SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED April 30, 1998 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO Commission file number 1-9186 TOLL BROTHERS, INC. (Exact name of registrant as specified in its charter) Delaware 23-2416878 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3103 Philmont Avenue, Huntingdon Valley, Pennsylvania 19006 (Address of principal executive offices) (Zip Code) (215) 938-8000 (Registrant's telephone number, including area code) Not applicable (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Common Stock, $.01 par value: 36,996,537 shares as of June 1, 1998 PAGE
TOLL BROTHERS, INC. AND SUBSIDIARIES INDEX Page No. PART I. Financial Information ITEM 1. Financial Statements Condensed Consolidated Balance Sheets (Unaudited) 1 as of April 30, 1998 and October 31, 1997 Condensed Consolidated Statements of Income 2 (Unaudited) For the Six Months and Three Months Ended April 30, 1998 and 1997 Condensed Consolidated Statements of Cash Flows 3 (Unaudited)For the Six Months Ended April 30, 1998 and 1997 Notes to Condensed Consolidated Financial Statements 4 (Unaudited) ITEM 2. Management's Discussion and Analysis of 7 Financial Condition and Results of Operations PART II. Other Information 10 SIGNATURES 12 STATEMENT OF FORWARD-LOOKING INFORMATION Certain information included herein and in other statements, reports and S.E.C.filings is foward-looking within the meaning of the Private Securities Litigation Reform Act of 1995 related to subject matter such as national and local economic conditions, the effect of governmental regulation on the Company, the competitive environment in which the Company operates, changes in interest rates, home prices, availability and cost of land for future growth, availability of working capital, the availability and cost of labor and materials and the levels of spending for selling, general and administrative costs. Such forward looking information involves important risks and uncertainties that could significantly affect expected results. These risks and uncertainties are addressed in this and other SEC filings. PAGE
<TABLE> <CAPTION> TOLL BROTHERS, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEET (Amounts in thousands) (Unaudited) April 30, October 31, 1998 1997 ASSETS <S> <C> <C> Cash and cash equivalents $ 55,122 $ 147,575 Residential inventories 1,037,315 921,595 Property, construction and office equipment 14,708 15,074 Receivables, prepaid expenses and other assets 44,465 31,793 Mortgage notes receivable 2,051 2,589 $1,153,661 $1,118,626 LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Loans payable $ 170,016 $ 189,579 Subordinated notes 269,255 319,924 Customer deposits on sales contracts 71,468 52,698 Accounts payable 49,629 48,600 Accrued expenses 77,196 75,237 Collateralized mortgage obligations payable 2,285 2,577 Income taxes payable 39,243 44,759 Total liabilities 679,092 733,374 Shareholders' equity: Preferred stock Common stock 370 343 Additional paid-in capital 106,677 48,514 Retained earnings 367,522 336,395 Total shareholders' equity 474,569 385,252 $1,153,661 $1,118,626 </TABLE> See accompanying notes
<TABLE> <CAPTION> TOLL BROTHERS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Amounts in thousands except per share data) (Unaudited) Six months Three months ended April 30 ended April 30 1998 1997 1998 1997 <S> <C> <C> <C> <C> Revenues: Housing sales $491,447 $409,950 $248,213 $208,513 Interest and other 2,891 1,776 1,410 693 494,338 411,726 249,623 209,206 Costs and expenses: Land and housing construction 381,156 317,980 192,306 162,599 Selling, general & administrative 48,517 38,893 24,999 20,073 Interest 14,625 12,742 7,594 6,605 444,298 369,615 224,899 189,277 Income before income taxes and extraordinary loss 50,040 42,111 24,724 19,929 Income taxes 17,798 15,411 9,037 7,326 Income before extraordinary loss 32,242 26,700 15,687 12,603 Extraordinary loss from extinguishment of debt, net of income taxes of $655 in 1998 and $1,659 in 1997 1,115 2,772 1,115 Net income $ 31,127 $ 23,928 $ 14,572 $ 12,603 Earnings per share: Basic Income before extraordinary $ .90 $ .78 $ .42 $ .37 loss Extraordinary loss from extinguishment of debt .03 .08 .03 Net Income $ .87 $ .70 $ .39 $ .37 Diluted Income before extraordinary $ .85 $ .74 $ .41 $ .35 loss Extraordinary loss from extinguishment of debt .03 .07 .03 Net Income $ .82 $ .67 $ .38 $ .35 Weighted average number of shares Basic 35,980 34,035 36,976 34,124 Diluted 38,400 37,083 38,673 37,138 </TABLE> See accompanying notes PAGE
<TABLE> <CAPTION> TOLL BROTHERS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands) (Unaudited) Six month ended April 30 1998 1997 <S> <C> <C> Cash flows from operating activities: Net income $31,127 $23,928 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 2,072 1,696 Amortization of discount on loans 916 190 Extraordinary loss from extinguishment of debt 1,770 4,431 Deferred taxes 3,869 2,764 Changes in operating assets and liabilities: Increase in residential inventories (118,724) (59,818) (Increase) decrease in receivables, prepaid expenses and other assets (15,881) 802 Increase in customer deposits on sales 18,770 8,016 contracts Increase (decrease) in accounts payable, accrued expenses and other liabilities 7,753 (171) Decrease in current income taxes payable (8,454) (7,449) Net cash used in operating activities (76,782) (25,611) Cash flows from investing activities: Purchase of property, construction and office equipment, net (1,350) (3,638) Principal repayments of mortgage notes receivable 538 157 Net cash used in investing activities (812) (3,481) Cash flows from financing activities: Proceeds from loans payable 50,000 80,000 Principal payments of loans payable (67,638) (40,027) Proceeds from the issuance of senior subordinated notes 97,500 Repurchase of subordinated notes (90,434) Principal payments of collateralized mortgage obligations (292) (152) Proceeds from stock options exercised and employee stock plan purchases 3,348 1,920 Purchase of treasury stock (277) Net cash (used in) provided by financing (14,859) 48,807 activities Net (decrease)increase in cash and cash equivalents(92,453) 19,715 Cash and cash equivalents, beginning of period 147,575 22,891 Cash and cash equivalents, end of period $55,122 $42,606 Supplemental disclosures of cash flow information Interest paid, net of capitalized amount $ 3,946 $ 2,678 Income taxes paid $21,731 $18,102 Supplemental disclosures of non-cash financing activities: Cost of residential inventories acquired through seller financing $11,144 Income tax benefit relating to exercise of employee stock options $ 843 $ 335 Stock bonus award $ 3,564 $ 2,295 Conversion of Subordinated debt $50,712 </TABLE> See accompanying notes PAGE
TOLL BROTHERS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands) (Unaudited) 1. Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission for interim financial information. The October 31, 1997 balance sheet amounts and disclosures included herein have been derived from the October 31, 1997 audited financial statements of the Registrant. Since the accompanying condensed consolidated financial statements do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements, it is suggested that they be read in conjunction with the financial statements and notes thereto included in the Registrant's October 31, 1997 Annual Report on Form 10-K. In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments, which are of a normal recurring nature, necessary to present fairly the Company's financial position as of April 30, 1998 the results of its operations for the six months and three months then ended and its cash flows for the six months then ended. The results of operations for such interim periods are not necessarily indicative of the results to be expected for the full year. In 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No.128, "Earnings Per Share". Statement 128 replaced the previously reported primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants, and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented, and where necessary, restated to conform to the Statement 128 requirements. PAGE
<TABLE> <CAPTION> 2. Residential Inventories Residential inventories consisted of the following: April 30, October 31, 1998 1997 <S> <C> <C> Land and land development costs $251,971 $234,855 Construction in progress 674,572 590,295 Sample homes 49,974 47,920 Land deposits and costs of future development 38,746 28,314 Deferred marketing and financing costs 22,052 20,211 $1,037,315 $921,595 </TABLE> Construction in progress includes the cost of homes under construction, land and land development and carrying costs of lots that have been substantially improved. The Company capitalizes certain interest costs to inventories during the development and construction period. Capitalized interest is charged to interest expense when the related inventories are closed. Interest incurred, capitalized and expensed is summarized as follows: Six months Three months ended April 30 ended April 30 1998 1997 1998 1997 <TABLE> <CAPTION> <S> <C> <C> <C> <C> Interest capitalized, beginning of period $51,687 $46,191 $54,991 $49,198 Interest incurred 19,705 17,993 9,352 8,768 Interest expensed (14,625) (12,742) (7,594) (6,605) Write off to cost of sales (18) (83) (2) Interest capitalized, end of period $56,749 $51,359 $56,749 $51,359 </TABLE> 3. Extinguishment of Debt In December 1997, the Company called for redemption on January 14, 1998 all of its outstanding 4 3/4% Convertible Senior Subordinated Notes due 2004 at 102.969% of principal amount plus accrued interest. Prior to the redemption date, $50.8 million of bonds were converted into common stock of the Company. In February 1998, the Company entered into a new five year, $355 million bank credit facility. In connection therewith, the Company repaid $62 million of fixed rate long-term bank loans. The Company recognized an extraordinary charge in the second quarter of 1998 of $1.1 million, net of $655,000 of income taxes, related to the retirement of its previous revolving credit agreement and prepayment of the term loans. In January 1997, the Company called for redemption on March 15, 1997 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 the first quarter of fiscal 1997 of $2,772,000, net of $1,659,000 of income taxes. The loss represents the redemption premium and the write-off of unamortized deferred issuance costs.
<TABLE> <CAPTION> 4. Earnings per share information: (in thousands) Six months Three months ended April 30 ended April 30 1998 1997 1998 1997 <S> <C> <C> <C> <C> Basic Weighted average shares outstanding (Basic) 35,980 34,035 36,976 34,124 Stock options 1,539 703 1,697 669 Convertible subordinated notes 881 2,345 2,345 Diluted weighted average shares 38,400 37,083 38,673 37,138 Earnings addback related to interest on convertible subordinated notes $ 315 $ 756 $ 0 $ 378 </TABLE> 5. Stock Repurchase Program 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 April 30, 1998, the Company had repurchased 10,000 shares. The Company reissued these shares to employees upon exercise of stock options. PAGE
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS <TABLE> <CAPTION> The following table sets forth, for the periods indicated, certain income statement items related to the Company's operations as percentages of total revenues and certain other data: Six months Three months ended April 30 ended April 30 1998 1997 1998 1997 <S> <C> <C> <C> <C> Revenues 100.0% 100.0% 100.0% 100.0% Costs and expenses: Land and housing construction 77.1 77.2 77.0 77.7 Selling, general and administrative 9.8 9.5 10.0 9.6 Interest 3.0 3.1 3.1 3.2 Total costs and expenses 89.9 89.8 90.1 90.5 Income before taxes 10.1% 10.2% 9.9% 9.5% </TABLE> Revenues for the six month and three month periods ended April 30, 1998 were higher than those of the comparable periods of 1997 by approximately $82.6 million, or 20%, and $40.4 million, or 19%, respectively. The increased revenues for the 1998 periods were primarily attributable to the increase in the number of the homes delivered during the periods which was due to the greater number of communities from which the Company was delivering homes and the larger backlog of homes at the beginning of fiscal 1998 as compared to the beginning of fiscal 1997. The revenue increases were offset in part by a 3.6% decrease in the average selling price per home delivered in the second quarter of fiscal 1998 and delays caused by the excessive rains in the Company's Western markets. The decrease in the average selling price per home delivered in the second quarter of fiscal 1998 compared to the second quarter of 1997 was due principally to an increase in the number of smaller homes delivered during the period and delays in delivery of some of the larger homes due to the aforementioned weather conditions. The value of new sales contracts signed amounted to $706 million (1,751 homes) and $435 million (1,076 homes) for the six month and three month periods ended April 30, 1998, respectively. The value of new contracts signed for the comparable periods of fiscal 1997 were $528 million (1,314 homes) and $355 million (872 homes), respectively. The increase in new contracts signed in both periods of 1998 was primarily attributable to an increase both in the number of communities in which the Company was offering homes for sale and in the number of contracts signed per community. Orders for new homes are generally the strongest during the Company's second quarter and consequently the backlog at April 30 is generally at its highest level in the Company's fiscal year. As of April 30, 1998, the backlog of homes under contract amounted to $852 million (2,045 homes), approximately 32% higher than the $644 million (1,593 homes) backlog as of April 30, 1997 and approximately 36% higher than the $627 million (1,551 homes) backlog as of October 31, 1997. The increase in backlog at April 30, 1998 is primarily attributable to the increases in the new contracts signed as previously discussed which exceeded the homes delivered during the applicable periods.
Land and construction costs as a percentage of revenues decreased in the three month period ended April 30, 1998 as compared to the same period of 1997. The decrease was due principally to a shift in the geographic mix of homes delivered to more profitable markets. The costs as a percentage of revenues for both six months periods of 1998 and 1997 were comparable. Selling, general and administrative expenses ("SG&A") in the six month and three month periods ended April 30, 1998 increased over the comparable periods of 1997 by $9.6 million or 25%, and $4.9 million or 25%, respectively. These increases were primarily attributable to the higher level of spending due to the increase in revenues in the 1998 periods as compared to the same periods of 1997 and the Company's geographic expansion. Interest expense is determined on a specific home-by-home basis and will vary depending on many factors including the period of time that the land under the home was owned, the length of time that the home was 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 revenues, interest expense was lower in the six month and three month periods of 1998 as compared to 1997. Income Taxes The Company's estimated combined state and federal tax rate before providing for the effect of permanent book-tax differences ("Base Rate") was 37% and 37.5% in the 1998 and 1997 periods, respectively. The decrease in the Base Rate was due to a decrease in the Company's estimated effective state tax rate. The effective tax rate for the six month and three month periods of 1998 were 35.6% and 36.6% as compared to 36.6% and 36.8% for the comparable periods of 1997. The primary differences between the Company's Base Rate and effective tax rate were tax free income in 1998 and 1997 and in the first quarter of 1998 and an adjustment due to the recomputation of the Company's deferred tax liability resulting from the change in the Company's estimated Base Rate. The Company expects the effective rate for the remainder of fiscal 1998 to increase and for the full 1998 fiscal year to be approximately 36.5%. EXTRAORDINARY LOSSES FROM EXTINGUISHMENT OF DEBT In February 1998, the Company entered into a new five year, $355 million bank credit facility. In connection therewith, the Company repaid $62 million of fixed rate long-term bank loans. The Company recognized an extraordinary charge in the second quarter of 1998 of $1.1 million, net of $655,000 of income taxes, related to the retirement of its previous revolving credit agreement and prepayment of the term loans. In January 1997, the Company called for redemption on March 15, 1997 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 the first quarter of fiscal 1997 of $2,772,000, net of $1,659,000 of income taxes. The loss represents the redemption premium and a write-off of unamortized deferred issuance costs. CAPITAL RESOURCES AND LIQUIDITY Funding for the Company's residential development activities has been principally provided by cash flows from operations, unsecured bank borrowings and the public debt and equity markets. The Company has a $355 million unsecured revolving credit facility with fifteen banks which extends through February 2003. As of April 30, 1998, the Company had $50 million of loans and approximately $17 million of letters of credit outstanding under the facility.
The Company believes that it will be able to continue to fund its activities through a combination of operating cash flow and existing sources of credit. YEAR 2000 In prior years, many computer programs were written using two digits rather than four to define the applicable year which could result in systems failures or errors. Management has reviewed its internal software systems and believes that the required changes will be completed without causing operational issues or have a material impact on the Company's results of operations or financial condition. <TABLE> <CAPTION> HOUSING DATA Six Months Three Month Ended April 30 Ended April 30 1998 1997 1998 1997 <S> <C> <C> <C> <C> Period ended April 30: # of homes closed 1,310 1,088 665 538 # of homes contracted 1,751 1,314 1,076 872 Sales value of homes contracted (in thous.) $705,873 $528,126 $435,453 $354,611 April 30, Oct.31, April 30, Oct. 31, 1998 1997 1997 1996 # of homes in backlog 2,045 1,551 1,593 1,367 Sales value of homes in backlog (in thous.) $852,337 $627,220 $644,370 $526,194 </TABLE>
PART II. Other Information ITEM 1. Legal Proceedings None. ITEM 2. Changes in Securities None. ITEM 3. Defaults upon Senior Securities None. ITEM 4. Submission of Matters to a Vote of Security Holders (a) The Company's 1998 Annual Meeting of Shareholders was held on March 5, 1998. (b) Not required. (c) The following proposals were submitted to a vote of shareholders and were approved by the affirmative vote of a majority of the shares of common stock of the Company that were present in person or by proxy, as indicated below. (i) The approval of the proposed Toll Brothers, Inc. Stock Incentive Plan (1998). FOR AGAINST ABSTAIN 19,298,984 10,947,238 49,002 (ii) The approval of the proposed amendment of the Company's Certificate of Incorporation. FOR AGAINST ABSTAIN 27,739,195 2,438,630 117,399 (iii) The approval of Ernst & Young LLP as the Company's independent auditors for the 1998 fiscal year. FOR AGAINST ABSTAIN 32,703,632 15,262 17,766 ITEM 5. Other Information None. ITEM 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit 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
Exhibit 10.2 Agreement dated March 5,1998 between the Registrant and Bruce E. Toll ("Mr. Toll") regarding Mr. Toll's resignation and related matters. Exhibit 10.3 Consulting and non-competition agreement dated March 5,1998 between the Registrant and Bruce E. Toll Exhibit 27 Financial Data Schedule (b) Reports on Form 8-K Form 8-K dated February 25, 1998 filed for the purpose of recalculating earnings per share for the five years ended October 31, 1997 in accordance with statement of Financial Accounting Standards No. 128,"Earnings Per Share".
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TOLL BROTHERS, INC. (Registrant) Date: June 9, 1998 By: /s/ Joel H. Rassman Joel H. Rassman Senior Vice President, Treasurer and Chief Financial Officer Date: June 9, 1998 By: /s/ Joseph R. Sicree Joseph R. Sicree Vice President - Chief Accounting Officer (Principal Accounting Officer)