes is attributable to an
17
increase in the number of affluent households, the maturation of the baby boom
generation, a constricted supply of available new home sites in our markets,
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 October 31, 2003, we had over 48,000 home sites under our
control nationwide, compared to approximately 41,000 home sites at October 31,
2002.
At October 31, 2003, our backlog of homes under contract was $2.64 billion
(4,667 homes), an increase of 41% over the $1.87 billion (3,366 homes) backlog
at October 31, 2002. The increase in backlog at October 31, 2003, compared to
the backlog at October 31, 2002, was primarily attributable to the increase in
the value and number of new contracts signed during fiscal 2003 as compared to
fiscal 2002, offset, in part, by an increase in the number of homes delivered
in fiscal 2003 as compared to fiscal 2002.
Based on the size of our current backlog, the continued demand for our
products, 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 between 6,000 and 6,400 homes in
fiscal 2004. We estimate that the average price of the homes delivered will be
between $545,000 and $555,000 in fiscal 2004.
Home costs as a percentage of home sales revenues decreased slightly in
fiscal 2003 as compared to fiscal 2002. The decrease was primarily the result
of selling prices increasing faster than costs. In addition, we had lower
inventory write-offs in fiscal 2003 than in fiscal 2002. We incurred $5.6
million in write-offs in fiscal 2003, as compared to $6.1 million in fiscal
2002.
For fiscal 2004, we expect that home costs as a percentage of home sales
will be equal to or slightly lower than the fiscal 2003 percentage.
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 year to year
depending upon the scheduled timing of the delivery of the land parcels. Land
sales revenues amounted to $27.4 million in fiscal 2003, including $6.6
million from the sale of land to the Trust. (See Note 10 to the financial
statements, "Related Party Transactions," for a description of the sale to the
Trust.) Land sales revenues in fiscal 2002 amounted to $36.2 million. Land
costs as a percentage of land sales revenues decreased from 70.9% in fiscal
2002 to 65.2% in fiscal 2003 due to lower cost parcels being sold in fiscal
2003 compared to 2002. For fiscal 2004, we expect land sales revenues to be
approximately $16.0 million and land costs to be approximately 72% of the
sales value.
Equity Earnings in Unconsolidated Entities
We are a participant in several joint ventures and in the Trust. We
recognize income for our proportionate share of the earnings from these
entities. (See "Off-Balance Sheet Arrangements" for a description of our
investments in and commitments to these entities.) Earnings from the joint
ventures will vary significantly from year to year. For fiscal 2003, we
recognized $1.0 million of earnings from these unconsolidated entities as
compared to $1.9 million in fiscal 2002. For fiscal 2004, we expect to realize
approximately $5.0 million of income from our investments in the joint
ventures and in the Trust.
Interest and Other Income
For fiscal 2003, interest and other income was $15.8 million, an increase of
$4.1 million as compared to $11.7 million in fiscal 2002. This increase was
primarily the result of a $3.5 million profit realized from the sale of a
small commercial property in fiscal 2003, and higher income realized from our
ancillary businesses offset, in part, by decreases in forfeited customer
deposits, lower management and construction fee income, and a decrease in
gains from the sale of miscellaneous assets. For fiscal 2004, we expect
interest and other income to be approximately $15.0 million.
Selling, General and Administrative Expenses ("SG&A")
In fiscal 2003, SG&A spending increased by 22%, or $52.2 million, as
compared to fiscal 2002, while revenues in fiscal 2003 increased by 19.2%
compared to fiscal 2002. The increased spending was principally
18
due to higher sales commissions, higher costs incurred to operate the greater
number of selling communities that we had during fiscal 2003 as compared to
fiscal 2002, increased compensation and benefit costs and higher insurance
costs. We expect that SG&A as a percentage of revenues will increase slightly
in fiscal 2004 as compared to fiscal 2003's percentage. We expect to open
approximately 84 communities in fiscal 2004 as compared to 75 in fiscal 2003
and 57 in fiscal 2002.
Expenses Related To the Early Retirement of Debt
We recognized a pretax charge of $7.2 million in fiscal 2003 representing
the premium paid on the early redemption of our 8 3/4% Senior Subordinated
Notes due 2006 and our 7 3/4% Senior Subordinated Notes due 2007 and the
write-off of unamortized bond issuance costs related to those notes. No
similar charge was incurred in fiscal 2002.
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%. This 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 at the time, 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 was 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 was 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 in fiscal 2002 was 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.
19
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 was 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.
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 faster rate than costs, lower land
and improvement costs, improved operating efficiencies and lower inventory
write-downs, 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.
Land Sales
We are developing several master planned communities in which we sell land
to other builders. The amount of land sales revenues will vary from year to
year depending upon the scheduled timing of the delivery of the land parcels.
Land sales revenues amounted to $36.2 million for fiscal 2002, as compared to
$27.5 million for fiscal 2001.
Equity Earnings in Unconsolidated Joint Ventures
We are a party to several joint ventures and in the Trust. We recognize
income for our proportionate share of the earnings from these entities. (See
"Off-Balance Sheet Arrangements" for a narrative of our investments 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.
Interest and Other Income
Interest and other income decreased by $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 fiscal 2001 from the sale of an office building constructed
by us, offset, in part, by increased income from forfeited customer deposits.
Selling, General and Administrative Expenses
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
costs incurred because of 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.
INTEREST EXPENSE
We determine interest expense on a specific lot-by-lot basis for our home
building 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 have owned the land, the length
of time that the homes delivered during the period
20
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 lower in fiscal 2003
than in fiscal 2002 and slightly higher in fiscal 2002 than in fiscal 2001.
For fiscal 2004, we expect interest expense to be approximately 2.6% of total
revenues.
INCOME BEFORE INCOME TAXES
Income before income taxes increased 18% in fiscal 2003 as compared to
fiscal 2002 and increased 2.8% in fiscal 2002 as compared to fiscal 2001.
INCOME TAXES
Income taxes for fiscal 2003, 2002 and 2001 were provided at effective rates
of 36.8%, 36.7% and 36.8%, respectively.
CAPITAL RESOURCES AND LIQUIDITY
Funding for our operations has been provided principally by cash flow from
operating activities, unsecured bank borrowings and the public debt and equity
markets.
In general, cash flow from operating activities 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 need to immediately buy home sites to
replace the ones delivered. Accordingly, we believe that cash flow from
operating activities before land inventory purchases is a better gauge of
liquidity.
Cash flow from operating activities before land inventory purchases has
improved as operating results have improved. One of the main factors that
determines cash flow from operating activities before land inventory purchases,
is the level of revenues from the delivery of homes and from land sales. We
anticipate that cash flow from operating activities before land inventory
purchases will continue to be strong in fiscal 2004 due to the expected
increase in home deliveries as compared to fiscal 2003. We expect that our
inventory will continue to increase as we are currently negotiating and
searching for additional opportunities to obtain control of land for future
communities. At October 31, 2003, we had option contracts to acquire land of
approximately $1.08 billion, of which approximately $99.2 million had been
paid or deposited. We have used our cash flow from operating activities before
land inventory purchases, bank borrowings and the proceeds of public debt and
equity financing, 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 generally do not begin construction of a home until we have a signed
contract with the home buyer. Because of the significant amount of time
between the time a home buyer enters into a contract to purchase a home and
the time that the home is built and delivered, we believe we can estimate with
reasonable accuracy the number of homes we will deliver in the next six to
nine months. Should our business decline significantly, our inventory would
decrease as we complete and deliver the homes under construction but do not
commence construction of as many new homes, resulting in a temporary increase
in our cash flow from operations. In addition, under such circumstances, we
might delay or curtail our acquisition of additional land, which would further
reduce our inventory levels and cash needs.
At October 31, 2003, we had a revolving credit facility of $575 million
which extends to March 2006. At October 31, 2003, we had no borrowings and
approximately $114.8 million of letters of credit outstanding under the
facility.
During fiscal 2003, we issued $300 million of 6.875% Senior Notes due 2012
and $250 million of 5.95% Senior Notes due 2013. We used the aggregate net
proceeds to repay all of the $100 million principal amount outstanding of our
8 3/4% Senior Subordinated Notes due 2006, to repay all of the $100 million
principal amount outstanding of our 7 3/4% Senior Subordinated Notes due 2007,
to repay bank debt and for general corporate purposes.
21
In August 2003, we sold in a public offering 3.0 million shares of common
stock for aggregate net sales proceeds of $86.4 million. The proceeds from
this sale were used for general corporate purposes.
We believe that we will be able to continue to fund our activities through a
combination of existing cash resources, cash flow from operating activities
and the public debt and equity 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 price of each of our homes is fixed at the time a
buyer enters into contract to acquire a home, and because we generally
contract to sell our homes before we begin 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.
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 but do 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.
At October 31, 2003, our long-term debt obligations, principal cash flows by
scheduled maturity, weighted-average interest rates and estimated fair value
were as follows (amounts in thousands):
Fixed Rate Debt Variable Rate Debt
--------------------- ------------------
Weighted Weighted
Average Average
Fiscal Year of Interest Interest
Expected Maturity Amount Rate Amount Rate
---------------- ---------- -------- ------- --------
2004 ............................................................................... $ 40,746 5.72% $50,089 2.74%
2005 ............................................................................... 227,342 7.38% 150 1.15%
2006 ............................................................................... 3,990 6.75% 150 1.15%
2007 ............................................................................... 2,567 5.96% 150 1.15%
2008 ............................................................................... 1,142 8.66% 150 1.15%
Thereafter ......................................................................... 1,171,300 7.37% 3,860 1.15%
Discount ........................................................................... (3,331)
---------- -------
Total .............................................................................. $1,443,756 7.32% $54,549 2.61%
========== =======
Fair value at October 31, 2003 ..................................................... $1,545,524 $54,549
========== =======
We have a $575 million revolving credit facility with 17 banks which extends
through March 2006. Interest is payable on borrowings under this facility at
0.90% (this rate will vary based upon our corporate
22
debt rating and leverage ratios) above the Eurodollar rate or at other
specified variable rates as selected by us from time to time. At October 31,
2003, we had no borrowings and approximately $114.8 million of letters of
credit outstanding under the facility.
One of our subsidiaries has a $100 million line of credit with three banks
to fund mortgage originations. The line is due within 90 days of demand by the
banks and bears interest at the bank's overnight rate plus an agreed upon
margin. At October 31, 2003, the subsidiary had $49.9 million outstanding
under the line at an average interest rate of 2.74%. Borrowing under this line
is included in the fiscal 2004 maturities.
Based upon the amount of variable rate debt outstanding at October 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 $.5 million per year.
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 F-1 through F-28 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
ITEM 9A. CONTROLS AND PROCEDURES
Our chief executive officer and chief financial officer evaluated the
effectiveness of our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended)
as of the end of the period covered by 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.
There has not been any change in our internal control over financial
reporting during our quarter ended October 31, 2003 that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
23
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item for executive officers is set forth
under the heading "Executive Officers of the Registrant" in Part I, Item 4A of
this report. The other information required by this item is included in our
Proxy Statement for the 2004 Annual Meeting of Stockholders (the "2004 Proxy
Statement") and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required in this item is included in the 2004 Proxy
Statement and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Except as set forth below, the information required in this item is included
in the 2004 Proxy Statement and is incorporated herein by reference.
The following table provides information as of October 31, 2003 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 to be average remaining available
issued upon exercise price for future issuance
exercise of of outstanding under equity
outstanding options, compensation plans
options, warrants warrants (excluding securities
and rights and rights reflected in column(a))(1)
Plan Category (in thousands) (in thousands)
- ------------- ----------------- -------------- --------------------------
(a) (b) (c)
Equity compensation plans approved by security holders......... 15,533 $13.91 3,275
Equity compensation plans not approved by security holders..... -- --
------ -----
Total.......................................................... 15,533 $13.91 3,275
====== =====
(1) 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 at any one time to a maximum of
five million shares.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required in this item is included in the 2004 Proxy
Statement and is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required in this item is included in the 2004 Proxy
Statement and is incorporated herein by reference.
24
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 .......................................... F-1
Consolidated Statements of Income for the Years Ended October 31, 2003,
2002 and 2001.......................................................... F-2
Consolidated Balance Sheets as of October 31, 2003 and 2002 ............. F-3
Consolidated Statements of Cash Flows for the Years Ended October 31,
2003, 2002 and 2001.................................................... F-4
Notes to Consolidated Financial Statements .............................. F-5
Summary Consolidated Quarterly Financial Data (unaudited) ............... F-27
2. Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts for the Years Ended
October 31, 2003, 2002 and 2001 ........................... F-28
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 hereto.
(b) Reports on Form 8-K
During the quarter ended October 31, 2003, we filed or furnished the
following Current Reports on Form 8-K:
(1) On August 6, 2003, we furnished a Current Report on Form 8-K for the
purpose of filing a press release dated August 6, 2003 related to the
announcement of preliminary information related to our third quarter 2003
revenue and contracts signed and the value of our backlog of undelivered homes
at July 31, 2003.
(2) On August 15, 2003, we filed a Current Report on Form 8-K for the
purpose of filing the Terms Agreement dated as of August 13, 2003 between Toll
Brothers, Inc. and Citigroup Global Markets Inc. as Underwriter and other
documents relating to the sale of three million shares of our common stock.
(3) On August 28, 2003, we filed a Current Report on Form 8-K for the
purpose of filing a press release dated August 26, 2003 related to the
announcement of our quarter ended July 31, 2003 financial results and a press
release dated August 26, 2003 announcing the private placement of $250 million
of Toll Brothers Finance Corp. Senior Notes due 2013.
(4) On September 4, 2003, we filed a Current Report on Form 8-K for the
purpose of filing a press release dated September 3, 2003 related to the
announcement of the redemption of our 7 3/4% Senior Subordinated Notes due
2007.
(5) On September 8, 2003, we filed a Current Report on Form 8-K for the
purpose of filing a press release dated September 4, 2003 related to the
announcement of our entry into the Jacksonville, Florida market with an
agreement to acquire Richard R. Dostie New Home Collection.
(6) On September 29, 2003, we filed a Current Report on Form 8-K for the
purpose of filing documents related to Toll Brothers Finance Corp.'s issuance
of its 5.95% Senior Notes due 2013.
(7) On October 29, 2003, we filed a Current Report on Form 8-K for the
purpose of filing a press release dated October 28, 2003 related to the
announcement of our acquisition of The Manhattan Building Company.
25
(c) 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 of 3.2 of the 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 the 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 of the 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 the 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 the Registrant's Form 10-Q for the quarter ended January 31, 2002.
3.7 By-laws of Toll Brothers, Inc., As Amended and Restated March 20, 2003, are hereby incorporated by reference to
Exhibit 3.1 of the Registrant's Form 8-K filed with the Securities and Exchange Commission on March 28, 2003.
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 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 with the Securities and Exchange Commission on July 13, 1999.
4.3 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 for the quarter ended January 31, 2001.
4.4 Indenture dated as of November 22, 2002 among Toll Brothers Finance Corp., as issuer, the Registrant, as
guarantor, and Bank One Trust Company, NA, 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
4.5 First Supplemental Indenture dated as of May 1, 2003 by and among the parties listed on Schedule A thereto, and
Bank One Trust Company, NA, as Trustee, is hereby incorporated by reference to Exhibit 4.4 of the Registrant's
Registration Statement on Form S-4/A filed with the Securities and Exchange Commission on June 16, 2003, File
Nos. 333-103931, 333-103931-01, 333-103931-02, 333-103931-03 and 333-103931-04.
4.6 Second Supplemental Indenture dated as of November 3, 2003 by and among the parties listed on Schedule A thereto,
and Bank One Trust Company, NA, as Trustee, is hereby incorporated by reference to Exhibit 4.5 of the
Registrant's Registration Statement on Form S-4/A filed with the Securities and Exchange Commission on November
5, 2003, File Nos. 333-109604, 333-109604-01, 333-109604-02, 333-109604-03 and 333-109604-04.
4.7 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 the Registrant, is
hereby incorporated by reference to Exhibit 4.1 of the Registrant's Form 8-K filed with the Securities and
Exchange Commission on January 25, 1999.
26
Exhibit
Number Description
- ------ -----------
4.8 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 the Registrant is hereby
incorporated by reference to Exhibit 4.1 of the Registrant's Form 8-K filed with the Securities and Exchange
Commission on April 14, 1999.
4.9 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 the Registrant is hereby
incorporated by reference to Exhibit 4.1 of the Registrant's Form 8-K filed with the Securities and Exchange
Commission on January 24, 2001.
4.10 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 the Registrant is hereby
incorporated by reference to Exhibit 4 of the Registrant's Form 8-K filed with the Securities and Exchange
Commission on December 6, 2001.
4.11 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.
4.12 Authorizing Resolution, dated as of September 3, 2003, relating to $250,000,000 principal amount of 5.95% Senior
Notes of Toll Brothers Finance Corp. due 2013, guaranteed on a Senior basis by the Registrant and certain
subsidiaries of the Registrant is hereby incorporated by reference to Exhibit 4.1 of the Registrant's Form 8-K
filed with the Securities and Exchange Commission on September 29, 2003.
4.13 Registration Rights Agreement dated as of November 22, 2002 by and among Toll Brothers Finance Corp., the
Registrant, Salomon Smith Barney Inc., Banc of America Securities LLC and Banc One Capital Markets, Inc. and each
of the other initial purchasers named on Schedule A attached thereto is hereby incorporated by reference to
Exhibit 4.3 of the Registrant's Form 10-Q for the quarter ended January 31, 2003.
4.14 Registration Rights Agreement dated as of September 3, 2003 by and among Toll Brothers Finance Corp., the
Registrant and Citigroup Global Markets, Inc. is hereby incorporated by reference to Exhibit 4.2 of the
Registrant's Form 8-K filed with the Securities and Exchange Commission on September 29, 2003.
4.15 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.
4.16 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.
27
Exhibit
Number Description
- ------ -----------
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 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.
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.
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.
28
Exhibit
Number Description
- ------ -----------
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.
10.26 Purchase Agreement dated as of November 22, 2002 among Toll Brothers Finance Corp., the Registrant, Salomon Smith
Barney Inc., Banc of America Securities LLC and Banc One Capital Markets, Inc. and each of the other initial
purchasers named therein is hereby incorporated by reference to Exhibit 10.1 of the Registrant's Form 10-Q for
the quarter ended January 31, 2003.
10.27 Agreement dated as of August 26, 2003 among Toll Brothers Finance Corp., the Registrant and Citigroup Global
Markets, Inc. is hereby incorporated by reference to Exhibit 10.1 of the Registrant's Form 8-K filed with the
Securities and Exchange Commission on September 29, 2003.
12 Statement re: Computation of Ratios of Earnings to Fixed Charges.
21 Subsidiaries of the Registrant.
23 Consent of Independent Auditors.
31.1 Certification of Robert I. Toll pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Joel H. Rassman pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Robert I. Toll pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 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.
29
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 January 14, 2004.
TOLL BROTHERS, INC.
By: 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
--------- ----- ----
Robert I. Toll Chairman of the Board
- ----------------- of Directors and Chief Executive
Robert I. Toll Officer January 14, 2004
(Principal Executive Officer)
Bruce E. Toll Vice Chairman of the Board
- ----------------- and Director
Bruce E. Toll January 14, 2004
Zvi Barzilay President, Chief Operating
- ----------------- Officer and Director
Zvi Barzilay January 14, 2004
Joel H. Rassman Executive Vice President,
- ----------------- Treasurer, Chief Financial
Joel H. Rassman Officer and Director January 14, 2004
(Principal Financial Officer)
Joseph R. Sicree Vice President and
- ----------------- Chief Accounting Officer
Joseph R. Sicree (Principal Accounting Officer) January 14, 2004
30
Signature Title Date
--------- ------ ----
Robert S. Blank Director
- -----------------------------
Robert S. Blank January 14, 2004
Edward G. Boehne Director
- -----------------------------
Edward G. Boehne January 14, 2004
Richard J. Braemer Director
- -----------------------------
Richard J. Braemer January 14, 2004
Roger S. Hillas Director
- -----------------------------
Roger S. Hillas January 14, 2004
Carl B. Marbach Director
- -----------------------------
Carl B. Marbach January 14, 2004
Stephen A. Novick Director
- -----------------------------
Stephen A. Novick January 14, 2004
Paul E. Shapiro Director
- -----------------------------
Paul E. Shapiro January 14, 2004
31
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, 2003 and 2002, and the related
consolidated statements of income and cash flows for each of the three years
in the period ended October 31, 2003. 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, 2003 and 2002, and the consolidated
results of their operations and their cash flows for each of the three years
in the period ended October 31, 2003, 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 9, 2003
F-1
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share data)
Year ended October 31,
-------------------------------------
2003 2002 2001
---------- ---------- ----------
REVENUES
Home sales............................................................................... $2,731,044 $2,279,261 $2,180,469
Land sales............................................................................... 27,399 36,183 27,530
Equity earnings in unconsolidated entities............................................... 981 1,870 6,756
Interest and other....................................................................... 15,817 11,658 14,850
---------- ---------- ----------
2,775,241 2,328,972 2,229,605
---------- ---------- ----------
COSTS AND EXPENSES
Home sales............................................................................... 1,977,439 1,655,331 1,602,276
Land sales............................................................................... 17,875 25,671 21,464
Selling, general and administrative...................................................... 288,337 236,123 209,729
Interest................................................................................. 73,245 64,529 58,247
Expenses related to early retirement of debt............................................. 7,192
---------- ---------- ----------
2,364,088 1,981,654 1,891,716
---------- ---------- ----------
INCOME BEFORE INCOME TAXES................................................................ 411,153 347,318 337,889
INCOME TAXES.............................................................................. 151,333 127,431 124,216
---------- ---------- ----------
NET INCOME................................................................................ $ 259,820 $ 219,887 $ 213,673
========== ========== ==========
EARNINGS PER SHARE:
Basic.................................................................................... $ 3.68 $ 3.12 $ 2.98
========== ========== ==========
Diluted.................................................................................. $ 3.44 $ 2.91 $ 2.76
========== ========== ==========
WEIGHTED AVERAGE NUMBER OF SHARES:
Basic.................................................................................... 70,670 70,472 71,670
Diluted.................................................................................. 75,541 75,480 77,367
See accompanying notes.
F-2
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
October 31,
-----------------------
2003 2002
---------- ----------
ASSETS
Cash and cash equivalents ........................... $ 425,251 $ 102,337
Inventory ........................................... 3,080,349 2,551,061
Property, construction and office equipment, net .... 43,711 38,496
Receivables, prepaid expenses and other assets ...... 113,633 95,503
Mortgage loans receivable ........................... 57,500 61,756
Customer deposits held in escrow .................... 31,547 23,019
Investments in and advances to
unconsolidated entities............................ 35,400 23,193
---------- ----------
$3,787,391 $2,895,365
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Loans payable ...................................... $ 281,697 $ 253,194
Senior notes ....................................... 546,669
Senior subordinated notes .......................... 620,000 819,663
Mortgage company warehouse loan .................... 49,939 48,996
Customer deposits .................................. 176,710 134,707
Accounts payable ................................... 151,730 126,391
Accrued expenses ................................... 346,944 281,275
Income taxes payable ............................... 137,074 101,630
---------- ----------
Total liabilities................................. 2,310,763 1,765,856
---------- ----------
STOCKHOLDERS' EQUITY
Preferred stock, none issued
Common stock, 77,002 and 74,002 shares issued at
October 31, 2003 and 2002, respectively............ 770 740
Additional paid-in capital ......................... 190,596 102,600
Retained earnings .................................. 1,361,619 1,101,799
Treasury stock, at cost - 3,680 shares and 3,785 shares
at October 31, 2003 and 2002, respectively........ (76,357) (75,630)
---------- ----------
Total stockholders' equity........................ 1,476,628 1,129,509
---------- ----------
$3,787,391 $2,895,365
========== ==========
See accompanying notes.
F-3
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
Year ended October 31,
------------------------------------
2003 2002 2001
----------- --------- ---------
Cash flow from operating activities:
Net income................................................................................. $ 259,820 $ 219,887 $ 213,673
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization............................................................. 12,075 10,495 9,356
Equity earnings in unconsolidated entities................................................ (981) (1,870) (6,756)
Deferred tax provision.................................................................... 17,933 1,831 7,323
Provision for inventory write-offs........................................................ 5,638 6,081 13,035
Write-off of unamortized debt discount
and financing costs..................................................................... 1,692
Changes in operating assets and liabilities:
Increase in inventory................................................................... (478,478) (360,409) (456,922)
Origination of mortgage loans........................................................... (714,505) (412,431) (199,102)
Sale of mortgage loans.................................................................. 718,761 376,764 183,449
(Increase) decrease in receivables,
prepaid expenses and other assets.................................................... (27,331) (27,430) 10,793
Increase (decrease) in customer deposits................................................ 42,003 32,929 (3,146)
Increase in accounts payable and accrued expenses....................................... 94,471 52,761 71,776
Increase in current income taxes payable................................................ 22,831 9,042 8,142
----------- --------- ---------
Net cash used in operating activities.................................................. (46,071) (92,350) (148,379)
----------- --------- ---------
Cash flow from investing activities:
Purchase of property and equipment, net................................................... (15,475) (14,170) (15,020)
Investment in and advances to unconsolidated entities..................................... (15,268) (11,281)
Distribution from unconsolidated entities................................................. 4,550 4,200 15,750
----------- --------- ---------
Net cash (used in) provided by investing activities..................................... (26,193) (21,251) 730
----------- --------- ---------
Cash flow from financing activities:
Proceeds from loans payable............................................................... 1,096,897 528,710 208,628
Principal payments of loans payable....................................................... (1,117,047) (627,270) (180,094)
Net proceeds from issuance of public debt................................................. 544,174 149,748 196,930
Net proceeds from issuance of common stock................................................ 86,241
Redemption of senior subordinated notes................................................... (200,000)
Proceeds from stock based benefit plans................................................... 10,478 12,997 14,932
Purchase of treasury stock................................................................ (25,565) (31,087) (71,767)
----------- --------- ---------
Net cash provided by financing activities............................................... 395,178 33,098 168,629
----------- --------- ---------
Net increase (decrease) in cash and cash equivalents....................................... 322,914 (80,503) 20,980
Cash and cash equivalents, beginning of year............................................... 102,337 182,840 161,860
----------- --------- ---------
Cash and cash equivalents, end of year..................................................... $ 425,251 $ 102,337 $ 182,840
=========== ========= =========
See accompanying notes.
F-4
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 revenues 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.
Property, Construction and Office Equipment
Property, construction and office equipment are recorded at cost and are
stated net of accumulated depreciation of $54.1 million and $44.5 million at
October 31, 2003 and 2002, 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 ("SFAS") No. 144, "Accounting for
the Impairment or Disposal of Long-Lived
F-5
Assets." 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 or more 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 write down 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. 144. 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
joint venture partners. The Company recognizes its proportionate 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.
In addition, the Company effectively owns one-third of the Toll Brothers
Realty Trust Group (the "Trust"), a 50% interest in a joint venture that is
selling and building an active-adult, age-qualified community, and a 40%
interest in a joint venture that is constructing a 326-unit, 17-story two-
tower structure in Hoboken, New Jersey. The Company recognizes its
proportionate share of the earnings of these entities. (See Note 10, "Related
Party Transactions," for a description of the accounting for sales of land to
the Trust.)
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.
F-6
Warranty Costs
The Company provides all of its home buyers with a limited warranty as to
workmanship and mechanical equipment. It also provides many of its home buyers
with a limited ten-year warranty as to structural integrity. 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 amounts on its various insurance policies.
Segment Reporting
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) in fiscal 2001. 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. At
October 31, 2003, the Company had $12.1 million of unamortized goodwill
including $2.7 million from the acquisition of the assets of Richard R.
Dostie, Inc.
Acquisitions
In September 2003, the Company acquired substantially all of the assets of
Richard R. Dostie, Inc. ("Dostie"), a privately owned home builder in the
Jacksonville, Florida area. Of the approximately $48 million (153 homes) of
homes sold but not delivered at the acquisition date, the Company delivered
$11.8 million (39 homes) of homes from the acquisition date to October 31,
2003. The Company realized no profit on the delivery of these homes since they
were substantially complete as of the acquisition date and, under purchase
accounting rules, the Company allocated a portion of the purchase price to the
unrealized profit on these homes as of the acquisition date. The Company has
reduced the value of the acquired inventory by the amount of revenue realized
on these homes. The Company expects the operations it acquired from Dostie to
deliver approximately $65 million (200 homes) of homes in fiscal 2004. The
Company also expects to deliver an additional $7.8 million (25 homes) of homes
in fiscal 2004 that were substantially complete at the acquisition date, and
it will account for those homes in the same manner as the aforementioned homes
delivered from the acquisition date to October 31, 2003.
In October 2003, the Company acquired substantially all of the assets of The
Manhattan Building Company ("MBC"), a privately owned developer of urban in-
fill locations in northern New Jersey. MBC, which is now operating under the
name City Living by Toll Brothers, is currently building for a joint venture
in which it has a 40% interest, The Sky Club, a 326-unit, 17-story two-tower
structure under construction in Hoboken, New Jersey. Through City Living by
Toll Brothers, the Company is also in the planning stages on several
additional high-rise and mid-rise projects in Hoboken and Jersey City, New
Jersey on the Hoboken border.
F-7
The acquisition agreements provide for contingent payments to the respective
sellers if post-closing operations exceed specified levels of cash flow as
provided in the agreements. The acquisition prices paid at closing together
with any contingent payments we are obligated to make for both acquisitions
are not expected to be material to the financial position of the Company.
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 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, 2002 did not have a material
impact on the Company's 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 the Company's fiscal year ended October 31, 2003. During fiscal
2003, the Company recognized pretax charges of approximately $7.2 million
related to the retirement in December 2002 of our 8 3/4% Senior Subordinated
Notes due 2006 and in October 2003 of our 7 3/4% Senior Subordinated Notes due
2007. Under previous accounting principles generally accepted in the United
States, this charge would have been treated as an extraordinary item.
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure," which amends SFAS No. 123, "Accounting for Stock-Based
Compensation," provides alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based
compensation. It also requires prominent disclosures in both annual and
interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on
reported results. The Company has not elected to change to the fair-value
based method of accounting for stock-based employee compensation. The financial
disclosures required by SFAS No. 148 have been provided in the notes to the
financial statements. The Financial Accounting Standards Board ("FASB") has
announced that it intends to have a new rule in place, effective for years
beginning after December 15, 2004, requiring stock-based compensation be
treated as a cost that is reflected in the financial statements.
SFAS No. 150, "Accounting for Certain Financial Instruments With
Characteristics of both Liabilities and Equity," establishes standards for how
an issuer classifies and measures financial instruments with characteristics
of both liabilities and equity. With the exception of certain financial
measurement criteria deferred indefinitely by the FASB, SFAS No. 150 was
adopted in fiscal 2003. The implementation of SFAS No. 150 had no impact on
the Company's financial condition or results of operations.
The FASB issued FASB Interpretation No. 45 ("FIN 45"), "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." FIN 45 elaborates on the existing
disclosure requirements for most guarantees, including loan guarantees such as
standby letters of credit. It also clarifies that at the time a company issues
a guarantee, the company must recognize an initial liability for the fair
value, or market value, of the obligation it assumes under the guarantee and
must disclose that information in its interim and annual financial statements.
The provisions related to recognizing a liability at inception of the
guarantee for the fair value of the guarantor's obligations do not apply to
product warranties. The initial recognition and initial measurement provisions
apply on a prospective basis to guarantees issued or modified after December
31, 2002. The adoption of the initial recognition and initial measurement
provisions of FIN 45 did not have a material effect on the Company's financial
position or results of operations. The disclosures related to product warranty
costs required by FIN 45 have been provided in the notes to the financial
statements.
F-8
The FASB issued FASB Interpretation No. 46 ("FIN 46"), "Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51." A Variable
Interest Entity ("VIE") is an entity with insufficient equity investment or in
which the equity investors lack some of the characteristics of a controlling
financial interest. Pursuant to FIN 46, an enterprise that absorbs a majority
of the expected losses of the VIE must consolidate the VIE. FIN 46 is
effective immediately for VIEs created after January 31, 2003. For VIEs
created on or before January 31, 2003, FIN 46 must be applied at the beginning
of our quarter ending January 31, 2004. FIN 46 may apply to certain of our
option contracts to acquire land that we entered into prior to January 31,
2003. We are in the process of evaluating the applicability of FIN 46 to these
contracts. The adoption of FIN 46 for entities created after January 31, 2003,
did not have a material effect on our financial position and results of
operations and we do not believe that it will have a material effect on our
financial position or results of operations for entities created prior to
January 31, 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
2003 presentation.
2. INVENTORY
Inventory at October 31, 2003 and 2002 consisted of the following (amounts
in thousands):
2003 2002
---------- ----------
Land and land development costs ..................... $1,115,805 $ 772,796
Construction in progress ............................ 1,609,314 1,491,108
Sample homes and sales offices ...................... 188,592 163,722
Land deposits and costs of future development ....... 155,649 114,212
Other ............................................... 10,989 9,223
---------- ----------
$3,080,349 $2,551,061
========== ==========
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 write-downs and the expensing of costs
which it believed not to be recoverable of $5.6 million in fiscal 2003, $6.1
million in fiscal 2002 and $13.0 million in fiscal 2001. Of these amounts,
$2.0 million, $2.5 million and $3.8 million were applicable to future
communities in fiscal 2003, fiscal 2002 and fiscal 2001, respectively.
Interest capitalized in inventories is charged to interest expense when the
related inventory is delivered. Changes in capitalized interest for each of
the three years ended October 31, 2003, 2002 and 2001, were as follows
(amounts in thousands):
2003 2002 2001
-------- -------- --------
Interest capitalized, beginning of year....... $123,637 $ 98,650 $ 78,443
Interest incurred............................. 104,754 90,313 79,209
Interest expensed............................. (73,245) (64,529) (58,247)
Write-off to cost and expenses................ (832) (797) (755)
-------- -------- --------
Interest capitalized, end of year............. $154,314 $123,637 $ 98,650
======== ======== ========
F-9
3. LOANS PAYABLE, SENIOR NOTES, SENIOR SUBORDINATED NOTES AND MORTGAGE COMPANY
WAREHOUSE LOAN
Loans payable at October 31, 2003 and 2002 consisted of the following
(amounts in thousands):
2003 2002
-------- --------
Term loan due July 2005 ................................. $222,500 $207,500
Other ................................................... 59,197 45,694
-------- --------
$281,697 $253,194
======== ========
The Company has a $575 million unsecured revolving credit facility with 17
banks that extends through March 2006. 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, 2003. At October
31, 2003, letters of credit and obligations under escrow agreements of
approximately $114.8 million were outstanding under the facility. Under the
terms of the revolving credit agreement, the Company is not permitted to allow
its maximum leverage ratio (as defined in the agreement) to exceed 2.00 to
1.00 and is required to maintain a minimum tangible net worth (as defined in
the agreement) of approximately $914.7 million at October 31, 2003. At October
31, 2003, the Company's leverage ratio was approximately .61 to 1.00 and its
tangible net worth was approximately $1.44 billion. Based upon the minimum
tangible net worth requirement, the Company's ability to pay dividends and
repurchase its common stock is limited to approximately $527.6 million at
October 31, 2003.
The Company has an unsecured term loan of $222.5 million from nine banks at
a weighted-average interest rate of 7.43% repayable in July 2005. Under the
terms of the term loan agreement, the Company is not permitted to allow its
maximum leverage ratio (as defined in the agreement) to exceed 2.25 to 1.00
and is required to maintain a minimum tangible net worth (as defined in the
agreement) of approximately $736.6 million at October 31, 2003. At October 31,
2003, the Company's leverage ratio was approximately .61 to 1.00 and its
tangible net worth was approximately $1.45 billion.
At October 31, 2003, the aggregate estimated fair value of the Company's
loans payable was approximately $298.6 million. The fair value of loans was
estimated based upon the interest rates at October 31, 2003 that the Company
believed were available to it for loans with similar terms and remaining
maturities.
During fiscal 2003, the Company issued $300 million of 6.875% Senior Notes
due 2012 and $250 million of 5.95% Senior Notes due 2013. The Company used a
portion of the proceeds from these transactions to redeem its $100 million
outstanding of 8 3/4% Senior Subordinated Notes due 2006 and its $100 million
outstanding of 7 3/4% Senior Subordinated Notes due 2007.
F-10
At October 31, 2003 and 2002, the Company's senior notes and senior
subordinated notes consisted of the following (amounts in thousands):
2003 2002
-------- --------
Senior notes:
6.875% Senior Notes due November 15, 2012 .............. $300,000
5.95% Senior Notes due September 15, 2013 .............. 250,000
Bond discount .......................................... (3,331)
-------- --------
$546,669 --
======== ========
Senior subordinated notes:
8 3/4% Senior Subordinated Notes due November 15, 2006 . $100,000
7 3/4% Senior Subordinated Notes due September 15, 2007 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 ... 150,000 150,000
Bond discount .......................................... (337)
-------- --------
$620,000 $819,663
======== ========
The senior notes are the unsecured obligations of the Company and
substantially all of its home building subsidiaries ("Loan Parties") and the
payment of principal and interest are fully and unconditionally guaranteed,
jointly and severally by them. The senior notes rank equally in right of
payment with all the Loan Parties' existing and future unsecured senior
indebtedness including the bank revolving credit facility and the bank term
loan. The senior notes are structurally subordinated to the prior claims of
creditors, including trade creditors, of the subsidiaries of Toll Brothers,
Inc. that are not guarantors of the senior notes. The senior notes are
redeemable in whole or in part at any time at the option of the Company at
prices that vary based upon the then current rates of interest and the
remaining original term of the notes.
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, 2003, the aggregate fair value of all the outstanding senior
notes and senior subordinated notes, based upon their indicated market prices,
was approximately $589.9 million and $661.7 million, respectively.
A subsidiary of the Company has a $100 million bank line of credit with
three banks to fund mortgage originations. The line of credit is due within
ninety days of demand by the banks and bears interest at the bank's overnight
rate plus an agreed upon margin. At October 31, 2003, the subsidiary had
borrowed $49.9 million under the line of credit at an average interest rate of
2.74%. The line of credit is collateralized by all the assets of the
subsidiary, which amounted to approximately $61.0 million at October 31, 2003.
The annual aggregate maturities of the Company's loans and notes during each
of the next five fiscal years are: 2004 - $90.8 million; 2005 - $227.5
million; 2006 - $4.1 million; 2007 - $2.7 million; and 2008 - $1.3 million.
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
2003, 2002 and 2001. The effective tax rate in 2003, 2002 and 2001 was 36.8%,
36.7% and 36.8%, respectively. The primary difference between the Company's
Base Rate and effective tax rate was tax-free income in each of the years.
F-11
The provision for income taxes for each of the three years ended October 31,
2003, 2002 and 2001 was as follows (amounts in thousands):
2003 2002 2001
-------- -------- --------
Federal............................................... $139,046 $117,233 $114,131
State................................................. 12,287 10,198 10,085
-------- -------- --------
$151,333 $127,431 $124,216
======== ======== ========
Current............................................... $133,400 $125,600 $116,893
Deferred.............................................. 17,933 1,831 7,323
-------- -------- --------
$151,333 $127,431 $124,216
======== ======== ========
The components of income taxes payable at October 31, 2003 and 2002
consisted of the following (amounts in thousands):
2003 2002
-------- --------
Current ................................................. $ 85,681 $ 68,170
Deferred ................................................ 51,393 33,460
-------- --------
$137,074 $101,630
======== ========
The components of net deferred taxes payable at October 31, 2003 and 2002
consisted of the following (amounts in thousands):
2003 2002
------- -------
Deferred tax liabilities:
Capitalized interest..................................... $48,679 $38,783
Deferred expense......................................... 43,166 22,192
------- -------
Total ................................................. 91,845 60,975
------- -------
Deferred tax assets:
Inventory valuation reserves............................. 18,014 14,618
Inventory valuation differences.......................... 2,684 2,204
Deferred income.......................................... 2,960 431
Accrued expenses deductible when paid.................... 2,401 2,105
Other.................................................... 14,393 8,157
------- -------
Total ................................................. 40,452 27,515
------- -------
Net deferred tax liability ................................ $51,393 $33,460
======= =======
5. STOCKHOLDERS' EQUITY
The Company's authorized capital stock consists of 100 million shares of
Common Stock, $.01 par value per share, and 1 million 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 million shares and the number of
shares of authorized Preferred Stock to 15 million shares.
Issuance of Common Stock
In August 2003, the Company issued 3 million shares of its common stock at a
price of $28.80 realizing net proceeds of $86.4 million.
F-12
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.
Stock Repurchase Program
In December 2000, the Company's Board of Directors authorized the repurchase
of up to 10 million 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. In March 2003, the Board of
Directors re-authorized and renewed the repurchase program to allow the
Company to repurchase up to 10 million shares (including any shares remaining
under the original authorization.) At October 31, 2003, the Company had
approximately 9.8 million shares remaining under the repurchase 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, 2003.
F-13
Changes in Stockholders' Equity
Changes in stockholders' equity for each of the three years ended October
31, 2003, 2002 and 2001 were as follows (amounts in thousands):
Common Stock Additional
--------------- Paid-In Retained Treasury
Shares Amount Capital Earnings Stock Total
------ ------ ---------- ---------- -------- ----------
Balance, November 1, 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
Net income ................................................. 259,820 259,820
Issuance of shares ......................................... 3,000 30 86,241 86,271
Purchase of treasury stock ................................. (1,340) 160 (25,725) (25,565)
Exercise of stock options .................................. 897 (240) 15,690 15,450
Executive bonus award ...................................... 471 1,685 7,959 9,644
Employee benefit plan issuances ............................ 77 150 1,349 1,499
------ ---- -------- ---------- -------- ----------
Balance, October 31, 2003 .................................. 73,322 $770 $190,596 $1,361,619 $(76,357) $1,476,628
====== ==== ======== ========== ======== ==========
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."
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, 2003, 2002 and 2001:
2003 2002 2001
----- ----- -----
Risk-free interest rate.................................................................................. 3.53% 5.02% 4.01%
Expected life (years).................................................................................... 7.07 7.50 7.31
Volatility............................................................................................... 43.37% 41.30% 37.40%
Dividends................................................................................................ none none none
F-14
At October 31, 2003, 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):
2003 2002 2001
-------- -------- --------
Net income ....................................................................... As reported $259,820 $219,887 $213,673
Pro forma $245,158 $205,314 $202,597
Basic net income per share ....................................................... As reported $ 3.68 $ 3.12 $ 2.98
Pro forma $ 3.47 $ 2.91 $ 2.83
Diluted net income per share ..................................................... As reported $ 3.44 $ 2.91 $ 2.76
Pro forma $ 3.25 $ 2.72 $ 2.62
Weighted-average grant date fair value per share of options granted .............. $ 10.24 $ 11.17 $ 8.93
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.
No additional options may be granted under the Company's Stock Option Plan
(1986) and the Company's Stock Option and Incentive Stock Plan (1995).
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 million
shares.
The following table summarizes stock option activity for the four plans
during each of the three years ended October 31, 2003, 2002 and 2001:
2003 2002 2001
---------------------- ---------------------- ----------------------
Number Average Number Average Number Average
of Exercise of Exercise of Exercise
Options Price Options Price Options Price
(in 000s) per Option (in 000s) per Option (in 000s) per Option
---------------------- ---------------------- ----------------------
Outstanding, November 1, ............................ 15,321 $13.24 14,486 $11.44 14,007 $ 9.94
Granted ............................................. 1,280 21.05 2,586 21.76 2,299 19.31
Exercised ........................................... (926) 11.86 (1,530) 9.98 (1,590) 9.59
Cancelled ........................................... (142) 19.39 (221) 17.68 (230) 11.51
------ ------ ------
Outstanding, October 31 ............................. 15,533 $13.91 15,321 $13.24 14,486 $11.44
====== ====== ======
Options exercisable, October 31, .................... 11,083 $11.62 9,781 $10.64 9,276 $ 9.96
====== ====== ======
Options available for grant October 31, ............. 3,275 3,498 5,619
====== ====== ======
F-15
The following table summarizes information about stock options outstanding
and exercisable at October 31, 2003:
Options Outstanding Options Exercisable
-------------------------------------- -----------------------
Weighted-
Average
Remaining Weighted- Weighted-
Contractual Average Average
Number Life Exercise Number Exercise
Range of Exercise Prices Outstanding (in years) Price Exercisable Price
- ------------------------ ----------- ----------- --------- ----------- ---------
$ 4.35 - $ 8.70............................................... 1,351,800 1.6 $ 6.19 1,351,800 $ 6.19
8.71 - 10.88................................................ 4,686,062 4.8 9.14 4,192,537 9.19
10.89 - 13.06............................................... 2,572,817 4.8 11.86 2,572,817 11.86
13.07 - 15.23............................................... 1,395,000 4.2 14.01 1,395,000 14.01
15.24 - 21.76............................................... 5,527,681 8.0 20.76 1,571,315 20.26
---------- ----------
$ 4.35 - $21.76............................................... 15,533,360 5.6 $13.91 11,083,469 $11.62
========== ==========
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, 1999, 2000 and 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 of $6.9 million which
represented the fair market value of the 440,002 shares issued to Mr. Toll.
In December 2000, Mr. Toll and the Board of Directors agreed that any bonus
payable for each of the three fiscal years ending October 31, 2002, 2003 and
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 2003 and 2002
of $20.3 million and $9.6 million, respectively, which represented the fair
market value of shares issued to Mr. Toll (550,857 shares for 2003 and 471,099
shares for 2002).
On October 31, 2003, 2002 and 2001, the closing price of the Company's
Common Stock on the New York Stock Exchange was $36.84, $20.48 and $15.58,
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. In December 2003, Mr. Toll will receive
199,920 shares of his 2001 bonus.
Employee Stock Purchase Plan
The Company's Employee Stock Purchase Plan enables substantially all
employees to purchase the Company's Common Stock at 95% of the market price of
the stock on specified offering dates without restriction 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, 2003, a total of 433,191 shares were
available for issuance.
The number of shares and the average price per share issued under this plan
during each of the three fiscal years ended October 31, 2003, 2002 and 2001
were 15,085 shares and $21.12; 15,672 shares and $21.24; and 12,536 shares and
$15.24, respectively. No compensation expense was recognized by the Company
under this plan.
F-16
7. EARNINGS PER SHARE INFORMATION
Information pertaining to the calculation of earnings per share for each of
the three years ended October 31, 2003, 2002 and 2001 is as follows (amounts
in thousands):
2003 2002 2001
------ ------ ------
Basic weighted average shares............................................ 70,670 70,472 71,670
Assumed conversion of dilutive stock options............................. 4,871 5,008 5,697
------ ------ ------
Diluted weighted average shares.......................................... 75,541 75,480 77,367
====== ====== ======
8. EMPLOYEE RETIREMENT AND DEFERRED COMPENSATION PLANS
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 $5.3 million, $3.5 million, and
$3.1 million for the years ended October 31, 2003, 2002 and 2001,
respectively.
The Company has an unfunded, non-qualified deferred compensation plan that
permits eligible employees to defer a portion of their compensation. The
deferred compensation, together with certain Company contributions, earns
various rates of return depending upon when the compensation was deferred and
the length of time that it was deferred. A portion of the deferred
compensation and interest earned may be forfeited by a participant if he or
she elects to withdraw the compensation prior to the end of the deferral
period. At October 31, 2003 and 2002, the Company had accrued $2.3 million and
$1.0 million, respectively, for its obligations under the plan.
9. COMMITMENTS AND CONTINGENCIES
The Company accrues expected warranty costs at the time each home is closed
and title and possession have been transferred to the home buyer. Changes in
the warranty accrual during fiscal 2003 is as follows (amounts in thousands):
Balance, November 1, 2002 ........................................... $ 29,197
Additions ........................................................... 19,732
Charges incurred .................................................... (15,177)
--------
Balance, October 31, 2003 ........................................... $ 33,752
========
At October 31, 2003, the Company had agreements to purchase land for future
development with an aggregate purchase price of approximately $1.08 billion,
of which $99.2 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, 2003, the Company had outstanding surety bonds amounting to
approximately $637.0 million related primarily to its obligations to various
governmental entities to construct improvements in the Company's various
communities. The Company estimates that approximately $300.3 million of work
remains on these improvements. The Company has an additional $58.0 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, 2003, the Company had agreements of sale outstanding to
deliver 4,667 homes with an aggregate sales value of approximately $2.64
billion.
At October 31, 2003, the Company was committed to provide approximately $505
million of mortgage loans to its home buyers 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
F-17
arranges a variety of mortgage programs that are offered to its home buyers
through outside mortgage lenders.
The Company leases certain facilities and equipment under non-cancelable
operating leases. Rental expense incurred by the Company amounted to $3.4
million for 2003, $2.8 million for 2002 and $2.6 million for 2001. At October
31, 2003, future minimum rent payments under these operating leases were $5.5
million for 2004, $4.5 million for 2005, $2.7 million for 2006, $1.5 million
for 2007, and $0.3 million for 2008.
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, the Company
formed Toll Brothers Realty Trust Group (the "Trust") in 1998. The Trust is
effectively owned one-third by the Company, one-third by Robert I. Toll, Bruce
E. Toll (and members of his family), Zvi Barzilay (and members of his family),
Joel H. Rassman, and other members of the Company's senior management, and
one-third by the Pennsylvania State Employees Retirement System (collectively,
the "Shareholders").
The Shareholders entered into subscription agreements whereby each group has
agreed to invest additional capital in an amount not to exceed $9.3 million if
required by the Trust. The subscription agreements, which were to expire in
August 2003, were extended until August 2005. At October 31, 2003, the Company
had an investment of $5.5 million in the Trust. This investment is accounted
for on the equity method.
In December 2002, the Company's Board of Directors, upon the recommendation
of its Real Estate Utilization Committee (the "Committee"), which is comprised
of members of the Board of Directors who do not have a financial interest in
the Trust, approved the sale to the Trust of a 62.2-acre parcel of land, which
is a portion of the Company's multi-product community known as The Estates at
Princeton Junction in New Jersey, that is intended for development as multi-
family rental apartment buildings (the "Property"). The Committee's
recommendation that the Company sell the Property to the Trust rather than to
an outside third party was based upon the following advantages to the Company:
(a) the Company will be able to influence the design and construction quality
so as to enhance the overall community; (b) there are synergies of development
and marketing costs which may be a benefit to the Company; (c) the Trust will
maintain a high quality of operations, ensuring that the existence of the
apartments in the community 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 the purchase of the
Company's townhomes and single-family homes. Moreover, the sale has allowed
the Company to recover cash, remove the Property from the Company's balance
sheet, and free the Company from the need to provide capital from its credit
facility to build the apartment units. The $9.8 million sales price was
approved by the Committee after reviewing an offer from an independent third
party and after reviewing an independent professional appraisal. The sale was
completed in May 2003. Because the Company owns one-third of the Trust, it
only recognized two-thirds of the revenue, cost and profit on the sale. The
remaining one-third of the profit on the sale reduced the Company's investment
in the Trust.
The Company provides development, finance and management services to the
Trust and received fees under the terms of various agreements in the amounts
of $1.0 million, $1.2 million and $1.7 million in fiscal 2003, 2002 and 2001,
respectively. The Company believes that the transactions, including the sale
of the Property, between itself and the Trust were on no less favorable terms
than it would have agreed to with unrelated third parties.
F-18
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, 2003, 2002 and 2001 (amounts in
thousands):
2003 2002 2001
-------- -------- --------
Cash flow information:
Interest paid, net of amount capitalized........................................................ $ 39,154 $ 29,867 $ 26,985
======== ======== ========
Income taxes paid............................................................................... $109,018 $116,558 $108,750
======== ======== ========
Non-cash activity:
Cost of inventory acquired through seller financing............................................. $ 56,956 $ 13,284 $ 32,395
======== ======== ========
Income tax benefit related to exercise of employee stock options................................ $ 5,320 $ 7,394 $ 5,396
======== ======== ========
Stock bonus awards.............................................................................. $ 9,643 $ 6,855 $ 4,413
======== ======== ========
Contributions to employee retirement plan....................................................... $ 1,180 $ 883 $ 791
======== ======== ========
12. SUPPLEMENTAL GUARANTOR INFORMATION
A wholly owned subsidiary of the Company, Toll Brothers Finance Corp. (the
"Subsidiary Issuer"), issued $300 million of 6.875% Senior Notes due 2012 on
November 22, 2002 and $250 million of 5.95% Senior Notes due 2013 on September
3, 2003. 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, the Subsidiary Issuer did not
have any operations.
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
is presented below (amounts in thousands $).
F-19
Consolidating Balance Sheet at October 31, 2003
Toll Non-
Brothers, Subsidiary Guarantor Guarantor
Inc. Issuer Subsidiaries Subsidiaries Eliminations Consolidated
--------- ---------- ------------ ------------ ------------ ------------
ASSETS
Cash & cash equivalents ................... 417,076 8,175 425,251
Inventory ................................. 3,080,171 178 3,080,349
Property, construction & office
equipment - net.......................... 33,582 10,129 43,711
Receivables, prepaid expenses and other
assets................................... 3,498 77,643 42,890 (10,398) 113,633
Mortgage loans receivable ................. 57,500 57,500
Customer deposits held in escrow .......... 31,547 31,547
Investments in & advances to
unconsolidated entities.................. 35,400 35,400
Investments in & advances to
consolidated entities.................... 1,615,110 555,078 (698,225) (2,403) (1,469,560) --
--------- ---------- ------------ ------------ ------------ ------------
1,615,110 558,576 2,977,194 116,469 (1,479,958) 3,787,391
========= ========== ============ ============ ============ ============
LIABILITIES & STOCKHOLDERS' EQUITY
LIABILITIES
Loans payable ............................ 277,087 4,610 281,697
Senior notes ............................. 546,669 546,669
Senior subordinated notes ................ 620,000 620,000
Mortgage company warehouse loan .......... 49,939 49,939
Customer deposits ........................ 176,710 176,710
Accounts payable ......................... 151,722 8 151,730
Accrued expenses ......................... 11,907 300,028 45,521 (10,512) 346,944
Income taxes payable ..................... 138,482 (1,408) 137,074
--------- ------- --------- ------- ---------- ---------
Total liabilities....................... 138,482 558,576 1,525,547 98,670 (10,512) 2,310,763
--------- ------- --------- ------- ---------- ---------
STOCKHOLDERS' EQUITY
Common stock ............................. 770 3,003 (3,003) 770
Additional paid-in capital ............... 190,596 4,420 1,734 (6,154) 190,596
Retained earnings ........................ 1,361,619 1,447,227 13,062 (1,460,289) 1,361,619
Treasury stock ........................... (76,357) (76,357)
--------- ------- --------- ------- ---------- ---------
Total equity............................ 1,476,628 -- 1,451,647 17,799 (1,469,446) 1,476,628
--------- ------- --------- ------- ---------- ---------
1,615,110 558,576 2,977,194 116,469 (1,479,958) 3,787,391
========= ======= ========= ======= ========== =========
F-20
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 and other assets................ (369) 70,480 24,812 580 95,503
Mortgage loans receivable 61,756 61,756
Customer deposits held in escrow .......... 23,019 23,019
Investments in & advances to
unconsolidated entities.................. 23,193 23,193
Investments in & advances to
consolidated entities.................... 1,231,508 -- (37,580) 10,465 (1,204,393) --
--------- ---------- --------- ------- ---------- ---------
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
Senior 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
========= ========== ========= ======= ========== =========
F-21
Consolidating Income Statement for the fiscal year ended October 31, 2003
Toll Non-
Brothers, Subsidiary Guarantor Guarantor
Inc. Issuer Subsidiaries Subsidiaries Eliminations Consolidated
--------- ---------- ------------ ------------ ------------ ------------
Revenues:
Home sales ............................... 2,731,044 2,731,044
Land sales ............................... 27,399 27,399
Equity earnings .......................... 981 981
Earnings from subsidiaries ............... 411,196 (411,196) --
Other .................................... (4) 22,157 14,534 31,841 (52,711) 15,817
------- ---------- --------- ------ -------- ---------
411,192 22,157 2,773,958 31,841 (463,907) 2,775,241
------- ---------- --------- ------ -------- ---------
Costs and expenses:
Cost of sales ............................ 1,991,979 2,903 432 1,995,314
Selling, general and administrative ...... 39 129 290,437 18,073 (20,341) 288,337
Interest ................................. 22,028 73,154 1,685 (23,622) 73,245
Expenses related to retirement of debt ... 7,192 7,192
------- ---------- --------- ------ -------- ---------
39 22,157 2,362,762 22,661 (43,531) 2,364,088
------- ---------- --------- ------ -------- ---------
Income before income taxes ................ 411,153 -- 411,196 9,180 (420,376) 411,153
Income taxes .............................. 151,333 151,352 3,392 (154,744) 151,333
------- ---------- --------- ------ -------- ---------
Net income ................................ 259,820 -- 259,844 5,788 (265,632) 259,820
======= ========== ========= ====== ======== =========
Consolidating Statement of Income for the fiscal year ended October 31, 2002
Toll Non-
Brothers, Subsidiary Guarantor Guarantor
Inc. Issuer Subsidiaries Subsidiaries Eliminations Consolidated
--------- ---------- ------------ ------------ ------------ ------------
Revenues:
Home sales ............................... 2,279,261 2,279,261
Land sales ............................... 36,183 36,183
Equity earnings .......................... 1,870 1,870
Earnings from subsidiaries ............... 347,478 (347,478) --
Other ..................................... 11,928 32,652 (32,922) 11,658
------- ---------- --------- ------ -------- ---------
347,478 -- 2,329,242 32,652 (380,400) 2,328,972
------- ---------- --------- ------ -------- ---------
Costs and expenses:
Cost of sales ............................ 1,678,590 14,383 (11,971) 1,681,002
Selling, general and administrative ...... 6 238,922 12,890 (15,695) 236,123
Interest ................................. 154 64,254 1,008 (887) 64,529
------- ---------- --------- ------ -------- ---------
160 -- 1,981,766 28,281 (28,553) 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
======= ========== ========= ====== ======== =========
F-22
Consolidating Statement of Income for the fiscal year ended October 31, 2001
Toll Non-
Brothers, Subsidiary Guarantor Guarantor
Inc. Issuer Subsidiaries Subsidiaries Eliminations Consolidated
--------- ---------- ------------ ------------ ------------ ------------
Revenues:
Home sales ............................... 2,180,469 2,180,469
Land sales ............................... 27,530 27,530
Equity earnings .......................... 6,756 6,756
Earnings from subsidiaries ............... 337,892 (337,892) --
Other ..................................... 14,074 15,192 (14,416) 14,850
------- ---------- --------- ------ -------- ---------
337,892 -- 2,228,829 15,192 (352,308) 2,229,605
------- ---------- --------- ------ -------- ---------
Costs and expenses:
Cost of sales ............................ 1,621,897 3,577 (1,734) 1,623,740
Selling, general and administrative ...... 3 211,006 9,036 (10,316) 209,729
Interest ................................. 58,035 960 (748) 58,247
------- ---------- --------- ------ -------- ---------
3 -- 1,890,938 13,573 (12,798) 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
======= ========== ========= ====== ======== =========
F-23
Consolidating Statement of Cash Flows for the fiscal year ended October 31, 2003
Toll Non-
Brothers, Subsidiary Guarantor Guarantor
Inc. Issuer Subsidiaries Subsidiaries Eliminations Consolidated
--------- ---------- ------------ ------------ ------------ ------------
Cash flows from operating activities
Net income ................................ 259,820 259,844 5,788 (265,632) 259,820
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities
Depreciation & amortization .............. 209 10,617 1,249 12,075
Deferred income taxes .................... 19,835 (1,902) 17,933
Provision for write-offs ................. 5,638 5,638
Equity earnings .......................... (981) (981)
Expenses related to retirement of debt ... 1,692 1,692
Changes in operating assets and
liabilities
Increase in inventory................... (478,653) 175 (478,478)
Origination of mortgage loans........... (714,505) (714,505)
Sale of mortgage loans.................. 718,761 718,761
Increase in receivables, prepaid expense
and other.............................. (383,969) (556,290) 652,349 (5,053) 265,632 (27,331)
Increase in customer deposits........... 42,003 42,003
Increase in accounts payable and
accrued expenses....................... 10,823 11,907 62,686 9,055 94,471
Decrease in current taxes payable....... 22,337 494 22,831
-------- -------- -------- -------- -------- ----------
Net cash provided by (used in) operating
activities .............................. (71,154) (544,174) 555,195 14,062 -- (46,071)
-------- -------- -------- -------- -------- ----------
Cash flows from investing activities
Purchase of property, construction
& office equipment ...................... (13,557) (1,918) (15,475)
Investment in unconsolidated entities .... (15,268) (15,268)
Distributions from unconsolidated
entities ............................... 4,550 4,550
-------- -------- -------- -------- -------- ----------
Net cash used in investing activities ..... -- -- (24,275) (1,918) -- (26,193)
-------- -------- -------- -------- -------- ----------
Cash flows from financing activities
Proceeds from loans payable .............. 420,597 676,300 1,096,897
Principal payments on loans payable ...... (434,256) (682,791) (1,117,047)
Net proceeds from public debt ............ 544,174 544,174
Redemption of public debt ................ (200,000) (200,000)
Proceeds from stock-based benefit plans .. 10,478 10,478
Proceeds from issuance of stock .......... 86,241 86,241
Purchase of treasury shares .............. (25,565) (25,565)
-------- -------- -------- -------- -------- ----------
Net cash provided by (used in) financing
activities .............................. 71,154 544,174 (213,659) (6,491) -- 395,178
-------- -------- -------- -------- -------- ----------
Increase (decrease) in cash & equivalents . -- -- 317,261 5,653 -- 322,914
Cash & equivalents, beginning of period ... 99,815 2,522 102,337
-------- -------- -------- -------- -------- ----------
Cash & equivalents, end of period ......... -- -- 417,076 8,175 -- 425,251
======== ======== ======== ======== ======== ==========
F-24
Consolidating Statement of Cash Flows for the Twelve Months ended October 31,
2002
Toll Non-
Brothers, Subsidiary Guarantor Guarantor
Inc. Issuer Subsidiaries Subsidiaries Eliminations Consolidated
--------- ---------- ------------ ------------ ------------ ------------
Cash flows from operating activities
Net income ................................ 219,887 219,987 2,755 (222,742) 219,887
Adjustments to reconcile net income to
net cash provided by (used in) operating
activities
Depreciation & amortization .............. 9,509 986 10,495
Deferred income taxes .................... 1,831 1,831
Provision for write-offs ................. 6,081 6,081
Equity earnings .......................... (1,870) (1,870)
Changes in operating assets and
liabilities
Increase in inventory .................. (360,552) 143 (360,409)
Origination of mortgage loans........... (412,431) (412,431)
Sale of mortgage loans.................. 376,764 376,764
Increase in receivables, prepaid
expense and other...................... (220,404) (11,207) (18,561) 222,742 (27,430)
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 current taxes payable....... 9,042 9,042
-------- ---------- -------- -------- -------- --------
Net cash used in operating activities ..... 18,090 -- (82,592) (27,848) -- (92,350)
-------- ---------- -------- -------- -------- --------
Cash flows from investing activities
Purchase of property, construction
& office equipment ...................... (9,758) (4,412) (14,170)
Unconsolidated entities
Investment in........................... (11,281) (11,281)
Distributions from...................... 4,200 4,200
-------- ---------- -------- -------- -------- --------
Net cash used in investing activities ..... -- -- (16,839) (4,412) -- (21,251)
-------- ---------- -------- -------- -------- --------
Cash flows from financing activities
Proceeds from loans payable .............. 180,995 347,715 528,710
Principal payments on loans payable ...... (310,931) (316,339) (627,270)
Net proceeds from public debt ............ 149,748 149,748
Redemption of public debt
Proceeds from stock-based benefit plans .. 12,997 12,997
Purchase of treasury shares .............. (31,087) (31,087)
-------- ---------- -------- -------- -------- --------
Net cash (used in) provided by financing
activities............................... (18,090) -- 19,812 31,376 -- 33,098
-------- ---------- -------- -------- -------- --------
Decrease in cash & equivalents ............ -- -- (79,619) (884) -- (80,503)
Cash & equivalents, beginning of period ... 179,434 3,406 182,840
-------- ---------- -------- -------- -------- --------
Cash & equivalents, end of period ......... -- -- 99,815 2,522 -- 102,337
======== ========== ======== ======== ======== ========
F-25
Consolidating Statement of Cash Flows for the Twelve Months ended October 31,
2001
Toll Non-
Brothers, Subsidiary Guarantor Guarantor
Inc. Issuer Subsidiaries Subsidiaries Eliminations Consolidated
--------- ---------- ------------ ------------ ------------ ------------
Cash flows from operating activities
Net income ................................ 213,673 213,895 1,022 (214,917) 213,673
Adjustments to reconcile net income to
net cash provided by (used in) operating
activities
Depreciation & amortization ............... 8,845 511 9,356
Deferred income taxes ..................... 7,323 7,323
Provision for write-offs .................. 13,035 13,035
Equity earnings ........................... (6,756) (6,756)
Changes in operating assets and
liabilities
Decrease (increase) in inventory ......... (457,142) 220 (456,922)
Origination of mortgage loans ............ (199,102) (199,102)
Sale of mortgage loans ................... 183,449 183,449
Increase in receivables, prepaid expense
and other................................ (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
Decrease in current taxes payable ........ 8,142 8,142
-------- ---------- -------- -------- -------- --------
Net cash provided by (used in) operating
activities............................... 56,835 -- (183,306) (21,908) -- (148,379)
-------- ---------- -------- -------- -------- --------
Cash flows from investing activities
Purchase of property, construction
& office equipment ..................... (10,957) (4,063) (15,020)
Distributions from unconsolidated
entities................................. 15,750 15,750
-------- ---------- -------- -------- -------- --------
Net cash used in investing activities ..... -- -- 4,793 (4,063) -- 730
-------- ---------- -------- -------- -------- --------
Cash flows from financing activities
Proceeds from loans payable .............. 123,662 84,966 208,628
Principal payments on loans payable ...... (119,731) (60,363) (180,094)
Net proceeds from public debt ............ 196,930 196,930
Redemption of public debt ................ --
Proceeds from stock-based benefit plans .. 14,932 14,932
Purchase of treasury shares .............. (71,767) (71,767)
-------- ---------- -------- -------- -------- --------
Net cash (used in) provided by financing
activities............................... (56,835) -- 200,861 24,603 -- 168,629
-------- ---------- -------- -------- -------- --------
Increase (decrease) in cash & equivalents . -- -- 22,348 (1,368) -- 20,980
Cash & equivalents, beginning of period ... 157,086 4,774 161,860
-------- ---------- -------- -------- -------- --------
Cash & equivalents, end of period ......... -- -- 179,434 3,406 -- 182,840
======== ========== ======== ======== ======== ========
F-26
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 2003:
Revenue ............................................................................ $903,364 $693,685 $607,932 $570,260
Gross profit ....................................................................... $256,157 $198,701 $167,595 $157,474
Income before income taxes ......................................................... $147,762 $107,855 $ 83,616 $ 71,920
Net Income ......................................................................... $ 93,382 $ 68,159 $ 52,865 $ 45,414
Earnings per share*
Basic............................................................................. $ 1.29 $ 0.98 $ 0.76 $ 0.65
Diluted........................................................................... $ 1.19 $ 0.90 $ 0.72 $ 0.61
Weighted average number of shares
Basic............................................................................. 72,564 69,848 69,859 70,407
Diluted........................................................................... 78,722 75,534 73,601 74,308
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
- ---------------
* 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.
F-27
TOLL BROTHERS, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(Amounts in thousands)
Balance at Charged Charged Balance
Beginning to Costs to other at End
Description of Period and Expenses Accounts Deductions of Period
-------------------------------------- ---------- ------------ -------- ---------- ---------
Net realizable value reserves for inventory
of land and land development costs:
Year ended
October 31, 2001:
New Jersey................................................ $3,708 3,708 --
Year ended
October 31, 2002:
New Jersey................................................ -- --
Year ended
October 31, 2003:
New Jersey................................................ -- --
F-28