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, 1999 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: 36,614,529 shares as of June 1, 1999
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, 1999 and October 31, 1998 Condensed Consolidated Statements of Income (Unaudited) 2 For the Six Months and Three Months Ended April 30, 1999 and 1998 Condensed Consolidated Statements of Cash Flows 3 (Unaudited)For the Six Months Ended April 30, 1999 and 1998 Notes to Condensed Consolidated Financial Statements 4 (Unaudited) ITEM 2. Management's Discussion and Analysis of 8 Financial Condition and Results of Operations PART II. Other Information 12 SIGNATURES 13 STATEMENT OF FORWARD-LOOKING INFORMATION Certain information included herein and in other Company statements, reports and S.E.C. filings is forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995, including, but not limited to, statements concerning anticipated operating results, financial resources, increases in revenues, increased profitability, interest expense, growth and expansion, ability to acquire land, Year 2000 readiness, and the effect on the Company if the Company or significant third parties are not Year 2000 compliant. Such forward-looking information involves important risks and uncertainties that could significantly affect actual results and cause them to differ materially from expectations expressed herein and in other Company statements, reports and S.E.C. filings. These risks and uncertainties include local, regional and national economic conditions, the effects of governmental regulation, the competitive environment in which the Company operates, fluctuations in interest rates, changes in home prices, the availability and cost of land for future growth, the availability of capital, the availability and cost of labor and materials, and weather conditions.
<TABLE> <CAPTION>
TOLL BROTHERS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Amounts in thousands) (Unaudited) April 30, October 31, 1999 1998 (Unaudited) ASSETS <S> <C> <C> Cash and cash equivalents $ 101,936 $ 80,143 Residential inventories 1,368,074 1,111,223 Property, construction and office equipment 16,466 14,425 Receivables, prepaid expenses and other assets 71,399 41,291 Investments in unconsolidated entities 18,636 6,001 Mortgage notes receivable 1,228 1,385 $1,577,739 $1,254,468 LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Loans payable $ 241,251 $ 182,292 Subordinated notes 469,377 269,296 Customer deposits on sales contracts 84,364 69,398 Accounts payable 64,623 58,081 Accrued expenses 108,392 97,449 Collateralized mortgage obligations payable 1,236 1,384 Income taxes payable 52,380 50,812 Total liabilities 1,021,623 728,712 Shareholders' equity: Preferred stock Common stock 366 369 Additional paid-in capital 105,242 106,099 Retained earnings 459,156 421,099 Treasury stock (8,648) (1,811) Total shareholders' equity 556,116 525,756 $1,577,739 $1,254,468 </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 1999 1998 1999 1998 <S> <C> <C> <C> <C> Revenues: Housing sales $610,677 $491,447 $339,995 $248,213 Interest and other 4,860 2,891 2,676 1,410 615,537 494,338 342,671 249,623 Costs and expenses: Land and housing construction 477,225 381,156 266,264 192,306 Selling, general & administrative 58,764 48,517 32,175 24,999 Interest 17,258 14,625 9,511 7,594 553,247 444,298 307,950 224,899 Income before income taxes and extraordinary loss 62,290 50,040 34,721 24,724 Income taxes 22,772 17,798 12,641 9,037 Income before extraordinary loss 39,518 32,242 22,080 15,687 Extraordinary loss from extinguishment of debt, net of income taxes of $857 in 1999 and $655 in 1998 1,461 1,115 1,115 Net income $ 38,057 $ 31,127 $22,080 $ 14,572 Earnings per share: Basic Income before extraordinary loss $ 1.07 $ .90 $ .60 $ .42 Extraordinary loss from extinguishment of debt .04 .03 .03 Net Income $ 1.03 $ .87 $ .60 $ .39 Diluted Income before extraordinary loss $ 1.05 $ .85 $ .59 $ .41 Extraordinary loss from extinguishment of debt .04 .03 .03 Net Income $ 1.01 $ .82 $ .59 $ .38 Weighted average number of shares Basic 36,840 35,980 36,717 36,976 Diluted 37,686 38,400 37,339 38,673 </TABLE> See accompanying notes
<TABLE> <CAPTION> TOLL BROTHERS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands) (Unaudited) Six months ended April 30 1999 1998 <S> <C> <C> Cash flows from operating activities: Net income $38,057 $31,127 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 2,385 2,072 Amortization of discount on loans 557 916 Extraordinary loss from extinguishment of debt 2,318 1,770 Deferred tax provision 2,838 3,869 Changes in operating assets and liabilities net of assets and liabilities acquired: Increase in residential inventories (207,556)(118,724) Increase in receivables, prepaid expenses and other assets (16,553) (13,381) Increase in customer deposits on sales contracts 13,426 18,770 Increase in accounts payable, accrued expenses and other liabilities 10,460 7,753 Decrease in current income taxes payable (674) (8,454) Net cash used in operating activities (154,742) (74,282) Cash flows from investing activities: Purchase of property, construction and office equipment, net (3,385) (1,350) Acquisition of company, net of cash acquired (11,092) Investments in unconsolidated entities (12,635) (2,500) Principal repayments of mortgage notes receivable 157 538 Net cash used in investing activities (26,955) (3,312) Cash flows from financing activities: Proceeds from loans payable 167,500 50,000 Principal payments of loans payable (149,063) (67,638) Net proceeds from the issuance of senior subordinated notes 267,716 Redemption of subordinated notes (71,359) Principal payments of collateralized mortgage obligations (148) (292) Proceeds from stock options exercised and employee stock plan purchases 2,064 3,348 Purchase of treasury stock (13,220) (277) Net cash provided by (used in) by financing activities 203,490 (14,859) Net increase (decrease) in cash and cash equivalents 21,793 (92,453) Cash and cash equivalents, beginning of period 80,143 147,575 Cash and cash equivalents, end of period $101,936 $ 55,122 </TABLE> See accompanying notes
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, 1998 balance sheet amounts and disclosures included herein have been derived from the October 31, 1998 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, 1998 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, 1999 and 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.
<TABLE> <CAPTION> 2. Residential Inventories Residential inventories consisted of the following: April 30, October 31, 1999 1998 <S> <S> <S> Land and land development costs $431,576 $298,948 Construction in progress 810,596 693,971 Sample homes 51,349 47,520 Land deposits and costs of future development 51,521 50,174 Deferred marketing 23,032 20,610 $1,368,074 $1,111,223 </TABLE> <TABLE> <CAPTION> 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 1999 1998 1999 1998 <S> <C> <C> <C> <C> Interest capitalized, beginning of period $53,966 $51,687 $56,338 $54,991 Interest incurred 23,468 19,705 13,342 9,352 Interest expensed (17,258) (14,625) (9,511) (7,594) Write off to cost of sales (31) (18) (24) Interest capitalized, end of period $60,145 $56,749 $60,145 $56,749 </TABLE> 3. Extinguishment of Debt In January 1999, the Company called for redemption on March 15, 1999 of all of its outstanding 9 1/2% Senior Subordinated Notes due 2003 at 102% of principal amount plus accrued interest. The principal amount outstanding at January 31, 1999 was $69,960,000. The redemption resulted in an extraordinary loss in the first quarter of fiscal 1999 of $1,461,000, net of $857,000 of income taxes. The loss represents the redemption premium and a write-off of unamortized deferred issuance costs. In December 1997, the Company called for redemption on January 14, 1998 of 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. The Company redeemed $165,000 of bonds.
4. Subordinated Notes In April 1999 and January 1999, the Company issued $100,000,000 of 8% Senior Subordinated Notes due 2009 and $170,000,000 of 8 1/8% Senior Subordinated Notes due 2009, respectively. The Company used a portion of the proceeds from the offerings to redeem all of the Company's 9 1/2% Senior Subordinated Notes due 2003 and to repay bank indebtedness. The remaining proceeds have or will be used for general corporate purposes including the acquisition of residential inventory. <TABLE> <CAPTION> 5. Earnings per share information: (in thousands) Information pertaining to the calculation of earnings per share for the six months and three months ended April 30, 1999 and 1998 is as follows: Six months Three months ended April 30 ended April 30 1999 1998 1999 1998 <S> <C> <C> <C> <C> Basic Weighted average shares outstanding (Basic) 36,840 35,980 36,717 36,976 Stock options 846 1,539 622 1,697 Convertible subordinated notes --- 881 --- --- Diluted weighted average shares 37,686 38,400 37,339 38,673 Earnings addback related to interest on convertible subordinated notes --- $ 315 --- --- </TABLE> 6. 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, 1999, the Company had repurchased 765,000 shares under the program, and has reissued approximately 344,000 shares to employees upon exercise of stock options, under the Company's 401(k) and Employee Stock Purchase Plans, and for payments in the form of Common Stock due under the Company's Cash Bonus Plan. 7. 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 own or control approximately 1,800 home sites and interests in over 1,000 existing and prospective apartments. The acquisition of the Silverman apartment assets is expected to be completed during the second half of fiscal 1999. The acquisition is expected to be accretive to earnings in fiscal 1999. The acquisition price is not material to the financial position of the Company.
<TABLE> <CAPTION> 8. Supplemental Disclosure to Statement of Cash Flows The following are supplemental disclosures to the statements of cash flow for six months ended April 30, 1999 and 1998: 1999 1998 <S> <C> <C> Supplemental disclosures of cash flow information: Interest paid, net of capitalized amount $ 3,667 $ 3,946 Income taxes paid $ 19,750 $ 21,731 Supplemental disclosures of non-cash activities: Cost of residential inventories acquired through seller financing $ 7,504 --- Income tax benefit relating to exercise of employee stock options $ 506 $ 843 Stock bonus awards $ 2,461 $ 3,564 Contributions to employee retirement plan $ 490 Conversion of subordinated debt $ 50,712 Acquisition of company: Fair value of assets acquired $ 56,124 Liabilities assumed 45,032 Cash paid $ 11,092 </TABLE> <TABLE> <CAPTION> PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS 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 1999 1998 1999 1998 <S> <C> <C> <C> <C> Revenues 100.0% 100.0% 100.0% 100.0% Costs and expenses: Land and housing construction 77.5 77.1 77.7 77.0 Selling, general and administrative 9.6 9.8 9.4 10.0 Interest 2.8 3.0 2.8 3.1 Total costs and expenses 89.9 89.9 89.9 90.1 Income before taxes 10.1% 10.1% 10.1% 9.9% </TABLE> Revenues for the six month and three month periods ended April 30, 1999 were higher than those for the comparable periods of 1998 by approximately $121.2 million, or 25%, and $93.0 million, or 37%, respectively. The increased revenues in the 1999 periods were primarily attributable to the increase in the number of 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 1999 and the second quarter of fiscal 1999 as compared to the beginning of fiscal 1998 and the second quarter of fiscal 1998, respectively. The revenue increases were also the result of a 6% increase in the average price per home delivered in both the six month and three month periods of fiscal 1999 as compared to fiscal 1998. The increase in the average selling price per home delivered in the 1999 periods was the result of the 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 in the three month period by the delivery of lower priced homes from operations of the Silverman Companies' that were acquired in March 1999. The value of new sales contracts signed amounted to $827 million (1,964 homes) and $517 million (1,208 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 1998 were $706 million (1,751 homes) and $435 million (1,076 homes), respectively. The increase in new contracts signed in both periods of 1999 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, 1999, the backlog of homes under contract amounted to $1.080 billion (2,516 homes), approximately 27% higher than the $852 million (2,045 homes) backlog as of April 30, 1998 and approximately 33% higher than the $815 million (1,892 homes) backlog as of October 31, 1998. The increase in backlog at April 30, 1999 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 housing construction costs as a percentage of revenues increased in the six month and three month periods of 1999 as compared to 1998. The increases were the result of the higher percentage of closings from the Company's newer markets (Arizona, Florida, Nevada, North Carolina and Texas) in both periods of 1999 as compared to 1998 which have a higher cost as a percentage of revenues as compared to our more established markets, higher inventory writeoffs in 1999 periods ($2,437,000 in the six month period and $1,523,000 in the three month period) as compared to 1998 ($408,000 in the six month period and $333,000 in the three month period), and, in the three month period, deliveries from the Silverman operations which have been experiencing higher costs than the Company's other operations. 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. Selling, general and administrative expenses ("SG&A") in the six month and three month periods ended April 30, 1999 increased over the comparable periods of 1998 by $10.2 million or 21%, and $7.2 million or 29%, respectively. The increased spending was primarily attributable to the increase in the size of the Company's operations in the 1999 periods as compared to the same periods of 1998. As a percentage of revenues, SG&A declined. 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 1999 as compared to 1998. 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% in 1999 and 1998. The primary differences between the Company's Base Rate and effective tax rate were tax free income in both periods of 1999 and 1998 and, in the first quarter of 1998, an adjustment due to the recomputation of the Company's deferred tax liability resulting from the change in the Company's effective tax rate. EXTRAORDINARY LOSS FROM EXTINGUISHMENT OF DEBT In January 1999, the Company called for redemption on March 15, 1999 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 the recognition of an extraordinary loss in the first quarter of fiscal 1999 of $1,461,000, net of $857,000 of income taxes. The loss represents the redemption premium and a write-off of unamortized deferred issuance costs. In February 1998, the Company entered into a new five year, $355 million bank credit facility (subsequently increased to $415 million). 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.
CAPITAL RESOURCES AND LIQUIDITY Funding for the Company's residential development activities has been principally provided by cash flows from homebuilding operations, unsecured bank borrowings and the public debt and equity markets. The Company has a $415 million unsecured revolving credit facility with fourteen banks which extends through February 2003. As of April 30, 1999, the Company had $100 million of loans and approximately $48.2 million of letters of credit outstanding under the facility. In April 1999 and January 1999, the Company issued $100,000,000 of 8% Senior Subordinated Notes due 2009 and $170,000,000 of 8 1/8% Senior Subordinated Notes due 2009, respectively. The remaining proceeds have or will be used for general corporate purposes including the acquisition of residential inventories. The Company used a portion of the proceeds from the offerings to redeem all of its 9 1/2% Senior Subordinated Notes due 2003 and to repay bank indebtedness. YEAR 2000 READINESS DISCLOSURE The Company has assessed and is continuing to assess 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 believes that almost all Programs are Year 2000 compliant. For those Programs that are not compliant the Company is reviewing the potential impact on the Company and the alternatives that are available to it if the Programs cannot be brought into compliance by December 31, 1999. The Company believes that the required changes to its Programs will be made on a timely basis without causing material operational issues or having a material impact on its results of operations or its financial position. The Company believes that its core business of homebuilding is not heavily dependent on the Year 2000 compliance of its Programs and that, should a reasonably likely worst case Year 2000 situation occur, the Company, because of the basic nature of its systems, would not likely suffer material loss or disruption in remedying the situation. The costs incurred and expected to be incurred in the future regarding Year 2000 compliance have been and are expected to be immaterial to the results of operation and financial position of the Company. Costs related to Year 2000 compliance are expensed. The Company has been reviewing whether its significant subcontractors, suppliers, financial institutions and other service providers ("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.
<TABLE> <CAPTION> HOUSING DATA Six Months Three Months Ended April 30 Ended April 30 1999 1998 1999 1998 <S> <C> <C> <C> <C> # of homes closed 1,531 1,310 857 665 Sales value of homes closed (in thous.) $610,677 $491,447 $339,995 $248,213 # of homes contracted 1,964 1,751 1,208 1,076 Sales value of homes contracted (in thous.) $826,583 $705,873 $517,303 $435,453 Average number of selling communities 135 121 143 132 April 30, April 30, Oct. 31, Oct. 31, 1999 1998 1998 1997 # of homes in backlog 2,516 2,045 1,892 1,551 Sales value of homes in backlog (in thous.) $1,080,156 $852,337 $814,714 $627,220 </TABLE>
PART II. Other Information ITEM 1. Legal Proceedings None. ITEM 2. Changes in Securities and Use of Proceeds None. ITEM 3. Defaults upon Senior Securities None. ITEM 4. Submission of Matters to a Vote of Security Holders (a) The Company's 1999 Annual Meeting of Shareholders was held on March 4, 1999. (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 election of three directors to hold office until the 2002 Annual Meeting of Shareholders. NOMINEES FOR AUTHORITY Robert I. Toll 32,788,821 1,247,392 Bruce E. Toll 32,789,113 1,247,100 Joel H. Rassman 32,793,451 1,242,762 (ii) The approval of the proposed amendment to the Toll Brothers, Inc. Cash Bonus Plan. FOR AGAINST ABSTAIN 33,130,909 842,782 59,613 (iii)The approval of Ernst & Young LLP as the Company's independent auditors for the 1998 fiscal year. BROKER FOR AGAINST ABSTAIN NON-VOTES 33,998,394 19,726 18,293 O ITEM 5. Other Information None.
ITEM 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit 27 Financial Data Schedule (b) Reports on Form 8-K Report on Form 8-K dated as of April 13, 1999 pertaining to Terms Agreement and Authorizing Resolutions relating to the issuance of $100,000,000 of the Company's 8% Senior Subordinated Notes due 2009.
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 10, 1999 By: /s/ Joel H. Rassman Joel H. Rassman Senior Vice President, Treasurer and Chief Financial Officer Date: June 10, 1999 By: /s/ Joseph R. Sicree Joseph R. Sicree Vice President - Chief Accounting Officer (Principal Accounting Officer)