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, 2001 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: 36,480,124 shares as of February 28, 2001 TOLL BROTHERS, INC. AND SUBSIDIARIES INDEX Page No. Statement of Forward Looking Information 1 PART I. Financial Information 2 ITEM 1. Financial Statements Condensed Consolidated Balance Sheets 2 January 31, 2001 (Unaudited) and October 31, 2000 Condensed Consolidated Statements of Income (Unaudited) 3 Three Months Ended January 31, 2001 and 2000 Condensed Consolidated Statements of Cash Flows (Unaudited) 4 Three Months Ended January 31, 2001 and 2000 Notes to Condensed Consolidated Financial Statements 5 (Unaudited) ITEM 2. Management's Discussion and Analysis of 8 Financial Condition and Results of Operations ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 13 PART II. Other Information 13 SIGNATURES 14 STATEMENT OF FORWARD-LOOKING INFORMATION Certain information included herein and in other Company reports, SEC filings, statements and presentations is forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995, including, but not limited to, statements concerning the Company's anticipated operating results, financial resources, changes in revenues, changes in profitability, interest expense, growth and expansion, ability to acquire land, ability to sell homes and properties, ability to deliver homes from backlog, ability to secure materials and subcontractors and stock market valuations. 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 reports, SEC filings, statements and presentations. These risks and uncertainties include local, regional and national economic conditions, the effect 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, fluctuations in capital and securities markets, the availability and cost of labor and materials, and weather conditions. Additional information concerning potential factors that the Company believes could cause its actual results to differ materially from expected and historical results is included under the caption "Factors That May Affect Our Future Results" in Item 1 of our Annual Report on Form 10-K for the fiscal year ended October 31, 2000. If one or more of the assumptions underlying our forward-looking statements proves incorrect, then the Company's actual results, performance or achievements could differ materially from those expressed in, or implied by the forward-looking statements contained in this report. Therefore, we caution you not to place undue reliance on our forward-looking statements. This statement is provided as permitted by the Private Securities Litigation Reform Act of 1995. PART 1. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS <TABLE> CONDENSED CONSOLIDATED BALANCE SHEETS (Amounts in thousands) January 31, October 31, 2001 2000 (Unaudited) ASSETS <S> <C> <C> Cash and cash equivalents $ 229,451 $ 161,860 Inventory 1,846,120 1,712,383 Property, construction and office equipment-net 26,150 24,075 Receivables, prepaid expenses and other assets 122,811 113,025 Investments in unconsolidated entities 17,403 18,911 $2,241,935 $2,030,254 LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Loans payable $ 327,389 $ 326,537 Subordinated notes 669,520 469,499 Customer deposits on sales contracts 105,527 104,924 Accounts payable 85,324 110,927 Accrued expenses 183,051 185,141 Income taxes payable 69,290 88,081 Total liabilities 1,440,101 1,285,109 Stockholders' equity: Common stock 365 359 Additional paid-in capital 108,786 105,454 Retained earnings 708,533 668,608 Treasury stock (15,850) (29,276) Total stockholders' equity 801,834 745,145 $2,241,935 $2,030,254 </TABLE> See accompanying notes <TABLE> CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Amounts in thousands, except per share data) (Unaudited) Three months ended January 31 2001 2000 <S> Revenues: <C> <C> Housing sales $458,369 $334,220 Land sales 10,907 9,025 Equity earnings in unconsolidated joint venture 2,386 Interest and other 3,599 1,306 475,261 344,551 Costs and expenses: Housing sales 344,813 257,794 Land sales 8,540 7,039 Selling, general and administrative 46,949 35,457 Interest 11,764 8,933 412,066 309,223 Income before income taxes 63,195 35,328 Income taxes 23,270 12,935 Net income $ 39,925 $ 22,393 Earnings per share: Basic: $ 1.10 $ .61 Diluted: $ 1.01 $ .61 Weighted average number of shares Basic 36,163 36,471 Diluted 39,415 36,909 </TABLE> See accompanying notes <TABLE> CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Amounts in thousands) Three months ended January 31 2001 2000 <S> <C> <C> Cash flows from operating activities: Net income $39,925 $22,393 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 2,265 2,093 Equity in earnings of unconsolidated joint ventures (2,386) Deferred tax provision 1,685 1,768 Changes in operating assets and liabilities: Increase in inventory (136,047) (110,744) Origination of mortgage loans (26,186) Sale of mortgage loans 24,877 Increase in receivables, prepaid expenses and other assets (5,800) (5,746) Increase in customer deposits on sales contracts 603 3,806 Decrease in accounts payable and accrued expenses (23,279) (14,416) Decrease in current income taxes payable (16,165) (9,333) Net cash used in operating activities (140,508) (110,179) Cash flows from investing activities: Purchase of property, construction and office equipment, net (3,396) (2,539) Distribution from investment in unconsolidated joint venture 8,750 Net cash provided by (used in) investing activities 5,354 (2,539) Cash flows from financing activities: Proceeds from loans payable 40,000 105,060 Principal payments of loans payable (42,268) (52,082) Net proceeds from issuance of senior subordinated notes 196,975 Proceeds from stock-based benefit plans 9,680 134 Purchase of treasury stock (1,642) (1,577) Net cash provided by financing activities 202,745 51,535 Increase (decrease) in cash and cash equivalents 67,591 (61,183) Cash and cash equivalents, beginning of period 161,860 96,484 Cash and cash equivalents, end of period $229,451 $ 35,301 </TABLE> See accompanying notes 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, 2000 balance sheet amounts and disclosures included herein have been derived from the October 31, 2000 audited financial statements of the Registrant. Since the accompanying condensed consolidated financial statements do not include all the information and footnotes required by accounting principles generally accepted in the United States 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, 2000 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, 2001, and the results of its operations and cash flows for the three months ended January 31, 2001 and 2000. The results of operations for such interim periods are not necessarily indicative of the results to be expected for the full year. 2. Inventory <TABLE> Inventory consisted of the following (amounts in thousands): <S> <C> <C> January 31, October 31, 2001 2000 Land and land development costs $ 613,086 $ 558,503 Construction in progress 1,068,210 992,098 Sample homes 67,182 60,511 Land deposits and costs of future development 63,996 68,560 Deferred marketing costs 33,646 32,711 $1,846,120 $1,712,383 </TABLE> Construction in progress includes the cost of homes under construction, land and land development costs and the 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 inventory is delivered to a customer. Interest incurred, capitalized and expensed is summarized as follows (amounts in thousands): <TABLE> Three months ended January 31 2001 2000 <S> <C> <C> Interest capitalized, beginning of period $ 78,443 $ 64,984 Interest incurred 16,913 14,193 Interest expensed (11,764) (8,933) Write-off to cost of sales and other (56) Interest capitalized, end of period $83,592 $ 70,188 </TABLE> 3. Earnings Per Share Information pertaining to the calculation of earnings per share for the three months ended January 31, 2001 and 2000 is as follows (amounts in thousands): <TABLE> 2001 2000 <S> <C> <C> Basic weighted average shares 36,163 36,471 Common stock equivalents 3,252 438 Diluted weighted average shares 39,415 36,909 </TABLE> 4. Subordinated Notes In January 2001, the Company issued $200,000,000 of 8 1/4 % Senior Subordinated Notes due 2011. The Company will use the proceeds for general corporate purposes including the acquisition of inventory. 5. Stock Repurchase Program The Company's Board of Directors has authorized the repurchase of up to 5,000,000 shares of the Company's Common Stock, par value $.01, from time to time, in open market transactions or otherwise, for the purpose of providing shares for the Company's various employee benefit plans. As of January 31, 2001, the Company had repurchased approximately 46,000 shares under the program. 6. Supplemental Disclosure to Statements of Cash Flows The following are supplemental disclosures to the statements of cash flows for the three months ended January 31, 2001 and 2000 (amounts in thousands): <TABLE> 2001 2000 <S> <C> <C> Supplemental disclosures of cash flow information: Interest paid, net of capitalized amount $ 3,045 $ 3,414 Income taxes paid $ 37,750 $ 20,500 Supplemental disclosures of non-cash activities: Cost of residential inventories acquired through seller financing $ 4,500 $ 2,893 Investment in unconsolidated subsidiary acquired through seller financing $ 3,000 Income tax benefit relating to exercise of employee stock options $ 4,312 $ 422 Stock bonus awards $ 4,413 $ 1,395 </TABLE> ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS <TABLE> The following table sets forth, for the three months ended January 31, 2001 and 2000, certain income statement items related to the Company's operations: Three months ended January 31, 2001 2000 <S> <C> <C> $ % $ % (millions) (millions) Housing sales Revenues 458.4 334.2 Costs 344.8 75.2 257.8 77.1 Land sales Revenues 10.9 9.0 Costs 8.5 78.3 7.0 78.0 Equity earning in unconsolidated joint venture 2.4 - Interest and other 3.6 1.3 Total revenues 475.3 344.6 Selling, general and administrative expenses* 46.9 9.9 35.5 10.3 Interest expense* 11.8 2.5 8.9 2.6 Total costs and expenses* 412.1 86.7 309.2 89.7 Income before income taxes 63.2 13.3 35.3 10.3 Note: Due to rounding, amounts may not add. * Percentages are based on total revenues. </TABLE> HOUSING SALES Housing revenues for the three months ended January 31, 2001 increased $124.1 million, or 37%, over housing revenues for the three months ended January 31, 2000. This increase was the result of a 22% increase in units delivered and a 13% increase in the average price of the homes delivered. The increase in the number of homes delivered was the result of the larger backlog of homes to be delivered at the beginning of the 2001 period as compared to the beginning of the 2000 period. The increased backlog was the result of the 31% increase in contracts signed in fiscal 2000 over fiscal 1999. The increase in the average price of the homes delivered was the result of increases in selling price due to increases in base sales prices and a shift in the location of homes delivered to more expensive areas. The aggregate sales value of contracts signed during the three months ended January 31, 2001 amounted to $448.0 million (883 homes), a 14% increase over the same period in fiscal 2000. This increase is primarily the result of an increase in the average price of homes sold (due primarily to increases in base selling prices and a shift in the location of homes sold to more expensive areas) and a slight increase in the number of contracts signed. As of January 31, 2001, the backlog of homes under contract but not delivered amounted to $1.42 billion (2,678 homes), a 27% increase over the $1.12 billion (2,431 homes) backlog as of January 31, 2000. Housing costs as a percentage of housing sales decreased in fiscal 2001 as compared to the comparable period of fiscal 2000. The decrease was largely the result of selling prices increasing at a greater rate than costs, lower land and improvement costs and improved operating efficiencies offset in part by higher inventory write-offs. The Company incurred $2.7 million in write-offs in the three-month period of fiscal 2001 as compared to $2.0 million in the comparable period of fiscal 2000. Based upon the aforementioned 37% increase in first quarter 2001 housing revenues and the 27% increase in backlog as of January 31, 2001, the Company expects homebuilding revenues to be higher in fiscal 2001 as compared to fiscal 2000. LAND SALES The Company operates a land development and sales operation in Loudoun County, Virginia. The Company is also developing several master planned communities in which it may sell land to other builders. The amount of land sales will vary from quarter to quarter depending upon the scheduled timing of the delivery of the land parcels. Land sales amounted to $10.9 million for the three months ended January 31, 2001, a 21% increase over the comparable quarter of 2000. INTEREST AND OTHER INCOME For the three months ended January 31, 2001, other income increased $2.3 million as compared to the three-months ended January 31, 2000. This increase was primarily the result of an increase in interest income due to the investment of available cash and increased earnings from the Company's ancillary businesses. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A") SG&A spending increased by $11.5 million, or 33%, in the three months ended January 31, 2001 as compared to the three months ended January 31, 2000. This increased spending was primarily due to the increase in the level of construction and sales activities in the fiscal 2001 period as compared to the fiscal 2000 period. INTEREST EXPENSE The Company determines interest expense on a specific lot-by-lot basis for its homebuilding operations and on a parcel-by-parcel basis for its land sales. As a percentage of total revenues, interest expense will vary depending on many factors including the period of time that the land was owned, the length of time that the homes delivered during the period were under construction, and the interest rates and the amount of debt carried by the Company in proportion to the amount of its inventory during those periods. Interest expense as a percentage of revenues was slightly lower in the fiscal 2001 period compared to the comparable period of fiscal 2000. INCOME TAXES Income taxes were provided at an effective rate of 36.8% and 36.6% in the first quarter of fiscal 2001 and fiscal 2000, respectively. CAPITAL RESOURCES AND LIQUIDITY Funding for the Company's operations has been principally provided by cash flows from operations, unsecured bank borrowings, and from the public debt and equity markets. Cash flow from operations, before inventory additions, has improved as operating results have improved. The Company anticipates that the cash flow from operations, before inventory additions, will continue to improve as a result of an increase in revenues from the delivery of homes from its existing backlog as well as from new sales contracts and land sales. The Company has used the cash flow from operations, bank borrowings and public debt to acquire additional land for new communities, to fund additional expenditures for land development and construction needed to meet the requirements of the increased backlog and continuing expansion of the number of communities in which the Company is offering homes for sale, to reduce debt and repurchase its Common Stock. The Company expects that inventories will continue to increase and is currently negotiating and searching for additional opportunities to obtain control of land for future communities. The Company has a $465 million unsecured revolving credit facility with sixteen banks which extends through February 2003. As of January 31, 2001, the Company had $80 million of loans and approximately $34.3 million of letters of credit outstanding under the facility. The Company believes that it will be able to fund its activities through a combination of existing cash resources, cash flow from operations and other sources of credit similar in nature to those the Company has accessed in the past. In January 2001, the Company issued $200 million of 8 1/4% Senior Subordinated Notes due 2011 to the public. The Company will use the proceeds for general corporate purposes including the acquisition of inventory. <TABLE> HOUSING DATA New Contracts Three months ended January 31, 2001 2000 units $000 units $000 <S> <C> <C> <C> <C> Northeast (MA, RI, NH, CT, NY, NJ) 180 $ 92,759 229 $107,416 Mid-Atlantic (PA, DE, MD, VA) 309 146,397 250 114,274 Midwest (OH, IL, MI) 109 45,829 101 41,623 Southeast (FL, NC, TN) 76 40,153 63 30,901 Southwest (AZ, NV, TX) 111 59,604 152 56,627 West Coast (CA) 98 63,256 69 40,737 Total 883 $447,998 864 $391,578 New contract amounts for the three months ended January 31, 2001 and 2000 include $4,333,000 (15 homes) and $4,759,000 (18 homes), respectively, from an unconsolidated joint venture. </TABLE> <TABLE> Closings Three months ended January 31, 2001 2000 units $000 units $000 <S> <C> <C> <C> <C> Northeast (MA, RI, NH, CT, NY, NJ) 244 $118,685 223 $99,684 Mid-Atlantic (PA, DE, MD, VA) 304 139,806 272 116,730 Midwest (OH, IL, MI) 92 39,865 75 24,056 Southeast (FL, NC, TN) 113 50,536 50 23,273 Southwest (AZ, NV, TX) 128 55,795 155 55,680 West Coast (CA) 90 53,682 24 14,797 Total 971 $458,369 799 $334,220 </TABLE> <TABLE> Backlog As of January 31, 2001 2000 units $000 units $000 <S> <C> <C> <C> <C> Northeast (MA, RI, NH, CT, NY, NJ) 659 $ 341,660 729 $353,949 Mid-Atlantic (PA, DE, MD, VA) 684 325,811 670 308,940 Midwest (OH, IL, MI) 315 149,535 251 96,659 Southeast (FL, NC, TN) 275 136,248 175 84,189 Southwest (AZ, NV, TX) 400 213,136 417 171,179 West Coast (CA) 345 254,542 189 106,683 Total 2,678 $1,420,932 2,431 $1,121,599 Backlog amounts as of January 31, 2001 and 2000 include $10,116,000 (35 homes) and $15,067,000 (57 homes) respectively, from an unconsolidated 50% owned joint venture. </TABLE> ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: Exhibit 4.1 - *Indenture dated as of January 25, 2001 among Toll Corp., as issuer, the Registrant, as guarantor and Bank One Trust Company, as trustee, including form of guarantee (b) Reports on Form 8-K During the quarter ended January 31, 2001, the Company filed a current report on Form 8-K on January 24, 2001, reporting under items five and seven, for the purpose of filing documents pertaining to Toll Corp.'s issuance of $200,000,000 of 8 1/4% Senior Subordinated Notes due 2011 guaranteed on a senior subordinated basis by Toll Brothers, Inc. * Filed electronically herewith 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 12, 2001 By: /s/ Joel H. Rassman Joel H. Rassman Senior Vice President, Treasurer and Chief Financial Officer Date: March 12, 2001 By: /s/ Joseph R. Sicree Joseph R. Sicree Vice President - Chief Accounting Officer (Principal Accounting Officer)