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 July 31, 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: 36,988,347 shares as of September 9, 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 July 31,1998 and October 31,1997
Condensed Consolidated Statements of Income (Unaudited) 2
For the Nine Months and Three Months Ended
July 31, 1998 and 1997
Condensed Consolidated Statements of Cash Flows 3
(Unaudited)For the Nine Months Ended
July 31, 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 11
STATEMENT ON 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
the number of selling communities, anticipated operating
results, financial resources, growth and expansion. Such
forward looking information involves important risks and
uncertainties that could significantly affect actual results
and cause them to differ materially from expectations
expressed therein. These risks and uncertainties include
local, regional and national 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.
<PAGE>
<TABLE>
<CAPTION>
TOLL BROTHERS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Amounts in thousands)
(Unaudited)
July 31, October 31,
1998 1997
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 75,830 $ 147,575
Residential inventories 1,075,718 921,595
Property, construction and office
equipment, net 14,405 15,074
Receivables, prepaid expenses and
other assets 40,726 31,793
Mortgage notes receivable 1,615 2,589
$1,208,294 $1,118,626
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Loans payable $ 176,396 $ 189,579
Subordinated notes 269,275 319,924
Customer deposits on sales
contracts 73,486 52,698
Accounts payable 52,058 48,600
Accrued expenses 85,853 75,237
Collateralized mortgage
obligations payable 1,796 2,577
Income taxes payable 49,070 44,759
Total liabilities 707,934 733,374
Shareholders' equity:
Preferred stock
Common stock 370 343
Additional paid-in capital 106,746 48,514
Retained earnings 393,244 336,395
Total shareholders' equity 500,360 385,252
$1,208,294 $1,118,626
</TABLE>
See accompanying notes
<PAGE>
<TABLE>
<CAPTION>
TOLL BROTHERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands except per share data)
(Unaudited)
Nine months Three months
ended July 31 ended July 31
1998 1997 1998 1997
<S> <C> <C>
Revenues:
Housing sales $832,628 $651,142 $341,181 $241,192
Interest and other 3,843 2,410 952 634
836,471 653,552 342,133 241,826
Costs and expenses:
Land and housing construction 643,709 504,235 262,553 186,255
Selling, general & administrative 77,003 60,807 28,486 21,914
Interest 24,991 19,975 10,366 7,233
745,703 585,017 301,405 215,402
Income before income taxes
and extraordinary loss 90,768 68,535 40,728 26,424
Income taxes 32,804 25,285 15,006 9,874
Income before extraordinary loss 57,964 43,250 25,722 16,550
Extraordinary loss from
extinguishment of debt,
net of income taxes of $655 in 1,115 2,772
1998 and $1,659 in 1997
Net income $ 56,849 $ 40,478 $ 25,722 $ 16,550
Earnings per share:
Basic
Income before extraordinary loss$ 1.60 $ 1.27 $ .70 $ .48
Extraordinary loss from
extinguishment of debt .03 .08
Net Income $ 1.57 $ 1.19 $ .70 $ .48
Diluted*
Income before extraordinary loss$ 1.52 $ 1.20 $ .67 $ .46
Extraordinary loss from
extinguishment of debt .03 .07
Net Income $ 1.49 $ 1.12 $ .67 $ .46
Weighted average number
of shares
Basic 36,322 34,090 37,005 34,200
Diluted 38,432 37,122 38,495 37,201
</TABLE>
*Due to rounding, amounts may not add.
See accompanying notes
<PAGE>
<TABLE>
<CAPTION>
TOLL BROTHERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
Nine months
ended July 31
1998 1997
<S> <C> <C>
Cash flows from operating activities:
Net income $56,849 $40,478
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 3,121 2,758
Amortization of loan discount 1,197 194
Extraordinary loss from
extinguishment of debt 1,770 4,431
Deferred taxes 3,629 2,803
Changes in operating assets and
liabilities:
Increase in residential inventories (149,627) (110,629)
Increase in receivables, prepaid
expenses and other assets (12,325) (3,059)
Increase in customer deposits on sales contracts 20,788 9,985
Increase inaccounts payable, accrued
expenses and other liabilities 18,839 10,531
Increase in current income taxes payable 1,691 259
Net cash used in operating activities (54,068) (42,249)
Cash flows from investing activities:
Purchase of property, construction and office
equipment, net (1,939) (4,341)
Principal repayments of mortgage notes receivable 974 213
Net cash used in investing activities (965) (4,128)
Cash flows from financing activities:
Proceeds from loans payable 55,000 125,000
Principal payments of loans payable (73,876) (83,447)
Proceeds from the issuance of senior subordinated notes 97,500
Repurchase of subordinated notes (163) (90,434)
Principal payments of collateralized mortgage
obligations (781) (205)
Proceeds from stock options exercised and employee
stock plan purchases 3,645 2,113
Purchase of treasury stock (537)
Net cash (used in) provided by financing activities (16,712) 50,527
Net (decrease) increase in cash and cash equivalents (71,745) 4,150
Cash and cash equivalents, beginning of period 147,575 22,891
Cash and cash equivalents, end of period $75,830 $27,041
Supplemental disclosures of cash flow information
Interest paid, net of capitalized amount $ 7,033 $ 6,089
Income taxes paid $26,831 $20,156
Supplemental disclosures of non-cash financing activities:
Cost of residential inventories acquired through
seller financing $ 7,500 $11,144
Income tax benefit relating to exercise of employee
stock options $ 872 $ 409
Stock bonus award $ 3,564 $ 2,295
Conversion of subordinated debt $50,712
</TABLE>
See accompanying notes
PAGE
<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 July 31, 1998, the results of
its operations for the nine months and three months
ended July 31, 1998 and 1997 and its cash flows for the
nine months ended July 31, 1998 and 1997. 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:
July 31, October 31,
1998 1997
<S> <C> <C>
Land and land development costs $ 264,794 $234,855
Construction in progress 683,244 590,295
Sample homes 52,703 47,920
Land deposits and costs of future
development 53,304 28,314
Deferred marketing and financing
costs 21,673 20,211
$1,075,718 $921,595
</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:
Nine months Three months
ended July 31 ended July 31
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Interest capitalized,
beginning of period $51,687 $46,191 $56,749 $51,359
Interest incurred 28,962 26,250 9,257 8,257
Interest expensed (24,991) (19,975) (10,366) (7,233)
Write off to cost of sales (18) (108) (25)
Interest capitalized,
end of period $55,640 $52,358 $55,640 $52,358
</TABLE>
3. Extinguishment of Debt
In December 1997, the Company called for redemption on
January 14, 1998 all of its oustanding 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.
<PAGE>
<TABLE>
<CAPTION>
4. Earnings per share information: (in thousands)
Nine months Three months
ended July 31 ended July 31
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Basic weighted average
shares outstanding 36,322 34,090 37,005 34,200
Stock options 1,523 687 1,490 656
Convertible subordinated
notes 587 2,345 2,345
Diluted weighted average
shares 38,432 37,122 38,495 37,201
Earnings addback related
to interest on convertible
subordinated notes $ 315 $ 1,134 $ 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 July 31, 1998, the Company had repurchased
20,000 shares. The Company reissued these shares to
employees upon exercise of stock options.
<PAGE>
<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:
Nine months Three months
ended July 31 ended July 31
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 77.0 77.2 76.8 77.0
Selling, general and
administrative 9.2 9.3 8.3 9.1
Interest 3.0 3.0 3.0 3.0
Total costs and expenses 89.2 89.5 88.1 89.1
Income before taxes 10.8% 10.5% 11.9% 10.9%
</TABLE>
Revenues for the nine month and three month periods ended
July 31, 1998 were higher than those of the comparable
periods of 1997 by approximately $183 million, or 28%, and
$100 million, or 41%, respectively. The increased revenues
for the 1998 periods were primarily attributable to the
increase in the number and higher average price of the homes
delivered during the periods. The increased number of homes
delivered 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 the 1998 periods as compared to
the beginning of the 1997 periods.
The value of new sales contracts signed amounted to $1.039
billion (2,546 homes) and $333 million (795 homes) for the
nine month and three month periods ended July 31, 1998,
respectively. The value of new contracts signed for the
comparable periods of fiscal 1997 were $779 million (1,952
homes) and $251 million (638 homes), respectively. The
increase in the value of new contracts signed in both periods
of 1998 was primarily attributable to an increase in the
average selling price of the homes (due primarily to the
location, size and increases in base selling prices), and 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.
As of July 31, 1998, the backlog of homes under contract
amounted to $844 million (1,971 homes), approximately 29%
higher than the $654 million (1,609 homes) backlog as of July
31, 1997 and approximately 35% higher than the $627 million
(1,551 homes) backlog as of October 31, 1997.
Land and construction costs as a percentage of revenues
decreased slightly in the nine month and three month periods ended
July 31, 1998 as compared to the same periods of 1997. The decreases
were due principally to lower overhead costs in both periods of 1998
as compared to the 1997 periods and lower inventory writedowns in the
nine months of 1998 as compared to 1997.
<PAGE>
Inventory writedowns recognized in 1998($.5 million for the
nine month period and $.1 million in the three month period)
as compared to 1997($1.3 million in the nine month period and
$.1 million in the three month period).
Selling, general and administrative expenses ("SG&A") in the
nine month and three month periods ended July 31, 1998
increased over the comparable periods of 1997 by $16.2
million and $6.6 million, respectively, but decreased as a
percentage of revenue. The increased spending was primarily
attributable to the increased revenues and the increased
number of communities which the Company was operating during
the 1998 periods as compared to the same periods of 1997 and
the Company's geographic expansion. The decrease in SG&A as
a percentage of revenues in the nine months and third quarter
of 1998 as compared to the 1997 periods was due to spending
increasing at a slower rate than revenues.
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
approximately the same in the nine 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 nine month and three month periods of 1998
were 36.1% and 36.8% as compared to 36.9% and 37.4% 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, 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 LOSS 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 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.
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.
<PAGE>
The Company has a $355 million unsecured revolving credit
facility with fifteen banks which extends through February
2003. As of July 31, 1998, the Company had $50 million of
loans and approximately $22 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 digits 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
Nine Months Three Months
Ended July 31 Ended July 31
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Period ended July 31:
# of homes closed 2,179 1,710 869 622
# of homes contracted 2,546 1,952 795 638
Sales value of homes
contracted (in thous.)$1,038,643 $778,761 $332,770 $250,636
July 31, Oct.31 July 31, Oct. 31
1998 1997 1997 1996
# of homes in backlog 1,971 1,551 1,609 1,367
Sales value of homes in
backlog (in thous.) $843,925 $627,220 $653,813 $526,194
</TABLE>
<PAGE>
PART II. Other Information
ITEM 1. Legal Proceedings
None.
ITEM 2. Changes in Securities
In July 1998, the Company amended its stockholder
rights plan to eliminate the use of continuing
Directors as defined in the Rights Agreement.
ITEM 3. Defaults upon Senior Securities
None.
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
ITEM 5. Other Information
None.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 4.1 Rights Agreement dated as of June
12, 1997, 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 dated June 20,1997).
Exhibit 4.2 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.
Exhibit 27* Financial Data Schedule
*Filed electronically herewith.
(b) Reports on Form 8-K
None.
<PAGE>
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: September 10, 1998 By: /s/Joel H. Rassman
Joel H. Rassman
Senior Vice President,
Treasurer and Chief
Financial Officer
Date: September 10, 1998 By: /s/Joseph R. Sicree
Joseph R. Sicree
Vice President -
Chief Accounting Officer
(Principal Accounting Officer)
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000794170
<NAME> TOLL BROTHERS, INC.
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-END> JUL-31-1998
<CASH> 75,830
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 1,075,318
<CURRENT-ASSETS> 0
<PP&E> 35,814
<DEPRECIATION> 21,409
<TOTAL-ASSETS> 1,208,294
<CURRENT-LIABILITIES> 0
<BONDS> 269,275
<COMMON> 370
0
0
<OTHER-SE> 499,990
<TOTAL-LIABILITY-AND-EQUITY> 1,208,294
<SALES> 832,628
<TOTAL-REVENUES> 836,471
<CGS> 643,709
<TOTAL-COSTS> 720,712
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24,991
<INCOME-PRETAX> 90,768
<INCOME-TAX> 32,804
<INCOME-CONTINUING> 57,964
<DISCONTINUED> 0
<EXTRAORDINARY> 1,115
<CHANGES> 0
<NET-INCOME> 56,849
<EPS-PRIMARY> 1.57
<EPS-DILUTED> 1.49
</TABLE>
