avatar Toll Brothers, Inc. Construction
  • Location: Pennsylvania 
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    2 0 0 0 A n n u a l Re p o r t


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    A D ECA D E O F GROW TH Toll Brothers is the nation's leading builder of luxury homes, serving move-up, D riven by geographic and product diversification, in the past decade our revenues empty-nester and active-adult buyers in over 140 communities in twenty states. have grown from $177 million to $1.81 billion, earnings from $3.7 million to $145.9 million, contracts from $230 million to $2.15 billion and year-end backlog The past decade has been a time of tremendous growth for us. W e began the from $124 million to $1.43 billion. In each year, we surpassed the previous year's 1990s building in five states: Pennsylvania, D elaware, N ew Jersey, Massachusetts results in all categories. W ith this growth came increased stability. As and Maryland. Expansion in the early 1990s into N ew York, Connecticut and shareholders' equity grew from $118 million to $745 million, our credit ratings Virginia established us as the dominant luxury builder in the Boston to continued to improve until we became one of just three home builders rated W ashington, D.C. corridor. Beginning in 1994, we expanded to California, then investment grade by Standard & Poor’s and Moody’s. into the Southeast, Southwest and Midwest regions of the United States. O ver the past ten years, we created an award-winning web site, won design In tandem with geographic expansion, we began diversifying our product offerings. awards in all our regions and became the only national builder to win all three of After focusing exclusively on move-up communities from 1967 through the 1980s, our industry’s highest honors: Builder of the Year, America's Best Builder and the we began building our first empty-nester and mixed-age, master planned N ational H ousing Quality Award. W e built our brand, honed our systems and communities in the early 1990s. W e have subsequently expanded both product maintained industry-leading profit margins while managing rapid, profitable growth lines into full-scale operations. W e entered the active-adult market in 1999 and and nationwide geographic expansion. W e view this as just a beginning. As the have age-qualified communities in N ew Jersey, Michigan and Connecticut. following pages will illustrate, we believe the best is yet to come. $145.9 $1,814 $1,435 $2,149 N et Income (in millions) Revenues (in millions) Backlog (in millions) Sales Contracts (in millions) Ten-Year Compound Annual Growth Rate – 32% Ten-Year Compound Annual Growth Rate – 25% Ten-Year Compound Annual Growth Rate – 35% Ten-Year Compound Annual Growth Rate – 29% $1,464 $1,641 $1,068 $103.0 $1,211 $1,383 $85.8 $815 $972 $1,069 $67.8 $627 $761 $885 $53.7 $526 $646 $49.9 $660 $504 $401 $587 $371 $36.2 $491 $395 $285 $27.4 $281 $343 $187 $17.4 $177 $230 $124 $3.7 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Fiscal year end October 31 Fiscal year end October 31 Fiscal year end October 31 Fiscal year end October 31 Before extraordinary items and change in accounting


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    D EA R SH A REH OL D ER 2000 was a fabulous year for Toll Brothers. W e delivered more homes,signed more W e could have signed more contracts and delivered houses in greater volumes this contracts, and achieved greater profits than ever before. O ver the last three, five, past year, but instead we followed our plan of maximizing the value of our land by seven and ten years, we have averaged more than 20% compound annual growth continuing to raise home prices. As a result, in fiscal 2000 the average price of for earnings, revenues, contracts and backlog. Even by these measures, fiscal 2000 homes delivered rose 10% over 1999 to $447,000. In an environment of relatively was an extraordinary year as our earnings grew 42%, our revenues 24%, our stable labor and material costs, our gross margins improved to 24.2% in FY 2000 contracts 31%, and our year-end backlog 34% versus fiscal 1999. from 22.3% in FY 1999. W e believe our strategy of focusing on the luxury market and creating a special The economy has helped us significantly. A recent Census Bureau study reported brand is the primary reason for our success. In 1990, we were 74th in Professional that, in constant 1999 dollars,U.S. households with incomes of $100,000 or more Builder magazine's annual ranking of U.S. home builders; today we are 9th. By have grown at nearly seven times the rate of U.S. households in general over the expanding geographically, and diversifying beyond the move-up market into the past twenty years. Affluent households now represent over 12%, or 12.8 million, empty-nester and active-adult sectors, we have broadened the scope of our of U.S. households. business,thereby accelerating our growth and increasing our revenue and earnings O ur stock price rose by 86% over the course of fiscal 2000 as our consistent potential dramatically. performance and strong growth gained the attention of investors. As of this W e continue to benefit from our strategy of acquiring control of well-located land writing we are still selling at a price/earnings multiple of approximately 9.5 times in affluent markets and taking sites through the entitlement process. Having First Call's consensus of analysts' earnings estimates for fiscal 2001, a discount of operated in the N ortheast for thirty years, we had to learn to be a land developer 56% to the S&P 500. Given our track record and future growth potential,we hope as well as a home builder. W e recognized that "slow-growth" and "no-growth" and believe that the market will reward us with a multiple more in line with other sentiment, now a nationwide phenomenon, would restrict supply and make growth companies. entitled land with development approvals very valuable. W e also recognized that O ur near-term prospects look outstanding. W e believe fiscal 2001 will be another baby boom demographics, which are driving the record year with net income and revenue growth of at least 15%. W e start with robust market for luxury a record $1.43 billion backlog, 34% ahead of last year's total and equal to nearly homes, would accelerate 80% of fiscal 2000's record revenues. This backlog means that most of our these lot shortages, revenues through third quarter 2001 are already in our pipeline. causing demand to outstrip supply. In And we believe that fiscal 2002 should be even better. Since we plan to increase anticipation of these the number of our selling communities over the coming year, if demand remains shortages, to fuel our relatively constant, we estimate at least 15% growth in both net income and continued growth we revenues in fiscal 2002 over 2001. have cautiously and The outlook beyond is very encouraging. Experts predict that from now through carefully built up the 2010, U.S. households should continue to grow in numbers comparable to that supply of lots we of the past decade. At that pace, by 2010 there could be over 26% more control to over 33,000. households than in 1990. W ith more affluent households than ever before and Left to right: Douglas C. Yearley, Jr., Zvi Barzilay, Wayne S. Patterson, Joel H. Rassman, Bruce E. Toll, Robert I. Toll Toll Brothers 1 Annual Report


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    huge waves of maturing baby boomers now communities we are selling lots to other in their 30s, 40s and 50s, we believe builders for homes other than our own demand for luxury homes should remain customized luxury product. strong throughout this decade. These highly amenitized communities Toll Brothers is uniquely positioned to benefit contain features such as clubhouses,fitness from these exciting demographics. We are centers, preserved open space, pools, the only national builder focused primarily on tennis courts and other recreational the luxury market. O ur average home price amenities. N ine have championship golf is double the average of the other major courses. O ne has a 170-acre recreational builders. O ur main competitors are small and lake with a private beach and marina. mid-sized private custom builders who don't Buyers are willing to pay more for a have our investment grade ratings,our access luxurious recreational lifestyle and, with so to land and low-cost capital, our national many product offerings, they are more buying power, our marketing reach or our likely to find the home of their dreams. brand name. As these communities reach full-scale production, over the next several years we W e have built our brand name by offering buyers choice, quality, value and service believe they will have a significant positive impact on our revenues and profits. in addition to luxurious homes and wonderful lifestyles. W e take the headache out of building a custom home. W e are the land developer, the architect, the mortgage As we look to the future, our goals are clear and within view. W e intend to consultant, the home builder and even, to an extent, the interior designer. By enhance and expand our brand name and reputation as the nation's leading builder marrying customization with production,we create great value for our customers. of luxury homes; to gain a larger share of the market in the affluent territories O ur buyers can design their dream homes while we control the customization where we build; to enter new markets with strong growth potential; to maintain process and benefit from the economies of scale of high-volume home building. the financial discipline that has assured us access to capital; and to sustain our At Toll Architecture, we pre-design and pre-budget the hundreds of structural record of consistent, strong growth and profitability. options we offer. At Toll Integrated Systems, our manufacturing operation, we W e thank the many people who have made this year such a success: our assemble wall panels, roof and floor trusses, windows and signature millwork in a shareholders for their patience and confidence in us, our home buyers who trust factory-controlled environment to ensure quality. our company to deliver their dreams, and the entire Toll Brothers team, whose To increase profits and expand our brand, we are introducing communities that diligence and determination are unparalleled in the industry. are more luxurious than ever before. W e have recently opened seven large, Sincerely, master planned communities totaling nearly 9,300 home sites. W e have three more comparable communities totaling over 3,500 home sites scheduled to open by 2002. In these large master plans, we are able to cross-market to the full range of luxury move-up and empty-nester buyers by offering in one location the wide RO BERT I. TO LL BRU CE E. TO LL Z VI BARZ ILAY array of Toll Brothers homes:estate, executive and villa lines of single-family homes Chairman o f the Bo ard and Vice Chairman President and and attached carriage homes and townhomes in numerous variations. W e are Chief Executive O fficer Chief O perating O fficer December 12, 2000 introducing an active-adult community within one of our master plans and in three Toll Brothers 2 Annual Report


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    The Coventry Manor at Hunt Valley Estates, MD


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    P ER F O R M A N CE ■ An investor who bought our stock at the end of July 1986, the month we went public, has seen its value increase over 1000%; that’s more than double the increase in value of the S&P 500. ■ In fiscal 2000, we produced our eighth consecutive year of record earnings, our ninth consecutive year of record revenues and year-end backlog, and our tenth consecutive year of record signed contracts. W e again led the home builders in the Fortune 1000 in net profit margin. W ith confidence in our future, we repurchased over 1.35 million shares of our stock. ■ W e ended fiscal 2000 with strong momentum. In our fourth quarter, we achieved our 39th consecutive quarterly year-over-year record for signed contracts, the highest revenues and earnings for any quarter in our history, and a record year-end backlog to jump-start fiscal 2001. 1155% $745 $616 $526 $385 507% 481% $315 $257 $204 $167 $136 $118 $85 $95 $73 $49 $31 $22 S&P Dow Toll IPO 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 500 Industrial Brothers Growth in Stock Price* Stockholders' Equity (in millions) 7/31/86 to 12/12/00 Compound Annual Growth Rate from July 1986 IPO - 27% * Source: Bloomberg L.P. FYE October 31 Toll Brothers 4 Annual Report


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    The Saddleback at O ak View, CA


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    The D iplomat at Mizner Country Club, FL


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    P R EPA R ED N ESS ■ W e have a tremendous land supply to control our destiny. W e now own or control over 33,000 home sites in many of the nation's most affluent markets. O ver 70% of our sites are in California, the Mid-Atlantic and the N ortheast markets - our most profitable regions. ■ In an environment of anti-growth sentiment and increasingly contentious entitlement processes, our expertise in gaining approvals and developing our own sites gives us a competitive advantage. O ur land supply can keep us growing for several years without having to be replenished. ■ Through Toll Brothers Realty Trust, our commercial property venture, we are taking advantage of opportunities to develop and acquire apartment, office and retail properties in current Toll Brothers markets. The Trust, of which we effectively own one-third, enables us to build equity via property ownership and to earn fees from development, construction and property management. ■ W e have the financial strength to fuel our expansion. W ith investment grade ratings from all three rating agencies, Standard & Poor’s, Moody’s and Fitch, we have exceptional access to the capital markets. ■ Since 1996, we have raised $470 million in long-term subordinated debt in the public capital markets, with a blended rate of 8.15%, and secured over $750 million of financing from U.S., European and Japanese banks. These diversified financial relationships help insulate us from the vagaries of individual capital markets. Toll Brothers 7 Annual Report


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    OPPORTU N I TY ■ W e have seen dramatic growth in the size of our target markets as affluent households, those earning $100,000 or more in constant 1999 dollars, have nearly tripled since 1980 to 12.8 million. ■ W ith the largest group of baby boomers, the 4 million born annually between 1954 and 1964, now 36 - 46 years of age, the outlook for the luxury move-up market is vibrant. The empty-nester market is poised to explode as more baby boomers enter their 50s. The active-adult market is gaining momentum with households headed by 55 - 64 year-olds projected to grow by 47% in this decade. ■ W e now operate in 40 markets in 20 states with over 5.2 million affluent households. Since 1994, we have expanded into the W est, Southwest, Southeast and Midwest regions. In these newer regions, which include many of the nation’s strongest housing markets, if we can capture just half the market share we’ve achieved in our core N ortheast and Mid-Atlantic markets, we could triple our current size. And we have identified another dozen markets for potential expansion. MI NY NH MA PA RI IL OH CT NV NJ DE VA MD CA TN NC Backlog by Region AZ Lots Controlled by Region ( Percent of $ value) Year ended O ctober 31, 2000 Year ended O ctober 31, 2000 TX ■ Northeast - 25.6% ■ Southeast - 10.2% ■ Northeast - 8,259 ■ Southeast - 3,417 ■ Mid-Atlantic - 22.2% ■ Southw est - 14.6% FL ■ Mid-Atlantic - 13,207 ■ Southw est - 2,819 ■ Midw est - 10.3% ■ West Coast - 17.1% ■ Midw est - 2,981 ■ West Coast - 2,435 Toll Brothers 8 Annual Report


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    The Claridge Georgian at River Crossing, PA


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    The view from Vista Estates, CA


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    L I FESTYL E ■ O ur communities are planned to enhance the lifestyles of our buyers. W inding, tree-lined streets, cul-de-sacs, shaded lanes and pocket parks make our communities beautiful. Tennis courts, pools, cabanas, fitness centers and tot lots make them fun to live in. W e believe this approach both increases demand for our homes and preserves the long-term value of our communities. ■ In an age of choice, our buyers demand the flexibility to customize their homes to complement their active lifestyles. To achieve this, we offer them thousands of combinations of options from which to choose. His and her offices, first-floor master suites, sun rooms, exercise areas, guest wings, media centers, two-story conservatories, elevators and four-car garages are among the many custom features that make our homes special. In fiscal 2000, our buyers added, on average, over $70,000 in options to their homes. ■ W e load our homes with luxury. Granite and marble countertops, vaulted and coffered ceilings, signature molding and elegant hard- wood flooring contribute to the luxurious lifestyle we offer. ■ W e make the home-buying process easy and build longer-term relationships with our customers by providing them with one-stop shopping for services such as title, mortgage, landscape, security monitoring, cable television and broadband Internet access. Toll Brothers 11 Annual Report


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    V I SI ON ■ W ith a dominant presence in the luxury markets of the N ortheast and Mid-Atlantic regions, burgeoning operations in some of the nation's most dynamic housing markets in the W est, Southwest, Midwest and Southeast, a diversified product mix and a rapidly growing base of potential customers, the future looks very bright. ■ O urs is an evolving industry. W e are integrating technology into all aspects of our business from marketing and sales, to manufacturing and construction, to planning and customer service. O n our award-winning web site, we now host 8,200 visitors daily, who average nearly 16 minutes per visit. W e install and provide Internet and cable television services to a number of our communities and have started testing web-based scheduling of home construction in the field. W e see great potential from the efficiencies of the Internet in communication, cost savings and wider access to customers. ■ W e recognize that home building remains a people-driven business. O ur reputation, integrity and relationships with our home buyers, shareholders, lenders and suppliers are the cornerstones of our business. ■ W e believe there is no substitute for hard work, diligence and focus. From the project management and sales teams in the field to the design, engineering, financial, land acquisition, legal, manufacturing, marketing and administrative teams that support them, we are dedicated to building the finest homes in America and making what we believe is the best home building company in the United States even better. Toll Brothers 12 Annual Report


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    The Balboa at O ak Knoll, CA


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    Somerset W illiamsburg at Northville Hills Golf Club, MI


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    CORP ORATE P ROFI L E ( AT 1 0 / 3 1 / 0 0 ) SOLI D PERFORMANCE GROWTH POTENTI AL Eight co nsecutive years Own o r co ntro l o ver 33,000 o f reco rd earnings ho me sites Nine co nsecutive years Selling fro m 146 co mmunities, o f reco rd revenues up 50% in five years Nine co nsecutive years Serve 40 affluent markets with o f reco rd year- end backlo g 5.2 millio n ho useho lds earning Ten co nsecutive years $100,000 and abo ve o f reco rd sales co ntracts Have identified a do zen 29% co mpo und average markets fo r po tential future annual diluted earnings per expansio n share gro wth since 1990 Active in 12 o f to p 15 states 39 co nsecutive quarterly fo r pro jected po pulatio n year- o ver- year reco rds fo r gro wth – years 1995- 2025 sales co ntracts Gro wing ancillary businesses: mo rtgage, title insurance, security, landscape, cable TV DI VERSI FI ED TARGET and bro adband Internet access MARKETS Land acquisitio n, appro vals Mo ve- up and develo pment expertise Empty- nester suppo rt gro wing ho me building Active- adult, age- qualified and land sales o peratio ns Go lf co urse, co untry club Apartment, o ffice and retail co mmunities develo pment thro ugh To ll Bro thers Realty Trust Luxury single- family and multi- family pro duct 20 states in six regio ns: BRAND NAME No rtheast, Mid- Atlantic, REPUTATI ON Midwest, So utheast, Fo unded in 1967 So uthwest and West Co ast Publicly traded since 1986 Traded o n the New Yo rk Sto ck Exchange and Pacific Exchange FI NANCI AL STRENGTH 9th largest U.S. ho me builder Investment grade co rpo rate by revenues credit ratings fro m Standard & Po o r’s ( BBB- ) , Mo o dy’s ( Baa3) , Average delivered ho me price and Fitch ( BBB) of $447,000 in fiscal year 2000, up 10% fro m 1999 Backed by a $465 millio n, 16- bank credit facility Fo rtune 1000 Co mpany Sto ckho lders’ equity nearly 1996 - Ame rica’s Be st Builde r tripled in the last five years Natio nal Asso ciatio n o f Ho me Builders ( NAHB) Secured o ver $1.2 billio n fro m banks and the public capital 1995 - Natio nal Ho using markets since 1996 Quality Award ( NAHB) 1988 - Builde r of the Ye ar ( Pro fessio nal Builder)


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    REGI ON A L RESU LTS CLOSIN GS CON TRACTS* BACKLOG* Units $ (millions) Units $ (millions) Units $ (millions) Year ended Oct. 31 2000 1999 2000 1999 2000 1999 2000 1999 2000 1999 2000 1999 N ortheast 1,043 910 $492.6 $401.1 1,043 1,068 $513.9 $482.7 723 723 $367.6 $346.1 ( CT, MA, NH, NJ, NY, RI) Mid-Atlantic 1,293 1,362 584.9 549.2 1,280 1,355 592.7 582.2 679 692 319.2 311.4 ( DE, MD, PA, VA) Midwest 335 242 122.1 68.6 481 262 206.0 91.6 311 240 147.2 82.5 ( IL, MI, OH) Southeast 269 238 133.9 112.9 419 268 204.0 123.7 312 162 146.6 76.6 ( FL, NC, TN) Southwest 734 717 276.5 246.3 731 725 315.7 262.4 417 420 209.3 170.2 ( AZ, NV, TX) W est Coast 271 86 152.9 60.2 464 167 317.1 98.4 337 144 245.0 80.7 ( CA) Total 3,945 3,555 $1,762.9 $1,438.3 4,418 3,845 $2,149.4 $1,641.0 2,779 2,381 $1,434.9 $1,067.5 *Contracts for the twelve-month period ended October 31, 2000 included $14,844,000 ( 54 homes) from an unconsolidated 50% owned joint venture. Contracts for the twelve-month period ended October 31, 1999 included $13,141,000 ( 46 homes) from this joint venture. Backlog as of October 31, 2000 and 1999 included $9,425,000 ( 33 homes) and $13,756,000 ( 54 homes) , respectively, from this joint venture. Toll Brothers 16 Annual Report


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    TOL L B ROTH ERS’ EL EV EN - YEA R F I N A N CI A L SU M M A RY Summary Consolidated Income Statement Data ( Amounts in thousands, except per share amounts) Year ended October 31 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 Revenues $1,814,362 $1,464,115 $1,210,816 $ 971,660 $760,707 $ 646,339 $504,064 $395,261 $281,471 $177,418 $200,031 Income before income taxes, extraordinary items and change in accounting $ 230,966 $ 162,750 $ 134,293 $ 107,646 $ 85,793 $ 79,439 $ 56,840 $ 43,928 $ 28,864 $ 6,248 $ 14,964 Income before extraordinary items and change in accounting $ 145,943 $ 103,027 $ 85,819 $ 67,847 $ 53,744 $ 49,932 $ 36,177 $ 27,419 $ 17,354 $ 3,717 $ 8,904 N et income $ 145,943 $ 101,566 $ 84,704 $ 65,075 $ 53,744 $ 49,932 $ 36,177 $ 28,058 $ 16,538 $ 5,013 $ 9,988 Income per share Basic: Income before extraordinary items and change in accounting $ 4.02 $ 2.81 $ 2.35 $ 1.99 $ 1.59 $ 1.49 $ 1.08 $ 0.83 $ 0.53 $ 0.12 $ 0.30 N et income $ 4.02 $ 2.77 $ 2.32 $ 1.91 $ 1.59 $ 1.49 $ 1.08 $ 0.84 $ 0.50 $ 0.16 $ 0.34 W eighted average number of shares 36,269 36,689 36,483 34,127 33,865 33,510 33,398 33,231 33,022 31,248 29,714 Diluted: Income before extraordinary items and change in accounting $ 3.90 $ 2.75 $ 2.25 $ 1.86 $ 1.50 $ 1.42 $ 1.05 $ 0.82 $ 0.52 $ 0.12 $ 0.30 N et income $ 3.90 $ 2.71 $ 2.22 $ 1.78 $ 1.50 $ 1.42 $ 1.05 $ 0.84 $ 0.50 $ 0.16 $ 0.34 W eighted average number of shares 37,413 37,436 38,360 37,263 36,879 36,360 35,655 33,467 33,234 31,412 29,714 Summary Consolidated Balance Sheet Data ( Amounts in thousands, except per share amounts) As of October 31 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 Inventory $1,712,383 $1,443,282 $1,111,223 $ 921,595 $772,471 $623,830 $506,347 $402,515 $ 287,844 $222,775 $240,155 Total assets $2,030,254 $1,668,062 $ 1,254,468 $1,118,626 $837,926 $692,457 $586,893 $ 475,998 $384,836 $312,424 $316,534 Debt Loans payable $ 326,537 $ 213,317 $ 182,292 $ 189,579 $132,109 $ 59,057 $ 17,506 $ 24,779 $ 25,756 $ 49,943 $ 71,707 Subordinated debt 469,499 469,418 269,296 319,924 208,415 221,226 227,969 174,442 128,854 55,513 61,474 Collateralized mortgage obligations payable 1,145 1,384 2,577 2,816 3,912 4,686 10,810 24,403 39,864 45,988 Total $ 796,036 $ 683,880 $ 452,972 $ 512,080 $343,340 $284,195 $250,161 $ 210,031 $179,013 $145,320 $179,169 Stockholders’ equity $ 745,145 $ 616,334 $ 525,756 $ 385,252 $314,677 $ 256,659 $204,176 $ 167,006 $136,412 $117,925 $ 94,599 N umber of shares outstanding 35,895 36,454 36,935 34,275 33,919 33,638 33,423 33,319 33,087 32,812 29,684 Book value per share $ 20.76 $ 16.91 $ 14.23 $ 11.24 $ 9.28 $ 7.63 $ 6.11 $ 5.01 $ 4.12 $ 3.59 $ 3.19 Return on beginning stockholders’ equity 23.7% 19.3% 22.0% 20.7% 20.9% 24.5% 21.7% 20.6% 14.0% 5.3% 11.7% Home Data Year ended October 31 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 N umber of homes closed 3,945 3,555 3,099 2,517 2,109 1,825 1,583 1,324 1,019 676 727 Sales value of homes closed (in thousands) $1,762,930 $1,438,171 $ 1,206,290 $ 968,253 $759,303 $643,017 $501,822 $392,560 $279,841 $175,971 $198,336 N umber of homes contracted 4,418 3,845 3,387 2,701 2,398 1,846 1,716 1,595 1,202 863 612 Sales value of homes contracted (in thousands) $2,149,366 $1,640,990 $ 1,383,093 $1,069,279 $884,677 $660,467 $586,941 $490,883 $342,811 $230,324 $163,975 N umber of homes in backlog 2,779 2,381 1,892 1,551 1,367 1,078 1,025 892 621 438 251 Sales value of homes in backlog (in thousands) $1,434,946 $1,067,685 $ 814,714 $ 627,220 $526,194 $ 400,820 $370,560 $285,441 $187,118 $124,148 $ 69,795 Average number of selling communities 147 133 120 104 97 86 72 61 48 40 38 Toll Brothers 17 Annual Report


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    M A N A GEM EN T ’ S D I SCU SSI O N increases, as previously discussed. Based on the Company’s current backlog and current healthy demand, the Company believes that fiscal 2001 will be another record year. A N D A N A LYSI S Housing costs as a percentage of housing sales decreased in fiscal 2000 as compared to fiscal 1999. The Results of O perations decrease was largely the result of selling prices increasing at a greater rate than costs, lower land and The following table sets forth comparisons of certain income statement items related to the Company’s improvement costs and improved operating efficiencies offset in part by higher inventory write-offs. The operations (dollars in millions): Company incurred $7.4 million in write-offs in fiscal 2000, as compared to $5.1 million in fiscal 1999. Year Ended October 31 2000 1999 1998 Land Sales $ % $ % $ % In March 1999, the Company acquired land for homes, apartments, retail, office and industrial space in the Home sales master planned community of South Riding, located in Loudoun County,Virginia. The Company will use some Revenues 1,762.9 1,438.2 1,206.3 of the property for its own homebuilding operations and will also sell home sites and commercial parcels to Costs 1,337.1 75.8 1,117.9 77.7 933.9 77.4 other builders. The Company recorded its first sale of land from this operation in the third quarter of fiscal Land sales 1999. The Company is also developing several master planned communities in which it may sell land to other Revenues 38.7 17.3 builders. The increase in land sales in fiscal 2000 over fiscal 1999 was due to the full year of operations in fiscal Costs 29.8 77.0 13.4 77.1 2000 compared to six months in fiscal 1999 at South Riding and the first sale of home sites at one of its other master planned communities. Equity earnings in unconsolidated joint ventures 3.3 Equity Earnings in Unconsolidated Joint Ventures Interest and other income 9.5 8.6 4.5 In fiscal 1998, the Company entered into a joint venture to develop and sell land owned by its venture partner. Under the terms of the agreement, the Company has the right to purchase a specified number of home sites Total revenues 1,814.4 1,464.1 1,210.8 on which to build homes with the majority of the home sites to be sold to other builders. In fiscal 2000, the Selling, general and joint venture sold its first group of home sites to other builders and to the Company. The Company recognizes administrative expenses 170.4 9.4 130.2 8.9 106.7 8.8 its share of earnings from the sale of home sites to other builders. The Company reduces its cost basis in the Interest expense 46.2 2.5 39.9 2.7 35.9 3.0 home sites it purchases from the joint venture by its share of the earnings on those home sites. Total costs and expenses 1,583.4 87.3 1,301.4 88.9 1,076.5 88.9 Interest and O ther Income O perating income 231.0 12.7 162.7 11.1 134.3 11.1 Interest and other income increased $900,000 in fiscal 2000 as compared to fiscal 1999. The increase was N ote: Percentages for selling, general and administrative expenses, interest expense, and total costs and expenses are principally due to gains from the sale of miscellaneous assets, offset in part by a reduction of fee income. based on total revenues. Selling, General and Administrative Expenses (“SG&A”) SG&A spending increased by $40.1 million, or 31%, in fiscal 2000 as compared to fiscal 1999. This increased Fiscal 2000 Compared to Fiscal 1999 spending was primarily due to the increase in the number of communities from which the Company was Home Sales selling, the increase in the number of homes delivered, costs associated with the Company’s expansion into Housing revenues for fiscal 2000 were higher than those of fiscal 1999 by approximately $325 million, or 23%. new markets,expenses incurred in the opening of divisional offices to manage the growth and spending related The revenue increase was primarily attributable to an 11% increase in the number of homes delivered and a to the development of its master planned communities and land sales. 10% increase in the average price of the homes delivered. The increase in the average price of the homes delivered was the result of increased selling prices,a shift in the location of homes delivered to more expensive Fiscal 1999 Compared to Fiscal 1998 areas and an increase in the number of homes delivered from our highly amenitized country club communities. The increase in the number of homes delivered is primarily due to a 7% increase in the number of communities Home Sales from which the Company was delivering homes and the larger backlog of homes to be delivered at the Revenues from home sales for fiscal 1999 as compared to 1998 increased by approximately $232 million, or beginning of fiscal 2000 as compared to fiscal 1999. 19%. The increase in revenues was attributable to a 15% increase in the number of homes delivered and a 4% increase in the average price of the homes delivered. The increased number of homes delivered was due to the The value of new sales contracts signed totaled $2.15 billion (4,418 homes) and $1.64 billion (3,845 homes) greater number of communities from which the Company was delivering homes in fiscal 1999 as compared to for fiscal 2000 and 1999, respectively. The increase in the value of new contracts signed in fiscal 2000 was fiscal 1998, the larger backlog of homes at the beginning of 1999 as compared to the beginning of 1998, and an primarily attributable to an increase in the average selling price of the homes (due primarily to the location, increase in the number of homes sold during fiscal 1999 over the number sold in fiscal 1998. Part of the increase size and increase in base selling prices) and an increase both in the average number of communities in which in the number of communities was attributable to the acquisition of the homebuilding operations of the the Company was offering homes for sale and in the number of contracts signed per community. Silverman Companies in March 1999. As of O ctober 31, 2000, the backlog of homes under contract was $1.43 billion (2,779 homes), approximately The increase in the average selling price per home delivered in fiscal 1999 as compared to fiscal 1998 was the result 34% higher than the $1.07 billion (2,381 homes) backlog as of O ctober 31, 1999. The increase in backlog at of a shift in the location of homes delivered to more expensive areas,changes in product mix to larger homes and O ctober 31, 2000 was primarily attributable to the increase in the number of new contracts signed and price increases in selling prices, offset in part by the delivery of lower priced products of the Silverman Companies. Toll Brothers 18 Annual Report


  • Page 21

    The value of new sales contracts signed in fiscal 1999 amounted to $1.64 billion (3,845 homes) compared to Extraordinary Loss From Extinguishment of Debt $1.38 billion (3,387 homes) in fiscal 1998. The increase in the value of new contracts signed was primarily In January 1999, the Company called for redemption of all its outstanding 9 1/2% Senior Subordinated N otes attributable to an increase in the number of communities in which the Company was offering homes for sale, an due 2003 at 102% of principal amount plus accrued interest. The redemption resulted in the recognition of increase in the number of contracts signed per community and an increase in the average selling price of the an extraordinary loss in 1999 of $1.5 million, net of $857,000 of income tax benefit. The loss represented the homes (due primarily to the location, size and increase in base selling prices). redemption premium and a write-off of unamortized deferred issuance costs. As of O ctober 31, 1999, the backlog of homes under contract was $1.07 billion (2,381 homes), approximately In February 1998, the Company entered into a five-year bank credit facility. The Company recognized an 31% higher than the $815 million (1,892 homes) backlog as of O ctober 31, 1998. The increase in backlog at extraordinary charge in 1998 of $1.1 million, net of $655,000 of income tax benefit, related to the retirement O ctober 31, 1999 was primarily attributable to the increase in the number of new contracts signed and price of its previous revolving credit agreement and prepayment of $62 million of fixed rate long-term bank loans. increases, as previously discussed. Home costs as a percentage of home revenues increased in 1999 as compared to 1998. The increase was the Capital Resources and Liquidity result of the higher percentage of closings from some of the Company’s newer markets (Arizona, Florida, N evada, N orth Carolina, Texas and Michigan) in 1999, which generally had higher costs as a percentage of Funding for the Company’s operations has been principally provided by cash flows from operations, unsecured revenue as compared to the Company’s more established markets. The Company also had higher inventory bank borrowings and, from time to time, the public debt and equity markets. write-offs in 1999 ($5.1 million) as compared to 1998 ($2.0 million). These cost increases were partially offset Cash flow from operations, before inventory additions, has improved as operating results have improved. The by lower costs as a percentage of revenues in the Company’s more established markets resulting from Company anticipates that the cash flow from operations, before inventory additions, will continue to improve increased selling prices and lower overhead costs. as a result of an increase in revenues from the delivery of homes from its existing backlog as well as from new Land Sales sales contracts and land sales. The Company has used the cash flow from operations, bank borrowings and public debt to acquire additional land for new communities, to fund additional expenditures for land In March 1999, the Company acquired land for homes, apartments, retail, office and industrial space in the development and construction costs needed to meet the requirements of the increased backlog and master planned community of South Riding, located in Loudoun County,Virginia. The Company will use some continuing expansion of the number of communities in which the Company is offering homes for sale, and to of the property for its own homebuilding operations and also will sell home sites and commercial parcels to reduce debt. The Company expects that inventories will continue to increase and is currently negotiating and other builders. Land sales revenues from South Riding, which amounted to $17.3 million in fiscal 1999, should searching for additional opportunities to obtain control of land for future communities. continue for the next several years. The Company has a $465 million unsecured revolving credit facility with 16 banks which extends through Interest and O ther Income February 2003. As of O ctober 31, 2000, the Company had $80 million of loans and approximately $36 million The increase in interest and other income in fiscal 1999 as compared to fiscal 1998 was primarily the result of letters of credit outstanding under the facility. of the Company’s expansion of its ancillary businesses such as title insurance, mortgage operations and construction management. The Company believes that it will be able to fund its activities through a combination of existing cash resources, cash flow from operations and other sources of credit similar in nature to those the Company has Selling, General and Administrative Expenses (“SG&A”) accessed in the past. SG&A expenses for fiscal 1999 increased by $23.5 million over 1998. The increased spending was primarily attributable to the increased number of communities in which the Company was operating, the geographic expansion of the Company’s homebuilding operations, the increase in the number of homes sold and the Inflation expansion of the Company’s ancillary businesses. As a percentage of revenues, SG&A in fiscal 1999 was slightly The long-term impact of inflation on the Company is manifested in increased land, land development, higher than in fiscal 1998. construction and overhead costs, as well as in increased sales prices. The Company generally contracts for land significantly before development and sales efforts begin. Accordingly, to the extent land acquisition costs Interest Expense 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 a buyer contracts to acquire a home and the Company generally The Company determines interest expense on a specific lot-by-lot basis for its homebuilding operations and on a contracts to sell its homes prior to commencement of construction, any inflation of costs in excess of those parcel-by-parcel basis for its land sales. As a percentage of total revenues, interest expense will vary depending on anticipated may result in lower gross margins. The Company generally attempts to minimize that effect by many factors including the period of time that the land was owned, the length of time that the homes delivered entering into fixed-price contracts with its subcontractors and material suppliers for specified periods of time, during the period were under construction,and the interest rates and the amount of debt carried by the Company which generally do not exceed one year. in proportion to the amount of its inventory during those periods. As a percentage of total revenues, interest expense was lower in fiscal 2000 as compared to 1999, and lower in fiscal 1999 as compared to fiscal 1998. 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 Income Taxes higher costs or if mortgage interest rates increase significantly, affecting prospective buyers’ ability to Income taxes for fiscal 2000, 1999 and 1998 were provided at effective rates of 36.8%, 36.7% and 36.1%, adequately finance home purchases, the Company’s revenues, gross margins and net income would be respectively. 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. Toll Brothers 19 Annual Report


  • Page 22

    F I N A N CI A L S TA T E M E N T S Consolidated Statements of Income Consolidated Balance Sheets (Amounts in thousands, except per share data) (Amounts in thousands) Year Ended October 31 2000 1999 1998 October 31 2000 1999 Revenues: Assets Home sales $ 1,762,930 $1,438,171 $ 1,206,290 Cash and cash equivalents $ 161,860 $ 96,484 Land sales 38,730 17,345 Inventory 1, 712,383 1,443,282 Equity earnings in Property, construction and office unconsolidated joint ventures 3,250 equipment, net 24,075 19,633 Interest and other 9,452 8,599 4,526 Receivables, prepaid expenses 1,814,362 1,464,115 1,210,816 and other assets 113,025 87,469 Costs and expenses: Investments in unconsolidated entities 18,911 21,194 Home sales 1,337,060 1,117,872 933,853 $2,030,254 $ 1,668,062 Land sales 29,809 13,375 Selling, general and administrative 170,358 130,213 106,729 Liabilities and Stockholders’ Equity Interest 46,169 39,905 35,941 Liabilities: 1,583,396 1,301,365 1,076,523 Loans payable $ 326,537 $ 213,317 Income before income taxes Subordinated notes 469,499 469,418 and extraordinary loss 230,966 162,750 134,293 Customer deposits on sales contracts 104,924 82,495 Income taxes 85,023 59,723 48,474 Accounts payable 110,927 84,777 Income before extraordinary loss 145,943 103,027 85,819 Extraordinary loss (1,461) (1,115) Accrued expenses 185,141 141,835 N et income $ 145,943 $ 101,566 $ 84,704 Income taxes payable 88,081 59,886 Total liabilities 1, 285,109 1,051,728 Earnings per share Basic: Stockholders’ equity: Income before extraordinary loss $ 4.02 $ 2.81 $ 2.35 Preferred stock, none issued Extraordinary loss (.04) (.03) Common stock, 37,028 and 37,035 N et income $ 4.02 $ 2.77 $ 2.32 shares issued at O ctober 31, 2000 and 1999, respectively 359 365 Diluted: Additional paid-in capital 105,454 105,239 Income before extraordinary loss $ 3.90 $ 2.75 $ 2.25 Retained earnings 668,608 522,665 Extraordinary loss (.04) (.03) Treasury stock, at cost – N et income $ 3.90 $ 2.71 $ 2.22 1,133 shares and 581 shares at W eighted average number of shares: O ctober 31, 2000 and 1999, respectively (29,276) (11,935) Basic 36,269 36,689 36,483 Total stockholders’ equity 745,145 616,334 Diluted 37,413 37,436 38,360 $2,030,254 $ 1,668,062 See accompanying notes. See accompanying notes. Toll Brothers 20 Annual Report


  • Page 23

    Consolidated Statements of Cash Flows (Amounts in thousands) Year Ended October 31 2000 1999 1998 Cash Flows From O perating Activities N et income $145,943 $101,566 $ 84,704 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 8,528 6,594 5,611 Equity earnings in unconsolidated joint ventures (3,250) Extraordinary loss from extinguishment of debt 2,318 1,770 Deferred tax provision 5,191 1,569 324 Changes in operating assets and liabilities, net of assets and liabilities acquired: Increase in inventory (264,303) (282,764) (179,132) Increase in receivables, prepaid expenses and other assets (28,025) (32,524) (11,862) Increase in customer deposits on sales contracts 22,429 11,557 16,700 Increase in accounts payable and accrued expenses 71,492 62,769 35,265 Increase in current income taxes payable 25,132 8,045 5,912 N et cash used in operating activities (16,863) ( 120,870) (40,708) Cash Flows From Investing Activities Purchase of property and equipment, net (9,415) (8,331) (2,834) Acquisition of company, net of cash acquired (11,090) Investment in unconsolidated entities (15,193) (6,001) Distribution from unconsolidated entities 13,589 N et cash provided by (used in) investing activities 4,174 (34,614) (8,835) Cash Flows From Financing Activities Proceeds from loans payable 559,843 177,500 55,000 Principal payments of loans payable (460,482) (187,551) (74,416) N et proceeds from issuance of subordinated notes 267,716 Redemption of subordinated notes (71,359) Proceeds from stock-based benefit plans 11,936 2,223 4,874 Purchase of treasury stock (33,232) (16,704) (3,347) N et cash provided by (used in) financing activities 78,065 171,825 (17,889) N et increase (decrease) in cash and cash equivalents 65,376 16,341 (67,432) Cash and cash equivalents, beginning of year 96,484 80,143 147,575 Cash and cash equivalents, end of year $161,860 $ 96,484 $ 80,143 See accompanying notes. Toll Brothers 21 Annual Report


  • Page 24

    Summary Consolidated Quarterly Financial Data (Unaudited) (Amounts in thousands, except per share data) Three Months Ended Oct. 31 July 31 April 30 Jan. 31 Fiscal 2000 Revenues $ 614,793 $ 464,532 $ 390,486 $ 344,551 Income before income taxes $ 92,484 $ 58,791 $ 44,363 $ 35,328 N et income $ 58,366 $ 37,234 $ 27,950 $ 22,393 Earnings per share Basic: N et income* $ 1.62 $ 1.03 $ .77 $ .61 Diluted: N et income* $ 1.52 $ 1.00 $ .75 $ .61 W eighted average number of shares: Basic 36,061 36,146 36,396 36,471 Diluted 38,486 37,219 37,036 36,909 Fiscal 1999 Revenues $ 442,884 $ 405,694 $ 342,671 $ 272,866 Income before income taxes and extraordinary loss $ 52,919 $ 47,541 $ 34,721 $ 27,569 Income before extraordinary loss $ 33,436 $ 30,073 $ 22,080 $ 17,438 N et income $ 33,436 $ 30,073 $ 22,080 $ 15,977 Earnings per share Basic: Income before extraordinary loss $ .92 $ .82 $ .60 $ .47 N et income $ .92 $ .82 $ .60 $ .43 Diluted: Income before extraordinary loss $ .90 $ .80 $ .59 $ .46 N et income $ .90 $ .80 $ .59 $ .42 W eighted average number of shares: Basic 36,462 36,614 36,717 36,963 Diluted 36,971 37,400 37,339 38,033 *Due to rounding, the sum of the quarterly earnings per share amounts does not equal the reported earnings per share for the year. Toll Brothers 22 Annual Report


  • Page 25

    NOTES TO CONSOLI DATED FI NANCI AL STATEMENTS 1. Significant Accounting Policies Acquisition In March 1999, the Company acquired the homebuilding operations of the Silverman Companies, a Detroit, Basis of Presentation Michigan homebuilder and developer of luxury apartments, for cash and the assumption of debt. The The accompanying consolidated financial statements include the accounts of Toll Brothers, Inc. (the acquisition price was not material to the financial position of the Company. “Company”), a Delaware corporation, and its majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Investments in 20% to 50% owned partnerships and affiliates Segment Reporting are accounted for on the equity method and investments in less than 20% owned affiliates are accounted for Statement of Financial Accounting Standards (“SFAS”) N o. 131,“Disclosures about Segments of an Enterprise on the cost method. and Related Information,” establishes standards for the manner in which public enterprises report information about operating segments. The Company has determined that its operations primarily involve one reportable Use of Estimates segment, homebuilding. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in N ew Accounting Pronouncement the financial statements and accompanying notes. Actual results could differ from those estimates. SFAS N o. 133, “Accounting for Derivative Instruments and for Hedging Activities,” establishes accounting and reporting standards of derivative instruments embedded in other contracts, and for hedging activities. The Income Recognition Company will adopt SFAS N o.133,as amended,in the first quarter of fiscal 2001. Such adoption is not expected The Company is primarily engaged in the development, construction and sale of residential homes. Revenues to have a material impact on the Company’s reported results of operations, financial position or cash flows. 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. Land sales revenues and cost of sales are recognized at the time that title and possession of the property has 2. Inventory been transferred to the buyer. Inventory consisted of the following (amounts in thousands): Cash and Cash Equivalents October 31 2000 1999 Liquid investments and investments with original maturities of three months or less are classified as cash Land and land development costs $ 558,503 $ 506,869 equivalents. The carrying value of these investments approximates their fair value. Construction in progress 992,098 794,599 Property, Construction and O ffice Equipment Sample homes 60,511 57,995 Property, construction and office equipment are recorded at cost and are stated net of accumulated Land deposits and costs of depreciation of $30,288,000 and $25,761,000 at O ctober 31, 2000 and 1999, respectively. Depreciation is future development 68,560 55,575 recorded by using the straight-line method over the estimated useful lives of the assets. Deferred marketing costs 32,711 28,244 Inventories $1,712,383 $ 1,443,282 Inventories are stated at the lower of cost or fair value. In addition to direct land acquisition,land development Construction in progress includes the cost of homes under construction, land and land development costs and and home construction costs, costs include interest, real estate taxes and direct overhead costs related to the carrying cost of lots that have been substantially improved. development and construction, which are capitalized to inventories during the period beginning with the commencement of development and ending with the completion of construction. For the years ended O ctober 31, 2000, 1999 and 1998, the Company provided for inventory writedowns and the expensing of costs which it believed not to be recoverable of $7,448,000, $5,092,000 and $2,010,000, Land,land development and related costs are amortized to cost of homes closed based upon the total number respectively. of homes to be constructed in each community. Home construction and related costs are charged to cost of homes closed under the specific identification method. Interest capitalized in inventories is charged to interest expense when the related inventories are closed. Changes in capitalized interest for the three years ended O ctober 31, 2000 were as follows (amounts in thousands): The Company capitalizes certain project marketing costs and charges them against income as homes are closed. 2000 1999 1998 Interest capitalized, beginning of year $64,984 $53,966 $ 51,687 Treasury Stock Interest incurred 60,236 51,396 38,331 Treasury stock is recorded at cost. Re-issuances of treasury stock are accounted for on a first-in, first-out basis. Differences between the cost of treasury shares and the re-issuance proceeds are charged to additional Interest expensed (46,169) (39,905) (35,941) paid-in capital. W rite-off to cost and expenses (608) (473) (111) Interest capitalized, end of year $78,443 $ 64,984 $ 53,966 Toll Brothers 23 Annual Report


  • Page 26

    3. Loans Payable and Subordinated Notes As of O ctober 31, 2000, the aggregate fair value of all the outstanding subordinated notes, based upon their indicated market prices, was approximately $437,570,000. Loans payable consisted of the following (amounts in thousands): The annual aggregate maturities of the Company’s loans and notes during the next five fiscal years are:2001 - October 31 2000 1999 $12,703,000; 2002 - $55,176,000; 2003 - $82,861,000; 2004 - $395,000; and 2005 - $170,342,000. Revolving credit facility due Feb. 2003 $ 80,000 $ 80,000 Term loan due July 2001 56,000 Term loan due March 2002 50,000 50,000 4. Income Taxes Term loan due July 2005 170,000 The Company’s estimated combined federal and state tax rate before providing for the effect of permanent book- O ther $ 26,537 27,317 tax differences (“Base Rate”) was 37% in 2000,1999 and 1998. The effective tax rates in 2000,1999 and 1998 were $326,537 $213,317 36.8%, 36.7% and 36.1%, respectively. The primary differences between the Company’s Base Rate and effective tax rate were tax-free income, and in 1998, an adjustment due to the recomputation of the Company’s deferred tax The Company has a $465,000,000 unsecured revolving credit facility with 16 banks which extends through liability resulting from the change in the Company’s estimated Base Rate and the deductibility of certain expenses at February 2003. Interest is payable on borrowings at .575% above the Eurodollar rate or at other specified a higher basis for tax purposes than for book purposes. variable rates as selected by the Company from time to time. The Company fixed the interest rate on $20,000,000 of borrowings at 6.39% until March 2002 through an interest rate swap with a bank. Had the The provisions for income taxes for each of the three years ended O ctober 31, 2000 were as follows Company not entered into the interest rate swap, the interest rate on this borrowing would have been 7.2% (amounts in thousands): at O ctober 31, 2000. As of O ctober 31, 2000, letters of credit and obligations under escrow agreements of 2000 1999 1998 $35,896,000 were outstanding. The agreement contains various covenants,including financial covenants related Federal $ 78,105 $ 54,874 $ 44,865 to consolidated stockholders’ equity, indebtedness and inventory. The agreement requires the Company to State 6,918 4,849 3,609 maintain a minimum consolidated stockholders’ equity which restricts the payment of cash dividends and the $ 85,023 $ 59,723 $ 48,474 repurchase of Company stock to approximately $271,000,000 as of O ctober 31, 2000. Current $ 79,832 $ 58,154 $ 48,150 The Company has borrowed $50,000,000 from three banks at a fixed rate of 7.72% repayable in March 2002. Deferred 5,191 1,569 324 The Company has borrowed $170,000,000 from eight banks at a fixed interest rate of 8.25% repayable in July 2005. Both loans are unsecured and the agreements contain substantially the same financial covenants as the $ 85,023 $ 59,723 $ 48,474 Company’s revolving credit facility. The components of income taxes payable consisted of the following (amounts in thousands): The carrying value of the loans payable approximates their estimated fair value. October 31 2000 1999 Subordinated notes consisted of the following (amounts in thousands): Current $ 63,775 $ 40,772 October 31 2000 1999 D eferred 24,306 19,114 8 3/4% Senior Subordinated N otes, $ 88,081 $ 59,886 due N ovember 15, 2006 $100,000 $100,000 7 3/4% Senior Subordinated N otes, The components of net deferred taxes payable consisted of the following (amounts in thousands): due September 15, 2007 100,000 100,000 October 31 2000 1999 8 1/8% Senior Subordinated N otes, D eferred tax liabilities: due February 1, 2009 170,000 170,000 Capitalized interest $ 26,287 $21,204 8% Senior Subordinated N otes Deferred expenses 13,743 7,640 due May 1, 2009 100,000 100,000 Total 40,030 28,844 Bond discount (501) (582) D eferred tax assets: $469,499 $469,418 Inventory valuation reserves 4,555 2,193 All issues of senior subordinated notes are subordinated to all senior indebtedness of the Company. The Inventory valuation differences 2,184 1,763 indentures restrict certain payments by the Company including cash dividends and the repurchase of Company Deferred income 2,170 stock. The notes are redeemable in whole or in part at the option of the Company at various prices on or Accrued expenses after N ovember 15, 2001 with regard to the 8 3/4% notes, on or after September 15, 2002 with regard to the deductible when paid 178 271 7 3/4% notes, on or after February 1, 2004 with regard to the 8 1/8% notes, and on or after May 1, 2004 with O ther 6,637 5,503 regard to the 8% notes. Total 15,724 9,730 N et deferred tax liability $ 24,306 $ 19,114 Toll Brothers 24 Annual Report


  • Page 27

    5. Stockholders’ Equity Stockholder Rights Plan The Company’s authorized capital stock consists of 45,000,000 shares of Common Stock, $.01 par value per Common shares outstanding are subject to stock purchase rights. The rights, which are exercisable only under share, and 1,000,000 shares of Preferred Stock, $.01 par value per share. The Company’s Certificate of certain conditions, entitle the holder, other than an acquiring person (and certain related parties of an acquiring Incorporation, as amended, authorizes the Board of Directors to increase the number of authorized shares of person) as defined in the plan,to purchase common shares at prices specified in the rights agreement. Unless earlier Common Stock to 100,000,000 shares and the number of shares of authorized Preferred Stock to 15,000,000 redeemed, the rights will expire on July 11, 2007. The rights were not exercisable at October 31, 2000. shares. Redemption of Common Stock Changes in Stockholder’s Equity In order to help provide for an orderly market in the Company’s Common Stock in the event of the death of Changes in stockholders’ equity for the three years ended O ctober 31, 2000 were as follows (amounts in either Robert I.Toll or Bruce E.Toll (the “Tolls”), or both of them, the Company and the Tolls have entered into thousands): agreements in which the Company has agreed to purchase from the estate of each of the Tolls $10,000,000 of the Company’s Common Stock (or a lesser amount under certain circumstances) at a price equal to the greater Additional of fair market value (as defined) or book value (as defined). Further,the Tolls have agreed to allow the Company Common Stock Paid-In Retained Treasury to purchase $10,000,000 of life insurance on each of their lives. In addition, the Tolls granted the Company an Shares Amount Capital Earnings Stock Total option to purchase up to an additional $30,000,000 (or a lesser amount under certain circumstances) of the Company’s Common Stock from each of their estates. The agreements expire in O ctober 2005. Balance, N ovember 1, 1997 34,275 $343 $48,514 $336,395 $ — $385,252 N et income 84,704 84,704 In April 1997, the Company’s Board of Directors authorized the repurchase of up to 3,000,000 shares of its Purchase of treasury stock (133) (1) (3,346) (3,347) Common Stock, par value $.01, from time to time, in open market transactions or otherwise, for the purpose of Exercise of stock options 285 3 3,240 1,405 4,648 providing shares for its various employee benefit plans. As of O ctober 31, 2000, the Company had repurchased 2,289,000 shares of which 1,156,000 shares had been re-issued under its various employee benefit plans. Executive bonus award 161 1 3,563 3,564 Employee stock plan purchases 10 93 130 223 Conversion of debt 2,337 23 50,689 50,712 6. Stock-Based Benefit Plans Balance, O ctober 31, 1998 36,935 369 106,099 421,099 (1,811) 525,756 Stock-Based Compensation Plans N et income 101,566 101,566 The Company accounts for its stock option plans according to Accounting Principles Board O pinion N o. 25, Purchase of treasury stock (801) (8) (16,696) (16,704) “Accounting for Stock Issued to Employees” (“APB 25”). Accordingly, no compensation costs are recognized Exercise of stock options 177 2 (1,143) 3,699 2,558 upon issuance or exercise of stock options. Executive bonus award 106 1 342 2,119 2,462 SFAS N o. 123,“Accounting for Stock-Based Compensation,” requires the disclosure of the estimated value of Employee stock plan purchases 12 (15) 221 206 employee option grants and their impact on net income using option pricing models which are designed to Contribution to employee estimate the value of options which, unlike employee stock options, can be traded at any time and are 401(k) Plan 25 1 (44) 533 490 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 Balance, O ctober 31, 1999 36,454 365 105,239 522,665 (11,935) 616,334 expected volatility of the stock price. Therefore, in management’s opinion, the existing models do not provide N et income 145,943 145,943 a reliable single measure of the value of employee stock options. Purchase of treasury stock (1,355) (14) (33,218) (33,232) At O ctober 31, 2000, the Company’s stock-based compensation plans consisted of its four stock option plans. Exercise of stock options 672 7 588 13,345 13,940 N et income and net income per share as reported in these consolidated financial statements and on a pro Executive bonus award 80 1 (225) 1,620 1,396 forma basis, as if the fair-value-based method described in SFAS N o. 123 had been adopted, were as follows (in Employee stock plan purchases 6 (8) 131 123 thousands, except per share amounts): Contribution to employee 2000 1999 1998 401(k) Plan 38 (140) 781 641 As Pro As Pro As Pro Balance, O ctober 31, 2000 35,895 $359 $105,454 $668,608 $ (29,276) $745,145 Reported Forma Reported Forma Reported Forma N et income $145,943 $136,622 $101,566 $ 93,402 $ 84,704 $ 72,841 Basic net income per share $ 4.02 $ 3.77 $ 2.77 $ 2.55 $ 2.32 $ 2.00 Diluted net income per share $ 3.90 $ 3.65 $ 2.71 $ 2.50 $ 2.22 $ 1.91 Weighted-average grant date fair value per share of options granted $ 9.03 $ 10.98 $ 12.01 Toll Brothers 25 Annual Report


  • Page 28

    For the purposes of providing the pro forma disclosures, the fair value of options granted was estimated using The following table summarizes information about stock options outstanding at O ctober 31, 2000: the Black-Scholes option pricing model with the following weighted average assumptions used for grants in each of the three fiscal years ended O ctober 31, 2000. O ptions O utstanding O ptions Exercisable W eighted- 2000 1999 1998 Average W eighted- W eighted- Risk-free interest rate 5.80% 6.14% 4.68% Range of Remaining Average Average Expected life (years) 7.7 7.1 7.2 Exercise N umber Contractual Exercise N umber Exercise Prices O utstanding Life (in years) Price Exercisable Price Volatility 35.7% 34.9% 35.1% $ 9.94 - $15.88 1,031,200 3.0 $ 12.13 1,031,200 $ 12.13 Dividends none none none 17.13 - 20.25 3,361,385 7.4 18.29 1,356,195 19.23 Stock O ption Plans 22.31 - 25.56 1,913,671 7.7 23.87 789,328 24.13 27.44 - 29.50 697,500 7.2 28.01 697,500 28.01 The Company’s four stock option plans for employees, officers and non-employee directors provide for the $ 9.94 - $29.50 7,003,756 6.8 $ 19.88 3,874,223 $ 19.92 granting of incentive stock options and non-statutory 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. The Company’s Stock O ption and Incentive Stock Plan (1995) provides for automatic increases each January 1 in the number of shares available for grant by 2% of the Bonus Award Shares number of shares issued (including treasury shares). The Company’s Stock Incentive Plan (1998) provides for Under the terms of the Company’s Cash Bonus Plan covering Robert I.Toll, Mr.Toll is entitled to receive cash automatic increases each N ovember 1 in the number of shares available for grant by 2.5% of the number of bonus awards based upon the pretax earnings and stockholders’ equity of the Company. In December 1998, shares issued (including treasury shares). The 1995 Plan and the 1998 Plan each restricts the number of options Mr.Toll and the Board of Directors agreed that any bonus payable for each of the three fiscal years ended available for grant in a year to a maximum of 2,500,000 shares and the number of options that may be granted O ctober 31, 2001 will be made (except for specified conditions) in shares of the Company’s Common Stock thereunder in a calendar year to the lesser of the number of shares available for grant thereunder or 2,500,000 using the value of the stock as of the date of the agreement ($24.25 per share). The stockholders approved shares. N o additional options may be granted under the Company’s Stock O ption Plan (1986). the plan at the Company’s 1999 Annual Meeting. The Company recognized compensation expense in 2000 of $4,413,000 and in 1999 of $1,395,000 which represented the fair market value of the shares issued to Robert The following summarizes stock option activity for the four plans during the three years ended O ctober 31,2000: I.Toll (135,792 shares in 2000 and 79,686 shares in 1999). O n O ctober 31, 2000 and 1999, the closing price of the Company’s Common Stock on the N ew York Stock Exchange was $32.50 and $17.50, respectively. 2000 1999 1998 W eighted- W eighted- W eighted- In May 1996,the Board of Directors,Robert I.Toll and Bruce E.Toll agreed to a similar type of plan and payment N umber Average N umber Average N umber Average arrangement for each of the three fiscal years ended O ctober 31,1998 based upon the value of the Company’s of Exercise of Exercise of Exercise Common Stock on the date of the agreement ($17.125 per share). The stockholders approved the plan at the O ptions Price O ptions Price O ptions Price Company’s 1997 Annual Meeting. In March 1998, in connection with Bruce E.Toll’s withdrawal from the day- O utstanding, to-day operations of the business, the Board of Directors and Bruce E.Toll agreed to modify his cash bonus beginning of year 5,891,593 $20.40 4,942,518 $19.53 3,684 ,175 $16.03 award whereby his 1998 cash bonus would be paid in cash and the amount would be calculated based upon Granted 1,879,750 17.53 1,252,800 22.81 1,720 ,575 26.41 50% of the estimated bonus that would have been earned. The Company recognized $3,944,000 as compensation expense in 1998 which represented the fair market value of the shares issued to Robert I.Toll Exercised (678,288) 17.69 (176,470) 11.39 (293,015) 14.04 (106,186 shares) and the cash bonus paid to Bruce E.Toll. Cancelled (89,299) 20.95 (127,255) 22.97 (169,217) 22.85 O utstanding, Employee Stock Purchase Plan end of year 7,003,756 $19.88 5,891,593 $20.40 4,942 ,518 $19.53 The Company’s Employee Stock Purchase Plan enables substantially all employees to purchase the Company’s Exercisable, Common Stock for 95% of the market price of the stock on specified offering dates or at 85% of the market end of year 3,874,223 $19.92 3,736,905 $18.93 3,286 ,706 $17.90 price of the stock on specified offering dates subject to restrictions. The plan, which terminates in December 2007,provides that 300,000 shares be reserved for purchase. As of O ctober 31,2000,a total of 233,242 shares Available for grant, were available for issuance. end of year 2,313,251 3,188,657 3,893 ,663 The number of shares and the average prices per share issued under this plan during each of the fiscal years ended O ctober 31, 2000, 1999 and 1998 were 6,309 shares and $19.41, 12,182 shares and $16.97, and 9,916 shares and $22.48, respectively. N o compensation expense was recognized by the Company under this plan. Toll Brothers 26 Annual Report


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    7. Earnings Per Share Information The Company is involved in various claims and litigation arising in the ordinary course of business. The Company believes that the disposition of these matters will not have a material effect on the business or on Information pertaining to the calculation of earnings per share for each of the three years ended O ctober 31, the financial condition of the Company. 2000 is as follows (amounts in thousands): 2000 1999 1998 Basic weighted average shares 36,269 36,689 36,483 11. Related Party Transactions Common stock equivalents 1,144 747 1,437 In order to take advantage of commercial real estate opportunities which may present themselves from time to time, the Company formed Toll Brothers Realty Trust (the “Trust”), a venture which is effectively owned Convertible subordinated notes 440 one-third by the Company, one-third by a number of senior executives and/or directors, including Robert I. Diluted weighted average shares 37,413 37,436 38,360 Toll, Bruce E.Toll (and certain members of his family), Zvi Barzilay (and certain members of his family), and Joel Earnings addback related to interest H. Rassman, and one-third by the Pennsylvania State Employees Retirement System (collectively, the on convertible subordinated notes, “Shareholders”). net of income tax benefits — — $ 315 In June 2000, the Shareholders entered into a subscription agreement whereby each group agreed to invest additional capital in an amount not to exceed $9,259,000 if required by the Trust. The commitment expires in June 2002. As of O ctober 31, 2000, the Company had an investment of $7,233,000 in the Trust. This 8. Employee Retirement Plan investment is accounted for on the equity method. 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 The Company provides development, finance and management services to the Trust and received fees under social security wage base, plus matching contributions of up to 2% of eligible compensation of employees the terms of various agreements in the amount of $1,392,000 and $2,524,000 in fiscal 2000 and 1999, electing to contribute via salary deferrals. Company contributions with respect to the plan totaled $2,579,000, respectively. $1,876,000 and $1,591,000 for the years ended O ctober 31, 2000, 1999 and 1998, respectively. O n September 18, 2000 and O ctober 12, 2000, the Company repurchased 200,000 shares and 50,000 shares of its common stock, respectively, from Bruce E.Toll at $30.00 per share. The high and low trading price of the Company’s common stock on the N ew York Stock Exchange was $30.50 and $28.875 on September 18, 9. Extraordinary Loss From Extinguishment of Debt 2000 and $32.0625 and $29.25 on O ctober 12, 2000. In January 1999,the Company called for redemption of all of its outstanding 9 1/2% Senior Subordinated N otes due 2003 at 102% of principal amount plus accrued interest. The redemption resulted in an extraordinary loss in fiscal 1999 of $1,461,000, net of $857,000 of income tax benefit. The loss represented the redemption premium and a write-off of unamortized deferred issuance costs. In February 1998, the Company entered into a five-year bank credit facility. The Company recognized an extraordinary charge in fiscal 1998 of $1,115,000, net of $655,000 of income tax benefit, related to the retirement of its previous revolving credit agreement and prepayment of $62 million of fixed-rate long-term bank loans. 10. Commitments and Contingencies As of O ctober 31, 2000, the Company had agreements to purchase land and improved home sites for future development with purchase prices aggregating approximately $648,347,000, of which $32,934,000 had been paid or deposited. Purchase of the properties is contingent upon satisfaction of certain requirements by the Company and the sellers. As of O ctober 31, 2000, the Company had agreements of sale outstanding to deliver 2,779 homes with an aggregate sales value of approximately $1,434,946,000. As of O ctober 31, 2000, the Company was committed to make approximately $63,000,000 of mortgage loans to its homebuyers and to others. All loans with committed interest rates are covered by take-out commitments from third party lenders,resulting in no interest rate risk to the Company. The Company also arranges through outside mortgage lenders, a variety of mortgage programs which are offered to its homebuyers. Toll Brothers 27 Annual Report


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    12. Supplemental Disclosure to Statements of Cash Flows Report of Independent Auditors The following are supplemental disclosures to the statements of cash flows for each of the three years ended The Board of D irectors and Stockholders O ctober 31, 2000 (amounts in thousands): Toll Brothers, Inc. W e have audited the accompanying consolidated balance sheets of Toll Brothers, Inc. and subsidiaries at 2000 1999 1998 O ctober 31, 2000 and 1999, and the related consolidated statements of income and cash flows for each of Supplemental disclosures the three years in the period ended O ctober 31, 2000. These financial statements are the responsibility of of cash flow information: the Company’s management. O ur responsibility is to express an opinion on these financial statements based Interest paid, net of on our audits. amount capitalized $ 21,548 $ 17,469 $ 13,430 We conducted our audits in accordance with auditing standards generally accepted in the United States. Those Income taxes paid $ 54,700 $ 49,250 $ 40,835 standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial Supplemental disclosures statements are free of material misstatement. An audit includes examining,on a test basis, evidence supporting of noncash activities: the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles Cost of residential inventories used and significant estimates made by management, as well as evaluating the overall financial statement acquired through seller financing $ 8,321 $ 7,504 $ 13,500 presentation. We believe that our audits provide a reasonable basis for our opinion. Investment in unconsolidated subsidiary In our opinion,the financial statements referred to above present fairly,in all material respects,the consolidated acquired through seller financing $ 4,500 financial position of Toll Brothers, Inc. and subsidiaries at O ctober 31, 2000 and 1999, and the consolidated results of their operations and their cash flows for each of the three years in the period ended O ctober 31, Income tax benefit relating to 2000, in conformity with accounting principles generally accepted in the United States. exercise of employee stock options $ 2,128 $ 541 $ 748 Stock bonus awards $ 1,395 $ 2,462 $ 3,564 Contributions to employee Philadelphia, Pennsylvania retirement plan $ 641 $ 490 December 12, 2000 Conversion of subordinated debt $ 50,712 Acquisition of company: Fair value of assets acquired $ 56,026 Liabilities assumed $ 44,934 Cash paid $ 11,092 Toll Brothers 28 Annual Report


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    CO R P O R A T E I N F O R M A T I O N Board of Directors and Executive Officers Stock Listing Robert I.Toll* Chairman of the Board and Chief Executive Officer The common stock ofToll Brothers,Inc.is traded on the N ew York Stock Exchange and Pacific Exchange (symbol“TO L”). Bruce E.Toll Vice Chairman of the Board Zvi Barzilay* President and Chief Operating Officer Investor Relations - Information Requests Robert S. Blank Partner - W hitcom Partners The Company’s Form 10-K Annual Report, Form 10-Q Q uarterly Reports and other Company information are Edward G. Boehne Retired President - Federal Reserve Bank of Philadelphia Richard J. Braemer Partner - Ballard, Spahr, Andrews & Ingersoll, LLP, Attorneys at Law available upon request from Frederick N . Cooper (fcooper@ tollbrothersinc.com) or Joseph R. Sicree Roger S. Hillas Retired Chairman - Meritor Savings Bank (jsicree@ tollbrothersinc.com), Co-D irectors of Investor Relations, at the Corporate O ffice. Carl B. Marbach President - Internetwork Publishing Corp. Joel H. Rassman* Senior Vice President, Treasurer and Chief Financial Officer Corporate Office Independent Auditors Paul E. Shapiro Chief Administrative Officer - Sunbeam Corp. Toll Brothers, Inc. Ernst & Young LLP *Executive Officer of the Company 3103 Philmont Avenue Philadelphia, Pennsylvania Officers Huntingdon Valley, Pennsylvania 19006 Senior Vice President (215) 938-8000 W ayne S. Patterson www.tollbrothers.com Vice President and General Counsel Transfer Agent & Registrar Securities Counsel Kenneth J. Gary Mellon Investor Services, L.L.C. W olf, Block, Schorr and Solis-Cohen LLP Vice Presidents - O perations Ridgefield Park, N ew Jersey Philadelphia, Pennsylvania Thomas Anhut Michael J. Donnelly Benjamin D. Jogodnick W alter A. Music Thomas A.Argyris, Jr. Kevin D. Duermit Gregory Kamedulski Robert Parahus Common Stock Price Range – New York Stock Exchange W illiam P. Berry John P. Elcano Webb A. Koschene Douglas C. Shipe Q uarter Ended CharlesW. Bowie Raymond P. Gamble B. Mitchell Kotler James A. Smith 2000 High Low 1999 High Low JamesW. Boyd W illiam J. Gilligan John G. Mangano James E.Tackett O cto ber 31 $35 $23 1 ⁄ 2 O cto ber 31 $21 1 ⁄ 2 $15 5⁄8 Roger A. Brush Daniel Grosswald Gary M. Mayo Steven W.W alker July 31 $24 5⁄ 8 $18 7⁄16 July 31 $23 7⁄16 $19 13⁄16 Thomas Carnaghi Richard T. Hartman Mark F. McAlpine Edward D.Weber 1 1 Barry A. Depew Douglas C. Heppe Richard C. McCormick Douglas C.Yearley, Jr. April 30 $23 ⁄16 $16 April 30 $23 ⁄4 $17 1⁄2 Cory DeSpain Thomas J. Murray January 31 $19 3⁄4 $16 1 ⁄ 8 January 31 $25 7⁄16 $21 5⁄8 Vice Presidents - Administration Statement on Forward-Looking Information Frederick N. Cooper Finance Joseph J. Palka Eastern States Engineering Certain information included herein and in other Company reports, SEC filings, statements and presentations is Jonathan C. Downs Human Resources Steven Robinson Land Development forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995, including, but not limited Evan G. Ernest Taxation Joseph R. Sicree Chief Accounting Officer to, statements concerning the Company’s anticipated operating results, financial resources, increases in revenues, Manfred P. Marotta Toll Integrated Systems Michael I. Snyder Corporate Planning and increased profitability, interest expense, growth and expansion, ability to acquire land, ability to sell homes and Kevin F. McAndrews Commercial Development Corporate Secretary properties, ability to deliver homes from backlog, ability to secure materials and subcontractors. Such forward- Kira McCarron Marketing Ronald E. Snyder Land Development looking information involves important risks and uncertainties that could significantly affect actual results and cause Robert N. McCarron Land Development Werner Thiessen Acquisitions them to differ materially from expectations expressed herein and in other Company reports, SEC filings, statements Kevin J. McMaster Controller Steven A.Turbyfill Product Development and presentations. These risks and uncertainties include local, regional and national economic conditions, the effect Charles E. Moscony Westminster Title Phillip M.Turner Land Development of governmental regulation, the competitive environment in which the Company operates, fluctuations in interest Subsidiary O perations rates,changes in home prices,the availability and cost of land for future growth,the availability of capital,the availability W ayne S. Patterson President, Westminster Security Company and cost of labor and materials, and weather conditions. Charles E. Moscony President, Westminster Title Company Demographic data: The sources for the demographic data included in this annual report are the U.S. Census Bureau, Donald L. Salmon President, Westminster Mortgage Corporation the Joint Center for Housing Studies of Harvard University and Claritas. Michael J. Zammit Managing Director, Advanced Broadband Listings are as o f 11/1/00. Photography: James B. Abbott, Mark Boisclair,Tim Buchman, Alan Goldstein, Barry Grossman, Rob Ikeler, Eric Kieley, Robb Miller, Kim Sargent, Beth Singer, Bill Taylor Employees As of O ctober 31, 2000, the Company had 2,479 full-time employees. Copyright 2000 by TO LL BROTHERS, IN C. Shareholders As of O ctober 31, 2000, the Company had 694 shareholders of record.


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    3103 Philmo nt Avenue, Huntingdo n Valley, Pennsylvania 19006 www.to llbro thers.co m


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