Toll_Shapell_proforma

Balance at December 31, 2011

New warranties issued

Cash expenditures

Balance at December 31, 2012

0000794170-14-000019.txt : 20140417 0000794170-14-000019.hdr.sgml : 20140417 20140416173541 ACCESSION NUMBER: 0000794170-14-000019 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20140303 ITEM INFORMATION: Financial Statements and Exhibits FILED AS OF DATE: 20140417 DATE AS OF CHANGE: 20140416 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TOLL BROTHERS INC CENTRAL INDEX KEY: 0000794170 STANDARD INDUSTRIAL CLASSIFICATION: OPERATIVE BUILDERS [1531] IRS NUMBER: 232416878 STATE OF INCORPORATION: DE FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-09186 FILM NUMBER: 14768203 BUSINESS ADDRESS: STREET 1: 250 GIBRALTAR ROAD CITY: HORSHAM STATE: PA ZIP: 19044 BUSINESS PHONE: 2159388000 MAIL ADDRESS: STREET 1: 250 GIBRALTAR ROAD CITY: HORSHAM STATE: PA ZIP: 19044 8-K/A 1 toll_shapellxproforma.htm 8-K/A Toll_Shapell_proforma

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 8-K/A

CURRENT REPORT

PURSUANT TO SECTION 13 OR 15(D) OF THE

SECURITIES EXCHANGE ACT OF 1934

Date of report (Date of earliest event reported): February 3, 2014

Toll Brothers, Inc.

(Exact Name of Registrant as Specified in Charter)



Delaware	001-09186	23-2416878
(State or Other Jurisdiction of Incorporation)	(Commission File Number)	(IRS Employer Identification No.)

250 Gibraltar Road, Horsham, PA		19044
(Address of Principal Executive Offices)		(Zip Code)

Registrant’s telephone number, including area code: (215) 938-8000

(Former Name or Former Address, if Changed Since Last Report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):



o	Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)



o	Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)



o	Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))



o	Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

INTRODUCTORY NOTE

On February 5, 2014, Toll Brothers, Inc. (“Toll”) filed with the Securities and Exchange Commission a Current Report on Form 8-K (the “Original Form 8-K”) in connection with the completion of its acquisition of Shapell Industries, Inc. (“SII”) pursuant to the Purchase and Sale Agreement (the “Purchase Agreement”), dated November 6, 2013, with Shapell Investment Properties, Inc. (“SIPI”). This Current Report on Form 8-K/A amends the Original Form 8-K to include Item 9.01(a) Financial Statements of Business Acquired and Item 9.01(b) Pro Forma Financial Information.

Toll purchased SII’s single-family home building operations. SII also conducted mortgage lending activities related to its home building operations; such mortgage lending activities were not acquired by Toll. The audited consolidated financial statements included as Exhibit 99.1 to this Current Report on Form 8-K/A include SII’s single-family home building operations and SII’s mortgage lending activities. The audited consolidated financial statements included as Exhibit 99.1 also include SII’s ownership of an undeveloped, unentitled land parcel that was not acquired by Toll. The mortgage lending activities and ownership of this land parcel are not material to the consolidated financial statements included as Exhibit 99.1. The mortgage lending activities and ownership of this land parcel are not included in the condensed consolidated financial statements included as Exhibit 99.2 or the pro forma financial information included as Exhibit 99.3.

Item 9.01 of the Original Form 8-K is hereby amended and restated in its entirety as set forth below.

ITEM 9.01. FINANCIAL STATEMENTS AND EXHIBITS


(a)	Financial Statements of Business Acquired

Attached as Exhibit 99.1 and incorporated herein by reference are the audited consolidated financial statements of Shapell Homebuilding Company, which is comprised of Shapell Homes, Inc. and Shapell Land Company, LLC, all of which are wholly owned subsidiaries of SII, as of and for the year ended December 31, 2012.

Attached as Exhibit 99.2 and incorporated herein by reference are the unaudited condensed consolidated financial statements of Shapell Homebuilding Company, which is comprised of Shapell Homes, Inc. and Shapell Land Company, LLC, as of September 30, 2013 and for the nine months ended September 30, 2013 and 2012.


(b)	Pro Forma Financial Information

Attached as Exhibit 99.3 and incorporated herein by reference are the unaudited pro forma condensed combined balance sheet of Toll Brothers, Inc. as of October 31, 2013 and unaudited pro forma condensed combined statement of operations for the year ended October 31, 2013, giving effect to the acquisition of SII.

(d). Exhibits

The following Exhibits are furnished as part of this Current Report on Form 8-K:

Exhibit

No. Item


23.1*	Consent of Ernst & Young LLP, Independent Auditors of SII.


99.1*	Audited consolidated financial statements of Shapell Homebuilding Company, which is comprised of Shapell Homes, Inc. and Shapell Land Company, LLC, as of and for the year ended December 31, 2012 under Rule 3-05 of Regulation S-X.


99.2*	Unaudited condensed consolidated financial statements of Shapell Homebuilding Company, which is comprised of Shapell Homes, Inc. and Shapell Land Company, LLC, as of September 30, 2013 and for the nine months ended September 30, 2013 and 2012 under Rule 3-05 of Regulation S-X.


99.3*	Unaudited pro forma condensed combined balance sheet of Toll Brothers, Inc. as of October 31, 2013 and unaudited pro forma condensed combined statement of operations for the year ended October 31, 2013, giving effect to the acquisition of SII.

* Filed electronically herewith

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.




		TOLL BROTHERS, INC.

Dated:	April 16, 2014	By:	Joseph R. Sicree
			Joseph R. Sicree
			Senior Vice President,
			Chief Accounting Officer

EX-23 2 shapellconsent2012_exh23.htm EXHIBIT 23 Shapellconsent2012_Exh23

Exhibit 23

Consent of Independent Auditors

We consent to the incorporation by reference in the following Registration Statements:


(1)	Registration Statement (Form S-3 No. 333-178130) of Toll Brothers, Inc., Toll Corp., First Huntingdon Finance Corp., Toll Brothers Finance Corp., Toll Finance Corp. and the additional registrants named therein and in the related Prospectus,


(2)	Registration Statement (Form S-4 No. 333-179380) of Toll Brothers, Inc., Toll Corp., First Huntingdon Finance Corp., Toll Brothers Finance Corp., and the additional registrants named therein and in the related Prospectus,


(3)	Registration Statements (Form S-8 No. 333-57645 and No. 333-113721) pertaining to the Stock Incentive Plan (1998) of Toll Brothers, Inc.,


(4)	Registration Statement (Form S-8 No. 333-143367) pertaining to the Stock Incentive Plan for Employees (2007) of Toll Brothers, Inc., as amended,


(5)	Registration Statement (Form S-8 No. 333-144230) pertaining to the Stock Incentive Plan for Non-Employee Directors (2007) of Toll Brothers, Inc., as amended,


(6)	Registration Statement (Form S-8 No. 333-148362) pertaining to the Employee Stock Purchase Plan of Toll Brothers, Inc., and


(7)	Registration Statement (Form S-8 No. 333-194533) pertaining to the Stock Incentive Plan for Employees (2014) of Toll Brothers, Inc.;

of our report dated October 8, 2013, with respect to the consolidated financial statements of Shapell Homebuilding Company, included in this Current Report (Form 8-K/A) of Toll Brothers, Inc.

/s/ Ernst & Young LLP

Los Angeles, California

April 16, 2014

EX-99.1 3 shapellaudit2012_exh991.htm EXHIBIT 99.1 Shapellaudit2012_Exh991

Exhibit 99.1

Shapell Homebuilding Company

Consolidated Financial Statements

Year Ended December 31, 2012

TABLE OF CONTENTS



	Page

Report of Independent Auditors	3

Consolidated Balance Sheet	4

Consolidated Statement of Income	5

Consolidated Statement of Equity	6

Consolidated Statement of Cash Flows	7

Notes to Consolidated Financial Statements	8

Report of Independent Auditors

The Board of Directors and Shareholders

Shapell Industries, Inc.

We have audited the accompanying consolidated financial statements of Shapell Homebuilding Company (the Company), which comprise the consolidated balance sheet as of December 31, 2012, and the related consolidated statements of income, equity, and cash flows for the year then ended, and the related notes to the consolidated financial statements.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in conformity with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free of material misstatement, whether due to fraud or error.

Auditor’s Responsibility

Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the 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 involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Shapell Homebuilding Company at December 31, 2012, and the consolidated results of its operations and its cash flows for the year then ended in conformity with U.S. generally accepted accounting principles.

/s/ Ernst & Young LLP

Los Angeles, CA

October 8, 2013

Shapell Homebuilding Company

Consolidated Balance Sheet

December 31, 2012



Assets
Cash and cash equivalents:
Cash	$	10,956,000
Short-term investments, at fair value	46,517,000
Total cash and cash equivalents	57,473,000

Receivables:
Installment notes receivable primarily collateralized by trust deeds, net	6,399,000
Other receivables, net	3,840,000
Total receivables	10,239,000

Real estate held for development and sale:
Land and improvement costs of residential subdivisions	414,529,000
Land held for future development and investment	131,775,000
Total real estate held for development and sale	546,304,000

Furniture, fixtures and equipment:
At cost, less accumulated depreciation of $4,214,000	949,000
Prepaid expenses and other assets	6,757,000
Total assets	$	621,722,000

Liabilities and equity
Accounts payable, accrued liabilities, and customer deposits	$	28,191,000
Dividends payable	50,000,000

Notes payable:
Uncollateralized notes payable	14,593,000
Notes collateralized by security interests in real estate	12,949,000
Total notes payable	27,542,000

Withdrawals and losses in excess of investments in and advances to unconsolidated joint ventures	457,000
Total liabilities	106,190,000

Commitments and contingencies (Note 10)

Equity:
Shareholder’s equity	491,249,000
Noncontrolling interests	24,283,000
Total equity	515,532,000
Total liabilities and equity	$	621,722,000

See accompanying notes

Shapell Homebuilding Company

Consolidated Statement of Income

Year ended December 31, 2012



Revenue and other income
Sales of single-family residences	$	271,900,000
Land sales	47,000,000
Interest income	543,000
Other income, net	1,212,000
Total revenue and other income	320,655,000

Costs and expenses
Cost of sales of single-family residences	203,251,000
Cost of land sales	17,341,000
Depreciation and amortization	787,000
General and administrative expenses	17,598,000
Impairments of real estate	5,405,000
Total costs and expenses	244,382,000

Income before provision for income taxes	76,273,000
Provision for income taxes	943,000
Net income	75,330,000

Net income attributable to noncontrolling interests	11,108,000
Net income attributable to Shapell Homebuilding Company	$	64,222,000

See accompanying notes

Shapell Homebuilding Company

Consolidated Statement of Equity



	Shareholder's Equity			Noncontrolling Interests			Total

Balance at December 31, 2011	$	519,969,000		$	26,877,000		$	546,846,000
Contributions ⁽¹⁾	33,593,000			—			33,593,000
Distributions/dividends	(126,535,000		)	(13,702,000		)	(140,237,000		)
Net income	64,222,000			11,108,000			75,330,000
Balance at December 31, 2012	$	491,249,000		$	24,283,000		$	515,532,000

Supplemental disclosure:
⁽¹⁾ Contributions reflect receipts received during the year on amounts due from affiliates.

See accompanying notes

Shapell Homebuilding Company

Consolidated Statement of Cash Flows

Year ended December 31, 2012



Operating activities
Net income	$	75,330,000
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	787,000
Provision for uncollectible accounts	1,319,000
Collections on installment notes receivable	241,200
Additions to installment notes receivable	(582,200		)
Impairments of real estate	5,405,000
Change in assets and liabilities:
Other receivables	1,253,000
Real estate held for development and sale	5,758,000
Prepaid expenses and other assets	(818,000		)
Accounts payable, accrued liabilities, and customer deposits	4,091,000
Net cash provided by operating activities	92,784,000

Investing activities
Purchases of furniture, fixtures and equipment	(328,000		)
Net cash used in investing activities	(328,000		)

Financing activities
Borrowings under notes payable agreements:
Uncollateralized	16,000,000
Collateralized by securities interests in real estate	16,690,000
Payments on notes payable:
Uncollateralized	(6,500,000		)
Collateralized by securities interests in real estate	(37,341,000		)
Contributions received	33,593,000
Distributions to noncontrolling interests	(13,702,000		)
Dividends paid	(76,535,000		)
Net cash used in financing activities	(67,795,000		)

Net increase in cash and cash equivalents	24,661,000
Cash and cash equivalents at beginning of year	32,812,000
Cash and cash equivalents at end of year	$	57,473,000

Supplemental disclosure of cash flow information
Cash paid during the year for interest	$	378,000

Supplemental disclosure of noncash flow information
Dividends accrued	$	50,000,000

See accompanying notes

Shapell Homebuilding Company

Notes to Consolidated Financial Statements

December 31, 2012

1. Summary of Significant Accounting Policies and Other Information

Nature of Operations and Principles of Consolidation

The principal operations of Shapell Homebuilding Company (the Company) consist of residential land development and construction of single-family residences for sale. All of the Company’s principal operations are located in California.

The Company is comprised of Shapell Homes, Inc. and Shapell Land Company, LLC, all of which are wholly owned subsidiaries of Shapell Industries, Inc. (SII). In addition to the Company’s operations, SII develops and operates residential and commercial rental properties and engages in mortgage lending activities as of the date of this report. However, the financial statements represent a consolidation of only SII’s single-family development, construction, and the related mortgage lending activities conducted by the homebuilding entities.

The consolidated financial statements include the accounts of the Company and certain partnerships (Affiliates) which are controlled by the Company. The equity interests of other partners in consolidated partnerships are reflected as noncontrolling interests. Intercompany transactions and balances have been eliminated in consolidation.

Basis of Presentation

The Company maintains its records, and the accompanying consolidated financial statements have been prepared, on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America (GAAP).

Shareholders’ equity represents common stock and retained earnings of the consolidated entities.

Use of Estimates

The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the consolidated financial statements. These estimates and assumptions also affect the reported amounts of revenues and expenses during the reporting period. Although management believes these estimates and assumptions to be reasonably accurate, actual results could differ from those estimates.

Revenue and Cost Recognition

Sales of single-family residences and undeveloped land are recognized when the following conditions have been met: (a) construction has been completed; (b) escrow has closed and title, possession and risk of ownership have been transferred to the buyer; (c) an adequate initial cash investment has been made by the buyer; (d) collectibility of the sales price is reasonably assured; and (e) the Company is not obligated to perform significant development activity and has no further continuing involvement after the sale.

Land and improvements of residential subdivision costs are accumulated by specific development and allocated to lots and undeveloped land within the development using the specific cost identification and relative sales value methods. Cost of sales of single-family residences is determined using specific cost identification and relative sales values, where appropriate, for all common costs incurred.

Other revenue includes dividend income and rental income from miscellaneous agreements. Dividend income is recognized when dividends are declared. Rental income is recognized when earned.

Cash and Cash Equivalents

The Company considers all highly liquid investments with a maturity of three months or less at date of purchase to be cash equivalents. The Company’s cash and cash equivalents include cash and short-term investments.

Shapell Homebuilding Company

Notes to Consolidated Financial Statements (continued)

1. Summary of Significant Accounting Policies and Other Information (continued)

Concentration of Credit Risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash deposited with financial institutions in excess of amounts insured by the FDIC. The Company believes it places cash balances with stable financial institutions, which limits its credit risk. In addition, a majority of the financial institutions in which the Company places cash balances have elected to participate in the “Transaction Account Guarantee Program” under the FDIC’s Temporary Liquidity Guarantee Program. This program provides for full FDIC insurance coverage for noninterest bearing accounts. Beginning on January 1, 2013, the FDIC insurance coverage was reduced to $250,000 and the Company has not experienced any losses to date on the deposited cash.

Installment notes receivables arise from sales of single-family residences, and are primarily sold to third-party purchasers. All mortgages are generally sold, although under certain limited circumstances, the Company is required to indemnify loan investors for losses incurred on sold loans. Once loans are sold, the ownership, credit risk and management passes to the third-party purchaser. The Company retains no role or interest, other than standard representations, warranties, and obligations to repurchase claims by third-party purchasers if the borrower obtained the loan through fraudulent information or omissions or if there are origination deficiencies attributable to the Company. Notes receivables not sold as of December 31, 2012, are either collateralized by first trust deeds or second trust deeds on single-family residences constructed by the Company, and are evaluated for collectibility throughout the year based on the Company’s best estimate of current and future losses, based on existing conditions and available information.

Credit risk also includes the possibility that a loss may occur from the failure of counterparties or issuers to make payments according to the terms of a contract. The Company’s exposure to credit risk at any time is generally limited to amounts recorded as cash or receivables on the consolidated balance sheet.

Market and Diversification Risk

The Company’s business is concentrated in the development and operation of real estate assets and the results of operations and financial condition are greatly affected by the performance of the residential real estate industry. The residential real estate development industry has historically been subject to up and down cycles driven by numerous market and economic factors, both national and local, beyond the control of the Company. Because of the effect these factors have on real estate values, it is difficult to predict with certainty when future sales will occur or what the sales prices will be.

The homebuilding industry is highly competitive and the Company competes with numerous other residential developers, including large national and regional firms, for customers, raw materials, skilled labor and employees. The Company competes for customers primarily based on the location, design, quality and price of homes and the availability of mortgage financing.

The Company’s business is concentrated in California. As a result, financial results are dependent on the economic strength of this region. Significant increases in local unemployment and cost of living, including increases in residential property taxes, or concerns about the financial condition of the municipalities in which the Company develops in, could adversely affect consumer demand for the Company’s housing projects and negatively impact financial results.

Concentrations of market, interest rate and credit risk may exist with respect to the Company’s investments and its other assets and liabilities. Market risk is a potential loss the Company may incur as a result of changes in the fair value of its investments. The Company may also be subject to risk associated with concentrations of investments in geographic regions and industries.

Receivables

Installment notes receivable, arising primarily from sales of single-family residences, are recorded at their face amount at the date of origination. The Company is required to establish reserves to address repurchase claims by third-party purchasers that arise primarily if the borrower obtained the loan through fraudulent information or omissions or if there are origination deficiencies attributable to the Company.

Other receivables, net consist primarily of other construction related receivables. Other construction related receivables are due to be collected in less than one year and are presented net of allowance for doubtful accounts of $708,000 at December 31, 2012.

Shapell Homebuilding Company

Notes to Consolidated Financial Statements (continued)

1. Summary of Significant Accounting Policies and Other Information (continued)

Real Estate Held for Development and Sale

The Company carries real estate held for development and sale at cost unless factors are present which indicate that impairment may exist. The carrying value is reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment charge is recognized when estimated expected future net cash flows (undiscounted) from the development and sale of real estate are less than its carrying value, in which case the Company is required to write down the carrying value of the real estate to its estimated fair value. The estimation of expected future net cash flows is inherently uncertain and relies to a considerable extent on assumptions regarding current and future economics and market conditions and the availability of capital. If, in future periods, there are changes in the estimates or assumptions incorporated into the impairment review analysis, the changes could result in an adjustment to the carrying amount of the Company’s real estate. Refer to Note 3 for further discussion.

Costs associated with the acquisition, development and construction of residential subdivisions are capitalized and allocated to individual lots based on the specific cost identification and relative sales value methods. These costs include pre-acquisition costs, interest, taxes, insurance, and indirect costs. Interest is capitalized as part of the historical cost of developing assets during the period required to bring the assets to the condition necessary for their intended use. Interest capitalized during construction totaled $1,873,000 for the year ended December 31, 2012. Real estate held for development and sale includes capitalized interest of $5,207,000 as of December 31, 2012.

The Company’s interest costs are as follows:



	December 31, 2012
Capitalized interest at beginning of year	$	9,637,000
Interest capitalized	1,873,000
Interest amortized to cost of sales	(6,303,000		)
Capitalized interest at end of year	$	5,207,000

Under the terms of single-family residence sale agreements, the Company is obligated to fix certain defects in construction for periods of up to ten years after sale. At the time of sale, the Company records a liability for the warranty costs expected to be incurred. Accrued warranty costs totaled $6,737,000 at December 31, 2012, and are included in accounts payable, accrued liabilities and customer deposits. The calculation for accrued warranty costs is based on historical average of warranty costs per unit multiplied by the average units under warranty. Warranty expense totaled $2,472,000 for the year ended December 31, 2012, and is included in cost of sales in the accompanying consolidated statement of operations.

The changes in the Company’s warranty accrual during the year ended December 31, 2012, was as follows:

Variable Interest Entities

The Company’s investment in joint ventures may create a variable interest entity (VIE), depending on the contractual terms of the arrangement. Under Accounting Standards Codification No. 810, Consolidations (ASC 810), the Company analyzes its joint ventures to identify which reporting entity has the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance and (i) the obligation to absorb losses of the VIE or (ii) the right to receive benefits from the VIE. The Company analyzes its joint ventures to determine whether they are VIEs and, if so, whether the Company is the primary beneficiary.

Shapell Homebuilding Company

Notes to Consolidated Financial Statements (continued)

1. Summary of Significant Accounting Policies and Other Information (continued)

Investments in and Advances to Unconsolidated Entities

Investments in and advances to unconsolidated entities are stated at cost and adjusted by the Company’s equity in the entities’ results of operations, contributions and distributions. In certain of the Company’s investments in unconsolidated entities, the Company has recognized distributions and losses in excess of its investment. In instances where the Company has guaranteed debt of an unconsolidated entity, serves as the general partner or has an obligation or intention to restore the deficit in its capital accounts, it will recognize losses in excess of its investment in an entity. Refer to Note 6 with respect to the condensed combined financial information of these entities.

Tax Status

The Company is taxed in accordance with the provisions of Subchapter S of the Internal Revenue Code and similar provisions of the California Revenue and Taxation Code. The Company is required to pay California franchise taxes amounting to 1.5% of its taxable income. The provision for income taxes in the accompanying financial statements reflects only those payments of the pro forma consolidation of the Company’s single-family development and construction activities.

In accordance with ASC 740, Income Taxes, the Company periodically evaluates its tax positions to determine whether it is more likely than not that such positions would be sustained upon examinations by a tax authority based on its technical merits. No liability for uncertain income tax positions is included in the accompanying consolidated financial statements.

2. Fair Value Measurement

ASC No. 820, Fair Value Measurements and Disclosures (ASC 820), clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. ASC 820 also clarifies that transaction costs should be excluded from the fair value measurement.

ASC 820 establishes a framework for measuring fair value, which includes a hierarchy based on the quality of inputs used to measure fair value. ASC 820 also expands disclosures about fair value measurements. ASC 820 does not require any new fair value measurements. ASC 820 requires the categorization of assets and liabilities, based on the inputs to the valuation technique, into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to the quoted prices in active markets for identical assets and liabilities and lowest priority to unobservable inputs. ASC 820 requires the use of observable market data, when available, in making fair value measurements. When inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement. The Company’s assessment of the significance of an input requires judgment and considers factors specific to the investment. The levels of the ASC 820 fair value hierarchy are described as follows:

Level 1 – Inputs that reflect unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

Level 2 – Inputs other than quoted prices that are observable for the asset or liability either directly or indirectly, including inputs in markets that are not considered to be active.

Level 3 – Inputs that are unobservable.

The following table presents the Company’s short-term investments measured on a recurring basis by level within the valuation hierarchy as of December 31, 2012:



	December 31, 2012
Valuation Inputs
Level 1 – quoted prices	$	46,517,000
Level 2 – other significant observable inputs	—
Level 3 – significant unobservable inputs	—
	$	46,517,000

Shapell Homebuilding Company

Notes to Consolidated Financial Statements (continued)

Level 1 securities consist of money market securities that are valued using quoted market prices with no valuation adjustments.

2. Fair Value Measurement (continued)

Nonfinancial Instruments

The following table summarizes the fair values of the Company’s nonfinancial assets that represent the fair values for land held for future development and investment for which it recognized noncash impairment charges during the reporting periods.

3. Real Estate Impairments

Each land parcel or community is assessed to determine if indicators of potential impairment exist. Given the inherent challenges and uncertainties in forecasting future results, inventory assessments take into consideration whether a community or land parcel is active, or whether it is being held for future development. For active communities and land parcels, due to their short-term nature as compared to land held for future development, inventory assessments generally assume the continuation of then-current market conditions, subject to identifying information suggesting a significant sustained deterioration or other changes in such conditions. These assessments, at the time made, generally anticipate net orders, average selling prices, volume of homes delivered and costs to continue at or near then-current levels through the asset’s estimated remaining life.

Inventory assessments for the Company’s land held for future development consider then-current market conditions as well as subjective forecasts regarding the timing and costs of land development and home construction and related cost inflation; the product(s) to be offered; and the net orders, volume of homes delivered, and selling prices and related price appreciation of the offered product(s) when an associated community is anticipated to open for sales. The Company evaluates various factors to develop these forecasts, including the availability of and demand for homes and finished lots within the relevant marketplace; historical, current and expected future sales trends for the marketplace; and third-party data, if available. These various estimates, trends, expectations, and assumptions used in the Company’s inventory assessments are specific to each community or land parcel based on what the Company believes are reasonable forecasts for performance and may vary among communities or land parcels and may vary over time. As discussed in Note 1, if indicators of potential impairment exist for a land parcel or community, the identified asset is evaluated for recoverability in accordance with ASC 360 by comparing the carrying amount of the asset to the undiscounted future net cash flows expected to be generated by the asset. Also taken into account are the Company’s future expectations related to the following: market supply and demand, including estimates concerning average selling prices; sales and cancellation rates; and anticipated land development, construction, and overhead costs to be incurred.

In 2012, the Company recognized pretax noncash inventory impairment charges of $1,000,000 and $4,405,000 associated with a 50-acre and 208-acre land parcel with post-impairment fair values of $2,500,000 and $5,201,000, respectively. These inventory impairment charges reflect the inability of the Company to obtain the necessary entitlements to develop the properties in a timeframe that justifies the book values of the properties and are included in the cost of sales of single-family residences line on the financial statements.

4. Sale of Properties

The Company continues to evaluate its ownership position in certain markets based upon the size of its holdings, marketing strategy, the strength and number of competing developers entering particular markets at given points in time, the availability of land in markets served and prevailing market conditions. During the current year, the Company sold 113 improved single-family lots in the City of Yorba Linda to Toll Brothers, Inc. for a total purchase price of $47,000,000. The associated costs for the land and improvements on the lots were $17,341,000, resulting in a net profit to the Company of $29,659,000. These amounts are reflected in the statement of operations as sales of properties and cost of sales of properties.

Shapell Homebuilding Company

Notes to Consolidated Financial Statements (continued)

5. Receivables

Installment notes receivable arise primarily from the sale of single-family residences. Notes collateralized by first trust deeds are due in monthly installments bearing interest at fixed rates from 2.00% to 6.88% for periods up to 30 years. Notes collateralized by second trust deeds bear interest at fixed rates from 4.38% to 8.38% for 15 years. The Company has recorded reserves of $1,319,000 against installment notes receivable primarily collateralized by trust deeds representing the Company’s best estimate of current and future losses as of December 31, 2012, based on existing conditions and available information.

Based on the interest rates at which similar loans would be made to borrowers for the same remaining maturities, the fair value of installment notes receivable and other receivables, approximates their carrying values.

6. Investments in and Advances to Unconsolidated Joint Ventures

The Company is both a general partner in partnerships and an investor in companies primarily involved in the development and leasing of real estate projects. The Company consolidates entities where it has a controlling operating or financial interest. In instances where the Company does not have voting or economic control, the financial statements of such entities are not consolidated in the preparation of the Company’s consolidated financial statements and are accounted for using the equity method of accounting. Such projects include government housing programs, urban redevelopment projects and other real estate projects. The accounting policies of these partnerships are substantially the same as those of the Company.

The Company re-evaluated each partially owned entity for the year ended December 31, 2012, and determined there were no consolidation changes for the current year.

Condensed combined financial information of these entities as of December 31, 2012, and for the year then ended, is summarized as follows:



Condensed Combined Balance Sheet	December 31, 2012
Assets
Cash and cash equivalents	$	548,000
Total assets	548,000

Liabilities and partners’ deficit
Accounts payable	$	1,462,000

Partners’ deficit:
Shapell Homebuilding Company	(457,000		)
Other	(457,000		)
Total liabilities and partners’ deficit	$	548,000

Condensed combined statement of operations of these entities was not material for the year ended December 31, 2012.

7. Furniture, Fixtures, and Equipment

Furniture, fixtures and equipment at December 31, 2012, are summarized as follows:

Depreciation expense totaled $475,000 for the year ended December 31, 2012.

Shapell Homebuilding Company

Notes to Consolidated Financial Statements (continued)

8. Notes Payable

Uncollateralized notes payable totaling $14,593,000 at December 31, 2012, consists of four short-term notes payable to banks bearing interest at rates ranging from 0.46% to 2.78% under revolving lines of credit maturing in 2013. Additional funds available under uncollateralized notes payable at December 31, 2012, approximate $55,000,000.

Notes payable of $12,949,000 at December 31, 2012, collateralized by security interests in real estate with an aggregate cost of $124,167,00 at December 31, 2012, bear interest at rates ranging from 1.96% to 2.21% and are payable over various periods of up to two years. Additional funds available under notes payable collateralized by security interests in land and land improvement costs of residential subdivisions at December 31, 2012, are approximately $21,392,000 contingent upon maintaining collateral, which may require the Company to fund improvements in advance of the date the funds can be received.

Future minimum principal payments to be made by the Company in relation to their notes payable as of December 31, 2012, are as follows:

During 2012, all uncollateralized notes payable and notes payable secured by real estate with 2012 maturities were either repaid with proceeds from the sale of single-family residences or extended pursuant to extension options in the original loan agreements, with new maturities in 2013. Subsequent to December 31, 2012, and prior to the issuance of these financial statements, notes payable maturing in 2013 were either repaid or extended through 2016.

The Company is required to comply with certain financial covenants under the terms of its credit agreements. Management has determined that the Company was in compliance with these covenants as of December 31, 2012.

9. Fair Value of Financial Instruments

The following disclosure of the estimated fair value of financial instruments at December 31, 2012, is made in accordance with the requirements of ASC No. 825, Financial Instruments. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

Based on the borrowing rates currently available to the Company for loans with similar terms and maturities, the carrying value of notes payable (Note 8), secured and uncollateralized are a reasonable estimate of their fair value.

The carrying values of cash and cash equivalents, receivables, prepaid expenses and other assets, and accounts payable, accrued liabilities and customer deposits at December 31, 2012, are a reasonable estimate of their fair value.

Shapell Homebuilding Company

Notes to Consolidated Financial Statements (continued)

10. Commitments and Contingencies

The Company is obligated under leases for office facilities for minimum annual rental payments through 2016 as follows:



	Office Leases
Years ending December 31,
2013	$	948,000
2014	821,000
2015	822,000
2016	800,000
	$	3,391,000

10. Commitments and Contingencies (continued)

The leases provide for payment of certain operating expenses applicable to the leased premises, as well as escalation clauses. During 2012, the Company made rental payments of $837,000.

The Company is obligated under certain financing and development agreements to guarantee the performance of its obligations at a future date. In some cases, the Company is required to obtain an unsecured standby letter of credit in favor of the counterparty. At December 31, 2012, the Company has approximately $441,000 of undrawn letters of credit outstanding.

The Company is required, due primarily to various development agreements, to construct various infrastructure improvements. In many cases, the Company is required to post a surety bond to ensure completion of infrastructure improvements in the event that the Company is unable to fulfill its obligation under these agreements. At December 31, 2012, the Company has $95,837,000 of undrawn surety bond obligations outstanding and has expended $48,897,000 towards construction of the various required infrastructure improvements.

The Company has been named as defendant in various legal actions, all of which are typically associated with the activities of a builder and developer. In the opinion of management, the amounts at which all such matters will ultimately be settled will not materially impact the financial position, results of operations or cash flows of the Company.

11. Subsequent Events

In April 2013, SII engaged an investment banker to analyze, formulate strategy and present structural alternatives in connection with the possible sale of the Company. The Company is not obligated to sell and the transaction, if any, is dependent on economic and financing conditions prevailing at the time of sale. Accordingly, no assurance can be given that a sale will be consummated. However, if a sale were to take place, the Company expects to receive sales proceeds in excess of the net book value recorded in the financial statements as of December 31, 2012.

Subsequent events have been evaluated through October 8, 2013, which is the date the financial statements were available to be issued.

EX-99.2 4 shapellinterim2013_exh992.htm EXHIBIT 99.2 Shapellinterim2013_Exh992

Exhibit 99.2

Shapell Homebuilding Company

Unaudited Condensed Consolidated Financial Statements

For the Nine Months Ended September 30, 2013

TABLE OF CONTENTS



	Page

Condensed Consolidated Balance Sheets	3

Condensed Consolidated Statements of Income	4

Condensed Consolidated Statements of Cash Flows	5

Notes to Condensed Consolidated Financial Statements	6

Shapell Homebuilding Company

Condensed Consolidated Balance Sheets



	September 30, 2013		December 31, 2012
	(Unaudited)
Assets
Cash and cash equivalents:
Cash	$	15,929,000	$	10,956,000
Short-term investments, at fair value	58,485,000		46,517,000
Total cash and cash equivalents	74,414,000		57,473,000

Receivables	5,340,000		3,840,000

Real estate held for development and sale:
Land and improvement costs of residential subdivisions	441,463,000		414,529,000
Land held for future development and investment	111,939,000		126,574,000
Total real estate held for development and sale	553,402,000		541,103,000

Furniture, fixtures and equipment:
At cost, less accumulated depreciation of $4,635,000 and $4,214,000 at September 30, 2013 and December 31, 2012, respectively	593,000		949,000
Prepaid expenses and other assets	10,561,000		6,757,000
Total assets	$	644,310,000	$	610,122,000

Liabilities and equity
Accounts payable, accrued liabilities, and customer deposits	$	44,004,000	$	28,191,000
Dividends payable			50,000,000

Notes payable:
Uncollateralized notes payable	8,593,000		14,593,000
Notes collateralized by security interests in real estate	3,489,000		12,949,000
Total notes payable	12,082,000		27,542,000

Withdrawals and losses in excess of investments in and advances to unconsolidated joint ventures	457,000		457,000
Total liabilities	56,543,000		106,190,000

Equity:
Shareholder’s equity	562,948,000		479,649,000
Noncontrolling interests	24,819,000		24,283,000
Total equity	587,767,000		503,932,000
Total liabilities and equity	$	644,310,000	$	610,122,000

See accompanying notes

Shapell Homebuilding Company

Condensed Consolidated Statements of Income



	Nine months ended September 30,
	2013		2012
	(Unaudited)
Revenue and other income
Sales of single-family residences	$	313,605,000	$	157,728,000
Interest income	129,000		92,000
Other income, net	488,000		739,000
Total revenue and other income	314,222,000		158,559,000

Costs and expenses
Cost of sales of single-family residences	197,697,000		130,335,000
Depreciation and amortization	421,000		623,000
General and administrative expenses	18,952,000		14,106,000
Total costs and expenses	217,070,000		145,064,000

Income before provision for income taxes	97,152,000		13,495,000
Provision for income taxes	1,513,000		204,000
Net income	95,639,000		13,291,000

Net income attributable to noncontrolling interests	6,369,000		1,468,000
Net income attributable to Shapell Homebuilding Company	$	89,270,000	$	11,823,000

See accompanying notes

Shapell Homebuilding Company

Condensed Consolidated Statements of Cash Flows



	Nine months ended September 30,
	2013			2012
	(Unaudited)
Operating activities
Net income	$	95,639,000		$	13,291,000
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	421,000			623,000
Change in assets and liabilities:
Receivables	(1,500,000		)	(289,000		)
Real estate held for development and sale	(12,299,000		)	(42,603,000		)
Prepaid expenses and other assets	(3,906,000		)	522,000
Accounts payable, accrued liabilities, and customer deposits	15,813,000			33,481,000
Net cash provided by operating activities	94,168,000			5,025,000

Investing activities
Purchases of furniture, fixtures and equipment				(246,000		)
Proceeds from sale of equipment	37,000
Net cash provided by (used in) investing activities	37,000			(246,000		)

Financing activities
Borrowings under notes payable agreements:
Uncollateralized	6,000,000			16,000,000
Collateralized by securities interests in real estate	20,013,000			9,192,000
Payments on notes payable:
Uncollateralized	(12,000,000		)	(1,000,000		)
Collateralized by securities interests in real estate	(29,473,000		)	(25,338,000		)
Contributions received	107,503,000			33,767,000
Distributions to noncontrolling interests	(5,833,000		)	(2,481,000		)
Dividends paid	(163,474,000		)	(26,533,000		)
Net cash (used in) provided by financing activities	(77,264,000		)	3,607,000

Net increase in cash and cash equivalents	16,941,000			8,386,000
Cash and cash equivalents at beginning of period	57,473,000			32,812,000
Cash and cash equivalents at end of period	$	74,414,000		$	41,198,000

Supplemental disclosure of cash flow information
Cash paid during the year for interest	$	101,000		$	266,000

See accompanying notes

Shapell Homebuilding Company

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Summary of Significant Accounting Policies and Other Information

Nature of Operations and Principles of Consolidation

The principal operations of Shapell Homebuilding Company (the “Company”) consist of residential land development and construction of single-family residences for sale. All of the Company’s principal operations are located in California.

The Company is comprised of Shapell Homes, Inc. and Shapell Land Company, LLC, all of which are wholly owned subsidiaries of Shapell Industries, Inc. (“SII”). In addition to the home building operations, SII owns and operates residential and commercial rental properties and engages in mortgage lending activities as of the date of these financial statements. However, the financial statements presented here represent a consolidation of only SII’s residential land development, construction and sale of single-family residences in California. The financial statements also exclude an undeveloped, unentitled land parcel with a book value of $5,201,000 at September 30, 2013; this parcel was not acquired by Toll Brothers, Inc. in the acquisition which is further discussed below in Note 8.

The condensed consolidated financial statements include the accounts of the Company and certain partnerships (the “Affiliates”) which are controlled by the Company. The equity interests of other partners in consolidated partnerships are reflected as noncontrolling interests. Intercompany transactions and balances have been eliminated in consolidation.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements were prepared for the purpose of complying with the provisions of Article 3-05 of Regulation S-X promulgated by the Securities and Exchange Commission (“SEC”), which requires certain information information with respect to business combinations to be included with certain filings with the SEC. The December 31, 2012 balance sheet amounts and disclosures included herein have been derived from the Company’s December 31, 2012 audited financial statements, adjusted for the mortgage lending activities and the unentitled land parcel not included in these condensed consolidated financial statements. Since the accompanying condensed consolidated financial statements do not include all the information and footnotes required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements, the Company suggests that they be read in conjunction with the consolidated financial statements and notes thereto included as Exhibit 99.1 in the Current Report on Form 8-K/A. In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments, which are of a normal recurring nature, necessary to present fairly the Company’s financial position as of September 30, 2013, the results of its operations and its cash flows for the nine-month periods ended September 30, 2013 and 2012. The results of operations for such interim periods are not necessarily indicative of the results to be expected for the full year.

Shareholders’ equity represents common stock and retained earnings of the consolidated entities.

Use of Estimates

The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements. These estimates and assumptions also affect the reported amounts of revenues and expenses during the reporting period. Although management believes these estimates and assumptions to be reasonably accurate, actual results could differ from those estimates.

Revenue and Cost Recognition

Shapell Homebuilding Company

Notes to Condensed Consolidated Financial Statements (continued)

(Unaudited)

Other revenue includes dividend income and rental income from miscellaneous agreements. Dividend income is recognized when dividends are declared. Rental income is recognized when earned.

Cash and Cash Equivalents

Concentration of Credit Risk

Market and Diversification Risk

The home building industry is highly competitive and the Company competes with numerous other residential developers, including large national and regional firms, for customers, raw materials, skilled labor and employees. The Company competes for customers primarily based on the location, design, quality and price of homes and the availability of mortgage financing.

Receivables

Receivables, net consist primarily of other construction related receivables. Other construction related receivables are due to be collected in less than one year and are presented net of allowance for doubtful accounts of $708,000 at September 30, 2013 and December 31, 2012.

Shapell Homebuilding Company

Notes to Condensed Consolidated Financial Statements (continued)

(Unaudited)

Real Estate Held for Development and Sale

Costs associated with the acquisition, development and construction of residential subdivisions are capitalized and allocated to individual lots based on the specific cost identification and relative sales value methods. These costs include pre-acquisition costs, interest, taxes, insurance, and indirect costs. Interest is capitalized as part of the historical cost of developing assets during the period required to bring the assets to the condition necessary for their intended use. Interest capitalized and expensed, for the periods indicated, was as follows:



	Nine months ended September 30,
	2013			2012
Capitalized interest at beginning of period	$	5,207,000		$	9,637,000
Interest capitalized	2,594,000			664,000
Interest amortized to cost of sales	(1,612,000		)	(4,426,000		)
Capitalized interest at end of period	$	6,189,000		$	5,875,000

Under the terms of single-family residence sale agreements, the Company is obligated to fix certain defects in construction for periods of up to ten years after sale. At the time of sale, the Company records a liability for the warranty costs expected to be incurred. Accrued warranty costs are included in accounts payable, accrued liabilities and customer deposits. The calculation for accrued warranty costs is based on historical average of warranty costs per unit multiplied by the average units under warranty. Warranty expense totaled $1,620,000 and $1,714,000 for the nine months ended September 30, 2013 and 2012, respectively, and is included in cost of sales in the accompanying condensed consolidated statement of operations.

The changes in the Company’s warranty accrual, for the periods indicated, was as follows:



	Nine months ended September 30,
	2013			2012
Balance at beginning of period	$	6,737,000		$	4,970,000
New warranties issued	1,620,000			1,714,000
Cash expenditures	(740,000		)	(566,000		)
Balance at end of period	$	7,617,000		$	6,118,000

Variable Interest Entities

The Company’s investment in joint ventures may create a variable interest entity (“VIE”), depending on the contractual terms of the arrangement. Under Accounting Standards Codification (“ASC”) No. 810, “Consolidations”, the Company analyzes its joint ventures to identify which reporting entity has the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance and (i) the obligation to absorb losses of the VIE or (ii) the right to receive benefits from the VIE. The Company analyzes its joint ventures to determine whether they are VIEs and, if so, whether the Company is the primary beneficiary.

Shapell Homebuilding Company

Notes to Condensed Consolidated Financial Statements (continued)

(Unaudited)

Investments in and Advances to Unconsolidated Entities

Investments in and advances to unconsolidated entities are stated at cost and adjusted by the Company’s equity in the entities’ results of operations, contributions and distributions. In certain of the Company’s investments in unconsolidated entities, the Company has recognized distributions and losses in excess of its investment. In instances where the Company has guaranteed debt of an unconsolidated entity, serves as the general partner or has an obligation or intention to restore the deficit in its capital accounts, it will recognize losses in excess of its investment in an entity. Refer to Note 5 with respect to the condensed combined financial information of these entities.

Tax Status

In accordance with ASC 740, “Income Taxes”, the Company periodically evaluates its tax positions to determine whether it is more likely than not that such positions would be sustained upon examinations by a tax authority based on its technical merits. No liability for uncertain income tax positions is included in the accompanying condensed consolidated financial statements.

2. Fair Value Measurement

ASC No. 820, “Fair Value Measurements and Disclosures” (“ASC 820”), clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. ASC 820 also clarifies that transaction costs should be excluded from the fair value measurement.

Level 1 – Inputs that reflect unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

Level 2 – Inputs other than quoted prices that are observable for the asset or liability either directly or indirectly, including inputs in markets that are not considered to be active.

Level 3 – Inputs that are unobservable.

The following table presents the Company’s short-term investments measured on a recurring basis by level within the valuation hierarchy as of September 30, 2013 and December 31, 2012:



	September 30, 2013		December 31, 2012
Valuation Inputs
Level 1 – quoted prices	$	58,485,000	$	46,517,000
Level 2 – other significant observable inputs	—		—
Level 3 – significant unobservable inputs	—		—
	$	58,485,000	$	46,517,000

Level 1 securities consist of money market securities that are valued using quoted market prices with no valuation adjustments.

Shapell Homebuilding Company

Notes to Condensed Consolidated Financial Statements (continued)

(Unaudited)

3. Real Estate Impairments

Inventory assessments for the Company’s land held for future development consider then-current market conditions as well as subjective forecasts regarding the timing and costs of land development and home construction and related cost inflation; the product(s) to be offered; and the net orders, volume of homes delivered, and selling prices and related price appreciation of the offered product(s) when an associated community is anticipated to open for sales. The Company evaluates various factors to develop these forecasts, including the availability of and demand for homes and finished lots within the relevant marketplace; historical, current and expected future sales trends for the marketplace; and third-party data, if available. These various estimates, trends, expectations, and assumptions used in the Company’s inventory assessments are specific to each community or land parcel based on what the Company believes are reasonable forecasts for performance and may vary among communities or land parcels and may vary over time. As discussed in Note 1, if indicators of potential impairment exist for a land parcel or community, the identified asset is evaluated for recoverability in accordance with ASC 360, “Property, Plant and Equipment”, by comparing the carrying amount of the asset to the undiscounted future net cash flows expected to be generated by the asset. Also taken into account are the Company’s future expectations related to the following: market supply and demand, including estimates concerning average selling prices; sales and cancellation rates; and anticipated land development, construction, and overhead costs to be incurred.

In the nine months ended September 30, 2013 and 2012, the Company did not recognize any inventory impairment charges.

4. Investments in and Advances to Unconsolidated Joint Ventures

Condensed combined financial information of these entities as of September 30, 2013 and December 31, 2012 is summarized as follows:



Condensed Combined Balance Sheets	September 30, 2013			December 31, 2012
Assets
Cash and cash equivalents	$	548,000		$	548,000
Total assets	548,000			548,000

Liabilities and partners’ deficit
Accounts payable	$	1,462,000		$	1,462,000

Partners’ deficit:
Shapell Homebuilding Company	(457,000		)	(457,000		)
Other	(457,000		)	(457,000		)
Total liabilities and partners’ deficit	$	548,000		$	548,000

Condensed combined statements of operations of these entities were not material for the nine-month periods ended September 30, 2013 and 2012.

Shapell Homebuilding Company

Notes to Condensed Consolidated Financial Statements (continued)

(Unaudited)

5. Notes Payable

Uncollateralized notes payable totaling $8,593,000 at September 30, 2013, consists of four short-term notes payable to banks bearing interest at rates ranging from 0.43% to 1.88% under revolving lines of credit maturing in 2013. Additional funds available under uncollateralized notes payable at September 30, 2013, approximate $33,407,000.

Notes payable of $3,489,000 at September 30, 2013, collateralized by security interests in real estate with an aggregate cost of $104,279,000, bear interest at a rate of 1.93% and are payable over various periods of up to two years. Additional funds available under notes payable collateralized by security interests in land and land improvement costs of residential subdivisions at September 30, 2013, are approximately $16,206,000 contingent upon maintaining collateral, which may require the Company to fund improvements in advance of the date the funds can be received.

6. Fair Value of Financial Instruments

The following disclosure of the estimated fair value of financial instruments at September 30, 2013, is made in accordance with the requirements of ASC No. 825, Financial Instruments. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

Based on the borrowing rates currently available to the Company for loans with similar terms and maturities, the carrying value of notes payable (Note 6), secured and uncollateralized are a reasonable estimate of their fair value.

The carrying values of cash and cash equivalents, receivables, prepaid expenses and other assets, and accounts payable, accrued liabilities and customer deposits at September 30, 2013, are a reasonable estimate of their fair value.

7. Commitments and Contingencies

The Company is obligated under certain financing and development agreements to guarantee the performance of its obligations at a future date. In some cases, the Company is required to obtain an unsecured standby letter of credit in favor of the counterparty. At September 30, 2013, the Company has approximately $441,000 of undrawn letters of credit outstanding.

The Company is required, due primarily to various development agreements, to construct various infrastructure improvements. In many cases, the Company is required to post a surety bond to ensure completion of infrastructure improvements in the event that the Company is unable to fulfill its obligation under these agreements. At September 30, 2013, the Company has $111,586,000 of undrawn surety bond obligations outstanding and has expended $45,565,000 towards construction of the various required infrastructure improvements.

8. Subsequent Events

On February 4, 2014, SII was sold to Toll Brothers, Inc. (“Toll”) pursuant to the Purchase and Sale Agreement (the “Purchase Agreement”), dated November 6, 2013. Pursuant to the Purchase Agreement, Toll acquired, for cash, all of the equity interests in SII for an aggregate purchase price of approximately $1.60 billion. The sale included the single-family residential real property development business of the Company, including a portfolio of approximately 4,950 home sites in California. In addition, Toll acquired approximately $106 million of cash. As of the acquisition date, the Company’s home building operation had 11 active selling communities in Northern California and Southern California, within which it is focused on a select number of premium markets.

EX-99.3 5 shapellproforma2013_exh993.htm EXHIBIT 99.3 Shapellproforma2013_Exh993

Exhibit 99.3

Toll Brothers, Inc.

Unaudited Pro Forma Condensed Combined Financial Statements

For the Year Ended October 31, 2013

TOLL BROTHERS, INC. AND SHAPELL HOMEBUILDING COMPANY UNAUDITED PRO FORMA

CONDENSED COMBINED FINANCIAL STATEMENTS

The following unaudited pro forma condensed combined financial statements are based upon the historical consolidated financial statements of Toll Brothers, Inc. (“Toll”) and Shapell Homebuilding Company (“Shapell”), which is comprised of Shapell Homes, Inc. and Shapell Land Company, LLC, after giving effect to the following items: (i) Toll’s February 4, 2014 acquisition of Shapell Industries, Inc. (“SII”), parent of Shapell Homes, Inc. and Shapell Land Company, LLC, pursuant to the Purchase and Sale Agreement between Toll and Shapell Investment Properties, Inc. (“SIPI”), parent of SII, dated November 6, 2013 (the “Purchase Agreement”), (ii) the issuance of $600 million of senior notes by Toll, (iii) the borrowing of $485 million of indebtedness by Toll under a 5-year senior unsecured term loan facility (the “Term Loan Facility”), (iv) the borrowing of $370 million under Toll’s $1.035 billion unsecured revolving credit facility (the “Credit Facility”), and (v) Toll’s issuance of 7.2 million shares of its common stock, par value $0.01 per share, at a price to the public of $32.00 per share.

Toll purchased SII’s single-family home building operations from SIPI, consisting of residential land development, construction and sale of single-family residences in California. Shapell’s historical financial statements as of and for the year ended December 31, 2012 include SII’s mortgage lending activities related to its home building operations, which were not acquired by Toll, and SII’s ownership of an undeveloped, unentitled land parcel that was not acquired by Toll. Shapell’s financial information reflected in this Exhibit 99.3 to the Current Report on Form 8-K/A represents a consolidation of only SII’s single-family home building operations conducted by Shapell and does not include the mortgage lending activities and ownership of the unentitled land parcel.

In addition to Shapell’s home building operations, SII owned and operated apartment and commercial rental properties and land intended for future commercial development (the “Commercial Properties”). Substantially all Commercial Properties and related operations were transferred out of SII prior to the acquisition date, except for certain undeveloped Commercial Properties that could not be transferred out prior to the acquisition date due to debt restrictions related to such assets and certain undeveloped Commercial Properties. Toll and SIPI have entered into agreements which provide for the conveyance of such Commercial Properties to SIPI for no consideration, but are subject to the parties obtaining subdivision approvals and other entitlements which are required in order for those conveyances to take place. Further, such Commercial Properties are not reflected in the pro forma financial information presented herein.

The Unaudited Pro Forma Condensed Combined Statement of Operations combine the historical consolidated statements of operations of Toll, for the year ended October 31, 2013, and Shapell, for the year ended September 30, 2013, giving effect to the acquisition as if it had occurred on November 1, 2012. The Unaudited Pro Forma Condensed Combined Balance Sheet combines the historical consolidated balance sheets of Toll, as of October 31, 2013, and Shapell, as of September 30, 2013, giving effect to the acquisition as if it had occurred on October 31, 2013. The historical consolidated financial statements have been adjusted in the unaudited pro forma condensed combined financial statements to give effect to pro forma events that are (1) directly attributable to the acquisition, (2) factually supportable, and (3) with respect to the statement of operations, expected to have a continuing impact on the combined results of operations. The unaudited pro forma condensed combined financial statements should be read in conjunction with the accompanying notes to the unaudited pro forma condensed combined financial statements. In addition, the unaudited pro forma condensed combined financial statements were based on and should be read in conjunction with the:


•	separate historical financial statements of Toll as of and for the year ended October 31, 2013 and the related notes included in Toll’s Annual Report on Form 10-K for the year ended October 31, 2013 and


•	separate historical financial statements of Shapell as of and for the year ended December 31, 2012 and for the nine months ended September 30, 2013 and the related notes included as Exhibit 99.1 and Exhibit 99.2 to the Current Report on Form 8-K/A, respectively.

The unaudited pro forma condensed combined financial statements have been presented for informational purposes only. The pro forma information is not necessarily indicative of what the combined company’s financial position or results of operations actually would have been had the acquisition been completed as of the dates indicated. In addition, the unaudited pro forma condensed combined financial statements do not purport to project the future financial position or operating results of the combined company.

The unaudited pro forma condensed combined financial statements have been prepared using the acquisition method of accounting under existing U.S. generally accepted accounting principles (“GAAP”). The pro forma adjustments are based on currently available information and have been made solely for the purpose of providing unaudited pro forma condensed combined financial information. The acquisition accounting is dependent upon certain valuation studies, the results of which

are preliminary. Differences between these preliminary estimates and the final acquisition accounting may occur and these differences could have a material impact on the accompanying unaudited pro forma condensed combined financial statements and the combined company’s future results of operations and financial position.

The unaudited pro forma condensed combined financial statements do not reflect any cost savings, operating synergies or revenue enhancements that the combined company may achieve as a result of the merger of operations, the costs to integrate the operations of Toll and Shapell, or the costs necessary to achieve these cost savings, operating synergies and revenue enhancements.

Unaudited Pro Forma Condensed Combined Balance Sheet

As of October 31, 2013

(Amounts in thousands)



	Historical Toll Brothers, Inc.		Historical Shapell Homebuilding Company		Pro Forma Adjustments				Pro Forma Combined
ASSETS					See Note 5
Cash and cash equivalents	$	772,972	$	74,414	$	56,130		(a)	$	903,516
Marketable securities	52,508								52,508
Restricted cash	32,036								32,036
Inventory	4,650,412		553,402		1,009,213			(b)	6,213,027
Property, construction and office equipment, net	131,320		593						131,913
Receivables, prepaid expenses and other assets	229,295		12,048		6,565			(c)	247,908
Mortgage loans held for sale	113,517								113,517
Customer deposits held in escrow	46,888		3,853						50,741
Investments in and advances to unconsolidated entities	403,133								403,133
Investments in distressed loans	36,374								36,374
Investments in foreclosed real estate	72,972								72,972
Deferred tax assets, net of valuation allowances	286,032								286,032
	$	6,827,459	$	644,310	$	1,071,908			$	8,543,677
LIABILITIES AND EQUITY
Liabilities
Loans payable	$	107,222	$	12,082	$	842,918		(d)	$	962,222
Senior notes	2,321,442				600,000			(e)	2,921,442
Mortgage company warehouse loan	75,000								75,000
Customer deposits	212,669		6,762						219,431
Accounts payable	167,787		21,545						189,332
Accrued expenses	522,987		16,154		2,400			(f)	541,541
Income taxes payable	81,188								81,188
Total liabilities	3,488,295		56,543		1,445,318				4,990,156
Equity
Total stockholders’ equity	3,332,987		562,948		(348,591		)	(g)	3,547,344
Noncontrolling interest	6,177		24,819		(24,819		)	(g)	6,177
Total equity	3,339,164		587,767		(373,410		)		3,553,521
	$	6,827,459	$	644,310	$	1,071,908			$	8,543,677

See accompanying notes to the unaudited pro forma condensed combined

financial statements, which are an integral part of these statements.

Unaudited Pro Forma Condensed

Combined Statement of Operations

For the year ended October 31, 2013

(Amounts in thousands, except per share data)



	Historical Toll Brothers, Inc.		Historical Shapell Homebuilding Company		Pro Forma Adjustments				Pro Forma Combined
					See Note 5
Revenues	$	2,674,299	$	427,777	$	—			$	3,102,076
Cost of revenues	2,133,300		271,613		83,751			(h)	2,488,664
Selling, general and administrative	339,932		22,459						362,391
	2,473,232		294,072		83,751				2,851,055
Income from operations	201,067		133,705		(83,751		)		251,021
Other:
Income from unconsolidated entities	14,392								14,392
Other income - net	52,238		30,791		(29,659		)	(h)	53,370
Income before income taxes	267,697		164,496		(113,410		)		318,783
Income tax provision	97,091		2,252		16,694			(i)	116,037
Net income	170,606		162,244		(130,104		)		202,746

Net income attributable to noncontrolling interests			16,009		(16,009		)	(g)	—
Net income attributable to Toll	$	170,606	$	146,235	$	(114,095	)		$	202,746

Income per share:
Basic	$	1.01							$	1.15
Diluted	$	0.97							$	1.09
Weighted-average number of shares:
Basic	169,288				7,200			(g)	176,488
Diluted	177,963				7,200			(g)	185,163

See accompanying notes to the unaudited pro forma condensed combined

financial statements, which are an integral part of these statements.

Notes to the Unaudited Pro Forma Condensed

Combined Financial Statements

1. Description of Transaction

On February 4, 2014, Toll completed its previously announced acquisition of SII pursuant to the Purchase Agreement dated November 6, 2013. Pursuant to the Purchase Agreement, Toll acquired, for cash, all of the equity interests in SII from SIPI for an aggregate purchase price of approximately $1.59 billion (the “Acquisition”). Toll acquired the single-family residential real property development business of SII, including a portfolio of approximately 4,950 home sites in California, some of which Toll expects to sell to other builders. As of the acquisition date, SII’s home building operation had 11 active selling communities in Northern California and Southern California, within which it is focused on a select number of premium markets. As part of the Acquisition, Toll assumed contracts to deliver approximately 126 homes with an aggregate value of approximately $105.3 million.

The purchase price is subject to post-closing adjustments in accordance with the terms of the Purchase Agreement. Toll financed the Acquisition with a combination of $370 million of borrowings under its $1.035 billion Credit Facility, $485 million from the Term Loan Facility described below, as well as with $817 million in net proceeds from debt and equity financings completed in November 2013.

On February 3, 2014, Toll entered into a 5-year senior, $485 million Term Loan Facility with ten banks. The full amount of the Term Loan Facility was borrowed by Toll on February 3, 2014 in order to fund the Acquisition. Toll may select interest rates for the Term Loan Facility equal to (i) the London interbank offered rate (“LIBOR”) plus an applicable margin, (ii) the base rate (which is defined as the greatest of (a) SunTrust Bank’s prime rate, (b) the federal funds effective rate plus 0.5% and (c) one-month LIBOR plus 1%) plus an applicable margin or (iii) the federal funds / Euro rate (which is defined as the greater of (a) the sum of the federal funds effective rate plus an applicable margin plus 0.25% and (b) one-month LIBOR), with the applicable margin, in each case, based on Toll’s leverage ratio. The initial interest rate on the Term Loan is 1.72% per annum.

Toll and substantially all of its 100% owned home building subsidiaries are guarantors under the Term Loan Facility. The Term Loan Facility contains substantially the same financial covenants as Toll’s $1.035 billion Credit Facility. The Term Loan Facility will mature, and amounts owing under it will become due and payable, on February 3, 2019.

In November 2013, in anticipation of the Acquisition, Toll issued $350 million principal amount of 4.0% Senior Notes due 2018 (the “4.0% Senior Notes”) and $250 million principal amount of 5.625% Senior Notes due 2024 (the “5.625% Senior Notes”). Toll received $596.2 million of net proceeds from the issuance of the 4.0% Senior Notes and the 5.625% Senior Notes.

In November 2013, in anticipation of the Acquisition, Toll issued 7.2 million shares of its common stock, par value $0.01 per share, at a price to the public of $32.00 per share. Toll received $220.4 million of net proceeds from the issuance. The dilutive effect of the equity offering is included in the Unaudited Pro Forma Condensed Combined Statement of Operations for the year ended October 31, 2013.

2. Basis of Presentation

The unaudited pro forma condensed combined financial statements were prepared using the acquisition method of accounting, under existing GAAP, and were based on the historical financial statements of Toll and Shapell. The Historical Shapell column in the Unaudited Pro Forma Condensed Combined Balance Sheet and Statement of Operations is as of September 30, 2013 and for the year then ended, respectively.

These standards require, among other things, that assets acquired and liabilities assumed be recognized at their acquisition-date fair value. These standards also require that consideration transferred be measured at the closing date of the acquisition at the then-current market price.

GAAP defines the term “fair value” and sets forth the valuation requirements for any asset or liability measured at fair value, and specifies a hierarchy of valuation techniques based on the inputs used to develop the fair value measures. Fair value is defined as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” This is an exit price concept for the valuation of the asset or liability. In addition, market participants are assumed to be buyers and sellers in the principal (or most advantageous) market for the asset or liability. Fair value measurements for an asset assume the highest and best use by these market participants. As a result, Toll may be required to record assets which are not intended to be used or sold and/or to record assets at fair value that do not reflect Toll’s intended use of those assets. Many of these fair value measurements can be highly subjective and it is also possible that other professionals, applying reasonable judgment to the same facts and circumstances, could develop and support a range of alternative estimated amounts.

Under the acquisition method of accounting, the assets acquired and liabilities assumed are recorded as of the completion of the acquisition, primarily at their respective fair values and added to the existing assets and liabilities of Toll. Financial statements and reported results of operations of Toll issued after completion of the Acquisition will reflect these values, but will not be retroactively restated to reflect the historical financial position or results of operations of Shapell as of any date or for any period prior to the acquisition.

Acquisition-related transaction costs (e.g. advisory, legal, regulatory, valuation, and other professional fees) are not included as a component of consideration transferred but are accounted for as expenses in the periods in which the costs were incurred. Through October 31, 2013, Toll had incurred approximately $1.4 million of acquisition-related transaction costs. Additional advisory, legal, regulatory, valuation and other acquisition-related costs incurred subsequent to October 31, 2013 were approximately $6.0 million and are reflected as a reduction to cash and retained earnings in the Pro Forma Adjustments column of the Unaudited Pro Forma Condensed Combined Balance Sheet.

3. Accounting Policies

Toll will continue to review Shapell’s accounting policies. As a result of the ongoing review, Toll may identify differences between the accounting policies of the two companies that could have a material impact on the combined financial statements. At this time, Toll is not aware of any differences that would have a material impact on the combined financial statements. The unaudited pro forma condensed combined financial statements assume there are no differences in accounting policies between the two companies.

4. Estimate of Assets Acquired and Liabilities Assumed

The following is an estimate of the assets acquired and the liabilities assumed by Toll, reconciled to the consideration transferred (in thousands):



Book value of net assets acquired as of October 31, 2013	$	587,767
Adjustments to:
Inventory (i)	1,009,213
Accrued expenses (ii)	(2,400		)
Total consideration	$	1,594,580


i.	Reflects the fair value adjustment of Shapell’s inventory.


ii.	Reflects the fair value adjustment for warranty obligations acquired from Shapell. The fair value represents an amount equivalent to the estimated cost to provide warranty services for homes sold by Shapell for the prior 10-year period.

The preliminary estimate of the fair value adjustments may be different from the final purchase accounting and the difference could have a material impact on the accompanying unaudited pro forma condensed combined financial statements.

5. Pro Forma Adjustments

This note should be read in conjunction with Note 1 - “Description of Transaction”; Note 2 - “Basis of Presentation”; and Note 4 - “Estimate of Assets Acquired and Liabilities Assumed”. Adjustments included in the unaudited pro forma condensed combined financial statements in the column under the heading “Pro Forma Adjustments” represent the following:


(a)	The cash portion of the acquisition consideration and related costs and fees were sourced from a combination of borrowings under the Credit Facility and Term Loan Facility and proceeds from debt and equity offerings. Estimated sources and uses of cash are as follows (in thousands):



Sources:
Proceeds from issuance of Senior Notes	$	600,000
Amount borrowed under the Term Loan Facility	485,000
Amount borrowed under the Credit Facility	370,000
Net proceeds from issuance of equity	220,357
	1,675,357
Uses:
Cash portion of acquisition consideration	(1,594,580		)
Acquisition related transaction costs, incurred subsequent to October 31, 2013	(6,000		)
Repayment of Shapell's loans payable	(12,082		)
Fees related to debt issuances	(6,565		)
	(1,619,227		)
Pro forma adjustment to cash and cash equivalents	$	56,130


(b)	Adjustments to inventory, to estimate the acquisition date fair value, are as follows (in thousands):



Eliminate Shapell's historical inventory	$	(553,402	)
Estimated fair value of inventory acquired	1,562,615
Total	$	1,009,213


(c)	Adjustments to receivables, prepaid expenses and other assets are as follows (in thousands):



Debt issuance costs - Senior Notes (see (e) below)	$	4,700
Debt issuance costs - Term Loan Facility (see (d) below)	1,865
Total	$	6,565

(d)

On February 3, 2014, Toll borrowed $370 million under the Credit Facility with 15 banks which expires on August 1, 2018. Toll may select interest rates for the Credit Facility equal to (i) LIBOR plus an applicable margin or (ii) the lenders’ base rate plus an applicable margin, which, in each case, is based on the Toll’s credit rating and leverage ratio. The initial interest rate on February 3, 2014 was 1.82%.

On February 3, 2014, Toll borrowed $485 million under the Term Loan Facility, which is further discussed in Note 1 - “Description of Transaction”. The initial interest rate on the Term Loan Facility is 1.72% per annum. Toll incurred costs of $1.9 million in connection with the Term Loan Facility.

In addition, prior to the Acquisition, Shapell repaid all of their loans payable. Accordingly, “Loans Payable” on the Unaudited Pro Forma Condensed Combined Balance Sheet was adjusted with a corresponding decrease to cash.

Adjustments to loans payable are as follows (in thousands):



Borrowings under Credit Facility	$	370,000
Borrowings under Term Note Facility	485,000
Repayment of Shapell's loans payable	(12,082		)
Total	$	842,918


(e)	In November 2013, Toll issued $350 million principal amount of 4.0% Senior Notes and $250 million principal amount of 5.625% Senior Notes. Toll incurred $4.7 million of costs in connection with these issuances which is included in receivables, prepaid expenses and other assets in the Pro Forma column of the accompanying Unaudited Pro Forma Condensed Combined Balance Sheet.

(f)

Reflects the fair value adjustment of $2.4 million for warranty obligations acquired from Shapell. The fair value represents an amount equivalent to the estimated incremental cost to provide warranty services for homes sold by Shapell for the prior 10-year period. The preliminary estimate of the cost may be different from the final purchase price allocation and the difference could have a material impact on the accompanying unaudited pro forma condensed combined financial statements.

(g)

Concurrent with the Acquisition, SIPI made cash distributions to acquire all of the noncontrolling interests. As a result, Toll did not acquire any interests in joint ventures. Accordingly, noncontrolling interest activity has been eliminated via adjustments in the Pro Forma Adjustments column of the Unaudited Pro Forma Condensed Combined Balance Sheet and Statement of Operations.

Adjustments to equity are as follows (in thousands):



Elimination of Shapell's stockholders' equity	$	(562,948	)
Net proceeds from issuance of equity	220,357
Acquisition related transaction costs, incurred subsequent to October 31, 2013	(6,000		)
	$	(348,591	)

Elimination of Shapell's noncontrolling interest	$	(24,819	)


(h)	Adjustments to cost of revenues are as follows (in thousands):



Increase in cost of revenues related to purchase price	$	91,997
Decrease in cost of revenues related to prior land sale	(10,499		)
Increase in interest expense	2,253
Total	$	83,751

Cost of revenues has been adjusted to reflect the impact of the purchase price allocation on Shapell’s inventory. During the first year subsequent to the Acquisition, Toll expects cost of revenues, as a percent of revenues, on Shapell-related home sales to be approximately 85%.

In November 2012, Shapell sold 113 improved single-family lots to Toll for a total purchase price of $47.0 million. The associated costs for the land and improvements on the lots were $17.3 million, resulting in a net profit to Shapell of $29.7 million. This profit is reflected in the Historical Shapell column in the Unaudited Pro Forma Condensed Combined Statement of Operations as “Other income - net”. This profit is eliminated in the Pro Forma Adjustments column in the Unaudited Pro Forma Condensed Combined Statement of Operations.

Through October 31, 2013, Toll sold to home buyers approximately 35.4% of these lots purchased from Shapell. The Historical Toll column in the Unaudited Pro Forma Condensed Combined Statement of Operations reflects costs of revenues based on the $47.0 million purchase price for these sales. The pro rata portion of the $29.7 million profit related to these sales of $10.5 million is reflected as a reduction to cost of revenues in the Pro Forma Adjustments column in the Unaudited Pro Forma Condensed Combined Statement of Operations.

As a result of the debt issuances and borrowings, net of repayments, as further discussed in items (d) and (e) above, Toll will incur approximately $45.1 million of additional interest based on interest rates in effect at issuance and assuming debt is outstanding for an entire year. Since Toll expects that qualifying inventory will exceed its debt, in accordance with ASC 835-20, “Capitalization of Interest”, the additional interest will initially be capitalized to inventory. Toll estimates that approximately 5.0% of interest incurred during a year is expensed in that year through

its interest capitalization model. Accordingly, $2.3 million of interest is reflected as an increase to cost of revenues in the Pro Forma Adjustments column in the Unaudited Pro Forma Condensed Combined Statement of Operations.

(i)

SII was taxed in accordance with the provisions of Subchapter S of the Internal Revenue Code and similar provisions of the California Revenue and Taxation Code. SII was required to pay California franchise taxes amounting to 1.5% of taxable income which is reflected in the Historical Shapell column in the Unaudited Pro Forma Condensed Combined Statement of Operations as “Income tax provision”. The increase to the income tax provision in the Pro Forma Adjustments column in the Unaudited Pro Forma Condensed Combined Statement of Operations reflects Toll’s estimated combined effective income tax rate of 36.4%.