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, 2002 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: 70,887,246 shares as of June 10, 2002.
TOLL BROTHERS, INC. AND SUBSIDIARIES INDEX Page No. Statement of Forward-Looking Information 2 PART I. Financial Information ITEM 1. Financial Statements Condensed Consolidated Balance Sheets (Unaudited) as of April 30, 2002 and October 31, 2001 3 Condensed Consolidated Statements of Income (Unaudited) For the Six Months and Three Months Ended April 30, 2002 and 2001 4 Condensed Consolidated Statements of Cash Flows (Unaudited)For the Six Months Ended April 30, 2002 and 2001 5 Notes to Condensed Consolidated Financial Statements (Unaudited) 6 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 15 PART II. Other Information 16 SIGNATURES 17 1
STATEMENT ON FORWARD-LOOKING INFORMATION Certain information included herein and in our other 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 our 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 open new communities, ability to secure materials and subcontractors and stock market valuations. In some cases you can identify those so called forward-looking statements by words such as "may," "should," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "potential," or "continue" or the negative of those words or other comparable words. 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 our other reports, SEC filings, statements and presentations. These risks and uncertainties include local, regional and national economic and political conditions, the consequences of any future terrorist attacks such as those that occurred on September 11, 2001, the effects of governmental regulation, the competitive environment in which we operate, 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 we believe could cause our 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, 2001. If one or more of the assumptions underlying our forward-looking statements proves incorrect, then our 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. When this report uses the word "we," "us," and "our," they refer to Toll Brothers, Inc. and its subsidiaries, unless the context otherwise requires. 2
PART 1. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS TOLL BROTHERS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Amounts in thousands) <TABLE> <CAPTION> April 30, October 31, 2002 2001 -------------------- -------------------- (Unaudited) <S> <C> <C> ASSETS Cash and cash equivalents $115,462 $182,840 Inventory 2,402,720 2,183,541 Property, construction and office equipment, net 36,144 33,095 Receivables, prepaid expenses and other assets 100,513 91,784 Mortgage loans receivable 25,765 26,758 Investments in unconsolidated entities 14,122 14,182 ---------- ---------- $2,694,726 $2,532,200 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Loans payable $235,547 $362,712 Subordinated notes 819,622 669,581 Mortgage company warehouse loans 22,614 24,754 Customer deposits 123,318 101,778 Accounts payable 144,318 132,970 Accrued expenses 235,587 229,671 Income taxes payable 85,376 98,151 ---------- ---------- Total liabilities 1,666,382 1,619,617 ---------- ---------- Stockholders' equity: Preferred stock Common stock 738 369 Additional paid-in-capital 103,713 107,014 Retained earnings 978,916 882,281 Treasury stock (55,023) (77,081) ---------- ---------- Total stockholders' equity 1,028,344 912,583 ---------- ---------- $2,694,726 $2,532,200 ========== ========== </TABLE> See accompanying notes 3
TOLL BROTHERS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Amounts in thousands, except per share data) (Unaudited) <TABLE> <CAPTION> Six months ended Three months ended April 30, April 30, ------------------------------- ------------------------------- 2002 2001 2002 2001 ------------------------------- ------------------------------- <S> <C> <C> <C> <C> Revenues: Housing sales $1,021,813 $955,915 $539,111 $497,546 Land sales 14,041 22,417 7,618 11,510 Equity earnings from unconsolidated joint ventures 1,497 5,261 1,497 2,875 Interest and other 5,324 6,192 2,270 2,593 ------------------------------- ------------------------------- 1,042,675 989,785 550,496 514,524 ------------------------------- ------------------------------- Costs and expenses: Housing sales 740,063 713,380 388,638 368,567 Land sales 9,178 17,538 4,961 8,998 Selling, general and administrative expense 110,992 98,339 58,594 51,390 Interest 29,632 24,982 15,477 13,218 ------------------------------- ------------------------------- 889,865 854,239 467,670 442,173 ------------------------------- ------------------------------- Income before income taxes 152,810 135,546 82,826 72,351 Income taxes 55,806 49,843 30,316 26,573 ------------------------------- ------------------------------- Net income $97,004 $85,703 $52,510 $45,778 =============================== =============================== Earnings per share: Basic $1.38 $1.18 $0.74 $0.63 Diluted $1.29 $1.09 $0.69 $0.58 Weighted average number of shares: Basic 70,425 72,591 70,849 72,857 Diluted 75,241 78,697 76,237 78,564 </TABLE> See accompanying notes 4
TOLL BROTHERS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands) (Unaudited) <TABLE> <CAPTION> Six months ended April 30, --------------------------------------- 2002 2001 ------------------ ------------------ <S> <C> <C> Cash flows from operating activities Net income $97,004 $85,703 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 5,363 4,873 Equity from earnings of unconsolidated joint ventures (1,497) (5,261) Deferred tax provision (602) 4,600 Changes in operating assets and liabilities: Increase in inventory (210,198) (320,982) Origination of mortgage loans (160,551) (64,391) Sale of mortgage loans 161,438 55,441 Increase in receivables, prepaid expenses and other assets (9,149) (6,080) Increase in customer deposits 21,541 10,601 Increase in accounts payable and accrued expenses 25,001 6,685 Decrease in current income taxes payable (6,593) (10,508) -------------- ------------- Net cash used in operating activities (78,243) (239,319) -------------- ------------- Cash flows from investing activities: Purchase of property, construction and office equipment, net (7,560) (6,851) Investments in unconsolidated entities (2,200) Distributions from unconsolidated entities 2,800 12,250 -------------- ------------- Net cash (used in)provided by investing activities (6,960) 5,399 -------------- ------------- Cash flows from financing activities: Proceeds from loans payable 167,985 60,000 Principal payments of loans payable (305,342) (67,692) Net proceeds from issuance of subordinated debt 149,748 196,975 Proceeds from stock-based benefit plans 11,360 11,331 Purchase of treasury stock (5,926) (11,550) -------------- ------------- Net cash provided by financing activities 17,825 189,064 -------------- ------------- Decrease in cash and cash equivalents (67,378) (44,856) Cash and cash equivalents, beginning of period 182,840 161,860 -------------- ------------- Cash and cash equivalents, end of period $115,462 $117,004 ============== ============= </TABLE> See accompanying notes 5
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, 2001 balance sheet amounts and disclosures included herein have been derived from our October 31, 2001 audited financial statements. 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, we suggest that they be read in conjunction with the financial statements and notes thereto included in our October 31, 2001 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 our financial position as of April 30, 2002, the results of our operations for the six months and three months ended April 30, 2002 and 2001 and our cash flows for the six months ended April 30, 2002 and 2001. The results of operations for such interim periods are not necessarily indicative of the results to be expected for the full year. On March 4, 2002, our Board of Directors declared a two-for-one split of our common stock in the form of a stock dividend to stockholders of record on March 14, 2002. The additional shares were distributed on March 28, 2002. All share and per share information has been restated to reflect this split. Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Asset" provides guidance on accounting for certain intangibles and eliminates the amortization of goodwill and certain intangible assets. Intangible assets, including goodwill, that are not subject to amortization are required to be tested for impairment and possible write-down on an annual basis. We adopted SFAS 142 on November 1, 2001, the first day of our 2002 fiscal year. We had $8.9 million of goodwill at November 1, 2001. The adoption of SFAS 142 did not have a material impact on our financial statements. For the six-month and three-month periods ended April 30, 2001, we amortized $531,000 (net of $309,000 of income taxes) and $266,000 (net of $154,000 of income taxes) of goodwill, respectively. Had we not amortized goodwill during the six-month and three-month periods ended April 30, 2001, we would have reported net income, diluted earnings per share and basic earnings per share of $86,234,000, $1.10 and $1.19, respectively, for the six-month period and $46,044,000, $.59 and $.63, respectively, for the three-month period. Certain amounts reported in prior periods have been reclassified for comparative purposes. 6
2. Inventory Inventory consisted of the following (amounts in thousands): <TABLE> <CAPTION> April 30, October 31, 2002 2001 --------------- --------------- <S> <C> <C> Land and land development costs $873,159 $833,386 Construction in progress 1,263,885 1,146,485 Sample homes and sales offices 151,131 107,744 Land deposits and costs of future development 105,968 89,360 Other 8,577 6,566 --------------- -------------- $2,402,720 $2,183,541 =============== ============== </TABLE> Construction in progress includes the cost of homes under construction, land and land development and carrying costs of lots that have been substantially improved. We capitalize 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> Six months ended Three months ended April 30, April 30, ------------------------------------- --------------------------------- 2002 2001 2002 2001 ------------------------------------- --------------------------------- <S> <C> <C> <C> <C> Interest capitalized, beginning of period $98,650 $78,443 $106,542 $83,592 Interest incurred 45,243 37,399 22,608 20,486 Interest expensed (29,632) (24,982) (15,477) (13,218) Write-off to cost of sales (624) (434) (36) (434) ------------------------------------- --------------------------------- Interest capitalized, end of period $113,637 $90,426 $113,637 $90,426 ===================================== ================================= </TABLE> 3. Earnings per share: Information pertaining to the calculation of earnings per share for the six months and three months ended April 30, 2002 and 2001 is as follows (amounts in thousands): <TABLE> <CAPTION> Six months ended Three months ended April 30, April 30, --------------------------------- -------------------------------- 2002 2001 2002 2001 --------------------------------- -------------------------------- <S> <C> <C> <C> <C> Basic weighted average shares 70,425 72,591 70,849 72,857 Common stock equivalents 4,816 6,106 5,388 5,707 --------------------------------- ------------------------------- Diluted weighted average shares 75,241 78,697 76,237 78,564 ================================= =============================== </TABLE> 7
4. Subordinated Notes In November 2001, we issued $150,000,000 of 8.25% Senior Subordinated Notes due 2011. We used the proceeds for general corporate purposes including the acquisition of inventory. 5. Stock Repurchase Program Our Board of Directors has authorized the repurchase of up to 10,000,000 shares of our common stock, par value $.01, from time to time, in open market transactions or otherwise, for the purpose of providing shares for our various employee benefit plans. At April 30, 2002, we had repurchased approximately 4,359,000 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 six months ended April 30, 2002 and 2001 (amounts in thousands): 2002 2001 ---- ---- Supplemental disclosures of cash flow information: Interest paid, net of capitalized amount $ 6,605 $ 5,440 -------- -------- Income taxes paid $ 63,000 $ 55,750 -------- -------- Supplemental disclosures of non-cash activities: Cost of residential inventories acquired through seller financing $ 8,810 $ 27,645 -------- -------- Income tax benefit relating to exercise of employee stock options $ 5,583 $ 4,611 -------- -------- Stock bonus awards $ 6,853 $ 4,413 -------- -------- Contributions to employee retirement plan $ 883 $ 791 -------- -------- 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CRITICAL ACCOUNTING ESTIMATES Basis of Presentation Our financial statements include the accounts of Toll Brothers, Inc. and its majority owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Investments in 20% to 50% owned partnerships and affiliates are accounted for on the equity method. Inventory Inventory is stated at the lower of cost or fair value in accordance with Statement of Accounting Standards Board No. 121 and 144. In addition to direct acquisition, land development and home construction costs, costs include interest, real estates taxes and direct overhead costs related to development and construction, which are capitalized to inventories during the period beginning with the commencement of development and ending with the completion of construction. Land, land development and related costs are amortized to the cost of homes closed based upon the total number of homes to be constructed in each community. Home construction and related costs are charged to the cost of homes closed under the specific identification method. Land, common area development and related costs of master planned communities are allocated to individual communities within the master planned community on a relative sales value basis. Income Recognition Revenue and cost of sales are recorded at the time each home, or lot, is closed and title and possession has been transferred to the buyer. Joint Venture Accounting We have entered into three joint ventures with third parties to develop and sell land that was owned or is currently owned by our venture partners. We recognize our share of earnings from the sale of lots to other builders. We do not recognize earnings from lots we purchase, but reduce our cost basis in the lots by our share of the earnings on those lots. We have agreed to purchase 180 lots from one of the ventures, 46 lots from another and have the right to purchase up to 385 lots from the third. We will also participate in the profits earned from the lots sold to other builders above certain agreed upon levels. In addition, we effectively own one-third of Toll Brothers Realty Trust (the "Trust"), an entity that was formed with a number of our senior executives and directors and with the Pennsylvania State Employees Retirement System, to take advantage of commercial real estate opportunities that may present themselves from time to time. We provide development, finance and management services to the Trust and receive fees under various agreements. We also own 50% of a joint venture that is currently selling and building an active adult, age-qualified community. Our total commitment to these entities is not material to our financial position. These investments are accounted for on the equity method. 9
RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, certain income statement items related to the Company's operations (dollars in millions): <TABLE> <CAPTION> Six months ended Three months ended April 30, April 30, -------------------------------------------- ------------------------------------------ 2002 2001 2002 2001 ------------------------- ---------------- --------------------- ------------------- $ % $ % $ % $ % <S> <C> <C> <C> <C> <C> <C> <C> <C> Housing sales Revenues 1,021.8 955.9 539.1 497.5 Costs 740.1 72.4 713.4 74.6 388.6 72.1 368.6 74.1 --------------------------------------------------------------------------------------- Land sales Revenues 14.0 22.4 7.6 11.5 Costs 9.2 65.4 17.5 78.2 5.0 65.1 9.0 78.2 --------------------------------------------------------------------------------------- Equity earnings from unconsolidated joint ventures 1.5 5.3 1.5 2.9 --------------------------------------------------------------------------------------- Other 5.3 6.2 2.3 2.6 --------------------------------------------------------------------------------------- Total revenues 1,042.7 989.8 550.5 514.5 --------------------------------------------------------------------------------------- Selling, general & administrative expenses* 111.0 10.6 98.3 9.9 58.6 10.6 51.4 10.0 --------------------------------------------------------------------------------------- Interest expense* 29.6 2.8 25.0 2.5 15.5 2.8 13.2 2.6 --------------------------------------------------------------------------------------- Total costs and expenses* 889.9 85.3 854.2 86.3 467.7 85.0 442.2 85.9 --------------------------------------------------------------------------------------- Income before income taxes* 152.8 14.7 135.5 13.7 82.8 15.0 72.4 14.1 --------------------------------------------------------------------------------------- </TABLE> Note: Due to rounding, amounts may not add. *Percentages are based on total revenues. HOUSING SALES Housing revenues for the six-month and three-month periods ended April 30, 2002 were higher than those of the comparable periods of 2001 by approximately $65.9 million or 7%, and $41.6 million or 8%, respectively. The increase in revenues in the six-month period of 2002 was primarily attributable to an increase in the number of homes we delivered. The increase in revenues in the three-month period of 2002 was attributable to an 11% increase in the number of homes we delivered, offset in part by a 2% decrease in the average price of the homes delivered. It takes on average nine months or more for us to deliver a home from the time we receive a contract from the homebuyer, thus most homes delivered during the six-month and three-month periods of fiscal 2002 and 2001 were in our backlog at October 31, 2001 and 2000, respectively. The increase in the number of homes delivered in the fiscal 2002 periods was primarily due to our delivering a higher percentage of homes in backlog at October 31, 2001 as compared to the percentage of homes we delivered in the fiscal 2001 periods from the October 31, 2000 backlog. 10
At April 30, 2002, we had $1.77 billion (3,271 homes)in our backlog of homes under contract but not delivered, a 10% increase over the $1.61 billion (3,112 homes) we had in our backlog at April 30, 2001 and a 25% increase over the $1.41 billion (2,727 homes) we had in our backlog at October 31, 2001. The increase in the value of our backlog at April 30, 2002 compared to April 30, 2001 was the result of the 21% increase in the value of contracts we signed in the first six months of fiscal 2002 as compared to the first six months of fiscal 2001, offset in part by the increase in the aggregate value of homes delivered in the 2002 periods compared to the same periods of 2001. The aggregate sales value of contracts we signed for the six-month period ended April 30, 2002 compared to the comparable period of 2001 increased by 21%. The increase in the six-month period was primarily the result of a 14% increase in the number of units sold and a 7% increase in the average price of homes sold. The aggregate sales value of contracts we signed for the three-month period ended April 30, 2002 compared to the comparable period of 2001 increased by 30%. The increase in the three-month period was primarily the result of a 19% increase in the number of units sold and a 9% increase in the average price of homes sold. The increase in the average selling price in both the six-month and three-month periods was due to a shift in product mix to more expensive locations and increases in the base selling prices. For more detail on contracts, closings and backlog, see the tables provided at the end of this Item 2. The terrorist attacks of September 11, 2001 impacted us most severely in the first few weeks immediately after the event as consumer confidence dropped and the stock market declined. Due to the weakness in new home orders in our fourth quarter of fiscal 2001, our backlog value at October 31, 2001 was 2% lower than the backlog value at October 31, 2000. Subsequent to October 31, 2001, deposit activity remained volatile week-to-week but generally showed improvement over time. A deposit is a non-binding agreement signed by a homebuyer which will reserve a home site and fix the home price for a short period of time. Not all deposits result in binding agreements of sale and, therefore, deposits are not included in our backlog. The increased deposit activity resulted in an increase in signed agreements of sale in the quarter ended January 31, 2002, although many of the agreements were signed in the month of January 2002. Because it takes more than nine months from the signing of an agreement to the delivery of a home in many of our communities, many of the agreements signed in January 2002 may not be delivered to our customers prior to October 31, 2002, the end of our fiscal year. In addition, most of the contracts signed in our quarter ended April 30, 2002 will not be delivered until fiscal 2003. Accordingly, we expect to deliver between 4,160 homes and 4,400 homes for our fiscal year 2002, compared to the 4,358 homes delivered in fiscal 2001. We continue to increase the number of communities from which we are selling and delivering homes. At April 30, 2002, we had 166 selling communities compared to 155 at October 31, 2001 and 145 at October 31, 2000. We expect to have approximately 175 selling communities at October 31, 2002. Based upon the strength of demand during the past six months, the increased number of communities from which we are currently operating and expect to open during the next six months and the current deposit trends, we believe that homes delivered in fiscal 2003 could exceed 5,000. Housing costs as a percentage of housing sales decreased in the six-month and three-month periods ended April 30, 2002 as compared to the comparable periods of fiscal 2001. The decreases were the result of selling prices increasing at a greater rate than costs, lower land and improvement costs, improved operating efficiencies and lower inventory write-downs. We incurred $1.7 million and $.5 million of write-downs in the six-month and three-month periods ended April 30, 2002, respectively, as compared to $4.3 million and $1.6 million in the comparable periods of fiscal 2001. 11
LAND SALES We operate a land development and sales operation in South Riding, Loudoun County, Virginia and are also developing several master planned communities in which we have sold and may, in the future, sell lots to other builders. Revenue from land sales will vary from quarter to quarter depending upon the scheduled timing of the delivery of the land parcels. Land sales for the six-month and three-month periods ended April 30, 2002 declined $8.4 million and $3.9 million, respectively, as compared to the same periods of fiscal 2001. The decreases in land sales were due to fewer lots being available for sale at South Riding during the fiscal 2002 periods than during fiscal 2001, offset in part by the increased sales of lots in our other master planned communities. INTEREST AND OTHER INCOME For the six-month and three-month periods ended April 30, 2002, interest and other income declined $.9 million and $.3 million, respectively, compared to the same periods of fiscal 2001. The decreases were primarily the result of a decrease in interest income due to lower interest rates offset, in part, by increased income from forfeitures of customer deposits. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A") As a percentage of revenues, SG&A increased to 10.6% from 9.9% in the six-month period ended April 30, 2002 as compared to the same period of fiscal 2001, and to 10.6% from 10.0% in the three-month period ended April 30, 2002 compared to the comparable period of fiscal 2001. SG&A spending increased by $12.7 million or 13%, and $7.2 million or 14%, respectively, in the six-month and three-month periods ended April 30, 2002 as compared to the same periods of fiscal 2001. The increases were primarily due to the increase in the number of selling communities, the increased number of homes delivered in the fiscal 2002 periods as compared to the fiscal 2001 periods and the expenditures required to prepare for the opening of several master planned communities. Due to the longer lead time that it takes us to open a master planned community as compared to a regular stand-alone community, we incur and expense a greater amount of money before we begin to realize revenue from a master planned community. INTEREST EXPENSE We determine interest expense on a specific lot-by-lot basis for our homebuilding operations and on a parcel-by-parcel basis for our land sales. As a percentage of total revenues, interest expense will vary depending on many factors including the length 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 us in proportion to the amount of our inventory during those periods. Interest expense as a percentage of revenues was higher in the six-month and three-month periods ended April 30, 2002 than in the comparable periods of fiscal 2001. 12
INCOME TAXES Income taxes were provided at an effective rate of 36.5% and 36.6% for the six-month and three-month periods of fiscal 2002, respectively. For the comparable periods of fiscal 2001, income taxes were provided at 36.8% and 36.7%. CAPITAL RESOURCES AND LIQUIDITY Funding for our operations has been provided principally by cash flows from operations, unsecured bank borrowings, and from the public debt markets. Cash flow from operations, before inventory additions, has improved as operating results have improved. One of the main factors that determines cash flow from operations, before inventory additions, is the level of revenues from the delivery of homes and land sales. We anticipate that cash flow from operations, before inventory additions, will continue to be strong. We have used our cash flow from operations, bank borrowings and public debt to: acquire additional land for new communities; fund additional expenditures for land development and construction costs needed to meet the requirements of our increased backlog and continuing expansion of the number of communities in which we are offering homes for sale; repurchase our stock; and repay debt. We expect that inventories will continue to increase and is currently negotiating and continuing to search for additional opportunities to obtain control of land for future communities. At April 30, 2002, we had a $535 million unsecured revolving credit facility with sixteen banks, of which $445 million extends through March 2006 and $90 million extends through February 2003. At April 30, 2002, we had no borrowings outstanding and approximately $50.3 million of letters of credit outstanding under the facility. We believe that we will be able to fund our activities through a combination of existing cash resources, cash flow from operations and existing sources of funds similar in nature to those we have accessed in the past. HOUSING DATA ($ in millions) <TABLE> <CAPTION> Closings Six months ended April 30, ---------------------------------------------------------- 2002 2001 units $ units $ ------------------------- ----------------------------- <S> <C> <C> <C> <C> Northeast 436 223.0 463 232.4 (MA, RI, NH, CT, NY, NJ) Mid-Atlantic 681 314.1 599 277.8 (PA, DE, MD, VA) Midwest 216 100.8 203 90.1 (OH, IL, MI) Southeast 290 114.3 215 99.3 (FL, NC, TN) Southwest 247 131.3 261 123.5 (AZ, NV, TX, CO) West Coast (CA) 195 138.3 209 132.8 ------------------------- ----------------------------- Total 2,065 1,021.8 1,950 955.9 ========================= ============================= </TABLE> 13
<TABLE> <CAPTION> Contracts (1) Six months ended April 30, ---------------------------------------------------------- 2002 2001 units $ units $ ------------------------- ----------------------------- <S> <C> <C> <C> <C> Northeast 449 260.3 443 219.4 (MA, RI, NH, CT, NY, NJ) Mid-Atlantic 981 450.1 791 371.0 (PA, DE, MD, VA) Midwest 202 101.3 296 123.6 (OH, IL, MI) Southeast 387 169.9 275 124.3 (FL, NC, TN) Southwest 306 149.4 272 140.3 (AZ, NV, TX, CO) West Coast (CA) 309 256.4 234 163.8 ------------------------- ----------------------------- Total 2,634 1,387.4 2,311 1,142.4 ========================= ============================= </TABLE> (1) Contracts for the six-month periods ended April 30, 2002 and 2001 included $4,600,000 (14 homes) and $9,433,000 (32 homes), respectively, from an unconsolidated 50% owned joint venture with a third party. <TABLE> <CAPTION> Backlog (2) at April 30, ---------------------------------------------------------- 2002 2001 units $ units $ ------------------------- ----------------------------- <S> <C> <C> <C> <C> Northeast 664 367.9 703 354.5 (MA, RI, NH, CT, NY, NJ) Mid-Atlantic 1,133 528.2 871 412.5 (PA, DE, MD, VA) Midwest 291 143.8 376 172.8 (OH, IL, MI) Southeast 425 207.0 372 171.6 (FL, NC, TN) Southwest 401 205.7 428 226.1 (AZ, NV, TX, CO) West Coast (CA) 357 316.6 362 276.0 ------------------------- ----------------------------- Total 3,271 1,769.2 3,112 1,613.5 ========================= ============================= </TABLE> (2)Backlog at April 30, 2002 and 2001 included $4,619,000 (14 homes) and $10,919,000 (37 homes), respectively, from this joint venture. 14
<TABLE> <CAPTION> Closings Three months ended April 30, ---------------------------------------------------------- 2002 2001 units $ units $ -------------------------- ----------------------------- <S> <C> <C> <C> <C> Northeast 213 107.4 219 113.7 (MA, RI, NH, CT, NY, NJ) Mid-Atlantic 353 160.6 295 138.0 (PA, DE, MD, VA) Midwest 104 45.7 111 50.2 (OH, IL, MI) Southeast 159 61.7 102 48.8 (FL, NC, TN) Southwest 138 74.0 133 67.7 (AZ, NV, TX, CO) West Coast (CA) 119 89.7 119 79.1 -------------------------- ----------------------------- Total 1,086 539.1 979 497.5 ========================== ============================= </TABLE> <TABLE> <CAPTION> Contracts (3) Three months ended April 30, ---------------------------------------------------------- 2002 2001 units $ units $ ------------------------- ----------------------------- <S> <C> <C> <C> <C> Northeast 259 152.2 263 126.6 (MA, RI, NH, CT, NY, NJ) Mid-Atlantic 662 304.3 482 224.7 (PA, DE, MD, VA) Midwest 124 63.7 187 77.8 (OH, IL, MI) Southeast 272 114.7 199 84.1 (FL, NC, TN) Southwest 190 95.8 161 80.7 (AZ, NV, TX, CO) West Coast (CA) 199 171.6 136 100.5 ------------------------- ----------------------------- Total 1,706 902.3 1,428 694.4 ========================= ============================= </TABLE> (3) Contracts for the three-month periods ended April 30, 2002 and 2001 included $2,833,000 (8 homes) and $5,194,000 (17 homes), respectively, from this joint venture. ITEM 3. Quantitative and Qualitative Disclosures About Market Risk There have been no material changes in our market risk from October 31, 2001. For more information regarding our market risk, see Item 7A, Quantitative and Qualitative Disclosures About Market Risk, in our Annual Report on Form 10-K for the fiscal year ended October 31, 2001. 15
PART II. Other Information ITEM 1. Legal Proceedings We are involved in various claims and litigation arising principally in the ordinary course of business. We believe that the disposition of these matters will not have a material adverse effect on the business or on our financial condition. There are no proceedings required to be disclosed pursuant to Item 103 of Regulation S-K. ITEM 2. Changes in Securities and Use of Proceeds On March 4, 2002, we amended our Certificate of Incorporation to increase the number of shares of our common stock authorized for issuance from 45,000,000 to 100,000,000. This amendment was effected by our Board of Directors by virtue of the authority granted to it by our stockholders at the Annual Meeting of Stockholders on March 21, 2001. This modification to our Certificate of Incorporation does not affect the rights of holders of our common stock. ITEM 3. Defaults upon Senior Securities None. ITEM 4. Submission of Matters to a Vote of Security Holders Our 2002 Annual Meeting of Stockholders was held on March 21, 2002. The following proposal was submitted to and approved by security holders at the Annual Meeting. There were 71,408,780 shares of our common stock eligible to vote at the 2002 Annual Meeting. (i) The election of three directors to hold office until the 2005 Annual Meeting of Stockholders. NOMINEE FOR WITHHELD AUTHORITY Robert I. Toll 62,477,600 5,768,998 Bruce E. Toll 62,474,974 5,771,624 Joel H. Rassman 62,477,352 5,769,246 The share amounts have been adjusted to reflect a two-for-one stock split that occurred subsequent to the Annual Meeting. ITEM 5. Other Information None. 16
ITEM 6. Exhibits and Reports on Form 8-K (a) Exhibits None (b) Reports on Form 8-K During the quarter ended April 30, 2002, we filed a Current Report on Form 8-K on March 5, 2002 for the purpose of filing our announcement of the Board of Directors' authorization of a two-for-one common stock split in the form of a stock dividend to be paid March 28, 2002, to stockholders of record as of the close of business on March 14, 2002. 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 12, 2002 By: /s/ Joel H.Rassman ----------------------------------------- Joel H. Rassman Executive Vice President, Treasurer and Chief Financial Officer Date: June 12, 2002 By: /s/ Joseph R. Sicree ----------------------------------------- Joseph R. Sicree Vice President - Chief Accounting Officer (Principal Accounting Officer) 17