TOL-2012.10.31-10K/A



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
Amendment No. 1
x
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the fiscal year ended October 31, 2012
 
 
or
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT of 1934
 
 
For the transition period from           to
Commission file number 1-9186
TOLL BROTHERS, INC.
(Exact name of Registrant as specified in its charter)
Delaware
23-2416878
(State or other jurisdiction of
I.R.S. Employer
incorporation or organization)
Identification No.)
250 Gibraltar Road, Horsham, Pennsylvania
19044
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code
(215) 938-8000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common Stock (par value $.01)*
 
New York Stock Exchange
Guarantee of Toll Brothers Finance Corp. 4.95% Senior Notes due 2014
 
New York Stock Exchange
Guarantee of Toll Brothers Finance Corp. 5.15% Senior Notes due 2015
 
New York Stock Exchange
* Includes associated Right to Purchase Series A Junior Participating Preferred Stock
 
 
    
Securities registered pursuant to Section 12(g) of the Act:    None

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes x No o
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Act. Yes o No x
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x
 
Accelerated filer o
 
Non-accelerated filer o
 
Smaller reporting company o
 
 
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of April 30, 2012, the aggregate market value of the Common Stock held by non-affiliates (all persons other than executive officers and directors of Registrant) of the Registrant was approximately $3,797,126,000.
As of December 24, 2012, there were approximately 169,041,000 shares of Common Stock outstanding.







EXPLANATORY NOTE
Toll Brothers, Inc. (the “Company”) is filing this Amendment No.1 on Form 10-K/A (the “Form 10-K/A”) to its Annual Report on Form 10-K for the fiscal year ended October 31, 2012, filed with the Securities and Exchange Commission on December 28, 2012 (the “Original Filing”), for the purpose of revising certain financial statements and footnotes contained in Part II, Item 8 as described below, making related updates to Part II, Item 9A to address the impact of the revised financial statements and footnotes on the Chief Executive Officer and Chief Financial Officer's original conclusions regarding the effectiveness of the Company's disclosure controls and procedures and internal control over financial reporting, and making corresponding revisions to the Interactive Data File included in the Original Filing as Exhibit 101. Part IV of the Original Filing has also been amended to contain currently dated certifications, as required by Rule 12b-15 under the Securities Exchange Act of 1934, as amended, and a currently dated auditor's consent.
The Company's Consolidated Statements of Operations for the years ended October 31, 2011 and 2010 ("Statements of Operations") have been revised to present the line entitled “Interest expense” as a separate line below the line entitled “Income (loss) from operations."

Note 1 - Significant Accounting Policies has been revised to include a section entitled "Revisions" to explain the changes made from the Original Filing.

Note 19 - Supplemental Guarantor Information has been revised in order to (i) retrospectively reflect the transfer of the balance sheets, statements of operations and cash flows of certain non-guarantor subsidiaries to guarantor subsidiaries as a result of such entities becoming guarantor subsidiaries as of April 30, 2013 and the reclassification of guarantor and non-guarantor intercompany advances and equity balances with corresponding offsets in the elimination column, (ii) revise the presentation of cash flows from operating activities, financing activities and investing activities in the consolidating statements of cash flows for the years ended October 31, 2012, 2011 and 2010 to reflect intercompany activity, which had previously been included in cash flow from operating activities, as cash flow from investing activities and cash flow from financing activities and (iii) present the line entitled “Interest expense” as a separate line below the line entitled “Income (loss) from operations" and include lines for other comprehensive income (loss) and total comprehensive income (loss) in each of the consolidating statements of operations presented. See Note 19 in the notes to the consolidated financial statements for more detail.
The Company has included Consolidated Statements of Comprehensive Income for the years ended October 31, 2012, 2011 and 2010 as required by the Financial Accounting Standards Board Accounting Standards Update No. 2011-05, “Statement of Comprehensive Income.”

This revised presentation of the financial statements and footnotes has no impact or effect on Toll Brothers, Inc.'s consolidated financial statements for any period presented, including the Consolidated Balance Sheets, Statements of Operations, Statements of Changes in Equity or Statements of Cash Flows except as noted above.
Except as described above, no other changes have been made to the Original Filing. The Original Filing continues to speak as of the date of the Original Filing, and we have not changed the disclosures contained therein to reflect any events which occurred at a date subsequent to the date of the Original Filing. Other events that have occurred since the Original Filing or other information necessary to reflect subsequent events have been disclosed in the Company's reports filed with the SEC subsequent to the Original Filing.
 







PART II
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the financial statements, listed in Item 15(a)(1) which appear at pages F-3 through F-56 of this report and which are incorporated herein by reference.
ITEM 9A. CONTROLS AND PROCEDURES
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Any controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. However, our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives.

The Company's Consolidated Statements of Operations for the years ended October 31, 2011 and 2010 (“Statements of Operations”) are being revised to present the line entitled “Interest expense” as a separate line below the line entitled “Income (loss) from operations." The consolidating financial statements included in Note 19 of the consolidated financial statements ("Guarantor Footnote") have been presented in a format that has been adjusted from prior annual and quarterly reports in order to (i) retrospectively reflect the transfer of the balance sheets, statements of operations and cash flows of certain non-guarantor subsidiaries to guarantor subsidiaries as a result of such entities becoming guarantor subsidiaries as of April 30, 2013 and the reclassification of guarantor and non-guarantor intercompany advances and equity balances with corresponding offsets in the elimination column, (ii) revise the presentation of cash flows from operating activities, financing activities and investing activities in the consolidating statements of cash flows for the years ended October 31, 2012, 2011 and 2010 to reflect intercompany activity, which had previously been included in cash flow from operating activities, as cash flow from investing activities and cash flow from financing activities and (iii) present the line entitled “Interest expense” as a separate line below the line entitled “Income (loss) from operations" and include lines for other comprehensive income (loss) and total comprehensive income (loss) in each of the consolidating statements of operations presented. See Note 19 in the notes to the consolidated financial statements for more detail.
This revised presentation of the Statements of Operations and Guarantor Footnote has no impact or effect on Toll Brothers, Inc.'s consolidated financial statements for any period presented, including the Consolidated Balance Sheets, Statements of Operations, Statements of Changes in Equity or Statements of Cash Flows except as noted above. The revised presentation of the Statements of Operations and Guarantor Footnote has not changed or amended our Chief Executive Officer's and Chief Financial Officer's conclusions regarding the effectiveness of our disclosure controls and procedures.
Our Chief Executive Officer and Chief Financial Officer, with the assistance of management, evaluated the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, (“Exchange Act”) as of the end of the period covered by this report (“Evaluation Date”). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Management’s Annual Report on Internal Control Over Financial Reporting
Management’s Annual Report on Internal Control Over Financial Reporting on internal control over financial reporting on page F-1 is incorporated herein.
Changes in Internal Control Over Financial Reporting
There has not been any change in our internal control over financial reporting (as that term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during our quarter ended October 31, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

2



PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Financial Statements and Financial Statement Schedules
 
Page
1. Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2. Financial Statement Schedules
None
Financial statement schedules have been omitted because they are either not applicable or the required information is included in the financial statements or notes hereto.
(b) Exhibits
The following exhibits are filed as apart of this Form 10-K/A:

3



Exhibit Number
 
Description
 
 
 
23
 
Consent of Ernst & Young LLP, Independent Registered Public Accountant.
 
 
 
31.1
 
Certification of Douglas C. Yearley, Jr. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
31.2
 
Certification of Martin P. Connor pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
32.1
 
Certification of Douglas C. Yearley, Jr. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
32.2
 
Certification of Martin P. Connor pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
101.INS
 
XBRL Instance Document
 
 
 
101.SCH
 
XBRL Schema Document
 
 
 
101.CAL
 
XBRL Calculation Linkbase Document
 
 
 
101.LAB
 
XBRL Labels Linkbase Document
 
 
 
101.PRE
 
XBRL Presentation Linkbase Document
 
 
 
101.DEF
 
XBRL Definition Linkbase Document
 
 
 

 



4



SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the Township of Horsham, Commonwealth of Pennsylvania on July 16, 2013.
 
TOLL BROTHERS, INC.
 
 
By:  
/s/ Martin P. Connor
 
 
Martin P. Connor
 
 
Senior Vice President and Chief Financial
Officer (Principal Financial Officer) 



5




Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in the Securities Exchange Act Rule 13a-15(f). Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

The revised presentation of the Company's Consolidated Statements of Operations for the years ended October 31, 2011 and 2010 (“Statements of Operations”) and Note 19 - Revised Supplemental Guarantor Information (the “Guarantor Footnote") contained in Part II, Item 8 of this Form 10-K/A has no impact or effect on Toll Brothers, Inc.'s consolidated financial statements for any period presented, including the Consolidated Balance Sheets, Statements of Operations, Statements of Changes in Equity or Statements of Cash Flows except as noted in the Explanatory Note in this Form 10-K/A. The revised presentation of the Statements of Operations and Guarantor Footnote has not changed or amended our chief executive officer's and chief financial officer's conclusions regarding the effectiveness of our internal control over financial reporting.
Under the supervision and with the participation of our management, including our principal executive officer and our principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation under the framework in Internal Control — Integrated Framework, our management concluded that our internal control over financial reporting was effective as of October 31, 2012.
Our independent registered public accounting firm, Ernst & Young LLP, has issued its report, which is included in the Form 10-K for the year ended October 31, 2012 filed with the Securities and Exchange Commission on December 28, 2012, on the effectiveness of our internal control over financial reporting.

F-1





Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of Toll Brothers, Inc.
We have audited the accompanying consolidated balance sheets of Toll Brothers, Inc. as of October 31, 2012 and 2011, and the related consolidated statements of operations, comprehensive income, changes in equity, and cash flows for each of the three years in the period ended October 31, 2012. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Toll Brothers, Inc. at October 31, 2012 and 2011, and the consolidated results of its operations and its cash flows for each of the three years in the period ended October 31, 2012, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Toll Brothers Inc.’s internal control over financial reporting as of October 31, 2012, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated December 28, 2012 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Philadelphia, Pennsylvania
December 28, 2012 except for
Note 1 and Note 19, as to which the
date is July 16, 2013




F-2



CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data)

 
Year ended October 31,
 
2012

2011

2010
Revenues
$
1,882,781

 
$
1,475,881

 
$
1,494,771

Cost of revenues
1,532,095

 
1,260,770

 
1,376,558

Selling, general and administrative
287,257

 
261,355

 
263,224

 
1,819,352

 
1,522,125

 
1,639,782

Income (loss) from operations
63,429

 
(46,244
)
 
(145,011
)
Other:
 
 
 
 
 
Income (loss) from unconsolidated entities
23,592

 
(1,194
)
 
23,470

Other income - net
25,921

 
23,403

 
28,313

Interest expense

 
(1,504
)
 
(22,751
)
Expenses related to early retirement of debt


 
(3,827
)
 
(1,208
)
Income (loss) before income taxes
112,942

 
(29,366
)
 
(117,187
)
Income tax benefit
(374,204
)
 
(69,161
)
 
(113,813
)
Net income (loss)
$
487,146

 
$
39,795

 
$
(3,374
)
Income (loss) per share:
 
 
 
 
 
Basic
$
2.91

 
$
0.24

 
$
(0.02
)
Diluted
$
2.86

 
$
0.24

 
$
(0.02
)
Weighted-average number of shares:
 
 
 
 
 
Basic
167,346

 
167,140

 
165,666

Diluted
170,154

 
168,381

 
165,666

See accompanying notes

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in thousands)

 
Year ended October 31,
 
2012
 
2011
 
2010
Net income (loss)
$
487,146

 
$
39,795

 
$
(3,374
)
 
 
 
 
 
 
Other comprehensive (loss) income, net of tax:
 
 
 
 
 
Defined benefit retirement plans
 
 
 
 
 
Net (loss) gain during period
(1,985
)
 
(2,628
)
 
867

Prior service cost arising during period
(367
)
 


 
(202
)
Amortization of prior service cost and unrecognized losses
513

 
694

 
1,321

Defined benefit retirement plans, net
(1,839
)
 
(1,934
)
 
1,986

Change in fair value of available-for-sale securities
476

 
(192
)
 
74

Unrealized loss on derivative held by equity investee
(554
)
 

 


Other comprehensive (loss) income
(1,917
)
 
(2,126
)
 
2,060

Total comprehensive income (loss)
$
485,229

 
$
37,669

 
$
(1,314
)

See accompanying notes


F-3




CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
 
October 31,
 
2012
 
2011
ASSETS
 
 
 
Cash and cash equivalents
$
778,824

 
$
906,340

Marketable securities
439,068

 
233,572

Restricted cash
47,276

 
19,760

Inventory
3,761,187

 
3,416,723

Property, construction and office equipment, net
106,214

 
99,712

Receivables, prepaid expenses and other assets
148,315

 
105,576

Mortgage loans receivable
86,386

 
63,175

Customer deposits held in escrow
29,579

 
14,859

Investments in and advances to unconsolidated entities
330,617

 
126,355

Investments in non-performing loan portfolios and foreclosed real estate
95,522

 
69,174

Deferred tax assets, net of valuation allowances
358,056

 


 
$
6,181,044

 
$
5,055,246

LIABILITIES AND EQUITY
 
 
 
Liabilities
 
 
 
Loans payable
$
99,817

 
$
106,556

Senior notes
2,080,463

 
1,490,972

Mortgage company warehouse loan
72,664

 
57,409

Customer deposits
142,977

 
83,824

Accounts payable
99,911

 
96,817

Accrued expenses
476,350

 
521,051

Income taxes payable
80,991

 
106,066

Total liabilities
3,053,173

 
2,462,695

Equity
 
 
 
Stockholders’ equity
 
 
 
Preferred stock, none issued

 

Common stock, 168,690 and 168,675 shares issued at October 31, 2012 and 2011, respectively
1,687

 
1,687

Additional paid-in capital
404,418

 
400,382

Retained earnings
2,721,397

 
2,234,251

Treasury stock, at cost - 53 shares and 2,946 shares at October 31, 2012 and 2011, respectively
(983
)
 
(47,065
)
Accumulated other comprehensive loss
(4,819
)
 
(2,902
)
Total stockholders’ equity
3,121,700

 
2,586,353

Noncontrolling interest
6,171

 
6,198

Total equity
3,127,871

 
2,592,551

 
$
6,181,044

 
$
5,055,246

See accompanying notes




F-4



CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Amounts in thousands)
 
Common
Stock
 
Additional Paid-In
Capital
 
Retained
Earnings
 
Treasury
Stock
 
Accum-
ulated
Other
Compre-
hensive Loss
 
Non-Controlling
Interest
 
Total
Equity
 
Shares
 
$
 
$
 
$
 
$
 
$
 
$
 
$
Balance, November 1, 2009
164,732

 
1,647

 
316,518

 
2,197,830

 
(159
)
 
(2,637
)
 
3,283

 
2,516,482

Net loss

 

 

 
(3,374
)
 

 

 

 
(3,374
)
Purchase of treasury stock
(31
)
 

 

 

 
(588
)
 

 

 
(588
)
Exercise of stock options
1,684

 
17

 
33,638

 

 
620

 

 

 
34,275

Employee benefit plan issuances
24

 

 
435

 

 

 

 

 
435

Conversion of restricted stock units to stock
3

 

 
61

 

 
31

 

 

 
92

Stock-based compensation

 

 
9,332

 

 

 

 

 
9,332

Issuance of restricted stock
1

 

 
22

 

 

 

 

 
22

Other comprehensive income

 

 

 

 

 
2,060

 

 
2,060

Capital contribution

 

 

 

 

 

 
277

 
277

Balance, October 31, 2010
166,413

 
1,664

 
360,006

 
2,194,456

 
(96
)
 
(577
)
 
3,560

 
2,559,013

Net income

 

 

 
39,795

 

 

 

 
39,795

Purchase of treasury stock

 

 
(1
)
 

 
(49,102
)
 

 

 
(49,103
)
Exercise of stock options
2,236

 
23

 
23,156

 

 
1,940

 

 

 
25,119

Employee benefit plan issuances
15

 

 
285

 

 
126

 

 

 
411

Conversion of restricted stock units to stock
10

 

 
208

 

 
67

 

 

 
275

Stock-based compensation

 

 
8,626

 

 

 

 

 
8,626

Issuance of restricted stock and stock units
1

 

 
8,102

 

 

 

 

 
8,102

Other comprehensive loss

 

 

 

 

 
(2,325
)
 

 
(2,325
)
Capital contribution

 

 

 

 

 

 
2,638

 
2,638

Balance, October 31, 2011
168,675

 
1,687

 
400,382

 
2,234,251

 
(47,065
)
 
(2,902
)
 
6,198

 
2,592,551

Net income

 

 

 
487,146

 

 

 

 
487,146

Purchase of treasury stock

 

 


 

 
(505
)
 

 

 
(505
)
Exercise of stock options
13

 


 
(9,831
)
 

 
44,472

 

 

 
34,641

Employee benefit plan issuances


 

 
174

 

 
301

 

 

 
475

Conversion of restricted stock units to stock


 

 
(1,814
)
 

 
1,814

 

 

 

Stock-based compensation

 

 
7,411

 

 

 

 

 
7,411

Issuance of restricted stock and stock units
2

 

 
8,096

 

 

 

 

 
8,096

Other comprehensive loss

 

 

 

 

 
(1,917
)
 

 
(1,917
)
Loss attributable to non-controlling interest

 

 

 

 

 

 
(27
)
 
(27
)
Balance, October 31, 2012
168,690

 
1,687

 
404,418

 
2,721,397

 
(983
)

(4,819
)
 
6,171

 
3,127,871

See accompanying notes


F-5



CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)

 
Year ended October 31,
 
 
2012
 
2011
 
2010
Cash flow (used in) provided by operating activities:
 
 
 
 
 
 
Net income (loss)
 
$
487,146

 
$
39,795

 
$
(3,374
)
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
 
 
 
 
 
 
Depreciation and amortization
 
22,586

 
23,142

 
20,044

Stock-based compensation
 
15,575

 
12,494

 
11,677

(Recovery) impairment of investments in unconsolidated entities
 
(2,311
)
 
40,870

 

Excess tax benefits from stock-based compensation
 
(5,776
)
 

 
(4,954
)
Income from unconsolidated entities
 
(21,281
)
 
(39,676
)
 
(23,470
)
Distributions of earnings from unconsolidated entities
 
5,258

 
12,081

 
10,297

Income from non-performing loan portfolios and foreclosed real estate
 
(12,444
)
 
(5,113
)
 

Deferred tax benefit
 
41,810

 
(18,188
)
 
60,697

Deferred tax valuation allowances
 
(394,718
)
 
18,188

 
(60,697
)
Inventory impairments and write-offs
 
14,739

 
51,837

 
115,258

Change in fair value of mortgage loans receivable and derivative instruments
 
(670
)
 
475

 
(970
)
Gain on sale of marketable securities
 
(40
)
 


 


Expenses related to early retirement of debt
 


 
3,827

 
1,208

Changes in operating assets and liabilities
 
 
 
 
 
 
Increase in inventory
 
(195,948
)
 
(215,738
)
 
(140,344
)
Origination of mortgage loans
 
(651,618
)
 
(630,294
)
 
(628,154
)
Sale of mortgage loans
 
629,397

 
659,610

 
579,221

(Increase) decrease in restricted cash
 
(27,516
)
 
41,146

 
(60,906
)
Increase in receivables, prepaid expenses and other assets
 
(33,922
)
 
(11,522
)
 
(3,115
)
Increase (decrease) in customer deposits
 
44,383

 
13,175

 
(15,182
)
Decrease in accounts payable and accrued expenses
 
(58,537
)
 
(28,624
)
 
(38,598
)
Decrease in income tax refund recoverable
 

 
141,590

 
20,250

(Decrease) increase in income taxes payable
 
(25,075
)
 
(56,225
)
 
14,828

Net cash (used in) provided by operating activities
 
(168,962
)
 
52,850

 
(146,284
)
Cash flow used in investing activities:
 
 
 
 
 
 
Purchase of property and equipment — net
 
(14,495
)
 
(9,553
)
 
(4,830
)
Purchase of marketable securities
 
(579,958
)
 
(452,864
)
 
(157,962
)
Sale and redemption of marketable securities
 
368,253

 
408,831

 
60,000

Investment in and advances to unconsolidated entities
 
(217,160
)
 
(132
)
 
(58,286
)
Return of investments in unconsolidated entities
 
38,368

 
43,309

 
9,696

Investment in non-performing loan portfolios and foreclosed real estate
 
(30,090
)
 
(66,867
)
 

Return of investments in non-performing loan portfolios and foreclosed real estate
 
16,707

 
2,806

 

Acquisition of a business
 
(144,746
)
 


 


Net cash used in investing activities
 
(563,121
)
 
(74,470
)
 
(151,382
)
Cash flow provided by (used in) financing activities:
 
 
 
 
 
 
Net proceeds from issuance of senior notes
 
578,696

 

 

Proceeds from loans payable
 
1,002,934

 
921,251

 
927,233

Principal payments of loans payable
 
(1,016,081
)
 
(952,621
)
 
(1,316,514
)
Redemption of senior subordinated notes
 

 

 
(47,872
)
Redemption of senior notes
 


 
(58,837
)
 
(46,114
)
Proceeds from stock-based benefit plans
 
33,747

 
25,531

 
7,589

Excess tax benefits from stock-based compensation
 
5,776

 

 
4,954

Purchase of treasury stock
 
(505
)
 
(49,102
)
 
(588
)
Change in noncontrolling interest
 


 
2,678

 
320

Net cash provided by (used in) financing activities
 
604,567

 
(111,100
)
 
(470,992
)
Net decrease in cash and cash equivalents
 
(127,516
)
 
(132,720
)
 
(768,658
)
Cash and cash equivalents, beginning of year
 
906,340

 
1,039,060

 
1,807,718

Cash and cash equivalents, end of year
 
$
778,824

 
$
906,340

 
$
1,039,060

See accompanying notes

F-6



Notes to Consolidated Financial Statements
1. Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements include the accounts of Toll Brothers, Inc. (the “Company”), a Delaware corporation, and its majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Investments in 50% or less owned partnerships and affiliates are accounted for using the equity method unless it is determined that the Company has effective control of the entity, in which case the entity would be consolidated.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Cash and Cash Equivalents
Liquid investments or investments with original maturities of three months or less are classified as cash equivalents. The carrying value of these investments approximates their fair value.
Marketable Securities
Marketable securities are classified as available-for-sale, and accordingly, are stated at fair value, which is based on quoted market prices. Changes in unrealized gains and losses are excluded from earnings and are reported as other comprehensive income, net of income tax effects, if any.
Restricted Cash
Restricted cash primarily represents cash deposits collateralizing certain deductibles under insurance policies, outstanding letters of credit outside of our bank revolving credit facility and cash deposited into a voluntary employee benefit association to fund certain future employee benefits.
Inventory
Inventory is stated at cost unless an impairment exists, in which case it is written down to fair value in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 360, “Property, Plant and Equipment” (“ASC 360”). In addition to direct land acquisition costs, land development costs and home construction costs, costs also include interest, real estate taxes and direct overhead related to development and construction, which are capitalized to inventory during the period beginning with the commencement of development and ending with the completion of construction. For those communities that have been temporarily closed, no additional capitalized interest is allocated to a community’s inventory until it reopens. While the community remains closed, carrying costs such as real estate taxes are expensed as incurred.
The Company capitalizes certain interest costs to qualified inventory during the development and construction period of its communities in accordance with ASC 835-20, “Capitalization of Interest” (“ASC 835-20”). Capitalized interest is charged to cost of revenues when the related inventory is delivered. Interest incurred on home building indebtedness in excess of qualified inventory, as defined in ASC 835-20, is charged to the Consolidated Statement of Operations in the period incurred.
Once a parcel of land has been approved for development and the Company opens one of its typical communities, it may take four or more years to fully develop, sell and deliver all the homes in such community. Longer or shorter time periods are possible depending on the number of home sites in a community and the sales and delivery pace of the homes in a community. The Company’s master planned communities, consisting of several smaller communities, may take up to ten years or more to complete. Because the Company’s inventory is considered a long-lived asset under GAAP, the Company is required, under ASC 360, to regularly review the carrying value of each community and write down the value of those communities for which it believes the values are not recoverable.

F-7



Current Communities: When the profitability of a current community deteriorates, the sales pace declines significantly, or some other factor indicates a possible impairment in the recoverability of the asset, the asset is reviewed for impairment by comparing the estimated future undiscounted cash flow for the community to its carrying value. If the estimated future undiscounted cash flow is less than the community’s carrying value, the carrying value is written down to its estimated fair value. Estimated fair value is primarily determined by discounting the estimated future cash flow of each community. The impairment is charged to cost of revenues in the period in which the impairment is determined. In estimating the future undiscounted cash flow of a community, the Company uses various estimates such as: (i) the expected sales pace in a community, based upon general economic conditions that will have a short-term or long-term impact on the market in which the community is located and on competition within the market, including the number of home sites available and pricing and incentives being offered in other communities owned by the Company or by other builders; (ii) the expected sales prices and sales incentives to be offered in a community; (iii) costs expended to date and expected to be incurred in the future, including, but not limited to, land and land development, home construction, interest and overhead costs; (iv) alternative product offerings that may be offered in a community that will have an impact on sales pace, sales price, building cost or the number of homes that can be built on a particular site; and (v) alternative uses for the property such as the possibility of a sale of the entire community to another builder or the sale of individual home sites.
Future Communities: The Company evaluates all land held for future communities or future sections of current communities, whether owned or under contract, to determine whether or not it expects to proceed with the development of the land as originally contemplated. This evaluation encompasses the same types of estimates used for current communities described above, as well as an evaluation of the regulatory environment applicable to the land and the estimated probability of obtaining the necessary approvals, the estimated time and cost it will take to obtain the approvals and the possible concessions that will be required to be given in order to obtain them. Concessions may include cash payments to fund improvements to public places such as parks and streets, dedication of a portion of the property for use by the public or as open space or a reduction in the density or size of the homes to be built. Based upon this review, the Company decides (i) as to land under contract to be purchased, whether the contract will likely be terminated or renegotiated, and (ii) as to land owned, whether the land will likely be developed as contemplated or in an alternative manner, or should be sold. The Company then further determines whether costs that have been capitalized to the community are recoverable or should be written off. The write-off is charged to cost of revenues in the period in which the need for the write-off is determined.
The estimates used in the determination of the estimated cash flows and fair value of both current and future communities are based on factors known to the Company at the time such estimates are made and its expectations of future operations and economic conditions. Should the estimates or expectations used in determining estimated fair value deteriorate in the future, the Company may be required to recognize additional impairment charges and write-offs related to current and future communities.
Variable Interest Entities
The Company is required to consolidate variable interest entities ("VIEs") in which it has a controlling financial interest in accordance with ASC 810, “Consolidation” (“ASC 810”). A controlling financial interest will have both of the following characteristics: (i) the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance and (ii) the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE.
The Company's variable interest in VIEs may be in the form of equity ownership, contracts to purchase assets, management services and development agreements between the Company and a VIE, loans provided by the Company to a VIE or other member and/or guarantees provided by members to banks and other third parties.
The Company has a significant number of land purchase contracts and several investments in unconsolidated entities which it evaluates in accordance with ASC 810. The Company analyzes its land purchase contracts and the unconsolidated entities in which it has an investment to determine whether the land sellers and unconsolidated entities are VIEs and, if so, whether the Company is the primary beneficiary. The Company examines specific criteria and uses its judgment when determining if it is the primary beneficiary of a VIE. Factors considered in determining whether the Company is the primary beneficiary include risk and reward sharing, experience and financial condition of other member(s), voting rights, involvement in day-to-day capital and operating decisions, representation on a VIE's executive committee, existence of unilateral kick-out rights or voting rights, level of economic disproportionality between the Company and the other member(s) and contracts to purchase assets from VIEs. The determination whether an entity is a VIE and, if so, whether the Company is primary beneficiary may require significant judgment.



F-8



Property, Construction and Office Equipment
Property, construction and office equipment are recorded at cost and are stated net of accumulated depreciation of $157.5 million and $153.3 million at October 31, 2012 and 2011, respectively. Depreciation is recorded using the straight-line method over the estimated useful lives of the assets. In fiscal 2012, 2011 and 2010, the Company recognized $8.1 million, $9.8 million and $14.1 million of depreciation expense, respectively.
Mortgage Loans Receivable
Residential mortgage loans held for sale are measured at fair value in accordance with the provisions of ASC 825, “Financial Instruments” (“ASC 825”). The Company believes the use of ASC 825 improves consistency of mortgage loan valuations between the date the borrower locks in the interest rate on the pending mortgage loan and the date of the mortgage loan sale. At the end of the reporting period, the Company determines the fair value of its mortgage loans held for sale and the forward loan commitments it has entered into as a hedge against the interest rate risk of its mortgage loans using the market approach to determine fair value. The evaluation is based on the current market pricing of mortgage loans with similar terms and values as of the reporting date and by applying such pricing to the mortgage loan portfolio. The Company recognizes the difference between the fair value and the unpaid principal balance of mortgage loans held for sale as a gain or loss. In addition, the Company recognizes the fair value of its forward loan commitments as a gain or loss. Interest income on mortgage loans held for sale is calculated based upon the stated interest rate of each loan. In addition, the recognition of net origination costs and fees associated with residential mortgage loans originated are expensed as incurred. These gains and losses, interest income and origination costs and fees are recognized in other income - net in the accompanying Consolidated Statements of Operations.
Investments in and Advances to Unconsolidated Entities
The trends, uncertainties or other factors that have negatively impacted our business and the industry in general have also impacted the unconsolidated entities in which the Company has investments. In accordance with ASC 323, “Investments—Equity Method and Joint Ventures”, the Company reviews each of its investments on a quarterly basis for indicators of impairment. A series of operating losses of an investee, the inability to recover the Company’s invested capital, or other factors may indicate that a loss in value of the Company’s investment in the unconsolidated entity has occurred. If a loss exists, the Company further reviews to determine if the loss is other than temporary, in which case, it writes down the investment to its fair value. The evaluation of the Company’s investment in unconsolidated entities entails a detailed cash flow analysis using many estimates including but not limited to expected sales pace, expected sales prices, expected incentives, costs incurred and anticipated, sufficiency of financing and capital, competition, market conditions and anticipated cash receipts, in order to determine projected future distributions.
Each of the unconsolidated entities evaluates its inventory in a similar manner as the Company. See “Inventory” above for more detailed disclosure on the Company’s evaluation of inventory. If a valuation adjustment is recorded by an unconsolidated entity related to its assets, the Company’s proportionate share is reflected in the Company’s income (loss) from unconsolidated entities with a corresponding decrease to its investment in unconsolidated entities.
The Company is a party to several joint ventures with independent third parties to develop and sell land that is owned by its joint venture partners. The Company recognizes its proportionate share of the earnings from the sale of home sites to other builders. The Company does not recognize earnings from the home sites it purchases from these ventures, but reduces its cost basis in the home sites by its share of the earnings from those home sites.
The Company is also a party to several other joint ventures. The Company recognizes its proportionate share of the earnings and losses of its unconsolidated entities.
Investments in Non-performing Loan Portfolios and Foreclosed Real Estate
The Company’s investments in non-performing loan portfolios were initially recorded at cost which the Company believes was fair value. The fair value was determined by discounting the cash flows expected to be collected from the portfolios using a discount rate that management believes a market participant would use in determining fair value. Management estimated cash flows expected to be collected on a loan-by-loan basis considering the contractual terms of the loan, current and expected loan performance, the manner and timing of disposition, the nature and estimated fair value of real estate or other collateral, and other factors it deemed appropriate. The estimated fair value of the loans at acquisition was significantly less than the contractual amounts due under the terms of the loan agreements.
Since, at the acquisition date, the Company expected to collect less than the contractual amounts due under the terms of the loans based, at least in part, on the assessment of the credit quality of the borrowers, the loans are accounted for in accordance

F-9



with ASC Topic 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality” (ASC 310-30). Under ASC 310-30, the accretable yield, or the amount by which the cash flows expected to be collected at the acquisition date exceeds the estimated fair value of the loan, is recognized in other income - net over the estimated remaining life of the loan using a level yield methodology provided the Company does not presently have the intention to utilize real estate secured by the loans for use in its operations or significantly improving the collateral for resale. The difference between the contractually required payments of the loan as of the acquisition date and the total cash flows expected to be collected, or non-accretable difference, is not recognized.
Pursuant to ASC 310-30, the Company aggregated loans with common risk characteristics into pools for purposes of recognizing interest income and evaluating changes in estimated cash flows. Loan pools are evaluated as a single loan for purposes of placing the pool on non-accrual status or evaluating loan impairment. Generally, a loan pool is classified as non-accrual when management is unable to reasonably estimate the timing or amount of cash flows expected to be collected from the loan pool or has serious doubts about further collectability of principal or interest. Proceeds received on non-accrual loan pools generally are either applied against principal or reported as other income - net, depending on management’s judgment as to the collectability of principal. For the year ended October 31, 2012, none of the Company’s loan pools were on non-accrual status.
A loan is removed from a loan pool only when the Company sells, forecloses or otherwise receives assets in satisfaction of the loan, or the loan is written off. Loans removed from a pool are removed at their amortized cost (unpaid principal balance less unamortized discount and provision for loan loss) as of the date of resolution.
The Company periodically re-evaluates cash flows expected to be collected for each loan pool based upon all available information as of the measurement date. Subsequent increases in cash flows expected to be collected are recognized prospectively through an adjustment to the loan pool’s yield over its remaining life, which may result in a reclassification from non-accretable difference to accretable yield. Subsequent decreases in cash flows expected to be collected are evaluated to determine whether a provision for loan loss should be established. If decreases in expected cash flows result in a decrease in the estimated fair value of the loan pool below its amortized cost, the loan pool is deemed to be impaired and the Company will record a provision for loan losses to write the loan pool down to its estimated fair value. For the year ended October 31, 2012, the Company recorded a provision for loan losses of $2.3 million. There were no loan losses recorded during the year ended October 31, 2011.
The Company’s investments in non-performing loans are classified as held for investment because the Company has the intent and ability to hold them for the foreseeable future.
Real Estate Owned ("REO")
REO assets, either directly owned or owned through a participation arrangement, acquired through subsequent foreclosure or deed in lieu actions on non-performing loans are initially recorded at fair value based upon third-party appraisals, broker opinions of value, or internal valuation methodologies (which may include discounted cash flows, capitalization rate analysis or comparable transactional analysis). Unobservable inputs used in estimating the fair value of REO assets are based upon the best information available under the circumstances and take into consideration the financial condition and operating results of the asset, local market conditions, the availability of capital, interest and inflation rates and other factors deemed appropriate by management. REO assets acquired are reviewed to determine if they should be classified as “held and used” or “held for sale”. REO classified as “held and used” is stated at carrying cost unless an impairment exists, in which case it is written down to fair value in accordance with ASC 360-10-35. REO classified as “held for sale” is carried at the lower of carrying amount or fair value less cost to sell. An impairment charge is recognized for any decreases in estimated fair value subsequent to the acquisition date. For both classifications, carrying costs incurred after the acquisition, including property taxes and insurance, are expensed.
Loan Sales
As part of its disposition strategy for the loan portfolios, the Company may sell certain loans to third-party purchasers. The Company recognizes gains or losses on the sale of mortgage loans when the loans have been legally isolated from the Company and it no longer maintains effective control over the transferred assets.
Fair Value Disclosures
The Company uses ASC 820, “Fair Value Measurements and Disclosures” (“ASC 820”), to measure the fair value of certain assets and liabilities. ASC 820 provides a framework for measuring fair value in accordance with GAAP, establishes a fair

F-10



value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value and requires certain disclosures about fair value measurements.
In January 2010, the FASB issued Accounting Standards Update ("ASU") No. 2010-06, “Improving Disclosure about Fair Value Measurements” (“ASU 2010-06”), which amended ASC 820 to increase disclosure requirements regarding recurring and non-recurring fair value measurements. The Company adopted ASU 2010-06 as of February 1, 2010, except for the disclosures about Level 3 fair value disclosures which were effective for the Company on November 1, 2011. The adoption of ASU 2010-06 did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
The fair value hierarchy is summarized below:
Level 1:
 
Fair value determined based on quoted prices in active markets for identical assets or liabilities.
Level 2:
 
Fair value determined using significant observable inputs, generally either quoted prices in active markets for similar assets or liabilities or quoted prices in markets that are not active.
Level 3:
 
Fair value determined using significant unobservable inputs, such as pricing models, discounted cash flows or similar techniques.
Treasury Stock
Treasury stock is recorded at cost. Issuance of treasury stock is accounted for on a first-in, first-out basis. Differences between the cost of treasury stock and the re-issuance proceeds are charged to additional paid-in capital.
Revenue and Cost Recognition
The construction time of the Company’s homes is generally less than one year, although some homes may take more than one year to complete. Revenues and cost of revenues from these home sales are recorded at the time each home is delivered and title and possession are transferred to the buyer. For single family detached homes, closing normally occurs shortly after construction is substantially completed. In addition, the Company has several high-rise/mid-rise projects that do not qualify for percentage of completion accounting in accordance with ASC 360, which are included in this category of revenues and costs. Based upon the current accounting rules and interpretations, the Company does not believe that any of its current or future communities currently qualify or will qualify in the future for percentage of completion accounting.
For the Company’s standard attached and detached homes, land, land development and related costs, both incurred and estimated to be incurred in the future, are amortized to the cost of homes closed based upon the total number of homes to be constructed in each community. Any changes resulting from a change in the estimated number of homes to be constructed or in the estimated costs subsequent to the commencement of delivery of homes are allocated to the remaining undelivered homes in the community. Home construction and related costs are charged to the cost of homes closed under the specific identification method. The estimated land, common area development and related costs of master planned communities, including the cost of golf courses, net of their estimated residual value, are allocated to individual communities within a master planned community on a relative sales value basis. Any changes resulting from a change in the estimated number of homes to be constructed or in the estimated costs are allocated to the remaining home sites in each of the communities of the master planned community.
For high-rise/mid-rise projects that do not qualify for percentage of completion accounting, land, land development, construction and related costs, both incurred and estimated to be incurred in the future, are generally amortized to the cost of units closed based upon an estimated relative sales value of the units closed to the total estimated sales value. Any changes resulting from a change in the estimated total costs or revenues of the project are allocated to the remaining units to be delivered.
Forfeited customer deposits: Forfeited customer deposits are recognized in other income - net in the period in which the Company determines that the customer will not complete the purchase of the home and it has the right to retain the deposit.
Sales Incentives: In order to promote sales of its homes, the Company grants its home buyers sales incentives from time to time. These incentives will vary by type of incentive and by amount on a community-by-community and home-by-home basis. Incentives that impact the value of the home or the sales price paid, such as special or additional options, are generally reflected as a reduction in sales revenues. Incentives that the Company pays to an outside party, such as paying some or all of a home buyer’s closing costs, are recorded as an additional cost of revenues. Incentives are recognized at the time the home is delivered to the home buyer and the Company receives the sales proceeds.


F-11



Advertising Costs
The Company expenses advertising costs as incurred. Advertising costs were $11.4 million, $11.1 million and $9.2 million for the years ended October 31, 2012, 2011 and 2010, respectively.
Warranty Costs
The Company provides all of its home buyers with a limited warranty as to workmanship and mechanical equipment. The Company also provides many of its home buyers with a limited ten-year warranty as to structural integrity. The Company accrues for expected warranty costs at the time each home is closed and title and possession have been transferred to the buyer. Costs are accrued based upon historical experience.
Insurance Costs
The Company accrues for the expected costs associated with the deductibles and self-insured amounts under its various insurance policies.
Stock-Based Compensation
The Company accounts for its stock-based compensation in accordance with ASC 718, “Compensation — Stock Compensation” (“ASC 718”). The Company used a lattice model for the valuation for its stock option grants. The option pricing models used are designed to estimate the value of options that, unlike employee stock options and restricted stock units, can be traded at any time and are transferable. In addition to restrictions on trading, employee stock options and restricted stock units may include other restrictions such as vesting periods. Further, such models require the input of highly subjective assumptions, including the expected volatility of the stock price.
Income Taxes
The Company accounts for income taxes in accordance with ASC 740, “Income Taxes” (“ASC 740”). Deferred tax assets and liabilities are recorded based on temporary differences between the amounts reported for financial reporting purposes and the amounts reported for income tax purposes. In accordance with the provisions of ASC 740, the Company assesses the realizability of its deferred tax assets. A valuation allowance must be established when, based upon available evidence, it is more likely than not that all or a portion of the deferred tax assets will not be realized. See “Income Taxes — Valuation Allowance” below.
Federal and state income taxes are calculated on reported pre-tax earnings (losses) based on current tax law and also include, in the applicable period, the cumulative effect of any changes in tax rates from those used previously in determining deferred tax assets and liabilities. Such provisions (benefits) differ from the amounts currently receivable or payable because certain items of income and expense are recognized for financial reporting purposes in different periods than for income tax purposes. Significant judgment is required in determining income tax provisions (benefits) and evaluating tax positions. The Company establishes reserves for income taxes when, despite the belief that its tax positions are fully supportable, it believes that its positions may be challenged and disallowed by various tax authorities. The consolidated tax provisions (benefits) and related accruals include the impact of such reasonably estimable disallowances as deemed appropriate. To the extent that the probable tax outcome of these matters changes, such changes in estimates will impact the income tax provision (benefit) in the period in which such determination is made.
ASC 740 clarifies the accounting for uncertainty in income taxes recognized and prescribes a recognition threshold and measurement attributes for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC 740 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. ASC 740 requires a company to recognize the financial statement effect of a tax position when it is “more-likely-than-not” (defined as a substantiated likelihood of more than 50%), based on the technical merits of the position, that the position will be sustained upon examination. A tax position that meets the “more-likely-than-not” recognition threshold is measured to determine the amount of benefit to be recognized in the financial statements based upon the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. The inability of the Company to determine that a tax position meets the “more-likely-than-not” recognition threshold does not mean that the Internal Revenue Service (“IRS”) or any other taxing authority will disagree with the position that the Company has taken.
If a tax position does not meet the “more-likely-than-not” recognition threshold, despite the Company’s belief that its filing position is supportable, the benefit of that tax position is not recognized in the Consolidated Statements of Operations and the Company is required to accrue potential interest and penalties until the uncertainty is resolved. Potential interest and penalties

F-12



are recognized as a component of the provision for income taxes which is consistent with the Company’s historical accounting policy. Differences between amounts taken in a tax return and amounts recognized in the financial statements are considered unrecognized tax benefits. The Company believes that it has a reasonable basis for each of its filing positions and intends to defend those positions if challenged by the IRS or other taxing jurisdiction. If the IRS or other taxing authorities do not disagree with the Company’s position, and after the statute of limitations expires, the Company will recognize the unrecognized tax benefit in the period that the uncertainty of the tax position is eliminated.
Income Taxes — Valuation Allowance

Significant judgment is applied in assessing the realizability of deferred tax assets. In accordance with GAAP, a valuation allowance is established against a deferred tax asset if, based on the available evidence, it is more-likely-than-not that such asset will not be realized. The realization of a deferred tax asset ultimately depends on the existence of sufficient taxable income in either the carryback or carryforward periods under tax law. The Company assesses the need for valuation allowances for deferred tax assets based on GAAP's “more-likely-than-not” realization threshold criteria. In the Company's assessment, appropriate consideration is given to all positive and negative evidence related to the realization of the deferred tax assets. Forming a conclusion that a valuation allowance is not needed is difficult when there is negative evidence such as cumulative losses in recent years. This assessment considers, among other matters, the nature, consistency and magnitude of current and cumulative income and losses, forecasts of future profitability, the duration of statutory carryback or carryforward periods, the Company's experience with operating loss and tax credit carryforwards being used before expiration, and tax planning alternatives.

The Company's assessment of the need for a valuation allowance on its deferred tax assets includes assessing the likely future tax consequences of events that have been recognized in its consolidated financial statements or tax returns. Changes in existing tax laws or rates could affect the Company's actual tax results and its future business results may affect the amount of its deferred tax liabilities or the valuation of its deferred tax assets over time. The Company's accounting for deferred tax assets represents its best estimate of future events.

Due to uncertainties in the estimation process, particularly with respect to changes in facts and circumstances in future reporting periods (carryforward period assumptions), actual results could differ from the estimates used in the Company's analysis. The Company's assumptions require significant judgment because the residential home building industry is cyclical and is highly sensitive to changes in economic conditions. If the Company's results of operations are less than projected and there is insufficient objectively verifiable positive evidence to support the “more-likely-than-not” realization of its deferred tax assets, a valuation allowance would be required to reduce or eliminate its deferred tax assets.
Noncontrolling Interest
The Company has a 67% interest in an entity that is developing land. The financial statements of this entity are consolidated in the Company’s consolidated financial statements. The amounts shown in the Company’s Consolidated Balance Sheets under “Noncontrolling interest” represent the noncontrolling interest attributable to the 33% minority interest not owned by the Company.
Geographic Segment Reporting
The Company has determined that its home building operations operate in four geographic segments: North, Mid-Atlantic, South and West. The states comprising each geographic segment are as follows:
North:        Connecticut, Illinois, Massachusetts, Michigan, Minnesota, New Jersey and New York
Mid-Atlantic:    Delaware, Maryland, Pennsylvania and Virginia
South:        Florida, North Carolina and Texas
West:        Arizona, California, Colorado, Nevada and Washington
In fiscal 2011, the Company discontinued the sale of homes in South Carolina. In fiscal 2010, the Company discontinued the sale of homes in West Virginia and Georgia. The operations in South Carolina, West Virginia and Georgia were immaterial to the South and Mid-Atlantic geographic segments.

F-13



Related Party Transactions
See Note 4 “Investments and Advances to Unconsolidated Entities” for information regarding Toll Brothers Realty Trust.
Reclassification
Certain prior period amounts have been reclassified to conform to the fiscal 2012 presentation.
Revisions
The Company's Consolidated Statements of Operations have been revised to present the line entitled “Interest expense” as a separate line below the line entitled “Income (loss) from operations."
In June 2011, the FASB issued ASU No. 2011-05, “Statement of Comprehensive Income” (“ASU 2011-05”), which requires entities to present net income and other comprehensive income in either a single continuous statement or in two separate, but consecutive, statements of net income and other comprehensive income. The Company has included Consolidated Statements of Comprehensive Income for the years ended October 31, 2012, 2011 and 2010 as required by ASU 2011-05 in two separate, but consecutive, statements of net income and comprehensive income. The adoption of this guidance, which relates to presentation only, did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
Note 19 - Supplemental Guarantor Information has been revised in order to (i) retrospectively reflect the transfer of the balance sheets, statements of operations and cash flows of certain non-guarantor subsidiaries to guarantor subsidiaries as a result of such entities becoming guarantor subsidiaries as of April 30, 2013 and the reclassification of guarantor and non-guarantor intercompany advances and equity balances with corresponding offsets in the elimination column, (ii) revise the presentation of cash flows from operating activities, financing activities and investing activities in the consolidating statements of cash flows for the years ended October 31, 2012, 2011 and 2010 to reflect intercompany activity, which had previously been included in cash flow from operating activities, as cash flow from investing activities and cash flow from financing activities and (iii) present the line entitled “Interest expense” as a separate line below the line entitled “Income (loss) from operations" and include lines for other comprehensive income (loss) and total comprehensive income (loss) in each of the consolidating statements of operations presented. See Note 19 in the notes to the consolidated financial statements for more detail.
2. Acquisition
In November 2011, the Company acquired substantially all of the assets of CamWest Development LLC (“CamWest”) for approximately $144.7 million in cash. The assets acquired were primarily inventory. As part of the acquisition, the Company assumed contracts to deliver approximately 29 homes with an aggregate value of $13.7 million. The average price of the homes in backlog at the date of acquisition was approximately $471,000. The assets the Company acquired included approximately 1,245 home sites owned and 254 home sites controlled through land purchase agreements. The Company’s selling community count increased by 15 communities at the acquisition date. The acquisition of the assets of CamWest was not material to the Company’s results of operations or its financial condition. In fiscal 2012, the Company delivered 201 homes and generated revenues of $99.7 million through its CamWest operations.
3. Inventory
Inventory at October 31, 2012 and 2011 consisted of the following (amounts in thousands):
 
2012
 
2011
Land controlled for future communities
$
56,300

 
$
46,581

Land owned for future communities
1,040,373

 
979,145

Operating communities
2,664,514

 
2,390,997

 
$
3,761,187

 
$
3,416,723


Operating communities include communities offering homes for sale, communities that have sold all available home sites but have not completed delivery of the homes, communities that were previously offering homes for sale but are temporarily closed due to business conditions or non-availability of improved home sites and that are expected to reopen within twelve months of the end of the fiscal year being reported on and communities preparing to open for sale. The carrying value attributable to operating communities includes the cost of homes under construction, land and land development costs, the carrying cost of home sites in current and future phases of these communities and the carrying cost of model homes.

F-14



Communities that were previously offering homes for sale but are temporarily closed due to business conditions that do not have any remaining backlog and are not expected to reopen within twelve months of the end of the fiscal period being reported on have been classified as land owned for future communities.
Information regarding the classification, number and carrying value of these temporarily closed communities at October 31, 2012, 2011 and 2010 is provided in the table below ($ amounts in thousands).
 
2012
 
2011
 
2010
Land owned for future communities:
 
 
 
 
 
Number of communities
40

 
43

 
36

Carrying value (in thousands)
$
240,307

 
$
256,468

 
$
212,882

Operating communities:
 
 
 
 
 
Number of communities
5

 
2

 
13

Carrying value (in thousands)
$
34,685

 
$
11,076

 
$
78,100

The Company provided for inventory impairment charges and the expensing of costs that it believed not to be recoverable in each of the three fiscal years ended October 31, 2012, 2011 and 2010 as shown in the table below (amounts in thousands).
Charge:
2012
 
2011
 
2010
Land controlled for future communities
$
451

 
$
17,752

 
$
6,069

Land owned for future communities
1,218

 
17,000

 
55,700

Operating communities
13,070

 
17,085

 
53,489

 
$
14,739

 
$
51,837

 
$
115,258

For information related to the number of operating communities that the Company reviewed for potential impairment, the number of operating communities in which the Company recognized impairment charges, the amount of impairment charges recognized and the fair value of the communities for which an impairment charge was recorded, net of the charge, see Note 12, "Fair Value Disclosures".
At October 31, 2012, the Company evaluated its land purchase contracts to determine if any of the selling entities were VIEs and, if they were, whether the Company was the primary beneficiary of any of them. Under these land purchase contracts, the Company does not possess legal title to the land and its risk is generally limited to deposits paid to the sellers and the creditors of the sellers generally have no recourse against the Company. At October 31, 2012, the Company determined that 64 land purchase contracts, with an aggregate purchase price of $540.8 million, on which it had made aggregate deposits totaling $25.5 million, were VIEs and that it was not the primary beneficiary of any VIE related to its land purchase contracts.
Interest incurred, capitalized and expensed in each of the three fiscal years ended October 31, 2012, 2011 and 2010 was as follows (amounts in thousands):
 
2012
 
2011
 
2010
Interest capitalized, beginning of year
$
298,757

 
$
267,278

 
$
259,818

Interest incurred
125,783

 
114,761

 
114,975

Interest expensed to cost of revenues
(87,117
)
 
(77,623
)
 
(75,876
)
Interest directly expensed in the consolidated statements of operations

 
(1,504
)
 
(22,751
)
Write-off against other income
(3,404
)
 
(1,155
)
 
(8,369
)
Interest reclassified to property, construction and office equipment


 
(3,000
)
 
(519
)
Capitalized interest applicable to investments in unconsolidated entities
(3,438
)
 

 


Interest capitalized, end of year
$
330,581

 
$
298,757

 
$
267,278

Inventory impairment charges are recognized against all inventory costs of a community, such as land, land improvements, cost of home construction and capitalized interest. The amounts included in the table directly above reflect the gross amount of capitalized interest without allocation of any impairment charges recognized. The Company estimates that, had inventory impairment charges been allocated on a pro rata basis to the individual components of inventory, capitalized interest at October 31, 2012, 2011 and 2010 would have been reduced by approximately $47.9 million, $54.0 million and $53.3 million, respectively.

F-15



During fiscal 2011, the Company reclassified $20.0 million of inventory related to commercial retail space located in one of its high-rise projects to property, construction and office equipment. The $20.0 million was reclassified due to the completion of construction of the facilities and the substantial completion of the high-rise project of which the facilities are a part.
4. Investments in and Advances to Unconsolidated Entities
The Company has investments in and advances to various unconsolidated entities. At October 31, 2012, the Company's aggregate investments in and advances to these unconsolidated entities amounted to $330.6 million, it had $97.0 million of funding commitments to them and had guaranteed $9.8 million of payments related to these entities.
Development Joint Ventures
The Company has investments in and advances to a number of joint ventures with unrelated parties to develop land (“Development Joint Ventures”). Some of these Development Joint Ventures develop land for the sole use of the venture participants, including the Company, and others develop land for sale to the joint venture participants and to unrelated builders. The Company recognizes its share of earnings from the sale of home sites by the Development Joint Ventures to other builders. With regard to home sites the Company purchases from the Development Joint Ventures, the Company reduces its cost basis in those home sites by its share of the earnings on the home sites. At October 31, 2012, the Company had approximately $116.5 million invested in or advanced to the Development Joint Ventures. In addition, the Company has a funding commitment of $3.5 million to one Development Joint Venture should an additional investment in that venture be required.
As of October 31, 2012, the Company had recognized cumulative impairment charges in connection with its current Development Joint Ventures of $95.2 million. These impairment charges are attributable to investments in certain Development Joint Ventures where the Company determined there were losses in value in the investments that were other than temporary. In fiscal 2011, the Company recognized impairment charges in connection with its Development Joint Ventures of $25.7 million. The Company did not recognize any impairment charges in connection with the Development Joint Ventures in fiscal 2012 or 2010. In fiscal 2012, the Company recovered $2.3 million of costs it previously incurred.
The impairment and recoveries related to Development Joint Ventures were attributable to the Company’s investment in South Edge LLC, and its successor entity, Inspirada Builders, LLC (collectively, "Inspirada"). The Company believes it has made adequate provision at October 31, 2012 for any remaining liabilities with respect to Inspirada. The Company’s investment in Inspirada is carried at a nominal value.
In the third quarter of fiscal 2012, the Company acquired a 50% interest in an existing joint venture for approximately $110.0 million. The joint venture intends to develop over 2,000 home sites in Orange County, California on land that it owns. The joint venture expects to borrow additional funds to complete the development of this project. In November 2012, we entered into an Amended and Restated Operating Agreement with our partner in this joint venture which, among other things, provided for our purchase of approximately 800 lots in the project, and the commitment by each partner to contribute an additional $10.0 million to the joint venture, if needed.
Planned Community Joint Venture
The Company is a participant in a joint venture with an unrelated party to develop a single master planned community (the “Planned Community Joint Venture”). At October 31, 2012, the Company had an investment of $31.3 million in this Planned Community Joint Venture. At October 31, 2012, each participant had agreed to contribute additional funds up to $8.3 million, if required. At October 31, 2012, this joint venture did not have any indebtedness. The Company recognized impairment charges in connection with the Planned Community Joint Venture of $15.2 million in fiscal 2011. The Company did not recognize any impairment charges in connection with the Planned Community Joint Venture in fiscal 2012 or fiscal 2010.

F-16



Other Joint Ventures
At October 31, 2012, the Company had an aggregate of $142.2 million of investments in a number of joint ventures with unrelated parties to develop luxury for-sale and rental residential units, commercial space and a hotel (“Other Joint Ventures”). At October 31, 2011, the Company had commitments to make $85.2 million of additional contributions to these joint ventures and had also guaranteed approximately $9.8 million of payments related to these joint ventures.
As of October 31, 2012, the Company had recognized cumulative impairment charges against its investments in these joint ventures and its pro rata share of impairment charges recognized by these joint ventures in the amount of $63.9 million. The Company did not recognize any impairment charges in connection with these joint ventures in fiscal 2012, 2011 or 2010.
In December 2011, the Company entered into a joint venture in which it has a 50% interest to develop a high-rise luxury for-sale/rental project in the metro-New York market. At October 31, 2012, the Company had an investment of $87.3 million and was committed to make additional investments of $37.5 million in this joint venture. Under the terms of the agreement, upon completion of the construction of the building, the Company will acquire ownership of the top 18 floors of the building to sell, for its own account, luxury condominium units and its partner will receive ownership of the lower floors containing residential rental units and retail space.
In the third quarter of fiscal 2012, the Company invested in a joint venture in which it has a 50% interest that will develop a high-rise luxury condominium/hotel project in the metro-New York market. At October 31, 2012, the Company had invested $5.4 million in this joint venture. The Company expects to make additional investments of approximately $47.7 million for the development of this property. The joint venture expects to borrow additional funds to complete the construction of this project. The Company has also guaranteed approximately $9.8 million of payments related to the ground lease on this project.
In the fourth quarter of fiscal 2012, the Company invested in a joint venture in which it has a 50% interest that will develop a multi-family residential apartment project containing approximately 398 units. At October 31, 2012, the Company had an investment of $15.4 million in this joint venture. The joint venture expects to borrow funds to complete the construction of this project. The Company does not have any additional commitment to fund this joint venture.
Structured Asset Joint Venture
In July 2010, the Company, through Gibraltar, invested in a joint venture in which it is a 20% participant with two unrelated parties to purchase a 40% interest in an entity that owns and controls a portfolio of loans and real estate (“Structured Asset Joint Venture”). At October 31, 2012, the Company had an investment of $37.3 million in this Structured Asset Joint Venture. At October 31, 2012, the Company did not have any commitments to make additional contributions to the joint venture and has not guaranteed any of the joint venture’s liabilities. If the joint venture needs additional capital and a participant fails to make a requested capital contribution, the other participants may make a contribution in consideration for a preferred return or may make the additional capital contribution and diminish the non-contributing participant’s ownership interest.
Toll Brothers Realty Trust and Trust II
In fiscal 2005, the Company, together with the Pennsylvania State Employees Retirement System (“PASERS”), formed Toll Brothers Realty Trust II (“Trust II”) to be in a position to invest in commercial real estate opportunities. Trust II is owned 50% by the Company and 50% by an affiliate of PASERS. At October 31, 2012, the Company had an investment of $3.2 million in Trust II. Prior to the formation of Trust II, the Company formed Toll Brothers Realty Trust (“Trust”) in 1998 to invest in commercial real estate opportunities. The Trust is effectively owned one-third by the Company; one-third by Robert I. Toll, Bruce E. Toll (and members of his family), Douglas C. Yearley, Jr. and former members of the Company’s senior management; and one-third by an affiliate of PASERS (collectively, the “Shareholders”). As of October 31, 2012, the Company had a net investment in the Trust of $0.1 million. The Company provides development, finance and management services to the Trust and recognized fees under the terms of various agreements in the amounts of $2.7 million, $2.9 million and $3.1 million in fiscal 2012, 2011 and 2010, respectively.

F-17



General
At October 31, 2012, the Company had accrued $2.1 million of aggregate exposure with respect to its estimated obligations to unconsolidated entities in which it has an investment. The Company’s investments in these entities are accounted for using the equity method. The Company recognized $40.9 million of impairment charges related to its investments in and advances to unconsolidated entities in fiscal 2011. The Company did not recognize any impairment charges related to its investments in and advances to unconsolidated entities in fiscal 2012 or 2010. In fiscal 2012, the Company recovered $2.3 million of costs it previously incurred. Impairment charges and recoveries related to these entities are included in “Income (loss) from unconsolidated entities” in the Company’s Consolidated Statements of Operations.
At October 31, 2012, the Company determined that two of its joint ventures were VIEs under the guidance within ASC810. However, the Company concluded that it was not the primary beneficiary of the VIEs because the power to direct the activities of these VIEs that most significantly impact their performance was shared by the Company and VIEs' other members. Business plans, budgets and other major decisions are required to be unanimously approved by all members. Management and other fees earned by the Company are nominal and believed to be at market rates and there is no significant economic disproportionality between the Company and other members.
The condensed balance sheets, as of the dates indicated, and the condensed statements of operations, for the periods indicated, for the Company’s unconsolidated entities in which it has an investment, aggregated by type of business, are included below (in thousands). The column titled "Home Building Joint Ventures" includes the Planned Community and Other Joint Ventures described above.

F-18



Condensed Balance Sheets:
 
October 31, 2012
 
Develop-
ment joint
ventures
 
Home
building
joint
ventures
 
Toll
Brothers
Realty Trust
I and II
 
Structured
asset
joint
venture
 
Total
Cash and cash equivalents
17,189

 
40,126

 
11,005

 
44,176

 
112,496

Inventory
255,561

 
294,724

 
5,643

 

 
555,928

Non-performing loan portfolio

 

 

 
226,315

 
226,315

Rental properties

 

 
173,767

 

 
173,767

Real estate owned

 

 


 
254,250

 
254,250

Other assets (1)
12,427

 
72,301

 
9,182

 
237,476

 
331,386

Total assets
285,177

 
407,151

 
199,597

 
762,217

 
1,654,142

Debt (1)
96,862

 
34,184

 
195,359

 
311,801

 
638,206

Other liabilities
13,890

 
5,707

 
5,202

 
561

 
25,360

Members’ equity
174,425

 
367,260

 
(964
)
 
179,942

 
720,663

Noncontrolling interest

 

 

 
269,913

 
269,913

Total liabilities and equity
285,177

 
407,151

 
199,597

 
762,217

 
1,654,142

Company’s net investment in unconsolidated entities (2)
116,452

 
173,465

 
3,357

 
37,343

 
330,617

 
October 31, 2011
 
Develop-
ment joint
ventures
 
Home
building
joint
ventures
 
Toll
Brothers
Realty Trust
I and II
 
Structured
asset
joint
venture
 
Total
Cash and cash equivalents
14,190

 
10,663

 
11,726

 
48,780

 
85,359

Inventory
37,340

 
170,239

 
5,501

 

 
213,080

Non-performing loan portfolio

 

 

 
295,044

 
295,044

Rental properties

 

 
178,339

 

 
178,339

Real estate owned

 

 
1,087

 
230,872

 
231,959

Other assets (1)
331,315

 
20,080

 
9,675

 
159,143

 
520,213

Total assets
382,845

 
200,982

 
206,328

 
733,839

 
1,523,994

Debt (1)
327,856

 
50,515

 
198,927

 
310,847

 
888,145

Other liabilities
5,352

 
9,745

 
3,427

 
382

 
18,906

Members’ equity
49,637

 
140,722

 
3,974

 
172,944

 
367,277

Noncontrolling interest

 

 

 
249,666

 
249,666

Total liabilities and equity
382,845

 
200,982

 
206,328

 
733,839

 
1,523,994

Company’s net investment in unconsolidated entities (2)
17,098

 
72,734

 
1,872

 
34,651

 
126,355

(1)
Included in other assets at October 31, 2012 and 2011 of the Structured Asset Joint Venture is $237.5 million and $152.6 million, respectively, of restricted cash held in a defeasance account which will be used to repay debt of the Structured Asset Joint Venture.
(2)
Differences between the Company’s net investment in unconsolidated entities and its underlying equity in the net assets of the entities are primarily a result of the difference in the purchase price of a joint venture interest and its underlying equity, impairments related to the Company’s investments in unconsolidated entities, a loan made to one of the entities by the Company, interest capitalized on the Company's investment and distributions from entities in excess of the carrying amount of the Company’s net investment.

F-19



Condensed Statements of Operations:
 
For the year ended October 31, 2012
 
Develop-
ment joint
ventures
 
Home
building
joint
ventures
 
Toll
Brothers
Realty Trust
I and II
 
Structured
asset
joint
venture
 
Total
Revenues
39,278

 
89,947

 
37,035

 
31,686

 
197,946

Cost of revenues
36,315

 
65,068

 
13,985

 
32,828

 
148,196

Other expenses
1,414

 
4,116

 
20,587

 
8,646

 
34,763

Gain on disposition of loans and REO


 

 

 
(42,244
)
 
(42,244
)
Total expenses
37,729

 
69,184

 
34,572

 
(770
)
 
140,715

Income from operations
1,549

 
20,763

 
2,463

 
32,456

 
57,231

Other income
2,658

 
157

 


 
691

 
3,506

Net income before noncontrolling interest
4,207

 
20,920

 
2,463

 
33,147

 
60,737

Less: Net income attributable to noncontrolling interest


 


 


 
19,888

 
19,888

Net income
4,207

 
20,920

 
2,463

 
13,259

 
40,849

Company’s equity in earnings of unconsolidated entities (3)
3,996

 
14,985

 
1,919

 
2,692

 
23,592

 
For the year ended October 31, 2011
 
Develop-
ment joint
ventures
 
Home
building
joint
ventures
 
Toll
Brothers
Realty Trust
I and II
 
Structured
asset
joint
venture
 
Total
Revenues
4,624

 
242,326

 
37,728

 
46,187

 
330,865

Cost of revenues
3,996

 
191,922

 
15,365

 
30,477

 
241,760

Other expenses
1,527

 
8,954

 
18,808

 
10,624

 
39,913

Gain on disposition of loans and REO


 

 

 
(61,406
)
 
(61,406
)
Total expenses
5,523

 
200,876

 
34,173

 
(20,305
)
 
220,267

Income (loss) from operations
(899
)
 
41,450

 
3,555

 
66,492

 
110,598

Other income
9,498

 
1,605

 


 
252

 
11,355

Net income before noncontrolling interest
8,599

 
43,055

 
3,555

 
66,744

 
121,953

Less: Net income attributable to noncontrolling interest


 


 


 
40,048

 
40,048

Net income
8,599

 
43,055

 
3,555

 
26,696

 
81,905

Company’s equity in (loss) earnings of unconsolidated entities (3)
(25,272
)
 
15,159

 
3,580

 
5,339

 
(1,194
)

F-20



 
For the year ended October 31, 2010
 
Development joint ventures
 
Home building joint ventures
 
Toll Brothers Realty Trust I and II
 
Structured asset
joint
venture
 
Total
Revenues
7,370

 
132,878

 
34,755

 
16,582

 
191,585

Cost of revenues
6,402

 
106,638

 
13,375

 
6,693

 
133,108

Other expenses
1,522

 
8,121

 
18,693

 
2,977

 
31,313

Loss on disposition of loans and REO


 

 

 
5,272

 
5,272

Total expenses
7,924

 
114,759

 
32,068

 
14,942

 
169,693

Income (loss) from operations
(554
)
 
18,119

 
2,687

 
1,640

 
21,892

Other income
13,616

 
572

 


 
5

 
14,193

Net income before noncontrolling interest
13,062

 
18,691

 
2,687

 
1,645

 
36,085

Less: Net income attributable to noncontrolling interest


 


 


 
987

 
987

Net income
13,062

 
18,691

 
2,687

 
658

 
35,098

Company’s equity in earnings of unconsolidated entities (3)
10,664

 
11,272

 
1,402

 
132

 
23,470

(3)
Differences between the Company’s equity in earnings (losses) of unconsolidated entities and the underlying net income of the entities are primarily a result of impairments related to the Company’s investments in unconsolidated entities, distributions from entities in excess of the carrying amount of the Company’s net investment and the Company’s share of the entities profits related to home sites purchased by the Company that reduces the Company’s cost basis of the home sites.
5. Investments in Non-performing Loan Portfolios and Foreclosed Real Estate
The Company’s investment in non-performing loan portfolios consisted of the following at October 31, 2012 and 2011 (amounts in thousands):
 
2012
 
2011
Unpaid principal balance
$
99,693

 
$
171,559

Discount on acquired loans
(62,524
)
 
(108,325
)
Carrying value
$
37,169

 
$
63,234

In fiscal 2012, Gibraltar acquired 12 non-performing loans with an unpaid principal balance of approximately $56.6 million. The purchase included non-performing loans primarily secured by commercial land and buildings in various stages of completion.
In September 2011, Gibraltar acquired 38 non-performing loans with an unpaid principal balance of approximately $71.4 million. The purchase included residential acquisition, development and construction loans secured by properties at various stages of completion.
In March 2011, the Company, through Gibraltar, acquired a 60% participation in a portfolio of non-performing loans. The portfolio of 83 loans, with an unpaid principal balance of approximately $200.3 million consisted primarily of residential acquisition, development and construction loans secured by properties at various stages of completion. The Company oversees the day-to-day management of the portfolio in accordance with the business plans that are jointly approved by the Company and the co-participant. The Company receives a management fee for such services. The Company recognizes income from the loan portfolio based upon its participation interest until such time as the portfolio meets certain internal rates of return as stipulated in the participation agreement. Upon reaching the stipulated internal rates of return, the Company will be entitled to receive additional income above its participation percentage from the portfolio.

F-21



The following table summarizes, for the portfolios acquired in fiscal 2012 and 2011, the accretable yield and the non-accretable difference on the Company's investment in the non-performing loan portfolios as of their acquisition date (amounts in thousands).
 
2012
 
2011
Contractually required payments, including interest
$
58,234

 
$
200,047

Non-accretable difference
(8,235
)
 
(81,723
)
Cash flows expected to be collected
49,999

 
118,324

Accretable difference
(20,514
)
 
(51,462
)
Non-performing loans carrying amount
$
29,485

 
$
66,862

The activity in the accretable yield for the Company’s investments in the non-performing loan portfolios for the years ended October 31, 2012 and 2011 was as follows (amounts in thousands):
 
2012
 
2011
Balance, beginning of period
$
42,326

 
$

Loans acquired
20,514

 
51,462

Additions
5,539

 


Deletions
(40,227
)
 
(4,656
)
Accretion
(10,956
)
 
(4,480
)
Balance, end of period
$
17,196

 
$
42,326

Additions primarily represent reclassifications from nonaccretable yield to accretable yield and the impact of impairments. The additions to accretable yield and the accretion of interest income are based on various estimates regarding loan performance and the value of the underlying real estate securing the loans. As the Company continues to gather additional information regarding the loans and the underlying collateral, the accretable yield may change. Therefore, the amount of accretable income recorded in the years ended October 31, 2012 and 2011 is not necessarily indicative of expected future results. Deletions primarily represent disposal of loans, which includes foreclosure of the underlying collateral and result in the removal of the loans from the accretable yield portfolios.
Real Estate Owned
The following table presents the activity in REO at October 31, 2012 and 2011 (amounts in thousands):
 
2012
 
2011
Balance, beginning of period
$
5,939

 
$

Additions
54,174

 
5,939

Sales
(1,353
)
 

Impairments
(126
)
 

Depreciation
(281
)
 

Balance, end of period
$
58,353

 
$
5,939

As of October 31, 2012, approximately $5.9 million and $52.4 million of REO was classified as held-for-sale and held-and-used, respectively. At October 31, 2011, all REO was classified as held-and-used.
General
The Company’s earnings from its Gibraltar's operations, excluding its equity earnings from its investment in the Structured Asset Joint Venture, are included in other income - net in its Consolidated Statements of Operations. In the years ended October 31, 2012 and 2011, the Company recognized $4.5 million and $1.5 million of earnings, respectively, from Gibraltar's operations.


F-22



6. Credit Facility, Loans Payable, Senior Notes, Senior Subordinated Notes and Mortgage Company Warehouse Loan
Credit Facility
On October 22, 2010, the Company entered into an $885 million revolving credit facility (“Credit Facility”) with 12 banks, which extends to October 2014. At October 31, 2012, the Company had no outstanding borrowings under the Credit Facility but had outstanding letters of credit of approximately $70.1 million. At October 31, 2012, interest would have been payable on borrowings under the Credit Facility at 2.75% (subject to adjustment based upon the Company’s debt rating and leverage ratios) above the Eurodollar rate or at other specified variable rates as selected by the Company from time to time. Under the terms of the Credit Facility, the Company is not permitted to allow its maximum leverage ratio (as defined in the Credit Facility agreement) to exceed 1.75 to 1.00 and is required to maintain a minimum tangible net worth (as defined in the Credit Facility agreement) of approximately $2.16 billion at October 31, 2012. At October 31, 2012, the Company’s leverage ratio was approximately 0.31 to 1.00 and its tangible net worth was approximately $3.07 billion. Based upon the minimum tangible net worth requirement, the Company’s ability to pay dividends and repurchase its common stock was limited to an aggregate amount of approximately $1.21 billion at October 31, 2012. At October 31, 2012, the Company is obligated to pay an undrawn commitment fee of 0.63% (subject to adjustment based upon the Company’s debt rating and leverage ratios) based on the average daily unused amount of the facility.
Loans Payable
The Company’s loans payable represent purchase money mortgages on properties the Company has acquired that the seller has financed and various revenue bonds that were issued by government entities on behalf of the Company to finance community infrastructure and the Company’s manufacturing facilities. Information regarding the Company’s loans payable at October 31, 2012 and 2011 is included in the table below ($ amounts in thousands).
 
2012
 
2011
Aggregate loans payable at October 31
$
99,817

 
$
106,556

Weighted-average interest rate
3.64
%
 
3.99
%
Interest rate range
0.26% - 7.87%

 
0.16% - 7.87%

Loans secured by assets
 
 
 
Carrying value of loans secured by assets
$
98,952

 
$
105,092

Carrying value of assets securing loans
$
311,104

 
$
283,169

Senior Notes
At October 31, 2012 and 2011, the Company’s senior notes consisted of the following (amounts in thousands):
 
2012
 
2011
6.875% Senior Notes due November 15, 2012
$
59,068

 
$
139,776

5.95% Senior Notes due September 15, 2013
104,785

 
141,635

4.95% Senior Notes due March 15, 2014
267,960

 
267,960

5.15% Senior Notes due May 15, 2015
300,000

 
300,000

8.91% Senior Notes due October 15, 2017
400,000

 
400,000

6.75% Senior Notes due November 1, 2019
250,000

 
250,000

5.875% Senior Notes due February 15, 2022
419,876

 


0.5% Exchangeable Senior Notes due September 15, 2032
287,500

 


Bond discount
(8,726
)
 
(8,399
)
 
$
2,080,463

 
$
1,490,972

The senior notes are the unsecured obligations of Toll Brothers Finance Corp., a 100%-owned subsidiary of the Company. The payment of principal and interest is fully and unconditionally guaranteed, jointly and severally, by the Company and a majority of its home building subsidiaries (together with Toll Brothers Finance Corp., the “Senior Note Parties”). The senior notes rank equally in right of payment with all the Senior Note Parties’ existing and future unsecured senior indebtedness, including the Credit Facility. The senior notes are structurally subordinated to the prior claims of creditors, including trade creditors, of the subsidiaries of the Company that are not guarantors of the senior notes. The senior notes, other than the 0.5% Exchangeable Senior Notes due 2032 (“0.5% Senior Notes”), are redeemable in whole or in part at any time at the option of the Company, at

F-23



prices that vary based upon the then-current rates of interest and the remaining original term of the notes. The 0.5% Senior Notes are not redeemable by the Company prior to September 15, 2017.
In February 2012, the Company, through Toll Brothers Finance Corp., issued $300 million principal amount of 5.875% Senior Notes due 2022 (the “5.875% Senior Notes”). The Company received $296.2 million of net proceeds from the issuance of the 5.875% Senior Notes. In March 2012, the Company, through Toll Brothers Finance Corp., issued an additional $119.9 million principal amount of its 5.875% Senior Notes in exchange for $80.7 million principal amount of its 6.875% Senior Notes due 2012 and $36.9 million principal amount of its 5.95% Senior Notes due 2013. The Company recognized a charge of $1.2 million in fiscal 2012 representing the aggregate costs associated with the exchange of both series of notes; these expenses are included in selling, general and administrative expenses in the Consolidated Statement of Operations.
In September 2012, the Company, through Toll Brothers Finance Corp., issued $287.5 million principal amount of 0.5% Senior Notes. The Company received $282.5 million of net proceeds from the issuance of the 0.5% Senior Notes. The 0.5% Senior Notes are exchangeable into shares of the Company's common stock at an exchange rate of 20.3749 shares per $1,000 principal amount of notes, corresponding to an initial exchange price of approximately $49.08 per share of the Company's common stock. If all of the 0.5% Senior Notes are exchanged, the Company would issue approximately 5.9 million shares of its common stock. Shares issuable upon conversion of the 0.5% Senior Notes are included in the calculation of diluted earnings per share (See Note 11, "Income (Loss) Per Share Information" for more information regarding the number of shares included). Holders of the 0.5% Senior Notes will have the right to require Toll Brothers Finance Corp. to repurchase their notes for cash equal to 100% of their principal amount, plus accrued but unpaid interest, on each of December 15, 2017, September 15, 2022 and September 15, 2027. Toll Brothers Finance Corp. will have the right to redeem the 0.5% Senior Notes on or after September 15, 2017 for cash equal to 100% of their principal amount, plus accrued but unpaid interest.
The Company repurchased $55.1 million of its 6.875% Senior Notes due 2012 in fiscal 2011 and $45.5 million ($13.5 million of its 5.95% Senior notes due 2013 and $32.0 million of its 4.95% Senior Notes due 2014) of its senior notes in fiscal 2010. In fiscal 2011 and 2010, the Company recognized $3.8 million and $1.2 million, respectively, of expenses related to the retirement of these notes. Expenses related to the retirement of notes include, if any, premium paid, write-off of unamortized debt issuance costs and other debt redemption costs.
In November 2012, the Company repaid the $59.1 million of outstanding 6.875% Senior Notes due November 15, 2012.
Senior Subordinated Notes
The senior subordinated notes were the unsecured obligations of Toll Corp., a 100%-owned subsidiary of the Company were guaranteed on a senior subordinated basis by the Company, were subordinated to all existing and future senior indebtedness of the Company and were structurally subordinated to the prior claims of creditors, including trade creditors, of the Company’s subsidiaries other than Toll Corp. The indentures governing these notes restricted certain payments by the Company, including cash dividends and repurchases of Company stock.
The Company redeemed $47.9 million of its 8.25% Senior Subordinated Notes due December 2011 in fiscal 2010 and recognized $34,000 of expenses related to the retirement of the notes.
Mortgage Company Loan Facilities
TBI Mortgage Company (“TBI Mortgage”), the Company’s wholly-owned mortgage subsidiary, has a Master Repurchase Agreement (the “Repurchase Agreement”) with Comerica Bank. The purpose of the Repurchase Agreement is to finance the origination of mortgage loans by TBI Mortgage and it is accounted for as a secured borrowing under ASC 860. The Repurchase Agreement, as amended, provides for loan purchases up to $50 million, subject to certain sublimits. In addition, the Repurchase Agreement provides for an accordion feature under which TBI Mortgage may request that the aggregate commitments under the Repurchase Agreement be increased to an amount up to $75 million for a short period of time. The Repurchase Agreement, as amended, expires on July 23, 2013 and bears interest at LIBOR plus 2.00%, with a minimum rate of 3.00%. Borrowings under this facility are included in the fiscal 2013 maturities.
At October 31, 2012 and 2011, there were $72.7 million and $57.4 million, respectively, outstanding under the Repurchase Agreement, which are included in liabilities in the accompanying Consolidated Balance Sheets. At October 31, 2012 and 2011, amounts outstanding under the Repurchase Agreement were collateralized by $86.4 million and $63.2 million, respectively, of mortgage loans held for sale, which are included in assets in the Company’s Consolidated Balance Sheets. As of October 31, 2012, there were no aggregate outstanding purchase price limitations reducing the amount available to TBI Mortgage. There are several restrictions on purchased loans under the Repurchase Agreement, including that they cannot be sold to others, they cannot be pledged to anyone other than the agent and they cannot support any other borrowing or repurchase agreement.

F-24



General
As of October 31, 2012, the annual aggregate maturities of the Company’s loans and notes during each of the next five fiscal years are as follows (amounts in thousands):
 
Amount
2013
$
265,837

2014
278,092

2015
310,103

2016
402,068

2017
1,003,323

7. Accrued Expenses
Accrued expenses at October 31, 2012 and 2011 consisted of the following (amounts in thousands):
 
2012
 
2011
Land, land development and construction
$
124,731

 
$
109,574

Compensation and employee benefit
111,093

 
96,037

Insurance and litigation
101,908

 
130,714

Warranty
41,706

 
42,474

Interest
28,204

 
25,968

Commitments to unconsolidated entities
2,135

 
60,205

Other
66,573

 
56,079

 
$
476,350

 
$
521,051

The Company accrues expected warranty costs at the time each home is closed and title and possession have been transferred to the home buyer. Changes in the warranty accrual during fiscal 2012, 2011 and 2010 were as follows (amounts in thousands):
 
2012
 
2011
 
2010
Balance, beginning of year
$
42,474

 
$
45,835

 
$
53,937

Additions for homes closed during the year
10,560

 
8,809

 
9,147

Additions for liabilities acquired
731

 


 


Additions (reductions) to accruals for homes closed in prior years
479

 
(828
)
 
(4,684
)
Charges incurred
(12,538
)
 
(11,342
)
 
(12,565
)
Balance, end of year
$
41,706

 
$
42,474

 
$
45,835












F-25



8. Income Taxes
The following table provides a reconciliation of the Company’s effective tax rate from the federal statutory tax rate for the fiscal years ended October 31, 2012, 2011 and 2010 ($ amounts in thousands).
 
2012
 
2011
 
2010
 
$
 
%*
 
$
 
%*
 
$
 
%*
Federal tax benefit at statutory rate
39,530

 
35.0

 
(10,278
)
 
35.0

 
(41,015
)
 
35.0

State taxes, net of federal benefit
4,711

 
4.2

 
(954
)
 
3.2

 
(3,809
)
 
3.3

Reversal of accrual for uncertain tax positions
(34,167
)
 
(30.3
)
 
(52,306
)
 
178.1

 
(39,485
)
 
33.7

Accrued interest on anticipated tax assessments
5,000

 
4.4

 
3,055

 
(10.4
)
 
9,263

 
(7.9
)
Increase in unrecognized tax benefits
5,489

 
4.9

 

 


 
35,575

 
(30.4
)
Increase in deferred tax assets, net

 

 
(25,948
)
 
88.4

 

 

Valuation allowance — recognized

 

 
43,876

 
(149.4
)
 
55,492

 
(47.4
)
Valuation allowance — reversed
(394,718
)
 
(349.5
)
 
(25,689
)
 
87.5

 
(128,640
)
 
109.8

Other
(49
)
 

 
(917
)
 
3.1

 
(1,194
)
 
1.0

Tax benefit
(374,204
)
 
(331.3
)
 
(69,161
)
 
235.5

 
(113,813
)
 
97.1

*
Due to rounding, amounts may not add.
The Company currently operates in 19 states and is subject to various state tax jurisdictions. The Company estimates its state tax liability based upon the individual taxing authorities’ regulations, estimates of income by taxing jurisdiction and the Company’s ability to utilize certain tax-saving strategies. Due primarily to a change in the Company’s estimate of the allocation of income or loss, as the case may be, among the various taxing jurisdictions and changes in tax regulations and their impact on the Company’s tax strategies, the Company’s estimated rate for state income taxes was 6.4% in fiscal 2012 and 5.0% for each of fiscal 2011 and 2010.
The following table provides information regarding the (benefit) provision for income taxes for each of the fiscal years ended October 31, 2012, 2011 and 2010 (amounts in thousands).
 
2012
 
2011
 
2010
Federal
$
(329,277
)
 
$
(21,517
)
 
$
(67,318
)
State
(44,927
)
 
(47,644
)
 
(46,495
)
 
$
(374,204
)
 
$
(69,161
)
 
$
(113,813
)
 
 
 
 
 
 
Current
$
(21,296
)
 
$