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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED OCTOBER 31, 2004
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______________ TO _____________
COMMISSION FILE NUMBER 1-9186
TOLL BROTHERS, INC.
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
DELAWARE 23-2416878
- ------------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
250 GIBRALTAR ROAD, HORSHAM, PENNSYLVANIA 19044
- ------------------------------------------ ----------
(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
Guarantee of Toll Brothers Finance New York Stock Exchange
Corp. 4.95% Senior Notes due 2014
* 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, 2004 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 $2,229,665,000.
As of January 5, 2005, there were approximately 76,597,000 shares of Common
Stock outstanding.
Documents Incorporated by Reference: Portions of the proxy statement of Toll
Brothers, Inc. with respect to the 2005 Annual Meeting of Stockholders,
scheduled to be held on March 17, 2005, 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 luxury residential communities. We cater to move-up,
empty-nester, active-adult age-qualified and second home buyers in 20 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 the Lehigh Valley area of Pennsylvania
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 Fairfield, New Haven, Hartford and East Hampton 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 the Palm Springs, California area
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 luxury homes and communities, high-quality construction and
customer satisfaction. In the five years ended October 31, 2004, we delivered
24,271 homes from 456 communities, including 6,627 homes from 273 communities
in fiscal 2004.
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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 associated with several of
our master planned communities.
At October 31, 2004, we were operating in 292 communities containing
approximately 24,343 home sites that we owned or controlled through options.
Of the 24,343 home sites, 17,634 were available for sale and 6,709 were sold
but not yet delivered. Of the 292 communities, 220 were offering homes for
sale, 25 either had not yet opened for sale or had been open for sale but were
temporarily closed due to the number of homes in backlog and/or the
availability of improved lots, and 47 were sold out but not all homes had been
completed and delivered. At October 31, 2004, we also owned or controlled
through options approximately 35,846 home sites in 380 proposed communities.
We expect to be selling from approximately 240 communities by October 31,
2005. Of the approximately 60,189 total home sites we owned or controlled
through options at October 31, 2004, we owned approximately 29,804.
At October 31, 2004, we were offering single-family detached homes at
prices, excluding customized options, generally ranging from $210,000 to
$2,028,000, with an average base sales price of $627,000. We were offering
single-family attached homes at prices, excluding customized options,
generally ranging from $211,000 to $716,000, with an average base sales price
of $443,000. On average, our home buyers added approximately 21.2%, or
$103,000 per home, in options and lot premiums to the base price of homes
delivered in fiscal 2004.
We had backlogs (homes under contract but not yet delivered to home buyers)
of $4.43 billion (6,709 homes) at October 31, 2004 and $2.63 billion (4,652
homes) at October 31, 2003. We expect to deliver approximately 95% of the
homes in backlog at October 31, 2004 by October 31, 2005.
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 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.
For financial information about our revenues, earnings, assets, liabilities,
shareholders' equity and cash flows, 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 20 states in six
regions around the country. The following table lists the states in which we
operate and the fiscal years in which we or our predecessors commenced
operations:
FISCAL FISCAL
YEAR OF YEAR OF
STATE ENTRY STATE ENTRY
----- ----- ----- -----
Pennsylvania................................. 1967 Texas........................................... 1995
New Jersey................................... 1982 Florida......................................... 1995
Delaware..................................... 1987 Arizona......................................... 1995
Massachusetts................................ 1988 Ohio............................................ 1997
Maryland..................................... 1988 Nevada.......................................... 1998
Virginia..................................... 1992 Michigan........................................ 1999
Connecticut.................................. 1992 Illinois........................................ 1999
New York..................................... 1993 Rhode Island.................................... 2000
California................................... 1994 Colorado........................................ 2001
North Carolina............................... 1994 South Carolina.................................. 2002
We market our high-quality, detached, single-family homes primarily to
"upscale" luxury home buyers, generally comprised of those persons who have
previously owned a principal residence and who are seeking to buy a larger
home - the so-called "move-up" market. We believe our reputation as a
developer of homes for this market enhances our competitive position with
respect to the sale of our smaller, more moderately priced detached homes, as
well as our attached homes.
We also market to the 50+ year-old "empty-nester" market and believe that
this market has strong growth potential. We have developed a number of home
designs with features such as one-story living and first floor master bedroom
suites, as well as communities with recreational amenities such as golf
courses, 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.
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 17 such communities and expect to open additional
age-qualified communities during the next few years. In fiscal 2004,
approximately 9.3% of new contracts signed were in active-adult communities.
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 2003 dollars) now
stands at 16.9 million households, approximately 15.1% of all households. This
group has grown at six 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 8.2 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 40 to 50 years of age and in their peak move-up
home buying years. The leading edge of the baby
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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.
Two recent studies -- one from Harvard University's Joint Center for Housing
Studies and the other from The Homeownership Alliance, which consists of the
chief economists of Fannie Mae, Freddie Mac, the National Association of Home
Builders and the National Association of Realtors -- project that the level of
demand for new single- and multi-family housing units will average between
1.85 million and 2.17 million annually over the next ten years. In addition,
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 multi-product
master planned communities. We currently have 16 master planned communities
containing approximately 10,000 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, Nevada, New Jersey, North Carolina,
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 21.2%, or $103,000 per
home, to the base price of homes purchased in fiscal 2004.
4
The range of base sales prices for our different lines of homes at
October 31, 2004, was as follows:
Detached Homes:
Move-up........................................ $210,000 -- $ 658,000
Executive...................................... 301,000 -- 835,000
Estate......................................... 325,000 -- 2,028,000
Active-adult, age-qualified.................... 249,000 -- 636,000
Attached Homes:
Flats.......................................... $268,000 -- $ 695,000
Townhomes...................................... 211,000 -- 700,000
Carriage homes................................. 248,000 -- 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.
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 87 new models.
We operate in six regions around the United States. The following table
summarizes by region closings and new contracts signed during fiscal 2004 and
2003, and backlog at October 31, 2004 and 2003 ($ in millions):
CLOSINGS NEW CONTRACTS BACKLOG
--------------- --------------- ---------------
UNITS $ UNITS $ UNITS $
----- ------- ----- ------- ----- -------
FISCAL 2004
Northeast (CT, MA, NH, NJ, NY, RI) ....................................... 1,016 572.9 1,112 653.0 1,028 599.5
Mid-Atlantic (DE, MD, PA, VA) ............................................ 2,398 1,252.5 2,969 1,787.8 2,245 1,372.4
Midwest (IL, MI, OH) ..................................................... 478 274.0 630 395.2 446 284.3
Southeast (FL, NC, SC) ................................................... 772 366.7 1,087 611.8 726 463.5
Southwest (AZ, CO, NV, TX) ............................................... 902 527.9 1,544 980.7 1,351 849.7
West (CA) ................................................................ 1,061 845.5 1,342 1,213.0 913 864.5
----- ------- ----- ------- ----- -------
Total consolidated entities .............................................. 6,627 3,839.5 8,684 5,641.5 6,709 4,433.9
Unconsolidated entities .................................................. 130 52.4 289 123.5 174 75.8
----- ------- ----- ------- ----- -------
Total ................................................................ 6,757 3,891.9 8,973 5,765.0 6,883 4,509.7
===== ======= ===== ======= ===== =======
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) ..................................................... 405 219.4 433 237.5 294 163.2
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
----- ------- ----- ------- ----- -------
Total consolidated entities .............................................. 4,911 2,731.0 6,132 3,476.0 4,652 2,631.9
Unconsolidated entities .................................................. 38 12.0 29 9.2 15 4.7
----- ------- ----- ------- ----- -------
Total ................................................................ 4,949 2,743.0 6,161 3,485.2 4,667 2,636.6
===== ======= ===== ======= ===== =======
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The following table summarizes certain information with respect to our
residential communities under development (excluding joint ventures) at
October 31, 2004:
HOMES UNDER
NUMBER OF HOMES HOMES CONTRACT AND HOMESITES
REGION COMMUNITIES APPROVED CLOSED NOT CLOSED AVAILABLE
- ------ ----------- -------- ------ ------------ ---------
Northeast.......................................................... 55 6,797 1,889 1,028 3,880
Mid-Atlantic....................................................... 86 13,025 4,895 2,245 5,885
Midwest............................................................ 27 3,187 1,059 446 1,682
Southeast.......................................................... 43 4,197 1,431 726 2,040
Southwest.......................................................... 56 5,674 1,544 1,351 2,779
West............................................................... 25 3,405 1,124 913 1,368
--- ------ ------ ----- ------
Total.......................................................... 292 36,285 11,942 6,709 17,634
=== ====== ====== ===== ======
At October 31, 2004, significant site improvements had not commenced on
approximately 10,316 of the 17,634 available home sites. Of the 17,634
available home sites, 2,985 were not yet owned by us but were controlled
through options.
Of the 292 communities under development at October 31, 2004, 220 were
offering homes for sale, 25 either had not yet opened for sale or had been
open for sale but were temporarily closed due to the number of homes in
backlog and/or the availability of improved lots, and 47 were sold out but
not all homes had been completed and delivered. Of the 220 communities in
which homes were being offered for sale, 181 were single-family detached-home
communities containing a total of 135 homes (exclusive of model homes) under
construction but not under contract, and 39 were attached-home communities
containing a total of 47 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
expended in obtaining any necessary governmental approvals, the costs incurred
in the planning and design of the community and, in some cases, our deposit.
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 increase. 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 initial payment on an agreement will be returned to us
if all approvals are not obtained, although pre-development costs may not be
recoverable. We generally have the right to cancel any of our agreements to
purchase land by forfeiture of our payment on the agreement. In such
instances, we generally are not able to recover any pre-development costs.
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.
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The following is a summary, at October 31, 2004, 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 ....................................... 59 6,677
Mid-Atlantic .................................... 144 15,038
Midwest ......................................... 25 3,119
Southeast ....................................... 20 2,574
Southwest ....................................... 48 3,922
West ............................................ 84 4,516
--- ------
Total ........................................... 380 35,846
=== ======
Of the 35,846 planned home sites, at October 31, 2004, we owned 8,446 and
controlled through options and purchase agreements 27,400. At October 31,
2004, the aggregate purchase price of land parcels under option and purchase
agreements was approximately $2.0 billion, of which we had paid or deposited
approximately $137.4 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, 2004, such feasibility analyses resulted in approximately
$5.2 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 home sites, 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
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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.
MARKETING AND SALES
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.
We have a two-step sales process. The first step takes place when a
potential home buyer visits one of our communities and decides to purchase one
of our homes, at which point the home buyer signs a
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non-binding deposit agreement and provides a small, refundable deposit. This
deposit will reserve, for a short period of time, the building lot that the
home buyer has selected and will lock in the base price of the home. Deposit
rates are tracked on a weekly basis to help us monitor the strength or
weakness in demand in each of our communities. If demand for homes in a
particular community is strong, senior management will determine whether the
base selling prices in that community should be increased, while if demand for
the homes in a particular community is weak, we may determine whether sales
incentives should be added to the community's sales effort. Although it may
vary significantly over time, based upon our experience, we expect on average
between 55% and 65% of the deposits taken will be converted into signed
agreements of sale. Because these deposit agreements are non-binding, they are
not recorded as signed contracts, nor are they recorded in backlog (homes
under contract but not yet delivered to home buyers as of the reporting date).
The second step in the sales process occurs when the home buyer and we
actually sign a binding agreement of sale and the home buyer gives us a
non-refundable cash down payment which, historically, has been approximately
7%, on average, of the total purchase price of the home. Between the time that
the home buyer signs the non-binding deposit agreement and the agreement of
sale, he or she is required to complete a financial questionnaire that gives
us the ability to evaluate whether the home buyer has the financial resources
necessary to purchase the home. If we determine that the home buyer is not
financially qualified, we will not enter into an agreement of sale with the
home buyer. In fiscal 2004, 2003 and 2002, home buyers have canceled
approximately 4.6%, 5.7% and 6.2%, respectively, of the agreements of sale
executed during the respective fiscal year. When we report contracts signed,
the number and value of contracts signed is reported net of any cancellations
occurring during the reporting period. Only outstanding agreements of sale
that have been signed by both the home buyer and us as of the end of the
period on which we are reporting are included in backlog. As of October 31,
2004, of the values of backlog reported at October 31, 2003, 2002 and 2001,
home buyers canceled agreements of sale representing approximately 3.0%, 4.7%
and 5.6% of these amounts, respectively.
At October 31, 2004, we had $4.43 billion (6,709 homes) of backlog. Based on
the expected delivery dates of the homes in backlog, we expect to deliver
approximately 95% of them by October 31, 2005.
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.
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
9
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, 2004, we employed 4,655 persons full-time; of these, 169 were
in executive positions, 474 were engaged in sales activities, 481 were in
project management activities, 1,712 were in administrative and clerical
activities, 1,045 were in construction activities, 215 were in architectural
and engineering activities, 329 were in golf course operations, and 230 were
in manufacturing and distribution. At October 31, 2004, we were subject to one
collective bargaining agreement that covered less than 3% of our employees. 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
10
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.
o 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.
o 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.
o 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.
o 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.
o 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.
o 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.
o 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.
o 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.
o 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.
o 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.
o 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.
o 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.
11
o 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.tollbrothers.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 to us at Toll Brothers, Inc., 250
Gibraltar Road, Horsham, PA 19044, Attention: Director of Investor Relations
or by telephoning us at (215) 938-8000.
ITEM 2. PROPERTIES
HEADQUARTERS
Our corporate office, which we lease from an unrelated party, contains
approximately 200,000 square feet, and is located in Horsham, Montgomery
County, Pennsylvania.
MANUFACTURING/DISTRIBUTION FACILITIES
We own a facility of approximately 200,000 square feet located in
Morrisville, Pennsylvania. We also own a facility of approximately 100,000
square feet located in Emporia, Virginia. 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 and the Virginia plant sell 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.
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.
12
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, 2004.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The following table includes information with respect to all of our
executive officers at October 31, 2004. All executive officers serve at the
pleasure of our Board of Directors.
NAME AGE POSITIONS
- ---- --- -------------------
Robert I. Toll 63 Chairman of the Board, Chief
Executive Officer
and Director
Zvi Barzilay 58 President, Chief Operating Officer
and Director
Joel H. Rassman 59 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.
13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
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, 2004.
THREE MONTHS ENDED
---------------------------------------------
OCTOBER 31 JULY 31 APRIL 30 JANUARY 31
---------- ------- -------- ----------
2004
High ........................................................... $47.80 $43.14 $47.74 $43.00
Low ............................................................ $40.34 $36.85 $39.32 $36.89
2003
High ........................................................... $37.02 $32.13 $23.65 $21.92
Low ............................................................ $25.67 $22.64 $17.63 $18.85
During the three months ended October 31, 2004, we repurchased the following
shares under our repurchase program (amounts in thousands, except per share
amounts):
TOTAL NUMBER OF MAXIMUM
SHARES PURCHASED NUMBER OF SHARES
TOTAL AVERAGE AS PART OF A THAT MAY
NUMBER OF PRICE PUBLICLY YET BE PURCHASED
SHARES PAID PER ANNOUNCED UNDER THE
PERIOD PURCHASED SHARE PLAN OR PROGRAM (a) PLAN OR PROGRAM (a)
- ------ --------- -------- ------------------- -------------------
August 1, 2004 to
August 31, 2004 ............................................. 1 $42.11 1 9,275
September 1, 2004 to
September 30, 2004 .......................................... 9,275
October 1, 2004 to
October 31, 2004 ............................................ 1 $44.72 1 9,274
--- ---
2 $43.22 2
=== ===
- ---------------
(a) On March 26, 2003, we announced that our Board of Directors had
authorized the repurchase of up to 10 million shares of our common stock,
par value $.01, from time to time, in open market transactions or
otherwise, for the purpose of providing shares for our various employee
benefit plans. The Board of Directors did not fix an expiration date for
the repurchase program.
Pursuant to the provisions of our stock option plans, participants are
permitted to use the value of our common stock that they own to pay for the
exercise of options. During the three months ended October 31, 2004, we
received 40,475 shares with an average fair market value per share of $43.96
for the exercise of stock options.
Except as set forth above, we have not repurchased any of our equity
securities.
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 and, from time to time, repurchase shares of our common stock.
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
14
dividends we may pay. At October 31, 2004, under the most restrictive of these
provisions, we could have paid up to approximately $619.1 million of cash
dividends.
At January 5, 2005, there were approximately 1,054 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 in the period ended October 31,
2004. It should be read in conjunction with the Consolidated Financial
Statements and Notes thereto, included in this report beginning at page F-1,
and Management's Discussion and Analysis of Financial Condition and Results of
Operations, included in Item 7 of this report.
SUMMARY CONSOLIDATED INCOME STATEMENT, BALANCE SHEET AND HOUSING DATA
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA):
YEAR ENDED OCTOBER 31: 2004 2003 2002 2001 2000
- ---------------------- ---------- ---------- ---------- ---------- ----------
Revenues....................................................... $3,893,093 $2,775,241 $2,328,972 $2,229,605 $1,814,362
Income before income taxes..................................... $ 647,432 $ 411,153 $ 347,318 $ 337,889 $ 230,966
Net income..................................................... $ 409,111 $ 259,820 $ 219,887 $ 213,673 $ 145,943
Earnings per share:
Basic......................................................... $ 5.50 $ 3.68 $ 3.12 $ 2.98 $ 2.01
Diluted....................................................... $ 5.04 $ 3.44 $ 2.91 $ 2.76 $ 1.95
Weighted average number of shares outstanding
Basic......................................................... 74,323 70,670 70,472 71,670 72,537
Diluted....................................................... 81,165 75,541 75,480 77,367 74,825
AT OCTOBER 31: 2004 2003 2002 2001 2000
- -------------- ---------- ---------- ---------- ---------- ----------
Inventory...................................................... $3,878,260 $3,080,349 $2,551,061 $2,183,541 $1,712,383
========== ========== ========== ========== ==========
Total assets................................................... $4,905,578 $3,787,391 $2,895,365 $2,532,200 $2,030,254
========== ========== ========== ========== ==========
Debt
Loans payable.................................................. $ 340,380 $ 281,697 $ 253,194 $ 362,712 $ 326,537
Senior notes................................................... 845,665 546,669
Senior subordinated notes...................................... 450,000 620,000 819,663 669,581 469,499
Mortgage company warehouse loan................................ 92,053 49,939 48,996 24,754
---------- ---------- ---------- ---------- ----------
Total debt..................................................... $1,728,098 $1,498,305 $1,121,853 $1,057,047 $ 796,036
========== ========== ========== ========== ==========
Stockholders' equity........................................... $1,919,987 $1,476,628 $1,129,509 $ 912,583 $ 745,145
========== ========== ========== ========== ==========
HOUSING DATA
YEAR ENDED OCTOBER 31: 2004 2003 2002 2001 2000
- ---------------------- ---------- ---------- ---------- ---------- ----------
Closings
Number of homes............................................... 6,627 4,911 4,430 4,358 3,945
Value (in thousands).......................................... $3,839,451 $2,731,044 $2,279,261 $2,180,469 $1,762,930
Contracts
Number of homes............................................... 8,684 6,132 5,070 4,314 4,364
Value (in thousands).......................................... $5,641,454 $3,475,992 $2,734,457 $2,158,536 $2,134,522
AT OCTOBER 31: 2004 2003 2002 2001 2000
- -------------- ---------- ---------- ---------- ---------- ----------
Backlog
Number of homes............................................... 6,709 4,652 3,342 2,702 2,746
Value (in thousands).......................................... $4,433,895 $2,631,900 $1,858,784 $1,403,588 $1,425,521
Number of selling communities.................................. 220 200 170 155 146
Homesites
Owned......................................................... 29,804 29,081 25,822 25,981 22,275
Controlled.................................................... 30,385 18,977 15,022 13,165 10,843
---------- ---------- ---------- ---------- ----------
Total...................................................... 60,189 48,058 40,844 39,146 33,118
========== ========== ========== ========== ==========
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Fiscal 2004 was another record year for us. Home sales revenues increased by
41% over fiscal 2003 and net income increased by 57%. In addition, contract
signings increased 62% in fiscal 2004 over fiscal 2003 and our backlog of
homes under contract but not yet delivered to home buyers ("backlog") at
October 31, 2004 was 68% greater than the backlog at October 31, 2003.
Geographic and product diversification, access to lower-cost capital, a
versatile and abundant home mortgage market and improving demographics are
promoting strong and steady demand for those builders who can control land and
persevere through the increasingly difficult regulatory approval process. This
evolution in our industry favors the large, publicly traded home building
companies with the capital and expertise to control home sites and gain market
share. We currently own or control more than 60,000 home sites in 47 markets
we consider to be affluent, a substantial number of which sites already have
the approvals necessary for development. We believe that as the approval
process becomes more difficult, and as the political pressure from no-growth
proponents increases, our expertise in taking land through the approval
process and our already approved land positions should allow us to continue to
grow for a number of years to come.
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. Based on our current backlog, which affords us revenue visibility over
the next 9 to 12 months, and the pace of current demand, we expect to deliver
between 7,900 and 8,300 homes during fiscal 2005, with an average delivered
price between $635,000 and $645,000. In addition, in fiscal 2005 we expect
that net income will increase by at least 40% over net income for fiscal 2004.
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 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 on 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.
Our revenues 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. At October 31, 2004, we had $580.9 million of
cash and cash equivalents and approximately $989.3 million available under our
new bank revolving credit facility which extends to July 15, 2009. In
addition, during the second quarter of 2004, we issued $300 million of 4.95%
Senior Notes due 2014. We used a portion of the proceeds from these notes to
redeem $170 million of our 8 1/8% Senior Subordinated Notes due 2009. With
these resources, our strong cash flow from operations before inventory growth,
and our history of success in accessing the public debt markets, we believe we
have the resources available to continue to grow in fiscal 2005 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.
16
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 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 U.S. generally accepted accounting principles, 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, 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 home site,
is delivered 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 home sites in each of the
communities of the master planned community.
OFF-BALANCE SHEET ARRANGEMENTS
We have investments in and advances to several joint ventures with unrelated
parties to develop land. Some of these joint ventures develop land for the
sole use of the venture partners, including ourselves, and others develop land
for sale to the venture partners and to unrelated builders. We recognize our
share of earnings from the sale of home sites to other builders. We do not
recognize earnings from home sites we purchase from the joint ventures, but
instead reduce our cost basis in these home sites by our share of the earnings
on the home sites. At October 31, 2004, we had approximately $42.8 million
invested in or advanced to these joint ventures and were committed to
contributing additional capital in an aggregate amount of approximately $90.2
million if the joint ventures require it. In November 2004, one of the joint
ventures obtained third-party financing of $535 million, of which each of the
joint venture partners guaranteed their pro-rata share. Our share of the loan
guarantee was $53.6 million, which has reduced the amount committed to the
funding of the joint venture.
17
In January 2004, we entered into a joint venture in which we have a 50%
interest with an unrelated party, to develop Maxwell Place, an 832-home luxury
condominium community on the Hoboken, New Jersey waterfront. At October 31,
2004, we had investments in and advances to the joint venture of $29.5
million, and were committed to making up to $1.0 million of additional
investments in and advances to it. We and our joint venture partner each have
guaranteed $7.5 million of principal amount of one of the loans obtained by
this joint venture.
In October 2004, we entered into a joint venture in which we have a 50%
interest with an unrelated party, to convert a 525-unit apartment complex, The
Hudson Tea Buildings, located in Hoboken, New Jersey, into luxury condominium
units. At October 31, 2004, we had investments in and advances to the joint
venture of $7.5 million, and were committed to making up to $1.5 million of
additional investments in and advances to it.
We have a minority interest in a joint venture with unrelated parties that
has developed and is currently marketing The Sky Club, a 326-unit, 17-story,
two-tower structure, located in Hoboken, New Jersey. At October 31, 2004, our
investment in this joint venture was $6.9 million. We do not have any
commitment to contribute additional capital to this joint venture.
We also own 50% of a joint venture with an unrelated party that is currently
building and selling an active-adult, age-qualified community in Michigan. At
October 31, 2004, our investment in this joint venture was $1.4 million. We do
not have any commitment to contribute additional capital to this joint
venture.
To take advantage of commercial real estate opportunities, Toll Brothers
Realty Trust Group (the "Trust") was formed 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 that it developed in Virginia, and is building a 635-unit apartment
complex in New Jersey. At October 31, 2004, our investment in the Trust was
$5.9 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 expire in August 2005.
Other than the guarantees discussed above, 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 using the equity method.
18
RESULTS OF OPERATIONS
The following table compares certain income statement items related to our
operations (amounts in millions):
YEAR ENDED OCTOBER 31, 2004 2003 2002
-------------- -------------- --------------
$ % $ % $ %
------- ---- ------- ---- ------- ----
Home sales
Revenues ................................................................... 3,839.5 2,731.0 2,279.3
Costs ...................................................................... 2,747.3 71.6 1,977.4 72.4 1,655.3 72.6
------- ------- -------
Land sales
Revenues ................................................................... 22.5 27.4 36.2
Costs ...................................................................... 15.8 70.1 17.9 65.2 25.7 70.9
------- ------- -------
Equity earnings in unconsolidated entities .................................. 15.7 1.0 1.9
Interest and other .......................................................... 15.4 15.8 11.7
------- ------- -------
Total revenues .............................................................. 3,893.1 2,775.2 2,329.0
------- ------- -------
Selling, general and administrative expenses* ............................... 381.1 9.8 288.3 10.4 236.1 10.1
Interest expense* ........................................................... 93.3 2.4 73.2 2.6 64.5 2.8
Expenses related to early retirement of debt* ............................... 8.2 0.2 7.2 0.3
------- ------- -------
Total costs and expenses* ................................................... 3,245.7 83.4 2,364.1 85.2 1,981.7 85.1
------- ------- -------
Income before income taxes* ................................................. 647.4 16.6 411.2 14.8 347.3 14.9
Income taxes ................................................................ 238.3 151.3 127.4
------- ------- -------
Net income* ................................................................. 409.1 10.5 259.8 9.4 219.9 9.4
------- ------- -------
- ---------------
* 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 2004 COMPARED TO FISCAL 2003
HOME SALES
Home sales revenues for fiscal 2004 of $3.84 billion (6,627 homes) were
higher than those of fiscal 2003 by approximately $1.11 billion, or 41%. The
increase was attributable to a 35% increase in the number of homes delivered
and a 4% increase in the average price of homes delivered. The increase in the
number of homes delivered in fiscal 2004 was primarily due to the higher
backlog of homes at October 31, 2003 as compared to October 31, 2002 which was
primarily the result of a 21% increase in the number of new contracts signed
in fiscal 2003 over fiscal 2002, and a 51% increase in the number of contracts
signed in the first six months of fiscal 2004 as compared to the first six
months of fiscal 2003. The increase in the average price of homes delivered in
fiscal 2004 was the result of increased base selling prices and a shift in the
location of homes delivered to more expensive areas offset, in part, by a
change in the mix of product types delivered.
The value of new sales contracts signed was $5.64 billion (8,684 homes) in
fiscal 2004, a 62% increase over the $3.48 billion (6,132 homes) value of new
sales contracts signed in fiscal 2003. The increase in fiscal 2004 was
attributable to a 42% increase in the number of new sales contracts signed and
a 15% increase in the average selling price of the homes. The increase in the
number of new sales contracts signed in fiscal 2004 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 220 communities at
October 31, 2004, compared to 200 communities at October 31, 2003. At
October 31, 2005 we expect to be selling from approximately 240 communities.
We believe that the demand for our homes is attributable to an increase in the
number of affluent households, the maturation of the baby boom generation, a
constricted supply of available new home sites in our markets, attractive
mortgage rates and the belief of potential customers that the purchase of a
home is a stable investment. At October 31, 2004, we had over 60,000 home
sites under our control
19
nationwide, compared to approximately 48,000 home sites at October 31, 2003.
The increase in the average price of homes contracted for in fiscal 2004 was
the result of increased base selling prices and a shift in the location of
homes delivered to more expensive areas.
At October 31, 2004, our backlog of homes under contract was $4.43 billion
(6,709 homes), an increase of 68% over the $2.63 billion (4,652 homes) backlog
at October 31, 2003. The increase in backlog at October 31, 2004, compared to
the backlog at October 31, 2003, was primarily attributable to the increase in
the number and average price of new contracts signed during fiscal 2004, as
compared to fiscal 2003, offset, in part, by an increase in the number and
average price of homes delivered in fiscal 2004 as compared to fiscal 2003.
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 7,900 and 8,300 homes in
fiscal 2005. We estimate that the average price of the homes delivered will be
between $635,000 and $645,000 in fiscal 2005.
Home costs as a percentage of home sales revenues decreased 80 basis points
in fiscal 2004 as compared to fiscal 2003. The decrease was primarily the
result of selling prices increasing at a greater rate than construction costs.
Inventory write-offs of $7.5 million in fiscal 2004 were 32% higher than the
$5.6 million of write-offs in fiscal 2003. As a percentage of home sales
revenues, write-offs in fiscal 2004 were comparable to fiscal 2003.
For fiscal 2005, we expect that home costs as a percentage of home sales
will be approximately 195 to 225 basis points lower than the fiscal 2004
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 were $22.5 million in fiscal 2004 compared to $27.4 million in
fiscal 2003. Land sales revenues in fiscal 2003 included $6.6 million from the
sale of land to the Trust. (See Note 12 to the financial statements, "Related
Party Transactions," for a description of the sale to the Trust.) Land costs
as a percentage of land sales revenues increased from 65.2% in fiscal 2003 to
70.1% in fiscal 2004 due to higher cost parcels being sold in fiscal 2004
compared to fiscal 2003. For fiscal 2005, we expect land sales revenues to be
approximately $17 million and land costs to be approximately 70% 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 on sales to
unrelated parties from these entities. (See "Off-Balance Sheet Arrangements"
for a description of our investments in and commitments to these entities.)
Earnings from these entities vary significantly from year to year. For fiscal
2004, we recognized $15.7 million of earnings from these unconsolidated
entities as compared to $1.0 million in fiscal 2003. For fiscal 2005, we
expect to realize approximately $15.5 million of earnings from our investments
in the joint ventures and in the Trust.
INTEREST AND OTHER INCOME
Interest and other income for fiscal 2004 was $15.4 million, a decrease of
$.4 million from the $15.8 million of interest and other income in fiscal
2003. This decrease was primarily the result of a $3.5 million profit realized
from the sale of a small commercial property in fiscal 2003 and a decrease in
forfeited customer deposits in fiscal 2004, as compared to fiscal 2003,
offset, in part, by higher income realized from our ancillary businesses,
higher management and construction fee income, and higher interest income. For
fiscal 2005, we expect interest and other income to be approximately $18.0
million.
20
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A")
In fiscal 2004, SG&A spending increased by 32%, or $92.7 million, as
compared to fiscal 2003, while total revenues in fiscal 2004 increased by 40%
as compared to fiscal 2003. The increased spending was principally due to
higher sales commissions, higher costs incurred to operate the greater number
of selling communities that we had during fiscal 2004, as compared to fiscal
2003, and increased compensation and benefit costs. We expect SG&A as a
percentage of revenues will be approximately the same in fiscal 2005 as in
fiscal 2004. We expect to open approximately 117 new communities in fiscal
2005 as compared to 91 in fiscal 2004 and 75 in fiscal 2003.
EXPENSES RELATED TO THE EARLY RETIREMENT OF DEBT
We recognized a pretax charge of $8.2 million in fiscal 2004 representing
the premium paid on the early redemption of our 8 1/8% Senior Subordinated
Notes due 2009, the write-off of unamortized bond issuance costs related to
those notes, and the write-off of unamortized debt issuance costs related to
our $575 million bank revolving credit agreement that was replaced by a new
$1.14 billion bank revolving credit agreement that expires in July 2009. 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.
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 $3.48 billion (6,132 homes) in
fiscal 2003, a 27% increase over the $2.73 billion (5,070 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 increased base selling prices and
increased 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 increased number of communities from which we
were selling homes. We were selling from 200 communities (including seven
communities that we acquired from Richard R. Dostie, Inc. in September 2003)
at October 31, 2003, as compared to 170 communities at October 31, 2002. We
believe that the demand for our homes 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 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,
as compared to approximately 41,000 home sites at October 31, 2002.
At October 31, 2003, our backlog of homes under contract was $2.63 billion
(4,652 homes), an increase of 42% over the $1.86 billion (3,342 homes) backlog
at October 31, 2002. The increase in backlog at October 31, 2003, as 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.
21
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.
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 12 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 as compared to 2002.
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.
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.
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, whereas revenues in fiscal 2003 increased by 19%
compared to fiscal 2002. The increased spending was principally 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.
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.
INTEREST EXPENSE
We determine interest expense on a specific home site-by-home site 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 upon
many factors, including the period of time that we have owned the land, the
length of time that the homes delivered during the period were under
construction and the interest rates and the amount of debt carried by us in
proportion to the amount of our inventory during those periods. Interest
expense as a percentage of revenues was slightly lower in fiscal 2004 than in
fiscal 2003, and slightly lower in fiscal 2003 than in fiscal 2002. For fiscal
2005, we expect interest expense to be approximately 2.3% of total revenues.
22
INCOME BEFORE INCOME TAXES
Income before income taxes increased 57% in fiscal 2004 as compared to
fiscal 2003, and increased 18% in fiscal 2003 as compared to fiscal 2002.
INCOME TAXES
Income taxes for fiscal 2004, 2003 and 2002 were provided at effective rates
of 36.8%, 36.8% and 36.7%, respectively. For fiscal 2005, we expect our
effective tax rate to be approximately 37%.
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 buy home sites immediately to
replace the ones delivered. Accordingly, we believe that cash flow from
operating activities before inventory additions is currently a better gauge of
liquidity.
Cash flow from operating activities, before inventory additions, has
improved as operating results have improved. One of the main factors that
determine cash flow from operating activities, before inventory additions, is
the level of revenues from the delivery of homes and land sales. We anticipate
that cash flow from operating activities, before inventory additions, will
continue to be strong in fiscal 2005 due to the expected increase in home
deliveries in fiscal 2005, as compared to fiscal 2004. We expect that our
inventory will continue to increase and we are currently negotiating and
searching for additional opportunities to obtain control of land for future
communities. At October 31, 2004, we had commitments to acquire land of
approximately $2.0 billion, of which approximately $137.4 million had been
paid or deposited. We have used our cash flow from operating activities,
before inventory additions, bank borrowings and the proceeds of public debt
and equity offerings 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 9 to
12 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.
In fiscal 2004, First Huntingdon Finance Corp., one of our indirect, wholly
owned subsidiaries, entered into a credit agreement with 27 banks. This new
credit facility replaced our previous facility of $575 million. The revolving
credit facility provides $1.14 billion of loan capacity and extends through
July 15, 2009. At October 31, 2004, interest was payable on borrowings under
the facility at 0.70% (subject to adjustment based upon our debt ratings and
leverage ratio) above the Eurodollar rate or other specified variable rates as
selected by us from time to time. At October 31, 2004, we had no borrowings
outstanding against the facility, and had approximately $150.7 million of
letters of credit outstanding under it.
In March 2004, Toll Brothers Finance Corp., another of our indirect, wholly
owned subsidiaries, sold $300 million of 4.95% Senior Notes due 2014. The
obligations of Toll Brothers Finance Corp. to pay principal, premiums if any
and interest are guaranteed jointly and severally on a senior basis by us and
substantially all of our home building subsidiaries. The guarantees are full
and unconditional. Our non-home building subsidiaries did not guarantee the
debt. We used a portion of the proceeds from the senior notes to redeem all of
the $170 million principal amount of our 8 1/8% Senior Subordinated Notes due
2009 at 104.0625% of principal amount.
23
We believe that we will be able to continue to fund our expected growth and
meet our contractual obligations through a combination of existing cash
resources, cash flow from operating activities, our existing sources of credit
and the public debt markets.
CONTRACTUAL OBLIGATIONS
The following table summarizes our estimated contractual obligations at
October 31, 2004 (in millions):
2005 2006-2007 2008 -2009 THEREAFTER TOTAL
-------- --------- ---------- ---------- --------
Senior and senior subordinated notes (a) ..................... $100.0 $1,200.0 $1,300.0
Loans payable (a) ............................................ $ 281.3 $ 50.2 4.4 4.5 340.4
Warehouse mortgage company loan (a) .......................... 92.1 92.1
Operating lease obligations .................................. 10.8 14.9 9.2 27.7 62.6
Purchase obligations (b) ..................................... 1,048.7 933.3 184.9 112.7 2,279.6
Retirement plan (c) .......................................... 2.7 2.8 4.7 23.3 33.5
-------- -------- ------ -------- --------
$1,435.6 $1,001.2 $303.2 $1,368.2 $4,108.2
======== ======== ====== ======== ========
- ---------------
(a) Amounts are included in the Consolidated Balance Sheet
(b) Amounts represent our commitments to acquire land under options and
contracts and the estimated remaining amount of the contractual
obligation for land development agreements secured by letters of credit
and surety bonds.
(c) Amounts represent our obligations under our 401K, deferred compensation
and supplemental executive retirement plans. Of the total amount
indicated, $20.1 million has been recorded in the Consolidated Balance
Sheet.
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. Because the sales price of each of our homes is fixed at the time a
buyer enters into a 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
rates and 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.
24
At October 31, 2004, our debt obligations, principal cash flows by scheduled
maturity, weighted-average interest rates, and estimated fair value were as
follows (amounts in thousands):
VARIABLE-RATE
FIXED-RATE DEBT DEBT(a)(b)
---------------------- -------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
FISCAL YEAR OF INTEREST INTEREST
EXPECTED MATURITY AMOUNT RATE AMOUNT RATE
- ----------------- ---------- --------- ------- ---------
2005 ............................................................................. $ 281,172 7.19% $92,203 3.02%
2006 ............................................................................. 19,719 5.46% 150 1.82%
2007 ............................................................................. 30,158 7.55% 150 1.82%
2008 ............................................................................. 2,952 6.04% 150 1.82%
2009 ............................................................................. 101,119 7.99% 150 1.82%
Thereafter ....................................................................... 1,200,800 6.60% 3,710 1.82%
Discount ......................................................................... (4,335)
---------- -------
Total ............................................................................ $1,631,585 6.79% $96,513 2.96%
========== =======
Fair value at October 31, 2004 ................................................... $1,727,885 $96,513
========== =======
- ---------------
(a) We have a $1.14 billion revolving credit facility with 27 banks which
extends through July 15, 2009. At October 31, 2004, interest was payable
on borrowings under this facility at 0.70% (this rate will vary based
upon our corporate debt rating and leverage ratios) above the Eurodollar
rate or at other specified variable rates as selected by us from time to
time. At October 31, 2004, we had no borrowings and approximately $150.7
million of letters of credit outstanding under the facility.
(b) Our mortgage subsidiary has a $125 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 banks' overnight rate plus
an agreed-upon margin. At October 31, 2004, the subsidiary had $92.1
million outstanding under the line at an average interest rate of 3.02%.
Borrowing under this line is included in the fiscal 2005 maturities.
Based upon the amount of variable-rate debt outstanding at October 31, 2004,
and holding the variable-rate debt balance constant, each 1% increase in
interest rates would increase the interest incurred by us by approximately
$1.0 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-26 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, with the assistance
of management, 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"). Based on that evaluation, our chief executive
officer and chief financial officer concluded that, as of the Evaluation Date,
our disclosure controls and procedures were effective to ensure that
information required to be disclosed in our reports under the Exchange Act, is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission's rules and forms, and that such
information is accumulated and communicated to management, including our chief
executive officer and chief financial officer, as appropriate, to allow
timely decisions regarding required disclosure.
25
There has not been any change in our internal control over financial
reporting during our quarter ended October 31, 2004 that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
ITEM 9B. OTHER INFORMATION
None
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 will be included in
our Proxy Statement for the 2005 Annual Meeting of Stockholders (the "2005
Proxy Statement") and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required in this item will be included in the 2005 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 will be
included in the 2005 Proxy Statement and is incorporated herein by reference.
The following table provides information as of October 31, 2004 with respect
to compensation plans (including individual compensation arrangements) under
which our equity securities are authorized for issuance.
EQUITY COMPENSATION PLAN INFORMATION
NUMBER OF SECURITIES TO WEIGHTED-AVERAGE NUMBER OF SECURITIES
BE ISSUED UPON EXERCISE EXERCISE PRICE REMAINING AVAILABLE FOR FUTURE
OF OUTSTANDING OF OUTSTANDING ISSUANCE UNDER EQUITY COMPENSATION
OPTIONS, WARRANTS OPTIONS, WARRANTS PLANS (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................. 15,245 $16.41 3,168
Equity compensation plans not
approved by security holders................. -- --
------ -----
Total..................................... 15,245 $16.41 3,168
====== =====
- ---------------
(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 will be included in the 2005 Proxy
Statement and is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required in this item will be included in the 2005 Proxy
Statement and is incorporated herein by reference.
26
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) Financial Statements and Financial Statement Schedules
PAGE
----
1. FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm.............. F-1
Consolidated Statements of Income for the Years Ended October 31,
2004, 2003 and 2002................................................. F-2
Consolidated Balance Sheets as of October 31, 2004 and 2003.......... F-3
Consolidated Statements of Cash Flows for the Years Ended October 31,
2004, 2003 and 2002................................................. F-4
Notes to Consolidated Financial Statements........................... F-5
Summary Consolidated Quarterly Financial Data (unaudited)............ F-26
2. FINANCIAL STATEMENT SCHEDULES
None
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) 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 Certificate of Amendment of 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 Certificate of Amendment of 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 Certificate of Amendment of Certificate of Incorporation dated June 12, 1997, is hereby incorporated by reference
to Exhibit 3.4 of the Registrant's Form 10-Q for the quarter ended January 31, 2002.
3.5 Certificate of Amendment of 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 Certificate of Amendment of 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.
27
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
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, NA, 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, National Association, 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, National Association, 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 Third Supplemental Indenture dated as of January 26, 2004 by and among the parties listed on Schedule A thereto,
and J.P. Morgan Trust Company, National Association, as successor Trustee, is incorporated by reference to
Exhibit 4.1 of the Registrant's Form 10-Q for the quarter ended January 31, 2004.
4.8 Fourth Supplemental Indenture dated as of March 1, 2004 by and among the parties listed on Schedule A thereto,
and J.P. Morgan Trust Company, National Association, as successor Trustee, is incorporated by reference to
Exhibit 4.2 of the Registrant's Form 10-Q for the quarter ended January 31, 2004.
4.9 Fifth Supplemental Indenture dated as of September 20, 2004 by and among the parties listed on Schedule A
thereto, and J.P. Morgan Trust Company, National Association, as successor Trustee, is filed herewith.
4.10 Sixth Supplemental Indenture dated as of October 28, 2004 by and among the parties listed on Schedule A thereto,
and J.P. Morgan Trust Company, National Association, as successor Trustee, is filed herewith.
4.11 Seventh Supplemental Indenture dated as of October 31, 2004 by and among the parties listed on Schedule A
thereto, and J.P. Morgan Trust Company, National Association, as successor Trustee, is filed herewith.
4.12 Joint Resolution Adopted by the Board of Directors of Toll Corp. and the Shelf Terms Committee of Toll Brothers,
Inc. 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.
4.13 Joint Resolution Adopted by the Board of Directors of Toll Corp. and the Shelf Terms Committee of Toll Brothers,
Inc. 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.
28
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
4.14 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.
4.15 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.
4.16 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.
4.17 Authorizing Resolutions, dated as of March 9, 2004, relating to $300,000,000 principal amount of 4.95% Senior
Notes of Toll Brothers Finance Corp. due 2014, 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 April 1, 2004.
4.18 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.
4.19 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.
4.20 Registration Rights Agreement dated as of March 16, 2004 by and among Toll Brothers Finance Corp., the Registrant
and Citigroup Global Markets Inc. and each of the other initial purchasers named on Schedule A attached thereto
is hereby incorporated by reference to Exhibit 4.2 of the Registrant's Form 8-K filed with the Securities and
Exchange Commission on April 1, 2004.
4.21 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.
4.22 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 Credit Agreement by and among First Huntingdon Finance Corp., the Registrant and the lenders which are parties
thereto dated July 15, 2004, is hereby incorporated by reference to Exhibit 10.1 of the Registrant's Form 10-Q
for the quarter ended July 31, 2004.
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* Amendment to the Toll Brothers, Inc. Amended and Restated Stock Option 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.
29
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
10.4* Toll Brothers, Inc. Amended and Restated Stock Purchase Plan (1986) is hereby incorporated by reference to
Exhibit 4 of the Registrant's Registration Statement on Form S-8 filed with the Securities and Exchange
Commission on August 4, 1987, File No. 33-16250.
10.5* Toll Brothers, Inc. 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. 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. 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 99.2 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* Form of Incentive Stock Option Grant for Executive Officers pursuant to Toll Brothers, Inc. Stock Incentive Plan
(1998) is hereby incorporated by reference to Exhibit 10.2 of the Registrant's Form 10-Q for the quarter ended
July 31, 2004.
10.18* Form of Non-Qualified Stock Option Grant for Executive Officers pursuant to Toll Brothers, Inc. Stock Incentive
Plan (1998) is hereby incorporated by reference to Exhibit 10.3 of the Registrant's Form 10-Q for the quarter
ended July 31, 2004.
10.19* Form of Non-Qualified Stock Option Grant for Non-Employee Directors pursuant to Toll Brothers, Inc. Stock
Incentive Plan (1998) is hereby incorporated by reference to Exhibit 10.4 of the Registrant's Form 10-Q for the
quarter ended July 31, 2004.
10.20* 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.
10.21* 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.
30
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
10.22* 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.
10.23* 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.
10.24* Consulting and Non-Competition Agreement dated March 5, 1998 between the Registrant and Bruce E. Toll is hereby
incorporated by reference to Exhibit 10.3 to the Registrant's Form 10-Q for the quarter ended April 30, 1998.
10.25* 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.
10.26* 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.
10.27* Toll Bros., Inc. Non-Qualified Deferred Compensation Plan is hereby incorporated by reference to Exhibit of the
Registrant's Form 10-K for the fiscal year ended October 31, 2001.
10.28* 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.
10.29 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.
10.30 Purchase 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.
10.31 Purchase Agreement dated as of March 16, 2004 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 April 1, 2004.
10.32* Toll Brothers, Inc. Supplemental Retirement Plan.
12 Statement re: Computation of Ratios of Earnings to Fixed Charges.
21 Subsidiaries of the Registrant.
23 Consent of Independent Registered Public Accounting Firm.
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.
31
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 Horsham, Commonwealth of Pennsylvania on January 13, 2005.
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 January 13, 2005
----------------- of Directors and Chief Executive
ROBERT I. TOLL Officer (Principal Executive Officer)
Bruce E. Toll Vice Chairman of the Board January 13, 2005
- ------------------ and Director
BRUCE E. TOLL
Zvi Barzilay President, Chief Operating January 13, 2005
- ------------------ Officer and Director
ZVI BARZILAY
Joel H. Rassman Executive Vice President, January 13, 2005
----------------- Treasurer, Chief Financial
JOEL H. RASSMAN Officer and Director
(Principal Financial Officer)
Joseph R. Sicree Vice President and January 13, 2005
----------------- Chief Accounting Officer
JOSEPH R. SICREE (Principal Accounting Officer)
Robert S. Blank Director January 13, 2005
-----------------
ROBERT S. BLANK
Edward G. Boehne Director January 13, 2005
- ------------------
EDWARD G. BOEHNE
Richard J. Braemer Director January 13, 2005
- ------------------
RICHARD J. BRAEMER
Roger S. Hillas Director January 13, 2005
- ------------------
ROGER S. HILLAS
Carl B. Marbach Director January 13, 2005
- ------------------
CARL B. MARBACH
Stephen A. Novick Director January 13, 2005
- ------------------
STEPHEN A. NOVICK
Paul E. Shapiro Director January 13, 2005
- ------------------
PAUL E. SHAPIRO
32
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 2004 and 2003, and the related
consolidated statements of income and cash flows for each of the three years
in the period ended October 31, 2004. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (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, 2004 and 2003, and the consolidated
results of their operations and their cash flows for each of the three years
in the period ended October 31, 2004, in conformity with U.S. generally
accepted accounting principles.
Ernst & Young LLP
Philadelphia, Pennsylvania
December 9, 2004
F-1
CONSOLIDATED STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED OCTOBER 31,
-------------------------------------
2004 2003 2002
---------- ---------- ----------
REVENUES
Home sales............................................................................... $3,839,451 $2,731,044 $2,279,261
Land sales............................................................................... 22,491 27,399 36,183
Equity earnings in unconsolidated entities............................................... 15,731 981 1,870
Interest and other....................................................................... 15,420 15,817 11,658
---------- ---------- ----------
3,893,093 2,775,241 2,328,972
---------- ---------- ----------
COSTS AND EXPENSES
Home sales............................................................................... 2,747,274 1,977,439 1,655,331
Land sales............................................................................... 15,775 17,875 25,671
Selling, general and administrative...................................................... 381,080 288,337 236,123
Interest................................................................................. 93,303 73,245 64,529
Expenses related to early retirement of debt............................................. 8,229 7,192
---------- ---------- ----------
3,245,661 2,364,088 1,981,654
---------- ---------- ----------
INCOME BEFORE INCOME TAXES................................................................ 647,432 411,153 347,318
INCOME TAXES.............................................................................. 238,321 151,333 127,431
---------- ---------- ----------
NET INCOME................................................................................ $ 409,111 $ 259,820 $ 219,887
========== ========== ==========
EARNINGS PER SHARE:
Basic.................................................................................... $ 5.50 $ 3.68 $ 3.12
========== ========== ==========
Diluted.................................................................................. $ 5.04 $ 3.44 $ 2.91
========== ========== ==========
WEIGHTED-AVERAGE NUMBER OF SHARES:
Basic.................................................................................... 74,323 70,670 70,472
Diluted.................................................................................. 81,165 75,541 75,480
See accompanying notes.
F-2
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
OCTOBER 31,
-----------------------
2004 2003
---------- ----------
ASSETS
Cash and cash equivalents ........................... $ 580,863 $ 425,251
Inventory ........................................... 3,878,260 3,080,349
Property, construction and office equipment, net .... 52,429 43,711
Receivables, prepaid expenses and other assets ...... 146,212 113,633
Mortgage loans receivable ........................... 99,914 57,500
Customer deposits held in escrow .................... 53,929 31,547
Investments in and advances to unconsolidated
entities.......................................... 93,971 35,400
---------- ----------
$4,905,578 $3,787,391
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Loans payable ...................................... $ 340,380 $ 281,697
Senior notes ....................................... 845,665 546,669
Senior subordinated notes .......................... 450,000 620,000
Mortgage company warehouse loan .................... 92,053 49,939
Customer deposits .................................. 291,424 176,710
Accounts payable ................................... 181,972 151,730
Accrued expenses ................................... 574,202 346,944
Income taxes payable ............................... 209,895 137,074
---------- ----------
Total liabilities ............................... 2,985,591 2,310,763
---------- ----------
STOCKHOLDERS' EQUITY
Preferred stock, none issued
Common stock, 77,002 shares issued at October 31,
2004 and 2003..................................... 770 770
Additional paid-in capital ......................... 200,938 190,596
Retained earnings .................................. 1,770,730 1,361,619
Treasury stock, at cost -- 2,181 shares and 3,680
shares at October 31, 2004 and 2003, respectively. (52,451) (76,357)
---------- ----------
Total stockholders' equity ...................... 1,919,987 1,476,628
---------- ----------
$4,905,578 $3,787,391
========== ==========
See accompanying notes.
F-3
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
YEAR ENDED OCTOBER 31,
------------------------------------
2004 2003 2002
--------- ----------- ---------
Cash flow from operating activities:
Net income................................................................................ $ 409,111 $ 259,820 $ 219,887
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Depreciation and amortization........................................................... 15,032 12,075 10,495
Amortization of initial benefit obligation.............................................. 6,735
Equity earnings in unconsolidated entities.............................................. (15,731) (981) (1,870)
Deferred tax provision.................................................................. 32,377 17,933 1,831
Provision for inventory write-offs...................................................... 7,452 5,638 6,081
Write-off of unamortized debt discount and financing costs.............................. 1,322 1,692
Changes in operating assets and liabilities, net of assets and
liabilities acquired:
Increase in inventory.................................................................. (692,400) (478,478) (360,409)
Origination of mortgage loans.......................................................... (744,380) (714,505) (412,431)
Sale of mortgage loans................................................................. 701,967 718,761 376,764
Increase in receivables, prepaid expenses and other assets............................. (26,210) (18,803) (23,469)
Increase in customer deposits.......................................................... 92,332 33,475 27,213
Increase in accounts payable and accrued expenses...................................... 265,387 94,471 52,761
Increase in current income taxes payable............................................... 58,618 22,831 9,042
--------- ----------- ---------
Net cash provided by (used in) operating activities................................... 111,612 (46,071) (94,105)
--------- ----------- ---------
Cash flow from investing activities:
Purchase of property and equipment, net................................................. (20,408) (15,475) (14,170)
Investment in and advances to unconsolidated entities................................... (84,729) (15,268) (9,526)
Distribution from unconsolidated entities............................................... 34,088 4,550 4,200
--------- ----------- ---------
Net cash used in investing activities................................................. (71,049) (26,193) (19,496)
--------- ----------- ---------
Cash flow from financing activities:
Proceeds from loans payable............................................................. 981,621 1,096,897 528,710
Principal payments of loans payable..................................................... (988,488) (1,117,047) (627,270)
Net proceeds from issuance of public debt............................................... 297,432 544,174 149,748
Redemption of senior subordinated notes................................................. (170,000) (200,000)
Net proceeds from issuance of common stock.............................................. 86,241
Proceeds from stock-based benefit plans................................................. 14,725 10,478 12,997
Purchase of treasury stock.............................................................. (20,241) (25,565) (31,087)
--------- ----------- ---------
Net cash provided by financing activities.............................................. 115,049 395,178 33,098
--------- ----------- ---------
Net increase (decrease) in cash and cash equivalents....................................... 155,612 322,914 (80,503)
Cash and cash equivalents, beginning of year............................................... 425,251 102,337 182,840
--------- ----------- ---------
Cash and cash equivalents, end of year..................................................... $ 580,863 $ 425,251 $ 102,337
========= =========== =========
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 U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Income Recognition
The Company is primarily engaged in the development, construction and sale
of residential 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 home sites 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 $64.4 million and $54.1 million at
October 31, 2004 and 2003, 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 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.
F-5
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. Because the
Company's inventory is considered a long-lived asset under U.S. generally
accepted accounting principles, 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.
Investments in and Earnings From Unconsolidated Entities
The Company is a party to several 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 home sites to other builders. The Company does not
recognize earnings from the home sites it purchases from these ventures, but
reduces its cost basis in the home sites by its share of the earnings from
those home sites.
The Company is also a party to several other joint ventures and effectively
owns one-third of the Toll Brothers Realty Trust Group (the "Trust"). The
Company recognizes its proportionate share of the earnings of these entities.
(See Note 12, "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.
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.
F-6
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
Intangible assets, including goodwill, that are not subject to amortization
are tested for impairment and possible write down on an annual basis. At
October 31, 2004, the Company had $12.2 million of unamortized goodwill.
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.
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, has developed and is currently
marketing for a joint venture in which it has a minority interest: The Sky
Club, a 326-unit, 17-story, two-tower structure under construction in Hoboken,
New Jersey.
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,
were not material to the financial position of the Company.
New Accounting Pronouncements
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. On December 16, 2004, the Financial Accounting Standards Board
("FASB") issued SFAS 123 (revised 2004), "Share-Based Payment" ("SFAS 123R") ,
effective for periods beginning after June 15, 2005. SFAS 123R requires that
all stock-based compensation be treated as a cost that is reflected in the
financial statements. The Company is required to adopt the new standard for
its fiscal period beginning August 1, 2005. The Company is currently reviewing
the effect of this statement on the Company's financial statements.
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities, an interpretation of ARB No.
51," as revised, 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. The full adoption of FIN 46 in fiscal 2004 did not have a
material effect on our financial position and results of operations.
In March 2004, the SEC released Staff Accounting Bulletin ("SAB") No. 105,
"Application of Accounting Principles to Loan Commitments." SAB No. 105
provides the SEC staff's position regarding the application of U.S. generally
accepted accounting principles to loan commitments that relate to the
origination of mortgage loans that will be held for resale. SAB No. 105
contains specific guidance on the inputs to a valuation-recognition model to
measure loan commitments accounted for at fair value. Current accounting
guidance requires the commitment to be recognized on the balance sheet at fair
value from its inception through its expiration or funding. SAB No. 105
requires that fair-value measurement include only the
F-7
differences between the guaranteed interest rate in the loan commitment and a
market interest rate, excluding any expected future cash flows related to the
customer relationship or loan servicing. In addition, SAB No. 105 requires the
disclosure of loan commitments and any associated hedging strategies. SAB 105
is effective for all loan commitments accounted for as derivatives and entered
into after March 31, 2004. The adoption of SAB No. 105 did not have a material
effect on our results of operations, financial condition, or cash flows.
Reclassification
Certain prior year amounts have been reclassified to conform with the fiscal
2004 presentation.
2. INVENTORY
Inventory at October 31, 2004 and 2003 consisted of the following (amounts
in thousands):
2004 2003
---------- ----------
Land and land development costs ..................... $1,242,417 $1,115,805
Construction in progress ............................ 2,178,112 1,609,314
Sample homes and sales offices ...................... 208,416 188,592
Land deposits and costs of future development ....... 237,353 155,649
Other ............................................... 11,962 10,989
---------- ----------
$3,878,260 $3,080,349
========== ==========
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
that it believed not to be recoverable of $7.5 million in fiscal 2004, $5.6
million in fiscal 2003 and $6.1 million in fiscal 2002. Of these amounts, $5.2
million, $2.0 million and $2.5 million were applicable to future communities
in fiscal 2004, fiscal 2003 and fiscal 2002, 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, 2004, 2003 and 2002, were as follows
(amounts in thousands):
2004 2003 2002
-------- -------- --------
Interest capitalized, beginning of year................................................. $154,314 $123,637 $ 98,650
Interest incurred....................................................................... 113,448 104,754 90,313
Interest expensed....................................................................... (93,303) (73,245) (64,529)
Write-off to cost and expenses.......................................................... (1,017) (832) (797)
-------- -------- --------
Interest capitalized, end of year....................................................... $173,442 $154,314 $123,637
======== ======== ========
3. LOANS PAYABLE, SENIOR NOTES, SENIOR SUBORDINATED NOTES AND MORTGAGE COMPANY
WAREHOUSE LOAN
Loans payable at October 31, 2004 and 2003 consisted of the following
(amounts in thousands):
2004 2003
-------- --------
Term loan due July 2005 ................................. $222,500 $222,500
Other ................................................... 117,880 59,197
-------- --------
$340,380 $281,697
======== ========
The Company has a $1.14 billion unsecured revolving credit facility with 27
banks, which extends to July 15, 2009. At October 31, 2004, interest was
payable on borrowings under the facility at 0.70% (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. At October 31, 2004, the Company had no outstanding borrowings against
the facility; and letters of credit of approximately $150.7 million were
F-8
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 : 1.00 and is required to
maintain a minimum tangible net worth (as defined in the agreement) of
approximately $1.26 billion at October 31, 2004. At October 31, 2004, the
Company's leverage ratio was approximately .56 : 1.00 and its tangible net
worth was approximately $2.06 billion. Based upon the minimum tangible net
worth requirement, the Company's ability to pay dividends and repurchase its
common stock was limited to an aggregate amount of approximately $842 million
at October 31, 2004.
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 : 1.00,
and is required to maintain a minimum tangible net worth (as defined in the
agreement) of approximately $946 million at October 31, 2004. At October 31,
2004, the Company's leverage ratio was approximately .54 : 1.00 and its
tangible net worth was approximately $2.12 billion.
At October 31, 2004, the aggregate estimated fair value of the Company's
loans payable was approximately $350.2 million. The fair value of loans was
estimated based upon the interest rates at October 31, 2004 that the Company
believed were available to it for loans with similar terms and remaining
maturities.
During fiscal 2004, the Company issued $300 million of 4.95% Senior Notes
due 2014 and used a portion of the proceeds from the transaction to redeem its
$170 million outstanding of 8 1/8% Senior Subordinated Notes due 2009.
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.
At October 31, 2004 and 2003, the Company's senior notes and senior
subordinated notes consisted of the following (amounts in thousands):
OCTOBER 31
-----------------------
2004 2003
---------- ----------
Senior notes:
6.875% Senior Notes due November 15, 2012 .......... $ 300,000 $ 300,000
5.95% Senior Notes due September 15, 2013 .......... 250,000 250,000
4.95% Senior Notes due March 15, 2014 .............. 300,000
Bond discount ...................................... (4,335) (3,331)
---------- ----------
845,665 546,669
---------- ----------
Senior subordinated notes:
8 1/8% Senior Subordinated Notes due February 1,
2009............................................... 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
---------- ----------
450,000 620,000
---------- ----------
Total .......................................... $1,295,665 $1,166,669
========== ==========
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.
F-9
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 governing these notes restrict
certain payments by the Company, including cash dividends and repurchases of
Company stock. The senior subordinated 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, 2004, the aggregate fair value of all the outstanding senior
notes and senior subordinated notes, based upon their indicated market prices,
was approximately $893.0 million and $489.1 million, respectively.
A subsidiary of the Company has a $125 million bank line of credit with
three banks to fund mortgage originations. The line of credit 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, 2004, the subsidiary had borrowed
$92.1 million under the line of credit at an average interest rate of 3.02%.
The line of credit is collateralized by all the assets of the subsidiary,
which amounted to approximately $105.4 million at October 31, 2004.
The annual aggregate maturities of the Company's loans and notes during each
of the next five fiscal years are: 2005- $373.4 million; 2006 -- $19.9
million; 2007 -- $30.3 million; 2008 -- $3.1 million; 2009 -- $101.3 million.
4. ACCRUED EXPENSES
Accrued expenses at October 31, 2004 and 2003 consisted of the following
(amounts in thousands):
2004 2003
-------- --------
Land, land development and construction costs ........... $229,045 $115,062
Compensation and employee benefit costs ................. 89,865 48,914
Warranty costs .......................................... 42,133 33,752
Other ................................................... 213,159 149,216
-------- --------
$574,202 $346,944
======== ========
5. 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
2004, 2003 and 2002. The effective tax rates in 2004, 2003 and 2002 were
36.8%, 36.8% and 36.7%, respectively. The primary difference between the
Company's Base Rate and effective tax rate was tax-free income in each of the
years.
The provision for income taxes for each of the three years ended October 31,
2004, 2003 and 2002 was as follows (amounts in thousands):
2004 2003 2002
-------- -------- --------
Federal................................................................................. $223,076 $139,046 $117,233
State................................................................................... 15,245 12,287 10,198
-------- -------- --------
$238,321 $151,333 $127,431
======== ======== ========
Current................................................................................. $205,944 $133,400 $125,600
Deferred................................................................................ 32,377 17,933 1,831
-------- -------- --------
$238,321 $151,333 $127,431
======== ======== ========
F-10
The components of income taxes payable at October 31, 2004 and 2003
consisted of the following (amounts in thousands):
2004 2003
-------- --------
Current ................................................. $126,125 $ 85,681
Deferred ................................................ 83,770 51,393
-------- --------
$209,895 $137,074
======== ========
The components of net deferred taxes payable at October 31, 2004 and 2003
consisted of the following (amounts in thousands):
2004 2003
-------- -------
Deferred tax liabilities:
Capitalized interest.................................... $ 60,906 $48,679
Deferred expense........................................ 58,362 43,166
-------- -------
Total............................................... 119,268 91,845
-------- -------
Deferred tax assets:
Inventory valuation reserves............................ 15,412 18,014
Inventory valuation differences......................... 2,784 2,684
Deferred income......................................... (1,013) 2,960
Accrued expenses deductible when paid................... 2,376 2,401
Other................................................... 15,939 14,393
-------- -------
Total............................................... 35,498 40,452
-------- -------
Net deferred tax liability $ 83,770 $51,393
======== =======
6. 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. At October 31,
2004, the Company had approximately 74.8 million shares of common stock issued
and outstanding (net of approximately 2.2 million shares of common stock held
in Treasury), approximately 15.2 million shares of common stock reserved for
outstanding options, approximately 3.2 million shares of common stock reserved
for future option and award issuances and approximately 0.4 million shares of
common stock reserved for issuance under the Company's employee stock purchase
plan. As of October 31, 2004, the Company had not issued any shares of
preferred stock.
Issuance of Common Stock
In August 2003, the Company issued 3.0 million shares of its common stock at
a price of $28.80, realizing net proceeds of $86.2 million.
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.
F-11
Stock Repurchase Program
In March 2003, 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. At October 31, 2004, the
Company had approximately 9.3 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, 2004.
Changes in Stockholders' equity
Changes in stockholders' equity for each of the three years ended October 31,
2004, 2003 and 2002 were as follows (amounts in thousands):
COMMON STOCK ADDITIONAL
--------------- PAID-IN RETAINED TREASURY
SHARES AMOUNT CAPITAL EARNINGS STOCK TOTAL
------ ------ ---------- ---------- --------- ----------
Balance, November 1, 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
Net income ................................................ 409,111 409,111
Purchase of treasury stock ................................ (544) 5 (20,241) (20,236)
Exercise of stock options ................................. 1,448 (883) 33,180 32,297
Executive bonus award ..................................... 551 10,520 9,768 20,288
Employee benefit plan issuances ........................... 44 700 1,199 1,899
------ ---- --------- ---------- --------- ----------
Balance, October 31, 2004 ................................. 74,821 $770 $ 200,938 $1,770,730 $ (52,451) $1,919,987
====== ==== ========= ========== ========= ==========
F-12
7. 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, 2004, 2003 and 2002:
2004 2003 2002
----- ----- -----
Risk-free interest rate.................................................................................. 3.73% 3.53% 5.02%
Expected life (years) 6.99 7.07 7.50
Volatility............................................................................................... 42.97% 43.37% 41.30%
Dividends none none none
At October 31, 2004, 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):
2004 2003 2002
-------- -------- --------
Net income ....................................................................... As reported $409,111 $259,820 $219,887
Pro forma $391,898 $245,158 $205,314
Basic net income per share ....................................................... As reported $ 5.50 $ 3.68 $ 3.12
Pro forma $ 5.27 $ 3.47 $ 2.91
Diluted net income per share ..................................................... As reported $ 5.04 $ 3.44 $ 2.91
Pro forma $ 4.83 $ 3.25 $ 2.72
Weighted-average grant date fair value
per share of options granted .................................................... $ 19.47 $ 10.24 $ 11.17
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), the Executives and Non-Employee Directors Stock Option Plan (1993) 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 five
million shares.
F-13
The following table summarizes stock option activity for the four plans
during each of the three years ended October 31, 2004, 2003 and 2002:
2004 2003 2002
-------------------------- -------------------------- --------------------------
NUMBER WEIGHTED- NUMBER WEIGHTED- NUMBER WEIGHTED-
OF AVERAGE OF AVERAGE OF AVERAGE
OPTIONS EXERCISE OPTIONS EXERCISE OPTIONS EXERCISE
(IN THOUSANDS) PRICE (IN THOUSANDS) PRICE (IN THOUSANDS) PRICE
-------------------------- -------------------------- --------------------------
Outstanding, November 1, ................ 15,533 $13.91 15,321 $13.24 14,486 $11.44
Granted ................................. 1,352 40.27 1,280 21.05 2,586 21.76
Exercised ............................... (1,509) 11.09 (926) 11.86 (1,530) 9.98
Cancelled ............................... (131) 26.78 (142) 19.39 (221) 17.68
------ ------ ------
Outstanding, October 31 ................. 15,245 $16.41 15,533 $13.91 15,321 $13.24
====== ====== ======
Options exercisable, October 31, ........ 11,535 $12.74 11,083 $11.62 9,781 $10.64
Options available for grant October 31, . 3,168 3,275 3,498
The following table summarizes information about stock options outstanding
and exercisable at October 31, 2004:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- --------------------------
WEIGHTED-
AVERAGE
REMAINING WEIGHTED- WEIGHTED-
NUMBER CONTRACTUAL AVERAGE NUMBER AVERAGE
OUTSTANDING LIFE EXERCISE EXERCISABLE EXERCISE
RANGE OF EXERCISE PRICES (IN THOUSANDS) (IN YEARS) PRICE (IN THOUSANDS) PRICE
- ------------------------ -------------- ----------- --------- -------------- ---------
$ 4.35 -- $8.70......................................... 811 0.9 $ 6.82 811 $ 6.82
8.71 -- 10.88........................................ 4,280 3.9 9.14 4,280 9.14
10.89 -- 13.06........................................ 2,417 3.8 11.85 2,417 11.85
13.07 -- 15.23........................................ 1,395 3.2 14.01 1,395 14.01
17.41 -- 21.76........................................ 5,031 7.0 20.78 2,632 20.55
21.77 -- 40.27........................................ 1,311 9.1 40.27 -- --
------ ------
$ 4.35 -- $40.27........................................ 15,245 5.1 $16.41 11,535 $12.74
------ ------
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 as defined by the plan.
In December 2000, Mr. Toll and the Board of Directors agreed that any bonus
payable for each of the three fiscal years ended October 31, 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. In October 2004, Mr. Toll and the Board of Directors amended
the plan for fiscal 2004, reducing the formula for the calculation of the cash
bonus and limiting the value of the shares that may be issued under the award.
The Company recognized compensation expense in 2004, 2003 and 2002 of $30.4
million, $20.3 million and $9.6 million, respectively, which represented the
fair market value of shares that will be issued or have been issued to Mr.
Toll (655,932 shares for 2004, 550,857 shares for 2003 and 471,099 shares for
2002). Had Mr. Toll and the Board of Directors not amended Mr. Toll's bonus
program for fiscal 2004, Mr. Toll would have received 1,073,937 shares with a
fair market value of $49.8 million.
On October 31, 2004, 2003 and 2002, the closing price of the Company's
Common Stock on the New York Stock Exchange was $46.35, $36.84 and $20.48,
respectively.
F-14
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 award shares for fiscal 2002. In December 2004, Mr. Toll will
receive 235,550 shares of his 2002 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. At October 31, 2004, 417,567 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, 2004, 2003 and 2002
were 15,624 shares and $38.24, 15,085 shares and $21.12 and 15,672 shares and
$21.24, respectively. No compensation expense was recognized by the Company
under this plan.
8. EARNINGS PER SHARE INFORMATION
Information pertaining to the calculation of earnings per share for each of
the three years ended October 31, 2004, 2003 and 2002 is as follows (amounts
in thousands):
2004 2003 2002
------ ------ ------
Basic weighted-average shares......................................................................... 74,323 70,670 70,472
Assumed conversion of dilutive stock options.......................................................... 6,842 4,871 5,008
------ ------ ------
Diluted weighted-average shares....................................................................... 81,165 75,541 75,480
====== ====== ======
9. EMPLOYEE RETIREMENT AND DEFERRED COMPENSATION PLANS
The Company maintains a salary deferral savings plan covering substantially
all employees. The plan provides for Company contributions of up to 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 $5.4 million, $5.3 million and
$3.5 million for the years ended October 31, 2004, 2003 and 2002,
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, 2004 and 2003, the Company had accrued $4.0 million and
$2.3 million, respectively, for its obligations under the plan.
In October 2004, the Company established a defined benefit retirement plan
(the "Retirement Plan") effective as of September 1, 2004, which covers a
number of senior executives and a director of the Company. The Retirement Plan
is unfunded and vests when the participant has completed 20 years of service
with the Company and reaches normal retirement age (age 62). An unrecognized
prior service cost of $13.7 million is being amortized over the period from
the effective date of the plan until the participants are fully vested. At
October 31, 2004, the balance sheet includes a $7.0 million intangible asset
related to unamortized prior service cost and an accrued pension liability of
$13.9 million. In fiscal 2004, the Company recognized $6.9 million of pension
expense under the Retirement Plan, which represented amortization of prior
service obligations of $6.7 million and current service expense and interest
of $.2 million. The Company used a 5.69% discount rate in its calculation of
the present value of its projected benefit obligation. At October 31, 2004,
the present value of the Company's projected benefit obligation was $13.9
million.
F-15
10. INVESTMENTS IN UNCONSOLIDATED ENTITIES
The Company has investments in and advances to several joint ventures with
unrelated parties to develop land. Some of these joint ventures develop land
for the sole use of the venture partners, including the Company, and others
develop land for sale to the venture partners and to unrelated builders. The
Company recognizes its share of earnings from the sale of home sites to other
builders. The Company does not recognize earnings from home sites it purchases
from the joint ventures, but instead reduces its cost basis in these home
sites by its share of the earnings on the home sites. At October 31, 2004, the
Company had approximately $42.8 million invested in or advanced to these joint
ventures and was committed to contributing additional capital in an aggregate
amount of approximately $90.2 million if the joint ventures require it. In
November 2004, one of the joint ventures obtained third-party financing of
$535 million, of which each of the joint venture partners guaranteed their
pro-rata share. The Company's share of the loan guarantee was $53.6 million,
which has reduced the amount committed to the funding of the joint venture.
In January 2004, the Company entered into a joint venture in which it has a
50% interest with an unrelated party to develop Maxwell Place, an 832-home
luxury condominium community on the Hoboken, New Jersey waterfront. At
October 31, 2004, the Company had investments in and advances to the joint
venture of $29.5 million and was committed to making up to $1.0 million of
additional investments in and advances to it. The Company and its joint
venture partner each have guaranteed $7.5 million of principal amount of one
of the loans obtained by this joint venture.
In October 2004, the Company entered into a joint venture in which it has a
50% interest with an unrelated party to convert a 525-unit apartment complex,
The Hudson Tea Buildings, located in Hoboken, New Jersey, into luxury
condominium units. At October 31, 2004, the Company had investments in and
advances to the joint venture of $7.5 million, and was committed to making up
to $1.5 million of additional investments in and advances to it.
The Company has a minority interest in a joint venture with unrelated
parties that has developed and is currently marketing The Sky Club, a
326-unit, 17-story, two-tower structure, located in Hoboken, New Jersey. At
October 31, 2004, the Company's investment in this joint venture was $6.9
million. The Company does not have any commitment to contribute additional
capital to this joint venture.
The Company also owns 50% of a joint venture with an unrelated party that is
currently building and selling an active-adult, age-qualified community in
Michigan. At October 31, 2004, the Company's investment in this joint venture
was $1.4 million. The Company does not have any commitment to contribute
additional capital to this joint venture.
See Note 12, "Related Party Transactions," for a description of the
Company's investment in Toll Brothers Realty Trust Group.
11. 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 2004 and 2003 were as follows (amounts in
thousands):
2004 2003
-------- --------
Balance, beginning of year .............................. $ 33,752 $ 29,197
Additions ............................................... 27,674 19,732
Charges incurred ........................................ (19,293) (15,177)
-------- --------
Balance, end of year .................................... $ 42,133 $ 33,752
======== ========
At October 31, 2004, the Company had agreements to purchase land for future
development with an aggregate purchase price of approximately $2.0 billion, of
which $137.4 million had been paid or deposited. Purchase of the properties is
generally contingent upon satisfaction of certain requirements by the Company
and the sellers.
F-16
At October 31, 2004, the Company had outstanding surety bonds amounting to
approximately $611.0 million related primarily to its obligations to various
governmental entities to construct improvements in the Company's various
communities. The Company estimates that approximately $205.7 million of work
remains on these improvements. The Company has an additional $74.5 million of
surety bonds outstanding that guarantee other obligations of the Company. The
Company does not believe that any outstanding bonds will likely be drawn upon.
At October 31, 2004, the Company had agreements of sale outstanding to
deliver 6,709 homes with an aggregate sales value of approximately $4.43
billion.
At October 31, 2004, the Company was committed to providing approximately
$524.1 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 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-cancellable
operating leases. Rental expense incurred by the Company amounted to $4.4
million for 2004, $3.4 million for 2003 and $2.8 million for 2002. At
October 31, 2004, future minimum rent payments under these operating leases
were $10.8 million for 2005, $8.1 million for 2006, $6.8 million for 2007,
$5.1 million for 2008, and $4.1 million for 2009.
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.
12. 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 expire in August 2005. At
October 31, 2004, the Company had an investment of $5.9 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, which is being developed 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's ability to influence the design and construction quality so as to
enhance the overall community; (b) synergies of development and marketing
costs were expected to be a benefit to the Company; (c) the Trust's
maintenance of a high quality of operations, ensuring that the existence of
the apartments in the community would not negatively affect the image of the
community as a whole; and (d) as was the Company's experience with another
Trust property, apartment tenants being 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
recognized only two-thirds of
F-17
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 $1.7 million, $1.0 million and $1.2 million in fiscal 2004, 2003 and 2002,
respectively. The Company believes that the transactions, including the sale
of the Property, between itself and the Trust were on terms no less favorable
than it would have agreed to with unrelated parties.
13. 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, 2004, 2003 and 2002 (amounts in
thousands):
2004 2003 2002
-------- -------- --------
Cash flow information:
Interest paid, net of amount capitalized....................................................... $ 50,157 $ 39,154 $ 29,867
Income taxes paid.............................................................................. $147,326 $109,018 $116,558
Non-cash activity:
Cost of inventory acquired through seller financing............................................ $107,664 $ 56,956 $ 13,284
Income tax benefit related to exercise of employee stock options............................... $ 18,175 $ 5,320 $ 7,394
Stock bonus awards............................................................................. $ 20,288 $ 9,643 $ 6,855
Contributions to employee retirement plan...................................................... $ 1,301 $ 1,180 $ 883
Adoption of supplemental executive retirement plan
- projected initial benefit obligation....................................................... $ 13,702
14. 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; $250 million of 5.95% Senior Notes due 2013 on September 3,
2003; and $300 million of 4.95% Senior Notes due 2014 on March 16, 2004. 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 home building subsidiaries
(the "Guarantor Subsidiaries"). The guarantees are full and unconditional. The
Company's non-home building 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.
F-18
Supplemental consolidating financial information of Toll Brothers, Inc., 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 $).
CONSOLIDATING BALANCE SHEET AT OCTOBER 31, 2004
TOLL NON-
BROTHERS, SUBSIDIARY GUARANTOR GUARANTOR
INC. ISSUER SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ---------- ------------ ------------ ------------ ------------
ASSETS
Cash & cash equivalents ................... 566,865 13,998 580,863
Inventory ................................. 3,877,900 360 3,878,260
Property, construction & office equipment
-- net................................... 42,431 9,998 52,429
Receivables, prepaid expenses and other
assets................................... 4,929 94,052 63,740 (16,509) 146,212
Mortgage loans receivable ................. 99,914 99,914
Customer deposits held in escrow .......... 53,929 53,929
Investments in & advances to
unconsolidated entities .................. 93,971 93,971
Investments in & advances to
consolidated entities .................... 2,131,882 854,888 (1,098,623) (3,403) (1,884,744) --
--------- ------- ---------- ------- ---------- ---------
2,131,882 859,817 3,630,525 184,607 (1,901,253) 4,905,578
========= ======= ========== ======= ========== =========
LIABILITIES & STOCKHOLDERS'
EQUITY
LIABILITIES:
Loans payable ............................ 335,920 4,460 340,380
Senior notes ............................. 845,665 845,665
Senior subordinated notes ................ 450,000 450,000
Mortgage company
warehouse loan.......................... 92,053 92,053
Customer deposits ........................ 291,424 291,424
Accounts payable ......................... 181,964 8 181,972
Accrued expenses ......................... 14,152 510,437 66,194 (16,581) 574,202
Income taxes payable ..................... 211,895 (2,000) 209,895
--------- ------- ---------- ------- ---------- ---------
Total liabilities....................... 211,895 859,817 1,769,745 160,715 (16,581) 2,985,591
--------- ------- ---------- ------- ---------- ---------
STOCKHOLDERS' EQUITY:
Common stock ............................. 770 2,003 (2,003) 770
Additional paid-in capital ............... 200,938 4,420 2,734 (7,154) 200,938
Retained earnings ........................ 1,770,730 1,856,360 19,155 (1,875,515) 1,770,730
Treasury stock ........................... (52,451) (52,451)
--------- ------- ---------- ------- ---------- ---------
Total equity............................ 1,919,987 -- 1,860,780 23,892 (1,884,672) 1,919,987
--------- ------- ---------- ------- ---------- ---------
2,131,882 859,817 3,630,525 184,607 (1,901,253) 4,905,578
========= ======= ========== ======= ========== =========
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 STATEMENT OF INCOME FOR THE FISCAL YEAR ENDED OCTOBER 31, 2004
TOLL NON-
BROTHERS, SUBSIDIARY GUARANTOR GUARANTOR
INC. ISSUER SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ---------- ------------ ------------ ------------ ------------
Revenues:
Home sales ............................... 3,839,451 3,839,451
Land sales ............................... 22,491 22,491
Equity earnings in unconsolidated
entities ............................... 15,731 15,731
Earnings from subsidiaries ............... 647,461 (647,461) --
Other .................................... 46,560 13,184 35,506 (79,830) 15,420
------- ------ --------- ------ -------- ---------
647,461 46,560 3,890,857 35,506 (727,291) 3,893,093
------- ------ --------- ------ -------- ---------
Costs and expenses:
Cost of sales ............................ 2,759,912 3,865 (728) 2,763,049
Selling, general and administrative ...... 29 491 382,041 20,393 (21,874) 381,080
Interest ................................. 46,069 93,214 1,579 (47,559) 93,303
Expenses related to early retirement of
debt ................................... 8,229 8,229
------- ------ --------- ------ -------- ---------
29 46,560 3,243,396 25,837 (70,161) 3,245,661
------- ------ --------- ------ -------- ---------
Income before
income taxes............................ 647,432 -- 647,461 9,669 (657,130) 647,432
Income taxes ............................. 238,321 238,331 3,573 (241,904) 238,321
------- ------ --------- ------ -------- ---------
Net income ............................... 409,111 -- 409,130 6,096 (415,226) 409,111
======= ====== ========= ====== ======== =========
CONSOLIDATING STATEMENT OF INCOME 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 in unconsolidated
entities................................ 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
======= ====== ========= ====== ======== =========
F-21
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 in unconsolidated
entities................................ 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 CASH FLOWS FOR THE TWELVE MONTHS ENDED OCTOBER 31,
2004
TOLL NON-
BROTHERS, SUBSIDIARY GUARANTOR GUARANTOR
INC. ISSUER SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ---------- ------------ ------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ................................ 409,111 409,130 6,096 (415,226) 409,111
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Depreciation & amortization .............. 445 12,929 1,658 15,032
Amortization of initial benefit
obligation............................... 6,735 6,735
Equity earnings in unconsolidated
entities................................. (15,731) (15,731)
Deferred income taxes .................... 32,377 32,377
Provision for inventory write-offs ....... 7,452 7,452
Write-off of unamortized debt discount
and financing costs...................... 1,322 1,322
Changes in operating assets and
liabilities:
Increase in inventory................... (692,218) (182) (692,400)
Origination of mortgage loans........... (744,380) (744,380)
Sale of mortgage loans.................. 701,967 701,967
Increase in receivables, prepaid expense
and other ............................. (516,772) (300,122) 389,242 (19,853) 421,295 (26,210)
Increase in customer deposits........... 92,332 92,332
Increase in accounts payable and accrued
expenses .............................. 21,589 2,245 226,949 20,673 (6,069) 265,387
Decrease in current taxes payable....... 59,211 (593) 58,618
-------- -------- -------- -------- -------- --------
Net cash provided by (used in)
operating activities ..................... 5,516 (297,432) 438,142 (34,614) -- 111,612
-------- -------- -------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, construction and
office equipment........................ (18,881) (1,527) (20,408)
Investments in unconsolidated entities ... (84,729) (84,729)
Distributions from unconsolidated
entities................................. 34,088 34,088
-------- -------- -------- -------- -------- --------
Net cash used in investing activities ..... -- -- (69,522) (1,527) -- (71,049)
-------- -------- -------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from loans payable .............. 321,077 660,544 981,621
Principal payments on loans payable ...... (369,908) (618,580) (988,488)
Net proceeds from public debt ............ 297,432 297,432
Redemption of subordinated debt .......... (170,000) (170,000)
Proceeds from stock-based benefit plans .. 14,725 14,725
Purchase of treasury shares .............. (20,241) (20,241)
-------- -------- -------- -------- -------- --------
Net cash provided by (used in) financing
activities............................... (5,516) 297,432 (218,831) 41,964 -- 115,049
-------- -------- -------- -------- -------- --------
Increase (decrease) in cash & equivalents . -- -- 149,789 5,823 -- 155,612
Cash & equivalents, beginning of period ... 417,076 8,175 425,251
-------- -------- -------- -------- -------- --------
Cash & equivalents, end of period ......... -- -- 566,865 13,998 -- 580,863
-------- -------- -------- -------- -------- --------
F-23
CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE TWELVE MONTHS 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 and 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 in unconsolidated
entities .............................. (981) (981)
Expenses related to retirement of debt ... 1,692 1,692
Changes in operating assets and
liabilities
(Increase) decrease in inventory........ (478,653) 175 (478,478)
Origination of mortgage loans........... (714,505) (714,505)
Sale of mortgage loans.................. 718,761 718,761
(Increase) decrease in receivables,
prepaid expense and other ............. (383,969) (556,290) 660,877 (5,053) 265,632 (18,803)
Increase in customer deposits........... 33,475 33,475
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 (used in) provided by
operating activities ..................... (71,154) (544,174) 555,195 14,062 -- (46,071)
-------- -------- -------- -------- -------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, construction
and 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 in cash and equivalents .......... -- -- 317,261 5,653 -- 322,914
Cash and equivalents, beginning of period . 99,815 2,522 102,337
-------- -------- -------- -------- -------- ----------
Cash and 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 and amortization.............. 9,509 986 10,495
Deferred income taxes ..................... 1,831 1,831
Provision for write-offs .................. 6,081 6,081
Equity earnings in unconsolidated
entities.................................. (1,870) (1,870)
Changes in operating assets and
liabilities
(Increase) decrease in inventory......... (360,552) 143 (360,409)
Origination of mortgage loans............ (412,431) (412,431)
Sale of mortgage loans................... 376,764 376,764
(Increase) decrease in receivables,
prepaid expense and other .............. (220,404) (7,246) (18,561) 222,742 (23,469)
Increase in customer deposits............ 27,213 27,213
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) provided by operating
activities............................... 18,090 -- (84,347) (27,848) -- (94,105)
-------- ---- -------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, construction &
office equipment......................... (9,758) (4,412) (14,170)
Investment in unconsolidated entities .... (9,526) (9,526)
Distributions from unconsolidated
entities................................. 4,200 4,200
-------- ---- -------- -------- -------- --------
Net cash used in investing activities .... -- -- (15,084) (4,412) -- (19,496)
-------- ---- -------- -------- -------- --------
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 provided by (used in) financing
activities............................... (18,090) -- 19,812 31,376 -- 33,098
-------- ---- -------- -------- -------- --------
Decrease in cash and equivalents .......... -- -- (79,619) (884) -- (80,503)
Cash and equivalents, beginning of period . 179,434 3,406 182,840
-------- ---- -------- -------- -------- --------
Cash and equivalents, end of period ....... -- -- 99,815 2,522 -- 102,337
======== ==== ======== ======== ======== ========
F-25
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 2004:
Revenue ........................................................................ $1,462,577 $1,013,119 $819,485 $597,912
Gross profit ................................................................... $ 430,378 $ 296,126 $233,359 $170,181
Income before income taxes ..................................................... $ 286,120 $ 167,821 $114,521 $ 78,970
Net income ..................................................................... $ 180,574 $ 106,015 $ 72,438 $ 50,084
Earnings per share
Basic......................................................................... $ 2.42 $ 1.43 $ 0.97 $ 0.68
Diluted....................................................................... $ 2.22 $ 1.31 $ 0.89 $ 0.62
Weighted-average number of shares
Basic......................................................................... 74,695 74,352 74,406 73,839
Diluted....................................................................... 81,496 80,920 81,426 80,819
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
- ---------------
* Due to rounding, the sum of the quarterly earnings per share amounts may
not equal the reported earnings per share for the year.
F-26