e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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þ
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
October 31, 2007
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number 1-9186
TOLL BROTHERS, INC.
(Exact name of Registrant as
specified in its charter)
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Delaware
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23-2416878
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(State or other jurisdiction
of
incorporation or organization)
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I.R.S. Employer
Identification No.)
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250 Gibraltar Road, Horsham, Pennsylvania
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19044
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(Address of principal executive
offices)
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(Zip Code)
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Registrants telephone number, including area code:
(215) 938-8000
Securities registered pursuant to Section 12(b) of the
Act:
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Name of Each Exchange
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Title of Each Class
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on Which Registered
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Common Stock (par value $.01)*
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New York Stock Exchange
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Guarantee of Toll Brothers Finance Corp. 6.875% Senior
Notes due 2012
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New York Stock Exchange
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Guarantee of Toll Brothers Finance Corp. 5.95% Senior
Notes due 2013
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New York Stock Exchange
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Guarantee of Toll Brothers Finance Corp. 4.95% Senior
Notes due 2014
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New York Stock Exchange
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Guarantee of Toll Brothers Finance Corp. 5.15% Senior
Notes due 2015
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New York Stock Exchange
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* Includes associated Right to Purchase Series A Junior
Participating Preferred Stock.
Securities
registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the Registrant is a well known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes þ No o
Indicate by check mark if the Registrant is not required to
file reports pursuant to Section 13 or 15(d) of the
Securities
Act. Yes o No þ
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 þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of Registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
Indicate by check mark whether the Registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act. (Check one):
Large accelerated
filer þ
Accelerated
filer o
Non-accelerated
filer o
Indicate by check mark whether the Registrant is a shell
company (as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
As of April 30, 2007, the aggregate market value of the
Common Stock held by non-affiliates (all persons other than
executive officers and directors of Registrant) of the
Registrant was approximately $3,784,846,000.
As of December 11, 2007, there were approximately
158,249,000 shares of Common Stock outstanding.
Documents
Incorporated by Reference:
Portions of the proxy statement of Toll Brothers, Inc. with
respect to the 2008 Annual Meeting of Stockholders, scheduled to
be held on March 12, 2008, are incorporated by reference
into Part III of this report.
TABLE OF CONTENTS
PART I
General
Toll Brothers, Inc., a Delaware corporation formed in May 1986,
began doing business through predecessor entities in 1967. When
this report uses the words we, us, and
our, it refers to Toll Brothers, Inc. and its
subsidiaries, unless the context otherwise requires.
We design, build, market and arrange financing for single-family
detached and attached homes in luxury residential communities.
We are also involved, directly and through joint ventures, in
projects where we are building, or converting existing rental
apartment buildings into high-, mid- and low-rise luxury homes.
We cater to
move-up,
empty-nester, active-adult, age-qualified and second-home buyers
in 22 states of the United States. In the five years ended
October 31, 2007, we delivered 35,931 homes from 618
communities, including 7,023 homes from 385 communities in
fiscal 2007. Included in the five-year and fiscal 2007
deliveries are 336 units that were delivered from several
communities where we use the percentage of completion accounting
method to recognize revenues and cost of revenues.
Our traditional, single-family communities are generally located
on land we have either acquired and developed or acquired fully
approved and, in some cases, improved. Currently, we operate in
the major suburban and urban residential areas of:
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the Philadelphia, Pennsylvania metropolitan area
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the Lehigh Valley area of Pennsylvania
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central and northern New Jersey
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the Virginia and Maryland suburbs of Washington, D.C.
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the Baltimore, Maryland metropolitan area
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the Eastern Shore of Maryland and Delaware
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the Richmond, Virginia metropolitan area
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the Boston, Massachusetts metropolitan area
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the Providence, Rhode Island metropolitan area
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Fairfield, Hartford and New Haven Counties, Connecticut
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Westchester, Dutchess and Ulster Counties, New York
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the boroughs of Manhattan, Brooklyn and Queens in New York City
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the Los Angeles, California metropolitan area
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the San Francisco Bay, Sacramento and San Jose areas
of northern California
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the Palm Springs, California area
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the Phoenix and Tucson, Arizona metropolitan areas
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the Raleigh and Charlotte, North Carolina metropolitan areas
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the Dallas, Austin and San Antonio, Texas metropolitan areas
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the southeast and southwest coasts and the Jacksonville, Orlando
and Tampa areas of Florida
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the Atlanta, Georgia metropolitan area
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the Las Vegas and Reno, Nevada metropolitan areas
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the Detroit, Michigan metropolitan area
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the Chicago, Illinois metropolitan area
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the Denver, Colorado metropolitan area
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the Hilton Head area of South Carolina
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the Minneapolis/St. Paul, Minnesota metropolitan area
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the Martinsburg, West Virginia area
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We continue to explore additional geographic areas for expansion.
We operate our own land development, architectural, engineering,
mortgage, title, landscaping, lumber distribution, house
component assembly, and manufacturing operations. We also
develop, own and operate golf courses and country clubs
associated with several of our master planned communities.
Beginning in the fourth quarter of fiscal 2005, continuing
throughout fiscal 2006 and 2007 and into the first quarter of
fiscal 2008, we, and our industry as a whole, have
experienced a slowdown. We believe this slowdown is attributable
to a decline in consumer confidence, an overall softening of
demand for new homes, an oversupply of homes available for sale,
the inability of some of our home buyers to sell their current
home and the direct and indirect impact of the turmoil in the
mortgage loan market. We attribute the reduction in demand to
concerns on the part of prospective home buyers about the
direction of home prices, due in part to the constant media
attention with regard to the potential of mortgage foreclosures,
many home builders advertising price reductions and
increased sales incentives, and concerns by prospective home
buyers about being able to sell their existing homes. In
addition, we believe speculators and investors are no longer
helping to fuel demand.
For information and analyses of recent trends in our operations
and financial condition, see Managements Discussion
and Analysis of Financial Condition and Results of
Operations in Item 7 of this
Form 10-K,
and for financial information about our revenues, earnings,
assets, liabilities, stockholders equity and cash flows,
please see the accompanying consolidated financial statements
and notes thereto in Item 8 of this
Form 10-K.
At October 31, 2007, we were operating from 368 communities
containing approximately 27,900 home sites that we owned or
controlled through options. Of the 27,900 home sites, 23,950
were available for sale and 3,950 were under agreement of sale
but not yet delivered (backlog). Of the 368
communities, 315 were offering homes for sale, 3 had been
offering homes for sale but were temporarily closed due to the
lack of availability of improved home sites and 50 were sold out
but not all homes had been completed and delivered. At
October 31, 2007, we also owned or controlled through
options approximately 31,400 home sites in 239 proposed
communities. We expect to be selling from approximately 300
communities by October 31, 2008. Of the approximately
59,300 total home sites that we owned or controlled through
options at October 31, 2007, we owned approximately 37,100.
At October 31, 2007, we were offering single-family
detached homes in 216 communities at prices, excluding
customized options and lot premiums, generally ranging from
$244,000 to $2,254,000. During fiscal 2007, the average base
price of detached homes delivered was approximately $648,000. On
average, our detached home buyers added approximately 24.1%, or
$156,000 per home, in customized options and lot premiums to the
base price of homes delivered in fiscal 2007.
At October 31, 2007, we were offering attached homes in 99
communities at prices, excluding customized options and lot
premiums, generally ranging from $185,000 to $2,550,000, with
some units offered at prices higher than $2,550,000. During
fiscal 2007, the average base price of attached homes delivered
was approximately $472,000. On average, our attached home buyers
added approximately 10.1%, or $48,000 per home, in customized
options and lot premiums to the base price of homes delivered in
fiscal 2007.
We had a backlog (homes under contract but not yet
delivered to home buyers as of the reporting date) of
$2.85 billion (3,950 homes) at October 31, 2007 and
$4.49 billion (6,533 homes) at October 31, 2006.
Backlog at October 31, 2007 and 2006 has been reduced by
$55.2 million and $170.1 million, respectively, for
revenue we recognized using the percentage of completion
accounting method. Of the homes in backlog at October 31,
2007, approximately 94% of the homes were scheduled to be
delivered by October 31, 2008.
2
In recognition of our achievements, we have received numerous
awards from national, state and local home builder publications
and associations. We are the only publicly traded national home
builder to have won all three of the industrys highest
honors: Americas Best Builder (1996), the National Housing
Quality Award (1995), and Builder of the Year (1988).
We attempt to reduce certain 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 risk reduction strategy of not commencing the construction
of a home until we had an agreement of sale with a buyer was
effective in the past, but due to the significant number of
cancellations of agreements of sale that we have had in our
fiscal 2006 and 2007 years, at October 31, 2007, we
have a significant number of homes under construction for which
we do not have an agreement of sale. In order to obtain better
terms or prices, or due to competitive pressures, we may
purchase properties outright, or acquire an underlying mortgage,
prior to obtaining all of the governmental approvals necessary
to commence development.
Our
Communities
Our communities are generally located in affluent suburban areas
near major highways providing access to major cities. We are
also operating in the affluent urban markets of Hoboken and
Jersey City, New Jersey; New York City, New York; and
Philadelphia, Pennsylvania. We currently operate in
22 states around the country. The following table lists the
states in which we operate and the fiscal years in which we or
our predecessors commenced operations:
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Fiscal Year
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State
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of Entry
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Pennsylvania
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1967
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New Jersey
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1982
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Delaware
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1987
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Massachusetts
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1988
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Maryland
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1988
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Virginia
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1992
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Connecticut
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1992
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New York
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1993
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California
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1994
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North Carolina
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1994
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Texas
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1995
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Florida
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1995
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Arizona
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1995
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Nevada
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1998
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Illinois
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1998
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Michigan
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1999
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Rhode Island
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2000
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Colorado
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2001
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South Carolina
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2002
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Minnesota
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2005
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West Virginia
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2006
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Georgia
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2007
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We market our high-quality single-family homes to
upscale luxury home buyers, generally comprised of
those persons who have previously owned a principal residence
and who are seeking to buy a larger home the
so-called
move-up
market. We believe our reputation as a developer of homes for
this market enhances our
3
competitive position with respect to the sale of our smaller,
more moderately priced detached homes, as well as our attached
homes.
We also market to the 50+ year-old empty-nester
market and believe that this market has strong growth potential.
We have developed a number of home designs with features such as
one-story living and first floor master bedroom suites, as well
as communities with recreational amenities such as golf courses,
marinas, pool complexes, country clubs and recreation centers,
that we believe appeal to this category of home buyer. We have
integrated these designs and features in our other home types
and communities.
In 1999, we opened for sale our first active-adult,
age-qualified community for households in which at least one
member is 55 years of age. We are currently selling from 20
such communities and expect to open additional age-qualified
communities during the next few years. In fiscal 2007, 6.6% of
the value of new contracts signed was in active-adult
communities.
We also sell homes in the second-home market. We have been
selling homes in this market for several years and currently
offer them in Arizona, California, Delaware, Florida, Maryland,
Nevada, Pennsylvania and South Carolina.
In order to serve a growing market of affluent
move-up
families, empty-nesters and young professionals seeking to live
in or close to major cities, we have developed
and/or are
developing a number of high-density, high-, mid- and low-rise
urban luxury communities and are in the process of converting
several for-rent apartment buildings to condominiums. These
communities, which we are currently developing on our own or
through joint ventures, are located in Phoenix, Arizona; Dublin
and Ontario, California; Singer Island, Florida; Bloomingdale,
Illinois; North Bethesda, Maryland; Hoboken and Jersey City, New
Jersey; the boroughs of Manhattan, Brooklyn and Queens, New
York; Philadelphia, Pennsylvania and its suburbs; and Leesburg,
Virginia.
We believe that the demographics of our
move-up,
empty-nester, active-adult, age-qualified and second-home
up-scale markets will provide us with the potential for growth
in the coming decade. According to the U.S. Census Bureau,
the number of households earning $100,000 or more (in constant
2006 dollars) now stands at 22.2 million households,
approximately 19.1% of all households. This group has grown at
five times the rate of increase of all U.S. households
since 1980. According to Claritas, Inc., a provider of
demographic information, approximately 9.1 million of these
households are located in our current markets. According to
Harvard University, the number of projected new household
formations over the next ten years will be approximately
14.6 million. In addition, Advertising Age magazine
predicts that, as the baby boomers mature and become more
affluent, second- home ownership will grow from approximately
6.4 million homes in 2000 to an estimated 10.0 million
homes in 2010.
Although the leading edge of the baby boom generation is now in
its late 50s and early 60s, the largest group of
baby boomers, the more than four million born annually between
1954 and 1964, are now in their peak
move-up home
buying years. The number of households with persons 55 to
64 years old, the focus of our age-qualified communities,
is projected to increase by over 49% between the year 2000 and
the year 2010, according to Joint Center for Housing Studies at
Harvard University.
We develop individual stand-alone communities as well as
multi-product master planned communities. We currently have 33
master planned communities. Our master planned communities, many
of which include golf courses and other country club-type
amenities, enable us to offer multiple home types and sizes to a
broad range of
move-up,
empty-nester, active-adult and second-home buyers. We realize
efficiencies from shared common costs such as land development
and infrastructure over the several communities within the
master planned community. We currently have master planned
communities in Arizona, California, Florida, Illinois, Maryland,
Michigan, Nevada, New Jersey, North Carolina, Pennsylvania,
South Carolina, Texas, Virginia and West Virginia.
Each of our single-family detached-home communities offers
several home plans, with the opportunity for home buyers to
select various exterior styles. We design each community to fit
existing land characteristics. We strive to achieve diversity
among architectural styles within an overall planned community
by offering a variety of house models and several exterior
design options for each house model, by preserving existing
trees and foliage whenever practicable, and by curving street
layouts which allow relatively few homes to be seen from any
vantage point. Normally, homes of the same type or color may not
be built next to each other. Our communities have attractive
entrances with distinctive signage and landscaping. We believe
that our added attention to community
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detail avoids a development appearance and gives
each community a diversified neighborhood appearance that
enhances home values.
Our traditional attached home communities generally offer one-
to four-story homes, provide for limited exterior options and
often include commonly-owned recreational facilities such as
playing fields, swimming pools and tennis courts.
Our
Homes
In most of our single-family detached home communities, we offer
at least four different house floor plans, each with several
substantially different architectural styles. In addition, the
exterior of each basic floor plan may be varied further by the
use of stone, stucco, brick or siding. Our traditional attached
home communities generally offer several different floor plans
with two, three or four bedrooms.
In all of our communities, a wide selection of options is
available to purchasers for additional charges. The number and
complexity of options typically increase with the size and base
selling price of our homes. Major options include additional
garages, guest suites and other additional rooms, finished lofts
and extra fireplaces. On average, options purchased by our
detached home buyers, including lot premiums, added
approximately 24.1%, or $156,000 per home, to the base price of
homes delivered in fiscal 2007, and options purchased by our
attached home buyers added approximately 10.1%, or $48,000 per
home, to the base price of homes delivered in fiscal 2007.
The general range of base sales prices for our different lines
of homes at October 31, 2007, was as follows:
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Detached homes
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Move-up
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$
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244,000
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$
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1,000,000
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Executive
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279,000
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958,000
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Estate
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332,000
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2,254,000
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Active-adult, age-qualified
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261,000
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583,000
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Attached homes
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Flats
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$
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219,000
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$
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755,000
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Townhomes/Carriage homes
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185,000
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939,000
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Active-adult, age-qualified
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232,000
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703,000
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High-rise/Mid-rise
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276,000
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2,550,000
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At October 31, 2007, we were offering some of our
single-family attached units at prices that were considerably
higher than $2.6 million.
Contracts for the sale of homes are at fixed prices. In the
past, the prices at which homes were offered in a community
generally increased during the period in which that community
was offering homes for sale; however, with the current weak
market, there can be no assurance that sales prices will
increase in the future. In fiscal 2007, the average incentive on
homes delivered was approximately $34,100 as compared to
approximately $10,100 in fiscal 2006.
We offer some of the same basic home designs in similar
communities. However, we are continuously developing new designs
to replace or augment existing ones to ensure that our homes
reflect current consumer tastes. We use our own architectural
staff, and also engage unaffiliated architectural firms, to
develop new designs. During the past year, we introduced 70 new
single-family detached models, 28 new single-family attached
models and 32 new condominium units.
We operate in the following four geographic segments around the
United States: the North, consisting of Connecticut, Illinois,
Massachusetts, Michigan, Minnesota, New Jersey, New York, Ohio
and Rhode Island; the Mid-Atlantic, consisting of Delaware,
Maryland, Pennsylvania, Virginia and West Virginia; the South,
consisting of Florida, Georgia, North Carolina, South Carolina
and Texas; and the West, consisting of Arizona, California,
Colorado and Nevada. We began operations in Georgia in the
fourth quarter of fiscal 2007. We stopped selling homes in Ohio
in fiscal 2005 and delivered our last home there in fiscal 2006.
Our operations in Ohio were immaterial to the North geographic
segment.
5
The following table summarizes closings and new contracts signed
during fiscal 2007, 2006 and 2005, and backlog at
October 31, 2007, 2006 and 2005 (dollars in millions):
Closings
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Geographic
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2007
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2006
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2005
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2007
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2006
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2005
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Segments
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Units(a)
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Units
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Units
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$(a)(b)
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$(b)
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$
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North
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1,467
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1,983
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1,870
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$
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1,084.1
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$
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1,444.2
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$
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1,126.3
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Mid-Atlantic
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2,137
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2,697
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3,290
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1,338.4
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1,777.5
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2,056.6
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South
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1,631
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2,017
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1,312
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970.8
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1,184.6
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701.4
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West
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1,452
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1,904
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2,297
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1,241.8
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1,709.0
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1,875.0
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Total
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6,687
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8,601
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8,769
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$
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4,635.1
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$
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6,115.3
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$
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5,759.3
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Contracts
(c)
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Geographic
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2007
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2006
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2005
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2007
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2006
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2005
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Segments
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Units
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Units
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Units
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$
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$
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$
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North
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1,485
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1,673
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2,297
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$
|
1,029.4
|
|
|
$
|
1,177.3
|
|
|
$
|
1,517.8
|
|
Mid-Atlantic
|
|
|
1,505
|
|
|
|
1,942
|
|
|
|
3,405
|
|
|
|
950.4
|
|
|
|
1,262.8
|
|
|
|
2,263.6
|
|
South
|
|
|
829
|
|
|
|
1,294
|
|
|
|
2,329
|
|
|
|
457.3
|
|
|
|
800.3
|
|
|
|
1,306.3
|
|
West
|
|
|
621
|
|
|
|
1,255
|
|
|
|
2,341
|
|
|
|
573.0
|
|
|
|
1,220.3
|
|
|
|
2,064.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
4,440
|
|
|
|
6,164
|
|
|
|
10,372
|
|
|
$
|
3,010.1
|
|
|
$
|
4,460.7
|
|
|
$
|
7,152.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Backlog
at October 31 (d)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Geographic
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Segments
|
|
Units
|
|
|
Units
|
|
|
Units
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
North
|
|
|
1,497
|
|
|
|
1,756
|
|
|
|
1,901
|
|
|
$
|
1,089.7
|
|
|
$
|
1,247.1
|
|
|
$
|
1,275.3
|
|
Mid-Atlantic
|
|
|
973
|
|
|
|
1,605
|
|
|
|
2,360
|
|
|
|
676.7
|
|
|
|
1,064.7
|
|
|
|
1,579.4
|
|
South
|
|
|
806
|
|
|
|
1,667
|
|
|
|
2,390
|
|
|
|
475.6
|
|
|
|
1,010.4
|
|
|
|
1,334.9
|
|
West
|
|
|
674
|
|
|
|
1,505
|
|
|
|
2,154
|
|
|
|
667.6
|
|
|
|
1,336.3
|
|
|
|
1,825.0
|
|
less, revenue recognized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(55.2
|
)
|
|
|
(170.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
3,950
|
|
|
|
6,533
|
|
|
|
8,805
|
|
|
$
|
2,854.4
|
|
|
$
|
4,488.4
|
|
|
$
|
6,014.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
Excludes 336 units delivered in fiscal 2007 that were
accounted for using the percentage of completion method with an
aggregate delivered value of $263.3 million (277 units
with a value of $193.7 million in the North segment and
59 units with a value of $69.6 million in the South
segment).
|
|
|
(b) |
Includes percentage of completion revenues of $91.0 million
and $48.5 million in the North and South, respectively, in
fiscal 2007, and $110.3 million and $59.8 million in
the North and South, respectively, in fiscal 2006.
|
|
|
(c) |
Includes $24.4 million (27 units) in buildings that
are accounted for using the percentage of completion accounting
method (27 units with a value of $22.0 million in the
North segment and $2.4 million in the South segment) in
fiscal 2007, and $59.1 million (65 units) in buildings
that are accounted for using the percentage of completion
accounting method (61 units with a value of
$43.1 million in the North segment and 4 units with a
value of $16.0 million in the South segment) in fiscal 2006.
|
|
|
(d) |
Includes $85.4 million (83 units) in buildings that
are accounted for using the percentage of completion accounting
method (66 units with a value of $38.7 million in the
North segment and 17 units with a value of
$46.7 million in the South) at October 31, 2007, and
$324.4 million (392 units) (316 units with a
value of $210.4 million in the North segment and
76 units with a value of $114.0 million in the South
segment) at October 31, 2006.
|
6
The following table summarizes certain information with respect
to our residential communities under development at
October 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homes
|
|
|
|
|
|
|
Total
|
|
|
Number of
|
|
|
|
|
|
|
|
|
Under
|
|
|
|
|
Geographic
|
|
Number of
|
|
|
Selling
|
|
|
Homes
|
|
|
Homes
|
|
|
Contract but
|
|
|
Home Sites
|
|
Segment
|
|
Communities
|
|
|
Communities
|
|
|
Approved
|
|
|
Closed
|
|
|
not Closed
|
|
|
Available
|
|
|
North
|
|
|
104
|
|
|
|
79
|
|
|
|
11,766
|
|
|
|
4,884
|
|
|
|
1,497
|
|
|
|
5,385
|
|
Mid-Atlantic
|
|
|
93
|
|
|
|
86
|
|
|
|
15,134
|
|
|
|
6,614
|
|
|
|
973
|
|
|
|
7,547
|
|
South
|
|
|
90
|
|
|
|
78
|
|
|
|
11,025
|
|
|
|
4,073
|
|
|
|
806
|
|
|
|
6,146
|
|
West
|
|
|
81
|
|
|
|
72
|
|
|
|
9,935
|
|
|
|
4,398
|
|
|
|
674
|
|
|
|
4,863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
368
|
|
|
|
315
|
|
|
|
47,860
|
|
|
|
19,969
|
|
|
|
3,950
|
|
|
|
23,941
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At October 31, 2007, significant site improvements had not
commenced on approximately 11,300 of the 23,941 available home
sites. Of the 23,941 available home sites, 3,725 were not yet
owned by us, but were controlled through options.
Of the 368 communities under development at October 31,
2007, 315 were offering homes for sale, 3 had been offering
homes but were temporarily closed at October 31, 2007 due
to the unavailability of improved home sites and 50 were sold
out but not all homes had been completed and delivered. Of the
315 communities in which homes were being offered for sale at
October 31, 2007, 216 were single-family detached home
communities containing a total of 529 homes (exclusive of model
homes) under construction but not under contract, and 99 were
attached home communities containing a total of 1,375 homes
(exclusive of model homes) under construction but not under
contract. We had a higher than normal number of homes under
construction but not under contract at October 31, 2007 due
to the increased number of contract cancellations by home buyers
in fiscal 2007. Of the 1,375 homes under construction but not
under contract in attached home communities, 408 were in high-
and mid-rise projects and 294 were in two communities that
we acquired and are converting to condominium units.
For more information regarding revenues, income before income
taxes and assets by geographic segment, see Note 14 of the
Notes to the Consolidated Financial Statements,
Information on Business Segments.
Land
Policy
Before entering into an agreement to purchase a land parcel, we
complete extensive comparative studies and analyses on detailed
company-designed forms that assist us in evaluating the
acquisition. We generally attempt to enter into option
agreements to purchase land for future communities. However, in
order to obtain better terms or prices, or due to competitive
pressures, we may acquire property outright from time to time.
In addition, we have, at times, acquired the underlying mortgage
on a property and subsequently obtained title to that property.
We generally enter into agreements to purchase land, referred to
herein as land purchase contracts, purchase
agreements, options or option
agreements, on a non-recourse basis, thereby limiting our
financial exposure to the amounts expended in obtaining any
necessary governmental approvals, the costs incurred in the
planning and design of the community and, in some cases, some or
all of our deposit. The use of options or purchase agreements
may increase the price of land that we eventually acquire, but
reduces our risk by allowing us to obtain the necessary
development approvals before acquiring the land or allowing us
to delay the acquisition to a later date. Historically, as
approvals were obtained, the value of the options, purchase
agreements and land generally increased. However, in any given
time period, this may not happen. We have the ability to extend
many of these options for varying periods of time, in some cases
by making an additional payment and, in other cases, without any
additional payment. Our purchase agreements are typically
subject to numerous conditions including, but not limited to,
our ability to obtain necessary governmental approvals for the
proposed community. Our initial payment on an agreement may be
returned to us if all approvals are not obtained, although
pre-development costs may not be recoverable. We generally have
the right to cancel any of our agreements to purchase land by
forfeiture of some or all of the money we have paid on the
agreement.
We also have investments in four joint ventures that are
developing large tracts of land in Arizona and Nevada. Under the
terms of the joint venture agreements, we have the right to
purchase and in some cases are required to
7
purchase home sites upon the completion of the development work
on the land. For more information regarding these joint
ventures, see Note 3 of the Notes to the Consolidated
Financial Statements, Investments in and Advances to
Unconsolidated Entities.
Our ability to continue development activities over the
long-term will be dependent upon our continued ability to locate
and enter into options or agreements to purchase land, obtain
governmental approvals for suitable parcels of land, and
consummate the acquisition and complete the development of such
land.
The following is a summary of the parcels of land that we either
owned or controlled through options or purchase agreements at
October 31, 2007 for proposed communities, as distinguished
from those currently under development:
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Number of
|
|
Geographic
|
|
Number of
|
|
|
Homes
|
|
Segment
|
|
Communities
|
|
|
Planned
|
|
|
North
|
|
|
46
|
|
|
|
6,106
|
|
Mid-Atlantic
|
|
|
92
|
|
|
|
9,725
|
|
South
|
|
|
28
|
|
|
|
3,382
|
|
West
|
|
|
73
|
|
|
|
12,147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
239
|
|
|
|
31,360
|
|
|
|
|
|
|
|
|
|
|
Of the 31,360 planned home sites, at October 31, 2007, we
owned 12,973 and controlled 18,387 through options and purchase
agreements. At October 31, 2007, the aggregate purchase
price of land parcels under option and purchase agreements was
approximately $2.33 billion (including $1.21 billion
of land to be acquired from joint ventures in which we have
invested). Of the $2.33 billion of land purchase
commitments, we had paid or deposited $130.5 million and
had investments in or guaranteed loans on behalf of joint
ventures of $196.2 million. The purchases of these home
sites are scheduled over the next several years.
We evaluate all of the land under our control for proposed
communities on an ongoing basis for continued economic and
market feasibility. During the year ended October 31, 2007,
such feasibility analyses resulted in approximately
$37.9 million of capitalized costs related to proposed
communities being charged to cost of revenue because they were
no longer deemed to be recoverable.
We have substantial land currently under control for which we
have obtained approvals or are seeking approvals (as set forth
in the tables above). We devote significant resources to
locating suitable land for future development and to obtaining
the required approvals on land under our control. There can be
no assurance that we will be successful in securing the
necessary development approvals for the land currently under our
control or for land which we may acquire control of in the
future or that, upon obtaining such development approvals, we
will elect to complete the purchases of land under option or
complete the development of land that we own. We generally have
been successful in obtaining governmental approvals in the past.
Failure to locate sufficient suitable land or to obtain
necessary governmental approvals may impair our ability over the
long-term to maintain current levels of development activities.
We believe that we have an adequate supply of land in our
existing communities and proposed communities (assuming that all
properties are developed) to maintain our operations at current
levels for several years.
Community
Development
We expend considerable effort in developing a concept for each
community, which includes determining the size, style and price
range of the homes, the layout of the streets and individual
home sites, and the overall community design. After obtaining
the necessary governmental subdivision and other approvals,
which may take several years, we improve the land by clearing
and grading it; installing roads, underground utility lines and
recreational amenities; erecting distinctive entrance
structures; and staking out individual home sites.
Each community is managed by a project manager. Working with
sales staff, construction managers, marketing personnel and,
when required, other in-house and outside professionals such as
accountants, engineers, architects and legal counsel, the
project manager is responsible for supervising and coordinating
the various
8
developmental steps from the approval stage through land
acquisition, marketing, selling, construction and customer
service, and for monitoring the progress of work and controlling
expenditures. Major decisions regarding each community are made
in consultation with senior members of our management team.
Since we build single-family detached and attached homes that
generally take less than one year to build, we recognize revenue
and costs from these home sales only when title and possession
of a home is transferred to the buyer, which usually occurs
shortly after home construction is substantially completed. For
high-rise/mid-rise projects where the construction time is
substantially more than one year and which qualify under
Statement of Financial Accounting Standard No. 66 for
percentage of completion accounting, revenues and costs of
individual communities are recognized on the individual
projects aggregate value of units for which the home
buyers have signed binding agreements of sale, less an allowance
for cancellations, and is based on the percentage of total
estimated construction costs which have been incurred. For
high-rise/mid-rise projects that do not qualify for percentage
of completion accounting, we recognize revenues and costs when
title and possession of a home is transferred to the buyer.
The most significant variable affecting the timing of our
revenue stream, other than housing demand, is the opening of the
community for sale, which generally occurs shortly after receipt
of final land regulatory approvals. Receipt of approvals permits
us to begin the process of obtaining executed sales contracts
from home buyers. Although our sales and construction activities
vary somewhat by season, which affects the timing of closings,
any such seasonal effect is relatively insignificant compared to
the effect of the timing of receipt of final governmental
approvals, the opening of the community and the subsequent
timing of closings.
Subcontractors perform all home construction and land
development work, generally under fixed-price contracts. We act
as a general contractor and directly purchase some, but not all,
of the building supplies we require. See
Manufacturing/Distribution Facilities in Item 2.
Our construction managers and assistant construction managers
coordinate subcontracting activities and supervise all aspects
of construction work and quality control. One of the ways in
which we seek to achieve home buyer satisfaction is by providing
our construction managers with incentive compensation
arrangements based on each home buyers satisfaction as
expressed by their responses on pre-closing and post-closing
questionnaires.
We maintain insurance, subject to deductibles and self-insured
amounts, to protect us against various risks associated with our
activities, including, among others, general liability,
all-risk property, workers compensation,
automobile and employee fidelity. We accrue for our expected
costs associated with the deductibles and self-insured amounts.
Marketing
and Sales
We believe that our marketing strategy, which emphasizes our
more expensive Estate and Executive
lines of homes, has enhanced our reputation as a
builder-developer of high-quality upscale housing. We believe
this reputation results in greater demand for all of our lines
of homes. To enhance this image, we generally include attractive
decorative features such as chair rails, crown moldings, dentil
moldings, vaulted and coffered ceilings and other aesthetic
elements, even in our less expensive homes, based on our belief
that this additional construction expense improves our marketing
and sales effort.
In determining the prices for our homes, we utilize, in addition
to managements extensive experience, an internally
developed value analysis program that compares our homes with
homes offered by other builders in each local marketing area. In
our application of this program, we assign a positive or
negative dollar value to differences between our product
features and those of our competitors, such as house and
community amenities, location and reputation.
We expend great effort in designing and decorating our model
homes, which play an important role in our marketing. In our
models, we create an attractive atmosphere, with bread baking in
the oven, fires burning in fireplaces, and music playing in the
background. Interior decorating varies among the models and is
carefully selected to reflect the lifestyles of prospective
buyers. During the past several years, we have received numerous
awards from various home builder associations for our interior
merchandising.
9
We typically have a sales office in each community that is
staffed by our own sales personnel. Sales personnel are
generally compensated with both salary and commission. A
significant portion of our sales is also derived from the
introduction of customers to our communities by local
cooperating realtors.
We advertise in newspapers, other local and regional
publications, and on billboards. We also use videotapes and
attractive color brochures to market our communities. The
Internet is also an important resource we use in marketing and
providing information to our customers. A visitor to our award
winning web site, www.tollbrothers.com, can obtain
detailed information regarding our communities and homes across
the country, take panoramic or video tours of our homes and
design their own homes based upon our available floor plans and
options.
All our homes are sold under our limited warranty as to
workmanship and mechanical equipment. Many homes also come with
a limited ten-year warranty as to structural integrity.
We have a two-step sales process. The first step takes place
when a potential home buyer visits one of our communities and
decides to purchase one of our homes, at which point the home
buyer signs a non-binding deposit agreement and provides a
small, refundable deposit. This deposit will reserve, for a
short period of time, the home site or unit that the home buyer
has selected and will lock in the base price of the home.
Deposit rates are tracked on a weekly basis to help us monitor
the strength or weakness in demand in each of our communities.
If demand for homes in a particular community is strong, senior
management will determine whether the base selling prices in
that community should be increased, whereas if demand for the
homes in a particular community is weak, we may determine
whether sales incentives
and/or
discounts on home prices should be added to the communitys
sales effort. Because these deposit agreements are non-binding,
they are not recorded as signed contracts, nor are they recorded
in backlog.
The second step in the sales process occurs when we actually
sign a binding agreement of sale with the home buyer and the
home buyer typically gives us a cash down payment which,
historically, has been approximately 7%, on average, of the
total purchase price of the home. Between the time that the home
buyer signs the non-binding deposit agreement and the binding
agreement of sale, he or she is required to complete a financial
questionnaire that gives us the ability to evaluate whether the
home buyer has the financial resources necessary to purchase the
home. If we determine that the home buyer is not financially
qualified, we will not enter into an agreement of sale with the
home buyer. During fiscal 2007, 2006 and 2005, our customers
signed 6,025, 7,470 and 10,869 gross contracts,
respectively. They cancelled 1,585, 1,306 and 497 contracts
during fiscal 2007, 2006 and 2005, respectively. Contract
cancellations in a fiscal year include contracts signed in that
fiscal year as well as contracts signed in prior fiscal years.
When we report contracts signed, the number and value of
contracts signed is reported net of any cancellations occurring
during the reporting period, whether signed in that reporting
period or in a prior period. Only outstanding agreements of sale
that have been signed by both the home buyer and us as of the
end of the period on which we are reporting are included in
backlog. Of the value of backlog reported on October 31,
2006, 2005 and 2004, home buyers subsequently cancelled
approximately 19.9%, 19.2% and 16.5% of it, respectively.
At October 31, 2007, we had $2.85 billion of backlog,
net of $55.2 million of revenues recognized under the
percentage of completion accounting method. Of the homes in
backlog at October 31, 2007, approximately 94% of the homes
were scheduled to be delivered by October 31, 2008.
Competition
The homebuilding business is highly competitive and fragmented.
We compete with numerous home builders of varying sizes, ranging
from local to national in scope, some of which have greater
sales and financial resources than we have. Sales of existing
homes also provide competition. We compete primarily on the
basis of price, location, design, quality, service and
reputation; however, we believe our financial stability,
relative to most others in our industry, has become an
increasingly favorable competitive factor.
Regulation
and Environmental Matters
We are subject to various local, state and federal statutes,
ordinances, rules and regulations concerning zoning, building
design, construction and similar matters, including local
regulations which impose restrictive zoning and
10
density requirements in order to limit the number of homes that
can eventually be built within the boundaries of a particular
property or locality. In a number of our markets, there has been
an increase in state and local legislation authorizing the
acquisition of land as dedicated open space, mainly by
governmental, quasi-public and non-profit entities. In addition,
we are subject to various licensing, registration and filing
requirements in connection with the construction, advertisement
and sale of homes in our communities. The impact of these laws
has been to increase our overall costs, and may have delayed the
opening of communities or caused us to conclude that development
of particular communities would not be economically feasible,
even if any or all necessary governmental approvals were
obtained. See Land Policy in this Item 1. We
also may be subject to periodic delays or may be precluded
entirely from developing communities due to building moratoriums
in one or more of the areas in which we operate. Generally, such
moratoriums relate to insufficient water or sewage facilities or
inadequate road capacity.
In order to secure certain approvals, in some areas, we may be
required to provide affordable housing at below market rental or
sales prices. The impact on us depends on how the various state
and local governments in the areas in which we engage, or intend
to engage, in development implement their programs for
affordable housing. To date, these restrictions have not had a
material impact on us.
We also are subject to a variety of local, state and federal
statutes, ordinances, rules and regulations concerning
protection of public health and the environment
(environmental laws). The particular environmental
laws that apply to any given community vary greatly according to
the location and environmental condition of the site, and the
present and former uses of the site. Complying with these
environmental laws may result in delays, may cause us to incur
substantial compliance and other costs,
and/or may
prohibit or severely restrict development in certain
environmentally sensitive regions or areas.
We maintain a policy of engaging independent environmental
consultants to evaluate land for the potential of hazardous or
toxic materials, wastes or substances before consummating an
acquisition. Because we generally have obtained such assessments
for the land we have purchased, we have not been significantly
affected to date by the presence of such materials.
Employees
At October 31, 2007, we employed 4,329 persons
full-time compared to 5,542 at October 31, 2006 and 6,147
at July 31, 2006. Of the 4,329 full-time employees at
October 31, 2007, 243 were in executive management
positions, 474 were engaged in sales activities, 381 were in
project management activities, 1,708 were in administrative and
clerical activities, 738 were in construction activities, 152
were in architectural and engineering activities, 375 were in
golf course operations, and 258 were in manufacturing and
distribution. At October 31, 2007, we were subject to one
collective bargaining agreement that covered approximately 2% of
our employees. We consider our employee relations to be good.
Available
Information
We file annual, quarterly and current reports, proxy statements
and other information with the Securities and Exchange
Commission (the SEC). These filings are available to
the public over the Internet at the SECs web site at
http://www.sec.gov.
You may also read and copy any document we file at the
SECs public reference room located at
100 F Street, N.E., Washington, DC 20549. Please call
the SEC at
1-800-SEC-0330
for further information on the public reference room.
Our principal Internet address is www.tollbrothers.com.
We make available free of charge on or through
www.tollbrothers.com our annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
and amendments to those reports, as soon as reasonably
practicable after we electronically file such material with, or
furnish it to, the SEC.
Our Board of Directors has an audit committee, an executive
compensation committee and a nominating and corporate governance
committee. Each of these committees has a formal charter. We
also have Corporate Governance Guidelines, a Code of Ethics for
the Principal Executive Officer and Senior Financial Officers,
and a Code of Ethics and Business Conduct which applies to all
directors, officers and employees. Copies of these charters,
guidelines and codes, and any waivers or amendments to such
codes which are applicable to our executive
11
officers, senior financial officers or directors, can be
obtained free of charge from our web site,
www.tollbrothers.com.
In addition, you may request a copy of the foregoing filings
(excluding exhibits), charters, guidelines and codes, and any
waivers or amendments to such codes which are applicable to our
executive officers, senior financial officers or directors, at
no cost by writing to us at Toll Brothers, Inc., 250 Gibraltar
Road, Horsham, PA 19044, Attention: Director of Investor
Relations, or by telephoning us at
(215) 938-8000.
Factors
That May Affect Our Future Results (Cautionary Statements Under
the Private Securities Litigation Reform Act of
1995)
Certain information included in this report or in other
materials we have filed or will file with the SEC (as well as
information included in oral statements or other written
statements made or to be made by us) contains or may contain
forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended. You
can identify these statements by the fact that they do not
relate strictly to historical or current facts. They contain
words such as anticipate, estimate,
expect, project, intend,
plan, believe, may,
can, could, might,
should and other words or phrases of similar meaning
in connection with any discussion of future operating or
financial performance. Such statements may include information
relating to anticipated operating results (including changes in
revenues, profitability and operating margins), financial
resources, interest expense, inventory write-downs, changes in
accounting treatment, effects of homebuyer cancellations, growth
and expansion, anticipated income to be realized from our
investments in unconsolidated entities, the ability to acquire
land, the ability to gain approvals and to open new communities,
the ability to sell homes and properties, the ability to deliver
homes from backlog, the ability to secure materials and
subcontractors, the ability to produce the liquidity and capital
necessary to expand and take advantage of opportunities in the
future, industry trends, and stock market valuations. From time
to time, forward-looking statements also are included in our
other periodic reports on
Forms 10-Q
and 8-K, in
press releases, in presentations, on our web site and in other
materials released to the public.
Any or all of the forward-looking statements included in this
report and in any other reports or public statements made by us
are not guarantees of future performance and may turn out to be
inaccurate. This can occur as a result of incorrect assumptions
or as a consequence of known or unknown risks and uncertainties.
Many factors mentioned in this report or in other reports or
public statements made by us, such as government regulation and
the competitive environment, will be important in determining
our future performance. Consequently, actual results may differ
materially from those that might be anticipated from our
forward-looking statements.
Forward-looking statements speak only as of the date they are
made. We undertake no obligation to publicly update any
forward-looking statements, whether as a result of new
information, future events or otherwise. On December 6,
2007, we issued a press release and held a conference call to
review the results of operations for our fiscal year ended
October 31, 2007 and to discuss the current state of our
business. The information contained in this report is the same
information given in the press release and on the conference
call on December 6, 2007, and we are not reconfirming or
updating that information in this
Form 10-K.
However, any further disclosures made on related subjects in our
subsequent reports on
Forms 10-K,
10-Q and
8-K should
be consulted. The following cautionary discussion of risks,
uncertainties and possible inaccurate assumptions relevant to
our business includes factors we believe could cause our actual
results to differ materially from expected and historical
results. Other factors beyond those listed below, including
factors unknown to us and factors known to us which we have not
determined to be material, could also adversely affect us. This
discussion is provided as permitted by the Private Securities
Litigation Reform Act of 1995, and all of our forward-looking
statements are expressly qualified in their entirety by the
cautionary statements contained or referenced in this section.
The
continuation of the slowdown in our business could adversely
affect our financial condition.
Beginning in the fourth quarter of fiscal 2005, continuing
throughout fiscal 2006 and 2007 and into the first quarter of
fiscal 2008, we experienced a slowdown in our business.
We believe this slowdown is attributable to a decline in
consumer confidence, an overall softening of demand for new
homes, an oversupply of homes available for sale, the inability
of some of our home buyers to sell their current home and the
direct and indirect impact of the
12
turmoil in the mortgage loan market. If these conditions
continue over an extended period of time, or worsen, they could
adversely affect our financial condition.
Continued
cancellations of existing agreements of sale may have a material
adverse effect on our business.
Our backlog reflects agreements of sale with our home buyers for
homes that have not yet been delivered. We have received a
deposit from our home buyer for each home reflected in our
backlog, and generally we have the right to retain the deposit
if the home buyer does not complete the purchase. In some cases,
however, a home buyer may cancel the agreement of sale and
receive a complete or partial refund of the deposit for reasons
such as his or her inability to obtain mortgage financing or to
sell his or her current home. Our home buyers have cancelled a
higher than normal number of agreements of sale since the fourth
quarter of our fiscal 2005. If the current industry downturn
continues, or if mortgage financing becomes less available, more
home buyers may cancel their agreements of sale with us. The
continued high levels of home buyer cancellations could have a
material adverse effect on our business and results of
operations.
An
adverse change in economic conditions could further reduce the
demand for homes and, as a result, could reduce our earnings and
adversely affect our financial condition.
Changes in national and regional economic conditions, as well as
local economic conditions where we conduct our operations and
where prospective purchasers of our homes live, can have a
negative impact on our business. Adverse changes in employment
levels, job growth, consumer confidence, interest rates and
population growth, or an oversupply of homes for sale may
further reduce demand, depress prices for our homes and cause
homebuyers to cancel their agreements to purchase our homes.
This, in turn, could reduce our earnings and adversely affect
our financial condition.
The
homebuilding industry is highly competitive and, if others are
more successful or offer better value to our customers, our
business could decline.
We operate in a very competitive environment, which is
characterized by competition from a number of other home
builders in each market in which we operate. We compete with
large national and regional home building companies and with
smaller local home builders for land, financing, raw materials
and skilled management and labor resources. We also compete with
the resale, or previously owned, home market.
Increased competition could cause us to increase our selling
incentives
and/or
reduce our prices. An oversupply of homes available for sale and
the heavy discounting of home prices by some of our competitors
has adversely affected demand for our homes and the results of
our operations. If we are unable to compete effectively in our
markets, our business could decline disproportionately to our
competitors.
If we
are not able to obtain suitable financing, our business and
earnings may decline.
Our business and earnings depend substantially on our ability to
obtain financing for the development of our residential
communities, whether from bank borrowings or from financing in
the public debt markets. Due to the decline in our business and
that of our competitors, the availability of financing from
banks and the public debt markets has declined significantly. If
we are not able to obtain suitable financing, our costs could
increase and our revenues could decrease, or we could be
precluded from continuing our operations at current levels.
Increases in interest rates can make it more difficult
and/or
expensive for us to obtain the funds we need to operate our
business. The amount of interest we incur on our revolving bank
credit facility fluctuates based on changes in short-term
interest rates, the amount of borrowings we incur and the
ratings that national rating agencies assign to our outstanding
debt securities. Increases in interest rates generally
and/or any
downgrading in the ratings that national rating agencies assign
to our outstanding debt securities could increase the interest
rates we must pay on any subsequent issuances of debt
securities, and any such ratings downgrade could also make it
more difficult for us to sell such debt securities.
13
If our
home buyers are not able to obtain suitable financing, our
business may decline.
Our business and earnings also depend on the ability of our
potential home buyers to obtain mortgages for the purchase of
our homes. The uncertainties created by recent events in the
mortgage markets and their impact on the overall mortgage
market, including the tightening of credit standards, could
adversely affect the ability of our customers to obtain
financing for a home purchase, thus preventing our potential
home buyers from purchasing our homes. Moreover, increases in
the cost of home mortgage financing could prevent our potential
home buyers from purchasing our homes. In addition, where our
potential home buyers must sell their existing homes in order to
buy a home from us, increases in mortgage costs could prevent
the buyers of our potential home buyers existing homes
from obtaining the mortgages they need to complete the purchase,
which could result in our potential customers inability to
buy a home from us. If our potential home buyers or the buyers
of our home buyers current homes are not able to afford or
obtain suitable financing under such circumstances, our sales
and revenues could decline. Similar risks apply to those buyers
who are in our backlog of homes to be delivered. If our
potential buyers cannot obtain suitable financing in order to
purchase our homes, our sales and profitability could be
materially affected.
If our
ability to resell mortgages to investors is impaired, we may be
required to fund these commitments ourselves.
Normally, when our mortgage subsidiary provides, at the time of
the closing of the home, a mortgage at a previously locked in
rate, it has an agreement with an investor to acquire the
mortgage. Should the resale market for our mortgages decline or
the underwriting requirements by our investors become more
stringent, our ability to sell future mortgages could decline
and we could be required, among other things, to fund our
commitments to our buyers with our own financial resources or
require our home buyer to find another source of financing. If
our home buyers cannot obtain another source of financing in
order to purchase our homes, our sales and profitability could
be adversely affected.
If
land is not available at reasonable prices, our sales and
earnings could decrease.
Our operations depend on our ability to continue to obtain land
for the development of our residential communities at reasonable
prices. Changes in the general availability of land, competition
for available land, availability of financing to acquire land,
zoning regulations that limit housing density and other market
conditions may hurt our ability to obtain land for new
residential communities at prices that will allow us to make a
reasonable profit. If the supply of land appropriate for
development of our residential communities becomes more limited
because of these factors, or for any other reason, the cost of
land could increase
and/or the
number of homes that we sell and build could be reduced.
If the
market value of our land and homes drop, our profits will likely
decrease.
The market value of our land and housing inventories depends on
market conditions. We acquire land for expansion into new
markets and for replacement of land inventory and expansion
within our current markets. If housing demand decreases below
what we anticipated when we acquired our inventory, we may not
be able to make profits similar to what we have made in the
past, may experience less than anticipated profits
and/or may
not be able to recover our costs when we sell and build homes.
Due to the significant decline in our business since September
2005, we have recognized significant write-downs of our
inventory in fiscal 2006 and fiscal 2007. If these adverse
market conditions continue or worsen, we may have to write-down
our inventories further,
and/or may
have to sell land or homes at a loss.
Government
regulations and legal challenges may delay the start or
completion of our communities, increase our expenses or limit
our homebuilding activities, which could have a negative impact
on our operations.
We must obtain the approval of numerous governmental authorities
in connection with our development activities, and these
governmental authorities often have broad discretion in
exercising their approval authority. We incur substantial costs
related to compliance with legal and regulatory requirements.
Any increase in legal and regulatory requirements may cause us
to incur substantial additional costs, or in some cases cause us
to determine
14
that the property is not feasible for development. Various
local, state and federal statutes, ordinances, rules and
regulations concerning building, zoning, sales and similar
matters apply to
and/or
affect the housing industry. This governmental regulation
affects construction activities as well as sales activities,
mortgage lending activities and other dealings with consumers.
The industry also has experienced an increase in state and local
legislation and regulations which limit the availability or use
of land. We may be required to apply for additional approvals or
modify our existing approvals because of changes in local
circumstances or applicable law. Further, we may experience
delays and increased expenses as a result of legal challenges to
our proposed communities, whether brought by governmental
authorities or private parties.
Expansion
of regulation in the housing industry has increased the time
required to obtain the necessary approvals to begin construction
and has prolonged the time between the initial acquisition of
land or land options and the commencement and completion of
construction. These delays can increase our costs and decrease
our profitability.
Municipalities may restrict or place moratoriums on the
availability of utilities, such as water and sewer taps. In some
areas, municipalities may enact growth control initiatives,
which will restrict the number of building permits available in
a given year. If municipalities in which we operate take actions
like these, it could have an adverse effect on our business by
causing delays, increasing our costs or limiting our ability to
operate in those municipalities.
Increases
in taxes or government fees could increase our costs, and
adverse changes in tax laws could reduce customer demand for our
homes.
Increases in real estate taxes and other local government fees,
such as fees imposed on developers to fund schools, open space,
road improvements,
and/or
provide low and moderate income housing, could increase our
costs and have an adverse effect on our operations. In addition,
increases in local real estate taxes could adversely affect our
potential customers who may consider those costs in determining
whether to make a new home purchase and decide, as a result, not
to purchase one of our homes. In addition, any changes in the
income tax laws that would reduce or eliminate tax deductions or
incentives to homeowners, such as proposed changes limiting the
deductibility of interest on home mortgages, could make housing
less affordable or otherwise reduce the demand for housing,
which in turn could reduce our sales and hurt our operating
results.
Adverse
weather conditions and conditions in nature beyond our control
could disrupt the development of our communities, which could
harm our sales and earnings.
Adverse weather conditions and natural disasters, such as
hurricanes, tornadoes, earthquakes, floods and fires, can have
serious effects on our ability to develop our residential
communities. We also may be affected by unforeseen engineering,
environmental or geological problems. Any of these adverse
events or circumstances could cause delays in the completion of,
or increase the cost of, developing one or more of our
residential communities and, as a result, could harm our sales
and earnings.
If we
experience shortages or increased costs of labor and supplies or
other circumstances beyond our control, there could be delays or
increased costs in developing our communities, which could
adversely affect our operating results.
Our ability to develop residential communities may be affected
by circumstances beyond our control, including: work stoppages,
labor disputes and shortages of qualified trades people, such as
carpenters, roofers, electricians and plumbers; lack of
availability of adequate utility infrastructure and services;
our need to rely on local subcontractors who may not be
adequately capitalized or insured; and shortages, or delays in
availability, or fluctuations in prices of, building materials.
Any of these circumstances could give rise to delays in the
start or completion of, or could increase the cost of,
developing one or more of our residential communities. We may
not be able to recover these increased costs by raising our home
prices because the price for each home is typically set months
prior to its delivery pursuant to the agreement of sale with the
home buyer. If that happens, our operating results could be
harmed. Additionally, we may be limited in the amount we can
raise sales prices by our customers unwillingness to pay
higher prices.
15
We are subject to one collective bargaining agreement that
covers approximately 2% of our employees. We have not
experienced any work stoppages due to strikes by unionized
workers, but we cannot assure you that there will not be any
work stoppages due to strikes or other job actions in the
future. We use independent contractors to construct our homes.
At any given point in time, some or all of these subcontractors
may be unionized.
Product
liability litigation and warranty claims that arise in the
ordinary course of business may be costly, which could adversely
affect our business.
As a home builder, we are subject to construction defect and
home warranty claims arising in the ordinary course of business.
These claims are common in the homebuilding industry and can be
costly. In addition, the costs of insuring against construction
defect and product liability claims are high, and the amount of
coverage offered by insurance companies is currently limited.
There can be no assurance that this coverage will not be further
restricted and become more costly. If we are not able to obtain
adequate insurance against these claims, we may experience
losses that could hurt our financial results.
Our
principal stockholders may effectively exercise control over
matters requiring stockholder approval.
As of December 11, 2007, Robert I. Toll and his affiliates
owned, directly or indirectly, or had the right to acquire
within 60 days, approximately 17.5% of the outstanding
shares of Toll Brothers, Inc.s common stock, and his
brother Bruce E. Toll and his affiliates owned, directly or
indirectly, or had the right to acquire within 60 days,
approximately 4.3% of the outstanding shares of Toll Brothers,
Inc.s common stock. All our directors and executive
officers as a group and their affiliates (including the shares
of Robert I. Toll and Bruce E. Toll and their affiliates) owned,
directly or indirectly, or had the right to acquire within
60 days, approximately 24.8% of the outstanding shares of
Toll Brothers, Inc.s common stock as of December 11,
2007. To the extent that Robert I. Toll, Bruce E. Toll and our
other directors and executive officers vote their shares in the
same manner, their combined stock ownership may effectively give
them the power to elect all of the directors and control the
management, operations and affairs of Toll Brothers, Inc. Their
ownership may discourage someone from making a significant
equity investment in Toll Brothers, Inc., even if we needed the
investment to operate our business. The size of their combined
stock holdings could be a significant factor in delaying or
preventing a change of control transaction that other
stockholders may deem to be in their best interests, such as a
transaction in which the other stockholders would receive a
premium for their shares over their current trading prices.
Our
business is seasonal in nature, so our quarterly operating
results fluctuate.
Our quarterly operating results typically fluctuate with the
seasons. A significant portion of our agreements of sale are
entered into with customers in the winter and spring months.
Construction of a customers home typically proceeds after
signing the agreement of sale and can require 12 months or
more to complete. Weather-related problems may occur in the late
winter and early spring, delaying starts or closings or
increasing costs and reducing profitability. In addition, delays
in opening new communities or new sections of existing
communities could have an adverse impact on home sales and
revenues. Because of these factors, our quarterly operating
results may be uneven and may be marked by lower revenues and
earnings in some quarters than in others.
Changes
in accounting principles, interpretations and practices may
affect our reported revenues, earnings and results of
operations.
Generally accepted accounting principles and their accompanying
pronouncements, implementation guidelines, interpretations and
practices for certain aspects of our business are complex and
may involve subjective judgments, such as revenue recognition,
inventory valuations and income taxes. Changes in
interpretations could significantly affect our reported
revenues, earnings and operating results, and could add
significant volatility to those measures without a comparable
underlying change in cash flows from operations.
16
Changes
in tax laws or the interpretation of tax laws may negatively
affect our operating results.
We believe that our recorded tax balances are adequate. However,
it is not possible to predict the effects of possible changes in
the tax laws or changes in their interpretation and whether they
could have a material negative effect on our operating results.
Our
cash flows and results of operations could be adversely affected
if legal claims are brought against us and are not resolved in
our favor.
Claims, including two securities class actions, have been
brought against us in various legal proceedings that have not
had, and are not expected to have, a material adverse effect on
our business or financial condition. Should claims be filed in
the future, it is possible that our cash flows and results of
operations could be affected, from time to time, by the negative
outcome of one or more of such matters.
Future
terrorist attacks against the United States or increased
domestic or international instability could have an adverse
effect on our operations.
In the weeks following the September 11, 2001 terrorist
attacks, we experienced a sharp decrease in the number of new
contracts signed for homes and an increase in the cancellation
of existing contracts. Although new home purchases stabilized
and subsequently recovered in the months after that initial
period, adverse developments in the war on terrorism, future
terrorist attacks against the United States, or increased
domestic or international instability could adversely affect our
business.
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|
ITEM 1B.
|
UNRESOLVED
STAFF COMMENTS
|
Not applicable
Headquarters
Our corporate office, which we lease from an unrelated third
party, contains approximately 200,000 square feet, and is
located in Horsham, Montgomery County, Pennsylvania.
Manufacturing/Distribution
Facilities
We own a facility of approximately 300,000 square feet
located in Morrisville, Pennsylvania, a facility and warehouse
of approximately 186,000 square feet located in Emporia,
Virginia and a 134,000 square foot facility in Knox,
Indiana. We lease a facility of approximately
144,000 square feet located in Fairless Hills,
Pennsylvania. At these facilities, we manufacture open wall
panels, roof and floor trusses, and certain interior and
exterior millwork to supply a portion of our construction needs.
These facilities supply components used in our North,
Mid-Atlantic and South geographic segments. These operations
also permit us to purchase wholesale lumber, plywood, windows,
doors, certain other interior and exterior millwork and other
building materials to supply to our communities. We believe that
increased efficiencies, cost savings and productivity result
from the operation of these plants and from the wholesale
purchase of materials. These plants sell wall panels and roof
and floor trusses to us as well as to a small number of outside
purchasers.
Office
and Other Facilities
We lease other office and warehouse space in various locations,
none of which are material to our business.
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ITEM 3.
|
LEGAL
PROCEEDINGS
|
In January 2006, we received a request for information pursuant
to Section 308 of the Clean Water Act from Region 3 of the
Environmental Protection Agency (the EPA) requesting
information about storm water discharge practices in connection
with our homebuilding projects in the states that comprise EPA
Region 3. To the extent the EPAs review were to lead the
EPA to assert violations of state
and/or
federal regulatory requirements and request
17
injunctive relief
and/or civil
penalties, we would defend and attempt to resolve any such
asserted violations. At this time we cannot predict the outcome
of the EPAs review.
On April 17, 2007, a securities class action was filed
against Toll Brothers Inc. and Robert I. Toll and Bruce E.
Toll in the U.S. District Court for the Eastern District of
Pennsylvania. The original plaintiff, Desmond Lowrey, has been
replaced by two new lead plaintiffs: The City of Hialeah
Employees Retirement System and the Laborers Pension
Trust Funds for Northern California. On August 14,
2007, an amended complaint was filed on behalf of the purported
class of purchasers of our common stock between December 9,
2004 and November 8, 2005 and the following individual
defendants, who are directors
and/or
officers of Toll Brothers, Inc., were added to the suit:
Zvi Barzilay, Joel H. Rassman, Robert S. Blank, Paul E.
Shapiro, Carl B. Marbach, Richard Braemer, and
Joseph R. Sicree. The amended complaint on behalf of
the purported class alleges that the defendants violated
Sections 10(b), 20(a), and 20A of the Securities Exchange
Act of 1934. We have responded to the amended complaint by
filing a motion to dismiss, challenging the sufficiency of the
pleadings. There has not yet been any ruling on our motion. We
believe that this lawsuit is without merit and intend to
vigorously defend against it.
A second securities class action suit was filed in federal court
in the Central District of California. The plaintiff, on behalf
of the purported class of shareholders, alleges that the Chief
Financial Officer of the Company violated federal securities
laws by issuing various materially false and misleading
statements during the class period between December 8, 2005
and August 22, 2007. This suit has not yet been served and,
therefore, we have not yet responded to it. We believe that this
lawsuit is without merit and intend to vigorously defend
against it.
Other than as set forth above, there are no proceedings required
to be disclosed pursuant to Item 103 of
Regulation S-K.
We are involved in various other 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.
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ITEM 4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
No matters were submitted to a vote of security holders, through
the solicitation of proxies or otherwise, during the fourth
quarter of the fiscal year ended October 31, 2007.
|
|
ITEM 4A.
|
EXECUTIVE
OFFICERS OF THE REGISTRANT
|
The following table includes information with respect to all of
our executive officers at October 31, 2007. All executive
officers serve at the pleasure of our Board of Directors.
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Positions
|
|
Robert I. Toll
|
|
|
66
|
|
|
Chairman of the Board, Chief Executive Officer and Director
|
Zvi Barzilay
|
|
|
61
|
|
|
President, Chief Operating Officer and Director
|
Joel H. Rassman
|
|
|
62
|
|
|
Executive Vice President, Treasurer, Chief Financial Officer and
Director
|
Robert I. Toll, with his brother Bruce E. Toll, the Vice
Chairman of the Board and a Director of Toll Brothers, Inc.,
co-founded our predecessors operations in 1967. Robert I.
Toll has been our Chief Executive Officer and Chairman of the
Board since our inception.
Zvi Barzilay joined us as a project manager in 1980 and
has been an officer since 1983. Mr. Barzilay was elected a
Director of Toll Brothers, Inc. in 1994. He has held the
position of Chief Operating Officer since May 1998 and the
position of President since November 1998.
Joel H. Rassman joined us as Senior Vice President, Chief
Financial Officer and Treasurer in 1984. Mr. Rassman has
been a Director of Toll Brothers, Inc. since 1996. He has held
the position of Executive Vice President since May 2002.
18
PART II
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ITEM 5.
|
MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
|
Our common stock is traded on the New York Stock Exchange
(Symbol: TOL).
The following table sets forth the price range of our common
stock on the New York Stock Exchange for each fiscal quarter
during the two years ended October 31, 2007.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Three Months Ended
|
|
|
|
October 31
|
|
|
July 31
|
|
|
April 30
|
|
|
January 31
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
$
|
25.55
|
|
|
$
|
31.14
|
|
|
$
|
35.64
|
|
|
$
|
34.43
|
|
Low
|
|
$
|
19.31
|
|
|
$
|
21.82
|
|
|
$
|
26.90
|
|
|
$
|
26.79
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
$
|
30.90
|
|
|
$
|
32.10
|
|
|
$
|
36.05
|
|
|
$
|
41.65
|
|
Low
|
|
$
|
23.82
|
|
|
$
|
22.22
|
|
|
$
|
28.70
|
|
|
$
|
33.04
|
|
During the three months ended October 31, 2007, we
repurchased the following shares under our repurchase program
(amounts in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number
|
|
|
Maximum
|
|
|
|
|
|
|
|
|
|
of Shares
|
|
|
Number
|
|
|
|
|
|
|
|
|
|
Purchased as
|
|
|
of Shares that
|
|
|
|
Total
|
|
|
Average
|
|
|
Part of a
|
|
|
May Yet be
|
|
|
|
Number of
|
|
|
Price
|
|
|
Publicly
|
|
|
Purchased
|
|
|
|
Shares
|
|
|
Paid per
|
|
|
Announced
|
|
|
Under the Plan
|
|
Period
|
|
Purchased
|
|
|
Share
|
|
|
Plan or Program
|
|
|
or Program (a)
|
|
|
August 1 to August 31, 2007
|
|
|
4
|
|
|
$
|
22.65
|
|
|
|
4
|
|
|
|
12,052
|
|
September 1 to September 30, 2007
|
|
|
10
|
|
|
$
|
20.71
|
|
|
|
10
|
|
|
|
12,042
|
|
October 1 to October 31, 2007
|
|
|
6
|
|
|
$
|
22.21
|
|
|
|
6
|
|
|
|
12,036
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
20
|
|
|
$
|
21.57
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
On March 20, 2003, our Board of Directors authorized the
repurchase of up to 20 million shares of our common stock,
par value $.01, from time to time, in open market transactions
or otherwise, for the purpose of providing shares for our
various employee benefit plans. The Board of Directors did not
fix an expiration date for the repurchase program. |
Except as set forth above, we did not repurchase any of our
equity securities during the three-month period ended
October 31, 2007.
We have not paid any cash dividends on our common stock to date
and expect that, for the foreseeable future, we will not do so;
rather, we will follow a policy of retaining earnings in order
to finance our business and, from time to time, repurchase
shares of our common stock. The payment of dividends is within
the discretion of our Board of Directors and any decision to pay
dividends in the future will depend upon an evaluation of a
number of factors, including our earnings, capital requirements,
our operating and financial condition, and any contractual
limitation then in effect. In this regard, our senior
subordinated notes contain restrictions on the amount of
dividends we may pay on our common stock. In addition, our bank
credit agreement requires us to maintain a minimum tangible net
worth (as defined in the agreement), which restricts the amount
of dividends we may pay. At October 31, 2007, under the
most restrictive of these provisions, we could have paid up to
approximately $1.12 billion of cash dividends.
At December 7, 2007, there were approximately 934 record
holders of our common stock.
19
|
|
ITEM 6.
|
SELECTED
FINANCIAL DATA
|
The following tables set forth selected consolidated financial
and housing data at and for each of the five fiscal years in the
period ended October 31, 2007. It should be read in
conjunction with the Consolidated Financial Statements and Notes
thereto, included in this report beginning at
page F-1,
and Managements Discussion and Analysis of Financial
Condition and Results of Operations, included in Item 7 of
this report.
Summary
Consolidated Income Statements and Balance Sheets (amounts in
thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31:
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Revenues
|
|
$
|
4,646,979
|
|
|
$
|
6,123,453
|
|
|
$
|
5,793,425
|
|
|
$
|
3,861,942
|
|
|
$
|
2,758,443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$
|
70,680
|
|
|
$
|
1,126,616
|
|
|
$
|
1,323,128
|
|
|
$
|
647,432
|
|
|
$
|
411,153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
35,651
|
|
|
$
|
687,213
|
|
|
$
|
806,110
|
|
|
$
|
409,111
|
|
|
$
|
259,820
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.23
|
|
|
$
|
4.45
|
|
|
$
|
5.23
|
|
|
$
|
2.75
|
|
|
$
|
1.84
|
|
Diluted
|
|
$
|
0.22
|
|
|
$
|
4.17
|
|
|
$
|
4.78
|
|
|
$
|
2.52
|
|
|
$
|
1.72
|
|
Weighted average number of shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
155,318
|
|
|
|
154,300
|
|
|
|
154,272
|
|
|
|
148,646
|
|
|
|
141,339
|
|
Diluted
|
|
|
164,166
|
|
|
|
164,852
|
|
|
|
168,552
|
|
|
|
162,330
|
|
|
|
151,083
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At October 31:
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Inventory
|
|
$
|
5,572,655
|
|
|
$
|
6,095,702
|
|
|
$
|
5,068,624
|
|
|
$
|
3,878,260
|
|
|
$
|
3,080,349
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
7,220,316
|
|
|
$
|
7,583,541
|
|
|
$
|
6,343,840
|
|
|
$
|
4,905,578
|
|
|
$
|
3,787,391
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans payable
|
|
$
|
696,814
|
|
|
$
|
736,934
|
|
|
$
|
250,552
|
|
|
$
|
340,380
|
|
|
$
|
281,697
|
|
Senior debt
|
|
|
1,142,306
|
|
|
|
1,141,167
|
|
|
|
1,140,028
|
|
|
|
845,665
|
|
|
|
546,669
|
|
Subordinated debt
|
|
|
350,000
|
|
|
|
350,000
|
|
|
|
350,000
|
|
|
|
450,000
|
|
|
|
620,000
|
|
Mortgage company warehouse loan
|
|
|
76,730
|
|
|
|
119,705
|
|
|
|
89,674
|
|
|
|
92,053
|
|
|
|
49,939
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
$
|
2,265,850
|
|
|
$
|
2,347,806
|
|
|
$
|
1,830,254
|
|
|
$
|
1,728,098
|
|
|
$
|
1,498,305
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity
|
|
$
|
3,527,234
|
|
|
$
|
3,415,926
|
|
|
$
|
2,763,571
|
|
|
$
|
1,919,987
|
|
|
$
|
1,476,628
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
Housing
Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31:
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Closings(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of homes
|
|
|
6,687
|
|
|
|
8,601
|
|
|
|
8,769
|
|
|
|
6,627
|
|
|
|
4,911
|
|
Value (in thousands)
|
|
$
|
4,495,600
|
|
|
$
|
5,945,169
|
|
|
$
|
5,759,301
|
|
|
$
|
3,839,451
|
|
|
$
|
2,731,044
|
|
Revenues percentage of completion (in thousands)
|
|
$
|
139,493
|
|
|
$
|
170,111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of homes
|
|
|
4,440
|
|
|
|
6,164
|
|
|
|
10,372
|
|
|
|
8,684
|
|
|
|
6,132
|
|
Value (in thousands)
|
|
$
|
3,010,013
|
|
|
$
|
4,460,734
|
|
|
$
|
7,152,463
|
|
|
$
|
5,641,454
|
|
|
$
|
3,475,992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At October 31:
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Backlog:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of homes
|
|
|
3,950
|
|
|
|
6,533
|
|
|
|
8,805
|
|
|
|
6,709
|
|
|
|
4,652
|
|
Value (in thousands)(2)
|
|
$
|
2,854,435
|
|
|
$
|
4,488,400
|
|
|
$
|
6,014,648
|
|
|
$
|
4,433,895
|
|
|
$
|
2,631,900
|
|
Number of selling communities
|
|
|
315
|
|
|
|
300
|
|
|
|
230
|
|
|
|
220
|
|
|
|
200
|
|
Homesites:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owned
|
|
|
37,139
|
|
|
|
41,808
|
|
|
|
35,838
|
|
|
|
29,804
|
|
|
|
29,081
|
|
Controlled
|
|
|
22,112
|
|
|
|
31,960
|
|
|
|
47,288
|
|
|
|
30,385
|
|
|
|
18,977
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
59,251
|
|
|
|
73,768
|
|
|
|
83,126
|
|
|
|
60,189
|
|
|
|
48,058
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Excludes 336 units delivered in fiscal 2007 that were
accounted for using the percentage of completion accounting
method with an aggregate delivered value of $263.3 million. |
|
(2) |
|
Net of $55.2 million of revenue recognized in fiscal 2007
and $170.1 million of revenue recognized in fiscal 2006
under the percentage of completion accounting method. |
21
|
|
ITEM 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
On December 6, 2007, we issued a press release and held a
conference call to review the results of operations for our
fiscal year ended October 31, 2007 and to discuss the
current state of our business. The information contained in this
report is the same information given in the press release and on
the conference call on December 6, 2007, and we are not
reconfirming or updating that information.
OVERVIEW
In fiscal 2007, we recognized $4.65 billion of revenues, as
compared to $6.12 billion of revenues in fiscal 2006 and
$5.79 billion in fiscal 2005. Net income in fiscal 2007 was
$35.7 million, as compared to $687.2 million and
$806.1 million in fiscal 2006 and fiscal 2005,
respectively. We recognized $619.5 million of inventory
impairment charges and write-offs in fiscal 2007,
$152.0 million in fiscal 2006 and $5.1 million in
fiscal 2005. In addition, we recognized $59.2 million of
impairment charges on two of our investments in unconsolidated
entities in our quarter ended October 31, 2007 and a
$9.0 million goodwill impairment charge in our quarter
ended January 31, 2007. In our quarter ended
October 31, 2007, we recorded our first loss since becoming
a public company in 1986. This loss was due to the continued
deterioration of the market that resulted in inventory
impairment charges and write-offs in our quarter ended
October 31, 2007 of $255.6 million and the
aforementioned $59.2 million of impairment charges related
to two of our investments in unconsolidated entities. The
impairment charges and write-offs recognized on inventory and
investments in unconsolidated entities in the quarter were
primarily located in our Arizona, California, Florida, Nevada,
and Washington, D.C. markets.
Beginning in the fourth quarter of fiscal 2005 and continuing
throughout fiscal 2006 and 2007 and into the first quarter of
fiscal 2008, we experienced a slowdown in new contracts signed.
The value of net new contracts signed in fiscal 2007 of
$3.01 billion (4,440 homes) was a decline of 32.5% from the
value of net new contracts signed in fiscal 2006 and a decline
of 57.9% from the value of net new contracts signed in fiscal
2005. Our backlog of $2.85 billion at October 31, 2007
decreased 36.4% compared to our backlog of $4.49 billion at
October 31, 2006 and decreased 52.5% compared to our
backlog of $6.01 billion at October 31, 2005. Backlog
includes (a) the value of homes under contract but not yet
delivered to our home buyers which are accounted for using the
completed contract method of accounting, and (b) the value
of homes under contract but not yet delivered to our home buyers
for which we use the percentage of completion accounting method
less the amount of revenues we have recognized related to those
homes.
We believe this slowdown is attributable to a decline in
consumer confidence, an overall softening of demand for new
homes, an oversupply of homes available for sale, the inability
of some of our home buyers to sell their current home and the
direct and indirect impact of the turmoil in the mortgage loan
market. We attribute the reduction in demand to concerns on the
part of prospective home buyers about the direction of home
prices, due in part to the constant media attention with regard
to the potential of mortgage foreclosures, many home
builders advertising price reductions and increased sales
incentives, and concerns by prospective home buyers about being
able to sell their existing homes. In addition, we believe
speculators and investors are no longer helping to fuel demand.
We try to avoid selling homes to speculators, and we generally
do not build detached homes without having a signed agreement of
sale and receiving a substantial down payment from a buyer.
Nonetheless, we have been impacted by an overall increase in the
supply of homes available for sale in many markets, as
speculators attempt to sell the homes they previously purchased
or cancel contracts for homes under construction, and as those
builders that as part of their business strategy were building
homes in anticipation of capturing additional sales in a
demand-driven market, attempt to reduce their inventories by
lowering prices and adding incentives. In addition, based on the
high cancellation rates reported by us and by other builders,
non-speculative buyer cancellations are also adding to the
supply of homes in the marketplace. During fiscal 2007, 2006 and
2005, our customers signed gross contracts of 6,025, 7,470 and
10,869, respectively. They cancelled 1,585, 1,306 and 497
contracts during fiscal 2007, 2006 and 2005, respectively.
Contract cancellations include contracts signed in the fiscal
year reported as well as contracts signed in prior fiscal years.
When we report contracts signed, the number and value of
contracts signed is reported net of any cancellations occurring
during the reporting period, whether signed in that reporting
period or in a prior period. Only outstanding agreements of sale
that have been signed by both the home buyer and us as of the
22
end of the period on which we are reporting are included in
backlog. Of the value of backlog reported on October 31,
2006, 2005 and 2004, home buyers subsequently cancelled
approximately 19.9%, 19.2% and 16.5%, respectively.
Despite this slowdown, we believe our industry demographics
remain strong due to the continuing regulation-induced
constraints on lot supplies and the growing number of affluent
households. We continue to seek a balance between our short-term
goal of selling homes in a tough market and our long-term goal
of maximizing the value of our communities. We believe that many
of our communities are in locations that are difficult to
replace and in markets where approvals are increasingly
difficult to achieve. We believe that many of these communities
have substantial embedded value that will be realizable in the
future and that this value should not necessarily be sacrificed
in the current soft market.
We are concerned about the dislocation in the secondary mortgage
market. We maintain relationships with a widely diversified
group of mortgage providers, most of which are among the largest
and, we believe, most reliable in our industry. With few
exceptions, the mortgage providers that provide our customers
with mortgages continue to issue new commitments. Our buyers
generally have been able to obtain adequate financing.
Nevertheless, tightening credit standards will likely shrink the
pool of potential home buyers. Mortgage market liquidity issues
and higher borrowing rates may impede some of our home buyers
from closing, while others may find it more difficult to sell
their existing homes as their buyers face the problem of
obtaining a mortgage. However, we believe that our buyers
generally should be able to continue to secure mortgages, due to
their typically lower loan-to-value ratios and attractive credit
profiles compared to the average American home buyer. Although
we cannot predict the short- and long-term liquidity of the loan
markets, we caution that, with the uncertainties in the mortgage
markets right now, the pace of home sales could slow further
until the credit markets settle down.
In the current challenging environment, we believe our access to
reliable capital and our strong balance sheet give us an
important competitive advantage. Based on our experience during
prior downturns in the housing market, we have learned that
unexpected opportunities may arise in difficult times for those
that are well-prepared. We believe that our solid financial
base, our broad geographic presence, our diversified product
lines and our national brand name all position us well for such
opportunities now and in the future. At October 31, 2007,
we had $900.3 million of cash and cash equivalents and
approximately $1.22 billion available under our bank
revolving credit facility which extends to March 17, 2011.
We believe we have the resources available to fund these
opportunities.
Notwithstanding the current market conditions, we believe
geographic and product diversification, access to lower-cost
capital, and strong demographics have in the past and will in
the future, as market conditions improve, benefit those builders
that can control land and persevere through the increasingly
difficult regulatory approval process. We believe that 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 believe that as home
builders reduce the number of home sites being taken through the
approval process and the process continues to become more
difficult, and as the political pressure from no-growth
proponents continues to increase, our expertise in taking land
through the approval process and our already approved land
positions will allow us to grow in the years to come, as market
conditions improve.
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 certain 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
detached home only after executing an agreement of sale and
receiving a substantial down payment from a buyer; and using
subcontractors to perform home construction and land development
work on a fixed-price basis. In response to current market
conditions, we have been reevaluating and renegotiating many of
our optioned land positions. As a result, we have reduced our
land position from a high of approximately 91,200 at
April 30, 2006 to approximately 59,300 lots at
October 31, 2007.
In the ordinary course of doing business, we must make estimates
and judgments that affect decisions on how we operate and on 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
23
warranty costs; and income taxes. We base our estimates on
historical experience and on various other assumptions that are
believed to be 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.
At October 31, 2007, we were selling from 315 communities
compared to 300 communities at October 31, 2006. We expect
to be selling from approximately 300 communities at
October 31, 2008.
Given the current business climate that we are operating in and
the numerous uncertainties related to sales paces, sales prices,
mortgage markets, cancellations, market direction and the
potential for and size of future impairments, it is difficult to
provide guidance for fiscal 2008. Subject to our caveats and
risks reported elsewhere and the preceding caveats, we currently
estimate that we will deliver between 3,900 and 5,100 homes in
fiscal 2008 at an average home price of between $630,000 and
$650,000 per home. We believe that, as a result of continuing
incentives and slower sales per community, our cost of revenues
as a percentage of revenues, before taking into account
write-downs, will be higher in fiscal 2008 than in fiscal 2007.
Additionally, based on fiscal 2008s lower projected
revenues, our selling, general and administrative expenses
(SG&A), which we expect to be lower in absolute
amounts in fiscal 2008 than in fiscal 2007, will likely be
higher as a percentage of revenues. The foregoing estimates are
identical to those given in our press release and conference
call on December 6, 2007 and we are not reconfirming or
updating those estimates herein.
CRITICAL
ACCOUNTING POLICIES
We believe the following critical accounting policies reflect
the more significant judgments and estimates used in the
preparation of our consolidated financial statements.
Inventory
Inventory is stated at the lower of cost or fair value in
accordance with Statement of Financial Accounting Standards
(SFAS) No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets
(SFAS 144). In addition to direct land
acquisition, land development and home construction costs, costs
include interest, real estate taxes and direct overhead 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. Once
a parcel of land has been approved for development, it generally
takes 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 and the sales and delivery pace of the homes in a
community. Our master planned communities, consisting of several
smaller communities, may take up to ten years or more to
complete. Because of the downturn in our business, the
aforementioned estimated community lives may be significantly
longer. Because our inventory is considered a long-lived asset
under U.S. generally accepted accounting principles, we are
required, under SFAS 144, to regularly 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.
Current Communities: 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, the asset is
reviewed for impairment by comparing the estimated future
undiscounted cash flow for the community to its carrying value.
If the estimated future undiscounted cash flow is less than the
communitys carrying value, the carrying value is written
down to its estimated fair value. Fair value is primarily
determined by discounting the estimated future cash flow of each
community. The impairment is charged to cost of revenues in the
period the impairment is determined. In estimating the cash flow
of a community, we use various estimates such as (a) the
expected sales pace in a community based upon general economic
conditions that will have a short-term or long-term impact on
the market in which the community is located and competition
within the market, including the number of homes/home sites
available and pricing and incentives being offered in other
communities owned by us or by other builders; (b) the
expected sales prices and sales incentives to be offered in a
community; (c) costs expended to date and expected to be
incurred in the future, including, but not limited to, land and
land development costs, home construction costs, interest costs
and overhead costs; (d) alternative product offerings that
may be offered in a community that will have an impact on sales
pace, sales price, building cost or the number of homes that
24
can be built on a particular site; and (e) alternative uses
for the property such as the possibility of a sale of the entire
community to another builder or the sale of individual home
sites.
Future Communities: We evaluate 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 originally contemplated. This evaluation encompasses the
same types of estimates used for current communities described
above as well as an evaluation of the regulatory environment in
which the land is located and the estimated probability of
obtaining the necessary approvals, the estimated time and cost
it will take to obtain the approvals and the possible
concessions that will be required to be given in order to obtain
them. Concessions may include cash payments to fund improvement
to public places such as parks and streets, dedication of a
portion of the property for use by the public or as open space
or a reduction in the density or size of the homes to be built.
Based upon this review, we decide (a) as to land under
contract to be purchased, 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 whether costs that have been capitalized to the
community are recoverable or should be written off. The
write-off is charged to cost of revenues in the period that the
need for the write-off is determined.
The estimates used in the determination of the estimated cash
flows and fair value of a community are based on factors known
to us at the time such estimates are made and our expectations
of future operations and economic conditions. Should the
estimates or expectations used in determining estimated fair
value deteriorate in the future, we may be required to recognize
additional write-downs/write-offs related to current and future
communities.
Variable Interest Entities: We have a
significant number of land purchase contracts, sometimes
referred to herein as land purchase contracts,
purchase agreements, options or
option agreements, and several investments in
unconsolidated entities which we evaluate in accordance with the
Financial Accounting Standards Board (FASB)
Interpretation No. 46 Consolidation of Variable
Interest Entities, an interpretation of ARB No. 51,
as amended by FIN 46R (FIN 46). Pursuant
to FIN 46, an enterprise that absorbs a majority of the
expected losses or receives a majority of the expected residual
returns of a variable interest entity (VIE) is
considered to be the primary beneficiary and 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. For land
purchase contracts with sellers meeting the definition of a VIE,
we perform a review to determine which party is the primary
beneficiary of the VIE. This review requires substantial
judgment and estimation. These judgments and estimates involve
assigning probabilities to various estimated cash flow
possibilities relative to the entitys expected profits and
losses and the cash flows associated with changes in the fair
value of the land under contract. At October 31, 2007, we
determined that we were the primary beneficiary of two VIEs
related to land purchase contracts and recorded inventory of
$22.9 million and accrued expenses of $18.7 million.
Revenue
and Cost Recognition
Home Sales-Completed Contract Method: The
construction time of our homes is generally less than one year,
although some may take more than one year to complete. Revenues
and cost of revenues from these home sales are recorded at the
time each home is delivered and title and possession are
transferred to the buyer. Closing normally occurs shortly after
construction is substantially completed. In addition, we have
several high-rise/mid-rise projects which do not qualify for
percentage of completion accounting in accordance
SFAS No. 66, Accounting for Sales of Real
Estate (SFAS 66), which are included in
this category of revenues and costs.
Land, land development, home construction 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
resulting from a change in the estimated number of homes to be
constructed or in 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
changes resulting from a
25
change in the estimated number of homes to be constructed or in
the estimated costs are allocated to the remaining home sites in
each of the communities of the master planned community.
Home Sales -Percentage of Completion
Method: We are developing several
high-rise/mid-rise projects that will take substantially more
than one year to complete. Under the provisions of SFAS 66,
revenues and costs for these projects are recognized using the
percentage of completion method of accounting when construction
is beyond the preliminary stage, the buyer is committed to the
extent of being unable to require a refund except for
nondelivery of the unit, sufficient units in the project have
been sold to ensure that the property will not be converted to
rental property, the sales proceeds are collectible and the
aggregate sales proceeds and the total cost of the project can
be reasonably estimated. Revenues and costs of individual
projects are recognized on the individual projects
aggregate value of units for which the home buyers have signed
binding agreements of sale, less an allowance for cancellations,
and are based on the percentage of total estimated construction
costs that have been incurred. Total estimated revenues and
construction costs are reviewed periodically, and any change is
applied to current and future periods.
Land Sales: Land sales revenues and cost of
revenues are recorded at the time that title and possession of
the property have been transferred to the buyer. We recognize
the pro rata share of land sales revenues and cost of land sales
revenues to entities in which we have a 50% or less interest
based upon the ownership percentage attributable to the
non-Company investors. Any profit not recognized in a
transaction reduces our investment in the entity or is recorded
as an accrued liability on our consolidated balance sheet.
OFF-BALANCE
SHEET ARRANGEMENTS
We have investments in and advances to several joint ventures
and to Toll Brothers Realty Trust Group (Trust)
and Toll Brothers Realty Trust Group II
(Trust II). At October 31, 2007, we had
investments in and advances to these entities of
$183.2 million, were committed to invest or advance an
additional $355.5 million in the aggregate to these
entities if needed and had guaranteed approximately
$140.3 million of these entities indebtedness
and/or loan
commitments. See Notes 3 and 13 of the Notes to
Consolidated Financial Statements, Investments in
and Advances to Unconsolidated Entities and Related
Party Transactions for more information regarding these
entities. Our investments in these entities are accounted for
using the equity method.
26
RESULTS
OF OPERATIONS
The following table compares certain income statement items
related to our operations ($ amounts in millions):
|
|
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
$
|
|
|
%
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|
|
$
|
|
|
%
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|
|
$
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|
|
%
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|
Revenues:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Completed contract
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|
$
|
4,495.6
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|
|
|
|
|
$
|
5,945.2
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|
|
|
|
|
|
$
|
5,759.3
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|
|
|
|
Percentage of completion
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|
139.5
|
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|
|
|
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170.1
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|
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|
|
|
|
|
|
Land sales
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|
|
11.9
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|
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|
8.2
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|
|
|
|
|
34.1
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|
|
|
|
|
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|
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|
|
|
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4,647.0
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|
|
|
6,123.5
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|
|
|
|
5,793.4
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Costs of revenues:
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|
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|
Completed contract
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|
|
3,905.9
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|
|
|
86.9
|
|
|
|
4,263.2
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|
|
71.7
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|
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|
3,902.7
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|
|
67.8
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Percentage of completion
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|
|
109.0
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78.1
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|
|
|
132.3
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77.8
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|
|
|
|
|
|
|
|
|
Land sales
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8.1
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|
|
|
67.9
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|
|
7.0
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|
|
|
85.6
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|
|
|
24.4
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|
|
71.6
|
|
Interest
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102.4
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|
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2.2
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|
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122.0
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|
|
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2.0
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125.3
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2.2
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4,125.4
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88.8
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4,524.5
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73.9
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4,052.4
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69.9
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Selling, general and administrative
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516.7
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|
11.1
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|
|
|
573.4
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9.4
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482.8
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8.3
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|
Goodwill impairment
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9.0
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(Loss) income from operations
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(4.1
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)
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1,025.6
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|
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1,258.2
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|
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(Loss) earnings from unconsolidated entities
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|
(40.4
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)
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48.4
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27.7
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|
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Interest and other
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|
115.1
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52.7
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41.2
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|
|
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|
|
Expenses related to early retirement of debt
|
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(4.1
|
)
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Income before income taxes
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|
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70.7
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|
|
|
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|
|
1,126.6
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|
|
|
|
|
|
|
1,323.1
|
|
|
|
|
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Income taxes
|
|
|
35.0
|
|
|
|
|
|
|
|
439.4
|
|
|
|
|
|
|
|
517.0
|
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Net income
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$
|
35.7
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|
|
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|
|
$
|
687.2
|
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|
|
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|
$
|
806.1
|
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Note: Percentages for cost of revenues for
completed contract, percentage of completion and land sales are
based on the corresponding item under revenues. Percentages for
interest expense and selling, general and administrative
expenses are based on total revenues. Amounts may not add due to
rounding.
FISCAL
2007 COMPARED TO FISCAL 2006
Unless otherwise stated, contracts signed represents a number or
amount equal to the gross number or amount of contracts signed
during the relevant period, less the number or amount of
contracts cancelled during the relevant period, which includes
contracts that were signed during the relevant period and
contracts signed in prior periods.
Revenues
and Costs Completed Contract
Revenues for fiscal 2007 were lower than those of fiscal 2006 by
approximately $1.45 billion, or 24.4%. The decrease was
attributable to a 22.3% decrease in the number of homes
delivered and a 2.7% decrease in the average price of the homes
delivered. The decrease in the number of homes delivered was
primarily due to the lower backlog of homes at October 31,
2006 as compared to October 31, 2005, which was primarily
the result of a 40.6% decrease in the number of contracts signed
in fiscal 2006 versus fiscal 2005, and a decline of 27.6% in the
number of contracts signed in fiscal 2007 as compared to fiscal
2006. The decrease in the average price of the homes delivered
was due primarily to the increased sales incentives given to
buyers on the homes delivered in fiscal 2007 as compared to
fiscal 2006 offset in part by a slight change in the mix of
homes delivered to higher priced homes.
The value of contracts signed in fiscal 2007 was
$2.99 billion (4,413 homes). This represented a 32.2%
decrease compared to the value of contracts signed in fiscal
2006 of $4.40 billion (6,099 homes). The decrease was
27
attributable to a 27.6% decrease in the number of contracts
signed in fiscal 2007 as compared to fiscal 2006, and a 6.3%
decrease in the average value of each contract signed in fiscal
2007 as compared to fiscal 2006. We believe the decrease in the
number of contracts signed is attributable to the increased
number of cancellations, a decline in consumer confidence, an
overall softening of demand for new homes and an oversupply of
homes available for sale. The value of contracts cancelled in
fiscal 2007 (including those signed in fiscal 2007 and those
signed in prior periods but not cancelled until fiscal
2007) as a percentage of the gross value of contracts
signed in fiscal 2007 was 27.9%, as compared to 17.8% in fiscal
2006.
We believe this slowdown is attributable to a decline in
consumer confidence, an overall softening of demand for new
homes, an oversupply of homes available for sale, the inability
of some of our home buyers to sell their current home and the
direct and indirect impact of the turmoil in the mortgage loan
market. We attribute the reduction in demand to concerns on the
part of prospective home buyers about the direction of home
prices, due in part to the constant media attention with regard
to the potential of mortgage foreclosures, many home
builders advertising price reductions and increased sales
incentives, and concerns by prospective home buyers about being
able to sell their existing homes. In addition, we believe
speculators and investors are no longer helping to fuel demand.
We try to avoid selling homes to speculators, and we generally
do not build detached homes without having a signed agreement of
sale and receiving a substantial down payment from a buyer.
Nonetheless, we have been impacted by an overall increase in the
supply of homes available for sale in many markets, as
speculators attempt to sell the homes they previously purchased
or cancel contracts for homes under construction, and as those
builders that as part of their business strategy were building
homes in anticipation of capturing additional sales in a
demand-driven market, attempt to reduce their inventories by
lowering prices and adding incentives. In addition, based on the
high cancellation rates reported by us and by other builders,
non-speculative buyer cancellations are also adding to the
supply of homes in the marketplace. The decline in the average
sales price of new sales contracts signed was due primarily to a
shift in the number of contracts signed to less expensive areas
and/or
smaller homes and the effect of increased sales incentives in
fiscal 2007 as compared to fiscal 2006.
At October 31, 2007, our backlog of homes under contract
accounted for under the completed contract method of accounting
was $2.82 billion (3,867 homes), 34.8% lower than the
$4.33 billion (6,141 homes) in backlog at October 31,
2006. The decrease in backlog at October 31, 2007 compared
to the backlog at October 31, 2006 is primarily
attributable to a lower backlog at October 31, 2006 as
compared to the backlog at October 31, 2005, and the
decrease in the value and number of contracts signed in fiscal
2007 as compared to fiscal 2006, offset in part by the lower
number of deliveries in fiscal 2007 as compared to fiscal 2006.
Home costs as a percentage of revenue were 86.9% in fiscal 2007
as compared to 71.7% in fiscal 2006. The increase in the fiscal
2007 percentage was primarily the result of the higher
amount of inventory impairment charges recognized, increased
sales incentives given to home buyers on the homes delivered and
higher overhead costs per home delivered. In fiscal 2007 and
2006, we recognized inventory impairment charges of
$619.5 million and $152.0 million, respectively.
Fiscal 2007 cost of revenues as a percentage of revenues
increased by approximately 2.6% due to the increased sales
incentives and by 1% due to higher overhead costs per home.
Revenues
and Costs Percentage of Completion
We are developing several projects for which we are recognizing
revenues and costs using the percentage of completion method of
accounting. Revenues and costs of individual projects are
recognized on the individual projects aggregate value of
units for which home buyers have signed binding agreements of
sale and are based on the percentage of total estimated
construction costs that have been incurred. Total estimated
revenues and construction costs are reviewed periodically, and
any change is applied to current and future periods. In fiscal
2007 and 2006, we recognized $139.5 million and
$170.1 million of revenues, respectively, and
$109.0 million and $132.3 million of costs,
respectively, on these projects. In fiscal 2007, cost of
revenues as a percentage of revenues recognized of 78.1% was
slightly higher than the fiscal 2006 percentage of 77.8%.
The increase was due primarily to cost increases and a change in
the mix of revenues recognized in fiscal 2007 to more costly
projects. In fiscal 2007, we delivered $263.3 million (336
homes) in projects for which we are using the percentage of
completion method of accounting.
28
At October 31, 2007, our backlog of homes in communities
that we account for using the percentage of completion method of
accounting was $30.2 million (net of $55.2 million of
revenue recognized) compared to $154.3 million at
October 31, 2006 (net of $170.1 million of revenue
recognized). The decline in the backlog at October 31, 2007
is primarily the result of the recognition of revenues and a
decline in contracts signed. We expect that this decline will
continue as we recognize revenues in the two remaining projects
where we use percentage of completion accounting, and as we sell
out of these projects without replacing them with new ones that
qualify under the accounting rules for the application of the
percentage of completion accounting method. See New
Accounting Pronouncements in Note 1 of our
Notes to Consolidated Financial Statements for
further information.
Revenues
and Costs Land Sales
We are developing several communities in which we expect to sell
a portion of the land to other builders or entities. The amount
and profitability of land sales will vary from year to year
depending upon the sale and delivery of the specific land
parcels. In fiscal 2007 and 2006, land sales revenues were
$11.9 million and $8.2 million, respectively, and the
cost of land sales revenues was approximately 67.9% and 85.6% of
land sales revenues, respectively.
Interest
Expense
In our communities accounted for using the completed contract
method of accounting, we determine interest expense on a
specific
lot-by-lot
basis, and for land sales we determine interest expense on a
parcel-by-parcel
basis. 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.
For projects using the percentage of completion method of
accounting, interest expense is determined based on the total
estimated interest for the project and the percentage of total
estimated construction costs that have been incurred to date.
Any change in the estimated interest expense for the project is
applied to current and future periods.
Interest expense as a percentage of revenues was 2.2% in fiscal
2007, as compared to 2.0% in fiscal 2006.
Selling,
General and Administrative Expenses
SG&A spending decreased by $56.7 million, or 10% in
fiscal 2007, as compared to fiscal 2006. The reduction in
spending was due primarily to cost reductions, offset in part by
the expenses resulting from the increased number of communities
from which we were operating during fiscal 2007 as compared to
fiscal 2006. At October 31, 2007, we had 315 selling
communities, a 5% increase over the 300 selling communities we
had at October 31, 2006.
Goodwill
Impairment
During the three-month period ended January 31, 2007, due
to the continued decline of the Detroit market, we re-evaluated
the carrying value of goodwill associated with a 1999
acquisition. We estimated the fair value of our assets in this
market, including goodwill. Fair value was determined based on
the discounted future cash flow expected to be generated in this
market. Based upon this evaluation and our expectation that this
market would not recover for a number of years, we determined
that the related goodwill was impaired. We recognized a
$9.0 million impairment charge in the three-month period
ended January 31, 2007. After recognizing this charge, we
did not have any goodwill remaining from this acquisition.
(Loss) Earnings
From Unconsolidated Entities
We are a participant in several joint ventures and in the Trust
and Trust II. We recognize our proportionate share of the
earnings from these entities. Many of our joint ventures are
land development projects or high-rise/mid-rise construction
projects and do not generate revenues and earnings for a number
of years during the development of the property. Once
development is complete, the joint ventures will generally, over
a relatively short period of time, generate revenues and
earnings until all the assets of the entities are sold. Because
there is not a steady flow of
29
revenues and earnings from these entities, the earnings
recognized from these entities will vary significantly from
period to period. In fiscal 2007, we recognized
$40.4 million of losses from unconsolidated entities as
compared to $48.4 million of earnings in fiscal 2006. The
fiscal 2007 loss was attributable to $59.2 million of
impairment charges on two of our investments in unconsolidated
entities in our quarter ended October 31, 2007.
Interest
and Other Income
In fiscal 2007, we recognized $115.1 million of interest
and other income as compared to $52.7 million in fiscal
2006. The $62.5 million increase in fiscal 2007 was
primarily the result of the recognition into income of
$36.5 million of retained customer deposits in fiscal 2007
as compared to $15.4 million in fiscal 2006, a
$14.8 million gain realized from the sale of our security
business, a $9.9 million gain realized from the sale of our
cable TV and broadband Internet business, and an
$8.8 million increase in interest income in fiscal 2007 as
compared to 2006.
Income
Before Income Taxes
Income before taxes in fiscal 2007 was $70.7 million, a
decrease of 93.7% from the $1.13 billion earned in fiscal
2006.
Income
Taxes
Income taxes were provided at an effective rate of 49.6% in
fiscal 2007 as compared to 39.0% in fiscal 2006. The increase in
the effective tax rate in fiscal 2007 as compared to fiscal 2006
was due primarily to lower pretax income reported in fiscal 2007
as compared to fiscal 2006 and the greater impact of individual
components of the provision for income taxes on the overall rate
in fiscal 2007 as compared to the fiscal 2006 rate. The
effective state income tax rate for fiscal 2007 was 21.4% as
compared to 7.0% in fiscal 2006. The increase in the state tax
rate was the result of the allocation of our income and losses
to the various taxing jurisdictions in which we operate and the
tax rates in those jurisdictions. In addition, in fiscal 2007,
we reported higher tax-free income, an increase in our estimated
interest provided on anticipated tax assessments and a lower
amount of expiring state tax provisions as compared to fiscal
2006. We also recognized $8.7 million and
$10.3 million of manufacturing and other tax credits in
fiscal 2007 and fiscal 2006, respectively. As a percentage of
income before taxes, the 2007 credits were significantly higher
then the fiscal 2006 percentage. See Note 7 to the
Notes to Consolidated Financial Statements,
Income Taxes, for additional information regarding
the change in the income tax rates and the impact on the
financial statements.
Geographic
Segments
We operate in four geographic segments around the United States:
the North, consisting of Connecticut, Illinois, Massachusetts,
Michigan, Minnesota, New Jersey, New York, Ohio and Rhode
Island; the Mid-Atlantic, consisting of Delaware, Maryland,
Pennsylvania, Virginia and West Virginia; the South, consisting
of Florida, Georgia, North Carolina, South Carolina, and Texas;
and the West, consisting of Arizona, California, Colorado and
Nevada. We stopped selling homes in Ohio in fiscal 2005 and
delivered our last home in that state in fiscal 2006. The
operations in Ohio were immaterial to the North segment. We
acquired and opened for sale our first communities in Georgia in
fiscal 2007.
30
The following table summarizes by geographic segments total
revenues and income (loss) before income taxes for each of the
years ended October 31, 2007 and 2006 ($ amounts in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) Before
|
|
|
|
Revenues
|
|
|
Income Taxes
|
|
|
|
2007 Units
|
|
|
2006 Units
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
North(a)
|
|
|
1,467
|
|
|
|
1,983
|
|
|
$
|
1,087.7
|
|
|
$
|
1,444.2
|
|
|
$
|
51.2
|
|
|
$
|
281.9
|
|
Mid-Atlantic(b)
|
|
|
2,137
|
|
|
|
2,697
|
|
|
|
1,340.6
|
|
|
|
1,777.9
|
|
|
|
206.4
|
|
|
|
491.8
|
|
South(c)
|
|
|
1,631
|
|
|
|
2,017
|
|
|
|
976.9
|
|
|
|
1,192.4
|
|
|
|
(20.4
|
)
|
|
|
161.8
|
|
West
|
|
|
1,452
|
|
|
|
1,904
|
|
|
|
1,241.8
|
|
|
|
1,709.0
|
|
|
|
(87.9
|
)
|
|
|
338.5
|
|
Corporate and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(78.6
|
)
|
|
|
(147.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
6,687
|
|
|
|
8,601
|
|
|
$
|
4,647.0
|
|
|
$
|
6,123.5
|
|
|
$
|
70.7
|
|
|
$
|
1,126.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Includes percentage of completion revenues of $91.0 million
and $110.3 million in fiscal 2007 and 2006, respectively,
and land sales revenues of $3.5 million and
$0.4 million in fiscal 2007 and 2006, respectively. |
|
(b) |
|
Includes land sales revenues of $2.3 million and
$0.2 million in fiscal 2007 and 2006, respectively. |
|
(c) |
|
Includes percentage of completion revenues of $48.5 million
and $59.8 million in fiscal 2007 and 2006, respectively,
and land sales revenues of $6.1 million and
$7.4 million in fiscal 2007 and 2006, respectively. |
North
Revenues in fiscal 2007 were lower than those for fiscal 2006 by
$356.5 million, or 25%. The decrease in revenues was
attributable to a 26% decrease in the number of homes delivered
and a reduction in percentage of completion revenues of
$19.3 million, offset, in part, by a 1% increase in the
average price of the homes delivered. Approximately 75% of the
decrease in revenues related to the New Jersey suburban markets,
where the number of homes delivered decreased 37% and the
average price of the homes delivered decreased 6%. The decrease
in the number of homes delivered in fiscal 2007 as compared to
fiscal 2006 was primarily due to the lower backlog of homes at
October 31, 2006 as compared to October 31, 2005,
which was the result of a 27% decrease in the number of new
contracts signed in fiscal 2006 over fiscal 2005, and the
increased cancellation rates by home buyers in fiscal 2007 as
compared to the rates in fiscal 2006.
The value of new contracts signed in fiscal 2007 was
$1.03 billion, a 13% decline from the $1.18 billion of
contracts signed in fiscal 2006. The number of net new contracts
signed and the average value of each contract decreased 11% and
2%, respectively. The decline in new contracts signed in fiscal
2007 was primarily due to a slowdown in the housing market,
predominantly in Illinois, Michigan and the suburban New Jersey
markets. However, in New York and the urban markets of northern
New Jersey, net new signed contracts increased by
$108.4 million for the year ended October 31, 2007, as
compared to the same period in 2006. The contract cancellation
rates for fiscal 2007 and fiscal 2006 were 14.7% and 8.7%,
respectively.
Income before income taxes in fiscal 2007 was
$51.2 million, a decrease of $230.7 million from the
$281.9 million reported for fiscal 2006. This decrease was
due to less profit realized on the lower revenues in fiscal
2007, higher costs of revenues in fiscal 2007 as compared to
fiscal 2006, and a $16.0 million decrease in income
realized from unconsolidated entities in fiscal 2007 as compared
to fiscal 2006. Cost of revenues before interest as a percentage
of revenues was 86.3% in fiscal 2007 versus 74.3% in fiscal
2006. The increase in the fiscal 2007 percentage was
primarily the result of the higher inventory impairment charges
recognized, increased sales incentives given to home buyers on
the homes delivered and higher land and direct costs as a
percentage of the revenues from homes delivered. In fiscal 2007
and 2006, we recognized inventory impairment charges of
$122.9 million and $46.7 million, respectively. As a
percentage of revenues, the higher land and direct costs
increased cost of revenues approximately 2.0% and sales
incentives increased cost of revenues approximately 1.3%.
Mid-Atlantic
Revenues in fiscal 2007 were lower than those for fiscal 2006 by
$437.3 million, or 25%. The decrease in revenues was
attributable to a 21% decrease in the number of homes delivered
(primarily in Virginia), and a 5%
31
decrease in the average sales price of the homes delivered. The
decrease in the number of homes delivered was primarily due to
the lower backlog of homes at October 31, 2006 as compared
to October 31, 2005. The decrease in the backlog of homes
was primarily the result of a 43% decrease in the number of net
new contracts signed in fiscal 2006 over fiscal 2005, due to
weak demand and a significantly higher number of contract
cancellations in fiscal 2006 as compared to fiscal 2005. The
decrease in the average price of the homes delivered in the
fiscal year 2007 as compared to fiscal 2006 was primarily
related to a change in the mix of communities delivering homes
in Maryland to a lower price point product.
The value of net new contracts signed during the year ended
October 31, 2007 of $950.4 million decreased 25% from
the net new contracts signed of $1.26 billion in the
comparable period of fiscal 2006. The decline was due primarily
to a 23% decrease in the number of net new contracts signed and
a 3% decrease in the average value of each contract. The decline
in the number of net new contracts signed was due primarily to
continued weak demand and an increase in contract cancellation
rates. The contract cancellation rates for the years ended
October 31, 2007 and 2006 were 15.1% and 13.3%,
respectively.
Income before income taxes in fiscal 2007 was
$206.4 million, a decrease of $285.4 million from the
$491.8 million reported for fiscal 2006. This decrease was
attributable to lower revenues and higher cost of revenues in
fiscal 2007 as compared to fiscal 2006. For the years ended
October 31, 2007 and 2006, cost of revenues before interest
as a percentage of revenues was 76.4% and 65.3%, respectively.
The increase in the fiscal 2007 percentage was primarily
the result of the higher amount of inventory impairment charges
recognized, increased sales incentives given to home buyers on
the homes delivered and higher land costs as a percentage of the
revenues from homes delivered. We recognized inventory
impairment charges of $72.3 million and $7.7 million
in fiscal 2007 and 2006, respectively. The higher sales
incentives and land costs increased cost of revenues as a
percentage of revenues approximately 3.4% and 1.8%, respectively.
South
Revenues in fiscal 2007 were lower than those of fiscal 2006 by
$215.5 million, or 18%. The decrease in revenues was
attributable to a 19% decrease in the number of homes delivered
and a reduction in percentage of completion revenues of
$11.3 million, partially offset by a 1% increase in the
average selling price of the homes delivered. The decrease in
the number of homes delivered in fiscal 2007 as compared to
fiscal 2006 was primarily attributable to our Florida
operations, where we had a lower number of homes in backlog at
October 31, 2006 as compared to October 31, 2005 and
increased cancellations rates by homebuyers in 2007 versus 2006.
For the year ended October 31, 2007, the value of net new
contracts signed was $457.3 million compared to
$800.3 million in the comparable period of fiscal 2006, a
decrease of 43%. The decline was due to decreases in the number
of net new contracts signed and the average value of each
contract of 36% and 11%, respectively. The decrease in the
number of net new contracts signed was attributable to weak
market conditions, especially in Florida, and a significantly
higher number of contract cancellations. In fiscal years 2007
and 2006, the cancellation rate in Florida was 60.7% and 28.2%,
respectively. For the entire region, the cancellation rate was
35.5% and 20.3% for the years ended October 31, 2007 and
2006, respectively. The decrease in the average sales price was
primarily due to a shift in the number of contracts to areas
with lower priced homes in fiscal 2007 compared to fiscal 2006.
We reported a loss before income taxes for the year ended
October 31, 2007 of $20.4 million, as compared to
income before taxes of $161.8 million for the same period
in 2006. This decrease was primarily due to a higher cost of
revenues as a percentage of total revenues in the fiscal 2007 as
compared to fiscal 2006, partially offset by higher retained
customer deposits on contract cancellations. Cost of revenues
before interest as a percentage of revenues was 92.3% in fiscal
2007 as compared to 77.5% in fiscal 2006. The increase in the
fiscal 2007 percentage was primarily due to the higher
amount of inventory impairment charges recognized, increased
sales incentives given to home buyers on the homes delivered,
offset, in part, by lower overhead costs. In fiscal 2007 and
2006, we recognized inventory impairment charges of
$151.4 million and $16.6 million, respectively. As a
percentage of revenues, higher sales incentives increased cost
of revenues approximately 3.9% while lower overhead costs
decreased the costs of revenues approximately 2.6%.
32
West
Revenues in fiscal 2007 were lower than those for fiscal 2006 by
$467.2 million or 27%. The decrease in revenues was
attributable to declines in the number of homes delivered and in
the average price of homes delivered of 24% and 5%,
respectively. The decrease in the number of homes delivered was
primarily attributable to the lower number of homes in backlog
at October 31, 2006 as compared to October 31, 2005, a
significantly higher number of contract cancellations in fiscal
2007 than in fiscal 2006 and higher sales incentives in fiscal
2007 versus 2006.
The value of net new contracts signed in the year ended
October 31, 2007 of $573.0 million decreased 53% from
the net new contracts signed of $1.22 billion in fiscal
2006. The decline was primarily due to a 51% decrease in the
number of net new contracts signed in fiscal 2007 as compared to
fiscal 2006, which was attributable to weak demand and higher
than normal contract cancellations. The cancellation rate for
the year ended October 31, 2007 was 49.5% as compared to
28.2% for the year ended October 31, 2006.
For fiscal 2007, we reported a loss before income taxes of
$87.9 million, compared to income before income taxes of
$338.5 million for fiscal 2006. This decrease was
attributable to lower revenues and higher cost of revenues in
2007 as compared to 2006 and a $59.2 million impairment
charge in fiscal 2007 related to two unconsolidated entities in
which we have investments. For the years ended October 31,
2007 and 2006, cost of revenues before interest as a percentage
of revenues was 93.4% and 72.8%, respectively. The increase in
the fiscal 2007 percentage was primarily the result of the
higher amount of inventory impairment charges recognized and
increased sales incentives given to home buyers on the homes
delivered. We recognized inventory impairment charges of
$273.0 million and $81.0 million in fiscal 2007 and
2006, respectively. The higher sales incentives increased cost
of revenues as a percentage of revenue approximately 2.3%.
Other
Other loss before income taxes for fiscal 2007 was
$78.6 million, a decrease of $68.8 million from the
$147.4 million loss before income taxes reported for fiscal
2006. This decline was primarily the result of lower general and
administrative costs attributable to lower compensation
expenses, a $14.8 million gain realized from the sale of
our security business, a $9.9 million gain realized from
the sale of our cable TV and broadband internet business, and
higher interest income.
FISCAL
2006 COMPARED TO FISCAL 2005
Home
Sales Revenues and Costs Completed
Contract
Home sales revenues for fiscal 2006 were higher than those for
fiscal 2005 by approximately $185.9 million, or 3%. The
increase in revenues was attributable to a 5% increase in the
average price of the homes delivered offset in part by a 2%
decrease in the number of homes delivered. The increase in the
average price of the homes delivered in fiscal 2006 was the
result of higher selling prices of homes in backlog at
October 31, 2005 compared to the homes in backlog at
October 31, 2004 and the delivery in fiscal 2006 of fewer
attached homes and age-qualified homes, which had lower average
selling prices, as compared to 2005. The decrease in the number
of homes delivered was primarily due to the slowdown in new
contracts signed in the fourth quarter of fiscal 2005 and the
first quarter of fiscal 2006 and a significant number of
cancellations of contracts for homes scheduled to be delivered
during fiscal 2006 from our backlog at October 31, 2005.
The value of new sales contracts signed was $4.15 billion
(5,812 homes) in fiscal 2006, a 41% decrease compared to the
value of contracts signed in fiscal 2005 of $7.05 billion
(10,213 homes). This decrease was primarily attributable to a
43% decrease in the number of new contracts signed despite
having a significantly higher number of communities open for
sale in fiscal 2006 compared to fiscal 2005. At October 31,
2006 and 2005, we had 300 and 230 selling communities,
respectively. The decrease in the value of new sales contracts
signed was partly offset by a 5% increase in the average value
of each contract.
We believe this slowdown was attributable to a decline in
consumer confidence, an overall softening of demand for new
homes and an oversupply of homes available for sale. We
attribute the reduction in demand to concerns on the part of
prospective home buyers about the direction of home prices, due
in part to many home builders advertising price reductions
and increased sales incentives, and concerns by the prospective
home
33
buyer about being able to sell their existing homes. In
addition, we believe speculators and investors are no longer
helping to fuel demand. We try to avoid selling homes to
speculators, and we generally do not build detached homes
without having a signed agreement of sale. Nonetheless, we have
been impacted by an overall increase in the supply of homes
available for sale in many markets as speculators attempt to
sell the homes they previously purchased or cancel contracts for
homes under construction, and as builders, who, as part of their
business strategy, were building homes in anticipation of
capturing additional sales in a demand-driven market attempt to
reduce their inventories by lowering prices and adding
incentives. In addition, based on the high cancellation rates
reported by us and by other builders, non-speculative buyer
cancellations are also adding to the supply of homes in the
marketplace.
At October 31, 2006, our backlog of traditional homes under
contract was $4.05 billion (5,801 homes), 31% lower than
the $5.84 billion (8,590 homes) backlog at October 31,
2005. The decrease in backlog at October 31, 2006 compared
to the backlog at October 31, 2005 was primarily
attributable to the decrease in the value of new contracts
signed in fiscal 2006 as compared to fiscal 2005 and to the
$185.9 million more of deliveries in fiscal 2006 as
compared to fiscal 2005, offset, in part, by a higher backlog at
October 31, 2005 as compared to the backlog at
October 31, 2004.
Cost of revenues before interest expense as a percentage of home
sales revenue was higher in fiscal 2006 as compared to fiscal
2005. The increase was primarily the result of higher inventory
write-offs, the cost of land and construction increasing faster
than selling prices, higher sales incentives given on the homes
delivered in fiscal 2006 as compared to those delivered in
fiscal 2005 and higher overhead costs. We recognized
$152.0 million of write-downs
and/or
write-offs of costs related to current and future communities in
fiscal 2006 as compared to $5.1 million in fiscal 2005. The
fiscal 2006 write-offs were attributable primarily to the
write-off of deposits and predevelopment costs attributable to a
number of land purchase contracts that we decided not to go
forward with (primarily in California and Florida) and the
write-down of the carrying cost of several active communities
(primarily in California and Michigan.)
Home
Sales Revenues and Costs Percentage of
Completion
We are developing several projects for which we are recognizing
revenues and costs using the percentage of completion method of
accounting. Revenues and costs of individual projects are
recognized on the individual projects aggregate value of
units for which home buyers have signed binding agreements of
sale and are based on the percentage of total estimated
construction costs that have been incurred. Total estimated
revenues and construction costs are reviewed periodically and
any change is applied to current and future periods. We began
recognizing revenue and costs using percentage of completion
accounting on several projects in fiscal 2006. In fiscal 2006,
we recognized $170.1 million of revenues and
$132.3 million of costs before interest expense on these
projects. At October 31, 2006, our backlog of homes in
communities that we account for using the percentage of
completion method of accounting was $154.3 million (net of
$170.1 million of revenue recognized) compared to
$152.5 million at October 31, 2005.
Land
Sales Revenues and Costs
We are developing several communities in which we expect to sell
a portion of the land to other builders or entities. The amount
and profitability of land sales will vary from period to period
depending upon the timing of the sale and delivery of the
specific land parcels. Land sales revenues were
$8.2 million in fiscal 2006 as compared to
$34.1 million in fiscal 2005. Cost of land sales revenues
before interest expense was approximately $7.0 million in
fiscal 2006 as compared to $24.4 million in fiscal 2005.
Interest
Expense
We determine interest expense on a specific
lot-by-lot
basis for our traditional homebuilding 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 for projects using the percentage of completion
method of revenue recognition is determined based on the total
estimated interest for the project and the percentage
34
of total estimated construction costs that have been incurred to
date. As a percentage of total revenues, interest was 2.0% in
fiscal 2006 as compared to 2.2% in fiscal 2005.
Selling,
General and Administrative Expenses
SG&A spending increased by $90.6 million, or 19%, in
fiscal 2006 as compared to fiscal 2005. The increased spending
was principally due to the costs associated with the increase in
the number of selling communities that we had during fiscal 2006
as compared to fiscal 2005 and the expensing of stock option
awards pursuant to SFAS No. 123 (revised 2004),
Share-Based Payment in fiscal 2006 of
$26.8 million, which expense we did not have in fiscal 2005.
Income
from Operations
Income from operations decreased $232.7 million in fiscal
2006 compared to fiscal 2005. As a percentage of total revenues,
income from operations was 16.7% in fiscal 2006 as compared to
21.7% in fiscal 2005.
Earnings
from Unconsolidated Entities
We are a participant in several joint ventures with unrelated
parties and in the Trust and Trust II. We recognize our
proportionate share of the earnings from these entities. See
Note 3 of Notes to the Consolidated Financial
Statements, Investments in and Advances to
Unconsolidated Entities and Note 13, Related
Party Transactions for more information regarding our
investments in and commitments to these entities. Many of our
joint ventures are land development projects or
high-rise/mid-rise construction projects and do not generate
revenues and earnings for a number of years during the
development of the property. Once development is complete, the
joint ventures will generally, over a relatively short period of
time, generate revenues and earnings until all the assets of the
entities are sold. Because there is not a steady flow of
revenues and earnings from these entities, the earnings
recognized from these entities will vary significantly from year
to year. In fiscal 2006, we recognized $48.4 million of
earnings from unconsolidated entities as compared to
$27.7 million in fiscal 2005.
Interest
and Other Income
Interest and other income was $52.7 million in fiscal 2006,
an increase of $11.5 million from the $41.2 million
recognized in fiscal 2005. The increase was primarily the result
of higher forfeited customer deposits and higher interest
income, offset, in part, by lower broker fees and lower income
realized from our ancillary businesses.
Income
Before Income Taxes
Fiscal 2006 income before income taxes was $1.13 billion, a
15% decrease from the $1.32 billion realized in fiscal 2005.
Income
Taxes
Income taxes were provided at an effective rate of 39.0% for
fiscal 2006 compared to 39.1% for fiscal 2005. The difference in
rate in fiscal 2006 as compared to fiscal 2005 was primarily due
to a manufacturing tax credit that we first became eligible for
in fiscal 2006, the reversal of prior year tax provisions in the
fiscal 2006 period that we no longer need due to the expiration
of tax statutes, offset in part by an increase in the blended
state income tax rate in fiscal 2006 compared to fiscal 2005,
the recognition of a higher amount of estimated interest expense
(net of estimated interest income) in fiscal 2006 compared to
fiscal 2005 on expected tax assessments and recoveries due to
ongoing tax audits and the effect on the fiscal 2005 rate due to
recomputing our net deferred tax liability to reflect the
increase in our fiscal 2005 state tax rate.
35
Geographic
Segments
The following table summarizes by geographic segments total
revenues and income (loss) before income taxes for each of the
years ended October 31, 2006 and 2005 ($ amounts in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss)
|
|
|
|
Revenues
|
|
|
Before Income Taxes
|
|
|
|
2006 Units
|
|
|
2005 Units
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
North(a)
|
|
|
1,983
|
|
|
|
1,870
|
|
|
$
|
1,444.2
|
|
|
$
|
1,134.5
|
|
|
$
|
281.9
|
|
|
$
|
240.2
|
|
Mid-Atlantic(b)
|
|
|
2,697
|
|
|
|
3,290
|
|
|
|
1,777.9
|
|
|
|
2,062.8
|
|
|
|
491.8
|
|
|
|
679.1
|
|
South(c)
|
|
|
2,017
|
|
|
|
1,312
|
|
|
|
1,192.4
|
|
|
|
721.1
|
|
|
|
161.8
|
|
|
|
81.6
|
|
West
|
|
|
1,904
|
|
|
|
2,297
|
|
|
|
1,709.0
|
|
|
|
1,875.0
|
|
|
|
338.5
|
|
|
|
450.8
|
|
Corporate and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(147.4
|
)
|
|
|
(128.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
8,601
|
|
|
|
8,769
|
|
|
$
|
6,123.5
|
|
|
$
|
5,793.4
|
|
|
$
|
1,126.6
|
|
|
$
|
1,323.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Includes percentage of completion revenues of
$110.3 million in fiscal 2006 and land sales revenues of
$0.4 million and $8.2 million in fiscal 2006 and 2005,
respectively. |
|
(b) |
|
Includes land sales revenues of $0.2 million and
$6.2 million in fiscal 2006 and 2005, respectively. |
|
(c) |
|
Includes percentage of completion revenues of $59.8 million
in fiscal 2006 and land sales revenues of $7.4 million and
$19.8 million in fiscal 2006 and 2005, respectively. |
North
Revenues in fiscal 2006 were higher than those for fiscal 2005
by approximately $309.7 million, or 27%. The increase in
revenues was attributable to the initial recognition of revenue
using percentage of completion accounting in two communities of
$110.3 million in fiscal 2006, and a 12% and 6% increase in
fiscal 2006 as compared to fiscal 2005 in the average sales
price and the number of traditional homes delivered,
respectively. The increase in the average price of the homes
delivered in fiscal 2006 was primarily the result of higher
selling prices of homes in backlog at October 31, 2005
compared to those in backlog at October 31, 2004. The value
of new contracts signed in fiscal 2006 was approximately
$1.18 billion, a 22% decline from the $1.52 billion of
contracts signed in fiscal 2005. This decrease was attributable
to a 27% decrease in the number of net new contracts signed,
despite an increase in the number of selling communities that we
had in fiscal 2006 compared to fiscal 2005, offset in part by a
7% increase in the average value of each contract. We had 77
selling communities at October 31, 2006 compared to 60
selling communities at October 31, 2005. The decline in new
contracts signed in fiscal 2006 was primarily due to a slowdown
in the housing market, which began in the fourth quarter of
fiscal 2005 and continued throughout fiscal 2006, and a
significantly higher number of contract cancellations in fiscal
2006 than in fiscal 2005.
Income before income taxes in fiscal 2006 was
$281.9 million, an increase of $41.7 million from the
$240.2 million reported for fiscal 2005. This increase was
due to the profits realized on the increased revenues in fiscal
2006, increased income realized from unconsolidated entities in
fiscal 2006 compared to fiscal 2005, offset in part by higher
costs of revenues, principally from the write-down of
communities under development and land owned or controlled for
future communities. We recognized inventory write-downs and
write-offs of $46.7 million in fiscal 2006 compared to
$2.7 million in fiscal 2005.
Mid-Atlantic
Revenues in fiscal 2006 were lower than those for fiscal 2005 by
approximately $284.9 million, or 14%. The decrease in
revenues was attributable to an 18% decrease in the number of
homes delivered (primarily in Virginia), offset in part by a 5%
increase in the average sales price of the homes delivered. The
decrease in the number of homes delivered was principally due to
a 43% decrease in the number of net new contracts signed in
fiscal year 2006 as compared to fiscal 2005, partially offset by
the higher number of homes in backlog at October 31, 2005
as compared to the backlog at October 31, 2004. The
decrease in net new contracts signed in fiscal 2006 as compared
to fiscal 2005 was due primarily to weak demand and a
significantly higher number of contract cancellations in fiscal
2006 than in fiscal 2005. At October 31, 2006 and 2005, we
had 91 and 83 selling communities, respectively.
36
Income before income taxes in fiscal 2006 was
$491.8 million, a decrease of $187.3 million from the
$679.1 million reported for fiscal 2005. This decrease was
attributable to lower revenues and higher cost of revenues in
fiscal 2006 as compared to fiscal 2005. The higher cost of
revenues was primarily due to, costs of land and construction
increasing faster than selling prices, higher sales incentives
given on the homes delivered in fiscal 2006 as compared to those
delivered in fiscal 2005 and higher overhead costs. We
recognized inventory write-downs and write-offs of
$7.7 million and $1.4 million in 2006 and 2005,
respectively.
South
Revenues in fiscal 2006 were higher than those of fiscal 2005 by
approximately $471.3 million, or 65%. The increase in
revenues was attributable to the initial recognition of revenue
using percentage of completion accounting for two communities of
$59.8 million in fiscal 2006, and a 54% increase in the
number of traditional homes delivered. The increase in the
number of homes delivered was primarily due to Florida and
Texas, which had a higher number of homes in backlog at
October 31, 2005 as compared to October 31, 2004. The
value of net new contracts signed in fiscal 2006 was
approximately $800.3 million, a 39% decline from the
$1.3 billion of contracts signed in fiscal 2005. This
decline was due to a 44% decrease in the number of new contracts
signed, which was primarily the result of weak market conditions
in Florida, despite an increase in the number of selling
communities in fiscal 2006 as compared to fiscal 2005, and a
significantly higher number of contract cancellations in fiscal
2006 than in fiscal 2005, partially offset by a 10% increase in
the average selling price of new signed contracts. At
October 31, 2006, we had 70 selling communities compared to
49 selling communities at October 31, 2005.
Income before income taxes in fiscal 2006 was
$161.8 million, an increase of $80.2 million from
fiscal 2005 income before income taxes of $81.6 million.
This increase was due to the profits realized on the increased
revenues in fiscal 2006, selling, general and administrative
costs decreasing as a percentage of revenues as the result of
efficiencies gained from the increase in the number of homes
delivered and lower cost of revenues as a percentage of total
revenues. The lower cost of revenues percentage was principally
due to selling prices increasing faster than costs of land and
construction, offset in part by higher inventory write-downs and
write-offs. We recognized inventory write-downs and write-offs
of $16.6 million in fiscal 2006 compared to
$0.7 million in fiscal 2005.
West
Revenues in fiscal 2006 were lower than those of fiscal 2005 by
approximately $166.0 million, or 9%. The decrease in
revenues was attributable to a 17% decrease in the number of
homes delivered, offset by a 10% increase in the average sales
price. The decrease in the number of homes delivered was
primarily due to California which had a lower number of homes in
backlog at October 31, 2005 as compared to October 31,
2004, and a significantly higher number of contract
cancellations in fiscal 2006 than in fiscal 2005, offset in part
by an increase in the number of homes closed in the other states
in the geographic segment which had a higher number of homes in
backlog at October 31, 2005 as compared to October 31,
2004. At October 31, 2006 and 2005, we had 62 and 38
selling communities, respectively. The increase in the average
sales price of the homes delivered in fiscal 2006 was the result
of higher selling prices of homes in backlog at October 31,
2005 compared to the homes in backlog at October 31, 2004,
and the delivery of fewer lower-priced homes. The value of net
new contracts signed in fiscal 2006, approximately
$1.2 billion, decreased 41% from fiscal 2005 new contracts
signed of approximately $2.1 billion. The decline was due
primarily to weak demand and higher than normal contract
cancellations in fiscal 2006, offset in part by the higher
number of selling communities.
Income before income taxes in fiscal 2006 was
$338.5 million, a decrease of $112.3 million from
fiscal 2005 income before income taxes of $450.8 million.
This decrease was due to the decrease in revenues in fiscal
2006, the higher cost of revenues as a percentage of total
revenues (principally related to the write-downs and write-offs
of communities under development and land owned or controlled
for future communities and higher costs related to the
inefficiencies related to the slowdown in construction) and
higher selling, general and administrative costs, partially
offset by increased income realized from unconsolidated entities
in fiscal 2006 compared to fiscal 2005. We recognized inventory
write-downs and write-offs of $81.0 million in fiscal 2006
compared to $0.1 million in fiscal 2005.
37
CAPITAL
RESOURCES AND LIQUIDITY
Funding for our business has been provided principally by cash
flow from operating activities, unsecured bank borrowings and
the public debt and equity markets. We have used our cash flow
from operating activities, 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 backlog and the increasing number of
communities in which we were offering homes for sale, invest in
unconsolidated entities, repurchase our stock, and repay debt.
In fiscal 2007, we generated approximately $267.8 million
of cash including $330.5 million of cash flow from
operating activities. Cash flow from operating activities in
fiscal 2007 was generated primarily from net income, the
commencement of deliveries of units accounted for using the
percentage of completion method of accounting and the decrease
in home sites owned during the period from 41,800 lots at
October 31, 2006 to 37,100 at October 31, 2007,
offset, in part, by our spending for inventory as we continued
to improve land that we owned, continued construction spending
in existing communities and the opening of additional high
density communities and the funding of the cost of the increased
number of speculative units that we had in our inventory as a
result of contract cancellations.
At October 31, 2007, the aggregate purchase price of land
parcels under option and purchase agreements was approximately
$2.33 billion (including $1.21 billion of land to be
acquired from joint ventures in which we have invested). Of the
$2.33 billion of land purchase commitments, we had paid or
deposited $130.5 million and had invested in or guaranteed
loans on behalf of the aforementioned joint ventures of
$196.2 million. The purchases of these land parcels are
scheduled over the next several years.
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. In addition, we generally do not begin construction
of our single-family detached homes until we have a signed
contract with the home buyer, although in fiscal 2006 and 2007,
due to an extremely high cancellation rate of customer contracts
and the increase in the number of attached-home communities that
we were operating from, the number of speculative homes in our
inventory increased significantly. In fiscal 2007, the value of
net new contracts signed decreased 32.5% versus fiscal 2006. In
fiscal 2006, the value of net new contracts signed with home
buyers decreased by 37.6% from fiscal 2005. Should our business
continue to decline significantly, we believe that our inventory
levels would continue to decrease, as we complete and deliver
the homes under construction but do not commence construction of
as many new homes, complete the improvements on the land we
already own and sell and deliver the speculative homes that are
currently in inventory, resulting in an increase in our cash
flow from operations. In addition, we might continue to delay or
curtail our acquisition of additional land, as we did in fiscal
2007 and the second half of fiscal 2006, which would further
reduce our inventory levels and cash needs. We decreased our
home sites owned and controlled at October 31, 2007 by
approximately 20% from the October 31, 2006 level and by
35% from the April 30, 2006 level, the high point of lots
owned and controlled, in response to the deterioration of the
housing market.
During the past several years, we have had a significant amount
of cash invested in either short-term cash equivalents or
short-term interest-bearing marketable securities. In addition,
we have made a number of investments in unconsolidated entities
related to the acquisition and development of land for future
home sites or in entities that are constructing or converting
apartment buildings into luxury condominiums. Our investment
activities related to marketable securities and investments in
and distributions of investments from unconsolidated entities
are contained in the Consolidated Statements of Cash Flows in
the section Cash flow from investing activities.
We have a $1.89 billion credit facility consisting of a
$1.56 billion unsecured revolving credit facility and a
$331.7 million term loan facility (collectively, the
Credit Facility) with 35 banks, which extends to
March 2011. At October 31, 2007, interest was payable on
borrowings under the revolving credit facility at 0.475%
(subject to adjustment based upon our corporate debt rating and
leverage ratios) above the Eurodollar rate or at other specified
variable rates as selected by us from time to time. At
October 31, 2007, we had no outstanding borrowings against
the revolving credit facility but had letters of credit of
approximately $339.0 million outstanding under it. Under
the term loan facility, interest is payable at 0.50% (subject to
adjustment based upon our corporate debt rating and
38
leverage ratios) above the Eurodollar rate or at other specified
variable rates as selected by us from time to time. At
October 31, 2007, interest was payable on the term loan at
5.53%.
We believe that we will be able to continue to fund our
operations and meet our contractual obligations through a
combination of existing cash resources and our existing sources
of credit.
CONTRACTUAL
OBLIGATIONS
The following table summarizes our estimated contractual payment
obligations at October 31, 2007 (amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009 2010
|
|
|
2011 2012
|
|
|
Thereafter
|
|
|
Total
|
|
|
Senior and senior subordinated notes(a)
|
|
$
|
94.7
|
|
|
$
|
189.4
|
|
|
$
|
505.7
|
|
|
$
|
1,284.9
|
|
|
$
|
2,074.7
|
|
Loans payable(a)
|
|
|
136.0
|
|
|
|
235.2
|
|
|
|
415.5
|
|
|
|
13.9
|
|
|
|
800.6
|
|
Mortgage company warehouse loan(a)
|
|
|
78.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78.9
|
|
Operating lease obligations
|
|
|
18.8
|
|
|
|
27.2
|
|
|
|
12.9
|
|
|
|
22.6
|
|
|
|
81.5
|
|
Purchase obligations(b)
|
|
|
760.1
|
|
|
|
802.2
|
|
|
|
271.3
|
|
|
|
778.5
|
|
|
|
2,612.1
|
|
Retirement plans(c)
|
|
|
6.8
|
|
|
|
5.7
|
|
|
|
8.4
|
|
|
|
32.7
|
|
|
|
53.6
|
|
Other
|
|
|
0.7
|
|
|
|
1.4
|
|
|
|
1.4
|
|
|
|
0.7
|
|
|
|
4.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,096.0
|
|
|
$
|
1,261.1
|
|
|
$
|
1,215.2
|
|
|
$
|
2,133.3
|
|
|
$
|
5,705.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Amounts include estimated annual interest payments until
maturity of the debt. Of the amounts indicated,
$1.5 billion of the senior and senior subordinated notes,
$696.8 million of loans payable, and $76.7 million of
the mortgage company warehouse loan were recorded on the
October 31, 2007 Consolidated Balance Sheet. |
|
(b) |
|
Amounts represent our expected acquisition of land under options
or purchase agreements and the estimated remaining amount of the
contractual obligation for land development agreements secured
by letters of credit and surety bonds. |
|
(c) |
|
Amounts represent our obligations under our 401(k), deferred
compensation and supplemental executive retirement plans. Of the
total amount indicated, $33.6 million has been recorded on
the October 31, 2007 Consolidated Balance Sheet. |
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. 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
detached 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 our 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.
|
|
ITEM 7A.
|
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
39
do not affect 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 such debt until we are
required to refinance such debt.
At October 31, 2007, our debt obligations, principal cash
flows by scheduled maturity, weighted-average interest rates,
and estimated fair value were as follows ($ amounts in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-Rate Debt
|
|
|
Variable-Rate Debt(a)(b)
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
Fiscal Year of Maturity
|
|
Amount
|
|
|
Interest Rate
|
|
|
Amount
|
|
|
Interest Rate
|
|
|
2008
|
|
$
|
72,113
|
|
|
|
6.72
|
%
|
|
$
|
104,876
|
|
|
|
6.76
|
%
|
2009
|
|
|
26,483
|
|
|
|
7.17
|
%
|
|
|
135,802
|
|
|
|
5.45
|
%
|
2010
|
|
|
18,273
|
|
|
|
6.43
|
%
|
|
|
150
|
|
|
|
3.48
|
%
|
2011
|
|
|
270,335
|
|
|
|
7.91
|
%
|
|
|
331,817
|
|
|
|
5.53
|
%
|
2012
|
|
|
150,000
|
|
|
|
8.25
|
%
|
|
|
|
|
|
|
|
|
Thereafter
|
|
|
1,150,850
|
|
|
|
5.72
|
%
|
|
|
12,845
|
|
|
|
3.48
|
%
|
Discount
|
|
|
(7,694
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,680,360
|
|
|
|
6.37
|
%
|
|
$
|
585,490
|
|
|
|
5.69
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value at October 31, 2007
|
|
$
|
1,610,711
|
|
|
|
|
|
|
$
|
585,490
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
We have a $1.89 billion credit facility consisting of a
$1.56 billion unsecured revolving credit facility and a
$331.7 million term loan facility (collectively, the
Credit Facility) with 35 banks, which extends to
March 17, 2011. At October 31, 2007, interest was
payable on borrowings under the revolving credit facility at
0.475% (subject to adjustment based upon our corporate debt
rating and leverage ratios) above the Eurodollar rate or at
other specified variable rates as selected by us from time to
time. At October 31, 2007, we had no outstanding borrowings
against the revolving credit facility, but had letters of credit
of approximately $339.0 million outstanding under it. Under
the term loan facility, interest is payable at 0.50% (subject to
adjustment based upon our corporate debt rating and leverage
ratios) above the Eurodollar rate or at other specified variable
rates as selected by us from time to time. At October 31,
2007, interest was payable on the $331.7 million term loan
at 5.53%. |
|
(b) |
|
At October 31, 2007, our mortgage subsidiary had a
$150 million line of credit with four banks to fund
mortgage originations. The line is due within 90 days of
demand by the banks and bears interest at the banks
overnight rate plus an
agreed-upon
margin. At October 31, 2007, the subsidiary had
$76.7 million outstanding under the line at an average
interest rate of 5.73%. Borrowings under this line are included
in the fiscal 2008 maturities. In November 2007, the bank line
was reduced to $125 million and three banks. |
Based upon the amount of variable-rate debt outstanding at
October 31, 2007, and holding the variable-rate debt
balance constant, each 1% increase in interest rates would
increase the interest incurred by us by approximately
$5.9 million per year.
|
|
ITEM 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
Reference is made to the financial statements, listed in
Item 15(a)(1) and (2), which appear at pages F-1 through
F-40 of this report and which are incorporated herein by
reference.
|
|
ITEM 9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
|
Not applicable
40
|
|
ITEM 9A.
|
CONTROLS
AND PROCEDURES
|
Conclusion
Regarding the Effectiveness of Disclosure 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
Rules 13a-15(e)
and
15d-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 required to be disclosed in
our reports under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the
Securities and Exchange Commissions 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.
Managements
Annual Report on Internal Control Over Financial Reporting and
Attestation Report of the Independent Registered Public
Accounting Firm
Managements Annual Report on Internal Control Over
Financial Reporting and the report of our independent registered
public accounting firm on internal control over financial
reporting are incorporated herein from pages F-1 and F-2,
respectively.
Changes
in Internal Control Over Financial Reporting
There has not been any change in our internal control over
financial reporting during our quarter ended October 31,
2007 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
|
|
ITEM 9B.
|
OTHER
INFORMATION
|
None
PART III
|
|
ITEM 10.
|
DIRECTORS
AND EXECUTIVE OFFICERS OF REGISTRANT
|
The information required by this item for executive officers is
set forth under the heading Executive Officers of the
Registrant in Part I, Item 4A of this report.
The other information required by this item will be included in
our Proxy Statement for the 2008 Annual Meeting of Stockholders
(the 2008 Proxy Statement) and is incorporated
herein by reference.
|
|
ITEM 11.
|
EXECUTIVE
COMPENSATION
|
The information required by this item will be included in the
2008 Proxy Statement and is incorporated herein by reference.
|
|
ITEM 12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
|
Except as set forth below, the information required in this item
will be included in the 2008 Proxy Statement and is incorporated
herein by reference.
41
The following table provides information as of October 31,
2007 with respect to compensation plans (including individual
compensation arrangements) under which our equity securities are
authorized for issuance.
Equity
Compensation Plan Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
Securities to
|
|
|
|
|
|
Number of Securities
|
|
|
|
be Issued Upon
|
|
|
Weighted-Average
|
|
|
Remaining Available For
|
|
|
|
Exercise
|
|
|
Exercise Price
|
|
|
Future Issuance Under
|
|
|
|
of Outstanding
|
|
|
of Outstanding
|
|
|
Equity Compensation
|
|
|
|
Options, Warrants
|
|
|
Options, Warrants
|
|
|
Plans (Excluding Securities
|
|
Plan Category
|
|
and Rights
|
|
|
and Rights
|
|
|
Reflected in Column(a))
|
|
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
|
(In thousands)
|
|
|
|
|
|
(In thousands)
|
|
|
Equity compensation plans approved by security holders
|
|
|
19,743
|
|
|
$
|
10.90
|
|
|
|
11,946
|
|
Equity compensation plans not approved by security holders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
19,743
|
|
|
$
|
10.90
|
|
|
|
11,946
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ITEM 13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
|
The information required in this item will be included in the
2008 Proxy Statement and is incorporated herein by reference.
|
|
ITEM 14.
|
PRINCIPAL
ACCOUNTANT FEES AND SERVICES
|
The information required in this item will be included in the
2008 Proxy Statement and is incorporated herein by reference.
PART IV
|
|
ITEM 15.
|
EXHIBITS AND
FINANCIAL STATEMENT SCHEDULES
|
|
|
(a)
|
Financial
Statements and Financial Statement Schedules
|
|
|
|
|
|
|
|
Page
|
|
1. Financial Statements
|
|
|
|
|
Managements Annual Report on Internal Control Over
Financial Reporting
|
|
|
F-1
|
|
Reports of Independent Registered Public Accounting Firm
|
|
|
F-2
|
|
Consolidated Statements of Income for the Years Ended
October 31, 2007, 2006, and 2005
|
|
|
F-4
|
|
Consolidated Balance Sheets as of October 31, 2007 and 2006
|
|
|
F-5
|
|
Consolidated Statements of Changes in Stockholders Equity
for the Years Ended October 31, 2007, 2006 and 2005
|
|
|
F-6
|
|
Consolidated Statements of Cash Flows for the Years Ended
October 31, 2007, 2006 and 2005
|
|
|
F-7
|
|
Notes to Consolidated Financial Statements
|
|
|
F-8
|
|
Summary Consolidated Quarterly Financial Data (unaudited)
|
|
|
F-40
|
|
|
|
2.
|
Financial
Statement Schedules
|
None
Financial statement schedules have been omitted because they are
either not applicable or the required information is included in
the financial statements or notes hereto.
42
The following exhibits are included with this report or
incorporated herein by reference:
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
Description
|
|
|
|
|
3
|
.1
|
|
Second Restated Certificate of Incorporation dated
September 8, 2005 is hereby incorporated by reference to
Exhibit 3.1 of the Registrants
Form 10-Q
for the quarter ended July 31, 2005.
|
|
|
|
3
|
.2
|
|
By-laws of the Registrant, as Amended and Restated June 15,
2006, are hereby incorporated by reference to Exhibit 3.1
of the Registrants
Form 8-K
filed with the Securities and Exchange Commission on
June 20, 2006.
|
|
|
|
3
|
.3
|
|
Amendment to the By-laws of the Registrant, dated
December 12, 2007, is hereby incorporated by reference to
Exhibit 3.1 of the Registrants
Form 8-K
filed with the Securities and Exchange Commission on
December 17, 2007.
|
|
|
|
3
|
.4
|
|
Certificate of Amendment of Certificate of Designations,
Preferences and Rights of Series A Junior Participating
Preferred Stock of the Registrant is hereby incorporated by
reference to Exhibit 3.1 to the Registrants Current
Report on
Form 8-K
filed with the Securities and Exchange Commission on
June 18, 2007.
|
|
|
|
4
|
.1
|
|
Specimen Stock Certificate is hereby incorporated by reference
to Exhibit 4.1 of the Registrants
Form 10-K
for the fiscal year ended October 31, 1991.
|
|
|
|
4
|
.2
|
|
Indenture dated as of January 25, 2001, among Toll Corp.,
as issuer, the Registrant, as guarantor, and Bank One
Trust Company, NA, as Trustee, including form of guarantee,
is hereby incorporated by reference to Exhibit 4.1 of the
Registrants
Form 10-Q
for the quarter ended January 31, 2001.
|
|
|
|
4
|
.3
|
|
Indenture dated as of November 22, 2002 among Toll Brothers
Finance Corp., as issuer, the Registrant, as guarantor, and Bank
One Trust Company, NA, as Trustee, including form of
guarantee, is hereby incorporated by reference to
Exhibit 4.1 of the Registrants
Form 8-K
filed with the Securities and Exchange Commission on
November 27, 2002.
|
|
|
|
4
|
.4
|
|
First Supplemental Indenture dated as of May 1, 2003 by and
among the parties listed on Schedule A thereto, and Bank
One Trust Company, National Association, as Trustee, is
hereby incorporated by reference to Exhibit 4.4 of the
Registrants Registration Statement on
Form S-4/A
filed with the Securities and Exchange Commission on
June 16, 2003, File Nos.
333-103931,
333-103931-01,
333-103931-02,
333-103931-03
and
333-103931-04.
|
|
|
|
4
|
.5
|
|
Second Supplemental Indenture dated as of November 3, 2003
by and among the parties listed on Schedule A thereto, and
Bank One Trust Company, National Association, as Trustee,
is hereby incorporated by reference to Exhibit 4.5 of the
Registrants Registration Statement on
Form S-4/A
filed with the Securities and Exchange Commission on
November 5, 2003, File Nos.
333-109604,
333-109604-01,
333-109604-02,
333-109604-03
and
333-109604-04.
|
|
|
|
4
|
.6
|
|
Third Supplemental Indenture dated as of January 26, 2004
by and among the parties listed on Schedule A thereto, and
J.P. Morgan Trust Company, National Association, as
successor Trustee, is hereby incorporated by reference to
Exhibit 4.1 of the Registrants
Form 10-Q
for the quarter ended January 31, 2004.
|
|
|
|
4
|
.7
|
|
Fourth Supplemental Indenture dated as of March 1, 2004 by
and among the parties listed on Schedule A thereto, and
J.P. Morgan Trust Company, National Association, as
successor Trustee, is hereby incorporated by reference to
Exhibit 4.2 of the Registrants
Form 10-Q
for the quarter ended January 31, 2004.
|
|
|
|
4
|
.8
|
|
Fifth Supplemental Indenture dated as of September 20, 2004
by and among the parties listed on Schedule A thereto, and
J.P. Morgan Trust Company, National Association, as
successor Trustee, is hereby incorporated by reference to
Exhibit 4.9 of the Registrants
Form 10-K
for the fiscal year ended October 31, 2004.
|
|
|
|
4
|
.9
|
|
Sixth Supplemental Indenture dated as of October 28, 2004
by and among the parties listed on Schedule A thereto, and
J.P. Morgan Trust Company, National Association, as
successor Trustee, is hereby incorporated by reference to
Exhibit 4.10 of the Registrants
Form 10-K
for the fiscal year ended October 31, 2004.
|
|
|
43
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
Description
|
|
|
|
|
4
|
.10
|
|
Seventh Supplemental Indenture dated as of October 31, 2004
by and among the parties listed on Schedule A thereto, and
J.P. Morgan Trust Company, National Association, as
successor Trustee, is hereby incorporated by reference to
Exhibit 4.11 of the Registrants
Form 10-K
for the fiscal year ended October 31, 2004.
|
|
|
|
4
|
.11
|
|
Eighth Supplemental Indenture dated as of January 31, 2005
by and among the parties listed on Schedule A thereto, and
J.P. Morgan Trust Company, National Association, as
successor Trustee, is hereby incorporated by reference to
Exhibit 4.1 of the Registrants
Form 10-Q
for the quarter ended April 30, 2005.
|
|
|
|
4
|
.12
|
|
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, is hereby incorporated by reference to
Exhibit 4.1 of the Registrants
Form 10-Q
for the quarter ended July 31, 2005.
|
|
|
|
4
|
.13
|
|
Tenth Supplemental Indenture dated as of August 1, 2005 by
and among the parties listed on Schedule A thereto, and
J.P. Morgan Trust Company, National Association, as
successor Trustee, is hereby incorporated by reference to
Exhibit 4.13 of the Registrants Registration
Statement on
Form S-4
filed with the Securities and Exchange Commission on
September 29, 2005, File Nos.
333-128683,
333-128683-01,
333-128683-02,
333-128683-03
and
333-128683-04.
|
|
|
|
4
|
.14
|
|
Eleventh Supplemental Indenture dated as of January 31,
2006 by and among the parties listed on Schedule I thereto,
and J.P. Morgan Trust Company, National Association,
as successor Trustee, is hereby incorporated by reference to
Exhibit 4.1 of the Registrants
Form 10-Q
for the quarter ended April 30, 2006.
|
|
|
|
4
|
.15
|
|
Twelfth Supplemental Indenture dated as of April 30, 2006
by and among the parties listed on Schedule I thereto, and
J.P. Morgan Trust Company, National Association, as
successor Trustee, is hereby incorporated by reference to
Exhibit 4.1 of the Registrants
Form 10-Q
for the quarter ended July 31, 2006.
|
|
|
|
4
|
.16
|
|
Thirteenth Supplemental Indenture dated as of July 31, 2006
by and among the parties listed on Schedule I thereto, and
J.P. Morgan Trust Company, National Association, as
successor Trustee, is hereby incorporated by reference to
Exhibit 4.16 of the Registrants
Form 10-K
for the year ended October 31, 2006.
|
|
|
|
4
|
.17
|
|
Fourteenth Supplemental Indenture dated as October 31, 2006
by and among the parties listed on Schedule I thereto, and
The Bank of New York Trust, N.A. as successor Trustee, is hereby
incorporated by reference to Exhibit 4.1 of the
Registrants
Form 10-Q
for the quarter ended April 30, 2007
|
|
|
|
4
|
.18
|
|
Fifteenth Supplemental Indenture dated as of June 25, 2007
by and among the parties listed on Schedule I thereto, and
The Bank of New York Trust, N.A. as successor Trustee, is hereby
incorporated by reference to Exhibit 4.1 of the
Registrants
Form 10-Q
for the quarter ended July 31, 2007.
|
|
|
|
4
|
.19
|
|
Sixteenth Supplemental Indenture dated as of June 27, 2007
by and among the parties listed on Schedule I thereto, and
The Bank of New York Trust, N.A. as successor Trustee, is hereby
incorporated by reference to Exhibit 4.2 of the
Registrants
Form 10-Q
for the quarter ended July 31, 2007.
|
|
|
|
4
|
.20
|
|
Joint Resolution Adopted by the Board of Directors of Toll Corp.
and the Shelf Terms Committee of Toll Brothers, Inc. dated as of
January 23, 2001, relating to $200,000,000 principal amount
of
81/4% Senior
Subordinated Notes of Toll Corp. due 2011, guaranteed on a
Senior Subordinated basis by the Registrant is hereby
incorporated by reference to Exhibit 4.1 of the
Registrants
Form 8-K
filed with the Securities and Exchange Commission on
January 24, 2001.
|
|
|
|
4
|
.21
|
|
Authorizing Resolutions, dated as of November 27, 2001,
relating to $150,000,000 principal amount of 8.25% Senior
Subordinated Notes of Toll Corp. due 2011, guaranteed on a
Senior Subordinated basis by the Registrant is hereby
incorporated by reference to Exhibit 4 of the
Registrants
Form 8-K
filed with the Securities and Exchange Commission on
December 6, 2001.
|
|
|
|
4
|
.22
|
|
Authorizing Resolutions, dated as of November 15, 2002,
relating to $300,000,000 principal amount of 6.875% Senior
Notes of Toll Brothers Finance Corp. due 2012, guaranteed on a
Senior basis by the Registrant and certain subsidiaries of the
Registrant is hereby incorporated by reference to
Exhibit 4.2 of the Registrants
Form 8-K
filed with the Securities and Exchange Commission on
November 27, 2002.
|
|
|
44
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
Description
|
|
|
|
|
4
|
.23
|
|
Authorizing Resolutions, dated as of September 3, 2003,
relating to $250,000,000 principal amount of 5.95% Senior
Notes of Toll Brothers Finance Corp. due 2013, guaranteed on a
Senior basis by the Registrant and certain subsidiaries of the
Registrant is hereby incorporated by reference to
Exhibit 4.1 of the Registrants
Form 8-K
filed with the Securities and Exchange Commission on
September 29, 2003.
|
|
|
|
4
|
.24
|
|
Authorizing Resolutions, dated as of March 9, 2004,
relating to $300,000,000 principal amount of 4.95% Senior
Notes of Toll Brothers Finance Corp. due 2014, guaranteed on a
Senior basis by the Registrant and certain subsidiaries of the
Registrant is hereby incorporated by reference to
Exhibit 4.1 of the Registrants
Form 8-K
filed with the Securities and Exchange Commission on
April 1, 2004.
|
|
|
|
4
|
.25
|
|
Authorizing Resolutions, dated as of May 26, 2005, relating
to $300,000,000 principal amount of 5.15% Senior Notes of
Toll Brothers Finance Corp. due 2015, guaranteed on a Senior
basis by the Registrant and certain subsidiaries of the
Registrant is hereby incorporated by reference to
Exhibit 4.1 of the Registrants
Form 8-K
filed with the Securities and Exchange Commission on
June 8, 2005.
|
|
|
|
4
|
.26
|
|
Registration Rights Agreement dated as of November 22, 2002
by and among Toll Brothers Finance Corp., the Registrant,
Salomon Smith Barney Inc., Banc of America Securities LLC and
Banc One Capital Markets, Inc. and each of the other initial
purchasers named on Schedule A attached thereto is hereby
incorporated by reference to Exhibit 4.3 of the
Registrants
Form 10-Q
for the quarter ended January 31, 2003.
|
|
|
|
4
|
.27
|
|
Registration Rights Agreement dated as of September 3, 2003
by and among Toll Brothers Finance Corp., the Registrant and
Citigroup Global Markets, Inc. is hereby incorporated by
reference to Exhibit 4.2 of the Registrants
Form 8-K
filed with the Securities and Exchange Commission on
September 29, 2003.
|
|
|
|
4
|
.28
|
|
Registration Rights Agreement dated as of March 16, 2004 by
and among Toll Brothers Finance Corp., the Registrant and
Citigroup Global Markets Inc. and each of the other initial
purchasers named on Schedule A attached thereto is hereby
incorporated by reference to Exhibit 4.2 of the
Registrants
Form 8-K
filed with the Securities and Exchange Commission on
April 1, 2004.
|
|
|
|
4
|
.29
|
|
Registration Rights Agreement dated as of June 2, 2005 by
and among Toll Brothers Finance Corp., the Registrant and
Citigroup Global Markets Inc. and each of the other initial
purchasers named on Schedule A attached thereto is hereby
incorporated by reference to Exhibit 4.2 of the
Registrants
Form 8-K
filed with the Securities and Exchange Commission on
June 8, 2005.
|
|
|
|
4
|
.30
|
|
Rights Agreement dated as of June 13, 2007, by and between
the Registrant and American Stock Transfer &
Trust Company, as Rights Agent, is hereby incorporated by
reference to Exhibit 4.1 to the Registrants Current
Report on
Form 8-K
filed with the Securities and Exchange Commission on
June 18, 2007.
|
|
|
|
4
|
.31
|
|
Employee Stock Purchase Plan, as amended and restated effective
January 1, 2008, is filed herewith.
|
|
|
|
10
|
.1
|
|
Credit Agreement by and among First Huntingdon Finance Corp.,
the Registrant and the lenders which are parties thereto dated
March 17, 2006, is hereby incorporated by reference to
Exhibit 10.1 of the Registrants
Form 10-Q
for the quarter ended April 30, 2006.
|
|
|
|
10
|
.2*
|
|
Toll Brothers, Inc. Executives and Non-Employee Directors Stock
Option Plan (1993) is hereby incorporated by reference to
Exhibit 10.1 of the Registrants
Form 8-K
filed with the Securities and Exchange Commission on
May 25, 1994.
|
|
|
|
10
|
.3*
|
|
Amendment to the Toll Brothers, Inc. Executives and Non-Employee
Directors Stock Option Plan (1993) is hereby incorporated
by reference to Exhibit 10.2 of the Registrants
Form 10-Q
for the quarter ended April 30, 1995.
|
|
|
|
10
|
.4*
|
|
Amendment to the Toll Brothers, Inc. Executives and Non-Employee
Directors Stock Option Plan (1993) effective June 14,
2001 is hereby incorporated by reference to Exhibit 10.2 of
the Registrants
Form 10-Q
for the quarter ended July 31, 2001.
|
|
|
|
10
|
.5*
|
|
Amendment to the Toll Brothers, Inc. Executives and Non-Employee
Directors Stock Option Plan (1993) effective
December 12, 2007 is filed herewith.
|
|
|
|
10
|
.6*
|
|
Toll Brothers, Inc. Stock Option and Incentive Stock Plan
(1995) is hereby incorporated by reference to
Exhibit 10.1 of the Registrants
Form 10-Q
for the quarter ended April 30, 1995.
|
|
|
45
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
Description
|
|
|
|
|
10
|
.7*
|
|
Amendment to the Toll Brothers, Inc. Stock Option and Incentive
Stock Plan (1995) dated May 29, 1996 is hereby
incorporated by reference to Exhibit 10.9 the
Registrants
Form 10-K
for the fiscal year ended October 31, 1996.
|
|
|
|
10
|
.8*
|
|
Amendment to the Toll Brothers, Inc. Stock Option and Incentive
Stock Plan (1995) effective March 22, 2001 is hereby
incorporated by reference to Exhibit 10.3 of the
Registrants
Form 10-Q
for the quarter ended July 31, 2001.
|
|
|
|
10
|
.9*
|
|
Amendment to the Toll Brothers, Inc. Stock Option and Incentive
Stock Plan (1995) effective December 12, 2007 is filed
herewith.
|
|
|
|
10
|
.10*
|
|
Toll Brothers, Inc. Stock Incentive Plan (1998) is hereby
incorporated by reference to Exhibit 4 of the
Registrants Registration Statement on
Form S-8
filed with the Securities and Exchange Commission on
June 25, 1998, File
No. 333-57645.
|
|
|
|
10
|
.11*
|
|
Amendment to the Toll Brothers, Inc. Stock Incentive Plan
(1998) effective March 22, 2001 is hereby incorporated
by reference to Exhibit 10.4 of the Registrants
Form 10-Q
for the quarter ended July 31, 2001.
|
|
|
|
10
|
.12*
|
|
Amendment to the Toll Brothers, Inc. Stock Incentive Plan
(1998) effective December 12, 2007 is filed herewith.
|
|
|
|
10
|
.13*
|
|
Form of Incentive Stock Option Grant for Executive Officers
pursuant to Toll Brothers, Inc. Stock Incentive Plan
(1998) is hereby incorporated by reference to
Exhibit 10.2 of the Registrants
Form 10-Q
for the quarter ended July 31, 2004.
|
|
|
|
10
|
.14*
|
|
Form of Non-Qualified Stock Option Grant for Executive Officers
pursuant to Toll Brothers, Inc. Stock Incentive Plan
(1998) is hereby incorporated by reference to
Exhibit 10.3 of the Registrants
Form 10-Q
for the quarter ended July 31, 2004.
|
|
|
|
10
|
.15*
|
|
Form of Non-Qualified Stock Option Grant for Non-Employee
Directors pursuant to Toll Brothers, Inc. Stock Incentive Plan
(1998) is hereby incorporated by reference to
Exhibit 10.4 of the Registrants
Form 10-Q
for the quarter ended July 31, 2004.
|
|
|
|
10
|
.16*
|
|
Form of Stock Award Grant for Directors pursuant to Toll
Brothers, Inc. Stock Incentive Plan (1998) is hereby
incorporated by reference to Exhibit 10.1 of the
Registrants
Form 8-K
with the Securities and Exchange Commission on December 17,
2004.
|
|
|
|
10
|
.17*
|
|
Form of Stock Award Grant for Individual Grantee pursuant to
Toll Brothers, Inc. Stock Incentive Plan (1998) is hereby
incorporated by reference to Exhibit 10.1 of the
Registrants
Form 8-K
with the Securities and Exchange Commission on April 8,
2005.
|
|
|
|
10
|
.18*
|
|
Stock Award to Robert I. Toll pursuant to the Toll Brothers,
Inc. Stock Incentive Plan (1998) is hereby incorporated by
reference to Exhibit 10.3 of the Registrants
Form 10-Q
for the quarter ended January 31, 2007.
|
|
|
|
10
|
.19*
|
|
Toll Brothers, Inc. Stock Incentive Plan for Employees
(2007) is hereby incorporated by reference to Addendum A to
Toll Brothers, Inc.s definitive proxy statement on
Schedule 14A for the Toll Brothers, Inc. 2007 Annual
Meeting of Stockholders held on March 14, 2007.
|
|
|
|
10
|
.20*
|
|
Amendment to the Toll Brothers, Inc. Stock Incentive Plan for
Employees (2007) effective December 12, 2007 is filed
herewith.
|
|
|
|
10
|
.21*
|
|
Toll Brothers, Inc. Stock Incentive Plan for Non-Employee
Directors (2007) is hereby incorporated by reference to
Addendum A to Toll Brothers, Inc.s definitive proxy
statement on Schedule 14A for the Toll Brothers, Inc. 2007
Annual Meeting of Stockholders held on March 14, 2007.
|
|
|
|
10
|
.22*
|
|
Amendment to the Toll Brothers, Inc. Stock Incentive Plan for
Non-Employee Directors (2007) effective December 12,
2007 is filed herewith.
|
|
|
|
10
|
.23*
|
|
Form of Non-Qualified Stock Option Grant pursuant to the Toll
Brothers, Inc. Stock Incentive Plan for Employees (2007) is
hereby incorporated by reference to Exhibit 10.1 of the
Registrants
Form 8-K
filed with the Securities and Exchange Commission on
December 19, 2007.
|
|
|
|
10
|
.24*
|
|
Form of Addendum to Non-Qualified Stock Option Grant pursuant to
the Toll Brothers, Inc. Stock Incentive Plan for Employees
(2007) is hereby incorporated by reference to
Exhibit 10.3 of the Registrants
Form 10-Q
for the quarter ended July 31, 2007.
|
|
|
46
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
Description
|
|
|
|
|
10
|
.25*
|
|
Form of Stock Award Grant pursuant to the Toll Brothers, Inc.
Stock Incentive Plan for Employees (2007) is hereby
incorporated by reference to Exhibit 10.4 of the
Registrants
Form 10-Q
for the quarter ended July 31, 2007.
|
|
|
|
10
|
.26*
|
|
Form of Non-Qualified Stock Option Grant pursuant to the Toll
Brothers, Inc. Stock Incentive Plan for Non-Employee Directors
(2007) is hereby incorporated by reference to
Exhibit 10.2 of the Registrants
Form 8-K
filed with the Securities and Exchange Commission on
December 19, 2007.
|
|
|
|
10
|
.27*
|
|
Form of Addendum to Non-Qualified Stock Option Grant pursuant to
the Toll Brothers, Inc. Stock Incentive Plan for Non-Employee
Directors (2007) is hereby incorporated by reference to
Exhibit 10.6 of the Registrants
Form 10-Q
for the quarter ended July 31, 2007.
|
|
|
|
10
|
.28*
|
|
Form of Stock Award Grant pursuant to the Toll Brothers, Inc.
Stock Incentive Plan for Non-Employee Directors (2007) is
hereby incorporated by reference to Exhibit 10.7 of the
Registrants
Form 10-Q
for the quarter ended July 31, 2007.
|
|
|
|
10
|
.29*
|
|
Toll Brothers, Inc. Cash Bonus Plan, as amended, is hereby
incorporated by reference to Exhibit 10.1 of the
Registrants
Form 8-K
filed with the Securities and Exchange Commission on
April 4, 2005.
|
|
|
|
10
|
.30*
|
|
Amendment to the Toll Brothers, Inc. Cash Bonus Plan, dated
December 7, 2005, is hereby incorporated by reference to
Exhibit 10.1 of the Registrants
Form 8-K
filed with the Securities and Exchange Commission on
December 9, 2005.
|
|
|
|
10
|
.31*
|
|
Amendment to the Toll Brothers, Inc. Cash Bonus Plan, dated
December 15, 2006, is hereby incorporated by reference to
Exhibit 10.1 of the Registrants
Form 8-K
filed with the Securities and Exchange Commission on
December 19, 2006.
|
|
|
|
10
|
.32*
|
|
Amendment to the Toll Brothers, Inc. Cash Bonus Plan, dated
March 14, 2007 is filed herewith.
|
|
|
|
10
|
.33*
|
|
Toll Brothers, Inc. Executive Officer Cash Bonus Plan, as
amended, is hereby incorporated by reference to
Exhibit 10.2 of the Registrants
Form 8-K
filed with the Securities and Exchange Commission on
April 4, 2005.
|
|
|
|
10
|
.34*
|
|
Executive Officer Cash Bonus Plan Performance Goals for each of
Messrs. Zvi Barzilay and Joel H. Rassman for the
Registrants 2006 fiscal year is hereby incorporated by
reference to Exhibit 10.1 of the Registrants
Form 8-K
filed with the Securities and Exchange Commission on
December 19, 2005.
|
|
|
|
10
|
.35*
|
|
Executive Officer Cash Bonus Plan Performance Goals for each of
Messrs. Zvi Barzilay and Joel H. Rassman for the
Registrants 2007 fiscal year is hereby incorporated by
reference to Exhibit 10.2 of the Registrants
Form 8-K
filed with the Securities and Exchange Commission on
December 19, 2006.
|
|
|
|
10
|
.36*
|
|
Toll Brothers, Inc. Supplemental Executive Retirement Plan, as
amended and restated, effective as of June 1, 2006, is
hereby incorporated by reference to Exhibit 10.1 of the
Registrants
Form 10-Q
for the quarter ended July 31, 2006.
|
|
|
|
10
|
.37*
|
|
Stock Redemption Agreement between the Registrant and
Robert I. Toll, dated October 28, 1995, is hereby
incorporated by reference to Exhibit 10.7 of the
Registrants
Form 10-K
for the fiscal year ended October 31, 1995.
|
|
|
|
10
|
.38*
|
|
Agreement dated May 1, 2005 to Abolish Stock
Redemption Agreement between the Registrant and Robert I.
Toll, dated October 28, 1995, is hereby incorporated by
reference to Exhibit 10.1 of the Registrants
Form 8-K
filed with the Securities and Exchange Commission on May 3,
2005.
|
|
|
|
10
|
.39*
|
|
Stock Redemption Agreement between the Registrant and Bruce
E. Toll, dated October 28, 1995, is hereby incorporated by
reference to Exhibit 10.8 of the Registrants
Form 10-K
for the fiscal year ended October 31, 1995.
|
|
|
|
10
|
.40*
|
|
Agreement dated May 1, 2005 to Abolish Stock
Redemption Agreement between the Registrant and Bruce E.
Toll, dated October 28, 1995, is hereby incorporated by
reference to Exhibit 10.2 of the Registrants
Form 8-K
filed with the Securities and Exchange Commission on May 3,
2005.
|
|
|
|
10
|
.41*
|
|
Agreement dated March 5, 1998 between the Registrant and
Bruce E. Toll regarding Mr. Tolls resignation and
related matters is hereby incorporated by reference to
Exhibit 10.2 to the Registrants
Form 10-Q
for the quarter ended April 30, 1998.
|
|
|
|
10
|
.42*
|
|
Consulting and Non-Competition Agreement dated March 5,
1998 between the Registrant and Bruce E. Toll is hereby
incorporated by reference to Exhibit 10.3 to the
Registrants
Form 10-Q
for the quarter ended April 30, 1998.
|
|
|
47
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
Description
|
|
|
|
|
10
|
.43*
|
|
Amendment to the Agreement dated March 5, 1998 between the
Registrant and Bruce E. Toll and to the Consulting and
Non-Competition Agreement dated March 5, 1998 between the
Registrant and Bruce E. Toll is hereby incorporated by reference
to Exhibit 10.1 of the Registrants
Form 10-Q
for the quarter ended July 31, 2000.
|
|
|
|
10
|
.44*
|
|
Advisory and Non-Competition Agreement between the Registrant
and Bruce E. Toll, dated as of November 1, 2004, is hereby
incorporated by reference to Exhibit 10.1 of the
Registrants
Form 8-K
filed with the Securities and Exchange Commission on
February 4, 2005.
|
|
|
|
10
|
.45*
|
|
Amendment dated as of June 13, 2007 to the Advisory and
Non-Competition Agreement dated as of November 1, 2004,
between the Registrant and Bruce E. Toll is hereby incorporated
by reference to Exhibit 10.1 to the Registrants
Current Report on
Form 8-K
filed with the Securities and Exchange Commission on
June 18, 2007.
|
|
|
|
10
|
.46*
|
|
Agreement between the Registrant and Joel H. Rassman, dated
June 30, 1988, is hereby incorporated by reference to
Exhibit 10.8 of Toll Corp.s Registration Statement on
Form S-1/A
filed with the Securities and Exchange Commission on
September 9, 1988, File
No. 33-23162.
|
|
|
|
10
|
.47*
|
|
Toll Bros., Inc. Non-Qualified Deferred Compensation Plan is
hereby incorporated by reference to Exhibit 10.24 of the
Registrants
Form 10-K
for the fiscal year ended October 31, 2001.
|
|
|
|
10
|
.48*
|
|
Amendment to the Toll Bros., Inc. Non-Qualified Deferred
Compensation Plan, effective as of January 1, 2005, is
hereby incorporated by reference to Exhibit 10.2 of the
Registrants
Form 10-Q
for the quarter ended July 31, 2006.
|
|
|
|
10
|
.49*
|
|
Toll Brothers, Inc. Stock Award Deferral Plan is hereby
incorporated by reference to Exhibit 10.25 of the
Registrants
Form 10-K
for the fiscal year ended October 31, 2001.
|
|
|
|
12
|
|
|
Statement re: Computation of Ratios of Earnings to Fixed Charges.
|
|
|
|
21
|
|
|
Subsidiaries of the Registrant.
|
|
|
|
23
|
|
|
Consent of Independent Registered Public Accounting Firm.
|
|
|
|
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.
|
|
|
|
|
|
* |
|
This exhibit is a management contract or compensatory plan or
arrangement required to be filed as an exhibit to this report. |
48
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the Township of Horsham,
Commonwealth of Pennsylvania on December 21, 2007.
TOLL BROTHERS, INC.
Robert I. Toll
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Robert
I. Toll
Robert
I. Toll
|
|
Chairman of the Board of Directors and Chief Executive Officer
(Principal Executive Officer)
|
|
December 21, 2007
|
|
|
|
|
|
/s/ Bruce
E. Toll
Bruce
E. Toll
|
|
Vice Chairman of the Board and Director
|
|
December 21, 2007
|
|
|
|
|
|
/s/ Zvi
Barzilay
Zvi
Barzilay
|
|
President, Chief Operating
Officer and Director
|
|
December 21, 2007
|
|
|
|
|
|
/s/ Joel
H. Rassman
Joel
H. Rassman
|
|
Executive Vice President, Treasurer, Chief Financial Officer and
Director (Principal Financial Officer)
|
|
December 21, 2007
|
|
|
|
|
|
/s/ Joseph
R. Sicree
Joseph
R. Sicree
|
|
Senior Vice President and Chief Accounting Officer
(Principal Accounting Officer)
|
|
December 21, 2007
|
|
|
|
|
|
/s/ Robert
S. Blank
Robert
S. Blank
|
|
Director
|
|
December 21, 2007
|
|
|
|
|
|
/s/ Edward
G. Boehne
Edward
G. Boehne
|
|
Director
|
|
December 21, 2007
|
|
|
|
|
|
/s/ Richard
J. Braemer
Richard
J. Braemer
|
|
Director
|
|
December 21, 2007
|
|
|
|
|
|
/s/ Roger
S. Hillas
Roger
S. Hillas
|
|
Director
|
|
December 21, 2007
|
|
|
|
|
|
/s/ Carl
B. Marbach
Carl
B. Marbach
|
|
Director
|
|
December 21, 2007
|
|
|
|
|
|
/s/ Stephen
A. Novick
Stephen
A. Novick
|
|
Director
|
|
December 21, 2007
|
|
|
|
|
|
/s/ Paul
E. Shapiro
Paul
E. Shapiro
|
|
Director
|
|
December 21, 2007
|
49
Managements
Annual Report on Internal Control Over Financial
Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term
is defined in the Securities Exchange Act
Rule 13a-15(f).
Internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted
accounting principles. Internal control over financial reporting
includes those policies and procedures that: (i) pertain to
the maintenance of records that in reasonable detail accurately
and fairly reflect the transactions and dispositions of the
assets of the company; (ii) provide reasonable assurance
that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance
with authorizations of management and directors of the company;
and (iii) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use, or
disposition of the companys assets that could have a
material effect on the financial statements. Because of its
inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of
any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes
in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
Under the supervision and with the participation of our
management, including our principal executive officer and our
principal financial officer, we conducted an evaluation of the
effectiveness of our internal control over financial reporting
based on the framework in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this
evaluation under the framework in Internal
Control Integrated Framework, our management
concluded that our internal control over financial reporting was
effective as of October 31, 2007.
Toll Brothers, Inc.s independent registered public
accounting firm, Ernst & Young LLP, has issued an
attestation report, which is included herein, on the
effectiveness of Toll Brothers, Inc.s internal control
over financial reporting.
F-1
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of Toll Brothers,
Inc.
We have audited Toll Brothers, Inc.s internal control over
financial reporting as of October 31, 2007, based on
criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (the COSO criteria). Toll Brothers,
Inc.s management is responsible for maintaining effective
internal control over financial reporting, and for its
assessment of the effectiveness of internal control over
financial reporting included in the accompanying
Managements Annual Report on Internal Control Over
Financial Reporting. Our responsibility is to express an opinion
on the Companys internal control over financial reporting
based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, Toll Brothers, Inc. maintained, in all material
respects, effective internal control over financial reporting as
of October 31, 2007, based on the COSO criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Toll Brothers, Inc. and
subsidiaries as of October 31, 2007 and 2006, and the
related consolidated statements of income, changes in
stockholders equity, and cash flows for each of the three
years in the period ended October 31, 2007 of Toll
Brothers, Inc. and subsidiaries and our report dated
December 20, 2007 expressed an unqualified opinion thereon.
Ernst & Young LLP
Philadelphia, Pennsylvania
December 20, 2007
F-2
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of Toll Brothers,
Inc.
We have audited the accompanying consolidated balance sheets of
Toll Brothers, Inc. and subsidiaries as of October 31, 2007
and 2006, and the related consolidated statements of income,
changes in stockholders equity, and cash flows for each of
the three years in the period ended October 31, 2007. These
financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Toll Brothers, Inc. and subsidiaries at
October 31, 2007 and 2006, and the consolidated results of
their operations and their cash flows for each of the three
years in the period ended October 31, 2007, in conformity
with U.S. generally accepted accounting principles.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of Toll Brothers, Inc.s internal control
over financial reporting as of October 31, 2007, based on
criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated
December 20, 2007 expressed an unqualified opinion thereon.
As discussed in Note 9 to the consolidated financial
statements, the Company changed its method of accounting for
stock-based compensation effective November 1, 2005.
Ernst & Young LLP
Philadelphia, Pennsylvania
December 20, 2007
F-3
CONSOLIDATED
STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Amounts in thousands, except per share data)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Completed contract
|
|
$
|
4,495,600
|
|
|
$
|
5,945,169
|
|
|
$
|
5,759,301
|
|
Percentage of completion
|
|
|
139,493
|
|
|
|
170,111
|
|
|
|
|
|
Land sales
|
|
|
11,886
|
|
|
|
8,173
|
|
|
|
34,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,646,979
|
|
|
|
6,123,453
|
|
|
|
5,793,425
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Completed contract
|
|
|
3,905,907
|
|
|
|
4,263,200
|
|
|
|
3,902,697
|
|
Percentage of completion
|
|
|
108,954
|
|
|
|
132,268
|
|
|
|
|
|
Land sales
|
|
|
8,069
|
|
|
|
6,997
|
|
|
|
24,416
|
|
Interest
|
|
|
102,447
|
|
|
|
121,993
|
|
|
|
125,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,125,377
|
|
|
|
4,524,458
|
|
|
|
4,052,396
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
516,729
|
|
|
|
573,404
|
|
|
|
482,786
|
|
Goodwill impairment
|
|
|
8,973
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from operations
|
|
|
(4,100
|
)
|
|
|
1,025,591
|
|
|
|
1,258,243
|
|
Other:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings from unconsolidated entities
|
|
|
(40,353
|
)
|
|
|
48,361
|
|
|
|
27,744
|
|
Interest and other income
|
|
|
115,133
|
|
|
|
52,664
|
|
|
|
41,197
|
|
Expenses related to early retirement of debt
|
|
|
|
|
|
|
|
|
|
|
(4,056
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
70,680
|
|
|
|
1,126,616
|
|
|
|
1,323,128
|
|
Income taxes
|
|
|
35,029
|
|
|
|
439,403
|
|
|
|
517,018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
35,651
|
|
|
$
|
687,213
|
|
|
$
|
806,110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.23
|
|
|
$
|
4.45
|
|
|
$
|
5.23
|
|
Diluted
|
|
$
|
0.22
|
|
|
$
|
4.17
|
|
|
$
|
4.78
|
|
Weighted average number of shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
155,318
|
|
|
|
154,300
|
|
|
|
154,272
|
|
Diluted
|
|
|
164,166
|
|
|
|
164,852
|
|
|
|
168,552
|
|
See accompanying notes.
F-4
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
October 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Amounts in thousands)
|
|
|
ASSETS
|
Cash and cash equivalents
|
|
$
|
900,337
|
|
|
$
|
632,524
|
|
Inventory
|
|
|
5,572,655
|
|
|
|
6,095,702
|
|
Property, construction and office equipment, net
|
|
|
84,265
|
|
|
|
99,089
|
|
Receivables, prepaid expenses and other assets
|
|
|
135,910
|
|
|
|
160,446
|
|
Contracts receivable
|
|
|
46,525
|
|
|
|
170,111
|
|
Mortgage loans receivable
|
|
|
93,189
|
|
|
|
130,326
|
|
Customer deposits held in escrow
|
|
|
34,367
|
|
|
|
49,676
|
|
Investments in and advances to unconsolidated entities
|
|
|
183,171
|
|
|
|
245,667
|
|
Deferred tax assets
|
|
|
169,897
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,220,316
|
|
|
$
|
7,583,541
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Liabilities:
|
|
|
|
|
|
|
|
|
Loans payable
|
|
$
|
696,814
|
|
|
$
|
736,934
|
|
Senior notes
|
|
|
1,142,306
|
|
|
|
1,141,167
|
|
Senior subordinated notes
|
|
|
350,000
|
|
|
|
350,000
|
|
Mortgage company warehouse loan
|
|
|
76,730
|
|
|
|
119,705
|
|
Customer deposits
|
|
|
260,155
|
|
|
|
360,147
|
|
Accounts payable
|
|
|
236,877
|
|
|
|
292,171
|
|
Accrued expenses
|
|
|
724,229
|
|
|
|
825,288
|
|
Income taxes payable
|
|
|
197,960
|
|
|
|
334,500
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
3,685,071
|
|
|
|
4,159,912
|
|
|
|
|
|
|
|
|
|
|
Minority interest
|
|
|
8,011
|
|
|
|
7,703
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, none issued
|
|
|
|
|
|
|
|
|
Common stock, 157,028 and 156,292 issued at October 31,
2007 and 2006
|
|
|
1,570
|
|
|
|
1,563
|
|
Additional paid-in capital
|
|
|
227,561
|
|
|
|
220,783
|
|
Retained earnings
|
|
|
3,298,925
|
|
|
|
3,263,274
|
|
Treasury stock, at cost 20 shares and
2,393 shares at October 31, 2007 and 2006, respectively
|
|
|
(425
|
)
|
|
|
(69,694
|
)
|
Accumulated other comprehensive income
|
|
|
(397
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
3,527,234
|
|
|
|
3,415,926
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,220,316
|
|
|
$
|
7,583,541
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-5
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Retained
|
|
|
Treasury
|
|
|
Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
$
|
|
|
Capital
|
|
|
Earnings
|
|
|
Stock
|
|
|
Income
|
|
|
Total
|
|
|
Balance, November 1, 2004
|
|
|
74,821
|
|
|
$
|
770
|
|
|
$
|
200,938
|
|
|
$
|
1,770,730
|
|
|
$
|
(52,451
|
)
|
|
|
|
|
|
$
|
1,919,987
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
806,110
|
|
|
|
|
|
|
|
|
|
|
|
806,110
|
|
Purchase of treasury stock
|
|
|
(2,396
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(118,767
|
)
|
|
|
|
|
|
|
(118,767
|
)
|
Exercise of stock options
|
|
|
3,887
|
|
|
|
14
|
|
|
|
26,780
|
|
|
|
|
|
|
|
97,504
|
|
|
|
|
|
|
|
124,298
|
|
Executive bonus award
|
|
|
656
|
|
|
|
|
|
|
|
14,930
|
|
|
|
|
|
|
|
15,466
|
|
|
|
|
|
|
|
30,396
|
|
Employee benefit plan issuances
|
|
|
22
|
|
|
|
|
|
|
|
506
|
|
|
|
|
|
|
|
871
|
|
|
|
|
|
|
|
1,377
|
|
Issuance of restricted stock
|
|
|
11
|
|
|
|
|
|
|
|
(778
|
)
|
|
|
|
|
|
|
778
|
|
|
|
|
|
|
|
|
|
Amortization of unearned compensation
|
|
|
|
|
|
|
|
|
|
|
170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
170
|
|
Two-for-one stock split
|
|
|
77,942
|
|
|
|
779
|
|
|
|
|
|
|
|
(779
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, October 31, 2005
|
|
|
154,943
|
|
|
|
1,563
|
|
|
|
242,546
|
|
|
|
2,576,061
|
|
|
|
(56,599
|
)
|
|
|
|
|
|
|
2,763,571
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
687,213
|
|
|
|
|
|
|
|
|
|
|
|
687,213
|
|
Purchase of treasury stock
|
|
|
(3,632
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(109,845
|
)
|
|
|
|
|
|
|
(109,845
|
)
|
Exercise of stock options
|
|
|
2,181
|
|
|
|
|
|
|
|
(48,576
|
)
|
|
|
|
|
|
|
81,925
|
|
|
|
|
|
|
|
33,349
|
|
Executive bonus award
|
|
|
296
|
|
|
|
|
|
|
|
(125
|
)
|
|
|
|
|
|
|
11,051
|
|
|
|
|
|
|
|
10,926
|
|
Employee benefit plan issuances
|
|
|
110
|
|
|
|
|
|
|
|
(123
|
)
|
|
|
|
|
|
|
3,727
|
|
|
|
|
|
|
|
3,604
|
|
Issuance of restricted stock
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47
|
|
|
|
|
|
|
|
47
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
26,748
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,748
|
|
Amortization of unearned compensation
|
|
|
|
|
|
|
|
|
|
|
313
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
313
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, October 31, 2006
|
|
|
153,899
|
|
|
|
1,563
|
|
|
|
220,783
|
|
|
|
3,263,274
|
|
|
|
(69,694
|
)
|
|
|
|
|
|
|
3,415,926
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,651
|
|
|
|
|
|
|
|
|
|
|
|
35,651
|
|
Purchase of treasury stock
|
|
|
(67
|
)
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
(1,818
|
)
|
|
|
|
|
|
|
(1,817
|
)
|
Exercise of stock options
|
|
|
2,714
|
|
|
|
7
|
|
|
|
(19,649
|
)
|
|
|
|
|
|
|
57,357
|
|
|
|
|
|
|
|
37,715
|
|
Executive bonus award
|
|
|
242
|
|
|
|
|
|
|
|
1,178
|
|
|
|
|
|
|
|
7,601
|
|
|
|
|
|
|
|
8,779
|
|
Employee benefit plan issuances
|
|
|
134
|
|
|
|
|
|
|
|
653
|
|
|
|
|
|
|
|
3,229
|
|
|
|
|
|
|
|
3,882
|
|
Issuance of restricted stock
|
|
|
86
|
|
|
|
|
|
|
|
(3,125
|
)
|
|
|
|
|
|
|
2,900
|
|
|
|
|
|
|
|
(225
|
)
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
26,964
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,964
|
|
Amortization of unearned compensation
|
|
|
|
|
|
|
|
|
|
|
756
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
756
|
|
Adjustment to adopt SFAS 158, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(397
|
)
|
|
|
(397
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, October 31, 2007
|
|
|
157,008
|
|
|
$
|
1,570
|
|
|
$
|
227,561
|
|
|
$
|
3,298,925
|
|
|
$
|
(425
|
)
|
|
$
|
(397
|
)
|
|
$
|
3,527,234
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-6
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Amounts in thousands)
|
|
|
Cash flow from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
35,651
|
|
|
$
|
687,213
|
|
|
$
|
806,110
|
|
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
29,949
|
|
|
|
30,357
|
|
|
|
20,345
|
|
Amortization of initial benefit obligation
|
|
|
1,291
|
|
|
|
1,957
|
|
|
|
3,802
|
|
Stock-based compensation
|
|
|
27,463
|
|
|
|
27,082
|
|
|
|
|
|
Excess tax benefits from stock-based compensation
|
|
|
(15,915
|
)
|
|
|
(16,110
|
)
|
|
|
|
|
Loss (earnings) from unconsolidated entities
|
|
|
40,353
|
|
|
|
(48,361
|
)
|
|
|
(27,744
|
)
|
Distributions of earnings from unconsolidated entities
|
|
|
23,545
|
|
|
|
10,534
|
|
|
|
13,401
|
|
Amortization of unearned compensation
|
|
|
|
|
|
|
|
|
|
|
200
|
|
Deferred tax (benefit) provision
|
|
|
(289,203
|
)
|
|
|
8,773
|
|
|
|
26,763
|
|
Inventory impairments
|
|
|
619,515
|
|
|
|
152,045
|
|
|
|
5,079
|
|
Gain on sale of businesses
|
|
|
(24,643
|
)
|
|
|
|
|
|
|
|
|
Goodwill impairment charge
|
|
|
8,973
|
|
|
|
|
|
|
|
|
|
Write-off of unamortized debt discount and financing costs
|
|
|
|
|
|
|
|
|
|
|
416
|
|
Changes in operating assets and liabilities, net of assets and
liabilities acquired or disposed of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in inventory
|
|
|
(18,273
|
)
|
|
|
(877,746
|
)
|
|
|
(1,025,421
|
)
|
Origination of mortgage loans
|
|
|
(1,412,629
|
)
|
|
|
(1,022,663
|
)
|
|
|
(873,404
|
)
|
Sale of mortgage loans
|
|
|
1,449,766
|
|
|
|
992,196
|
|
|
|
873,459
|
|
Decrease (increase) in contract receivables
|
|
|
123,586
|
|
|
|
(170,111
|
)
|
|
|
|
|
Decrease (increase) in receivables, prepaid expenses and other
assets
|
|
|
9,929
|
|
|
|
22,345
|
|
|
|
(39,169
|
)
|
(Decrease) increase in customer deposits
|
|
|
(84,683
|
)
|
|
|
(36,530
|
)
|
|
|
109,506
|
|
(Decrease) increase in accounts payable and accrued expenses
|
|
|
(195,594
|
)
|
|
|
51,885
|
|
|
|
314,949
|
|
Increase in current income taxes payable
|
|
|
1,388
|
|
|
|
63,045
|
|
|
|
126,404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
330,469
|
|
|
|
(124,089
|
)
|
|
|
334,696
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment, net
|
|
|
(14,975
|
)
|
|
|
(41,740
|
)
|
|
|
(43,029
|
)
|
Proceeds from sale of ancillary businesses
|
|
|
32,299
|
|
|
|
|
|
|
|
|
|
Purchase of marketable securities
|
|
|
(5,769,805
|
)
|
|
|
(2,844,810
|
)
|
|
|
(4,575,434
|
)
|
Sale of marketable securities
|
|
|
5,769,805
|
|
|
|
2,844,810
|
|
|
|
4,690,463
|
|
Investment in and advances to unconsolidated entities
|
|
|
(34,530
|
)
|
|
|
(122,190
|
)
|
|
|
(55,059
|
)
|
Return of investments in unconsolidated entities
|
|
|
42,790
|
|
|
|
53,806
|
|
|
|
14,631
|
|
Acquisition of interest in unconsolidated entities
|
|
|
|
|
|
|
(44,750
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
25,584
|
|
|
|
(154,874
|
)
|
|
|
31,572
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from loans payable
|
|
|
1,507,865
|
|
|
|
1,614,087
|
|
|
|
1,125,951
|
|
Principal payments of loans payable
|
|
|
(1,632,785
|
)
|
|
|
(1,316,950
|
)
|
|
|
(1,391,833
|
)
|
Net proceeds from issuance of public debt
|
|
|
|
|
|
|
|
|
|
|
293,097
|
|
Redemption of senior subordinated notes
|
|
|
|
|
|
|
|
|
|
|
(100,000
|
)
|
Proceeds from stock-based benefit plans
|
|
|
20,475
|
|
|
|
15,103
|
|
|
|
44,729
|
|
Proceeds from restricted stock award
|
|
|
1,800
|
|
|
|
|
|
|
|
|
|
Excess tax benefits from stock-based compensation
|
|
|
15,915
|
|
|
|
16,110
|
|
|
|
|
|
Purchase of treasury stock
|
|
|
(1,818
|
)
|
|
|
(109,845
|
)
|
|
|
(118,767
|
)
|
Change in minority interest
|
|
|
308
|
|
|
|
3,763
|
|
|
|
3,940
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(88,240
|
)
|
|
|
222,268
|
|
|
|
(142,883
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
267,813
|
|
|
|
(56,695
|
)
|
|
|
223,385
|
|
Cash and cash equivalents, beginning of year
|
|
|
632,524
|
|
|
|
689,219
|
|
|
|
465,834
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$
|
900,337
|
|
|
$
|
632,524
|
|
|
$
|
689,219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-7
Notes to
Consolidated Financial Statements
|
|
1.
|
Significant
Accounting Policies
|
Basis
of Presentation
The accompanying 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 50% or less owned partnerships and
affiliates are accounted for using the equity method unless it
is determined that the Company has effective control of the
entity, in which case the entity would be consolidated.
Use of
Estimates
The preparation of financial statements in conformity with
U.S. generally accepted accounting principles requires
management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
Revenue
and Cost Recognition
Completed Contract Method: The construction
time of the Companys homes is generally less than one year
although some may take more than one year to complete. Revenues
and cost of revenues from these home sales are recorded at the
time each home is delivered and title and possession are
transferred to the buyer. Closing normally occurs shortly after
construction is substantially completed. In addition, the
Company has several high-rise/mid-rise projects which do not
qualify for percentage of completion accounting in accordance
with Financial Accounting Standards (SFAS)
No. 66, Accounting for Sales of Real Estate
(SFAS 66), which are included in this category
of revenues and costs.
Land, land development and other common 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 resulting from a
change in the estimated number of homes to be constructed or in
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 changes resulting from a change
in the estimated number of homes to be constructed or in the
estimated costs are allocated to the remaining home sites in
each of the communities of the master planned community.
Percentage of Completion Method: The Company
is developing several high-rise/mid-rise projects that may take
substantially more than one year to complete. Under the
provisions of SFAS 66, revenues and costs are recognized
using the percentage of completion method of accounting when
construction is beyond the preliminary stage, the buyer is
committed to the extent of being unable to require a refund
except for nondelivery of the unit, sufficient units in the
project have been sold to ensure that the property will not be
converted to rental property, the sales proceeds are collectible
and the aggregate sales proceeds and the total cost of the
project can be reasonably estimated. Revenues and costs of
individual projects are recognized on the individual
projects aggregate value of units for which the home
buyers have signed binding agreements of sale, less an allowance
for cancellations, and are based on the percentage of total
estimated construction costs that have been incurred. Total
estimated revenues and construction costs are reviewed
periodically, and any change is applied to current and future
periods.
Land Sales: Land sales revenues and cost of
revenues are recorded at the time that title and possession of
the property have been transferred to the buyer. The Company
recognizes the pro rata share of land sales revenues and cost of
land sales revenues to entities in which it has a 50% or less
interest based upon the ownership percentage attributable to the
non-Company investors. Any profit not recognized in a
transaction reduces the Companys investment in the entity
or is recorded as an accrued liability on its consolidated
balance sheet.
F-8
Notes to
Consolidated Financial
Statements (Continued)
Cash
and Cash Equivalents
Liquid investments or investments with original maturities of
three months or less are classified as cash equivalents. The
carrying value of these investments approximates their fair
value.
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 land
acquisition, land development and home construction costs, costs
include interest, real estate taxes and direct overhead 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. Once
a parcel of land has been approved for development, it generally
takes four to five years to fully develop, sell and deliver all
the homes in one of the Companys typical communities.
Longer or shorter time periods are possible depending on the
number of home sites in a community and the sales and delivery
pace of the homes in a community. The Companys master
planned communities, consisting of several smaller communities,
may take up to ten years or more to complete. Because of
the downturn in the Companys business, the aforementioned
estimated community lives may be significantly longer. Because
the Companys inventory is considered a long-lived asset
under U.S. generally accepted accounting principles, the
Company is required, under SFAS 144, to regularly review
the carrying value of each of its communities and write down the
value of those communities for which it believes the values are
not recoverable.
Current Communities: 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, the asset is
reviewed for impairment by comparing the estimated future
undiscounted cash flow for the community to its carrying value.
If the estimated future undiscounted cash flow is less than the
communitys carrying value, the carrying value is written
down to its estimated fair value. Fair value is primarily
determined by discounting the estimated future cash flow of each
community. The impairment is charged to cost of revenues in the
period the impairment is determined. In estimating the cash flow
of a community, the Company uses various estimates such as
(a) the expected sales pace in a community based upon
general economic conditions that will have a short-term or
long-term impact on the market in which the community is located
and competition within the market, including the number of
homes/home sites available and pricing and incentives being
offered in other communities owned by it or by other builders;
(b) the expected sales prices and sales incentives to be
offered in a community; (c) costs expended to date and
expected to be incurred in the future, including, but not
limited to, land and land development costs, home construction
costs, interest costs and overhead costs; (d) alternative
product offerings that may be offered in a community that will
have an impact on sales pace, sales price, building cost or the
number of homes that can be built on a particular site; and
(e) alternative uses for the property such as the
possibility of a sale of the entire community to another builder
or the sale of individual home sites.
Future Communities: The Company evaluates all
land held for future communities or future sections of current
communities, whether owned or under contract, to determine
whether or not it expects to proceed with the development of the
land as originally contemplated. This evaluation encompasses the
same types of estimates used for current communities described
above as well as an evaluation of the regulatory environment in
which the land is located and the estimated probability of
obtaining the necessary approvals, the estimated time and cost
it will take to obtain the approvals and the possible
concessions that will be required to be given in order to obtain
them. Concessions may include cash payments to fund improvement
to public places such as parks and streets, dedication of a
portion of the property for use by the public or as open space
or a reduction in the density or size of the homes to be built.
Based upon this review, the Company decides (a) as to land
under contract to be purchased, whether the contract will likely
be terminated or renegotiated, and (b) as to land the
Company owns, whether the land will likely be developed as
contemplated or in an alternative manner, or should be sold. The
Company then further determines whether costs that have been
capitalized to the community are recoverable or should be
written off. The write-off is charged to cost of revenues in the
period that the need for the write-off is determined.
F-9
Notes to
Consolidated Financial
Statements (Continued)
The estimates used in the determination of the estimated cash
flows and fair value of a community are based on factors known
to the Company at the time such estimates are made and the
Companys expectations of future operations and economic
conditions. Should the estimates or expectations used in
determining estimated fair value deteriorate in the future, the
Company may be required to recognize additional impairment
charges or write-offs related to current and future communities.
Variable Interest Entities: The Company has a
significant number of land purchase contracts, sometimes
referred to herein as land purchase agreements,
purchase agreements, options or
option agreements, and several investments in
unconsolidated entities which it evaluates in accordance with
the Financial Accounting Standards Board (FASB)
Interpretation No. 46 Consolidation of Variable
Interest Entities, an interpretation of ARB No. 51,
as amended by FIN 46R (FIN 46). Pursuant
to FIN 46, an enterprise that absorbs a majority of the
expected losses or receives a majority of the expected residual
returns of a variable interest entity (VIE) is
considered to be the primary beneficiary and 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. For land
purchase contracts with sellers meeting the definition of a VIE,
the Company performs a review to determine which party is the
primary beneficiary of the VIE. This review requires substantial
judgment and estimation. These judgments and estimates involve
assigning probabilities to various estimated cash flow
possibilities relative to the entitys expected profits and
losses and the cash flows associated with changes in the fair
value of the land under contract.
Property,
Construction and Office Equipment
Property, construction and office equipment are recorded at cost
and are stated net of accumulated depreciation of
$116.6 million and $97.8 million at October 31,
2007 and 2006, respectively. Depreciation is recorded using the
straight-line method over the estimated useful lives of the
assets.
Investments
in and Advances to Unconsolidated Entities
The Company is a party to several joint ventures with
independent third parties to develop and sell land that was
owned by its joint venture partners. The Company recognizes its
proportionate share of the earnings from the sale of home sites
to other builders. The Company does not recognize earnings from
the home sites it purchases from these ventures, but reduces its
cost basis in the home sites by its share of the earnings from
those home sites.
The Company is also a party to several other joint ventures,
effectively owns one-third of the Toll Brothers Realty
Trust Group (Trust) and owns 50% of Toll
Brothers Realty Trust Group II
(Trust II).
The Company recognizes its proportionate share of the earnings
of these entities.
Mortgage
Loans Receivable
Mortgage loans, classified as held for sale, include the value
of mortgage loans funded to borrowers plus the deferral of
expenses directly associated with the loans less any points
collected at closing. The carrying value of these loans
approximates their fair value.
Goodwill
and Other Intangible Assets
Intangible assets, including goodwill, that are not subject to
amortization are tested for impairment and possible write-down.
At October 31, 2007 and 2006, the Company had
$3.2 million and $12.2 million of goodwill,
respectively.
F-10
Notes to
Consolidated Financial
Statements (Continued)
Treasury
Stock
Treasury stock is recorded at cost. Issuance of treasury stock
is accounted for on a
first-in,
first-out basis. Differences between the cost of treasury stock
and the re-issuance proceeds are charged to additional paid-in
capital.
Advertising
Costs
The Company expenses advertising costs as incurred. Advertising
costs were $36.3 million, $36.0 million and
$24.0 million for the years ended October 31, 2007,
2006 and 2005, respectively.
Warranty
Costs
The Company provides all of its home buyers with a limited
warranty as to workmanship and mechanical equipment. The Company
also provides many of its home buyers with a limited ten-year
warranty as to structural integrity. The Company accrues for
expected warranty costs at the time each home is closed and
title and possession have been transferred to the buyer. Costs
are accrued based upon historical experience.
Insurance
Costs
The Company accrues for the expected costs associated with the
deductibles and self-insured amounts under its various insurance
policies.
Income
Taxes
The Company accounts for income taxes in accordance with
SFAS No. 109, Accounting for Income Taxes,
(SFAS 109). Deferred tax assets and liabilities
are recorded based on temporary differences between the amounts
reported for financial reporting purposes and the amounts
deductible for income tax purposes. SFAS 109 also requires
that the Company provide for valuation allowances for any
deferred tax assets that it believes are not recoverable.
Provisions for federal and state income taxes are calculated on
reported pretax earnings based on current tax law and also
include, in the applicable 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. The Company
establishes reserves for income taxes when, despite the belief
that its tax positions are fully supportable, it believes that
its 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 estimates will impact
the income tax provision in the period in which such
determination is made.
Segment
Reporting
SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, establishes standards
for the manner in which public enterprises report information
about operating segments. The Company has determined that its
home building operations primarily involve four reportable
geographic segments: North, Mid-Atlantic, South and West. The
states comprising each geographic segment are as follows:
|
|
|
North:
|
|
Connecticut, Illinois, Massachusetts, Michigan, Minnesota, New
Jersey, New York, Ohio and Rhode Island
|
Mid-Atlantic:
|
|
Delaware, Maryland, Pennsylvania, Virginia and West Virginia
|
South:
|
|
Florida, Georgia, North Carolina, South Carolina and Texas
|
West:
|
|
Arizona, California, Colorado and Nevada
|
F-11
Notes to
Consolidated Financial
Statements (Continued)
The Company began operations in Georgia in the fourth quarter of
fiscal 2007. The Company stopped selling homes in Ohio in fiscal
2005 and delivered its last home there in fiscal 2006. The
operations in Ohio were immaterial to the North geographic
segment.
Acquisitions
In June 2005, the Company acquired substantially all of the
assets of the home building operations of the Central Florida
Division of Landstar Homes (Landstar). Landstar
designed, constructed, marketed and sold homes in the Orlando
metropolitan area. Of the approximately $209.0 million (566
homes) of homes sold but not delivered at the acquisition date
of Landstar, the Company delivered approximately
$66.0 million (202 homes) of homes between the acquisition
date and October 31, 2005. 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 $21.3 million (73
homes) of home deliveries in the quarter ended July 31,
2005 but reduced the value of the acquired inventory by the
$21.3 million. The acquisition had a minimal impact on the
Companys earnings in fiscal 2005.
In January 2004, the Company entered into a joint venture in
which it had a 50% interest with an unrelated party to develop
Maxwell Place, a luxury condominium community of approximately
800 units in Hoboken, New Jersey. In November 2005, the
Company acquired its partners 50% equity ownership
interest in this joint venture. As a result of the acquisition,
the Company now owns 100% of the joint venture and the joint
venture has been included as a consolidated subsidiary of the
Company since the acquisition date. As of the acquisition date,
the joint venture had open contracts of sale to deliver
165 units with a sales value of approximately
$128.3 million. The Companys investment in and
subsequent purchase of the partners interest in the joint
venture was not material to the financial position of the
Company. The Company is recognizing revenue and costs related to
a portion of this project using the percentage of completion
method of accounting.
New
Accounting Pronouncements
On December 16, 2004, the FASB issued
SFAS No. 123 (revised 2004), Share-Based
Payment (SFAS 123R). In April 2005, the
Securities and Exchange Commission (the SEC) adopted
a rule permitting implementation of SFAS 123R at the
beginning of the fiscal year commencing after June 15,
2005. Under the provisions of SFAS 123R, an entity is
required to treat all stock-based compensation as a cost that is
reflected in the financial statements. The Company was required
to adopt SFAS 123R beginning in its fiscal quarter ended
January 31, 2006. The Company adopted SFAS 123R using
the modified prospective method whereby the Company recognized
the expense only for periods beginning after October 31,
2005. See Note 9, Stock-Based Benefit Plans,
for information regarding expensing of stock options in fiscal
2007 and 2006 and for pro forma information regarding the
Companys expensing of stock options for fiscal 2005.
In June 2006, the FASB issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes
(FIN 48). FIN 48 clarifies the accounting
for uncertainty in income taxes recognized in accordance with
SFAS 109 and prescribes a recognition threshold and
measurement attributes for the financial statement recognition
and measurement of a tax position taken or expected to be taken
in a tax return. FIN 48 also provides guidance on
de-recognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition.
FIN 48 requires a company to recognize the financial
statement effect of a tax position when it is
more-likely-than-not (defined as a likelihood of more than
50 percent), based on the technical merits of the position,
that the position will be sustained upon examination. A tax
position that meets the more-likely-than-not recognition
threshold is measured to determine the amount of benefit to be
recognized in the financial statements based upon the largest
amount of benefit that is greater than 50 percent likely of
being realized upon ultimate settlement with a taxing authority
that has full knowledge of all relevant information. If a tax
position does not meet the more-likely-than-not recognition
threshold, the benefit of that tax position is not recognized in
the financial statements. FIN 48 will be effective for the
Companys fiscal year beginning November 1, 2007 with
the cumulative effect of the change recorded as an adjustment to
retained earnings. The Company is currently evaluating the
effect the adoption of FIN 48 will have on its financial
statements but does not expect it to have a material impact on
its financial position.
F-12
Notes to
Consolidated Financial
Statements (Continued)
In September 2006, the FASB issued SFAS No. 158,
Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans, an Amendment of FASB Statements
No. 87, 88, 106, and 132(R)
(SFAS 158). SFAS 158 requires the Company
to (a) recognize in its statement of financial position the
overfunded or underfunded status of a defined benefit
postretirement plan measured as the difference between the fair
value of plan assets and the benefit obligation,
(b) recognize as a component of other comprehensive income,
net of tax, the actuarial gains and losses and the prior service
costs and credits that arise during the period, (c) measure
defined benefit plan assets and defined benefit plan obligations
as of the date of the Companys statement of financial
position, and (d) disclose additional information about
certain effects on net periodic benefit costs in the upcoming
fiscal year that arise from the delayed recognition of the
actuarial gains and losses and the prior service costs and
credits. The Company adopted SFAS 158 effective
October 31, 2007 related to its recognition of accumulated
other comprehensive income, net of tax. The Companys
adoption of SFAS 158 did not have a material effect on its
financial statements. The incremental effect of applying
SFAS 158 on the individual line items of the consolidated
balance sheet at October 31, 2007 was as follows (amounts
in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before
|
|
|
|
|
|
After
|
|
|
|
Application
|
|
|
|
|
|
application
|
|
|
|
of SFAS 158
|
|
|
Adjustment
|
|
|
of SFAS 158
|
|
|
Receivables, prepaid expenses and other assets
|
|
$
|
138,410
|
|
|
$
|
(2,500
|
)
|
|
$
|
135,910
|
|
Deferred tax assets
|
|
$
|
169,631
|
|
|
$
|
266
|
|
|
$
|
169,897
|
|
Total assets
|
|
$
|
7,222,550
|
|
|
$
|
(2,234
|
)
|
|
$
|
7,220,316
|
|
Accrued expenses
|
|
$
|
726,066
|
|
|
$
|
(1,837
|
)
|
|
$
|
724,229
|
|
Total liabilities
|
|
$
|
3,686,908
|
|
|
$
|
(1,837
|
)
|
|
$
|
3,685,071
|
|
Accumulated other comprehensive income
|
|
|
|
|
|
$
|
(397
|
)
|
|
$
|
(397
|
)
|
Total stockholders equity
|
|
$
|
3,527,631
|
|
|
$
|
(397
|
)
|
|
$
|
3,527,234
|
|
Total liabilities and stockholders equity
|
|
$
|
7,222,550
|
|
|
$
|
(2,234
|
)
|
|
$
|
7,220,316
|
|
In September 2006, the Emerging Issues Task Force
(EITF) issued EITF Issue
No. 06-8,
Applicability of the Assessment of a Buyers
Continuing Investment under SFAS No. 66 for the Sale
of Condominiums
(EITF 06-8).
EITF 06-8 states
that in assessing the collectibility of the sales price pursuant
to paragraph 37(d) of SFAS 66, an entity should
evaluate the adequacy of the buyers initial and continuing
investment to conclude that the sales price is collectible. If
an entity is unable to meet the criteria of paragraph 37,
including an assessment of collectibility using the initial and
continuing investment tests described in
paragraphs 8-12
of SFAS 66, then the entity should apply the deposit method
as described in
paragraphs 65-67
of SFAS 66.
EITF 06-8
is effective for the Companys fiscal year beginning
November 1, 2007. The application of the continuing
investment criteria on the collectibility of the sales price
will limit the Companys ability to recognize revenues and
costs using the percentage of completion accounting method. The
change in criteria did not have an affect on any revenues or
costs reported under percentage of completion accounting in
fiscal 2006 and 2007.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements (SFAS 157).
SFAS 157 provides guidance for using fair value to measure
assets and liabilities. The standard also responds to
investors request for expanded information about the
extent to which a company measures assets and liabilities at
fair value, the information used to measure fair value, and the
effect of fair value measurements on earnings. SFAS 157
will be effective for the Companys fiscal year beginning
November 1, 2008. The Company is currently reviewing the
effect SFAS 157 will have on its financial statements;
however, it is not expected to have a material impact on the
Companys consolidated financial position, results of
operations or cash flows.
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities, Including an Amendment of FASB Statement
No. 115 (SFAS 159). SFAS 159
permits entities to choose to measure certain financial assets
and liabilities at fair value. Unrealized gains and losses on
items for which the fair value option has been elected will be
reported in earnings. SFAS No. 159 will be effective
for the Companys fiscal year beginning November 1,
2009. The Company is currently evaluating the impact of the
F-13
Notes to
Consolidated Financial
Statements (Continued)
adoption of SFAS No. 159; however, it is not expected
to have a material impact on the Companys consolidated
financial position, results of operations or cash flows.
Stock
Split
On June 9, 2005, the Companys Board of Directors
declared a two-for-one split of the Companys 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.
Reclassification
Certain prior year amounts have been reclassified to conform to
the fiscal 2007 presentation.
Inventory at October 31, 2007 and 2006 consisted of the
following (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Land and land development costs
|
|
$
|
1,749,652
|
|
|
$
|
2,193,850
|
|
Construction in progress completed contract
|
|
|
3,109,243
|
|
|
|
3,174,483
|
|
Construction in progress percentage of completion
|
|
|
62,677
|
|
|
|
153,452
|
|
Sample homes and sales offices
|
|
|
357,322
|
|
|
|
244,097
|
|
Land deposits and costs of future development
|
|
|
274,799
|
|
|
|
315,041
|
|
Other
|
|
|
18,962
|
|
|
|
14,779
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,572,655
|
|
|
$
|
6,095,702
|
|
|
|
|
|
|
|
|
|
|
Construction in progress includes the cost of homes under
construction, land and land development costs and the carrying
cost of home sites that have been substantially improved.
The Company capitalizes certain interest costs to inventory
during the development and construction period. Capitalized
interest is charged to cost of revenues when the related
inventory is delivered for traditional homes or when the related
inventory is charged to cost of revenues under percentage of
completion accounting. Interest incurred, capitalized and
expensed for each of the three years ended October 31,
2007, 2006 and 2005, was as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Interest capitalized, beginning of year
|
|
$
|
181,465
|
|
|
$
|
162,672
|
|
|
$
|
173,442
|
|
Interest incurred
|
|
|
136,758
|
|
|
|
135,166
|
|
|
|
115,449
|
|
Capitalized interest in inventory acquired
|
|
|
|
|
|
|
6,100
|
|
|
|
|
|
Interest expensed to cost of sales
|
|
|
(102,447
|
)
|
|
|
(121,993
|
)
|
|
|
(125,283
|
)
|
Write-off against other
|
|
|
(205
|
)
|
|
|
(480
|
)
|
|
|
(936
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest capitalized, end of year
|
|
$
|
215,571
|
|
|
$
|
181,465
|
|
|
$
|
162,672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory impairment charges are recognized against all
inventory costs of a community, such as land, land improvements,
cost of home construction and capitalized interest. The amounts
included in the above table reflect the gross amount of
capitalized interest before allocation of any impairment charges
recognized.
F-14
Notes to
Consolidated Financial
Statements (Continued)
Interest included in cost of revenues for each of the three
years ended October 31, 2007, 2006 and 2005, was as follows
(amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Completed contract
|
|
$
|
97,246
|
|
|
$
|
116,405
|
|
|
$
|
122,451
|
|
Percentage of completion
|
|
|
4,797
|
|
|
|
4,552
|
|
|
|
|
|
Land sales
|
|
|
404
|
|
|
|
1,036
|
|
|
|
2,832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
102,447
|
|
|
$
|
121,993
|
|
|
$
|
125,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company recognized inventory impairment charges and the
expensing of costs that it believed not to be recoverable for
each of the three years ended October 31, 2007, 2006 and
2005, was as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Land controlled for future communities
|
|
$
|
37,920
|
|
|
$
|
90,925
|
|
|
$
|
3,279
|
|
Operating communities and land owned
|
|
|
581,596
|
|
|
|
61,120
|
|
|
|
1,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
619,516
|
|
|
$
|
152,045
|
|
|
$
|
5,079
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At the end of each fiscal quarter, the Company evaluates each of
its operating communities to determine their estimated fair
value and whether the estimated fair value exceeded their
carrying costs. The table below provides, as of the date
indicated, the number of operating communities in which the
Company recognized impairment charges, the fair value of those
communities, net of impairment charges and the amount of
impairment charges recognized ($ amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
Fair Value of
|
|
|
|
|
|
|
|
|
Fair Value of
|
|
|
|
|
|
|
|
|
|
Communities,
|
|
|
|
|
|
|
|
|
Communities,
|
|
|
|
|
|
|
|
|
|
Net of
|
|
|
|
|
|
|
|
|
Net of
|
|
|
|
|
|
|
Number of
|
|
|
Impairment
|
|
|
Impairment
|
|
|
Number of
|
|
|
Impairment
|
|
|
Impairment
|
|
|
|
Communities
|
|
|
Charges
|
|
|
Charges
|
|
|
Communities
|
|
|
Charges
|
|
|
Charges
|
|
|
January 31,
|
|
|
18
|
|
|
$
|
211,800
|
|
|
$
|
82,962
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 30,
|
|
|
24
|
|
|
$
|
228,900
|
|
|
$
|
116,150
|
|
|
|
5
|
|
|
$
|
30,083
|
|
|
$
|
10,700
|
|
July 31,
|
|
|
28
|
|
|
$
|
344,100
|
|
|
$
|
139,628
|
|
|
|
1
|
|
|
$
|
5,043
|
|
|
$
|
2,800
|
|
October 31,
|
|
|
54
|
|
|
$
|
530,508
|
|
|
$
|
242,856
|
|
|
|
14
|
|
|
$
|
142,538
|
|
|
$
|
47,620
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
581,596
|
|
|
|
|
|
|
|
|
|
|
$
|
61,120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At October 31, 2007, the Company evaluated its land
purchase contracts to determine if any of the selling entities
were VIEs and if they were, whether the Company was the primary
beneficiary of any of them. The Company does not possess legal
title to the land and its risk is generally limited to deposits
paid to the sellers. The creditors of the sellers generally have
no recourse against the Company. At October 31, 2007, the
Company had determined that it was the primary beneficiary of
two VIEs related to land purchase contracts and had recorded
$22.9 million of inventory and $18.7 million of
accrued expenses.
|
|
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 those home sites by its share
of the earnings on the home sites. At October 31, 2007, the
Company had approximately $100.1 million invested in or
advanced to these joint ventures and was committed to
contributing additional capital in an aggregate amount of
approximately
F-15
Notes to
Consolidated Financial
Statements (Continued)
$218.9 million (net of the Companys
$121.7 million of loan guarantees related to two of the
joint ventures loans) if required by the joint ventures.
At October 31, 2007, three of the joint ventures had an
aggregate of $1.22 billion of loan commitments, and had
approximately $1.05 billion borrowed against the
commitments, of which the Company guarantees of its pro-rata
share of the borrowings were $98.6 million. The
Companys recognized impairment charges of
$59.2 million against its investment in two of these
entities because it did not believe that its investments were
recoverable.
The Company has investments in and advances to two joint
ventures with unrelated parties to develop luxury condominium
projects, including for-sale residential units and commercial
space. At October 31, 2007, the Company had investments in
and advances to the joint ventures of $23.4 million, was
committed to making up to $124.0 million of additional
investments in and advances to the joint ventures if required by
the joint ventures, and guaranteed $13.0 million of joint
venture loans. At October 31, 2007, the joint ventures had
an aggregate of $294.5 million of loan commitments, and had
approximately $172.9 million borrowed against the
commitments.
The Company has a 50% interest in a joint venture 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 October 31,
2007, the Company had investments in and advances to the joint
venture of $50.6 million, and was committed to making up to
$1.5 million of additional investments in and advances to
the joint venture.
In fiscal 2005, the Company, together with the Pennsylvania
State Employees Retirement System (PASERS), formed
Trust II to be in a position to take advantage of commercial
real estate opportunities. Trust II is owned 50% by the
Company and 50% by PASERS. At October 31, 2007, the Company
had an investment of $9.2 million in Trust II. In
addition, the Company and PASERS each entered into subscription
agreements that expire in September 2009, whereby each agreed to
invest additional capital in an amount not to exceed
$11.1 million if required by Trust II. Prior to the
formation of Trust II, the Company used the Trust to invest
in commercial real estate opportunities. See Note 13,
Related Party Transactions for information about the
Trust.
The Companys investments in these entities are accounted
for using the equity method.
In January 2007, due to the continued decline of the Detroit
market, the Company re-evaluated the carrying value of goodwill
that resulted from a 1999 acquisition in accordance with
SFAS No. 142, Goodwill and Other Intangible
Assets. The Company estimated the fair value of its assets
in this market including goodwill. Fair value was determined
based on the discounted future cash flow expected to be
generated in this market. Based upon this evaluation and the
Companys expectation that this market would not recover
for a number of years, the Company determined that the related
goodwill was impaired. The Company recognized a
$9.0 million impairment charge in fiscal 2007. After
recognizing this charge, the Company did not have any goodwill
remaining from this acquisition.
|
|
5.
|
Loans
Payable, Senior Notes, Senior Subordinated Notes and Mortgage
Company Warehouse Loan
|
Loans
Payable
Loans payable at October 31, 2007 and 2006 consisted of the
following (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Term loan due March 2011(a)
|
|
$
|
331,667
|
|
|
$
|
300,000
|
|
Other(b)
|
|
|
365,147
|
|
|
|
436,934
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
696,814
|
|
|
$
|
736,934
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The Company has a $1.89 billion credit facility consisting
of a $1.56 billion unsecured revolving credit facility and
a $331.7 million term loan facility (collectively, the
Credit Facility) with 35 banks, which extends to
March 17, 2011. At October 31, 2007, interest was
payable on borrowings under the revolving credit facility at
0.475% (subject to adjustment based upon the Companys debt
rating and leverage ratios) above the Eurodollar |
F-16
Notes to
Consolidated Financial
Statements (Continued)
|
|
|
|
|
rate or at other specified variable rates as selected by the
Company from time to time. At October 31, 2007, the Company
had no outstanding borrowings against the revolving credit
facility but had letters of credit of approximately
$339.0 million outstanding under it, of which the Company
had recorded $38.8 million as liabilities under land
purchase agreements and investments in unconsolidated entities.
Under the term loan facility, interest is payable at 0.50%
(subject to adjustment based upon the Companys 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 October 31, 2007, interest was payable on the
$331.7 million term loan at 5.53%. Under the terms of the
Credit Facility, the Company is not permitted to allow its
maximum leverage ratio (as defined in the agreement) to exceed
2.00 to 1.00 and was required to maintain a minimum tangible net
worth (as defined in the agreement) of approximately
$2.37 billion at October 31, 2007. At October 31,
2007, the Companys leverage ratio was approximately .43 to
1.00, and its tangible net worth was approximately
$3.49 billion. Based upon the minimum tangible net worth
requirement, the Companys ability to pay dividends and
repurchase its common stock was limited to an aggregate amount
of approximately $1.12 billion at October 31, 2007. |
|
(b) |
|
The weighted average interest rate on these loans was 5.82% at
October 31, 2007 and ranged from 3.48% to 10.0%. At
October 31, 2007, $365.1 million of loans payable were
secured by assets of approximately $475.9 million. |
At October 31, 2007, the aggregate estimated fair value of
the Companys loans payable was approximately
$701.4 million. The fair value of loans was estimated based
upon the interest rates at October 31, 2007 that the
Company believed were available to it for loans with similar
terms and remaining maturities.
Senior
Notes
During fiscal 2005, the Company issued $300 million of
5.15% Senior Notes due 2015 and used the proceeds from the
transaction to redeem its $100 million outstanding of
8% Senior Subordinated Notes due 2009 and, with additional
available funds, to retire a $222.5 million bank term loan.
At October 31, 2007 and 2006, the Companys senior
notes consisted of the following (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
6.875% Senior Notes due November 15, 2012
|
|
$
|
300,000
|
|
|
$
|
300,000
|
|
5.95% Senior Notes due September 15, 2013
|
|
|
250,000
|
|
|
|
250,000
|
|
4.95% Senior Notes due March 15, 2014
|
|
|
300,000
|
|
|
|
300,000
|
|
5.15% Senior Notes due May 15, 2015
|
|
|
300,000
|
|
|
|
300,000
|
|
Bond discount
|
|
|
(7,694
|
)
|
|
|
(8,833
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,142,306
|
|
|
$
|
1,141,167
|
|
|
|
|
|
|
|
|
|
|
The senior notes are the unsecured obligations of Toll Brothers
Finance Corp., a 100%-owned subsidiary of the Company. The
payment of principal and interest is fully and unconditionally
guaranteed, jointly and severally, by the Company and
substantially all of its home building subsidiaries (together
with Toll Brothers Finance Corp., the Senior Note
Parties). The senior notes rank equally in right of
payment with all the Senior Note Parties existing and
future unsecured senior indebtedness, including the Credit
Facility. The senior notes are structurally subordinated to the
prior claims of creditors, including trade creditors, of the
subsidiaries of the Company that are not guarantors of the
senior notes. The senior notes are redeemable in whole or in
part at any time at the option of the Company, at prices that
vary based upon the then-current rates of interest and the
remaining original term of the notes.
At October 31, 2007, the aggregate fair value of the
Companys senior notes, based upon their indicated market
prices, was approximately $1.07 billion.
F-17
Notes to
Consolidated Financial
Statements (Continued)
Senior
Subordinated Notes
At October 31, 2007 and 2006, the Companys senior
subordinated notes consisted of the following (amounts in
thousands):
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
81/4% Senior
Subordinated Notes due February 1, 2011
|
|
$
|
200,000
|
|
|
$
|
200,000
|
|
8.25% Senior Subordinated Notes due December 1, 2011
|
|
|
150,000
|
|
|
|
150,000
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
350,000
|
|
|
$
|
350,000
|
|
|
|
|
|
|
|
|
|
|
The senior subordinated notes are the unsecured obligations of
Toll Corp., a 100%-owned subsidiary of the Company; these
obligations are guaranteed on a senior subordinated basis by the
Company. All issues of senior subordinated notes are
subordinated to all existing and future senior indebtedness of
the Company and are structurally subordinated to the prior
claims of creditors, including trade creditors, of the
Companys subsidiaries other than Toll Corp. The indentures
governing these notes restrict certain payments by the Company,
including cash dividends and repurchases of Company stock. The
senior subordinated notes are redeemable in whole or in part at
the option of the Company at various prices, on or after the
fifth anniversary of each issues date of issuance.
At October 31, 2007, the aggregate fair value of the
Companys senior subordinated notes, based upon their
indicated market prices, was approximately $348.2 million.
Mortgage
Company Warehouse Loan
A subsidiary of the Company had a $150 million bank line of
credit with four banks to fund home mortgage originations. The
line of credit is due within 90 days of demand by the banks
and bears interest at the banks overnight rate plus 0.95%.
At October 31, 2007, the subsidiary had borrowed
$76.7 million under the line of credit at an average
interest rate of 5.73%. The line of credit is collateralized by
all the assets of the subsidiary, which amounted to
approximately $97.1 million at October 31, 2007. In
November 2007, the bank line was reduced to $125 million
and three banks.
The annual aggregate maturities of the Companys loans and
notes during each of the next five fiscal years are
2008 $177.0 million; 2009
$162.3 million; 2010 $18.4 million;
2011 $602.2 million; and 2012
$150 million.
Accrued expenses at October 31, 2007 and 2006 consisted of
the following (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Land, land development and construction
|
|
$
|
275,114
|
|
|
$
|
376,114
|
|
Compensation and employee benefit
|
|
|
100,893
|
|
|
|
127,433
|
|
Insurance and litigation
|
|
|
144,349
|
|
|
|
130,244
|
|
Warranty
|
|
|
59,249
|
|
|
|
57,414
|
|
Interest
|
|
|
47,136
|
|
|
|
43,629
|
|
Other
|
|
|
97,488
|
|
|
|
90,454
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
724,229
|
|
|
$
|
825,288
|
|
|
|
|
|
|
|
|
|
|
F-18
Notes to
Consolidated Financial
Statements (Continued)
The Company accrues expected warranty costs at the time each
home is closed and title and possession have been transferred to
the home buyer. Changes in the warranty accrual during fiscal
2007, 2006 and 2005 were as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Balance, beginning of year
|
|
$
|
57,414
|
|
|
$
|
54,722
|
|
|
$
|
42,133
|
|
Additions
|
|
|
28,719
|
|
|
|
36,405
|
|
|
|
41,771
|
|
Charges incurred
|
|
|
(26,884
|
)
|
|
|
(33,713
|
)
|
|
|
(29,182
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
$
|
59,249
|
|
|
$
|
57,414
|
|
|
$
|
54,722
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provisions for federal and state income taxes are calculated on
reported pretax earnings based on current tax law and also
include, in the applicable 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. The Company
establishes reserves for income taxes when, despite the belief
that its tax positions are fully supportable, it believes that
its 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 estimates will impact
the income tax provision in the period in which such
determination is made.
The Company operates in 22 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 by taxing jurisdictions and the
Companys ability to utilize certain tax-saving strategies.
Due primarily to a change in the Companys estimate of the
allocation of income or loss, as the case may be, among the
various taxing jurisdictions and changes in tax regulations and
their impact on the Companys tax strategies, the
Companys estimated rate for state income taxes was 21.4%
for fiscal 2007, 7.0% for fiscal 2006 and 6.3% for fiscal 2005.
A reconciliation of the Companys effective tax rate from
the federal statutory tax rate for the fiscal years ended
October 31, 2007, 2006 and 2005 is as follows ($ amounts in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
Federal statutory tax
|
|
|
24,738
|
|
|
|
35.0
|
|
|
|
394,316
|
|
|
|
35.0
|
|
|
|
463,095
|
|
|
|
35.0
|
|
State taxes, net of federal benefit
|
|
|
9,854
|
|
|
|
13.9
|
|
|
|
50,895
|
|
|
|
4.5
|
|
|
|
54,268
|
|
|
|
4.1
|
|
Accrued interest on anticipated tax assessments
|
|
|
16,786
|
|
|
|
23.8
|
|
|
|
11,719
|
|
|
|
1.0
|
|
|
|
|
|
|
|
|
|
Benefit from tax credits
|
|
|
(8,700
|
)
|
|
|
(12.3
|
)
|
|
|
(10,315
|
)
|
|
|
(0.9
|
)
|
|
|
|
|
|
|
|
|
Non-taxable earnings
|
|
|
(6,078
|
)
|
|
|
(8.6
|
)
|
|
|
(3,385
|
)
|
|
|
(0.3
|
)
|
|
|
(3,795
|
)
|
|
|
(0.3
|
)
|
Reversal of expiring state taxes provisions
|
|
|
(2,751
|
)
|
|
|
(3.9
|
)
|
|
|
(5,200
|
)
|
|
|
(0.4
|
)
|
|
|
|
|
|
|
|
|
FAS 109 adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,450
|
|
|
|
0.3
|
|
Other
|
|
|
1,180
|
|
|
|
1.7
|
|
|
|
1,373
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,029
|
|
|
|
49.6
|
|
|
|
439,403
|
|
|
|
39.0
|
|
|
|
517,018
|
|
|
|
39.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-19
Notes to
Consolidated Financial
Statements (Continued)
The provision for income taxes for each of the three years ended
October 31, 2007, 2006 and 2005 was as follows (amounts in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Federal
|
|
$
|
2,728
|
|
|
$
|
361,543
|
|
|
$
|
428,221
|
|
State
|
|
|
32,301
|
|
|
|
77,860
|
|
|
|
88,797
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
35,029
|
|
|
$
|
439,403
|
|
|
$
|
517,018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
324,232
|
|
|
$
|
430,630
|
|
|
$
|
490,254
|
|
Deferred
|
|
|
(289,203
|
)
|
|
|
8,773
|
|
|
|
26,764
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
35,029
|
|
|
$
|
439,403
|
|
|
$
|
517,018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of income taxes payable at October 31, 2007
and 2006 consisted of the following (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Current
|
|
$
|
197,960
|
|
|
$
|
215,194
|
|
Deferred
|
|
|
|
|
|
|
119,306
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
197,960
|
|
|
$
|
334,500
|
|
|
|
|
|
|
|
|
|
|
The components of net deferred tax assets and liabilities at
October 31, 2007 and 2006 consisted of the following
(amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Accrued expenses
|
|
$
|
38,144
|
|
|
$
|
38,390
|
|
Impairment charges
|
|
|
250,395
|
|
|
|
24,920
|
|
Inventory valuation differences
|
|
|
12,468
|
|
|
|
10,193
|
|
Stock-based compensation expense
|
|
|
19,186
|
|
|
|
9,078
|
|
Other
|
|
|
11,248
|
|
|
|
9,082
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
331,441
|
|
|
|
91,663
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Capitalized interest
|
|
|
62,128
|
|
|
|
61,936
|
|
Deferred income
|
|
|
68,850
|
|
|
|
127,394
|
|
Depreciation
|
|
|
9,764
|
|
|
|
10,337
|
|
Deferred marketing
|
|
|
12,347
|
|
|
|
312
|
|
State taxes
|
|
|
8,455
|
|
|
|
(6,771
|
)
|
Other
|
|
|
|
|
|
|
17,761
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
161,544
|
|
|
|
210,969
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets (liabilities)
|
|
$
|
169,897
|
|
|
$
|
(119,306
|
)
|
|
|
|
|
|
|
|
|
|
At October 31, 2007 and 2006, no valuation allowance was
recorded against the Companys deferred tax assets as it
considers them to be fully recoverable.
F-20
Notes to
Consolidated Financial
Statements (Continued)
The Companys authorized capital stock consists 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 Board of Directors is
authorized to amend the Companys Certificate of
Incorporation to increase the number of authorized shares of
common stock to 400 million shares and the number of shares
of authorized preferred stock to 15 million shares. At
October 31, 2007, the Company had 157.0 million shares
of common stock issued and outstanding (net of 20 thousand
shares of common stock held in treasury), 24.1 million
shares of common stock reserved for outstanding stock options,
11.9 million shares of common stock reserved for future
stock option and award issuances and 716 thousand shares of
common stock reserved for issuance under the Companys
employee stock purchase plan. As of October 31, 2007, the
Company had not issued any shares of preferred stock.
Issuance
of Common Stock
In fiscal 2007, the Company issued 33,512 shares of
restricted common stock pursuant to its Stock Incentive Plan for
Employees (2007) to an employee. The restricted stock award
vests over an
18-month
period. The Company is amortizing the fair market value of the
award on the date of grant over the period of time that the
award vests. At October 31, 2007, no shares under the award
were vested.
In fiscal 2007, 2006 and 2005, the Company issued
1,000 shares, 1,000 shares and 22,000 shares,
respectively, of restricted common stock pursuant to its Stock
Incentive Plan (1998) to certain outside directors and in
fiscal 2005 to certain outside directors and an employee. 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
October 31, 2007, 1,500 shares of these restricted
stock awards outstanding were unvested.
In December 2006, Mr. Tolls bonus payment pursuant to
the Companys Cash Bonus Plan was revised to provide that
$3 million ($1.8 million of cash and $1.2 million
of unrestricted stock valued as of the date of the payment of
his fiscal 2006 bonus) be exchanged for shares of restricted
stock on the date of the bonus payment. The number of shares of
restricted stock was calculated by dividing $3 million by
$31.06, the closing price of the Companys common stock on
the New York Stock Exchange (the NYSE) on
January 5, 2007, the date on which Mr. Tolls
fiscal 2006 bonus award was paid. Mr. Toll received
96,586 shares of restricted stock. The restricted stock
Mr. Toll received will vest over a two-year period unless
Mr. Toll retires, dies or becomes disabled (as such terms
are defined in the stock award document), at which time the
shares will immediately vest.
Stock
Repurchase Program
In March 2003, the Companys 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. At October 31, 2007, the Company
had approximately 12.0 million shares remaining under the
repurchase authorization.
Stockholder
Rights Plan
Shares of the Companys common stock outstanding are
subject to stock purchase rights. The rights, which are
exercisable only under certain conditions, entitle the holder,
other than an acquiring person (and certain related parties of
an acquiring person), as defined in the plan, to purchase common
shares at prices specified in the rights agreement. Unless
earlier redeemed, the rights will expire on July 11, 2017.
The rights were not exercisable at October 31, 2007.
F-21
Notes to
Consolidated Financial
Statements (Continued)
|
|
9.
|
Stock-Based
Benefit Plans
|
Stock-Based
Compensation Plans
Effective November 1, 2005, the Company adopted
SFAS 123R and recognized compensation expense in its
financial statements in fiscal 2007 and 2006. Prior to the
adoption of SFAS 123R, the Company accounted for its stock
option plans according to Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to
Employees. Accordingly, no compensation costs were
recognized upon issuance or exercise of stock options for fiscal
2005.
SFAS No. 123, Accounting for Stock-Based
Compensation, required the disclosure of the estimated
fair value of employee option grants and their impact on net
income using 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. Further, such models
require the input of highly subjective assumptions, including
the expected volatility of the stock price.
For the purposes of providing the pro forma disclosures, prior
to November 1, 2004, the fair value of options granted was
estimated using the Black-Scholes option pricing model for
grants. To better value option grants as required by
SFAS 123R, the Company developed a lattice model, which it
believes better reflects the establishment of the fair value of
option grants. The Company used a lattice mode