ITEM 1. BUSINESS
General
Toll Brothers, Inc. ("Toll Brothers" or the "Company"), a Delaware corporation formed in May 1986, commenced its business operations, through predecessor entities, in 1967. Toll Brothers designs, builds, markets and arranges financing for single-family detached and attached homes in middle and high income residential communities. The communities are generally located on land the Company has developed, although, due to the poor economic conditions during the early 1990's, the Company has been able to acquire a number of fully approved parcels and often improved subdivisions. Currently, Toll Brothers operates predominantly in major suburban residential areas in southeastern Pennsylvania, central New Jersey, the Virginia and Maryland suburbs of Washington, D.C., northern Delaware, the Boston, Massachusetts metropolitan area, southern Connecticut and Westchester County, New York. It is also developing communities in Orange County, California, Nassau County, New York, the suburbs of Raleigh, North Carolina and in Charlotte, North Carolina. The Company has recently acquired property in McKinney, Texas, a northern suburb of Dallas and in Palm Beach County, Florida and expects to begin offering homes for sale there in the first half of 1995.
The Company markets its homes primarily to upper-income buyers, emphasizing high quality construction and customer satisfaction. In the five years ended October 31, 1994, Toll Brothers closed contracts for 5,329 homes in 111 communities. In recognition of the Company's achievements, it has received numerous awards from national, state and local homebuilder publications and associations including being named "The Builder of the Year" in 1988 by Professional Builder magazine. In 1994, the Company received one of the first place awards in the "Build America Beautiful" Awards Program, sponsored by Better Homes and Gardens Magazine, the National Association of Homebuilders and Keep America Beautiful, Inc. in recognition of the Company's programs to improve the handling of solid waste on construction sites. In 1993, the Company received the "Spotlight on Building Excellence" silver award from Builder Magazine and the National Association of Homebuilders in recognition of the Company's demonstrated excellence in marketing, product design, service and overall financial performance.
As of October 31, 1994, the Company was offering homes for sale in 80 communities. Single-family detached homes were being offered at prices, excluding customized options, generally ranging from $174,900 to $664,900, with an average base sales price of $352,000. Attached home prices, excluding customized options, generally range from $99,900 to $467,900, with an average base sales price of $255,000.
On October 31, 1994 and 1993, the Company had backlogs of $370,560,000 (1,025 homes) and $285,441,000 (892 homes), respectively. Substantially all homes in backlog at October 31, 1994 are expected to be closed by October 31, 1995.
As of October 31, 1994, the Company owned, or controlled through options, over 6,100 home sites in communities under development, as well as land for approximately 5,100 planned home sites in proposed communities.
The Company generally attempts to reduce certain risks homebuilders encounter, by controlling land for future development through options whenever possible (which allows the Company to obtain the necessary government approvals before acquiring title to the land), by beginning construction of homes after an agreement of sale has been executed and by using subcontractors to perform home construction and land development work on a fixed-price basis. However, in order to obtain better terms or prices or due to competitive pressures, the Company has purchased several properties outright or acquired the underlying mortgage prior to obtaining all of the necessary governmental approvals needed to commence development.
The Communities
Toll Brothers' communities are generally located in suburban areas near major highways with access to major cities. Through 1981, all communities were located in southeastern Pennsylvania. The Company began selling homes in central New Jersey in 1982, in northern Delaware and Massachusetts in 1987, in Maryland in 1988, in Virginia and Connecticut in 1992, in New York in 1993 and in California and North Carolina in 1994. The Company has recently acquired property in McKinney, Texas, a northern suburb of Dallas and in Palm Beach County, Florida and expects to begin offering homes for sale there in the first half of 1995.
The Company emphasizes its high-quality, detached single-family homes that are marketed primarily to the "upscale" luxury market, generally those persons who have previously owned a principal residence - the so-called "move-up" market. The Company believes its reputation as a developer of homes for this market enhances its competitive position with respect to the sale of more moderately priced detached homes, as well as attached homes.
Each single-family home community offers several home plans, with the opportunity to select various exterior styles. The communities are designed to fit existing land characteristics, blending winding streets, cul-de-sacs and underground utilities to establish a pleasant environment. The Company strives to create a diversity of architectural styles within an overall planned community. This diversity arises from variations among the models offered and in exterior design options of homes of the same basic floor plan, from the preservation of existing trees and foliage whenever practicable, and from the curving street layout, which allows 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. The communities have attractive entrances with distinctive signage and landscaping. The Company believes this avoids a "development" appearance and gives the community a diversified neighborhood look that enhances home value.
Attached home communities are generally one to three stories and provide for limited exterior options and often contain commonly-owned recreational acreage with swimming pools and tennis courts. These communities have associations through which homeowners act jointly for their common interest.
It is the Company's belief that the homes built by Toll Brothers in its named communities provide homeowners with additional value upon resale.
The Homes
Most single-family detached-home communities offer at least three different home plans, each with several substantially different architectural styles. For example, the same basic floor plan may be selected with a Colonial, Georgian, Federal or Provincial design, and exteriors may be varied further by the use of stone, stucco, brick or siding. Attached home communities generally offer two or three different floor plans with two, three or four bedrooms.
In all of Toll Brothers' communities, certain options are available to the purchaser for an additional charge. The options typically are more numerous and significant on the more expensive homes. Major options include additional garages, additional rooms, finished basements, finished lofts, and additional fireplaces. As a result of the additional charges for such options, the average sales price was approximately 12.8% higher than the base sales price during fiscal 1994.
The range of base sales prices for the Company's lines of homes as of October 31, 1994, was as follows:
Contracts for the sale of homes are at fixed prices. The prices at which homes are offered have generally increased from time to time during the sellout period for each community; however, there can be no assurance that sales prices will increase in the future.
The Company uses some of the same basic home designs in similar communities. However, the Company is continuously developing new designs to replace or augment existing ones to assure that its homes are responsive to current consumer preferences. For new designs, the Company has its own architectural staff and occasionally engages unaffiliated architectural firms. During the past two years, the Company has introduced 45 new models.
Residential Communities Under Development
The Company generally constructs model homes at each of its communities. Construction of single-family detached homes usually commences only after an agreement of sale has been executed, while construction of attached-home buildings usually commences only after agreements of sale have been executed for a majority of the homes in that building.
The following table summarizes certain information with respect to residential communities of Toll Brothers under development as of October 31, 1994:
(1) Of these 101 communities, 80 had homes being offered for sale, 7 had not yet opened for sales, and 14 had been sold out but not all closings had been completed. Of the 80 communities in which homes were being offered for sale as of October 31, 1994, 72 were single-family detached-home communities containing a total of 36 homes under construction but not under contract (exclusive of model homes) and 8 were attached home communities containing a total of 22 homes under construction but not under contract (exclusive of model homes).
(2) On October 31, 1994, significant site improvements had not commenced on approximately 3,191 of the 5,107 available home sites. Of the 5,107 available home sites, 592 were not owned, but were controlled through options.
Land Policy
Before entering into a contract to acquire land, the Company completes extensive comparative studies and analyses on detailed Company-designed forms that assist it in evaluating the acquisition. Toll Brothers generally attempts to follow a policy of acquiring options to purchase land for future communities. However, in order to obtain better terms or prices, or due to competitive pressures, the Company has acquired property outright or acquired the underlying mortgage allowing it to obtain title to the property.
The options or purchase agreements are generally on a non-recourse basis, thereby limiting the Company's financial exposure to the amounts invested in property and pre-development costs. The use of options or purchase agreements may somewhat raise the price of land that the Company eventually acquires, but significantly reduces risk. It also allows the Company to obtain necessary development approvals before acquisition of the land, thus enhancing the value of the options and the land eventually acquired. The Company's purchase agreements are typically subject to numerous conditions including, but not limited to, the Company's ability to obtain necessary governmental approvals for the proposed community. Often, the down payment on the agreement will be returned to the Company if all approvals are not obtained, although pre-development costs may not be recoverable. The Company has the ability to extend many of these options for varying periods of time, in some cases by the payment of an additional deposit and in some cases without an additional payment. The Company has the right to cancel any of its land agreements by forfeiture of the Company's down payment on the agreement. In such instances, the Company generally is not able to recover any pre-development costs.
During the early 1990's, the number of buyers competing for land in the Company's market area had diminished, while the number of sellers increased, resulting in more advantageous prices for land acquisitions made by the Company. Further, many of the land parcels offered for sale were fully approved, and often improved, subdivisions. Generally, such types of subdivisions previously had not been available for acquisition in the Company's market area. The Company purchased several such subdivisions outright and acquired control of several others through option contracts, which generally provided that the Company's option would remain intact as long as the Company purchased a specified number of home sites each quarter. Contracts of this nature enable the Company to begin offering homes for sale in a new community with relatively minimal capital expenditures and limited risk.
Due to the improvement in the economy and the improved availability of capital, during the past year, the Company has seen an increase in competition for available land in its market areas. The continuation of the Company's development activities over the long term will be dependent upon its continued ability to locate, enter into contracts to acquire, obtain governmental approvals for, consummate the acquisition of, and improve suitable parcels of land.
The following is a summary of the parcels of land that the Company either owns or controls through options and loan assets at October 31, 1994 for proposed communities, as distinguished from those currently under development:
(1) New Jersey includes two communities which contain plans for 170 units which will either be rented or sold at lower than market rentals or prices.
(2) Virginia includes one community which contains plans for 30 "affordable dwelling units" which will be sold at lower than market prices.
(3) Of these 5,092 planned home sites, 3,853 were not owned; 3,071 lots were controlled through options and 782 lots were controlled through loan assets secured by liens.
The aggregate of loan assets, option deposits and related pre- development costs for proposed communities was approximately $39,129,000 at October 31, 1994. The aggregate purchase price of land parcels under option at October 31, 1994 was approximately $210,506,000. If all of the above land were to be developed, the Company believes it would have sufficient land to maintain its development activities at current levels for more than the next three years.
The Company evaluates all of the land under control for proposed communities on an ongoing basis with respect to economic and market feasibility. During the year ended October 31, 1994 such feasibility analyses resulted in approximately $2,657,000 of capitalized costs related to proposed communities being charged to expense because they were no longer deemed to be recoverable.
There can be no assurance that the Company will be successful in securing necessary development approvals for the land currently under its control or for which the Company may acquire control of in the future or, that upon obtaining such development approvals, the Company will elect to complete its purchases under such options. The Company has generally been successful in the past in obtaining governmental approvals, has substantial land currently under its control for which it is seeking such approvals (as set forth in the table above), and devotes significant resources to locating suitable additional land and to obtaining the required approvals on land under its control. Failure to locate sufficient suitable land or to obtain necessary governmental approvals, however, may impair the ability of the Company over the long term to maintain current levels of development activities.
The Company generally has not purchased land for speculation or with the contemplation of selling it for profit.
Community Development
The Company expends considerable effort in developing a concept for each community, which includes determination of size, style and price range of the homes, layout of the streets and individual lots, and overall community design. Necessary governmental subdivision and other approvals are sought, which typically require at least 24 months and sometimes several years to obtain. The Company then improves the land by grading and clearing the site, installing roads, underground utility lines and pipes, erecting distinctive entrance structures, and staking out individual home sites.
Each community is managed by a project manager who is located at the site. Working with construction supervisors, marketing personnel and, when required, other Company and outside professionals such as engineers, architects and legal counsel, the project manager is responsible for supervising and coordinating the various developmental steps from acquisition through the approval stage, marketing, construction and customer service, including monitoring the progress of work and controlling expenditures. Major decisions regarding each community are made by senior members of the Company's management.
The Company recognizes revenue only upon the closing of the home sale (the point at which title and possession are transferred to the buyer), which generally occurs shortly after construction is substantially completed. The most significant variable affecting the timing of the Company's revenue stream, other than housing demand, is receipt of final regulatory approvals, which, in turn, permits the Company to begin the process of obtaining executed contracts for sales of homes. Receipt of such final approvals is not seasonal. Although the Company's sales and construction activities vary somewhat with the seasons, affecting the timing of closings, any such seasonal effect is relatively insignificant compared to the effect of receipt of final governmental approvals.
Subcontractors perform all home construction and land development work, generally under fixed-price contracts. Toll Brothers acts as a general contractor and purchases some, but not all, of the building supplies it requires (see "PROPERTIES - Panel Plant"). The Company is not, and does not anticipate, experiencing a shortage of either subcontractors or supplies of building materials. The Company's construction superintendents and assistant superintendents coordinate subcontracting activities and supervise all aspects of construction work and quality control. The Company seeks to achieve homebuyer satisfaction by generally providing its construction superintendents with incentive compensation arrangements based on each homebuyer's responses on pre-closing and post-closing checklists.
The Company maintains insurance to protect against certain risks associated with its activities. These insurance coverages include, among others, general liability, "all-risk" property, workers' compensation, automobile, and employee fidelity. The Company believes the amounts and extent of such insurance coverages are adequate.
Marketing
The Company believes that its marketing strategy, which emphasizes its more expensive "Estate" and "Executive" lines of homes, has enhanced the Company's reputation as a builder-developer of high-quality upscale housing. The Company believes this reputation results in greater demand for all of the Company's lines of homes. The Company generally includes attractive decorative moldings such as chair rails, crown moldings, dentil moldings and other aesthetic features, even in its less expensive homes, on the basis that this additional construction expense is important to its marketing effort.
In addition to relying on management's extensive experience, the Company determines the prices for its homes through a Company-designed value analysis program that compares a Toll Brothers home with homes offered by other builders in the relevant marketing area. The Company accomplishes this by assigning a positive or negative dollar value to differences in product features, such as amenities, location and marketing.
Toll Brothers expends great effort in creating its model homes, which play an important role in the Company's marketing. In its models, Toll Brothers creates an attractive atmosphere, with bread baking in the oven, fires burning in fireplaces, and background music. Interior decorations vary among the models and are carefully selected based upon the lifestyles of the prospective buyers. During the past several years, the Company has received a number of awards from various homebuilder associations for its interior merchandising.
The sales office located in each community is generally staffed by Company sales personnel, who are compensated with salary and commission. In addition, a significant portion of Toll Brothers' sales is derived from the introduction of customers to its communities by local cooperating realtors.
The Company advertises extensively in newspapers, other local and regional publications and on billboards. The Company also uses videotapes and attractive color brochures to describe each community.
All Toll Brothers homes are sold under the Company's one-year limited warranty as to workmanship and two-year limited warranty as to mechanical equipment, supplemented by privately insured programs, which provides to home purchasers a limited ten-year warranty as to structural integrity.
Customer Financing
The Company makes arrangements with a variety of mortgage lenders to provide homebuyers a range of conventional mortgage financing programs. By making available an array of attractive mortgage programs to qualified purchasers, the Company is able to better coordinate and expedite the entire sales transaction by ensuring that mortgage commitments are received and that closings take place on a timely and efficient basis. During fiscal 1994, approximately 68% of the Company's closings were financed through mortgage programs offered by the Company. In addition, during the same period, the Company's homebuyers, on average, financed approximately 71% of the purchase price of their home.
The Company secures the availability of a variety of competitive market rate mortgage products from both national and regional lenders. Such availability is generally obtained at no cost to the Company and is committed for varying lengths of time and amounts.
The Company also obtains forward commitments for fixed and variable rate mortgage financing which contain various rate protection features. Such commitments generally cost the Company from zero to one percent of the mortgage funds reserved and typically have terms of 9 to 18 months. As of October 31, 1994, there were approximately $70 million of such commitments available, which expire at various dates through June 1995.
Competition
The homebuilding business is highly competitive and fragmented. The Company competes with numerous homebuilders of varying size, ranging from local to national in scope, some of which have greater sales and financial resources than the Company. Resales of homes also provide competition. The Company competes primarily on the basis of price, location, design, quality, service and reputation; however, during the past several years, the Company's financial stability, relative to others in its industry (some of which have gone out of business), has become an increasingly favorable competitive factor. The Company also believes that due to the increased availability of capital, competition has increased during the past year.
Regulation and Environmental Matters
The Company is 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 density requirements in order to limit the number of homes that can eventually be built within the boundaries of a particular locality. In addition, the Company is subject to registration and filing requirements in connection with the construction, advertisement and sale of homes in its communities in certain states and localities in which it operates. These laws have not had a material effect on the Company, except to the extent that application of such laws may have caused the Company to conclude that development of a proposed community would not be economically feasible, even if any or all necessary governmental approvals were obtained (See "Business-Land Policy"). The Company may also be subject to periodic delays or may be precluded entirely from developing communities due to building moratoriums in any of the states in which it operates. Generally, such moratoriums relate to insufficient water or sewage facilities or inadequate road capacity.
In order to secure certain approvals, the Company may have to provide affordable housing at below market rental or sales prices. The impact on the Company will depend on how the various state and local governments in which the Company engages or intends to engage in development implement their programs for affordable housing. To date, these restrictions have not had a material impact on the Company.
The Company is also subject to a variety of local, state and federal statutes, ordinances, rules and regulations concerning protection of health and the environment ("environmental laws"), as well as the effects of environmental factors. The particular environmental laws which apply to any given community vary greatly according to the community site, the site's environmental conditions and the present and former uses of the site. These environmental laws may result in delays, may cause the Company to incur substantial compliance and other costs, and can prohibit or severely restrict development in certain environmentally sensitive regions or areas.
The Company maintains a policy of engaging, prior to consummating the purchase of land, independent environmental engineers to formally evaluate such land for the presence of hazardous or toxic materials, wastes or substances. Because it has generally obtained such analyses for the land it has purchased, the Company has not been significantly affected to date by the potential presence of such materials.
Employees
As of October 31, 1994, the Company employed 935 full-time persons; of these, 30 were in executive positions, 119 were engaged in sales activities, 96 in project management activities, 245 in administrative and clerical activities, 246 in construction activities, 59 in engineering activities and 140 in the panel plant operations. The Company considers its employee relations to be good.
ITEM 2.
ITEM 2. PROPERTIES
Headquarters
Toll Brothers' corporate offices, containing approximately 45,000 square feet, are located in a modern facility at 3103 Philmont Avenue, Huntingdon Valley, Montgomery County, Pennsylvania. The facility was purchased by the Company in September 1988.
Panel Plant
Toll Brothers owns a facility of approximately 200,000 square feet in which it manufactures open wall panels, roof and floor trusses, and certain interior and exterior millwork to supply a portion of the Company's construction needs. This operation also permits Toll Brothers to purchase wholesale lumber, plywood, windows, doors, certain other interior and exterior millwork and other building materials to supply its communities. The Company believes that increased efficiency, cost savings and productivity result from the operation of this plant and from such wholesale purchases of material. This plant generally does not sell or supply to any purchasers other than Toll Brothers. The property, which is located in Morrisville, Pennsylvania, is adjacent to U.S. Route 1, a major thoroughfare, and is served by rail.
Regional and Other Facilities
The Company leases office and warehouse space in various locations, none of which is material to the business of the Company.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various claims and litigation arising from its usual and customary business with customers and subcontractors. The Company believes that it has adequate insurance or meritorious defenses, or both, in all pending cases, and that adverse decisions in any or all of the cases would not have a material adverse effect on the financial condition and the results of operations of the Company.
ITEM 4.
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, 1994.
EXECUTIVE OFFICERS OF THE REGISTRANT
The section entitled "Proposal One: Election of Directors" of the Company's Proxy Statement for the 1995 Annual Meeting of Shareholders is incorporated herein by reference.
The following table includes information with respect to all executive officers of the Company as of October 31, 1994. All executive officers serve at the pleasure of the Board of Directors of the Company.
Robert and Bruce Toll, who are brothers, co-founded the Company's predecessors' operations in 1967. Their principal occupations since inception have been related to their various homebuilding and other real estate related activities.
Zvi Barzilay joined the Company as a project manager in 1980 and has been an officer since 1983. In 1994, Mr. Barzilay was elected a Director of the Company.
Joel H. Rassman has been a senior vice president of the Company since joining the Company in 1984.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's common stock is principally traded on the New York Stock Exchange (Symbol: TOL). It is also listed on the Pacific Stock Exchange.
The following table sets forth the price range of the Company's common stock on the New York Stock Exchange for each fiscal quarter during the two years ended October 31, 1994.
The Company has not paid any cash dividends on its common stock to date and expects that for the foreseeable future it will follow a policy of retaining earnings in order to finance the continued development of its business. Payment of dividends is within the discretion of the Company's Board of Directors and will depend upon the earnings, capital requirements and operating and financial condition of the Company, among other factors. The Company's 10 1/2% Senior Subordinated Notes due March 15, 2002 and 9 1/2% Senior Subordinated Notes due March 15, 2003, contain restrictions on the amount of dividends the Company may pay on its common stock. In addition, the Company's Bank Revolving Credit Agreement requires the maintenance of minimum shareholders' equity which may restrict the amount of dividends the Company may pay. As of October 31, 1994, under the most restrictive of the Agreements, the Company could pay up to approximately $50,245,000 of cash dividends.
At December 31, 1994, there were approximately 1,028 record holders of the Company's common stock.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial data of the Company as of and for each of the five fiscal years ended October 31, 1994. It should be read in conjunction with the Consolidated Financial Statements and Notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations."
Summary Consolidated Income Statement Data (Amounts in thousands, except per share data)
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain income statement items related to homebuilding operations as percentages of total homebuilding revenues and certain other homebuilding data:
Fiscal 1994 Compared to Fiscal 1993
Revenues for fiscal 1994 of $504.1 million exceeded those of fiscal 1993 by approximately $109 million or 28%. This increase is principally due to the greater number of homes closed during the year and the increase in the average selling price of these homes. The increase in the number of homes closed is due to the substantially larger backlog of homes at the beginning of fiscal 1994 as compared to the beginning of fiscal 1993 and the greater number of contracts signed in fiscal 1994 as compared to 1993. The increase in the average selling price in 1994 over that of 1993 is principally the result of a shift in the location of homes closed to more expensive communities, a change in product mix to larger homes and increases in selling prices.
As of October 31, 1994, the backlog of homes under contract amounted to $370.6 million (1,025 homes), approximately 30% higher than the $285.4 million (892 homes) backlog the Company had as of October 31, 1993. The aggregate sales value of new contracts signed in fiscal 1994 amounted to $586.9 million (1,716 homes), an increase of approximately 20% over the $490.9 million (1,595 homes) of contracts signed in fiscal 1993. The Company believes that the increase in backlog and the increase in contracts signed are the result of (a) the Company's expansion through a greater penetration of its existing markets, such as Connecticut and Virginia, and its entry into new markets such as New York State and California, (b) a shift in the location of homes sold to higher priced communities, as well as increases in the selling prices in existing communities, (c) pent-up demand for new homes due to poor economic conditions in the early 1990's which resulted in a decline in housing demand and a resulting decline in construction, and (d) diminished competition due to the aforementioned poor economic conditions.
The average selling price per home settled will vary from year to year based upon the community and product mix of homes closed, as well as changes in selling price and the value of options selected by homebuyers. Based upon the average selling price of homes in backlog as of October 31, 1994, the Company expects that the average selling price of homes closed in fiscal 1995 will exceed the average selling price of homes closed in fiscal 1994.
Land and construction costs as a percentage of revenues increased in 1994 as compared to 1993 due principally to (a) an increase in the cost of materials, (b) an increase in costs due to the severe weather conditions the Company experienced in the first half of fiscal 1994 which resulted in increased spending and reduced construction activity causing an increase in per home overhead, and (c) higher provisions in fiscal 1994 over the amounts provided in fiscal 1993 for inventory writedowns consisting of provisions for a reduction to net realizable value and the expensing of previously capitalized costs which the Company no longer considered realizable. The Company provided approximately $7.0 million in 1994 for these writedowns as compared to $2.8 million in 1993. These increases were partially offset by lower land and land development costs.
Selling, general and administrative expense ("SG&A") in fiscal 1994 amounted to $48.8 million or 9.7% of revenues as compared to $43.3 million or 11.0% of revenues for 1993. The decline in SG&A as a percentage of revenues in 1994 as compared to 1993 is principally the result of revenue increasing at a greater rate than spending. The $5.5 million increase in spending is principally due to the increased selling costs related to the greater number of homes closed in 1994 over 1993, the increase in the number of communities in which the Company was offering homes for sale, and the increase in payroll and payroll related costs due to the growth of the Company.
Interest expense was lower both as a percentage of revenues and on a per home closed basis in 1994 as compared to 1993. On average, land and land development costs associated with the homes closed in 1994 remained in inventory for a shorter period of time than those closed in fiscal 1993. In addition, the amount of interest incurred has declined as a percentage of inventory due to lower interest rates and the decline in the amount of debt carried by the Company in proportion to the amount of its inventory. Accordingly, less capitalized interest was accumulated, on average, on the homes closed in 1994 than those closed in 1993.
Fiscal 1993 Compared to Fiscal 1992
Revenues for fiscal 1993 were higher than those of fiscal 1992 by approximately $114 million or 40%. This was principally due to the increased number of homes closed during the year, which in turn was the result of the much larger backlog at the beginning of fiscal 1993 as compared to the backlog at the beginning of fiscal 1992, and the increased number of contracts signed in 1993 as compared to 1992. In addition, the average sales price per home increased in 1993 over 1992 as a result of a change in product mix to larger homes and due to the shift in the location of homes closed to more expensive communities.
The aggregate sales value of new contracts signed for fiscal 1993 amounted to $490.9 million (1,595 homes), an increase of 43% over the $342.8 million (1,202 homes) signed in fiscal 1992. As of October 31, 1993, the backlog of homes under contract amounted to $285.4 million (892 homes), approximately $98 million or 53% higher than the backlog as of October 31, 1992. In assessing the levels of backlog and new contracts signed it should be noted that orders for new homes are generally strongest during the Company's second fiscal quarter. The Company believes that the increase in contracts signed is attributable to pent-up demand, which was caused by a combination of homebuyers' deferral of the decision to purchase a new home due to poor economic conditions and lack of consumer confidence, an increase in the number of potential move-up homebuyers and the increased affordability of homes due, in part, to the lowest interest rates in more than twenty years. The increase is also attributable to an expansion of the Company's markets, both through greater penetration of existing ones and entry into new ones assisted, in part, by diminished competition resulting from the aforementioned economic conditions as well as credit restrictions that were placed on homebuilders by lenders and by governmental regulations.
Land and housing construction costs as a percentage of sales increased in 1993 as compared to 1992 due to increased material costs (primarily lumber), a change in product mix, and an increase in costs due to construction delays resulting from adverse weather conditions during the first half of fiscal 1993. These percentage increases were partially offset by a decrease, as a percentage of sales, in land and land development costs. In fiscal 1993, the Company provided $2.8 million or 0.7% of revenues for inventory writedowns consisting of net realizable value provisions and the expensing of previously capitalized costs which the Company no longer considered realizable. The Company provided $2.0 million or 0.7% of revenues in fiscal 1992 for similar items.
Selling, general and administrative expense ("SG&A") was lower as a percentage of sales in 1993 as compared to 1992 because the year-to-year increase in sales was greater than the increase in spending. Aggregate spending increased $10.3 million, from $33.0 million in 1992 to $43.3 million in 1993. Of this increase, $6.5 million was attributable to general and administrative expenses and was principally due to the increased number of employees and resulting increased payroll and related costs and an increase in the accrual for incentive compensation. The remainder of the increase was due to higher selling expenses, which were attributable to the increase in the number of communities in which the Company was offering homes for sale.
Interest expense for fiscal 1993 was lower as a percentage of revenues and on a per home basis than in fiscal 1992. In general, on average, the land and land development costs associated with the homes closed in fiscal 1993 remained in inventory for a shorter period of time than those closed in the prior year. In addition, the amount of interest incurred in recent years has declined as a percentage of inventory due to lower interest rates and the decline in the amount of debt in proportion to the amount of inventory. Accordingly, less capitalized interest was accumulated on the homes closed in 1993 than on those closed in 1992. It is expected that this downward trend will slow as more recently developed communities are held in inventory for longer periods of time.
Income Taxes
Income taxes for fiscal 1994, 1993, 1992 and 1991 were provided at effective rates of 36.4%, 37.6% and 39.9%, respectively.
Effective November 1, 1992, the Company adopted Statement of Financial Accounting Standard No. 109, "Accounting for Income Taxes". This Statement requires a liability approach for measuring deferred taxes based on temporary differences between the financial statement and tax bases of assets and liabilities existing at each balance sheet date using enacted tax rates for years in which taxes are expected to be recovered or paid. The cumulative effect of this change in accounting for income taxes of $1,307,000 of income has been included in the consolidated statement of income for 1993.
Extraordinary (Loss) Gain
During fiscal 1993 and 1992, the Company redeemed, at prices above par, all of its outstanding 12.95% and 12 1/8% subordinated debt, respectively. This resulted in losses, net of income tax, of $668,000 in fiscal 1993 and $816,000 in fiscal 1992. The losses represent the redemption premium and a write-off of unamortized discount and deferred issuance costs.
CAPITAL RESOURCES AND LIQUIDITY
Funding for the Company's residential development activities is principally provided by cash flows from operations, from the public debt and equity markets and unsecured bank borrowings.
Cash flow from operations, before inventory additions, improved as operating results improved and it is anticipated that it will continue to improve as a result of an increase in revenues from the delivery of homes from the existing backlog as well as from new sales agreements. During 1994, the Company received approximately $55.5 million from the issuance of 4 3/4% Convertible Senior Subordinated Notes to the public. The Company used the proceeds and cash flow from operations to acquire additional land for new communities, to fund additional expenditures for land development and construction costs needed to meet the requirements of the increased backlog and the continuing expansion of the number of communities in which the Company is offering homes for sale and to reduce debt. The Company expects that inventories will continue to increase and is currently negotiating and searching for additional opportunities to obtain control of land for future communities at advantageous prices and/or terms (although the availability of such advantageous prices and terms is diminishing).
The Company has a $150 million unsecured revolving credit facility with nine banks which extends through November 1, 1997. The agreement provides for extensions subject to mutual agreement of the Company and the banks. As of October 31, 1994, the Company had $10.0 million of loans and approximately $52.6 million of letters of credit outstanding under the facility.
The Company believes that it will be able to fund its activities through a combination of operating cash flow, cash balances and existing sources of credit.
INFLATION
The long-term impact of inflation on the Company is manifested in increased land, land development, construction and overhead costs, as well as in increased sales prices. For several years prior to fiscal 1989, the Company was able to raise sales prices by amounts at least equal to its cost increases. From fiscal 1989 through February 1, 1991, however, sales prices either declined slightly or remained steady, and since then have risen only modestly. Since fiscal 1989, the Company's costs generally have increased except for land acquisition costs, which have generally decreased.
The Company generally contracts for land significantly before development and sales efforts begin and, accordingly, to the extent land acquisition costs are fixed, increases or decreases in the sales prices of homes may affect the Company's profits. Since the sales prices of homes are fixed at the time of sale and the Company generally sells its homes prior to commencement of construction, any inflation of costs in excess of those anticipated may result in lower gross margins. The Company generally attempts to minimize that effect by entering into fixed-price contracts with its subcontractors and material suppliers for specified periods of time, which generally do not exceed one year.
Housing demand, in general, is adversely affected by increases in interest costs, as well as in housing costs. Interest rates, the length of time that land remains in inventory and the proportion of inventory that is financed affect the Company's interest costs. If the Company is unable to raise sales prices enough to compensate for higher costs, which had generally been the condition during prior years, or if mortgage interest rates increased significantly, affecting prospective buyers' ability to adequately finance a home purchase, the Company's 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 a new home.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements as set forth in item 14(a)(1) and (2).
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item with respect to executive officers of the Company is set forth in Part I. The information required by this item with respect to the Directors of the Company is incorporated by reference to the Company's Proxy Statement for the 1995 Annual Meeting of Shareholders.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the Company's Proxy Statement for the 1995 Annual Meeting of Shareholders.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the Company's Proxy Statement for the 1995 Annual Meeting of Shareholders.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the Company's Proxy Statement for the 1995 Annual Meeting of Shareholders.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements and Financial Statement Schedules
1. Financial Statements
Page
Report of Independent Auditors Consolidated Statements of Income - Years Ended October 31, 1994, 1993 and 1992 Consolidated Balance Sheets - October 31, 1994 and 1993 Consolidated Statements of Cash Flows - Years Ended October 31, 1994, 1993 and 1992 Notes to Consolidated Financial Statements - Summary Consolidated Quarterly Data
2. Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts for the years ended October 31, 1994, 1993 and 1992
Schedules not listed above have been omitted because they are either not applicable or the required information is included in the financial statements or notes thereto.
3. Exhibits required to be filed by Item 601 of Regulation S-K:
Exhibit Number Description
3.1 Certificate of Incorporation, as amended, is hereby incorporated by reference to Exhibit 3.1 of the Registrant's Form 10-K for the fiscal year ended October 31, 1989.
3.2 Amendment to the Certificate of Incorporation dated March 11, 1993, is hereby incorporated by reference to Exhibit 3.1 of Registrant's Form 10-Q for the quarter ended January 31, 1993.
3.3 By-laws, as amended, are hereby incorporated by reference to Exhibit 3.2 of the Registrant's Form 10-K for the fiscal year ended October 31, 1989.
4.1 Specimen Stock Certificate is hereby incorporated by reference to Exhibit 4.1 of the Registrant's Form 10-K for the fiscal year ended October 31, 1991.
4.2 Indenture dated as of March 15, 1992, between Toll Corp., as issuer, the Registrant, as guarantor, NBD Bank, National Association, as Trustee, including Form of Guarantee, is hereby incorporated by reference to Exhibit 4 of Toll Corp.'s Registration Statement on Form S-3 filed with the Securities and Exchange Commission on March 11, 1992, File No. 33- 45704.
4.3 Indenture dated as of March 15, 1993, among Toll Corp., as issuer, the Registrant, as guarantor, and NBD Bank, National Association, as Trustee, including Form of Guarantee, is hereby incorporated by reference to Exhibit 4.1 of Toll Corp.'s Registration Statement on Form S-3 filed with the Securities and Exchange Commission, March 10, 1993, File No. 33-58350.
4.4 Indenture dated as of January 15, 1994 between Toll Corp., as issuer, the Registrant, as guarantor, Security Trust Company, N.A., as Trustee, including Form of Guarantee, is incorporated by reference to Exhibit 4.1 of Toll Corp.'s Registration Statement on Form S-3 filed with the Securities and Exchange Commission on January 23, 1995, File No. 33-51775.
Exhibit Number Description
10.1 Revolving credit agreement, dated as of November 1, 1993, among First Huntingdon Finance Corp., the Registrant, PNC Bank, Natinal Association, CoreStates Bank, N.A., Meridian Bank, NBD Bank, N.A., NationsBank of Virginia, N.A., Bank Hapoalim B.M., Kleinwort Benson Limited, Mellon Bank and The Fuji Bank, Limited, and PNC Bank, National Association, as Agent, is hereby incorporated by reference to Exhibit 10.1 of the Registrant's Form 10-K for the fiscal year ended October 31, 1993.
10.2 Revolving credit agreement, dated as of November 1, 1993 as amended on July 11, 1994, among First Huntingdon Finance Corp., the Registrant, PNC Bank, National Association, CoreStates Bank, N.A., Meridian Bank, NBD Bank, N.A., NationsBank of Virginia, N.A., Bank Hapoalim B.M., Kleinwort Benson Limited, Mellon Bank and The Fuji Bank, Limited, and PNC Bank, National Association, as Agent.
10.3 Amendment dated as of November 29, 1994 to Revolving Credit Agreement dated as of November 1, 1993 among First Huntingdon Finance Corp., the Registrant, PNC Bank, National Association, CoreStates Bank, N.A., Meridian Bank, NBD Bank, N.A., Nations Bank of Virginia, N.A., Bank Hapoalim, B.M., Kleinwort Benson Limited, Mellon Bank and The Fuji Bank, Limited, and PNC Bank, National Association, as Agent.
10.4 Toll Brothers, Inc. Amended and Restated Stock Option Plan (1986), as amended and restated by the Registrant's Board of Directors on February 24, 1992 and adopted by its shareholders on April 6, 1992, is hereby incorporated by reference to Exhibit 19(a) of the Registrant's Form 10-Q for the quarterly period ended April 30, 1992.
10.5 Toll Brothers, Inc. Amended and Restated Stock Purchase Plan is hereby incorporated by reference to Exhibit 4 of the Registrant's Registration Statement on Form S-8 filed with the Securities and Exchange Commission on August 4, 1987, File No. 33-16250.
10.6 Toll Brothers, Inc. Key Executives and Non-Employee Directors Stock Option Plan (1993) is hereby incorporated by reference to Exhibit 10.1 of the Registrant's Form 8K filed with the Securities and Exchange Commission on May 25, 1994.
Exhibit Number Description
10.7 Toll Brothers, Inc. Cash Bonus Plan is hereby incorporated by reference to Exhibit 10.2 of the Registrant's Form 8-K filed with the Securities and Exchange Commission on May 25, 1994.
10.8 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 filed with the Securities and Exchange Commission on September 9, 1988, File No. 33-23162.
10.9 Agreement regarding sharing of office expenses, dated May 29, 1986, among Robert Toll, Bruce Toll and the Registrant, is hereby incorporated by reference to Exhibit 10.8 of the Registrant's Registration Statement on Form S-1 filed with the Securities and Exchange Commission on July 8, 1986, File No. 33-6066.
11 Statement regarding computation of Per Share Earnings.
22 Subsidiaries of the Registrant.
24 Consent of Independent Auditors.
27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the last quarter of the period covered by this report.
Indemnification Undertaking - Registration Statements on Form S-8
For the purpose of complying with the amendments to the rules governing Form S-8 (effective July 13, 1990) under the Securities Act of 1933, the undersigned Registrant hereby undertakes as follows, which undertaking shall be incorporated by reference into Registrant's Registration Statements on Form S-8 Nos. 33-6066 (filed July 3, 1989) and 33-16250 (filed August 4, 1987):
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
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 Lower Moreland, Commonwealth of Pennsylvania on December 8, 1994.
TOLL BROTHERS, INC.
By: /s/ Robert I. Toll 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 Chairman of the Board December 8, 1994 Robert I. Toll of Directors and Chief Executive Officer (Principal Executive Officer)
/s/ Bruce E. Toll President, Chief December 8, 1994 Bruce E. Toll Operating Officer, Secretary and Director
/s/ Zvi Barzilay Executive Vice President December 8, 1994 Zvi Barzilay and Director
/s/ Joel H. Rassman Senior Vice President, December 8, 1994 Joel H. Rassman Treasurer and Chief Financial Officer (Principal Financial Officer)
/s/ Joseph R. Sicree Vice President and December 8, 1994 Joseph R. Sicree Chief Accounting Officer (Principal Accounting Officer)
/s/ Robert S. Blank Director December 8, 1994 Robert S. Blank
/s/ Richard J. Braemer Director December 8, 1994 Richard J. Braemer
/s/ Roger S. Hillas Director December 8, 1994 Roger S. Hillas
/s/ Carl B. Marbach Director December 8, 1994 Carl B. Marbach
/s/ Paul E. Shapiro Director December 8, 1994 Paul E. Shapiro
REPORT OF INDEPENDENT AUDITORS The Board of Directors and Shareholders Toll Brothers, Inc.
We have audited the accompanying consolidated balance sheets of Toll Brothers, Inc. and subsidiaries at October 31, 1994 and 1993, and the related consolidated statements of income and cash flows for each of the three years in the period ended October 31, 1994. Our audits also included the financial statement schedule listed in the Index at item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. 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, 1994 and 1993, and the consolidated results of their operations and their cash flows for each of the three years in the period ended October 31, 1994 in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
As discussed in Note 1 to the financial statements, in 1993 the Company changed its method of accounting for income taxes.
/s/ Ernst & Young LLP ----------------------
Philadelphia, Pennsylvania December 8, 1994
Consolidated Statements of Income (Amounts in thousands, except per share data)
See accompanying notes
See accompanying notes
See accompanying notes
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 and mortgage financing partnerships. All significant intercompany accounts and transactions have been eliminated.
Certain amounts reported in prior years have been reclassified for comparative purposes.
Income recognition The Company is engaged in the development, construction and sale of residential housing. Revenues and cost of sales are recorded at the time each home sale is closed and title and possession have been transferred to the buyer. Closing normally occurs shortly after construction is substantially completed.
Cash and cash equivalents Highly liquid investments with original maturities of three months or less are classified as cash equivalents. The carrying value of these investments approximates fair market value.
Property, construction and office equipment Property, construction and office equipment are recorded at cost and are stated net of accumulated depreciation of $12,343,000 and $10,910,000 at October 31, 1994 and 1993, respectively. Depreciation is recorded by using the straight-line method over the estimated useful lives of the assets.
Residential inventories General Inventories are stated at the lower of cost or estimated net realizable value. In addition to direct land acquisition, land development and housing construction costs, costs include interest, real estate taxes and direct overhead costs related to development and construction, which are capitalized to inventories during the period beginning with the commencement of development and ending with the completion of construction.
Land, land development and housing construction costs Land, land development and related costs are amortized to cost of homes closed based upon the total number of homes to be constructed in each community. Housing construction and related costs are charged to cost of homes closed under the specific identification method.
Deferred marketing costs The Company capitalizes project marketing costs and charges them against income as homes are closed.
Income taxes During the fourth quarter of 1993, the Company adopted Statement of Financial Accounting Standard No. 109, "Accounting for Income Taxes", effective November 1, 1992. This Statement requires a liability approach for measuring deferred taxes based on temporary differences between the financial statement and tax bases of assets and liabilities existing at each balance sheet date using enacted tax rates for years in which taxes are expected to be paid or recovered. The cumulative effect of this change in accounting for income taxes of $1,307,000 is included in the consolidated statement of income for 1993.
Earnings per share
The computation of primary and full-duluted earnings per share is based on the weighted average number of shares of common stock and common stock equivalents outstanding. In addition, the 1994 computation of fully-diluted earnings per share assumes the conversion of the Company's 4 3/4% Convertible Subordinated Notes due 2004 at $21.75 per share for the period that the notes were outstanding, although the closing price of the Company's common stock on the New York Stock Exchange on October 31, 1994 was $11 per share.
2. Residential inventories Residential inventories consisted of the following (amounts in thousands):
Construction in progress includes the cost of homes under construction, land and land development costs and the carrying costs of lots that have been substantially improved.
The Company acquired a number of loan assets (secured by liens on development property) from the Resolution Trust Corporation and various banks with the intention of converting a substantial portion of the value to land for new communities. At the time the Company acquires title to the property, the cost of the loan asset is reclassified to land and land development costs.
For the years ended October 31, 1994, 1993 and 1992, the Company provided for inventory writedowns consisting of provisions for a reduction to net realizable value and the expensing of previously capitalized costs which the Company no longer considered realizable of $6,957,000, $2,754,000 and $1,988,000, respectively.
Interest capitalized in inventories is charged to interest expense when the related inventories are closed. Interest incurred, capitalized and expensed for the three years ended October 31, 1994 is as follows (amounts in thousands):
3. Loans payable
As of October 31, 1994 and 1993, the Company had loans payable of $17,506,000 and $24,779,000, respectively, including borrowings under the Company's revolving credit agreement of $10,000,000 and $21,293,000. Due to their relative short-term maturity and terms, the face amount of the loans approximates fair market value.
The Company has a $150,000,000 unsecured revolving credit facility with nine banks which extends through November 1, 1997. The agreement provides for extensions of the maturity date. Interest is payable at 1 3/8% above the Eurodollar rate or at other specified variable rates as selected by the Company from time to time. The interest rate on outstanding loans at October 31, 1994 was 6.44%. A commitment fee of 3/8 of 1% is payable on the unused portion of the facility. As of October 31, 1994, letters of credit and obligations under escrow agreements of $52,609,000 were outstanding. The agreement contains various covenants, including financial covenants related to consolidated shareholders' equity, indebtedness and inventory. Due to the requirement that a minimum consolidated shareholders' equity be maintained, the Company is restricted to the payment of cash dividends and the repurchase of Company stock of approximately $50,245,000 as of October 31, 1994.
4. Subordinated notes and debentures
In January 1994, the Company issued $57,500,000 of 4 3/4% Convertible Senior Subordinated Notes (the "4 3/4% Notes"), due January 15, 2004, that are subordinated to all senior indebtedness. The notes are convertible into shares of common stock of the Company at the option of the noteholder at any time prior to maturity at a conversion price of $21.75 per share. The 4 3/4% Notes are redeemable, in whole or in part, at the option of the Company on or after January 15, 1997 at various prices. During 1994, the Company acquired $3,000,000 of these notes in the open market at prices below par. The gain realized by the Company was immaterial and included in other income.
In March 1993, the Company issued $75,000,000 of 9 1/2% Senior Subordinated Notes (the "9 1/2 Notes"), due March 15, 2003 that are subordinated to all senior indebtedness. The 9 1/2% Notes are redeemable, in whole or in part, at the option of the Company on or after March 15, 1998 at various prices. During 1994, the Company acquired $1,040,000 of these notes in the open market at prices below par. The gain realized by the Company was immaterial and included in other income.
In March 1992, the Company issued $100,000,000 of 10 1/2% Senior Subordinated Notes (the "10 1/2% Notes"), which are due March 15, 2002, provide for semiannual interest payments and are subordinated to all senior indebtedness. The 10 1/2% Notes are redeemable in whole or in part, at the option of the Company on or after March 15, 1997 at various prices.
During the year ended October 31, 1993, the Company redeemed all of its outstanding 12.95% Subordinated Notes due 1996 at a price above par. The principal amount of Notes redeemed was $28,973,000 and the redemption resulted in an extraordinary loss of $668,000, net of income taxes of $440,000.
During the year ended October 31, 1992, the Company redeemed all of its outstanding 12 1/8% Subordinated Debentures due 1998 at a price above par. The principal amount of debentures redeemed was $26,708,000 and the redemption resulted in an extraordinary loss of $816,000, net of income taxes of $555,000.
The aggregate fair market value of the notes, based upon their quoted market price as of October 31, 1994, was approximately $201,836,000.
The indentures related to the 10 1/2% and 9 1/2% Notes, restrict certain payments including payments for cash dividends and repurchase of the Company's stock.
5. Income taxes
The provisions for income taxes include federal and state taxes. Substantially all of the difference between the effective tax rate (36.4%, 37.6% and 39.9% for 1994, 1993 and 1992, respectively) used in these provisions and the statutory federal tax rate of 35% in 1994, 34.8% in 1993 and 34% in 1992 was due to state taxes, net of federal tax benefit, and in 1994 and 1993, the recalculation of the deferred tax balances due to the increase in the Federal statutory rate and decrease in the estimated state tax rate, and the effect of nontaxable income generated from short-term investments. The provisions for income taxes for the three years ended October 31, 1994 were as follows (amounts in thousands):
The principal components of deferred tax expense in fiscal 1992 were $486,000 for costs capitalized to inventories and $1,685,000 for net realizable value provision recoveries offset by $883,000 for income from housing sales reported on the installment method.
The components of income taxes payable as of October 31, 1994 and 1993 were (amounts in thousands):
6. Shareholders' equity
The Company's authorized capital stock consists of 40,000,000 shares of Common Stock, $.01 par value per share, and 1,000,000 shares of Preferred Stock, $.01 par value per share. The Company's Certificate of Incorporation, as amended, authorizes the Board of Directors to increase the number of authorized shares of Common Stock to 60,000,000 shares and the number of shares of authorized Preferred Stock to 15,000,000 shares.
Changes in shareholders' equity are summarized as follows (amounts in thousands):
Stock option plans
The Company's stock option plans for employees, officers and nonemployee directors provide for the granting of incentive stock options and nonstatutory options with a term of up to ten years at a price not less than the market price of the stock at the date of grant. Options available for grant at October 31, 1994, 1993 and 1992 were 2,537,400, 2,225,200 and 2,786,550, respectively.
Employee stock purchase plan
The Company's Employee Stock Purchase Plan enables substantially all employees to purchase the Company's common stock for 95% of the market price of the stock on specified offering dates. The plan, which terminates in December 1996, provides that 300,000 shares be reserved for purchase each year. As of October 31, 1994, a total of 27,698 shares had been purchased pursuant to the terms of the Plan since its inception.
7. Employee retirement plan
The Company maintains a salary deferral savings plan covering substantially all employees. The plan provides for Company contributions totaling 2% of all eligible compensation, plus 2% of eligible compensation above the social security wage base, plus matching contributions of up to 2% of eligible compensation of employees electing to contribute via salary deferrals. Company contributions with respect to the plan totaled $770,000, $604,000 and $529,000 for the years ended October 31, 1994, 1993 and 1992, respectively.
8. Commitments and contingencies
As of October 31, 1994, the Company had agreements to purchase land and improved homesites for future development with purchase prices aggregating approximately $210,506,000 of which $13,058,000 had been paid or deposited. Purchase of the properties is contingent upon satisfaction of certain requirements by the Company and the sellers.
As of October 31, 1994, the Company had agreements of sale outstanding to deliver 1,025 homes with an aggregate sales value of approximately $370,560,000. The Company has arranged through a number of outside mortgage lenders to provide approximately $185,489,000 of mortgages related to those sales agreements.
The Company is also involved in various claims and litigation arising from its usual and customary business with customers and subcontractors. The Company believes that it has adequate insurance or meritorious defenses in all pending cases and that adverse decisions in any or all of the cases would not have a material effect on the financial condition and the results of operations of the Company.
(A) Represents amount of reserves utilized, which is recorded at the time that affected homes are closed.