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, 2005
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 Identification No.)
incorporation or organization)
250 GIBRALTAR ROAD, HORSHAM, PENNSYLVANIA 19044
------------------------------------------ --------------
(Address of principal executive offices) (Zip Code)
(215) 938-8000
----------------------------------------------------
(Registrant's telephone number, including area code)
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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 by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
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:
TOLL BROTHERS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PAGE NO.
Statement on Forward-Looking Information....................... 1
PART I. Financial Information
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets
at July 31, 2005 (Unaudited)
and October 31, 2004................. 2
Condensed Consolidated Statements of
Income (Unaudited) For the
Nine Months and Three Months Ended
July 31, 2005 and 2004................ 3
Condensed Consolidated Statements of
Cash Flows (Unaudited) For the
Nine Months Ended July 31, 2005 and
2004.................................. 4
Notes to Condensed Consolidated
Financial Statements (Unaudited)............................... 5
ITEM 2. Management's Discussion and Analysis
of Financial Condition and
Results of Operations................ 20
ITEM 3. Quantitative and Qualitative
Disclosures About Market Risk.................................. 27
ITEM 4. Controls and Procedures............... 28
PART II. Other Information
Item 1. Legal Proceedings..................... 29
Item 2. Unregistered Sales of Equity
Securities and Use of Proceeds................................. 29
Item 3. Defaults upon Senior Securities....... 29
Item 4. Submission of Matters to a Vote of
Security Holders............................................... 29
Item 5. Other Information..................... 29
Item 6. Exhibits.............................. 30
SIGNATURES..................................................... 31
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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, anticipated income to be realized from our investments in unconsolidated entities, interest expense, growth and expansion, ability to acquire land, ability to sell homes and properties, ability to deliver homes from backlog, ability to gain approvals and to open new communities, ability to secure materials and subcontractors, average delivered prices of homes, ability to maintain the liquidity and capital necessary to expand and take advantage of future opportunities and stock market valuations. In some cases you can identify those so called forward-looking statements by words such as "may," "will," "should," "expect," "plan," "anticipate," "believe," "estimate," "predict," "potential," "project," "intend," "can," "could," "might," 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, 2004. 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 words "we," "us," and "our," they refer to Toll Brothers, Inc. and its subsidiaries, unless the context otherwise requires. References herein to "fiscal 2006," "fiscal 2005," and "fiscal 2004" refer to our fiscal years ending October 31, 2006 and October 31, 2005 and our fiscal year ended October 31, 2004, respectively.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TOLL BROTHERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
JULY 31, OCTOBER 31,
2005 2004
----------- -----------
(UNAUDITED)
ASSETS
Cash and cash equivalents ......................... $ 505,947 $ 465,834
Marketable securities ............................. 115,029
Inventory ......................................... 4,840,115 3,878,260
Property, construction and office equipment, net .. 72,735 52,429
Receivables, prepaid expenses and other assets .... 166,858 146,212
Mortgage loans receivable ......................... 82,929 99,914
Customer deposits held in escrow .................. 86,721 53,929
Investments in and advances to unconsolidated
entities........................................ 126,566 93,971
---------- ----------
$5,881,871 $4,905,578
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Loans payable .................................... $ 152,655 $ 340,380
Senior notes ..................................... 1,139,743 845,665
Senior subordinated notes ........................ 350,000 450,000
Mortgage company warehouse loan .................. 72,149 92,053
Customer deposits ................................ 438,184 291,424
Accounts payable ................................. 261,244 181,972
Accrued expenses ................................. 767,510 574,202
Income taxes payable ............................. 173,708 209,895
---------- ----------
Total liabilities ............................. 3,355,193 2,985,591
---------- ----------
STOCKHOLDERS' EQUITY
Preferred stock, none issued
Common stock, 156,266 shares and 154,004 shares
issued at July 31, 2005 and October 31, 2004,
respectively.................................... 1,563 770
Additional paid-in capital ....................... 260,178 200,938
Retained earnings ................................ 2,265,808 1,770,730
Unearned compensation ............................ (760)
Treasury stock, at cost - 2 shares and 4,362
shares at July 31, 2005 and October 31, 2004,
respectively.................................... (111) (52,451)
---------- ----------
Total stockholders' equity .................... 2,526,678 1,919,987
---------- ----------
$5,881,871 $4,905,578
========== ==========
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See accompanying notes.
TOLL BROTHERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
NINE MONTHS ENDED JULY THREE MONTHS ENDED JULY
31, 31,
----------------------- -----------------------
2005 2004 2005 2004
---------- ---------- ---------- ----------
Revenues:
Home sales ................................................................. $3,751,594 $2,395,150 $1,536,499 $ 991,264
Land sales ................................................................. 21,608 20,938 10,583 12,940
Equity earnings in unconsolidated entities ................................. 9,539 6,945 4,231 5,551
Interest and other ......................................................... 26,575 7,483 10,583 3,364
---------- ---------- ---------- ----------
3,809,316 2,430,516 1,561,896 1,013,119
---------- ---------- ---------- ----------
COSTS AND EXPENSES:
Home sales ................................................................. 2,539,885 1,716,535 1,023,743 709,484
Land sales ................................................................. 15,707 14,315 9,612 7,509
Selling, general and administrative ........................................ 349,706 270,155 126,283 103,608
Interest ................................................................... 85,532 59,970 35,594 24,216
Expenses related to early retirement of debt ............................... 4,056 8,229 4,056 481
---------- ---------- ---------- ----------
2,994,886 2,069,204 1,199,288 845,298
---------- ---------- ---------- ----------
Income before income taxes .................................................. 814,430 361,312 362,608 167,821
Income taxes ................................................................ 318,572 132,775 147,076 61,806
---------- ---------- ---------- ----------
Net income .................................................................. $ 495,858 $ 228,537 $ 215,532 $ 106,015
========== ========== ========== ==========
EARNINGS PER SHARE:
Basic ...................................................................... $ 3.22 $ 1.54 $ 1.39 $ 0.71
========== ========== ========== ==========
Diluted .................................................................... $ 2.94 $ 1.41 $ 1.27 $ 0.66
========== ========== ========== ==========
WEIGHTED AVERAGE NUMBER OF SHARES:
Basic ...................................................................... 153,851 148,398 155,274 148,705
Diluted .................................................................... 168,426 162,110 169,843 161,840
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See accompanying notes.
TOLL BROTHERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED JULY
31,
-------------------------
2005 2004
----------- -----------
Cash flow from operating activities:
Net income ....................................... $ 495,858 $ 228,537
Adjustments to reconcile net income to net cash
provided by operating
activities:
Depreciation and amortization................... 14,355 11,231
Amortization of initial benefit obligation...... 2,851
Equity earnings in unconsolidated entities...... (9,539) (6,945)
Deferred tax provision.......................... 27,501 12,113
Provision for inventory write-offs.............. 3,722 2,441
Write-off of unamortized debt discount and
financing costs................................. 416 1,322
Changes in operating assets and liabilities
Increase in inventory ......................... (899,807) (728,665)
Origination of mortgage loans ................. (599,634) (516,397)
Sale of mortgage loans ........................ 616,619 482,968
Increase in receivables, prepaid expenses and
other assets.................................... (20,735) (67,912)
Increase in customer deposits ................. 113,968 110,998
Increase in accounts payable and accrued
expenses........................................ 297,273 139,251
Increase in current income taxes payable ...... 7,221 26,086
----------- -----------
Net cash provided by (used in) operating
activities...................................... 50,069 (304,972)
----------- -----------
Cash flow from investing activities:
Purchase of property and equipment, net .......... (31,655) (13,543)
Purchase of marketable securities ................ (3,599,814) (1,568,142)
Sale of marketable securities .................... 3,714,843 1,752,753
Investments in and advances to unconsolidated
entities........................................ (29,961) (60,792)
Distributions from unconsolidated entities ....... 6,905 23,588
----------- -----------
Net cash provided by investing activities .... 60,318 133,864
----------- -----------
Cash flow from financing activities:
Proceeds from loans payable ...................... 786,321 693,407
Principal payments of loans payable .............. (1,059,720) (684,384)
Net proceeds from issuance of public debt ........ 293,597 297,432
Redemption of senior subordinated notes .......... (100,000) (170,000)
Proceeds from stock based benefit plans .......... 40,640 12,065
Purchase of treasury stock ....................... (31,112) (20,138)
----------- -----------
Net cash (used in) provided by financing
activities...................................... (70,274) 128,382
----------- -----------
Net increase (decrease) in cash and cash
equivalents..................................... 40,113 (42,726)
Cash and cash equivalents, beginning of period .... 465,834 234,506
----------- -----------
Cash and cash equivalents, end of period .......... $ 505,947 $ 191,780
=========== ===========
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See accompanying notes.
TOLL BROTHERS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
GENERAL
Our condensed consolidated financial statements include the accounts of Toll Brothers, Inc. (the "Company"), a Delaware corporation, and its majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Investments in 20% to 50% owned entities are accounted for on the equity method. Investments in less than 20% owned entities are accounted for on the cost method.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission ("SEC") for interim financial information. The October 31, 2004 balance sheet amounts and disclosures included herein have been derived from the Company's October 31, 2004 audited financial statements. Since the accompanying condensed consolidated financial statements do not include all the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements, the Company suggests that they be read in conjunction with the financial statements and notes thereto included in its October 31, 2004 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, 2005, the results of its operations for the nine months and three months ended July 31, 2005 and 2004 and its cash flows for the nine months ended July 31, 2005 and 2004. The results of operations for such interim periods are not necessarily indicative of the results to be expected for the full year.
RECENT ACCOUNTING PRONOUNCEMENTS
On December 16, 2004, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123R"), effective for periods beginning after June 15, 2005. In April 2005, the SEC adopted a rule permitting issuers to implement SFAS 123R at the beginning of their next fiscal year that begins after June 15, 2005. The Company expects that the FASB will adopt the SEC's rule. SFAS 123R requires that all stock-based compensation be treated as a cost that is reflected in the financial statements. Under the provisions of SFAS 123R, the Company has the choice of adopting the fair-value-based method of expensing of stock options using (a) the "modified prospective method," whereby the Company recognizes the expense only for periods beginning after the date that SFAS 123R is adopted, or (b) the "modified retrospective method," whereby the Company recognizes the expense for all years and interim periods since the effective date of SFAS 123 or for only those interim periods of the year of initial adoption of SFAS 123R. The Company has not yet determined which method it will adopt. Under the SEC's rule, the Company is required to adopt the new standard for its fiscal year 2006 and under the FASB's current rule for its fiscal period beginning August 1, 2005. See Note 9, "Stock Based Benefit Plans," for pro forma information regarding the Company's expensing of stock options for the nine-month and three-month periods ended July 31, 2005 and 2004.
In June 2005, the Emerging Issues Task Force ("EITF") released Issue No. 04-5 "Determining Whether a General Partner, or the General Partner as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights" ("EITF 04-5"). EITF 04-5 provides guidance in determining whether a general partner controls a limited partnership and therefore should consolidate the limited partnership in its financial statements. EITF 04-5 states that the general partner in a limited partnership is presumed to control that limited partnership and that the presumption may be overcome if the limited partners have either (1) the substantive ability to dissolve or liquidate the limited partnership or otherwise remove the general partner without cause, or (2) substantive participating rights. The effective date for applying the guidance in EITF 04-5 is (1) June 29, 2005 for all new limited partnerships and existing limited partnerships for which the partnership agreement is modified after that date, and (2) no later than the beginning of the first reporting period in fiscal years beginning after December 15, 2005, for all other limited partnerships.
Implementation of EITF 04-5 did not have a material impact on the Company's financial position during the quarter ended July 31, 2005.
RECLASSIFICATION
Auction rate securities in the amount of $115.0 million, $6.1 million and $191.0 million have been reclassified from cash and cash equivalents to marketable securities at October 31, 2004, July 31, 2004 and October 31, 2003, respectively, to conform with the fiscal 2005 financial statement presentation.
STOCK SPLIT
On June 9, 2005, the Company's Board of Directors declared a two-for-one split of the Company's common stock in the form of a stock dividend to stockholders of record on June 21, 2005. The additional shares of stock were distributed as of the close of business on July 8, 2005. All share and per share information has been adjusted and restated to reflect this split.
ACQUISITION
In June 2005, the Company acquired substantially all of the assets of the Central Florida Division of Landstar Homes ("Landstar"). Landstar designs, constructs, markets and sells homes in the Orlando metropolitan area. For the full calendar year 2005, Landstar anticipated delivering approximately 520 homes and producing revenues of approximately $150 million. Of the approximately $209.0 million (566 homes) of homes sold but not delivered at the acquisition date of Landstar, the Company delivered $21.3 million (73 homes) of homes between the acquisition date and July 31, 2005. The Company realized no profit from the delivery of these homes since they were substantially complete at the acquisition date, and under purchase accounting rules, the Company allocated a portion of the purchase price to the unrealized profit on these homes at the acquisition date. The Company did not recognize revenues on these home deliveries but has reduced the value of the acquired inventory by the amount of revenue realized. The Company expects that the deliveries from this acquisition will have a minimal impact on the Company's earnings in its fiscal quarter ending October 31, 2005. The acquisition price of Landstar is not material to the financial position of the Company.
2. INVENTORY
Inventory consisted of the following (amounts in thousands):
JULY 31, OCTOBER 31,
2005 2004
---------- -----------
Land and land development costs .................... $1,329,243 $1,242,417
Construction in progress ........................... 2,934,669 2,178,112
Sample homes and sales offices ..................... 216,953 208,416
Land deposits and costs of
future development................................ 347,019 237,353
Other .............................................. 12,231 11,962
---------- -----------
$4,840,115 $3,878,260
========== ==========
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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 inventory during the development and construction period. Capitalized interest is charged to interest expense when the related inventory is delivered. Interest incurred, capitalized and expensed for the nine-month and three-month periods ended July 31, 2005 and 2004 is summarized as follows (amounts in thousands):
NINE MONTHS ENDED THREE MONTHS ENDED
JULY 31, JULY 31,
------------------- -------------------
2005 2004 2005 2004
-------- -------- -------- --------
Interest capitalized, beginning of period ................................... $173,442 $154,314 $180,797 $174,416
Interest incurred ........................................................... 87,069 85,137 28,921 28,632
Interest expensed ........................................................... (85,532) (59,970) (35,594) (24,216)
Write-off to cost and expenses .............................................. (868) (784) (13) (135)
-------- -------- -------- --------
Interest capitalized, end of period ......................................... $174,111 $178,697 $174,111 $178,697
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The Company evaluates its land purchase contracts in accordance with the FASB Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities, an interpretation of ARB No. 51" as amended by FIN 46R. Pursuant to FIN 46, an enterprise that absorbs a majority of the expected losses of the variable interest entities ("VIE") must consolidate the VIE. A VIE is an entity with insufficient equity investment or in which the equity investors lack some of the characteristics of a controlling financial interest. At July 31, 2005 and October 31, 2004, the Company had recorded $73.3 million and $15.4 million of land purchase contracts, respectively, as inventory pursuant to the terms of FIN 46.
3. INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED ENTITIES
The Company has investments in and advances to several joint ventures with unrelated parties to develop land. Some of these joint ventures develop land for the sole use of the venture partners, including the Company, and others develop land for sale to the venture partners and to unrelated builders. The Company recognizes its share of earnings from the sale of home sites to other builders. The Company does not recognize earnings from home sites it purchases from the joint ventures, but instead reduces its cost basis in these home sites by its share of the earnings on the home sites. At July 31, 2005, the Company had approximately $76.3 million invested in or advanced to these joint ventures and was committed to contributing additional capital in an aggregate amount of approximately $34.3 million (in addition to $129.7 million of loan guarantees by the Company related to two of the joint ventures' debt as described below) if required by the joint ventures. At July 31, 2005, one of the joint ventures had a loan commitment of $535 million, of which the Company has guaranteed up to $56.2 million, its pro-rata share of the amount financed, and the joint venture had approximately $402 million borrowed against this commitment. At July 31, 2005, a second joint venture had a loan commitment of $490 million, of which the Company has guaranteed up to $73.5 million, its pro-rata share of the loan commitment, and the joint venture had approximately $375 million borrowed against this commitment.
In January 2004, the Company entered into a joint venture in which it has a 50% interest with an unrelated party to develop Maxwell Place, an approximately 800-unit luxury condominium community in Hoboken, New Jersey. At July 31, 2005, the Company had investments in and advances to the joint venture of $30.1 million and was committed to making up to $1.0 million of additional investments in and advances to the joint venture. The joint venture has obtained a loan to finance a portion of the construction, of which the Company and its joint venture partner each have separately guaranteed $25.0 million of the principal amount of the loan. The Company expects that the joint venture will obtain additional third-party financing to fund the remaining portion of the construction of this project and that the Company and the other joint venture partner may be required to guarantee their pro-rata portions of any additional loans.
In October 2004, the Company entered into a joint venture in which it has a 50% interest with an unrelated party to convert a 525-unit apartment complex, The Hudson Tea Buildings, located in Hoboken, New Jersey, into luxury condominium units. At July 31, 2005, the Company had investments in and advances to the joint venture of $7.5 million, and was committed to making up to $1.5 million of additional investments in and advances to the joint venture.
The Company has a minority interest in a joint venture with unrelated parties that has developed and marketed The Sky Club, a 326-unit, 17-story, two-tower structure, located in Hoboken, New Jersey. The joint venture has delivered substantially all of the units in the Sky Club. At July 31, 2005, the Company's investment in this joint venture was $5.7 million. The Company does not have any commitment to contribute additional capital to this joint venture.
To take advantage of commercial real estate opportunities, the Company formed Toll Brothers Realty Trust Group (the "Trust") in 1998. The Trust is effectively owned one-third by the Company, one-third by Robert I. Toll, Bruce E. Toll (and members of his family), Zvi Barzilay (and members of his family), Joel H. Rassman and other members of the Company's senior management, and one-third by the Pennsylvania State Employees Retirement System (collectively, the "Shareholders"). In addition, the Shareholders entered into subscription agreements (which were to expire in August 2005), whereby each group agreed to invest additional capital in an amount not to exceed $9.3 million if required by the Trust. In August 2005, the capital investment amounts under the subscription agreements were reduced to $1.9 million for each Shareholder and the expiration dates were extended to August 2006. At July 31, 2005, the Company had an investment of $6.1 million in the Trust. The Company provided development, finance and management services to the Trust and received fees under the terms of various agreements in the amount of $1.9 million and $.4 million in the nine-month and three-month periods ended July 31, 2005, respectively, compared to $1.3 million and $.3 million in the comparable periods of fiscal 2004. The Company believes that the transactions between itself and the Trust have been on terms no less favorable than it would have agreed to with unrelated parties.
4. LOANS PAYABLE, SENIOR NOTES AND SENIOR SUBORDINATED NOTES
In June 2005, Toll Brothers Finance Corp., a wholly-owned, indirect subsidiary of the Company, sold $300 million of 5.15% Senior Notes due 2015. The obligations of Toll Brothers Finance Corp. to pay principal, premiums, if any, and interest are guaranteed jointly and severally on a senior basis by the Company and substantially all of the Company's home building subsidiaries. The guarantees are full and unconditional. The Company's non-home building subsidiaries and certain home building subsidiaries did not guarantee the debt.
In June 2005, the Company repaid all of its $222.5 million bank term loan that would have matured in July 2005 and redeemed all of its outstanding $100 million 8% Senior Subordinated Notes due 2009 at 102.667% of principal amount. The repayment and redemption resulted in a pre-tax charge in the Company's quarter ended July 31, 2005 of approximately $4.1 million, which represented the bank term loan termination charge, the call premium on the notes and the write-off of the unamortized issuance costs.
5. ACCRUED EXPENSES
Accrued expenses consisted of the following (amounts in thousands):
JULY 31, OCTOBER 31,
2005 2004
-------- -----------
Land, land development
and construction costs.............................. $371,929 $229,045
Compensation and employee benefit costs .............. 100,638 89,865
Warranty costs ....................................... 48,346 42,133
Other ................................................ 246,597 213,159
-------- --------
$767,510 $574,202
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6. WARRANTY COSTS
The Company accrues for expected warranty costs at the time each home is
closed and title and possession have been transferred to the home buyer. Costs
are accrued based upon historical experience. Changes in the warranty accrual
for the nine-month and three-month periods ended July 31, 2005 and 2004 are as
follows (amounts in thousands):
THREE MONTHS
NINE MONTHS ENDED ENDED
JULY 31, JULY 31,
------------------- -----------------
2005 2004 2005 2004
-------- -------- ------- -------
Balance, beginning of period .................................................. $ 42,133 $ 33,752 $46,058 $36,225
Additions ..................................................................... 25,265 16,640 9,752 6,720
Charges incurred .............................................................. (19,052) (12,187) (7,464) (4,740)
-------- -------- ------- -------
Balance, end of period ........................................................ $ 48,346 $ 38,205 $48,346 $38,205
======== ======== ======= =======
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7. RETIREMENT PLAN
In October 2004, the Company established an unfunded defined benefit retirement plan effective as of September 1, 2004. For the nine-month and three-month periods ended July 31, 2005, the Company recognized the following costs related to this plan (amounts in thousands):
NINE MONTHS ENDED THREE MONTHS ENDED
JULY 31, 2005 JULY 31, 2005
----------------- ------------------
Service cost ......................... $ 234 $ 78
Interest cost ........................ 582 194
Amortization of initial benefit
obligation.......................... 2,851 950
------ ------
$3,667 $1,222
====== ======
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The Company used a 5.69% discount rate in its calculation of the present value of its projected benefit obligation.
8. INCOME TAXES
The Company operates in 20 states and is subject to various state tax jurisdictions. The Company estimates its state tax liability based upon the individual taxing authorities' regulations, estimates of income and its ability to utilize certain tax saving strategies. Due primarily to a change in the Company's estimate of the allocation of income to the various taxing jurisdictions and changes in tax regulations and their impact on the Company's tax strategies, the Company's estimated effective state income tax rate for fiscal 2005 has been revised to 6.3% from the estimated effective state income tax rate of 4.6% used at April 30, 2005.
Provisions for federal and state income taxes are calculated on reported pre-tax earnings based on current tax law and also include, in the current period, the cumulative effect of any changes in tax rates from those used previously in determining deferred tax assets and liabilities. Such provisions differ from the amounts currently receivable or payable because certain items of income and expense are recognized for financial reporting purposes in different periods than for income tax purposes. Significant judgment is required in determining income tax provisions and evaluating tax positions. We establish reserves for income taxes when, despite the belief that our tax positions are fully supportable, we believe that our positions may be challenged and disallowed by various tax authorities. The consolidated tax provision and related accruals include the impact of such reasonably estimable disallowances as deemed appropriate. To the extent that the probable tax outcome of these matters changes, such changes in estimate will impact the income tax provision in the period in which such determination is made.
The Company's estimated combined federal and state income tax rate before providing for the effect of permanent book-tax differences ("Base Rate") was 39.1% for 2005 and 37.0% for 2004. The increase in the Base Rate was due primarily to an increase in the Company's estimated state income tax rate. The increase in
the estimated state income tax rate was due to a combination of an expected shift in income to states with higher tax rates and changes in state income tax regulations.
The effective tax rates for the nine-month periods ended July 31, 2005 and 2004 were 39.1% and 36.7%, respectively. For the nine-month period ended July 31, 2005, the recalculation of the Company's net deferred tax liability using the new estimated state tax rate (the "FAS 109 Adjustment") resulted in an additional tax provision of approximately $2.9 million. The impact of the FAS 109 Adjustment in the nine-month period was offset by the positive impact of tax-free income on the tax provision. For the nine-month period ended July 31, 2004, the primary difference between the effective rate and the Base Rate was the effect of tax-free income.
The effective tax rates for the three-month periods ended July 31, 2005 and 2004 were 40.6% and 36.8%, respectively. The difference between the effective rate and the Base Rate in the fiscal 2005 period was the additional tax provision provided in the period for a FAS 109 Adjustment of approximately $1.4 million and the recalculation of the tax provision for the six-month period ended April 30, 2005 of approximately $5.0 million resulting from a change in the Company's estimated Base Rate from 38.0% at April 30, 2005 to 39.1% at July 31, 2005, offset, in part, by the positive impact of tax-free income on the tax provision. For the three-month period ended July 31, 2004, the primary difference between the effective rate and the Base Rate was the effect of tax-free income.
9. STOCK BASED BENEFIT PLANS
SFAS No. 123, "Accounting for Stock-Based Compensation," as amended by SFAS No. 148 ("SFAS 123"), requires the disclosure of the estimated value of employee option grants and their impact on net income. SFAS 123 (revised 2004), "Share-Based Payment" ("SFAS 123R"), requires the estimated value of employee option grants to be recorded as an expense. SFAS 123 requires the use of option pricing models that are designed to estimate the value of options that, unlike employee stock options, can be traded at any time and are transferable. In addition to restrictions on trading, employee stock options may include other restrictions such as vesting periods and periods of time when they cannot be exercised. Further, such models require the input of highly subjective assumptions, including the expected volatility of the stock price. Therefore, in management's opinion, the existing models do not provide a reliable single measure of the value of employee stock options. For fiscal 2004, the fair value of options granted was estimated using the Black-Scholes option pricing model.
In order to better value option grants, the Company has developed a lattice model which it believes better reflects the establishment of the fair value of option grants. The Company has used the lattice model for the valuation of the fiscal 2005 grants.
Under the terms of the Company's stock option grants, options are exercisable for a period of 10 years and generally vest over a period of two to four years, provided the grantee remains in the employ of the Company during the vesting period. In some cases, options will continue to vest upon an employee's retirement and agreement not to compete. The pro forma disclosure presented below reflects the amortization of the stock option expense over the expected vesting period.
The weighted-average assumptions used for stock option grants in fiscal 2005 and 2004 were approximately:
2005 2004
----- -----
Weighted-average risk-free interest rate .............. 3.64% 3.73%
Weighted-average expected life (years) ................ 5.70 6.99
Weighted-average volatility ........................... 31.31% 42.97%
Dividends ............................................. none none
|
Net income and net income per share as reported in these condensed consolidated financial statements and on a pro forma basis, as if the fair-value-based method described in SFAS 123R and SFAS 123 had been adopted, for the nine-month and three-month periods ended July 31, 2005 and 2004 were as follows (amounts in thousands, except per share amounts):
NINE MONTHS ENDED THREE MONTHS ENDED
JULY 31, JULY 31,
------------------- -------------------
2005 2004 2005 2004
-------- -------- -------- --------
Net income ........................................................ As reported $495,858 $228,537 $215,532 $106,015
Pro forma $484,137 $215,830 $211,520 $101,508
Basic net income per share ........................................ As reported $ 3.22 $ 1.54 $ 1.39 $ 0.71
Pro forma $ 3.15 $ 1.45 $ 1.36 $ 0.68
Diluted net income per share ...................................... As reported $ 2.94 $ 1.41 $ 1.27 $ 0.66
Pro forma $ 2.87 $ 1.33 $ 1.25 $ 0.63
Weighted-average grant date
fair value per share of
options granted .................................................. $ 11.67 $ 9.74 $ 11.67 $ 9.74
|
10. EARNINGS PER SHARE INFORMATION
The calculation of earnings per share for the nine-month and three-month
periods ended July 31, 2005 and 2004 is based upon the following share
information (amounts in thousands):
THREE MONTHS
NINE MONTHS ENDED ENDED
JULY 31, JULY 31,
----------------- -----------------
2005 2004 2005 2004
------- ------- ------- -------
Basic weighted average shares ................................................... 153,851 148,398 155,274 148,705
Common stock equivalents ........................................................ 14,575 13,712 14,569 13,135
------- ------- ------- -------
Diluted weighted average shares ................................................. 168,426 162,110 169,843 161,840
======= ======= ======= =======
|
11. STOCKHOLDERS EQUITY
At July 31, 2005, the Company's authorized share capital consisted of 200 million shares of common stock, $.01 par value per share, and 1 million shares of preferred stock, $.01 par value per share. The Company's Board of Directors is authorized to file amendments, from time to time, to the Company's Certificate of Incorporation to increase the number of authorized shares of common stock up to 400 million shares and the number of authorized shares of preferred stock up to 15 million shares.
The Company issued 22,000 shares of restricted common stock pursuant to its Stock Incentive Plan (1998) to certain directors and an employee in fiscal 2005. The Company is amortizing the fair market value of the awards on the date of grant over the period of time that each award vests. At July 31, 2005, the Company had 22,000 shares of unvested restricted stock awards outstanding.
At July 31, 2005, the Company had approximately 156.3 million shares of common stock outstanding, approximately 26.8 million shares of common stock reserved for outstanding options, approximately 6.1 million shares of common stock reserved for future option and award issuances, and approximately .4 million shares reserved for issuance under the Company's employee stock purchase plan. At July 31, 2005, the Company had not issued any shares of preferred stock.
In March 2003, the Company's Board of Directors authorized the repurchase of up to 20 million shares of its common stock from time to time, in open market transactions or otherwise, for the purpose of providing shares for its various employee benefit plans. During the nine-month and three-month periods ended July 31, 2005, the Company repurchased 857,000 shares and 15,000 shares, respectively. At July 31, 2005, the remaining number of shares that the Company was authorized to repurchase was approximately 17.7 million shares.
12. COMMITMENTS AND CONTINGENCIES
At July 31, 2005, the Company had agreements to purchase land for future development with an aggregate purchase price of approximately $3.59 billion, including approximately $34.8 million of land from unconsolidated entities which the Company has investments in, advances to, or on behalf of which the Company has guaranteed loans. The Company is also committed to acquire land with an approximate cost of $199.7 million from two joint ventures which the Company has investments in and advances to, of approximately $48.3 million and has guaranteed up to $129.7 million of their loan commitments. See Note 3 "Investments in and Advances to Unconsolidated Entities" for more information regarding these entities. The Company's option contracts to acquire the home sites do not require the Company to buy the home sites, although the Company may forfeit any deposit balance outstanding if and at the time it terminates the option contract. The Company has paid or deposited $267.1 million on these purchase agreements, of which $190.4 million was non-refundable. Any deposit in the form of a standby letter of credit is recorded as a liability at the time the standby letter of credit is issued. Included in accrued liabilities is $77.0 million representing the Company's outstanding standby letters of credit issued in connection with its options to purchase home sites.
At July 31, 2005, the Company had outstanding surety bonds amounting to approximately $675.9 million related primarily to its obligations to various governmental entities to construct improvements in its various communities. The Company estimates that approximately $242.7 million of work remains to be performed on these improvements. The Company has an additional $85.9 million of surety bonds outstanding which guarantee other of its obligations. The Company does not believe that any outstanding bonds will be drawn upon.
At July 31, 2005, the Company had agreements of sale outstanding to deliver 9,490 homes with an aggregate sales value of approximately $6.43 billion.
At July 31, 2005, the Company was committed to provide approximately $657.1 million of mortgage loans to its home buyers and to others. All loans with committed interest rates are covered by take-out commitments from third-party lenders, which minimizes the Company's interest rate risk. The Company also arranges a variety of mortgage programs that are offered to its home buyers through outside mortgage lenders.
The Company has a $1.2 billion unsecured revolving credit facility with a group of 30 banks that extends to July 15, 2009. At July 31, 2005, interest was payable on borrowings under the facility at 0.625%, subject to adjustment based upon the Company's debt rating and leverage ratios, above the Eurodollar rate or at other specified variable rates as selected by the Company from time to time. At July 31, 2005, the Company had no outstanding borrowings against the facility and approximately $269.1 million of letters of credit outstanding under it. Under the terms of the revolving credit agreement, the Company is not permitted to allow its maximum leverage ratio, as defined in the agreement, to exceed 2.00 to 1.00 and, at July 31, 2005, the Company was required to maintain a minimum tangible net worth, as defined in the agreement, of approximately $1.55 billion. At July 31, 2005, the Company's leverage ratio was approximately .53 to 1.00 and its tangible net worth was approximately $2.48 billion. Based upon the minimum tangible net worth requirement of the revolving credit facility, the Company's ability to pay dividends and repurchase its common stock was limited to approximately $1.15 billion at July 31, 2005.
The Company is involved in various claims and litigation arising in the ordinary course of business. The Company believes that the disposition of these matters will not have a material effect on its business or on its financial condition.
13. SUPPLEMENTAL DISCLOSURE TO STATEMENTS OF CASH FLOWS
The following are supplemental disclosures to the statements of cash flows for the nine months ended July 31, 2005 and 2004 (amounts in thousands):
2005 2004
-------- -------
Cash flow information:
Interest paid, net of amount capitalized....... $ 33,289 $30,847
======== =======
Income taxes paid ............................... $283,850 $94,576
======== =======
Non-cash activity:
Cost of inventory acquired through
seller financing.............................. $ 65,770 $85,950
======== =======
Income tax benefit related to
exercise of employee stock options............. $ 70,909 $11,649
======== =======
Stock bonus awards .............................. $ 30,396 $20,288
======== =======
Contribution to employee retirement plan ........ $ 1,301
=======
14. SUPPLEMENTAL GUARANTOR INFORMATION
|
At July 31, 2005, Toll Brothers Finance Corp. (the "Subsidiary Issuer") was the issuer of four series of senior notes aggregating $1.15 billion. The obligations of the Subsidiary Issuer to pay principal, premiums, if any, and interest are guaranteed jointly and severally on a senior basis by the Company and substantially all of its wholly-owned home building subsidiaries (the "Guarantor Subsidiaries"). The guarantees are full and unconditional. The Company's non-home building subsidiaries and certain home building subsidiaries (the "Non-Guarantor Subsidiaries") did not guarantee the debt. Separate financial statements and other disclosures concerning the Guarantor Subsidiaries are not presented because management believes that such disclosures would not be considered by investors to be material. The Subsidiary Issuer has not had and does not have any operations other than the issuance of the senior notes and the lending of the proceeds from the senior notes to other subsidiaries of the Company.
Supplemental consolidating financial information of the Company, the Subsidiary Issuer, the Guarantor Subsidiaries, the Non-Guarantor Subsidiaries and the eliminations to arrive at the Company on a consolidated basis are as follows:
CONDENSED CONSOLIDATED BALANCE SHEET AT JULY 31, 2005
(AMOUNTS IN THOUSANDS)(UNAUDITED)
TOLL NON-
BROTHERS, SUBSIDIARY GUARANTOR GUARANTOR
INC. ISSUER SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ---------- ------------ ------------ ------------ ------------
ASSETS
Cash and cash equivalents ................. 485,437 20,510 505,947
Inventory ................................. 4,839,813 302 4,840,115
Property, construction
and office equipment, net ................ 60,161 12,574 72,735
Receivables, prepaid
expenses and other assets ................ 5,433 107,228 85,355 (31,158) 166,858
Mortgage loans receivable ................. 82,929 82,929
Customer deposits held
in escrow ................................ 86,721 86,721
Investments in and advances
to unconsolidated entities ............... 126,566 126,566
Investments in and advances
to consolidated entities ................. 2,702,386 1,153,312 (1,479,818) 1,784 (2,377,664) --
--------- --------- ---------- ------- ---------- ---------
2,702,386 1,158,745 4,226,108 203,454 (2,408,822) 5,881,871
========= ========= ========== ======= ========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Loans payable ............................ 147,697 4,958 152,655
Senior notes ............................. 1,139,743 1,139,743
Senior subordinated notes ................ 350,000 350,000
Mortgage company
warehouse loan.......................... 72,149 72,149
Customer deposits ........................ 438,184 438,184
Accounts payable ......................... 261,223 21 261,244
Accrued expenses ......................... 19,002 684,335 95,261 (31,088) 767,510
Income taxes payable ..................... 175,708 (2,000) 173,708
--------- --------- ---------- ------- ---------- ---------
Total liabilities....................... 175,708 1,158,745 1,881,439 170,389 (31,088) 3,355,193
--------- --------- ---------- ------- ---------- ---------
Stockholders' equity
Common stock ............................. 1,563 2,003 (2,003) 1,563
Additional paid-in capital ............... 260,178 (11,907) 2,734 9,173 260,178
Retained earnings ........................ 2,265,808 2,356,576 28,328 (2,384,904) 2,265,808
Unearned stock compensation .............. (760) (760)
Treasury stock, at cost .................. (111) (111)
--------- --------- ---------- ------- ---------- ---------
Total stockholders' equity.............. 2,526,678 -- 2,344,669 33,065 (2,377,734) 2,526,678
--------- --------- ---------- ------- ---------- ---------
2,702,386 1,158,745 4,226,108 203,454 (2,408,822) 5,881,871
========= ========= ========== ======= ========== =========
|
CONDENSED CONSOLIDATED BALANCE SHEET AT OCTOBER 31, 2004
(AMOUNTS INTHOUSANDS)
TOLL NON-
BROTHERS, SUBSIDIARY GUARANTOR GUARANTOR
INC. ISSUER SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ---------- ------------ ------------ ------------ ------------
ASSETS
Cash and cash equivalents ................. 456,836 8,998 465,834
Marketable securities ..................... 110,029 5,000 115,029
Inventory ................................. 3,877,900 360 3,878,260
Property, construction
and office equipment, net ................ 42,431 9,998 52,429
Receivables, prepaid
expenses and other assets ................ 4,929 94,052 63,740 (16,509) 146,212
Mortgage loans receivable ................. 99,914 99,914
Customer deposits held
in escrow ................................ 53,929 53,929
Investments in and advances
to unconsolidated entities ............... 93,971 93,971
Investments in and advances
to consolidated entities ................. 2,131,882 854,888 (1,098,623) (3,403) (1,884,744) --
--------- ------- ---------- ------- ---------- ---------
2,131,882 859,817 3,630,525 184,607 (1,901,253) 4,905,578
========= ======= ========== ======= ========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Loans payable ............................ 335,920 4,460 340,380
Senior notes ............................. 845,665 845,665
Senior subordinated notes ................ 450,000 450,000
Mortgage company warehouse loan .......... 92,053 92,053
Customer deposits ........................ 291,424 291,424
Accounts payable ......................... 181,964 8 181,972
Accrued expenses ......................... 14,152 510,437 66,194 (16,581) 574,202
Income taxes payable ..................... 211,895 (2,000) 209,895
--------- ------- ---------- ------- ---------- ---------
Total liabilities....................... 211,895 859,817 1,769,745 160,715 (16,581) 2,985,591
--------- ------- ---------- ------- ---------- ---------
Stockholders' equity
Common stock ............................. 770 2,003 (2,003) 770
Additional paid-in capital ............... 200,938 4,420 2,734 (7,154) 200,938
Retained earnings ........................ 1,770,730 1,856,360 19,155 (1,875,515) 1,770,730
Treasury stock, at cost .................. (52,451) (52,451)
--------- ------- ---------- ------- ---------- ---------
Total stockholders' equity.............. 1,919,987 -- 1,860,780 23,892 (1,884,672) 1,919,987
--------- ------- ---------- ------- ---------- ---------
2,131,882 859,817 3,630,525 184,607 (1,901,253) 4,905,578
========= ======= ========== ======= ========== =========
|
CONDENSED CONSOLIDATING STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED JULY 31,2005
(AMOUNTS IN THOUSANDS) (UNAUDITED)
TOLL NON-
BROTHERS, SUBSIDIARY GUARANTOR GUARANTOR
INC. ISSUER SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ---------- ------------ ------------ ------------ ------------
Revenues:
Home sales ............................... 3,751,594 3,751,594
Land sales ............................... 21,608 21,608
Equity earnings .......................... 9,539 9,539
Interest and other ....................... 41,252 24,508 33,538 (72,723) 26,575
Earnings from subsidiaries ............... 814,465 (814,465) --
------- ------ --------- ------ -------- ---------
814,465 41,252 3,807,249 33,538 (887,188) 3,809,316
------- ------ --------- ------ -------- ---------
Costs and expenses:
Home sales ............................... 2,537,476 3,547 (1,138) 2,539,885
Land sales ............................... 15,707 15,707
Selling, general and administrative ...... 35 434 350,146 19,284 (20,193) 349,706
Interest ................................. 40,818 85,399 1,904 (42,589) 85,532
Expenses related to early
retirement of debt...................... 4,056 4,056
------- ------ --------- ------ -------- ---------
35 41,252 2,992,784 24,735 (63,920) 2,994,886
------- ------ --------- ------ -------- ---------
Income before income taxes ................ 814,430 -- 814,465 8,803 (823,268) 814,430
Income taxes .............................. 318,572 315,318 3,442 (318,760) 318,572
------- ------ --------- ------ -------- ---------
Net income ................................ 495,858 -- 499,147 5,361 (504,508) 495,858
======= ====== ========= ====== ======== =========
|
CONDENSED CONSOLIDATING STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED JULY 31,2004
(AMOUNTS IN THOUSANDS) (UNAUDITED)
TOLL NON-
BROTHERS, SUBSIDIARY GUARANTOR GUARANTOR
INC. ISSUER SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ---------- ------------ ------------ ------------ ------------
Revenues:
Home sales ............................... 2,395,150 2,395,150
Land sales ............................... 20,938 20,938
Equity earnings .......................... 6,945 6,945
Interest and other ....................... 33,749 6,298 24,072 (56,636) 7,483
Earnings from subsidiaries ............... 361,332 (361,332) --
------- ------ --------- ------ -------- ---------
361,332 33,749 2,429,331 24,072 (417,968) 2,430,516
------- ------ --------- ------ -------- ---------
Costs and expenses:
Home sales ............................... 1,714,546 2,795 (806) 1,716,535
Land sales ............................... 14,315 14,315
Selling, general and administrative ...... 20 351 271,002 14,707 (15,925) 270,155
Interest ................................. 33,398 59,907 1,038 (34,373) 59,970
Expenses related to early
retirement of debt...................... 8,229 8,229
------- ------ --------- ------ -------- ---------
20 33,749 2,067,999 18,540 (51,104) 2,069,204
------- ------ --------- ------ -------- ---------
Income before income taxes ................ 361,312 -- 361,332 (5,532) (366,864) 361,312
Income taxes .............................. 132,775 132,782 2,044 (134,826) 132,775
------- ------ --------- ------ -------- ---------
Net income ................................ 228,537 -- 228,550 (3,488) (232,038) 228,537
======= ====== ========= ====== ======== =========
|
CONDENSED CONSOLIDATING STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED JULY 31, 2005
(AMOUNTS IN THOUSANDS) (UNAUDITED)
TOLL NON-
BROTHERS, SUBSIDIARY GUARANTOR GUARANTOR
INC. ISSUER SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ---------- ------------ ------------ ------------ ------------
Revenues:
Home sales ............................... 1,536,499 1,536,499
Land sales ............................... 10,583 10,583
Equity earnings .......................... 4,231 4,231
Interest and other ....................... 15,547 9,791 11,595 (26,350) 10,583
Earnings from subsidiaries ............... 362,625 (362,625) --
------- ------ --------- ------ -------- ---------
362,625 15,547 1,561,104 11,595 (388,975) 1,561,896
------- ------ --------- ------ -------- ---------
Costs and expenses:
Home sales ............................... 1,022,524 1,241 (22) 1,023,743
Land sales ............................... 9,612 9,612
Selling, general and administrative ...... 17 153 126,742 6,930 (7,559) 126,283
Interest ................................. 15,394 35,545 762 (16,107) 35,594
Expenses related to early
retirement of debt...................... 4,056 4,056
------- ------ --------- ------ -------- ---------
17 15,547 1,198,479 8,933 (23,688) 1,199,288
------- ------ --------- ------ -------- ---------
Income before income taxes ................ 362,608 -- 362,625 2,662 (365,287) 362,608
Income taxes .............................. 147,076 145,361 1,108 (146,469) 147,076
------- ------ --------- ------ -------- ---------
Net income ................................ 215,532 -- 217,264 1,554 (218,818) 215,532
======= ====== ========= ====== ======== =========
|
CONDENSED CONSOLIDATING STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED JULY 31, 2004
(AMOUNTS IN THOUSANDS) (UNAUDITED)
TOLL NON-
BROTHERS, SUBSIDIARY GUARANTOR GUARANTOR
INC. ISSUER SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ---------- ------------ ------------ ------------ ------------
Revenues:
Home sales ............................... 991,264 991,264
Land sales ............................... 12,940 12,940
Equity earnings .......................... 5,551 5,551
Interest and other ....................... 12,877 2,796 9,030 (21,339) 3,364
Earnings from subsidiaries ............... 167,838 (167,838) --
------- ------ --------- ----- -------- ---------
167,838 12,877 1,012,551 9,030 (189,177) 1,013,119
------- ------ --------- ----- -------- ---------
Costs and expenses:
Home sales ............................... 708,595 1,014 (125) 709,484
Land sales ............................... 7,509 7,509
Selling, general and administrative ...... 17 137 103,933 5,080 (5,559) 103,608
Interest ................................. 12,740 24,195 459 (13,178) 24,216
Expenses related to early
retirement of debt...................... 481 481
------- ------ --------- ----- -------- ---------
17 12,877 844,713 6,553 (18,862) 845,298
------- ------ --------- ----- -------- ---------
Income before income taxes ................ 167,821 -- 167,838 2,477 (170,315) 167,821
Income taxes .............................. 61,806 61,812 915 (62,727) 61,806
------- ------ --------- ----- -------- ---------
Net income ................................ 106,015 -- 106,026 1,562 (107,588) 106,015
======= ====== ========= ===== ======== =========
|
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JULY 31, 2005
(AMOUNTS IN THOUSANDS) (UNAUDITED)
TOLL NON-
BROTHERS, SUBSIDIARY GUARANTOR GUARANTOR
INC. ISSUER SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ---------- ------------ ------------ ------------ ------------
Cash flow from operating activities:
Net income ............................... 495,858 499,147 5,361 (504,508) 495,858
Adjustments to reconcile net income to
net
cash used in operating activities:
Depreciation and amortization........... 481 12,575 1,299 14,355
Amortization of initial benefit
obligation............................... 2,851 2,851
Equity earnings in unconsolidated
entities .............................. (9,539) (9,539)
Deferred tax provision.................. 27,501 27,501
Provision for inventory write-offs...... 3,722 3,722
Write-off of unamortized debt issuance
costs ................................. 416 416
Changes in operating assets and
liabilities:
(Increase) decrease in inventory ...... (899,865) 58 (899,807)
Origination of mortgage loans ......... (599,634) (599,634)
Sale of mortgage loans ................ 616,619 616,619
(Increase) decrease in receivables,
prepaid expenses and other assets.... (570,504) (298,928) 368,998 (22,990) 502,689 (20,735)
Increase in customer deposits ......... 113,968 113,968
Increase in accounts payable and
accrued expenses.................... 30,396 4,850 247,455 29,080 (14,508) 297,273
Increase in current income taxes
payable.............................. 7,221 7,221
-------- -------- ---------- -------- -------- ----------
Net cash (used in) provided by
operating activities................ (9,528) (293,597) 339,728 29,793 (16,327) 50,069
-------- -------- ---------- -------- -------- ----------
Cash flow from investing activities:
Purchase of property and equipment, net .. (27,780) (3,875) (31,655)
Purchase of marketable securities ........ (3,599,814) (3,599,814)
Sale of marketable securities ............ 3,709,843 5,000 3,714,843
Investments in and advances to
unconsolidated entities................. (29,961) (29,961)
Distributions from unconsolidated
entities................................. 6,905 6,905
-------- -------- ---------- -------- -------- ----------
Net cash used in investing activities -- -- 59,193 1,125 -- 60,318
-------- -------- ---------- -------- -------- ----------
Cash flow from financing activities:
Proceeds from loans payable .............. 239,992 546,329 786,321
Principal payments of loans payable ...... (510,312) (565,735) 16,327 (1,059,720)
Proceeds from issuance of senior notes ... 293,597 293,597
Redemption of senior subordinated notes .. (100,000) (100,000)
Proceeds from stock based benefit plans .. 40,640 40,640
Purchase of treasury stock ............... (31,112) (31,112)
-------- -------- ---------- -------- -------- ----------
Net cash provided by (used in)
financing activities................ 9,528 293,597 (370,320) (19,406) 16,327 (70,274)
-------- -------- ---------- -------- -------- ----------
Net decrease in cash and cash equivalents . -- -- 28,601 11,512 -- 40,113
Cash and cash equivalents, beginning of
period................................... 456,836 8,998 465,834
-------- -------- ---------- -------- -------- ----------
Cash and cash equivalents, end of period .. -- -- 485,437 20,510 -- 505,947
======== ======== ========== ======== ======== ==========
|
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JULY 31, 2004
(AMOUNTS IN THOUSANDS) (UNAUDITED)
TOLL NON-
BROTHERS, SUBSIDIARY GUARANTOR GUARANTOR
INC. ISSUER SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ---------- ------------ ------------ ------------ ------------
Cash flow from operating activities:
Net income ............................... 228,537 228,550 3,488 (232,038) 228,537
Adjustments to reconcile net income to
net
cash used in operating activities:
Depreciation and amortization........... 320 8,943 1,968 11,231
Equity earnings in unconsolidated
entities .............................. (6,945) (6,945)
Deferred tax provision.................. 12,113 12,113
Provision for inventory write-offs...... 2,441 2,441
Write-off of unamortized debt issuance
costs ................................. 1,322 1,322
Changes in operating assets and
liabilities:
Increase in inventory ................. (727,775) (890) (728,665)
Origination of mortgage loans ......... (516,397) (516,397)
Sale of mortgage loans 482,968 482,968
(Increase) decrease in receivables,
prepaid expenses and other assets.... (280,844) (302,272) 291,994 (16,624) 239,834 (67,912)
Increase in customer deposits ......... 110,998 110,998
Increase in accounts payable and
accrued expenses..................... 21,589 4,520 103,143 17,795 (7,796) 139,251
Increase (decrease) in current income
taxes payable........................ 26,678 (592) 26,086
-------- -------- ---------- -------- -------- ----------
Net cash provided by (used in)
operating activities................ 8,073 (297,432) 12,671 (28,284) -- (304,972)
-------- -------- ---------- -------- -------- ----------
Cash flow from investing activities:
Purchase of property and equipment, net .. (11,942) (1,601) (13,543)
Purchase of marketable securities ........ (1,568,142) (1,568,142)
Sale of marketable securities ............ 1,752,753 1,752,753
Investments in and advances to
unconsolidated entities................. (60,792) (60,792)
Distributions from unconsolidated
entities................................. 23,588 23,588
-------- -------- ---------- -------- -------- ----------
Net cash provided by (used in)
investing activities................ -- -- 135,465 (1,601) -- 133,864
-------- -------- ---------- -------- -------- ----------
Cash flow from financing activities:
Proceeds from loans payable .............. 240,800 452,607 693,407
Principal payments of loans payable ...... (263,749) (420,635) (684,384)
Proceeds from issuance of senior notes ... 297,432 297,432
Redemption of senior subordinated notes .. (170,000) (170,000)
Proceeds from stock based benefit plans .. 12,065 12,065
Purchase of treasury stock ............... (20,138) (20,138)
-------- -------- ---------- -------- -------- ----------
Net cash provided by (used in)
financing activities................ (8,073) 297,432 (192,949) 31,972 -- 128,382
-------- -------- ---------- -------- -------- ----------
Net (decrease) increase in cash and cash
equivalents.............................. -- -- (44,813) 2,087 -- (42,726)
Cash and cash equivalents, beginning of
period................................... 226,331 8,175 234,506
-------- -------- ---------- -------- -------- ----------
Cash and cash equivalents, end of period .. -- -- 181,518 10,262 -- 191,780
======== ======== ========== ======== ======== ==========
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Revenues for the nine-month and three-month periods ended July 31, 2005 increased by 57% and 54%, respectively, compared to the comparable periods of fiscal 2004. Net income for the nine-month and three-month periods ended July 31, 2005 increased by 117% and 103%, respectively, compared to the comparable periods of fiscal 2004. In addition, our backlog, homes under contract but not yet delivered, at July 31, 2005, of $6.43 billion (9,490 homes) was up by 48% over our backlog at July 31, 2004. We believe backlog is a useful predictor of future results because for each home included in backlog, we have a binding, signed agreement of sale with a non-refundable cash deposit averaging approximately 7% of the purchase price from our buyer, and over the next nine to twelve months we expect to deliver many of the homes in backlog and recognize the revenues and related income. We expect that the total number of homes closed for fiscal 2005 will be between 8,562 and 8,662 homes, with an average delivered price between $655,000 and $658,500. We estimate that net income will increase by approximately 80% in fiscal 2005 as compared to fiscal 2004. We also believe that, due to the continuing strong demand for our homes, a recovering economy, our diversified offerings in the luxury move-up, active-adult, and empty-nester urban and suburban niches, and our growing portfolio of well-positioned communities in upscale markets, fiscal 2006 will be another record year.
Geographic and product diversification, access to lower-cost capital, a versatile and abundant home mortgage market and improving demographics are promoting strong and steady demand for those builders who can control land and persevere through the increasingly difficult regulatory approval process. This evolution in our industry favors the large, publicly traded home building companies with the capital and expertise to control home sites and gain market share. We currently own or control more than 79,500 home sites in 48 markets we consider to be affluent, a substantial number of which sites already have the approvals necessary for development. We believe that as the approval process becomes more difficult, and as the political pressure from no-growth proponents increases, our expertise in taking land through the approval process and our already approved land positions should allow us to continue to grow for a number of years to come.
Because of the length of time that it takes to obtain the necessary approvals on a property, complete the land improvements on it, and deliver a home after a home buyer signs an agreement of sale, we are subject to many risks. We attempt to reduce our risks by: controlling land for future development through options whenever possible, thus allowing us to obtain the necessary governmental approvals before acquiring title to the land; generally commencing construction of a home only after executing an agreement of sale with a buyer; and using subcontractors to perform home construction and land development work on a fixed-price basis.
Our revenues have grown on average over 20% per year in the last decade. We have funded this growth through the reinvestment of profits, bank borrowings and capital market transactions. At July 31, 2005, we had $505.9 million of cash and cash equivalents and approximately $930.9 million available under our bank revolving credit facility which extends to July 15, 2009. In addition, a significant portion of our debt does not mature until 2011 and beyond, which we believe gives us a stable financial platform on which to grow. In June 2005, we issued $300 million of 5.15% Senior Notes due 2015. The proceeds from this offering were used to redeem all of our $100 million of 8% Senior Subordinated Notes due 2009 and to repay a portion of our $222.5 million bank term loan which was repaid in full on June 3, 2005. With these resources, our strong cash flow from operations before inventory growth, and our history of success in accessing the public debt markets, we believe we have the resources available to continue to grow in fiscal 2005 and beyond.
CRITICAL ACCOUNTING POLICIES
We believe the following are our critical accounting policies that require more significant judgments and estimates when we prepare our consolidated financial statements.
INVENTORY
Inventory is stated at the lower of cost or fair value in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). In addition to direct acquisition, land development and home construction costs, costs include interest, real estate 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.
It takes approximately four to five years to fully develop, sell and deliver all the homes in one of our typical communities. Longer or shorter time periods are possible depending on the number of home sites in a community. Our master planned communities, consisting of several smaller communities, may take up to 10 years or more to complete. Because our inventory is considered a long-lived asset under U.S. generally accepted accounting principles, we are required to review the carrying value of each of our communities and write down the value of those communities for which we believe the values are not recoverable. When the profitability of a current community deteriorates, the sales pace declines significantly or some other factor indicates a possible impairment in the recoverability of the asset, we evaluate the property in accordance with the guidelines of SFAS No. 144. If this evaluation indicates that an impairment loss should be recognized, we charge cost of sales for the estimated impairment loss in the period determined.
In addition, we review all land held for future communities or future sections of current communities, whether owned or under contract, to determine whether or not we expect to proceed with the development of the land as planned. Based upon this review, we decide: (a) as to land that is under a purchase contract but not owned, whether the contract will likely be terminated or renegotiated and (b) as to land we own, whether the land will likely be developed as contemplated or in an alternative manner, or should be sold. We then further determine which costs that have been capitalized to the property are recoverable and which costs should be written off. We recognized $3.7 million and $1.2 million in write-offs of costs related to current and future communities in the nine-month and three-month periods ended July 31, 2005, respectively, as compared to $2.4 million and $1.2 million in the comparable periods of fiscal 2004.
INCOME RECOGNITION
Revenues and cost of sales are recorded at the time each home or home site is delivered and title and possession are transferred to the buyer.
Land, land development and related costs, both incurred and estimated to be incurred in the future, are amortized to the cost of homes closed based upon the total number of homes to be constructed in each community. Any changes to the estimated costs subsequent to the commencement of delivery of homes are allocated to the remaining undelivered homes in the community. Home construction and related costs are charged to the cost of homes closed under the specific identification method.
The estimated land, common area development and related costs of master planned communities, including the cost of golf courses, net of their estimated residual value, are allocated to individual communities within a master planned community on a relative sales value basis. Any change in the estimated cost is allocated to the remaining lots in each of the communities of the master planned community.
USE OF ESTIMATES
In the ordinary course of doing business, we must make estimates and judgments that affect decisions on how we operate and the reported amounts of assets, liabilities, revenues and expenses. These estimates include, but are not limited to, those related to the recognition of income and expenses, impairment of assets, estimates of future improvement and amenity costs, capitalization of costs to inventory, provisions for litigation, insurance and warranty costs, and income taxes. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. On an ongoing basis, we evaluate and adjust our estimates based on the information currently available. Actual results may differ from these estimates and assumptions or conditions.
OFF-BALANCE SHEET ARRANGEMENTS
We have investments in and advances to several joint ventures and to Toll Brothers Realty Trust Group (the "Trust"). At July 31, 2005, we had investments in and advances to these unconsolidated entities of $126.6 million, were committed to invest or advance an additional $48.8 million to these entities if needed and had guaranteed approximately $162.2 million of these entities' indebtedness and/or loan commitments. See Note 3 to the Condensed Consolidated Financial Statements, "Investments in and Advances to Unconsolidated Entities" for more information regarding these entities. Our total commitment to these entities is not material to our financial condition. Investments in 20%-to-50% owned entities are accounted for using the equity method. Investments in less than 20%-owned entities are accounted for on the cost method.
RESULTS OF OPERATIONS
The following table sets forth, for the nine-month and three-month periods ended July 31, 2005 and 2004, a comparison of certain income statement items related to our operations (amounts in millions):
NINE MONTHS ENDED JULY 31, THREE MONTHS ENDED JULY 31,
-------------------------------- --------------------------------
2005 2004 2005 2004
-------------- -------------- -------------- --------------
$ % $ % $ % $ %
------- ---- ------- ---- ------- ---- ------- ----
Home sales
Revenues ................................................ 3,751.6 2,395.2 1,536.5 991.3
Cost of sales ........................................... 2,539.9 67.7% 1,716.5 71.7% 1,023.7 66.6% 709.5 71.6%
Land sales
Revenues ................................................ 21.6 20.9 10.6 12.9
Cost of sales ........................................... 15.7 72.7% 14.3 68.4% 9.6 90.8% 7.5 58.0%
Equity earnings in
unconsolidated entities ................................. 9.5 6.9 4.2 5.6
Interest and other ....................................... 26.6 7.5 10.6 3.4
Total revenues ........................................... 3,809.3 2,430.5 1,561.9 1,013.1
Selling, general and
administrative expenses* ................................ 349.7 9.2% 270.2 11.1% 126.3 8.1% 103.6 10.2%
Interest expense* ........................................ 85.5 2.2% 60.0 2.5% 35.6 2.3% 24.2 2.4%
Expenses related to early
retirement of debt* ..................................... 4.1 0.1% 8.2 0.3% 4.1 0.3% 0.5 0.0%
Total costs and expenses* ................................ 2,994.9 78.6% 2,069.2 85.1% 1,199.3 76.8% 845.3 83.4%
Income before income taxes* .............................. 814.4 21.4% 361.3 14.9% 362.6 23.2% 167.8 16.6%
Income taxes ............................................. 318.6 132.8 147.1 61.8
Net income* .............................................. 495.9 13.0% 228.5 9.4% 215.5 13.8% 106.0 10.5%
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HOME SALES
Home sales revenues for the nine-monthand three-month periods ended July 31, 2005 were higher than those for the comparable periods of 2004 by approximately $1.36 billion, or 57%, and $545.2 million, or 55%, respectively. The increase in the nine-month period was attributable to a 37% increase in the number of homes delivered and a 14% increase in the average price of the homes delivered. The increase in the three-month period was attributable to a 37% increase in the number of homes delivered and a 13% increase in the average price of the homes delivered. The increase in the average price of the homes delivered in the fiscal 2005 periods was the result of increased selling prices and a shift in the location of homes delivered to more expensive areas. The increase in the number of homes delivered in the fiscal 2005 periods was primarily due to the higher backlog of homes at October 31, 2004 as compared to October 31, 2003, which was primarily the result of a 42% increase in the number of new contracts signed in fiscal 2004 over fiscal 2003.
The value of new sales contracts signed in the nine months ended July 31, 2005 was $5.56 billion (8,100 homes), a 35% increase over the $4.11 billion (6,436 homes) value of new sales contracts signed in the comparable period of fiscal 2004. The value of new sales contracts signed in the three months ended July 31, 2005 was $1.92 billion (2,746 homes), a 19% increase over the $1.61 billion (2,329 homes) value of new sales contracts signed in the comparable period of fiscal 2004. The increase in the nine-month period was attributable to a 26% increase in the number of new contracts signed and an 8% increase in the average value of each contract, due primarily to the location and size of homes sold and increases in base selling prices. The increase in the three-month period was attributable to an 18% increase in the number of new contracts signed and a 1% increase in the average value of each contract, due primarily to increases in base selling prices, offset, in part, by a shift in product type sold to less expensive attached and age-qualified products. The increase in the number of new contracts signed is attributable to the continued demand for our product and an increase in the number of communities from which we are selling. At July 31, 2005, we were selling from 230 communities compared to 210 communities at July 31, 2004 and 220 communities at October 31, 2004. We expect to be selling from approximately 237 communities at October 31, 2005.
We believe that the demand for our product is attributable to an increase in the number of affluent households, the maturation of the baby boom generation, a constricted supply of available new home sites, attractive mortgage rates and the belief of potential customers that the purchase of a home is a stable investment in the recent period of economic uncertainty. At July 31, 2005, we had over 79,500 home sites under our control nationwide in markets we consider to be affluent.
At July 31, 2005, our backlog of homes under contract was $6.43 billion (9,490 homes), 48% higher than the $4.35 billion (6,856 homes) backlog at July 31, 2004. The increase in backlog at July 31, 2005 compared to the backlog at July 31, 2004 is primarily attributable to a higher backlog at October 31, 2004 as compared to the backlog at October 31, 2003, a 7% increase in the value and a 38% increase in the number of new contracts signed in the first nine months of fiscal 2005 as compared to the comparable period of fiscal 2004 and the backlog of homes acquired in the acquisition of the Orlando division of Landstar Homes, offset, in part, by an increase in the number of homes delivered in the first nine months of fiscal 2005 compared to the comparable period of fiscal 2004. Based on the size and the expected delivery dates of our current backlog, we believe that we will deliver between 8,562 and 8,662 homes in fiscal 2005 and that the average delivered price of those homes will be between $655,000 and $658,500.
Home costs as a percentage of home sales revenues decreased by 400 basis points (4.0%) and 500 basis points in the nine-month and three-month periods ended July 31, 2005, respectively, compared to the comparable periods of fiscal 2004. The decreases were largely the result of selling prices increasing at a greater rate than costs, as well as from efficiencies realized from the increased number of homes delivered. For the full 2005 fiscal year, we expect that home costs as a percentage of home sales revenues will decrease by between 365 basis points and 375 basis points compared to the full 2004 fiscal year due to selling prices continuing to increase at a greater rate than costs, as well as from efficiencies realized from the increase in the number of homes to be delivered in fiscal 2005 as compared to fiscal 2004.
LAND SALES
We are developing several communities in which we sell a portion of the land to other entities. The amount of land sales and the profitability of such sales will vary from quarter to quarter depending upon the timing of the delivery of the specific land parcels sold. Land sales were $21.6 million for the nine months ended July 31, 2005 and $10.6 million for the three months ended July 31, 2005. For the nine-month and three-month periods ended July 31, 2004, land sales were $20.9 million and $12.9 million, respectively. For the full 2005 fiscal year, land sales are expected to be approximately $31.6 million, compared to $22.5 million in fiscal 2004. Cost of land sales is expected to be approximately 75% of land sales revenues in fiscal 2005, as compared to approximately 70% in fiscal 2004.
EQUITY EARNINGS IN UNCONSOLIDATED ENTITIES
We are a participant in several joint ventures and in the Trust. We recognize our proportionate share of the earnings from these entities, except for earnings on home sites purchased by the Company from these joint ventures. See Note 3 to the Condensed Consolidated Financial Statements, "Investments in and Advances to Unconsolidated Entities" for more information regarding our investments in and commitments to
these entities. Earnings from these entities will vary significantly from quarter to quarter depending on the level of activity of each entity during the period. For the nine months ended July 31, 2005, we recognized $9.5 million of earnings from unconsolidated entities as compared to $6.9 million in the comparable period of fiscal 2004. For the three months ended July 31, 2005, we recognized $4.2 million of earnings from unconsolidated entities as compared to $5.6 million in the comparable period of fiscal 2004. For the full 2005 fiscal year, we expect to realize approximately $19.5 million of earnings from our investments in the joint ventures and the Trust compared to $15.7 million in fiscal 2004.
INTEREST AND OTHER INCOME
For the nine months ended July 31, 2005, interest and other income was $26.6 million, an increase of $19.1 million from the $7.5 million recognized in the comparable period of fiscal 2004. For the three months ended July 31, 2005, interest and other income was $10.6 million, an increase of $7.2 million from the $3.4 million recognized in the comparable period of fiscal 2004. These increases were primarily the result of higher interest income and higher income realized from our ancillary businesses in the fiscal 2005 periods. For the full 2005 fiscal year, we expect interest and other income to be approximately $35.6 million compared to $15.4 million in fiscal 2004.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A")
SG&A spending increased by $79.6 million or 29% in the nine-month period ended July 31, 2005 and by $22.7 million, or 22%, in the three-month period ended July 31, 2005, compared to the comparable periods of fiscal 2004. The increased spending was principally due to the costs incurred to support the increased levels of construction and sales activity in the fiscal 2005 periods as compared to the comparable periods of fiscal 2004 and the continued costs incurred in the search for new land to replace the home sites that were sold during the period and to expand our land position to enable us to grow in the future. For the full 2005 fiscal year, we expect that SG&A as a percentage of revenues will decrease between 109 basis points and 119 basis points compared to the full 2004 fiscal year.
INTEREST EXPENSE
We determine interest expense on a specific lot-by-lot basis for our home building operations and on a parcel-by-parcel basis for land sales. As a percentage of total revenues, interest expense varies depending on many factors, including the period of time that we owned the land, 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 approximately 2.2% and 2.3% of revenues in the nine-month and three-month periods of fiscal 2005, respectively, compared to 2.5% and 2.4% in the comparable periods of fiscal 2004 For the full 2005 fiscal year, we expect interest expense as a percentage of total revenues to be approximately 2.25% as compared to 2.4% in fiscal 2004.
INCOME BEFORE INCOME TAXES
For the nine-month period ended July 31, 2005, income before income taxes was $814.4 million, an increase of 125% over the $361.3 million earned in the comparable period of fiscal 2004. For the three-month period ended July 31, 2005, income before income taxes was $362.6 million, an increase of 116% over the $167.8 million earned in the comparable period of fiscal 2004.
INCOME TAXES
Income taxes were provided at an effective rate of 39.1% and 40.6% for the nine-month and three-month periods ended July 31, 2005, respectively. For the nine-month and three-month periods of fiscal 2004, income taxes were provided at an effective rate of 36.7% and 36.8%, respectively. The difference in rates in fiscal 2005 compared to the comparable periods of fiscal 2004 was due primarily to a change in our estimated combined federal and state income tax rate before providing for the effect of permanent book-tax differences ("Base Rate") for the fiscal 2005 periods and the impact of recalculating our net deferred tax liability using
the new Base Rate. The change in the Base Rate was due to the combination of changes in tax legislation and regulations and an expected shift in income to states with higher tax rates in fiscal 2005. See Note 8 to the Condensed Consolidated Financial Statements, "Income Taxes" for additional information regarding the change in the income tax rates and the impact on the financial statements. For the three-month period ended October 31, 2005, we expect that the effective tax rate will be approximately 39.1%.
CAPITAL RESOURCES AND LIQUIDITY
We fund our operations principally from cash flow from operating activities, unsecured bank borrowings and the public debt and equity markets.
In general, cash flow from operating activities assumes that as each home is delivered we will purchase a home site to replace it. Because we own several years' supply of home sites, we do not need to buy home sites immediately to replace the ones delivered. Accordingly, we believe that cash flow from operating activities before inventory additions is currently a better gauge of liquidity.
Cash flow from operating activities, before inventory additions, has improved as operating results have improved. One of the main factors that determine cash flow from operating activities, before inventory additions, is the level of revenues from the delivery of homes and land sales. We anticipate that cash flow from operating activities, before inventory additions, will continue to be strong in fiscal 2005 due to the expected increase in home deliveries in fiscal 2005, as compared to fiscal 2004. We expect that our inventory will continue to increase and we are currently negotiating and searching for additional opportunities to obtain control of land for future communities. At July 31, 2005, we had commitments to acquire land totaling approximately $3.59 billion, of which approximately $267.1 million had been paid or deposited. See Note 12 to the Condensed Consolidated Financial Statements, "Commitments and Contingencies" for more information concerning these commitments. We have used our cash flow from operating activities, before inventory additions, bank borrowings and the proceeds of public debt and equity offerings to: acquire additional land for new communities; fund additional expenditures for land development; fund construction costs needed to meet the requirements of our increased backlog and the increasing number of communities in which we are offering homes for sale; repurchase our stock; and repay debt.
We generally do not begin construction of a home until we have a signed contract with the home buyer. Because of the significant amount of time between the time a home buyer enters into a contract to purchase a home and the time that the home is built and delivered, we believe we can estimate, with reasonable accuracy, the number of homes we will deliver in the next 9 to 12 months. Should our business decline significantly, our inventory would decrease as we complete and deliver the homes under construction but do not commence construction of as many new homes, resulting in a temporary increase in our cash flow from operations. In addition, under such circumstances, we might delay or curtail our acquisition of additional land, which would further reduce our inventory levels and cash needs.
In June 2005, we issued $300 million of 5.15% Senior Notes due 2015. We used the net proceeds from the issuance of the notes to redeem all of our $100 million Senior Subordinated Notes due 2009 and the remainder to repay a portion of our $222.5 million bank term loan which was repaid in full on June 3, 2005. We recognized a charge of approximately $4.1 million related to the redemption of the notes and repayment of the bank term loan in our quarter ended July 31, 2005.
We have a $1.2 billion bank credit facility which extends to July 15, 2009. At July 31, 2005, we did not have any borrowings under the facility and had approximately $269.1 million of letters of credit outstanding under it.
We believe that we will be able to continue to fund our expected growth and meet our contractual obligations through a combination of existing cash resources, cash flow from operating activities, our existing sources of credit and the public debt markets.
INFLATION
The long-term impact of inflation on us is manifested in increased costs for land, land development, construction and overhead, as well as in increased sales prices of our homes. We generally contract for land significantly before development and sales efforts begin. Accordingly, to the extent land acquisition costs are
fixed, increases or decreases in the sales prices of homes may affect our profits. Because the sales price of each of our homes is fixed at the time a buyer enters into a contract to acquire a home, and because we generally contract to sell our homes before we begin construction, any inflation of costs in excess of those anticipated may result in lower gross margins. We generally attempt to minimize that effect by entering into fixed-price contracts with our subcontractors and material suppliers for specified periods of time, which generally do not exceed one year.
In general, housing demand is adversely affected by increases in interest rates and housing costs. Interest rates, the length of time that land remains in inventory and the proportion of inventory that is financed affect our interest costs. If we are unable to raise sales prices enough to compensate for higher costs, or if mortgage interest rates increase significantly, affecting prospective buyers' ability to adequately finance home purchases, our revenues, gross margins and net income would be adversely affected. Increases in sales prices, whether the result of inflation or demand, may affect the ability of prospective buyers to afford new homes.
OVERVIEW OF FISCAL 2006
In fiscal 2006, we expect unit deliveries to be between 10,200 and 10,600 homes and the average delivered home price to be approximately $665,000. This estimated delivery price reflects a change in the mix of homes delivered in fiscal 2006 compared to fiscal 2005. We expect that approximately 21% of the homes to be delivered in fiscal 2006 to be lower priced multi-family homes as compared to 17% in fiscal 2005 and that we will also see a greater number of deliveries from smaller, lower-priced single-family home communities in 2006 as compared to 2005. This change in mix of homes delivered in fiscal 2006 will not be uniform over the individual quarters of the year. For the quarter ending January 31, 2006, deliveries are expected to be between 1,900 and 2,100 homes with an average delivered home price of approximately $640,000. In addition, we expect net income to increase by approximately 20% in fiscal 2006 as compared to fiscal 2005.
HOUSING DATA
($ IN MILLIONS)
NINE MONTHS ENDED JULY 31,
CLOSINGS ----------------------------------
2005 2004 2005 2004
----- ----- ------- -------
REGION UNITS UNITS $ $
--------------------------------------------------------------------------------------------- ----- ----- ------- -------
Northeast (CT, MA, NH, NJ, NY, RI) .......................................................... 793 655 447.6 379.1
Mid-Atlantic (DE, MD, PA, VA) ............................................................... 2,308 1,555 1,400.0 789.9
Midwest (IL, MI, OH) ........................................................................ 414 307 256.8 174.0
Southeast (FL, NC, SC, TN) .................................................................. 588 518 328.7 243.0
Southwest (AZ, CO, NV, TX) .................................................................. 914 544 584.0 313.9
West (CA) ................................................................................... 795 653 734.5 495.3
----- ----- ------- -------
Total consolidated entities............................................................... 5,812 4,232 3,751.6 2,395.2
Unconsolidated entities................................................................... 207 41 90.5 15.5
----- ----- ------- -------
6,019 4,273 3,842.1 2,410.7
===== ===== ======= =======
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NINE MONTHS ENDED JULY 31,
NEW CONTRACTS ----------------------------------
2005 2004 2005 2004
----- ----- ------- -------
REGION UNITS UNITS $ $
--------------------------------------------------------------------------------------------- ----- ----- ------- -------
Northeast (CT, MA, NH, NJ, NY, RI) .......................................................... 1,273 774 814.5 455.8
Mid-Atlantic (DE, MD, PA, VA) ............................................................... 2,702 2,186 1,778.5 1,273.5
Midwest (IL, MI, OH) ........................................................................ 473 471 330.8 289.9
Southeast (FL, NC, SC, TN) .................................................................. 1,450 803 827.7 446.3
Southwest (AZ, CO, NV, TX) .................................................................. 1,489 1,113 1,049.4 691.8
West (CA) ................................................................................... 713 1,089 762.9 951.8
----- ----- ------- -------
Total consolidated entities............................................................... 8,100 6,436 5,563.8 4,109.1
Unconsolidated entities................................................................... 270 198 164.1 82.2
----- ----- ------- -------
8,370 6,634 5,727.9 4,191.3
===== ===== ======= =======
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AT JULY 31
BACKLOG ----------------------------------
2005 2004 2005 2004
----- ----- ------- -------
REGION UNITS UNITS $ $
--------------------------------------------------------------------------------------------- ----- ----- ------- -------
Northeast (CT, MA, NH, NJ, NY, RI) .......................................................... 1,508 1,051 966.5 596.1
Mid-Atlantic (DE, MD, PA, VA) ............................................................... 2,639 2,305 1,750.8 1,320.6
Midwest (IL, MI, OH) ........................................................................ 505 458 358.3 279.2
Southeast (FL, NC, SC) ...................................................................... 2,081 696 1,150.1 421.5
Southwest (AZ, CO, NV, TX) .................................................................. 1,926 1,278 1,315.1 774.7
West (CA) ................................................................................... 831 1,068 893.0 953.7
----- ----- ------- -------
Total consolidated entities............................................................... 9,490 6,856 6,433.8 4,345.8
Unconsolidated entities................................................................... 237 172 149.4 71.4
----- ----- ------- -------
9,727 7,028 6,583.2 4,417.2
===== ===== ======= =======
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THREE MONTHS ENDED JULY 31,
CLOSINGS ----------------------------------
2005 2004 2005 2004
----- ----- ------- -------
REGION UNITS UNITS $ $
--------------------------------------------------------------------------------------------- ----- ----- ------- -------
Northeast (CT, MA, NH, NJ, NY, RI) .......................................................... 310 256 184.0 149.8
Mid-Atlantic (DE, MD, PA, VA) ............................................................... 886 616 554.4 314.4
Midwest (IL, MI, OH) ........................................................................ 178 136 110.7 74.4
Southeast (FL, NC, SC) ...................................................................... 236 205 139.0 97.9
Southwest (AZ, CO, NV, TX) .................................................................. 361 205 239.2 124.7
West (CA) ................................................................................... 339 266 309.2 230.1
----- ----- ------- -------
Total consolidated entities............................................................... 2,310 1,684 1,536.5 991.3
Unconsolidated entities................................................................... 57 30 25.7 12.1
----- ----- ------- -------
2,367 1,714 1,562.2 1,003.4
===== ===== ======= =======
|
THREE MONTHS ENDED JULY 31,
NEW CONTRACTS ----------------------------------
2005 2004 2005 2004
----- ----- ------- -------
REGION UNITS UNITS $ $
--------------------------------------------------------------------------------------------- ----- ----- ------- -------
Northeast (CT, MA, NH, NJ, NY, RI) .......................................................... 459 270 295.1 155.4
Mid-Atlantic (DE, MD, PA, VA) ............................................................... 758 748 522.9 473.8
Midwest (IL, MI, OH) ........................................................................ 149 164 108.4 105.9
Southeast (FL, NC, SC) ...................................................................... 606 361 360.0 229.5
Southwest (AZ, CO, NV, TX) .................................................................. 544 455 391.6 300.0
West (CA) ................................................................................... 230 331 238.2 341.6
----- ----- ------- -------
Total consolidated entities............................................................... 2,746 2,329 1,916.2 1,606.2
Unconsolidated entities................................................................... 111 188 63.4 79.1
----- ----- ------- -------
2,857 2,517 1,979.6 1,685.3
===== ===== ======= =======
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk primarily due to fluctuations in interest rates. We utilize both fixed-rate and variable-rate debt. For fixed-rate debt, changes in interest rates generally affect the fair market value of the debt instrument, but not our earnings or cash flow. Conversely, for variable-rate debt, changes in interest rates generally do not impact the fair market value of the debt instrument, but do affect our earnings and cash flow. We do not have the obligation to prepay fixed-rate debt prior to maturity, and, as a result, interest rate risk and changes in fair market value should not have a significant impact on our fixed-rate debt until we are required or elect to refinance it.
The table below sets forth, at July 31, 2005, our debt obligations by
scheduled maturity, weighted-
average interest rates and estimated fair value (amounts in thousands):
VARIABLE-RATE DEBT
FIXED-RATE DEBT (1)(2)
--------------------------- ------------------------
WEIGHTED WEIGHTED
FISCAL YEAR OF AVERAGE AVERAGE
EXPECTED MATURITY AMOUNT INTEREST RATE AMOUNT INTEREST RATE
------------------------------------------------------------------------ ----------- ------------- -------- -------------
2005 ................................................................... $ 31,032 7.68% $ 72,149 4.54%
2006 ................................................................... 52,427 5.79% 150 2.40%
2007 ................................................................... 55,505 6.77% 150 2.40%
2008 ................................................................... 5,403 6.02% 150 2.40%
2009 ................................................................... 3,178 6.34% 150 2.40%
2010 ................................................................... 800 10.00% 150 2.40%
Thereafter ............................................................. 1,500,000 6.31% 3,560 2.40%
Discount ............................................................... (10,257)
---------- --------
Total................................................................ $1,638,088 6.34% $76,459 4.42%
========== ========
Fair value at
July 31, 2005 .......................................................... $1,690,323 $ 76,459
========== ========
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Based upon the amount of variable-rate debt outstanding at July 31, 2005 and holding the variable-rate debt balance constant, each percentage point increase in interest rates would increase our interest costs by approximately $.8 million per year.
ITEM 4. CONTROLS AND PROCEDURES
A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Our chief executive officer and chief financial officer, with the assistance of management, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report (the "Evaluation Date"). Based on that evaluation, our chief executive officer and chief financial officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective to ensure that information that is required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.
There has not been any change in our internal control over financial reporting during our quarter ended July 31, 2005 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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 our business or our financial condition. There are no proceedings required to be disclosed pursuant to Item 103 of Regulation S-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the three months ended July 31, 2005, we repurchased the following shares of our common stock (amounts in thousands, except per share amounts):
MAXIMUM
TOTAL NUMBER NUMBER
OF SHARES OF SHARES
PURCHASED AS THAT MAY
TOTAL AVERAGE PART OF A YET BE
NUMBER OF PRICE PUBLICLY PURCHASED
SHARES PAID PER ANNOUNCED UNDER THE
PERIOD PURCHASED (1)(2) SHARE (1) PLAN OR PROGRAM (1) PLAN OR PROGRAM (1)(3)
--------------------------------------------------- ---------------- --------- ------------------- ----------------------
May 1, 2005 to May 31, 2005 ....................... 4 40.21 4 17,722
June 1, 2005 to June 30, 2005 ..................... 9 48.50 4 17,718
July 1, 2005 to July 31, 2005 ..................... 2 54.87 1 17,717
-- -
Total........................................... 15 47.32 9
-- -
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Except as set forth above, we did not repurchase any of our equity securities.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
(a) Effective September 8, 2005, our Certificate of Incorporation was restated to integrate and restate, but not further amend our Restated Certificate of Incorporation, dated July 1, 1986, and all amendments thereto.
(b) None
ITEM 6. EXHIBITS
3.1* Second Restated Certificate of Incorporation dated September 8,
2005.
4.1* Ninth Supplemental Indenture dated as of June 6, 2005 by and
among the parties listed on Schedule A thereto, and J.P. Morgan
Trust Company, National Association, as successor Trustee.
4.2 Authorizing Resolutions relating to the $300,000,000 Principal
Amount of Toll Brothers Finance Corp.'s 5.15% Senior Notes due 2015
Guaranteed on a Senior Basis by Toll Brothers, Inc. and certain of
its subsidiaries is hereby incorporated by reference to Exhibit 4.1
of the Registrant's Form 8-K filed with the Commission on June 8,
2005.
4.3 Registration Rights Agreement dated as of June 3, 2005 by and among
Toll Brothers Finance Corp., Toll Brothers, Inc., Citigroup
Global Markets Inc., and each of the Initial Purchasers named on
Schedule A attached thereto is hereby incorporated by reference to
Exhibit 4.2 of the Registrant's Form 8-K filed with the Commission
on June 8, 2005.
31.1* Certification of Robert I. Toll pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2* Certification of Joel H. Rassman pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1* Certification of Robert I. Toll pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2* Certification of Joel H. Rassman pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
---------------
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* 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: September 8, 2005 By: Joel H. Rassman
-----------------------
Joel H. Rassman
Executive Vice
President,
Treasurer and Chief
Financial Officer
(Principal Financial
Officer)
Date: September 8, 2005 By: Joseph R. Sicree
-----------------------
Joseph R. Sicree
Vice President --
Chief Accounting
Officer
(Principal Accounting
Officer)
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EXHIBIT 3.1
SECOND RESTATED CERTIFICATE OF INCORPORATION OF TOLL BROTHERS, INC.
Toll Brothers, Inc., a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, does hereby certify that:
FIRST: The original Certificate of Incorporation of the corporation was filed with the Secretary of State of the State of Delaware on May 28, 1986. The Restated Certificate of Incorporation of the corporation was filed with the Secretary of State of the State of Delaware on July 3, 1986.
SECOND: This Second Restated Certificate of Incorporation was duly adopted in accordance with Section 245 of the General Corporation Law of the State of Delaware.
THIRD: This Second Restated Certificate of Incorporation only restates and integrates and does not further amend the provisions of the Restated Certificate of Incorporation of the corporation as heretofore amended or supplemented, and there is no discrepancy between those provisions and the provisions of this Second Restated Certificate of Incorporation, which reads in its entirety as follows:
ARTICLE ONE
The name of the corporation is Toll Brothers, Inc.
ARTICLE TWO
The address of its registered office in the State of Delaware is 1209 Orange Street, Wilmington, County of New Castle, Delaware 19801. The name of its registered agent at such address is The Corporation Trust Company.
ARTICLE THREE
The purpose of the corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware.
ARTICLE FOUR
The corporation is authorized to issue 201,000,000 shares of capital stock, consisting of two (2) classes of stock, to wit:
(a) COMMON STOCK. The total number of shares of Common Stock which the corporation shall have authority to issue is Two Hundred Million (200,000,000) shares and the par value of each of such shares is One Cent ($.01) amounting in the aggregate to Two Million Dollars ($2,000,000).
(b) PREFERRED STOCK. The total number of shares of Preferred Stock
which the corporation shall have authority to issue is One Million
(1,000,000), and the par value of each such share is One Cent ($.01)
amounting in the aggregate to Ten Thousand Dollars ($10,000).
The Board of Directors is authorized, subject to the limitations prescribed by law and the provisions of this Article Four, to provide by adopting a resolution or resolutions, a certificate of which action shall be filed and recorded in accordance with the General Corporation Law of the State of Delaware, for the issuance of the Preferred Stock in one or more series, each with such designations, powers, preferences and rights of the shares, and the qualifications, limitations or restrictions thereof.
The number of authorized shares of Preferred Stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of a majority of the Common Stock, without a vote of the holders of the Preferred Stock, or of any series thereof, unless a vote of any such holders is required pursuant to the certificate or certificates establishing the series of Preferred Stock."
CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS OF SERIES A JUNIOR
PARTICIPATING PREFERRED STOCK OF TOLL BROTHERS, INC.
SECTION 1. DESIGNATION AND AMOUNT.
The shares of such series shall be designated as "Series A Junior Participating Preferred Stock" and the number of shares constituting such series shall be 60,000.
SECTION 2. DIVIDENDS AND DISTRIBUTIONS.
(A) The holders of shares of Series A Junior Participating Preferred Stock shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for the purpose, quarterly dividends payable in cash on the last day of March, June, September and December in each year (each such date being referred to herein as a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Series A Junior Participating Preferred Stock, in an amount per share (rounded to the nearest cent) equal to the greater of (a) $0.01 or (b) subject to the provision for adjustment hereinafter set forth, 1,000 times the aggregate per share amount of all cash dividends, and 1,000 times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions other than a dividend payable in shares of Common Stock or a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise), declared on the Common Stock, par value $0.01 per share, of the Corporation (the "Common Stock") since the immediately preceding Quarterly Dividend Payment Date, or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Series A Junior Participating Preferred Stock. In the event the Corporation shall at any time after June 12, 1997 (the "Rights Declaration Date") (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the amount to which holders of shares of Series A Junior Participating Preferred Stock were entitled immediately prior to such event under clause (b) of the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event.
(B) The Corporation shall declare a dividend or distribution on the outstanding shares of Series A Junior Participating Preferred Stock as provided in Paragraph (A) above immediately after it declares a dividend or distribution on the Common Stock (other than a dividend payable in shares of Common Stock); provided that, in the event no dividend or distribution shall have been declared on the Common Stock during the period between any Quarterly Dividend Payment Date and the next subsequent Quarterly Dividend Payment Date, a dividend of $0.01 per share on the outstanding shares of Series A Junior Participating Preferred Stock shall nevertheless be payable on such subsequent Quarterly Dividend Payment Date.
(C) Dividends shall begin to accrue and be cumulative on outstanding shares of Series A Junior Participating Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issue of such shares of Series A Junior Participating Preferred Stock, unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of Series A Junior Participating Preferred Stock entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of Series A Junior Participating Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of shares of Series A Junior Participating Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be no more than thirty (30) days prior to the date fixed for the payment thereof.
SECTION 3. VOTING RIGHTS.
The holders of shares of Series A Junior Participating Preferred Stock shall have the following voting rights:
(A) Subject to the provision for adjustment hereinafter set forth, each share of Series A Junior Participating Preferred Stock shall entitle the holder thereof to 1,000 votes on all matters submitted to a vote of the stockholders of the Corporation. In the event the Corporation shall at any time after the Rights Declaration Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the number of votes per share to which holders of shares of Series A Junior Participating Preferred Stock were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event.
(B) Except as otherwise provided herein or by law, the holders of shares of Series A Junior Participating Preferred Stock and the holders of shares of Common Stock shall vote together as one class on all matters submitted to a vote of stockholders of the Corporation.
(C) (i) If at any time dividends on any Series A Junior Participating
Preferred Stock shall be in arrears in an amount equal to six (6)
quarterly dividends thereon, the occurrence of such contingency shall
mark the beginning of a period (herein called a "default period") which
shall extend until such time when all accrued and unpaid dividends for
all previous quarterly dividend periods and for the current quarterly
dividend period on all shares of Series A Junior Participating
Preferred Stock then outstanding shall have been declared and paid or
set apart for payment. During each default period, all holders of
Preferred Stock (including holders of the Series A Junior Participating
Preferred Stock) with dividends in arrears in an amount equal to six
(6) quarterly dividends thereon, voting as a class, irrespective of
series, shall have the right to elect two (2) Directors.
(ii) During any default period, such voting right of the holders of Series A Junior Participating Preferred Stock may be exercised initially at a special meeting called pursuant to subparagraph (iii) of this Section 3(C) or at any annual meeting of stockholders, and thereafter at annual meetings of stockholders, provided that such voting right shall not be exercised unless the holders of ten percent (10%) in number of shares of Preferred Stock outstanding shall be present in person or by proxy. The absence of a quorum of the holders of Common Stock shall not affect the exercise by the holders of Preferred Stock of such voting right. At any meeting at which the holders of Preferred Stock shall exercise such voting right initially during an existing default period, they shall have the right, voting as a class, to elect Directors to fill such vacancies, if any, in the Board of Directors as may then exist up to two (2) Directors or, if such right is exercised at an annual meeting, to elect two (2) Directors. If the number which may be so elected at any special meeting does not amount to the required number, the holders of the Preferred Stock shall have the right to make such increase in the number of Directors as shall be necessary to permit the election by them of the required number. After the holders of the Preferred Stock shall have exercised their right to elect Directors in any default period and during the continuance of such period, the number of Directors shall not be increased or decreased except by vote of the holders of Preferred Stock as herein provided or pursuant to the rights of any equity securities ranking senior to or pari passu with the Series A Junior Participating Preferred Stock.
(iii) Unless the holders of Preferred Stock shall, during an existing
default period, have previously exercised their right to elect
Directors, the Board of Directors may order, or any stockholder or
stockholders owning in the aggregate not less than ten percent (10%) of
the total number of shares of Preferred Stock outstanding, irrespective
of series, may request, the calling of a special meeting of the holders
of Preferred Stock, which meeting shall thereupon be called by the
President, a Vice-President or the Secretary of the Corporation. Notice
of such meeting and of any annual meeting at which holders of Preferred
Stock are entitled to vote pursuant to this Paragraph (C)(iii) shall be
given to each holder of record of Preferred Stock by mailing a copy of
such notice to such holder at such holder's last address as the same
appears on the books of the Corporation. Such meeting shall be called
for a time not earlier than twenty (20) days and not later than sixty
(60) days after such order or request, or in default of the calling of
such meeting within sixty (60) days after such order or request, such
meeting may be called on similar notice by any stockholder or
stockholders owning in the aggregate not less than ten percent (10%) of
the total number of shares of Preferred Stock outstanding.
Notwithstanding the provisions of this Paragraph (C)(iii), no such
special meeting shall be called during the period within sixty (60)
days immediately preceding the date fixed for the next annual meeting
of the stockholders.
(iv) In any default period, the holders of Common Stock, and other
classes of stock of the Corporation if applicable, shall continue to be
entitled to elect the whole number of Directors until the holders of
Preferred Stock shall have exercised their right to elect two (2)
Directors voting as a class, after the exercise of which right (x) the
Directors so elected by the holders of Preferred Stock shall continue
in office until their successors shall have been elected by such
holders or until the expiration of the default period, and (y) any
vacancy in the Board of Directors may (except as provided in Paragraph
(C)(ii) of this Section 3) be filled by vote of a majority of the
remaining Directors theretofore elected by the holders of the class of
stock which elected the Director whose office shall have become vacant.
References in this Paragraph (C) to Directors elected by the holders of
a particular class of stock shall include Directors elected by such
Directors to fill vacancies as provided in clause (y) of the foregoing
sentence.
(v) Immediately upon the expiration of a default period, (x) the right of the holders of Preferred Stock as a class to elect Directors shall cease, (y) the term of any Directors elected by the holders of Preferred Stock as a class shall terminate, and (z) the number of Directors shall be such number as may be provided for in the Certificate of Incorporation or By-laws of the Corporation irrespective of any increase made pursuant to the provisions of Paragraph (C)(ii) of this Section 3 (such number being subject, however, to change thereafter in any manner provided by law or in the Certificate of Incorporation or By-laws of the Corporation). Any vacancies in the Board of Directors effected by the provisions of clauses (y) and (z) in the preceding sentence may be filled by a majority of the remaining Directors.
(D) Except as set forth herein, holders of Series A Junior Participating Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for taking any corporate action.
SECTION 4. CERTAIN RESTRICTIONS.
(A) Whenever quarterly dividends or other dividends or distributions payable on the Series A Junior Participating Preferred Stock as provided in Section 2 hereof are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on shares of Series A Junior Participating Preferred Stock outstanding shall have been paid in full, the Corporation shall not:
(i) declare or pay dividends on, make any other distributions on, or redeem or purchase or otherwise acquire for consideration any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Junior Participating Preferred Stock;
(ii) declare or pay dividends on or make any other distributions on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Junior Participating Preferred Stock, except dividends paid ratably on the Series A Junior Participating Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled;
(iii) redeem or purchase or otherwise acquire for consideration shares of any stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Junior Participating Preferred Stock, provided that the Corporation may at any time redeem, purchase or otherwise acquire shares of any such parity stock in exchange for shares of any stock of the Corporation ranking junior (either as to dividends or upon dissolution, liquidation or winding up) to the Series A Junior Participating Preferred Stock; or
(iv) purchase or otherwise acquire for consideration any shares of Series A Junior Participating Preferred Stock, or any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Junior Participating Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes.
(B) The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of stock of the Corporation unless the Corporation could, under Paragraph (A) of this Section 4, purchase or otherwise acquire such shares at such time and in such manner.
SECTION 5. REACQUIRED SHARES.
Any shares of Series A Junior Participating Preferred Stock purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and canceled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Preferred Stock and may be reissued as part of a new series of Preferred Stock to be created by resolution or resolutions of the Board of Directors, subject to the conditions and restrictions on issuance set forth herein.
SECTION 6. LIQUIDATION, DISSOLUTION OR WINDING UP.
(A) Upon any liquidation (voluntary or otherwise), dissolution or winding up of
the Corporation, no distribution shall be made to the holders of shares of stock
ranking junior (either as to dividends or upon liquidation, dissolution or
winding up) to the Series A Junior Participating Preferred Stock unless, prior
thereto, the holders of shares of Series A Junior Participating Preferred Stock
shall have received an amount equal to $100,000 per share of Series A Junior
Participating Preferred Stock, plus an amount equal to accrued and unpaid
dividends and distributions thereon, whether or not declared, to the date of
such payment (the "Series A Liquidation Preference"). Following the payment of
the full amount of the Series A Liquidation Preference, no additional
distributions shall be made to the holders of shares of Series A Junior
Participating Preferred Stock unless, prior thereto, the holders of shares of
Common Stock shall have received an amount per share (the "Common Adjustment")
equal to the quotient obtained by dividing (i) the Series A Liquidation
Preference by (ii) 1,000 (as appropriately adjusted as set forth in subparagraph
(C) below to reflect such events as stock splits, stock dividends and
recapitalizations with respect to the Common Stock) (such number in clause (ii),
the "Adjustment Number"). Following the payment of the full amount of the Series
A Liquidation Preference and the Common Adjustment in respect of all outstanding
shares of Series A Junior Participating Preferred Stock and Common Stock,
respectively, holders of Series A Junior Participating Preferred Stock and
holders of shares of Common Stock shall receive their ratable and proportionate
share of the remaining assets to be distributed in the ratio of the Adjustment
Number to 1 with respect to such Preferred Stock and Common Stock, on a per
share basis, respectively.
(B) In the event, however, that there are not sufficient assets available to permit payment in full of the Series A Liquidation Preference and the liquidation preferences of all other series of Preferred Stock, if any, which rank on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Junior Participating Preferred Stock, then such remaining assets shall be distributed ratably to the holders of such parity shares in proportion to their respective liquidation preferences. In the event, however, that there are not sufficient assets available to permit payment in full of the Common Adjustment, then such remaining assets shall be distributed ratably to the holders of Common Stock.
(C) In the event the Corporation shall at any time after the Rights Declaration
Date (i) declare any dividend on Common Stock payable in shares of Common Stock,
(ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding
Common Stock into a smaller number of shares, then in each such case the
Adjustment Number in effect immediately prior to such event shall be adjusted by
multiplying such Adjustment Number by a fraction the numerator of which is the
number of shares of Common Stock outstanding immediately after such event and
the denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
SECTION 7. CONSOLIDATION, MERGER, ETC.
In case the Corporation shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case the shares of Series A Junior Participating Preferred Stock shall at the same time be similarly exchanged or changed in an amount per share (subject to the provision for adjustment hereinafter set forth) equal to 1,000 times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. In the event the Corporation shall at any time after the Rights Declaration Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of shares of Series A Junior Participating Preferred Stock shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event.
SECTION 8. NO REDEMPTION.
The shares of Series A Junior Participating Preferred Stock shall not be redeemable.
SECTION 9. AMENDMENT.
The Certificate of Incorporation of the Corporation shall not be further amended in any manner which would materially alter or change the powers, preferences or special rights of the Series A Junior Participating Preferred Stock so as to affect them adversely without the affirmative vote of the holders of a majority or more of the outstanding shares of Series A Junior Participating Preferred Stock, voting separately as a class.
SECTION 10. FRACTIONAL SHARES.
Series A Junior Participating Preferred Stock may be issued in fractions of a share which shall entitle the holder, in proportion to such holder's fractional shares, to exercise voting rights, receive dividends, participate in distributions and to have the benefit of all other rights of holders of Series A Junior Participating Preferred Stock.
ARTICLE FIVE
PART I - POWERS OF THE BOARD
The business and affairs of the corporation shall be managed by or under the direction of the Board of Directors. In furtherance and not in limitation of the powers conferred by statute, the Board of Directors is expressly authorized to make, alter, amend or repeal the By-Laws of the corporation. Any By-Laws which the Directors make under the power conferred hereby may not be altered, amended or repealed, nor may any provisions inconsistent therewith be adopted by the stockholders, without the affirmative vote of the holders of at least 66-2/3% of the voting power of the voting stock of the corporation entitled to vote generally in the election of directors, voting together as single class.
PART II - NUMBER OF DIRECTORS AND BALLOTS
The number of Directors shall be fixed from time to time by, or in the manner provided in, the By-laws of the corporation and may be increased or decreased as therein provided. Directors of the corporation need not be elected by ballot unless required by the By-laws.
PART III - CLASSIFICATION OF THE BOARD
The Directors shall be classified, with respect to the time for which they severally hold office, into three classes, as nearly equal in number as reasonably possible, as shall be provided in the manner specified in the By- Laws of the corporation, one class to be originally elected for a term expiring at the annual meeting of stockholders to be held in 1990, another class to be originally elected for a term expiring at the annual meeting of stockholders to be held in 1991, and another class to be originally elected for a term expiring at the annual meeting of stockholders to be held in 1992, with each class to hold office until its successor is elected and qualified. At each annual meeting of the stockholders of the corporation, the successors of the class of Directors whose term expires at that meeting shall be elected to hold office for a term expiring at the annual meeting of stockholders held in the third year following the year of their election.
PART IV - REMOVAL OF DIRECTORS
Any Director may be removed from office only for cause and only by the affirmative vote of the holders of 66-2/3% of the combined voting power of the then outstanding shares of stock entitled to vote generally in the election of Directors, voting together as a single class.
PART V - VACANCIES AND NEWLY CREATED DIRECTORSHIPS
Newly created directorships resulting from any increase in the number of Directors and any vacancies on the Board of Directors resulting from death, resignation, disqualification, removal or other cause shall be filled solely by the affirmative vote of a majority of the remaining Directors then in office, even though less than a quorum of the Board of Directors. Any Director elected in accordance with the preceding sentence shall hold office for the remainder of the full term of the class of Directors in which the new directorship was created or the vacancy occurred and until successors for such Director's class shall have been elected and qualified.
PART VI - NOTICE OF STOCKHOLDER NOMINATIONS
Advance notice of stockholder nominations for the election of Directors shall be given in the manner provided in the By-Laws of the corporation.
PART VII - ABILITY TO ALTER, AMEND OR REPEAL
Notwithstanding anything contained in this Certificate of Incorporation to the contrary, the affirmative vote of the holders of at least 66-2/3% of the combined voting power of all shares of the corporation entitled to vote generally in the election of Directors, voting together as a single class, shall be required to alter, amend or repeal this Article Five or to adopt any provision inconsistent herewith.
ARTICLE SIX
PART I. RIGHT TO INDEMNIFICATION
Each person who was or is made a party or is threatened to be made a party to or is involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative ("proceeding"), by reason of the fact that he or she, or a person of whom he or she is the legal representative, is or was a director or officer of this corporation or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, whether the basis of such proceeding is
alleged action in an official capacity as a director, officer, employee or agent or in any other capacity while serving as a director, officer, employee or agent, shall be indemnified and held harmless by the corporation to the fullest extent authorized by the General Corporation Law of the State of Delaware, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the corporation to provide broader indemnification rights than said law permitted the corporation to provide prior to such amendment), against all expenses, liability and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by such person in connection therewith; provided, however, that the corporation shall indemnify any such person seeking indemnity in connection with a proceeding (or part thereof) initiated by such person only if the initiation of such proceeding (or part thereof) was authorized or approved by the Board of Directors of the corporation. Such right shall be a contract right and shall include the right to have the corporation pay, or repay such person for, expenses incurred in defending any such proceeding in advance of its final disposition; provided, however, that the payment of such expenses incurred by a director or officer in his or her capacity as a director or officer (and not in any other capacity in which service was or is rendered by such person while a director or officer, including, without limitation, service to an employee benefit plan) in advance of the final disposition of such proceeding, shall be made only upon delivery to the corporation of an undertaking, by or on behalf of such director or officer, to repay all amounts so advanced if it should be determined ultimately that such director or officer is not entitled to be indemnified under this Article Six or otherwise. The financial ability of any such person to make such repayment shall not be a prerequisite to the making of such payment of or for expenses.
PART II. RIGHT OF CLAIMANT TO BRING SUIT
If a claim (including a request for expenses) under Part I of this Article Six is not paid in full by the corporation within ninety days after a written request has been received by the corporation, the claimant may at any time thereafter bring suit against the corporation to recover the unpaid amount of the claim and, if successful, in whole or in part, the claimant shall be entitled to be paid also the expense of prosecuting such claim. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in defending any proceeding in advance of its final disposition where the required undertaking has been tendered to the corporation) that the claimant has not met the standards of conduct which make it permissible under the General Corporation Law of the State of Delaware for the corporation to indemnify the claimant for the amount claimed, but the burden of proving such defense shall be on the corporation. Neither the failure of the corporation (including its Board of Directors, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he or she has met the applicable standards of conduct set forth in said law, nor an actual determination by the corporation (including its Board of Directors, independent legal counsel, or its stockholders) that the claimant had not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the claimant had not met the applicable standard of conduct. The provisions of this Part II of this Article Six shall be applicable to all actions, suits or proceedings commenced after its adoption, whether such arise out of acts or omissions which occurred prior or subsequent to such adoption and shall continue as to a person who has ceased to be a Director, officer, employee or agent of, or to render services for or at the request of, the corporation or as the case may be, its parent, or subsidiaries and shall inure to the benefit of the heirs, executors and administrators of such a person.
PART III. INDEPENDENT LEGAL COUNSEL
Independent legal counsel may be appointed by the Board of Directors, even if a quorum of disinterested Directors is not available, or by a person designated by the Board of Directors. If independent legal counsel, so appointed, shall determine in a written opinion that indemnification is proper under this Article Six, indemnification shall be made without further action of the Board of Directors.
PART IV. NON-EXCLUSIVITY OF RIGHTS
The rights conferred on any person by Parts I and II of this Article Six shall not be exclusive of any other right which such person may have or hereafter acquire under any statute, provision of this Certificate of Incorporation, as amended and restated, by-law, agreement, or vote of stockholders or disinterested directors or otherwise.
PART V. INSURANCE
The corporation may maintain insurance, at its expense, to protect itself and any such director, officer, employee, agent or other person, or all of them, of the corporation or another corporation, partnership, joint venture, trust or other enterprise against any such expense, liability or loss, whether or not the corporation would have the power to indemnify such person against such expense, liability or loss under the General Corporation Law of the State of Delaware.
ARTICLE SEVEN
A Director of this corporation shall not be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the Director's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the General Corporation Law of the State of Delaware, or (iv) for any transaction from which the director derived an improper personal benefit.
ARTICLE EIGHT
Whenever a compromise or arrangement is proposed between this corporation and
its creditors or any class of them and/or between this corporation and its
stockholders or any class of them, any court of equitable jurisdiction within
the State of Delaware may, on the application in a summary way of this
corporation or of any creditor or stockholder thereof or on the application of
any receiver or receivers appointed for this corporation under the provisions of
Section 291 of Title 8 of the Delaware Code or on the application of trustees in
dissolution or of any receiver or receivers appointed for this corporation under
the provisions of Section 279 of Title 8 of the Delaware Code order a meeting of
the creditors or class of creditors, and/or of the stockholders or class of
stockholders of this corporation, as the case may be, to be summoned in such
manner as the said court directs. If a majority in number representing
three-fourths in value of the creditors or class of creditors, and/or of the
stockholders or class of stockholders of this corporation, as the case may be,
agree to any compromise or arrangement and to any reorganization of this
corporation as consequence of such compromise or arrangement, the said
compromise or arrangement and the said reorganization shall, if sanctioned by
the court to which the said application has been made, be binding on all the
creditors or class of creditors, and/or on all the stockholders or class of
stockholders, of this corporation, as the case may be, and also on this
corporation.
I, the undersigned, being the Chairman of the Board, do make, file and record this Second Restated Certificate of Incorporation, do certify that the facts herein stated are true and that this Second Restated Certificate of Incorporation has been duly adopted in accordance with the provisions of Section 245 of the General Corporation Law of Delaware and accordingly, have hereto set my hand and seal this 8th day of September, 2005.
Robert I. Toll
Chairman of the Board
MICHAEL I. SNYDER
ATTEST: ---------------------------
Michael I. Snyder
Secretary
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EXHIBIT 4.1
THIS NINTH SUPPLEMENTAL INDENTURE, dated as of June 6, 2005 by and among the parties listed on Schedule A hereto (each an "Additional Guarantor" and collectively, the "Additional Guarantors") and J.P. MORGAN TRUST COMPANY, NATIONAL ASSOCIATION, as successor to BANK ONE TRUST COMPANY, NATIONAL ASSOCIATION, as trustee (the "Trustee").
RECITALS
WHEREAS, Section 4.04 of the Indenture (as defined on Exhibit A attached hereto) provides that if in accordance with the provisions of the Bank Credit Facility the Company adds, or causes to be added, any Subsidiary that was not a Guarantor at the time of execution of the Original Indenture (as defined on Exhibit A attached hereto) as a guarantor under the Bank Credit Facility, such Subsidiary shall contemporaneously become a Guarantor under the Indenture;
WHEREAS, desiring to become a Guarantor under the Indenture, each of the Additional Guarantors is executing and delivering this Ninth Supplemental Indenture; and
WHEREAS, the consent of Holders to the execution and delivery of this Ninth Supplemental Indenture is not required, and all other actions required to be taken under the Indenture with respect to this Ninth Supplemental Indenture have been taken.
NOW, THEREFORE IT IS AGREED:
SECTION 1. DEFINITIONS. Capitalized terms used in this Ninth Supplemental Indenture and not otherwise defined herein (including Exhibit A attached hereto) shall have the meanings ascribed to them in the Indenture.
SECTION 2. JOINDER. Each Additional Guarantor agrees that by its
entering into this Ninth Supplemental Indenture it hereby unconditionally
guarantees all of the Issuer's obligations under (i) the 6.875% Senior Notes,
(ii) the 5.95% Senior Notes, (iii) the 4.95% Senior Notes, (iv) the 5.15% Senior
Notes, (v) any other Securities of any Series that has the benefit of Guarantees
of other Subsidiaries of the Company, and (vi) the Indenture (as it relates to
all such Series) on the terms set forth in the Indenture, as if each such
Additional Guarantor was a party to the Original Indenture.
SECTION 3. RATIFICATION OF INDENTURE. This Ninth Supplemental Indenture is executed and shall be construed as an indenture supplemental to the Indenture, and as supplemented and modified hereby, the Indenture is in all respects ratified and confirmed, and the Indenture and this Ninth Supplemental Indenture shall be read, taken and construed as one and the same instrument.
SECTION 4. EFFECT OF HEADINGS. The Section headings herein are for convenience only and shall not affect the construction hereof.
SECTION 5. SUCCESSORS AND ASSIGNS. All covenants and agreements in this Ninth Supplemental Indenture by each Additional Guarantor shall bind each such Additional Guarantor's successors and assigns, whether so expressed or not.
SECTION 6. SEPARABILITY CLAUSE. In case any one or more of the provisions contained in this Ninth Supplemental Indenture shall for any reason be held to be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby.
SECTION 7. GOVERNING LAW. This Ninth Supplemental Indenture shall be governed by and construed in accordance with the laws of the State of New York. This Ninth Supplemental Indenture is subject to the provisions of the TIA that are required to be part of this Ninth Supplemental Indenture and shall, to the extent applicable, be governed by such provisions.
SECTION 8. COUNTERPARTS. This Ninth Supplemental Indenture may be executed in any number of counterparts, and each of such counterparts shall for all purposes be deemed to be an original, but all such counterparts shall together constitute one and the same instrument.
SECTION 9. ROLE OF TRUSTEE. The recitals contained herein shall be taken as the statements of the Company, and the Trustee assumes no responsibility for their correctness. The Trustee makes no representations as to the validity or sufficiency of this Ninth Supplemental Indenture.
IN WITNESS WHEREOF, the parties hereto have caused this Ninth Supplemental Indenture to be duly executed as of the date first above written.
By: Joseph R. Sicree Name: Joseph R. Sicree Title: Designated Officer
J.P. MORGAN TRUST COMPANY, NATIONAL ASSOCIATION,
as Trustee
By: Jennifer McCourt
Name: Jennifer McCourt
Title: Vice President
CORPORATIONS
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110-112 THIRD AVE. REALTY CORP
PARTNERSHIPS GENERAL PARTNER
CHELLIS HILL LIMITED PARTNERSHIP FRANKLIN FARMS G.P., INC.
TOLL CA VIII, L.P. TOLL CA GP CORP.
TOLL MI V LIMITED PARTNERSHIP TOLL MI GP CORP.
TOLL NJ VII, L.P. TOLL LAND CORP. NO. 10
WATERFORD PRESERVE LP TOLL VA GP CORP.
LIMITED LIABILITY COMPANIES
---------------------------------------------
MEMBER(S)
------------------------------
1500 GARDEN ST. LLC HOBOKEN LAND LP
TOLL VA GP CORP. AND TOLL
SOUTHEAST LP
TOLL STRATFORD LLC COMPANY
TOLL VANDERBILT I LLC TOLL RI GP CORP.
TOLL VANDERBILT II LLC TOLL RHODE ISLAND LP COMPANY, INC.
VANDERBILT CAPITAL LLC TOLL VANDERBILT I LLC AND
TOLL VANDERBILT II LLC
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For purposes of this Ninth Supplemental Indenture, the term "Indenture" shall mean that certain Indenture dated as of November 22, 2002 (the "Original Indenture") by and among Toll Brothers Finance Corp., Toll Brothers, Inc. as Guarantor, the other Guarantors identified therein and the Trustee, as supplemented by: (i) the Authorizing Resolutions, related to the issuance of $300,000,000 aggregate principal amount of 6.875% Senior Notes due 2012 (the "6.875% Senior Notes") by Toll Brothers Finance Corp. (the "Issuer") and the issuance of related guarantees by Toll Brothers, Inc. (the "Company") and the other Guarantors, attached as Exhibit A to the Joint Action of the Persons Authorized to Act on Behalf of Each of Toll Brothers Finance Corp., Toll Brothers, Inc. and Each of the Entities listed on Schedule I thereto dated as of November 22, 2002; (ii) the First Supplemental Indenture dated May 1, 2003 (the "First Supplemental Indenture"), by and among the parties listed on Schedule A thereto (who, pursuant to such First Supplemental Indenture, thereby became Guarantors) and the Trustee; (iii) the Authorizing Resolutions related to the issuance of $250,000,000 aggregate principal amount of 5.95% Senior Notes due 2013 (the "5.95% Senior Notes") by the Issuer and the issuance of related guarantees by the Company and the other Guarantors, attached as Exhibit A to the Joint Action of the Persons Authorized to Act on Behalf of Each of Toll Brothers Finance Corp., Toll Brothers, Inc. and Each of the Entities listed on Schedule I thereto dated as of September 3, 2003; (iv) the Second Supplemental Indenture dated November 3, 2003 (the "Second Supplemental Indenture"), by and among the parties listed on Schedule A thereto (who, pursuant to such Second Supplemental Indenture, thereby became Guarantors) and the Trustee; (v) the Third Supplemental Indenture dated January 26, 2004 (the "Third Supplemental Indenture"), by and among the parties listed on Schedule A thereto (who, pursuant to such Third Supplemental Indenture, thereby became Guarantors) and the Trustee; (vi) the Fourth Supplemental Indenture dated March 1, 2004 (the "Fourth Supplemental Indenture"), by and among the parties listed on Schedule A thereto (who, pursuant to such Fourth Supplemental Indenture, thereby became Guarantors) and the Trustee; (vii) the Authorizing Resolutions related to the issuance of $300,000,000 aggregate principal amount of 4.95% Senior Notes due 2014 (the "4.95% Senior Notes") by the Issuer and the issuance of related guarantees by the Company and the other Guarantors attached as Exhibit A to the Joint Action of the Persons Authorized to Act on Behalf of Each of Toll Brothers Finance Corp., Toll Brothers, Inc. and Each of the Entities listed on Schedule I thereto dated as of March 9, 2004; (viii) the Fifth Supplemental Indenture dated September 20, 2004 (the "Fifth Supplemental Indenture"), by and among the parties listed on Schedule A thereto (who, pursuant to such Fifth Supplemental Indenture, thereby became Guarantors) and the Trustee; (ix) the Sixth Supplemental Indenture dated as of October 28, 2004 (the "Sixth Supplemental Indenture"), by and among the parties listed on Schedule A thereto (who, pursuant to such Sixth Supplemental Indenture, thereby became Guarantors) and the Trustee; (x) the Seventh Supplemental Indenture dated as of October 31, 2004 (the "Seventh Supplemental Indenture"), by and among the parties listed on Schedule A thereto (who, pursuant to such Seventh Supplemental Indenture, thereby became Guarantors) and the Trustee; (xi) the Eighth Supplemental Indenture dated as of January 31, 2005 (the "Eighth Supplemental Indenture"), by and among the parties listed on Schedule A thereto (who, pursuant to such Eighth Supplemental Indenture, thereby became Guarantors) and the Trustee, and (xii) the Authorizing Resolutions related to the issuance of $300,000,000 aggregate principal amount of 5.15% Senior Notes due 2015 (the "5.15% Senior Notes") by the Issuer and the issuance of related guarantees by the Company and the other Guarantors attached as Exhibit A to the Joint Action of the Persons Authorized to Act on Behalf of Each of Toll Brothers Finance Corp., Toll Brothers, Inc. and Each of the Entities listed on Schedule I thereto dated as of May 26, 2005 and as may be further supplemented (including by this Ninth Supplemental Indenture) and/or amended.
EXHIBIT 31.1
CERTIFICATION
I, Robert I. Toll, Chief Executive Officer of Toll Brothers, Inc., certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Toll Brothers, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Signed: ROBERT I. TOLL
Name: Robert I. Toll
Title: Chief Executive Officer
September 8, 2005
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EXHIBIT 31.2
CERTIFICATION
I, Joel H. Rassman, Chief Financial Officer of Toll Brothers, Inc., certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Toll Brothers, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Signed: JOEL H. RASSMAN
------------------------
Name: Joel H. Rassman
Title: Chief Financial Officer
September 8, 2005
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EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Toll Brothers, Inc. (the
"Company") on Form 10-Q for the quarter ended July 31, 2005 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Robert
I. Toll, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
ROBERT I. TOLL
By: Robert I. Toll
Chief Executive Officer
September 8, 2005
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Toll Brothers, Inc. (the
"Company") on Form 10-Q for the quarter ended July 31, 2005 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Joel H.
Rassman, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
JOEL H. RASSMAN
Joel H. Rassman
Chief Financial Officer
September 8, 2005