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
January 31,
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: 36,879,162 shares as of February 22,
1999
<PAGE>
TOLL BROTHERS, INC. AND SUBSIDIARIES
INDEX
Page No.
PART I. Financial Information
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets 1
January 31, 1999 (Unaudited) and October 31, 1998
Condensed Consolidated Statements of Income (Unaudited) 2
Three Months Ended January 31, 1999 and 1998
Condensed Consolidated Statements of Cash Flows 3
(Unaudited)
Three Months Ended January 31, 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 11
SIGNATURES 12
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 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.
<PAGE>
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
January 31, October 31,
1999 1998
(Unaudited)
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 196,932 $ 80,143
Residential inventories 1,208,207 1,111,863
Property, construction and office
equipment 14,215 14,425
Receivables, prepaid expenses and
other assets 54,754 46,652
Mortgage notes receivable 1,379 1,385
$1,475,487 $1,254,468
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Loans payable $ 240,871 $ 182,292
Subordinated notes 439,316 269,296
Customer deposits on sales
contracts 69,115 69,398
Accounts payable 43,853 58,081
Accrued expenses 94,505 97,449
Collateralized mortgage
obligations payable 1,377 1,384
Income taxes payable 42,543 50,812
Total liabilities 931,580 728,712
Stockholders' equity:
Common stock 370 369
Additional paid-in capital 106,751 106,099
Retained earnings 437,076 421,099
Treasury stock (290) (1,811)
Total stockholders' equity 543,907 525,756
$1,475,487 $1,254,468
</TABLE>
See accompanying notes
PAGE
<PAGE>
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED STATEMENTS OF
INCOME
(Amounts in thousands, except per share data)
(Unaudited)
Three months
ended January 31
1999 1998
<S> <C> <C>
Revenues:
Housing sales $270,682 $243,234
Interest and other 2,184 1,481
272,866 244,715
Costs and expenses:
Land and housing construction 210,961 188,850
Selling, general and
administrative 26,589 23,518
Interest 7,747 7,031
245,297 219,399
Income before income taxes and
extraordinary loss 27,569 25,316
Income taxes 10,131 8,761
Income before extraordinary loss 17,438 16,555
Extraordinary loss from extinguishment
of debt, net of income taxes of $857 (1,461)
Net income $ 15,977 $ 16,555
Earnings per share
Basic:
Income before extraordinary loss $ .47 $ .47
Extraordinary loss from extinguishment
of debt (.04)
Net income $ .43 $ .47
Diluted:
Income before extraordinary loss $ .46 $ .44
Extraordinary loss from extinguishment of debt (.04)
Net income $ .42 $ .44
Weighted average number of shares
Basic 36,963 34,983
Diluted 38,033 38,127
</TABLE>
See accompanying notes
<PAGE>
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS
(Unaudited)
(Amounts in thousands)
Three months
ended January 31
1999 1998
<S> <C> <C>
Cash flows from operating activities:
Net income $15,977 $16,555
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 991 1,051
Amortization of loan discount 265 585
Deferred tax provision 758 3,066
Extraordinary loss from extinguishment of debt 2,318
Changes in operating assets and liabilities
Increase in inventory (95,514) (61,032)
Increase in receivables, prepaid
expenses and other assets (1,070) (3,772)
(Decrease) increase in customer deposits on
sales contracts (283) 3,768
Decrease in accounts payable,
accrued expenses and other liabilities (16,110)
(2,648)
Decrease in current income taxes payable (8,484)
(9,303)
Net cash used in operating activities (101,152)
(51,730)
Cash flows from investing activities:
Purchase of property, construction and office
equipment, net (630) (682)
Principal repayments of mortgage notes receivable 6
137
Investment in unconsolidated affiliate (6,700)
Net cash used in investing activities (7,324) (545)
Cash flows from financing activities:
Proceeds from loans payable 90,000
Principal payments of loans payable (32,512) (3,034)
Net proceeds from issuance of
senior subordinated notes 168,569
Principal payments of collateralized mortgage
obligations (7) (120)
Proceeds from stock-based benefit plans 317
2,166
Purchase of treasury stock (1,102)
Net cash provided by (used in) financing activities 225,265
(988)
Increase (decrease) in cash and cash equivalents 116,789
(53,263)
Cash and cash equivalents, beginning of period 80,143
147,575
Cash and cash equivalents, end of period $196,932 $
94,312
</TABLE>
See accompanying notes
<PAGE> TOLL BROTHERS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(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 to Shareholders. 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 January 31, 1999 and 1998, and
the
results
of its operations and cash flows for each of the three months then ended.
The
results of operations for such interim period are not necessarily indicative
of
the results to be expected for the full year.
2. Residential Inventories
<TABLE>
<CAPTION>
Residential inventories consisted of the following (amounts in
thousands):
January 31, October 31,
1999 1998
<S> <C> <C>
Land and land development costs $ 408,122 $ 298,948
Construction in progress 680,472 693,971
Sample homes 46,650 47,520
Land deposits and costs of future development 50,520 50,174
Deferred marketing and financing costs 22,443 21,250
$1,208,207 $1,111,863
</TABLE>
Construction in progress includes the cost of homes under construction,
land
and
land development costs and carrying costs of lots that have been
substantially
improved.
<PAGE>
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 (amounts in thousands):
<TABLE>
<CAPTION>
Three months
ended January 31
1999 1998
<S> <C> <C>
Interest capitalized, beginning of period $53,966 $51,687
Interest incurred 10,126 10,353
Interest expensed (7,747) (7,031)
Write-off to cost of sales and other (7) (18)
Interest capitalized, end of period $56,338 $54,991
</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 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 January 1999, the Company issued $170,000,000 of 8 1/8% Senior
Subordinated
Notes due 2009. The Company intends to use the proceeds to redeem all
of the
Company's 9 1/2% Senior Subordinated Notes due 2003, to repay bank
indebtedness
and for general corporate purposes.
<PAGE>
5. Earnings Per Share
<TABLE>
<CAPTION>
Information pertaining to the calculation of earnings per share for the
three
months ended January 31, 1999 and 1998 is as follows:
1999 1998
<S> <C> <C>
Basic weighted average shares 36,963 34,983
Common stock equivalents 1,070 1,381
Convertible subordinated notes 1,763
38,033 38,127
Earnings addback related to
interest on convertible
subordinated notes,
net of income taxes -- $ 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 January 31, 1999, the Company
had
repurchased approximately 180,000 shares under the program, and had
reissued
approximately 167,600 shares to employees upon exercise of stock
options and
for
payments due under the Company's Cash Bonus Plan.
7. Acquisition
In January 1999, the Company entered into an agreement to acquire 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 is expected to be completed
during the
Company's second fiscal quarter ended April 30, 1999 and is expected to
be
accretive to earnings in fiscal 1999. The acquisition price is not material
to the
financial position of the Company.
<PAGE>
<TABLE>
<CAPTION>
8. Supplemental Disclosure to Statement of Cash Flows
The following are supplemental disclosures to the statements of cash
flow for
three months ended January 31, 1999 and 1998:
1999 1998
<S> <C> <C>
Supplemental disclosures of cash flow information:
Interest paid, net of capitalized amount $ 1,119 $
805
Income taxes paid $ 17,000
$
14,998
Supplemental disclosures of non-cash activities:
Cost of residential inventories acquired
through seller financing $ 898
---
Income tax benefit relating to exercise of
employee stock options $ 497 $ 476
Stock bonus awards $ 2,461
$
3,564
Conversion of subordinated debt --- $ 50,712
</TABLE>
<PAGE>
<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 three months ended January 31,
1999 and
1998,
certain income statement items related to the Company's operations as
percentages of
total revenues:
1999 1998
<S> <C> <C>
Revenues 100.0% 100.0%
Costs and expenses:
Land and housing construction 77.3 77.2
Selling, general and administrative 9.8 9.6
Interest 2.8 2.9
Total costs and expenses 89.9 89.7
Income before taxes and extraordinary loss 10.1% 10.3%
</TABLE>
Revenues for the three months ended January 31, 1999 amounted to
$272.9
million
compared to $244.7 million reported in the first quarter of fiscal 1998.
This
increase
was due primarily to an increase in the number of homes delivered in the
first
quarter
of 1999 over the first quarter of 1998 and an increase in the average
delivered
price
per home. The higher unit deliveries in the 1998 first quarter were due
primarily
to
the higher backlog of homes at October 31, 1998 as compared to October
31,
1997, which
was the result of the greater number of contracts of sale signed in fiscal
1998 over
fiscal 1997. The increase in the average selling price per home delivered in
the
first
quarter of 1999 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.
As of January 31, 1999, the backlog of homes under contract amounted to
$853.3
million
(1,974 homes), approximately 28% higher than the $665.1 million (1,634
homes)
backlog
as of January 31, 1998. The aggregate sales value of new contracts signed
in the
first
quarter of fiscal 1999 amounted to $309.3 million (756 homes), an
increase of
approximately 14% over the $270.4 million (675 homes) signed in the first
quarter of
1998.
Land and housing construction costs as a percentage of revenues increased
slightly
in the first quarter of 1999 as compared to 1998. This increase was the net
result
of higher inventory write-offs in the first quarter of 1999 ($914,000) as
compared
to
1998 ($75,000) and the higher number of closing from the Company's
newer
markets
(Arizona, Florida, Nevada, North Carolina and Texas) in 1999 as
compared to
1998 which
had a higher cost as a percentage of revenues as compared to our more
established
markets, 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.
<PAGE>
Selling, general and administrative expenses ("SG&A") in the first quarter
of
1999
increased slightly as a percentage of revenues as compared to the first
quarter of
1998. This increase was primarily attributable to the additional SG&A
spending
incurred by the Company in connection with its expansion into its new
markets.
Interest expense is determined on a specific house-by-house 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 house 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.
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 the first quarter of 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 an extraordinary loss 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.
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
from 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 January 31, 1999, the
Company had
$110
million of loans and approximately $27.3 million of letters of credit
outstanding
under the facility.
<PAGE>
In January 1999, the Company issued $170,000,000 of 8 1/8% Senior
Subordinated Notes
due 2009. The Company intends to use the proceeds to redeem all of its 9
1/2%
Senior
Subordinated Notes due 2003, repay bank indebtedness and for general
corporate
purposes.
<PAGE>
The Company believes that it will be able to fund its activities through a
combination
of existing cash resources, operating cash flow and existing sources of
credit.
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 expects that almost all Programs will be Year 2000 compliant
by the
end of
the first quarter of calendar 1999. For those Programs that will not be
compliant
by
then, 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.
<PAGE>
<TABLE>
<CAPTION>
HOUSING DATA
(Dollars in thousands)
New Contracts Closings
Three Months Ended Contract Backlog Three Months
Ended
January 31 January 31 January 31
1999 1998 1999 1998 1999 1998
<S> <C> <C> <C> <C> <C> <C>
Sales value $309,280 $270,420 $853,312 $665,097 $270,682
$243,234
Homes 756 675 1,974 1,634 674 645
</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 - None.
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 January 22, 1999 pertaining to
Terms
Agreement
and Authorizing Resolutions relating to the issuance of the
Company's
$170,000,000
Senior Subordinated Notes due 2009.
<PAGE>
<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: March 05, 1999 By: /s/ Joel H. Rassman
Joel H. Rassman
Senior Vice President,
Treasurer and Chief
Financial Officer
Date: March 05, 1999 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> 3-MOS
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-END> JAN-31-1999
<CASH> 196,932
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 1,208,207
<CURRENT-ASSETS> 0
<PP&E> 36,938
<DEPRECIATION> 22,722
<TOTAL-ASSETS> 1,475,487
<CURRENT-LIABILITIES> 0
<BONDS> 439,316
<COMMON> 370
0
0
<OTHER-SE> 543,537
<TOTAL-LIABILITY-AND-EQUITY> 1,475,487
<SALES> 270,682
<TOTAL-REVENUES> 272,866
<CGS> 210,961
<TOTAL-COSTS> 237,550
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,747
<INCOME-PRETAX> 27,569
<INCOME-TAX> 10,131
<INCOME-CONTINUING> 17,438
<DISCONTINUED> 0
<EXTRAORDINARY> (1,461)
<CHANGES> 0
<NET-INCOME> 15,977
<EPS-PRIMARY> .43
<EPS-DILUTED> .42
</TABLE>
