ITEM 1. BUSINESS General
Toll Brothers, Inc. ("Toll Brothers" or the "Company"), a Delaware corporation formed in May 1986, commenced its business operations, through predecessor entities, in 1967. Toll Brothers designs, builds, markets and arranges financing for single family detached and attached homes in middle and high income residential communities catering to move-up, empty nester and age-qualified homebuyers in eighteen states in six regions around the country. The communities are generally located on land the Company has either developed or acquired fully approved and, in some cases, improved. During fiscal 1999, the Company began building homes in the San Francisco, San Diego, Chicago and Detroit markets. Currently, the Company operates in the major suburban areas of southeastern Pennsylvania and Delaware, central New Jersey, the Virginia and Maryland suburbs of Washington, D.C., the Boston, Massachusetts metropolitan area, Fairfield and Hartford Counties, Connecticut, Westchester County, New York, southern and northern California, the Phoenix, Arizona metropolitan area, Raleigh and Charlotte North Carolina, Las Vegas, Nevada, Dallas and Austin, Texas, the east and west coasts of Florida, Columbus, Ohio, Nashville, Tennessee, the suburbs of Detroit Michigan, and the suburbs of Chicago, Illinois. The Company continues to explore additional geographic areas for expansion. The Company markets its homes primarily to middle-income and upper-income buyers, emphasizing high quality construction and customer satisfaction. In the five years ended October 31, 1999, Toll Brothers delivered more than 13,000 homes in 288 communities including 3,555 homes in 183 communities delivered in fiscal 1999.
In March 1999, the Company acquired the homebuilding operations of the Silverman Companies, a Detroit, Michigan homebuilder and developer of luxury apartments, for cash and the assumption of debt. The Silverman Companies owned or controlled approximately 1,800 homesites and interests in over 1,000 existing and prospective apartments. The acquisition of the Silverman apartment assets is expected to be completed during the first half of fiscal 2000.
In March 1999, the Company acquired land for homes, apartments, retail, office and industrial space in the master planned community of South Riding, located in Loudoun County, Virginia. The Company will use some of the property for its own homebuilding operation and will also sell homesites and commercial parcels to other builders. Land sales revenues from South Riding, which amounted to $17.3 million in fiscal 1999, should continue for the next several years.
The Company also operates its own architectural, engineering, mortgage, title, security monitoring, landscape, lawn maintenance, insurance brokerage, cable T.V., broadband Internet access, component assembly and manufacturing operations.
At October 31, 1999, the Company was offering homes for sale in 140 communities containing over 16,000 home sites which were owned or controlled through options; the Company also controlled approximately 16,200 home sites in 113 proposed communities.
At October 31, 1999, the Company was offering single family detached homes at prices, excluding customized options, generally ranging from $127,000 to $1,073,000 with an average base sales price of $421,000. The offering price of the Company's attached homes, excluding customized options, generally ranged from $220,000 to $447,000, with an average base sales price of $339,000.
In recognition of its achievements, the Company has received numerous awards from national, state and local homebuilder publications and associations. Toll Brothers is the only publicly traded 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).
On October 31, 1999 and 1998, the Company had backlogs of $1,067,685,000 (2,381 homes) and $814,714,000 (1,892 homes), respectively. The Company expects that substantially all homes in backlog at October 31, 1999 will be delivered by October 31, 2000.
The Company generally attempts to reduce certain risks homebuilders encounter by controlling land for future development through options whenever possible (which allows the Company to obtain the necessary governmental approvals before acquiring title to the land), by generally beginning construction of homes after executing an agreement of sale with a buyer and by using subcontractors to perform home construction and land development work on a fixed-price basis. In order to obtain better terms or prices, or due to competitive pressures, the Company has purchased several properties outright, or acquired the underlying mortgage, prior to obtaining all of the necessary governmental approvals needed to commence development.
In 1998, the Company formed a group of entities (collectively, the "Real Estate Group")to take advantage of commercial real estate opportunities which may present themselves from time to time. These opportunities may result from commercially zoned parcels included with larger properties that the Company has acquired or may acquire for its homebuilding operations or from the direct acquisition of unrelated land or operating properties.
In November 1998, Robert I. Toll, Bruce E. Toll, Zvi Barzilay, Joel Rassman, all of whom are executive officers and/or directors of the Company, and other Company officers (the "Partners") contributed their partnership interests in an apartment complex under construction in exchange for a fifty percent ownership interest in the Real Estate Group. Based upon independent valuations obtained by the Company and reviewed by the Board of Directors, the Board of Directors determined that the value of the assets received, net of liabilities assumed, was at least equal to the consideration given to the Partners. In December 1998, the Pennsylvania State Employees Retirement System ("PASERS") acquired a one- third interest in the
Real Estate Group for $10,000,000. In fiscal 1999, the Company, the Partners and PASERS made additional cash contributions to the Real Estate Group to acquire several office buildings from unrelated parties. As of October 31, 1999, the Company had an investment of $7,285,000 which represented its one-third interest in the Real Estate Group.
The Company provides development, finance and management services to the Real Estate Group and received fees under the terms of various agreements in the amount of $2,524,000 in fiscal 1999.
The Company emphasizes its high-quality, detached single family homes that are marketed primarily to the "upscale" luxury market, generally comprised of those persons who have previously owned a principal residence seeking to buy a larger home - the so-called "move-up" market. The Company believes its reputation as a developer of homes for this market enhances its competitive position with respect to the sale of more moderately priced detached homes, as well as attached homes.
The Company also sells to the 50+ year-old "empty-nester" market and believes that this market has strong growth potential. The Company has developed a number of home designs that it believes will appeal to this category of home buyer and has integrated these designs into its communities along with its other homes.
In 1999, the Company opened for sale its first active adult, age-qualified community for households in which at least one member is 55 years of age. The Company expects to open three additional age-qualified communities during the next two years.
The Company believes that the demographics of its move-up, empty nester and active adult, age-qualified up-scale markets provide 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 1998 dollars) now stands at 10.5 million households, an increase by over 60% since 1985, and triple the rate of increase of all U.S. households over the past 15 years. According to Claritas, Inc., a provider of demographic information, approximately 4.5 million of these households are located in our current markets. The largest number of baby boomers, more than four million born annually between 1954 and 1964, are now 35 to 46 years of age and in their peak move-up home buying years. The leading edge of the baby boom generation is just now entering its 50's and the empty nester market. And the number of 55 to 64 year old households, which corresponds to the Company's age-qualified communities, is projected to increase by over 45% by the Year 2010 according to the U.S. Census Bureau.
Toll Brothers also develops a number of master planned country club communities. In fiscal 1999, the Company opened four master planned country club communities containing more than 4,000 lots and expects to open four additional such communities during the next two years. These communities, many of which contain golf courses and other country club type amenities, enable the Company to offer multiple home types and sizes to a broad range of move-up and empty nester buyers. The Company realizes efficiencies from shared common costs such as land development and infrastructure costs and marketing. The Company currently has master planned communities in New Jersey, California, Michigan, Florida, North Carolina and Virginia.
Each single family detached home community offers several home plans, with the opportunity for home buyers to select various exterior styles. The Company designs each community to fit existing land characteristics, blending winding streets, cul-de-sacs and underground utilities to establish a pleasant environment. The Company strives to create a diversity of architectural styles within an overall planned community. This diversity is created and enhanced by variations among the house models offered, in exterior design options for homes of the same basic floor plan, preservation of existing trees and foliage whenever practicable, and 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. The communities have attractive entrances with distinctive signage and landscaping. The Company believes this avoids a "development" appearance and gives each community a diversified neighborhood appearance that enhances home values.
The Company's attached home communities generally offer one to three story homes, provide for limited exterior options and often contain commonly-owned recreational acreage such as playing fields, swimming pools and tennis courts. These communities have associations through which homeowners act jointly for their common interest.
The Homes
Most single family detached-home communities offer at least four different floor plans, each with several substantially different architectural styles. For example, the purchaser may select the same basic floor plan with a Colonial, Georgian, Federal or Provincial design, and exteriors 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 Toll Brothers' communities, a wide selection of options is available to the purchaser for an additional charge. The options typically are more numerous and significant for the more expensive homes. Major options include additional garages, additional rooms, finished lofts and additional fireplaces. As a result of the additional charges for such options, the average sales price was approximately 20% higher than the base sales price during fiscal 1999.
Contracts for the sale of homes are at fixed prices. The prices at which homes are offered have generally increased from time to time during the sellout period for a community; however, there can be no assurance that sales prices will increase in the future.
The Company uses some of the same basic home designs in similar communities. However, the Company is continuously developing new designs to replace or augment existing ones to assure that its homes reflect current consumer preferences. For new designs, the Company has its own architectural staff and also engages unaffiliated architectural firms. During the past year, the Company has introduced over 100 new models.
(1) New contract and backlog amounts include $13,141,000 (46 homes) and $13,756,000 (54 homes), respectively, from an unconsolidated 50% owned joint venture.
On October 31, 1999, significant site improvements had not commenced on approximately 8,846 of the 13,628 available home sites. Of the 13,628 available home sites, 1,375 were not owned by the Company, but were controlled through options.
Of the 197 communities under development, 140 had homes being offered for sale, 32 had not yet opened for sale and 25 had been sold out, but not all closings had been completed. Of the 140 communities in which homes were being offered for sale, 132 were single-family detached-home communities containing a total of 153 homes under construction but not under contract (exclusive of model homes) and 8 were attached home communities containing a total of 14 homes under construction but not under contract (exclusive of model homes).
Land Policy
Before entering into an agreement to purchase a land parcel, the Company completes extensive comparative studies and analyses on detailed Company- designed forms that assist it in evaluating the acquisition. Toll Brothers generally attempts to follow a policy of acquiring options to purchase land for future communities. However, in order to obtain better terms or prices, or due to competitive pressures, the Company will acquire from time to time property outright. In addition, the Company has, at times, acquired the underlying mortgage on a property and subsequently obtained title to that property.
The options or purchase agreements are generally on a non-recourse basis, thereby limiting the Company's financial exposure to the amounts invested in property and pre-development costs. The use of options or purchase agreements may increase the price of land that the Company eventually acquires, but significantly reduces the risk. It also allows the Company to obtain necessary development approvals before acquisition of the land, which generally enhances the value of the options and purchase agreements, and the land when acquired. The Company has the ability to extend many of these options for varying periods of time, in some cases by the payment of an additional deposit and in some cases without an additional payment. The Company's purchase agreements are typically subject to numerous conditions including, but not limited to, the Company's ability to obtain necessary governmental approvals for the proposed community. Often, the down payment on the agreement will be returned to the Company if all approvals are not obtained, although pre-development costs may not be recoverable. The Company has the right to cancel any of its land agreements by forfeiture of the Company's down payment on the agreement. In such instances, the Company generally is not able to recover any pre-development costs.
During the early 1990's, due to the recession and the difficulties other builders and land developers had in obtaining financing, the number of buyers competing for land in the Company's market areas diminished, while the number of sellers increased, resulting in more advantageous prices for the Company's land acquisitions. Further, many of the land parcels offered for sale were fully approved, and often improved, subdivisions. Previously, such types of subdivisions generally were not available for acquisition in the Company's market areas. The Company purchased several such subdivisions outright and acquired control of several others through option contracts.
Due to the improvement in the economy and the increased availability of capital during the past several years, the Company has experienced an increase in competition for available land in its market areas. The Company's ability to continue its development activities over the long-term will be dependent upon its continued ability to locate and enter into options or agreements to purchase land, obtain governmental approvals for suitable parcels of land, and consummate the acquisition and complete the development of such land.
While the Company believes that there is significant diversity in its existing markets and that this diversity provides protection from the vagaries of individual local economies, it believes that greater geographic diversification will provide additional protection and more opportunities for growth. The Company continues to look for new markets.
(1) Of the 16,249 planned home sites, 6,356 lots were owned by the Company. The aggregate purchase price of land parcels under option and purchase agreements at October 31, 1999 was approximately $512,904,000, of which the Company has paid or deposited $30,020,000.
The Company evaluates all of the land under its control for proposed communities on an ongoing basis with respect to economic and market feasibility. During the year ended October 31, 1999, such feasibility analyses resulted in approximately $2,757,000 of capitalized costs related to proposed communities being charged to expense because they were no longer deemed to be recoverable.
There can be no assurance that the Company will be successful in securing necessary development approvals for the land currently under its control or for land which the Company may acquire control of in the future or, that upon obtaining such development approvals, the Company will elect to complete its purchases under such options. The Company has generally been successful in the past in obtaining governmental approvals, has substantial land currently owned or under its control for which it has obtained or is seeking such approvals (as set forth in the table above), and devotes significant resources to locating suitable land for future development and to obtaining the required approvals on land under its control. Failure to locate sufficient suitable land or to obtain necessary governmental approvals, however, may impair the ability of the Company over the long-term to maintain current levels of development activities.
The Company believes that it has an adequate supply of land in its existing communities or held for future development (assuming that all properties are developed) to maintain its operations at its current levels for several years.
Community Development
The Company expends considerable effort in developing a concept for each community, which includes determination of size, style and price range of the homes, layout of the streets and individual lots, and overall community design. After obtaining the necessary governmental subdivision and other approvals, which can sometimes take several years, the Company improves the land by grading and clearing it, installing roads, recreational amenities, underground utility lines and pipes, 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 construction managers, marketing personnel and, when required, other Company and outside professionals such as engineers, architects and legal counsel, the project manager is responsible for supervising and coordinating the various developmental steps from acquisition through the approval stage, marketing, construction and customer service, including monitoring the progress of work and controlling expenditures. Major decisions regarding each community are made by senior members of the Company's management.
The Company recognizes revenue only when title and possession are transferred to the buyer, which generally occurs shortly after home construction is substantially completed. The most significant variable affecting the timing of the Company's revenue stream, other than housing demand, is receipt of final regulatory approvals, which, in turn, permits the Company to begin the process of obtaining executed contracts for sales of homes. Receipt of such final approvals is not seasonal. Although the Company's sales and construction activities vary somewhat with the seasons, affecting the timing of closings, any such seasonal effect is relatively insignificant compared to the effect of receipt of final governmental approvals.
Subcontractors perform all home construction and land development work, generally under fixed-price contracts. Toll Brothers acts as a general contractor and purchases some, but not all, of the building supplies it requires(See "Manufacturing/Distribution Facilities" in Item 2).
While the Company has experienced some shortages from time to time in the availability of subcontractors in some markets, it does not anticipate any material effect from these shortages in its homebuilding operations. The Company's construction managers and assistant construction managers coordinate subcontracting activities and supervise all aspects of construction work and quality control. One of the ways the Company seeks to achieve home buyer satisfaction is by providing its construction managers with incentive compensation arrangements based on each home buyer's satisfaction as expressed by their responses on pre-closing and post-closing checklists.
The Company maintains insurance to protect against certain risks associated with its activities including, among others, general liability, "all-risk" property, workers' compensation, automobile, and employee fidelity. The Company believes the amounts and extent of such insurance coverages are adequate.
Marketing
The Company believes that its marketing strategy, which emphasizes its more expensive "Estate" and "Executive" lines of homes, has enhanced the Company's reputation as a builder-developer of high-quality upscale housing. The Company believes this reputation results in greater demand for all of the Company's lines of homes. The Company generally includes attractive decorative moldings such as chair rails, crown moldings, dentil moldings and other aesthetic features, even in its less expensive homes, based on its belief that this additional construction expense improves its marketing effort.
In addition to relying on management's extensive experience, the Company determines the prices for its homes through a Company-designed value analysis program that compares Toll Brothers homes with homes offered by other builders in the local marketing area. The Company accomplishes this by assigning a positive or negative dollar value to differences between itself and its competitors' product features, such as amenities, location and marketing.
Toll Brothers expends great effort in creating its model homes, which play an important role in its marketing. In its models, Toll Brothers creates 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 based upon the lifestyles of prospective buyers. During the past several years, the Company has received a number of awards from various homebuilder associations for its interior merchandising.
The sales office located in each community is generally staffed by Company sales personnel, who are compensated with salary and commission. In addition, a significant portion of Toll Brothers' sales is derived from the introduction of customers to its communities by local cooperating realtors.
The Company advertises extensively in newspapers, other local and regional publications, and on billboards. The Company also uses videotapes and attractive color brochures to market its communities. The Internet has become an important source of information for our customers. In fiscal 1999, the Company welcomed its one-millionth visitor to its web site. A visitor to its web site can obtain information regarding the Company's communities and homes across the country and take a panoramic or video tour of the homes. The Company's web address is www.tollbrothers.com.
All Toll Brothers homes are sold under the Company's limited warranty as to workmanship and mechanical equipment. Many homebuyers are also provided with a limited ten-year warranty as to structural integrity.
Customer Financing
The Company secures the availability of a variety of competitive market rate mortgage products from both national and regional lenders. Such availability is generally obtained at no cost to the Company and is committed for varying lengths of time and amounts. By making available an array of attractive mortgage programs to qualified purchasers, the Company is able to better coordinate and expedite the entire sales transaction by ensuring that mortgage commitments are received and that closings take place on a timely and efficient basis. During
fiscal 1999, approximately 42% of the Company's closings were financed through mortgage programs offered by the Company and the Company's home buyers, on average, financed approximately 71% of the purchase price of their homes.
Competition
The homebuilding business is highly competitive and fragmented. The Company competes with numerous homebuilders of varying sizes, ranging from local to national in scope, some of which have greater sales and financial resources than the Company. Resales of homes also provide competition. The Company competes primarily on the basis of price, location, design, quality, service and reputation; however, during the past several years, the Company's financial stability, relative to others in its industry, has become an increasingly favorable competitive factor. The Company believes that, due to the increased availability of capital, competition has increased during the past several years.
Regulation and Environmental Matters
The Company is 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 locality. In a number of the Company's markets there has been an increase in state and local legislation authorizing the acquisition of land, mainly by governmental, quasi-public and non-profit entities, as dedicated open space. In addition, the Company is subject to various licensing, registration and filing requirements in connection with the construction, advertisement and sale of homes in its communities in the states and localities in which it operates. These laws have not had a material effect on the Company, except to the extent that application of such laws may have caused the Company to conclude that development of a proposed community would not be economically feasible, even if any or all necessary governmental approvals were obtained.(see "Land Policy" in this Item 1). The Company may also be subject to periodic delays or may be precluded entirely from developing communities due to building moratoriums in the areas in which it operates. Generally, such moratoriums relate to insufficient water or sewage facilities, or inadequate road capacity.
In order to secure certain approvals, the Company may have to provide affordable housing at below market rental or sales prices. The impact on the Company will depend on how the various state and local governments in the areas in which the Company engages, or intends to engage, in development implement their programs for affordable housing. To date, these restrictions have not had a material impact on the Company.
The Company is also subject to a variety of local, state and federal statutes, ordinances, rules and regulations concerning protection of health and the environment ("environmental laws"), as well as the effects of environmental factors. The particular environmental laws which apply to any given community
vary greatly according to the location of the site, the site's environmental condition and the present and former uses of the site. These environmental laws may result in delays, may cause the Company to incur substantial compliance and other costs, and may prohibit or severely restrict development in certain environmentally sensitive regions or areas.
The Company maintains a policy of engaging independent environmental consultants to assess land for the potential of hazardous or toxic materials, wastes or substances prior to consummating its acquisition. Because it has generally obtained such assessments for the land it has purchased, the Company has not been significantly affected to date by the presence of such materials.
Employees
As of October 31, 1999, the Company employed 2,208 full-time persons; of these, 87 were in executive positions, 222 were engaged in sales activities, 207 were in project management activities, 794 were in administrative and clerical activities, 616 were in construction activities, 73 were in engineering activities and 209 were in the manufacturing/distribution facilities. The Company considers its 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 the Company) contains or may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended. You can identify these statements by the fact that they do not relate strictly to historical or current facts. They contain words like "anticipate," "estimate", "expect," "project," "intend," "plan," "believe," "may," "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 construction activities, plans for future development of residential communities, land acquisition and related activities as well as capital spending, financing sources and the effects of regulation and competition. From time to time, forward-looking statements are also included in the Company's other periodic reports on Forms 10-Q and 8-K, in press releases 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 of the Company 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 of the Company, such as government regulation and the competitive environment, will be important in determining the Company's future performance. Consequently, actual results may differ materially from those that might be anticipated from 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 could also adversely affect us. This discussion is provided as permitted by the Private Securities Litigation Reform Act of 1995.
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 the Company.
Our business can be affected by changes in general economic and market conditions as well as local economic and market conditions where our operations are conducted and where prospective purchasers of our homes live.
The plans for future development of our residential communities can be affected by a number of factors including, for example, time delays in obtaining necessary governmental permits and approvals and legal challenges to our proposed communities.
Our operations depend on our ability to continue to obtain land for the development of our residential communities at reasonable prices. Changes in competition, availability of financing, customer trends and market conditions may impact on our ability to obtain land for new residential communities.
The development of our residential communities may be affected by circumstances beyond our control, including weather interference, work stoppages, labor disputes, unforeseen engineering, environmental or geological problems and unanticipated shortages 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.
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.
The interest rate on our revolving credit agreement is subject to fluctuation based on changes in short-term interest rates and the ratings which national rating agencies assign to our outstanding debt securities. Our interest expense could increase as a result of these factors.
Our business and earnings are substantially dependent on our ability to obtain financing for our development activities. Increases in interest rates, concerns about the market or the economy, or consolidation of financial institutions could increase our cost of borrowing and reduce our ability to obtain the funds required for our future operations.
Our business and earnings are also substantially dependent on the ability of our customers to finance the purchase of their homes, and limitations on the availability of such financing or increases in the cost of such financing could adversely affect our operations.
Claims have been brought against us in various legal proceedings, which have not had, and are not expected to have a material adverse effect on the business or the financial condition of the Company; 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.
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 in the event of our inability to recruit or retain key personnel in one or more of the markets in which we conduct our operations.
ITEM 2.
ITEM 2. PROPERTIES
Headquarters
Toll Brothers' corporate offices, which are owned by the Company, contain approximately 70,000 square feet, and are located at 3103 Philmont Avenue, Huntingdon Valley, Montgomery County, Pennsylvania.
Manufacturing/Distribution Facilities
Toll Brothers owns a facility of approximately 200,000 square feet located in Morrisville, Pennsylvania. The Company also owns a facility of approximately 100,000 square feet located in Emporia, Virginia which it acquired in 1999. In both facilities it manufactures open wall panels, roof and floor trusses, and certain interior and exterior millwork to supply a portion of the Company's construction needs. These operations also permit Toll Brothers to purchase wholesale lumber, plywood, windows, doors, certain other interior and exterior millwork and other building materials to supply to its communities. The Company believes that increased efficiency, cost savings and productivity result from the operation of these plants and from such wholesale purchases of material. The Pennsylvania plant generally does not sell or supply to any purchaser other than Toll Brothers. The Virginia plant sells wall panels and roof and floor trusses to outside purchasers as well as to Toll Brothers.
Regional and Other Facilities
The Company leases office and warehouse space in various locations, none of which is material to the business of the Company.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various claims and litigation arising principally in the ordinary course of business. The Company believes that the disposition of these matters will not have a material adverse effect on the business or the financial condition of the Company.
ITEM 4.
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, 1999.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table includes information with respect to all executive officers of the Company as of October 31, 1999. All executive officers serve at the pleasure of the Board of Directors of the Company.
Name Age Positions
Robert I. Toll 58 Chairman of the Board, Chief Executive Officer and Director
Zvi Barzilay 53 President, Chief Operating Officer and Director
Joel H. Rassman 54 Senior 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 the Company, co-founded the Company's predecessors' operations in 1967. He has been the Company's Chief Executive Officer and Chairman of the Board since the Company's inception.
Zvi Barzilay joined the Company as a project manager in 1980 and has been an officer of the Company since 1983. Mr. Barzilay was elected a Director of the Company 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 has been a Senior Vice President of the Company since joining the Company in 1984. Mr. Rassman has been a Director of the Company since 1996.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is principally traded on the New York Stock Exchange (Symbol: TOL). It is also listed on the Pacific Exchange.
The Company has not paid any cash dividends on its common stock to date and expects that, for the foreseeable future, it will follow a policy of retaining earnings in order to finance the continued development of its business. Payment of dividends is within the discretion of the Company's Board of Directors and will depend upon the earnings, capital requirements and operating and financial condition of the Company, among other factors. The Company's 8 3/4% Senior Subordinated Notes due 2006, 7 3/4% Senior Subordinated Notes due 2007, 8 1/8% Senior Subordinated Notes due 2009 and 8% Senior Subordinated Notes due 2009, contain restrictions on the amount of dividends the Company may pay on its common stock. In addition, the Company's Bank Revolving Credit Agreement requires the maintenance of minimum consolidated stockholders' equity which restricts the amount of dividends the Company may pay. As of October 31, 1999, under the most restrictive of these provisions, the Company could pay up to approximately $206,865,000 of cash dividends.
At October 31, 1999, there were approximately 741 record holders of the Company's common stock.
Note: Percentages for selling, general and administrative expense, interest expense and total costs and expenses are based on total revenues.
FISCAL 1999 COMPARED TO FISCAL 1998
HOME SALES Revenues from home sales for fiscal 1999 as compared to 1998 increased by approximately $232 million, or 19%. The increase in revenues was attributable to a 15% increase in the number of homes delivered and a 4% increase in the average price of the homes delivered. The increased number of homes delivered was due to the greater number of communities from which the Company was delivering homes in fiscal 1999 as compared to fiscal 1998, the larger backlog of homes at the beginning of 1999 as compared to the beginning of 1998 and an increase in the number of homes sold during fiscal 1999 over the number sold in fiscal 1998. Part of the increase in the number of communities was attributable to the acquisition of the homebuilding operations of the Silverman Companies in March 1999.
The increase in the average selling price per home delivered in fiscal 1999 as compared to fiscal 1998 was the result of a shift in the location of homes delivered to more expensive areas, changes in product mix to larger homes and increases in selling prices, offset in part by the delivery of lower priced products of the Silverman Companies.
The value of new sales contracts signed in fiscal 1999 amounted to $1.64 billion (3,845 homes) compared to $1.38 billion (3,387 homes) in fiscal 1998. The increase in the value of new contracts signed was primarily attributable to an increase in the number of communities in which the Company was offering homes
for sale, an increase in the number of contracts signed per community and an increase in the average selling price of the homes (due primarily to the location, size and increase in base selling prices).
As of October 31, 1999, the backlog of homes under contract was $1.07 billion (2,381 homes), approximately 31% higher than the $815 million (1,892 homes) backlog as of October 31, 1998. The increase in backlog at October 31, 1999 was primarily attributable to the increase in the number of new contracts signed and price increases, as previously discussed.
Home costs as a percentage of home revenues increased in 1999 as compared to 1998. The increase was the result of the higher percentage of closings from some of the Company's newer markets (Arizona, Florida, Nevada, North Carolina, Texas and Michigan) in 1999, which generally had higher costs as a percentage of revenues as compared to the Company's more established markets. The Company also had higher inventory writeoffs in 1999 ($5.1 million) as compared to 1998 ($2.0 million). These cost increases were partially offset by lower costs as a percentage of revenues in the Company's more established markets resulting from increased selling prices and lower overhead costs.
LAND SALES
In March 1999, the Company acquired land for homes, apartments, retail, office and industrial space in the master planned community of South Riding, located in Loudoun County, Virginia. The Company will use some of the property for its own homebuilding operations and also will sell homesites and commercial parcels to other builders. Land sales revenues from South Riding, which amounted to $17.3 million in fiscal 1999, should continue for the next several years. INTEREST AND OTHER INCOME
The increase in interest and other income in fiscal 1999 as compared to fiscal 1998 was primarily the result of the Company's expansion of its ancillary businesses such as title insurance, mortgage operations and construction management.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A")
SG&A expenses for fiscal 1999 increased by $23.5 million over 1998. The increased spending was primarily attributable to the increased number of communities in which the Company was operating, the geographic expansion of the Company's homebuilding operations, the increase in the number of homes sold and the expansion of the Company's ancillary businesses. As a percentage of revenues, SG&A in fiscal 1999 was slightly higher than in 1998.
FISCAL 1998 COMPARED TO FISCAL 1997
Home Sales
Revenues from home sales of $1.2 billion for fiscal 1998 exceeded fiscal 1997 revenues by $238 million or 25%. The increase was primarily due to a 23% increase in the number of homes delivered. The increase in the number of homes delivered was the result of the higher backlog of homes at the beginning of
fiscal 1998 as compared to the beginning of fiscal 1997 and an increase in the number of homes sold during fiscal 1998 over the number of homes sold in fiscal 1997. The Company signed $1.38 billion (3,387 homes) of new sales contracts in fiscal 1998, a 29% increase over the $1.07 billion (2,701 homes) of new sales contracts signed in fiscal 1997. The increase in new sales contracts signed in fiscal 1998 was the result of an increase in the average number of selling communities in 1998 compared to 1997, an increase in the number of homes sold per community and an increase in the average sales price per home. The increase in the number of selling communities was the result of the Company's expansion in its newer markets and its entry into the Las Vegas market in November 1997. The increase in the average sales price per home was the result of the shift in the location of homes sold to more expensive areas, a change in product mix to larger homes, an increase in base selling prices and an increase in the total price of options that homebuyers selected.
Home costs were higher as a percentage of home revenues in fiscal 1998 as compared to fiscal 1997 due to increased material costs and increased costs in the Company's newer markets resulting from generally higher construction costs as a percentage of selling price, and the relatively less efficient construction and construction-related activities, in these markets. Although the Company became more efficient in its newer markets during fiscal 1998, as compared to fiscal 1997, the increase in revenues from these newer markets as a percentage of total revenues resulted in the increase in the overall percentage of land and construction costs as a percentage of revenues. These increases were partially offset by decreased land and land development costs and decreased overhead costs.
SG&A amounted to $106.7 million in fiscal 1998, a 24% increase over the $86.3 million spent in fiscal 1997. The increase in spending was primarily attributable to the increase in the number of homes delivered, the increased number of selling communities and the Company's continued geographic expansion. As a percentage of revenues, SG&A declined slightly in fiscal 1998 as compared to fiscal 1997 due to revenues increasing at a faster rate then spending.
INTEREST EXPENSE
The Company determines interest expense on a specific lot-by-lot basis for its homebuilding operations and on a parcel-by-parcel basis for its land sales. As a percentage of total revenues, interest expense will vary depending on many factors including the period of time that the land was owned, 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 the Company in proportion to the amount of its inventory during those periods. As a percentage of total revenues, interest expense was lower in fiscal 1999 as compared to 1998 and 1997.
INCOME TAXES
Income taxes for fiscal 1999, 1998, and 1997 were provided at effective rates of 36.7%, 36.1% and 37.0%, respectively.
EXTRAORDINARY LOSS FROM EXTINGUISHMENT OF DEBT
In January 1999, the Company called for redemption all of its outstanding 9 1/2% Senior Subordinated Notes due 2003 at 102% of principal amount plus accrued interest. The redemption resulted in the recognition of an extraordinary loss in 1999 of $1,461,000, net of $857,000 of income tax benefit. The loss represented the redemption premium and a write-off of unamortized deferred issuance costs.
In February 1998, the Company entered into a five-year bank credit facility. The Company recognized an extraordinary charge in 1998 of $1,115,000, net of $655,000 of income tax benefit, related to the retirement of its previous revolving credit agreement and prepayment of $62 million of fixed rate long-term bank loans.
In January 1997, the Company called for redemption all its outstanding 10 1/2% Senior Subordinated Notes due 2002 at 103% of principal amount plus accrued interest. The redemption resulted in an extraordinary loss in 1997 of $2,772,000, net of $1,659,000 of income tax benefit.
CAPITAL RESOURCES AND LIQUIDITY
Funding for the Company's operations has been principally provided by cash flows from operations, unsecured bank borrowings and, from time to time, the public debt and equity markets.
Cash flow from operations, before inventory additions, has improved as operating results have improved. The Company anticipates that the cash flow from operations, before inventory additions, will continue to improve as a result of an increase in revenues from the delivery of homes from its existing backlog as well as from new sales contracts and from land sales. The Company has used the cash flow from operations, bank borrowings and public debt to acquire additional land for new communities, to fund additional expenditures for land development and construction costs needed to meet the requirements of the increased backlog and continuing expansion of the number of communities in which the Company is offering homes for sale, and to reduce debt. The Company expects that inventories will continue to increase and is currently negotiating and searching for additional opportunities to obtain control of land for future communities. The Company has a $440 million unsecured revolving credit facility with fifteen banks which extends through February 2003. As of October 31, 1999, the Company had $80 million of loans and approximately $34 million of letters of credit outstanding under the facility.
The Company believes that it will be able to fund its activities through a combination of existing cash reserves, operating cash flow and other sources of credit similar in nature to those the Company has accessed in the past.
INFLATION
The long-term impact of inflation on the Company is manifested in increased land, land development, construction and overhead costs, as well as in increased
sales prices. The Company generally contracts 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 the Company's profits. Since the sales prices of homes are fixed at the time of sale and the Company generally sells its homes prior to commencement of construction, any inflation of costs in excess of those anticipated may result in lower gross margins. The Company generally attempts to minimize that effect by entering into fixed-price contracts with its subcontractors and material suppliers for specified periods of time, which generally do not exceed one year.
Housing demand, in general, is adversely affected by increases in interest costs, as well as in housing costs. Interest rates, the length of time that land remains in inventory, and the proportion of inventory that is financed affect the Company's interest costs. If the Company is 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 a home purchase, the Company's 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 a new home.
YEAR 2000 READINESS DISCLOSURE
The Company has assessed its operating systems, computer software applications, computer equipment and other equipment with embedded electronic circuits ("Programs") that it currently uses to identify whether they are Year 2000 compliant and, if not, what steps are needed to bring them into compliance. The Company expects that all material Programs will be Year 2000 compliant by the end of calendar 1999.
The costs incurred and expected to be incurred regarding Year 2000 compliance have been, and are expected to be, immaterial to the results of operations and financial position of the Company. Costs related to Year 2000 compliance are expensed as incurred.
The Company has been reviewing whether its significant subcontractors, suppliers, financial institutions and other providers of goods and services ("Providers") are Year 2000 compliant. The Company is not aware of any Providers that do not expect to be compliant; however, the Company has no means of ensuring that its Providers will be Year 2000 ready. The inability of Providers to be Year 2000 ready in a timely fashion could have an adverse impact on the Company. The Company plans to respond to any such contingency involving any of its Providers by seeking to utilize alternative sources for such goods and services, where practicable. In addition, widespread disruptions in the national or international economy, including, for example, disruptions affecting financial markets, commercial and investment banks, governmental agencies and utility services, such as heat, lights, power and telephones, could also have an adverse impact on the Company. The likelihood and effects of such disruptions are not determinable at this time.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the financial statements, listed in Item 14(a)(1) and (2), which appear at pages through of this report.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following is incorporated herein by reference:
the information in Part I, Item 4 of this report immediately following the caption "Executive Officers of the Registrant";
the information in the Company's Proxy Statement for the 2000 Annual Meeting of Stockholders (the "2000 Proxy Statement") immediately following the caption "Election of Three Directors for Terms Ending 2003" to but not including the subcaption "Election of Three Directors for terms Ending 2003 - Meetings and Committees of the Board of Directors"; and
the information in the 2000 Proxy Statement immediately following the caption "Section 16(a) Beneficial Ownership Reporting Compliance" to but not including the caption "Certain Transactions".
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The following information is incorporated herein by reference:
the information in the 2000 Proxy Statement in the section captioned "Proposal One - Election of Three Directors for Terms Ending 2003 - Compensation of Directors", and
the information in the 2000 Proxy Statement immediately following the caption "Executive Compensation" to but not including the sub-caption "Executive Compensation - Formation of Real Estate Entities".
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information in the 2000 Proxy Statement immediately following the sub-caption "Voting Securities and Security Ownership - Security Ownership of Principal Stockholders and Management" to but not including the caption "Proposal One - Election of Three Directors for Terms Ending 2003" is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following information is incorporated herein by reference:
the information in the 2000 Proxy Statement in the section sub-captioned "Executive Compensation - Formation of Real Estate Entities";
the information in the 2000 Proxy Statement immediately following the caption "Certain Transactions" to but not including the caption "Stockholder Proposals"; and
the information in the 2000 Proxy Statement immediately following the sub-caption "Executive Compensation - Compensation Committee Interlocks and Insider Participation" to but not including the sub-caption "Executive Compensation - Formation of Real Estate Entities".
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements and Financial Statement Schedule
1. Financial Statements Page
Report of Independent Auditors Consolidated Statements of Income for the Years Ended October 31, 1999, 1998 and 1997 Consolidated Balance Sheets as of October 31, 1999 and 1998 Consolidated Statements of Cash Flows for the Years Ended October 31, 1999, 1998 and 1997 Notes to Consolidated Financial Statements - Summary Consolidated Quarterly Financial Data
2. Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts for the Years Ended October 31, 1999, 1998 and 1997
Schedules not listed above have been omitted because they are either not applicable or the required information is included in the financial statements or notes thereto.
3. Exhibits
The following exhibits are included with this report or incorporated herein by reference:
Exhibit Number Description
3.1 Certificate of Incorporation, as amended, is hereby incorporated by reference to Exhibit 3.1 of the Registrant's Form 10-K for the fiscal year ended October 31, 1989.
3.2 Amendment to the Certificate of Incorporation dated March 11, 1993, is hereby incorporated by reference to Exhibit 3.1 of Registrant's Form 10-Q for the quarter ended January 31, 1993.
3.3 By-laws, as amended, are hereby incorporated by reference to Exhibit 3.2 of the Registrant's Form 10-K for the fiscal year ended October 31, 1989. 4.1 Specimen Stock Certificate is hereby incorporated by reference to Exhibit 4.1 of the Registrant's Form 10-K for the fiscal year ended October 31, 1991.
4.2 Indenture dated as of March 15, 1993, among Toll Corp., as issuer, the Registrant, as guarantor, and NBD Bank, National Association, as Trustee, including Form of Guarantee, is hereby incorporated by reference to Exhibit 4.1 of Toll Corp.'s Registration Statement on Form S-3 filed with the Securities and Exchange Commission, March 10, 1993, File No. 33-58350.
4.3 Indenture dated as of November 12, 1996 between Toll Corp., as issuer, the Registrant, as guarantor, NBD Bank, a Michigan banking corporation, as Trustee, including form of guarantee, is hereby incorporated by reference to Exhibit 4.1 of the Registrant's Form 8-K dated November 6, 1996 filed with the Securities and Exchange Commission.
4.4 Authorizing Resolutions, dated as of November 6, 1996, relating to the $100,000,000 principal amount of 8 3/4% Senior Subordinated Notes of Toll Corp. due 2006, guaranteed on a Senior Subordinated Basis by Toll Brothers, Inc., is hereby incorporated by reference to Exhibit 4.2 of the Registrant's Form 8-K filed on November 15, 1996 with the Securities and Exchange Commission.
Exhibit Number Description
4.5 Authorizing Resolutions, dated as of September 16, 1997, relating to the $100,000,000 principal amount of 7 3/4% Senior Subordinated Notes due 2007 of Toll Corp., guaranteed on a Senior Subordinated basis by Toll Brothers, Inc. is hereby incorporated by reference to Exhibit 4.5 of the Registrant's Form 10-K for the fiscal year ended October 31, 1997.
4.6 Authorizing Resolutions, dated as of January 22, 1999, relating to the $170,000,000 principal amount of 8.125% Senior Subordinated Notes of Toll Corp. Due 2009, guaranteed on a Senior Subordinated basis by Toll Brothers, Inc., is hereby incorporated by reference to Exhibit 4.1 of the Registrant's Form 8-K filed on January 25, 1999 with the Securities and Exchange Commission.
4.7 Authorizing Resolutions, dated as of April 13, 1999, relating to $100,000,000 principal amount of 8% Senior Subordinated Notes of Toll Corp. Due 2009, guaranteed on a Senior Subordinated basis by Toll Brothers, Inc. is hereby incorporated by reference to Exhibit 4.1 of the Registrant's Form 8-K filed on April 14, 1999 with the Securities and Exchange Commission.
4.8 Rights Agreement dated as of June 12, 1997 by and between the Company and ChaseMellon Shareholder Service, L.L.C., as Rights Agent, is hereby incorporated by reference to Exhibit 1 to the Company's Registration Statement on Form 8A dated June 20, 1997. 4.9 Amendment to Rights Agreement dated as of July 31, 1998, by and between the Company and ChaseMellon Shareholder Service, L.L.C. as Rights Agent incorporated herein by reference to Exhibit 1 to the Company's Registration Statement on Form 8-A/A dated August 21, 1998.
10.1 Credit Agreement dated as of February 25, 1998 among First Huntingdon Finance Corp., The Registrant, The First National Bank of Chicago, (Administrative Agent); Bank of America National Trust and Savings Association; (Co-Agent); CoreStates Bank, N.A., (Co-Agent); Credit Lyonnais New York Branch (Co-Agent); Comerica Bank; Nationsbank, National Association; Fleet National Bank; Guaranty Federal Bank, F.S.B.; Mellon Bank, N.A.; Banque Paribas; Bayerische Vereinsbank AG, New York Branch; Kredietbank N.V.; Suntrust Bank, Atlanta; The Fuji Bank Limited; and Bank Hapoalim B.M. Philadelphia Branch is hereby incorporated by reference to Exhibit 10.1 of the Registrant's Form 10-Q for the quarter ended April 30, 1998.
Exhibit Number Description
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 shareholders on April 6, 1992, is hereby incorporated by reference to Exhibit 19(a) of the Registrant's Form 10-Q for the quarterly period ended April 30, 1992.
10.3* Toll Brothers, Inc. Amended and Restated Stock Purchase Plan is hereby incorporated by reference to Exhibit 4 of the Registrant's Registration Statement on Form S-8 filed with the Securities and Exchange Commission on August 4, 1987, File No. 33-16250.
10.4* Toll Brothers, Inc. Key Executives and Non-Employee Directors Stock Option Plan (1993) is hereby incorporated by reference to Exhibit 10.1 of the Registrant's Form 8K filed with the Securities and Exchange Commission on May 25, 1994.
10.5* Amendment to the Toll Brothers, Inc. Key Executives and Non-Employee Directors Stock Option Plan (1993) is hereby incorporated by reference to Exhibit 10.2 of the Registrant's's Quarterly Report on Form 10-Q for the quarter ended April 30, 1995.
10.6* Toll Brothers, Inc. Cash Bonus Plan is hereby incorporated by reference to Exhibit 10.2 of the Registrant's Form 8-K filed with the Securities and Exchange Commission on May 25, 1994.
10.7* 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 year ended October 31, 1996.
10.8* Amendment to the Toll Brothers, Inc. Cash Bonus Plan dated December 10, 1998.
10.9* Toll Brothers, Inc. Stock Option and Incentive Stock Plan (1995) is hereby incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended April 30, 1995.
10.10* 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 year ended October 31, 1997.
Exhibit Number Description
10.11* Toll Brothers, Inc. Stock Incentive Plan (1998) is hereby incorporated by reference to Exhibit 4 of the Registant's Registration Statement on Form S-8 filed with the Securities and Exchange Commission on June 25, 1998, File No. 333-57645.
10.12* 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 Registrants Form 10-K for the year ended October 31, 1995.
10.13* 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 Registrants Form 10-K for the year ended October 31, 1995.
10.14* 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 Quarterly Report on Form 10-Q for the quarter ended April 30, 1998.
10.15* 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 Quarterly Report on Form 10-Q for the quarter ended April 30, 1998.
10.16* 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.
12 Statement RE: Computation of Ratios of Earnings to Fixed Charges.
22 Subsidiaries of the Registrant.
23 Consent of Independent Auditors.
27 Financial Data Schedule.
*This exhibit is a management contract or compensatory plan or arrangement required to be filed as an exhibit to this report.
(b) Reports on Form 8-K
During the fourth quarter of the fiscal year ended October 31,1999, the Company did not file a current report on Form 8-K.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the Township of Lower Moreland, Commonwealth of Pennsylvania on December 13, 1999.
TOLL BROTHERS, INC. By: /s/ Robert I. Toll Robert I. Toll Chairman of the Board and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Robert I. Toll Chairman of the Board December 13, 1999 Robert I. Toll of Directors and Chief Executive Officer (Principal Executive Officer)
/s/ Bruce E. Toll Vice Chairman of the Board December 13, 1999 Bruce E. Toll and Director
/s/ Zvi Barzilay President, Chief Operating December 13, 1999 Zvi Barzilay Officer and Director
/s/ Joel H. Rassman Senior Vice President, December 13, 1999 Joel H. Rassman Treasurer, Chief Financial Officer and Director (Principal Financial Officer)
/s/ Joseph R. Sicree Vice President and December 13, 1999 Joseph R. Sicree Chief Accounting Officer (Principal Accounting Officer)
Signature Title Date
/s/ Robert S. Blank Director December 13, 1999 Robert S. Blank
/s/ Richard J. Braemer Director December 13, 1999 Richard J. Braemer
/s/ Roger S. Hillas Director December 13, 1999 Roger S. Hillas
/s/ Carl B. Marbach Director December 13, 1999 Carl B. Marbach
/s/ Paul E. Shapiro Director December 13, 1999 Paul E. Shapiro
REPORT OF INDEPENDENT AUDITORS The Board of Directors and Shareholders Toll Brothers, Inc.
We have audited the accompanying consolidated balance sheets of Toll Brothers, Inc. and subsidiaries at October 31, 1999 and 1998, and the related consolidated statements of income, and cash flows for each of the three years in the period ended October 31, 1999. Our audits also included the financial statement schedule listed in the Index at item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Toll Brothers, Inc. and subsidiaries at October 31, 1999 and 1998, and the consolidated results of their operations and their cash flows for each of the three years in the period ended October 31, 1999, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania December 13, 1999
* Due to rounding, the amounts may not add.
See accompanying notes.
See accompanying notes.
See accompanying notes.
Notes to Consolidated Financial Statements
1. Significant Accounting Policies
Basis of Presentation The accompanying consolidated financial statements include the accounts of Toll Brothers, Inc. (the "Company"), a Delaware corporation, and its majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.
Certain amounts reported in prior years have been reclassified for comparative purposes.
Use of Estimates The preparation of financial statements in conformity with 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.
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 $25,761,000 and $21,938,000 at October 31, 1999 and 1998, respectively. Depreciation is recorded by using the straight- line method over the estimated useful lives of the assets.
Inventories
Inventories are stated at the lower of cost or fair value. In addition to direct land acquisition, land development and home construction costs, costs include interest, real estate taxes and direct overhead costs related to development and construction, which are capitalized to inventories during the period beginning with the commencement of development and ending with the completion of construction.
Land, land development and related costs are amortized to cost of homes closed based upon the total number of homes to be constructed in each community. Home construction and related costs are charged to cost of homes closed under the specific identification method.
The Company capitalizes certain project marketing costs and charges them against income as homes are closed. Treasury Stock
Treasury stock is recorded at cost. Re-issuances of treasury stock are 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.
Acquisition
In March 1999, the Company acquired the homebuilding operations of the Silverman Companies, a Detroit, Michigan homebuilder and developer of luxury apartments, for cash and the assumption of debt. The Silverman Companies owned or controlled approximately 1,800 homesites and interests in over 1,000 existing and prospective apartments. The acquisition of the Silverman apartment assets is expected to be completed during the first half of fiscal 2000. The acquisition price is not material to the financial position of the Company. Segment Reporting
Statement of Financial Accounting Standards 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, homebuilding.
Construction in progress includes the cost of homes under construction, land and land development costs and the carrying cost of lots that have been substantially improved.
For the years ended October 31, 1999, 1998, and 1997, the Company provided for inventory writedowns and the expensing of costs which it believed not to be recoverable of $5,092,000, $2,010,000, and $2,048,000, respectively.
The Company has a $440,000,000 unsecured revolving credit facility with fifteen banks which extends through February 2003. Interest is payable on borrowings at .575% above the Eurodollar rate or at other specified variable rates as selected by the Company from time to time. The Company fixed the interest rate on $20,000,000 of borrowing at 6.39% until March 2002 through an interest rate swap with a bank. Had the Company not entered into the interest rate swap, the interest rate on this borrowing would have been 6% at October 31, 1999. As of October 31, 1999, letters of credit and obligations under escrow agreements of $34,444,000 were outstanding. The agreement contains various covenants, including financial covenants related to consolidated stockholders' equity, indebtedness and inventory. The agreement requires the Company to maintain a minimum consolidated stockholders' equity which restricts the payment of cash dividends and the repurchase of Company stock to approximately $206,865,000 as of October 31, 1999.
The Company borrowed $56,000,000 from six banks at a fixed interest rate of 7.91% repayable in July 2001. The Company borrowed $50,000,000 from three banks at a fixed rate of 7.72% repayable in March 2002. Both loans are unsecured and the agreements contain substantially the same financial covenants as the Company's revolving credit facility.
All issues of senior subordinated notes are subordinated to all senior indebtedness of the Company. The indentures restrict certain payments by the Company including cash dividends and the repurchase of Company stock. The notes are redeemable in whole or in part at the option of the Company at various prices on or after November 15, 2001 with regard to the 8 3/4% notes, on or after September 15, 2002 with regard to the 7 3/4% notes, on or after February 1, 2004 with regard to the 8 1/8% notes, and on or after May 1, 2004 with regard to the 8% notes.
As of October 31, 1999, the aggregate fair value of all the outstanding subordinated notes, based upon their quoted market prices, was approximately $440,150,000.
The annual aggregate maturities of the Company's loans and notes during the next five fiscal years are: 2000 - $12,453,000; 2001 - $66,767,000; 2002 - $52,065,000; 2003 - $82,032,000 and 2004 - $0.
4. Income taxes
The Company's estimated combined federal and state tax rate before providing for the effect of permanent book-tax differences ("Base Rate") was 37% in 1999 and 1998, and 37.5% in 1997. The decrease in the Base Rate was due to a decrease in the Company's estimated effective state tax rate. The effective tax rates in 1999, 1998, and 1997 were 36.7%, 36.1% and 37.0%, respectively. The primary differences between the Company's Base Rate and effective tax rate were tax-free income, and in 1998, an adjustment due to the recomputation of the Company's deferred tax liability resulting from the change in the Company's estimated Base Rate and the deductibility of certain expenses at a higher basis for tax purposes than for book purposes.
5. Stockholders' Equity
The Company's authorized capital stock consists of 45,000,000 shares of Common Stock, $.01 par value per share, and 1,000,000 shares of Preferred Stock, $.01 par value per share. The Company's Certificate of Incorporation, as amended, authorizes the Board of Directors to increase the number of authorized shares of Common Stock to 100,000,000 shares and the number of shares of authorized Preferred Stock to 15,000,000 shares. Changes in stockholders' equity for the three years ended October 31, 1999 were as follows (amounts in thousands):
Additional Common Stock Paid-In Retained Treasury Shares Amount Capital Earnings Stock Total [S] [C] [C] [C] [C] [C] [C] Balance, November 1, 1996 33,919 $339 $43,018 $271,320 $ - $314,677 Net Income 65,075 65,075 Exercise of stock options 218 2 3,121 3,123 Executive bonus awards 134 2 2,293 2,295 Employee stock plan purchases 4 82 82 Balance, October 31, 1997 34,275 343 48,514 336,395 - 385,252 Net income 84,704 84,704 Purchase of treasury stock (133) (1) (3,346) (3,347) Exercise of stock options 285 3 3,240 1,405 4,648 Executive bonus award 161 1 3,563 3,564 Employee stock plan purchases 10 93 130 223 Conversion of debt 2,337 23 50,689 50,712 Balance, October 31, 1998 36,935 369 106,099 421,099 (1,811) 525,756 Net income 101,566 101,566 Purchase of treasury stock (801) (8) (16,696) (16,704) Exercise of stock options 177 2 (1,143) 3,699 2,558 Executive bonus award 106 1 342 2,119 2,462 Employee stock plan purchases 12 (15) 221 206 Contribution to employee 401(k) Plan 25 1 (44) 533 490 Balance, October 31, 1999 36,454 $ 365 $105,239 $522,665$( 11,935)$616,334
Stockholder Rights Plan
The Company's stockholder rights plan, as amended, provides for a dividend of one right for each share of Common Stock of the Company to all stockholders of record at the close of business on July 11, 1997. The rights are not currently exercisable, but would become exercisable if certain events occurred relating
to a person or group acquiring or attempting to acquire beneficial ownership of 15% or more of the Common Stock of the Company subsequent to July 11, 1997. If any person acquires 15% or more of the Common Stock of the Company, each right, will entitle the holder to acquire, upon payment of the exercise price of the right (presently $100), Common Stock of the Company having a market value equal to twice the right's exercise price. If, after a person has acquired 15% or more of the outstanding Common Stock of the Company, the Company is acquired in a merger or other business combination, or 50% or more of its assets or earning power is sold or transferred in one transaction or a series of related transactions, each right becomes a right to acquire common shares of the other party to the transaction having a value equal to twice the exercise price of the right. Rights are redeemable at $.001 per right by action of the Board of Directors at any time prior to the tenth day following the public announcement that a person or group, has acquired beneficial ownership of 15% or more of the Common Stock of the Company. Unless earlier redeemed, the rights will expire on July 11, 2007.
Redemption of Common Stock
In order to help provide for an orderly market in the Company's Common Stock in the event of the death of either Robert I. Toll or Bruce E. Toll (the "Tolls"), or both of them, the Company and the Tolls have entered into agreements in which the Company has agreed to purchase from the estate of each of the Tolls $10,000,000 of the Company's Common Stock (or a lesser amount under certain circumstances) at a price equal to the greater of fair market value (as defined) or book value (as defined). Further, the Tolls have agreed to allow the Company to purchase $10,000,000 of life insurance on each of their lives. In addition, the Tolls granted the Company an option to purchase up to an additional $30,000,000 (or a lesser amount under certain circumstances) of the Company's Common Stock from each of their estates. The agreements expire in October 2005.
In April 1997, the Company's Board of Directors authorized the repurchase of up to 3,000,000 shares of its Common Stock, par value $.01, from time to time, in open market transactions or otherwise, for the purpose of providing shares for its various employee benefit plans. As of October 31, 1999, the Company had repurchased 935,000 shares of which 354,000 shares have been re-issued under its various employee benefit plans.
6. Stock-Based Benefit Plans
Stock-Based Compensation Plans
The Company accounts for its stock option plans according to Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" ("APB 25"). Accordingly, no compensation costs are recognized upon issuance or exercise of stock options.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation"("FAS 123"), requires the disclosure of the estimated value of employee option grants and their impact on net income using option pricing models which are designed to estimate the value of options which, 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.
The effects of applying FAS 123 for the purposes of providing pro forma disclosures may not be indicative of the effects on reported net income and net income per share for future years, as the pro forma disclosures include the effects of only those awards granted on or after November 1, 1995.
Stock Option Plans
The Company's four stock option plans for employees, officers and non-employee directors provide for the granting of incentive stock options and non-statutory options with a term of up to ten years at a price not less than the market price of the stock at the date of grant. The Company's Stock Option and Incentive Stock Plan (1995) provides for automatic increases each January 1 in the number of shares available for grant by 2% of the number of shares outstanding (including treasury shares). The Company's Stock Incentive Plan (1998) provides for automatic increases each November 1 in the number of shares available for grant by 2.5% of the number of shares outstanding (including treasury shares). The 1995 Plan and the 1998 Plan restrict the number of options available for grant in a year to a maximum of 2,500,000 shares and the number of options that may be granted in a calendar year in each plan to the lesser of the number of shares available for grant or 2,500,000 shares. No additional options may be granted under the Company's Stock Option Plan (1986).
Options exercisable and their weighted average exercise price as of October 31, 1999, 1998 and 1997 were 3,736,905 shares and $18.93, 3,286,706 shares and $17.90, and 2,336,186 shares and $13.99, respectively.
Options available for grant at October 31, 1999, 1998 and 1997 under all the plans were 3,188,657, 3,893,663, and 2,412,372, respectively.
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 pretax earnings and stockholders' equity of the Company. In December 1998, Mr. Toll and the Board of Directors agreed that any bonus payable for each of the three fiscal years ended October 31, 2001 will be made (except for specific conditions) in shares of the Company's Common Stock using the value of the stock as of the date of the agreement ($24.25 per share). The stockholders approved the plan at the Company's 1999 Annual Meeting. The Company recognized compensation expense in 1999 of $1,395,000 which represented the fair market value of the shares issued to Robert. I. Toll (79,686 shares). On October 31, 1999, the closing price of the Company's Common Stock on the New York Stock Exchange was $17.50.
In May 1996, the Board of Directors, Robert I. Toll and Bruce E. Toll agreed to a similar type of plan and payment arrangement for each of the three fiscal years ended October 31, 1998 based upon the value of the Company's Common Stock on the date of the agreement ($17.125 per share). The stockholders approved the plan at the Company's 1997 Annual Meeting. In March 1998, in connection with Bruce E. Toll's withdrawal from the day-to-day operations of the business, the Board of Directors and Bruce E. Toll agreed to modify his cash bonus award whereby his 1998 cash bonus award would be paid in cash and the amount would be calculated based upon 50% of the estimated bonus that would have been earned. The Company recognized $3,944,000 as compensation expense in 1998 which represented the fair market value of the shares issued to Robert I. Toll (106,186 shares) and the cash bonus paid to Bruce E. Toll. Robert I. Toll and Bruce E. Toll received 80,547 shares each for their 1997 bonus award. The 1997 award had a fair market value of $3,564,000 which the Company recognized as compensation expense in 1997.
Employee Stock Purchase Plan
The Company's Employee Stock Purchase Plan enables substantially all employees to purchase the Company's Common Stock for 95% of the market price of the stock on specified offering dates or at 85% of the market price of the stock on specified offering dates subject to restrictions. The plan, which terminates in December 2001, provides that 100,000 shares be reserved for purchase. As of October 31, 1999, a total of 39,551 shares were available for issuance.
The number of shares and the average prices per share issued under this plan during each of the three fiscal years ended October 31, 1999, 1998 and 1997 were 12,182 shares and $16.97, 9,916 shares and $22.48, and 4,131 shares and $19.98, respectively. No compensation expense was recognized by the Company under this plan.
8. Employee Retirement Plan
The Company maintains a salary deferral savings plan covering substantially all employees. The plan provides for Company contributions totaling 2% of all eligible compensation, plus 2% of eligible compensation above the social security wage base, plus matching contributions of up to 2% of eligible compensation of employees electing to contribute via salary deferrals. Company contributions with respect to the plan totaled $1,876,000, $1,591,000, and $1,399,000 for the years ended October 31, 1999, 1998 and 1997, respectively.
9. Extraordinary Loss from Extinguishment of Debt
In January 1999, the Company called for redemption of all of its outstanding 9 1/2% Senior Subordinated Notes due 2003 at 102% of principal amount plus accrued interest. The redemption resulted in an extraordinary loss in fiscal 1999 of $1,461,000, net of $857,000 of income tax benefit. The loss represented the redemption premium and a write-off of unamortized deferred issuance costs.
In February 1998, the Company entered into a five-year bank credit facility. The Company recognized an extraordinary charge in fiscal 1998 of $1,115,000, net of $655,000 of income tax benefit, related to the retirement of its previous revolving credit agreement and prepayment of $62 million of fixed rate long-term bank loans.
In January 1997, the Company called for redemption of all of its outstanding 10 1/2% Senior Subordinated Notes due 2002 at 103% of principal amount plus accrued interest. The redemption resulted in an extraordinary loss in fiscal 1997 of $2,772,000, net of $1,659,000 of income tax benefit. The loss represented the redemption premium and the write-off of unamortized deferred issuance costs.
10. Commitments and Contingencies
As of October 31, 1999, the Company had agreements to purchase land and improved homesites for future development with purchase prices aggregating approximately $512,904,000 of which $30,020,000 had been paid or deposited. Purchase of the properties is contingent upon satisfaction of certain requirements by the Company and the sellers.
As of October 31, 1999, the Company had agreements of sale outstanding to deliver 2,381 homes with an aggregate sales value of approximately $1,067,685,000. As of that date, the Company had arranged, through a number of outside mortgage lenders, approximately $400,819,000 of mortgages related to those sales agreements.
The Company is involved in various claims and litigation arising in the ordinary course of business. The Company believes that the disposition of these matters will not have a material effect on the business or on the financial condition of the Company.
11. Related Party Transaction
In 1998, the Company formed a group of entities (collectively, the "Real Estate Group")to take advantage of commercial real estate opportunities which may present themselves from time to time. These opportunities may involve commercial parcels, attached to larger properties that the Company has acquired or may acquire for its homebuilding operations, or from the direct acquisition of
unrelated land or operating properties. In November 1998, Robert I. Toll, Bruce E. Toll, Zvi Barzilay, Joel Rassman, all of whom are officers and directors of the Company, and other Company officers (the "Partners") contributed their partnership interests in an apartment complex under construction in exchange for a 50% ownership interest in the Real Estate Group. Based upon independent valuations obtained by the Company and reviewed by the Board of Directors, the Board of Directors believes that the value of the assets received, net of liabilities assumed, was at least equal to the consideration given to the Partners. In December 1998, the Pennsylvania State Employees Retirement System ("PASERS") acquired a one-third interest in the Real Estate Group for $10,000,000.
In fiscal 1999, the Company, the Partners and PASERS made additional cash contributions to acquire several office buildings. As of October 31, 1999, the Company had an investment of $7,285,000 which represented its one-third interest in the Real Estate Group. This investment is accounted for on the equity method.
The Company provides development, finance and management services to the Real Estate Group and received fees under the terms of various agreements in the amount of $2,524,000 in fiscal 1999.
(A) Represents amount of reserves utilized, which is recorded at the time that affected homes are closed.
(B) Applied to asset carrying value.